AUTONOMY OF CONTRACTS

Republic of the Philippines SUPREME COURT Manila EN BANC G.R. No. L-46591 July 28, 1987

BANCO FILIPINO SAVINGS and MORTGAGE BANK, petitioner, vs. HON. MIGUEL NAVARRO, Presiding Judge, Court of First Instance of Manila, Branch XXXI and FLORANTE DEL VALLE, respondents. MELENCIO-HERRERA, J.: This is a Petition to review on certiorari the Decision of respondent Court, the dispositive portion of which decrees: WHEREFORE, the Court finds that the enforcement of the escalation clause retroactively before the lapse of the 15-year period stated in the promissory note is contrary to Sec. 3 of Presidential Decree No. 116 and Sec. 109 of Republic Act No. 265, and hereby declares null and void the said escalation clause. The respondent Banco Filipino Savings and Mortgage Bank is hereby ordered to desist from enforcing the increased rate of interest on petitioner's loan. SO ORDERED. The facts are not in dispute: On May 20, 1975, respondent Florante del Valle (the BORROWER) obtained a loan secured by a real estate mortgage (the LOAN, for short) from petitioner BANCO FILIPINO1 in the sum of Forty-one Thousand Three Hundred (P41,300.00) Pesos, payable and to be amortized within fifteen (15) years at twelve (12%) per cent interest annually. Hence, the LOAN still had more than 730 days to run by January 2, 1976, the date when CIRCULAR No. 494 was issued by the Central Bank. Stamped on the promissory note evidencing the loan is an Escalation Clause, reading as follows: I/We hereby authorize Banco Filipino to correspondingly increase the interest rate stipulated in this contract without advance notice to me/us in the event law should be enacted increasing the lawful rates of interest that may be charged on this particular kind of loan. The Escalation Clause is based upon Central Bank CIRCULAR No. 494 issued on January 2, 1976, the pertinent portion of which reads: 3. The maximum rate of interest, including commissions, premiums, fees and other charges on loans with maturity of more than seven hundred thirty (730) days, by banking institutions, including thrift banks and rural banks, or by financial intermediaries authorized to engage in quasi-banking functions shall be nineteen percent (19%) per annum.

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7. Except as provided in this Circular and Circular No. 493, loans or renewals thereof shall continue to be governed by the Usury Law, as amended." CIRCULAR No. 494 was issued pursuant to the authority granted to the Monetary Board by Presidential Decree No. 116 (Amending Further Certain Sections of the Usury Law) promulgated on January 29, 1973, the applicable section of which provides: Sec. 2. The same Act is hereby amended by adding the following section immediately after section one thereof, which reads as follows: Sec. 1-a. The Monetary Board is hereby authorized to prescribe the maximum rate or rates of interest for the loan or renewal thereof or the forbearance of any money, goods or credits, and to change such rate or rates whenever warranted by prevailing economic and social conditions: Provided, that such changes shall not be made oftener than once every twelve months. The same grant of authority appears in P.D. No. 858, promulgated on December 31, 1975, except that the limitation on the frequency of changes was eliminated. On the strength of CIRCULAR No. 494 BANCO FILIPINO gave notice to the BORROWER on June 30, 1976 of the increase of interest rate on the LOAN from 12% to 17% per annum effective on March 1, 1976. On September 24, 1976, Ms. Mercedes C. Paderes of the Central Bank wrote a letter to the BORROWER as follows: September 24, 1976 Mr. Florante del Valle 14 Palanca Street B.F. Homes, Paranaque Rizal Dear Mr. del Valle: This refers to your letter dated August 28, 1976 addressed to the Governor, Central Bank of the Philippines, seeking clarification and our official stand on Banco Filipino's recent decision to raise interest rates on lots bought on installment from 12% to 17% per annum. A verification made by our Examiner of the copy of your Promissory Note on file with Banco Filipino showed that the following escalation clause with your signature is stamped on the Promissory Note: I /We hereby authorize Banco Filipino to correspondingly increase the interest rate stipulated in this contract without advance notice to me/us in the event a law should be enacted increasing the lawful rates of interest that may be charged on this particular kind of loan. In this connection, please be advised that the Monetary Board, in its Resolution No. 1155 dated June 11, 1976, adopted the following guidelines to govern interest rate adjustments by banks and

non-banks performing quasi-banking functions on loans already existing as of January 3, 1976, in the light of Central Bank Circulars Nos. 492-498: l. Only banks and non-bank financial intermediaries performing quasi-banking functions may increase interest rates on loans already existings of January 2, 1976, provided that: a. The pertinent loan contracts/documents contain escalation clauses expressly authorizing lending bank or non-bank performing quasi-banking functions to increase the rate of interest stipulated in the contract, in the event that any law or Central Bank regulation is promulgated increasing the maximum interest rate for loans; and b. Said loans were directly granted by them and the remaining maturities thereof were more than 730 days as of January 2, 1976; and 2. The increase in the rate of interest can be effective only as of January 2, 1976 or on a later date. The foregoing guidelines, however, shall not be understood as precluding affected parties from questioning before a competent court of justice the legality or validity of such escalation clauses. We trust the above guidelines would help you resolve your problems regarding additional interest charges of Banco Filipino. Very truly yours, (Sgd.) MERCEDES C. PAREDES Director Contending that CIRCULAR No. 494 is not the law contemplated in the Escalation Clause of the promissory note, the BORROWER filed suit against BANCO FILIPINO for "Declaratory Relief" with respondent Court, praying that the Escalation Clause be declared null and void and that BANCO FILIPINO be ordered to desist from enforcing the increased rate of interest on the BORROWER's real estate loan. For its part, BANCO FILIPINO maintained that the Escalation Clause signed by the BORROWER authorized it to increase the interest rate once a law was passed increasing the rate of interest and that its authority to increase was provided for by CIRCULAR No. 494. In its judgment, respondent Court nullified the Escalation Clause and ordered BANCO FILIPINO to desist from enforcing the increased rate of interest on the BORROWER's loan. It reasoned out that P.D. No. 116 does not expressly grant the Central Bank authority to maximize interest rates with retroactive effect and that BANCO FILIPINO cannot legally impose a higher rate of interest before the expiration of the 15-year period in which the loan is to be paid other than the 12% per annum in force at the time of the execution of the loan. It is from that Decision in favor of the BORROWER that BANCO FILIPINO has come to this instance on review by Certiorari. We gave due course to the Petition, the question being one of law. On February 24, 1983, the parties represented by their respective counsel, not only moved to withdraw the appeal on the ground that it had become moot and academic "because of recent developments in the rules and regulations of the Central Bank," but also prayed that "the decision

rendered in the Court of First Instance be therefore vacated and declared of no force and effect as if the case was never filed," since the parties would like to end this matter once and for all." However, "considering the subject matter of the controversy in which many persons similarly situated are interested and because of the need for a definite ruling on the question," the Court, in its Resolution of February 24, 1983, impleaded the Central Bank and required it to submit its Comment, and encouraged homeowners similarly situated as the BORROWER to intervene in the proceedings. At the hearing on February 24, 1983, one Leopoldo Z. So, a mortgage homeowner at B.F. Resort Subdivision, was present and manifested that he was in a similar situation as the BORROWER. Since then, he has written several letters to the Court, pleading for early resolution of the case. The Court allowed the intervention of Lolita Perono2and issued a temporary restraining order enjoining the Regional Trial Court (Pasay City Branch) in the case entitled "Banco Filipino Savings and Mortgage Bank vs. Lolita Perono" from issuing a writ of possession over her mortgaged property. Also snowed to intervene were Enrique Tabalon, Jose Llopis, et als., who had obtained loans with Identical escalation clauses from Apex Mortgage and Loans Corporation, apparently an affiliate of BANCO FILIPINO, Upon motion of Jose Llopis, a Temporary Restraining Order was likewise issued enjoining the foreclosure of his real estate mortgage by BANCO FILIPINO. The Court made it explicit, however, that intervention was allowed only for the purpose of "joining in the discussion of the legal issue involved in this proceedings, to wit, the validity of the so-called "escalation clause," or its applicability to existing contracts of loan." The Central Bank has submitted its Comment and Supplemental Comment and like BANCO FILIPINO, has taken the position that the issuance of its Circulars is a valid exercise of its authority to scribe maximum rates of interest and that, based on general principles of contract, the Escalation Clause is a valid provision in the loan agreement provided that "(1) the increased rate imposed or charged by petitioner does not exceed the ceiling fixed by law or the Monetary Board; (2) the increase is made effective not earlier than the effectivity of the law or regulation authorizing such an increase; and (3) the remaining maturities of the loans are more than 730 days as of the effectivity of the law or regulation authorizing such an increase. However, with respect to loan agreements entered into,on or after March 17, 1980, such agreement, in order to be valid, must also include a de-escalation clause as required by Presidential Decree No. 1684."3 The substantial question in this case is not really whether the Escalation Clause is a valid or void stipulation. There should be no question that the clause is valid. Some contracts contain what is known as an "escalator clause," which is defined as one in which the contract fixes a base price but contains a provision that in the event of specified cost increases, the seller or contractor may raise the price up to a fixed percentage of the base. Attacks on such a clause have usually been based on the claim that, because of the open price-provision, the contract was too indefinite to be enforceable and did not evidence an actual meeting of the minds of the parties, or that the arrangement left the price to be determined arbitrarily by one party so that the contract lacked mutuality. In most instances, however, these attacks have been unsuccessful.4 The Court further finds as a matter of law that the cost of living index adjustment, or escalator clause, is not substantively unconscionable. Cost of living index adjustment clauses are widely used in commercial contracts in an effort to maintain fiscal stability and to retain "real dollar" value to the price terms of long term contracts. The provision is a common one, and has been universally upheld and enforced.

Indeed, the Federal government has recognized the efficacy of escalator clauses in tying Social Security benefits to the cost of living index, 42 U.S.C.s 415(i). Pension benefits and labor contracts negotiated by most of the major labor unions are other examples. That inflation, expected or otherwise, will cause a particular bargain to be more costly in terms of total dollars than originally contemplated can be of little solace to the plaintiffs.5 What should be resolved is whether BANCO FILIPINO can increase the interest rate on the LOAN from 12% to 17% per annum under the Escalation Clause. It is our considered opinion that it may not. The Escalation Clause reads as follows: I/We hereby authorize Banco Filipino to correspondingly increase the interest rate stipulated in this contract without advance notice to me/us in the event a law increasing the lawful rates of interest that may be charged on this particular kind of loan. (Paragraphing and emphasis supplied) It is clear from the stipulation between the parties that the interest rate may be increased "in the event a lawshould be enacted increasing the lawful rate of interest that may be charged on this particular kind of loan." " The Escalation Clause was dependent on an increase of rate made by "law" alone. CIRCULAR No. 494, although it has the effect of law, is not a law. "Although a circular duly issued is not strictly a statute or a law, it has, however, the force and effect of law."6 (Italics supplied). "An administrative regulation adopted pursuant to law has the force and effect of law."7 "That administrative rules and regulations have the force of law can no longer be questioned. "8 The distinction between a law and an administrative regulation is recognized in the Monetary Board guidelines quoted in the letter to the BORROWER of Ms. Paderes of September 24, 1976 (supra). According to the guidelines, for a loan's interest to be subject to the increases provided in CIRCULAR No. 494, there must be an Escalation Clause allowing the increase "in the event that any law or Central Bank regulation is promulgated increasing the maximum interest rate for loans." The guidelines thus presuppose that a Central Bank regulation is not within the term "any law." The distinction is again recognized by P.D. No. 1684, promulgated on March 17, 1980, adding section 7-a to the Usury Law, providing that parties to an agreement pertaining to a loan could stipulate that the rate of interest agreed upon may be increased in the event that the applicable maximum rate of interest is increased "by law or by the Monetary Board." To quote: Sec. 7-a Parties to an agreement pertaining to a loan or forbearance of money, goods or credits may stipulate that the rate of interest agreed upon may be increased in the event that the applicable maximum rate of interest

is increased by law or by the Monetary Board: Provided, That such stipulation shall be valid only if there is also a stipulation in the agreement that the rate of interest agreed upon shall be reduced in the event that the applicable maximum rate of interest is reduced by law or by the Monetary Board; Provided, further, That the adjustment in the rate of interest agreed upon shall take effect on or after the effectivity of the increase or decrease in the maximum rate of interest. (Paragraphing and emphasis supplied). It is now clear that from March 17, 1980, escalation clauses to be valid should specifically provide: (1) that there can be an increase in interest if increased by law or by the Monetary Board; and (2) in order for such stipulation to be valid, it must include a provision for reduction of the stipulated interest "in the event that the applicable maximum rate of interest is reduced by law or by the Monetary Board." While P.D. No. 1684 is not to be given retroactive effect, the absence of a de-escalation clause in the Escalation Clause in question provides another reason why it should not be given effect because of its one-sidedness in favor of the lender. 2. The Escalation Clause specifically stipulated that the increase in interest rate was to be "on this particular kind of loan, " meaning one secured by registered real estate mortgage. Paragraph 7 of CIRCULAR No. 494 specifically directs that "loans or renewals continue to be governed by the Usury Law, as amended." So do Circular No. 586 of the Central Bank, which superseded Circular No. 494, and Circular No. 705, which superseded Circular No. 586. The Usury Law, as amended by Acts Nos. 3291, 3998 and 4070, became effective on May 1, 1916. It provided for the maximum yearly interest of 12% for loans secured by a mortgage upon registered real estate (Section 2), and a maximum annual interest of 14% for loans covered by security other than mortgage upon registered real estate (Section 3). Significant is the separate treatment of registered real estate loans and other loans not secured by mortgage upon registered real estate. It appears clear in the Usury Law that the policy is to make interest rates for loans guaranteed by registered real estate lower than those for loans guaranteed by properties other than registered realty. On June 15, 1948, Congress approved Republic Act No. 265, creating the Central Bank, and establishing the Monetary Board. That law provides that "the Monetary Board may, within the limits prescribed in the Usury law,9 fix the maximum rates of interest which banks may charge for different types of loans and for any other credit operations, ... " and that "any modification in the maximum interest rates permitted for the borrowing or lending operations of the banks shall apply only to future operations and not to those made prior to the date on which the modification becomes effective" (Section 109).
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On January 29, 1973, P.D. No. 116 was promulgated amending the Usury Law. The Decree gave authority to the Monetary Board "to prescribe maximum rates of interest for the loan or renewal thereof or the forbearance of any money goods or credits, and to change such rate or rates whenever warranted by prevailing economic and social conditions. In one section,10 the Monetary Board could prescribe the maximum rate of interest for loans secured by mortgage upon registered real estate or by any document conveying such real estate or an interest therein and, in another separate section,11 the Monetary Board was also granted authority to fix the maximum interest rate for loans secured by types of security other than registered real property. The two sections read: SEC. 3. Section two of the same Act is hereby amended to read as follows:

SEC. 2. No person or corporation shall directly or indirectly take or receive in money or other property, real or personal, or choses in action, a higher rate of interest or greater sum or value, including commissions, premiums, fines and penalties, for the loan or renewal thereof or forbearance of money, goods, or credits, where such loan or renewal or forbearance is secured in whole or in part by a mortgage upon real estate the title to which is duly registered or by any document conveying such real estate or an interest therein, than twelve per centum per annum or the maximum rate prescribed by the Monetary Board and in force at the time the loan or renewal thereof or forbearance is granted: Provided, That the rate of interest under this section or the maximum rate of interest that may be prescribed by the Monetary Board under this section may likewise apply to loans secured by other types of security as may be specified by the Monetary Board. SEC. 4. Section three of the same Act is hereby amended to read as follows: SEC. 3. No person or corporation shall directly or indirectly demand, take, receive, or agree to charge in money or other property, real or personal, a higher rate or greater sum or value for the loan or forbearance of money, goods, or credits, where such loan or forbearance is not secured as provided in Section two hereof, than fourteen per centum per annum or the maximum rate or rates prescribed by the Monetary Board and in force at the time the loan or forbearance is granted. Apparent then is that the separate treatment for the two classes of loans was maintained. Yet, CIRCULAR No. 494 makes no distinction as to the types of loans that it is applicable to unlike Circular No. 586 dated January 1, 1978 and Circular No. 705 dated December 1, 1979, which fix the effective rate of interest on loan transactions with maturities of more than 730 days to not exceeding 19% per annum (Circular No. 586) and not exceeding 21% per annum (Circular No. 705) "on both secured and unsecured loans as defined by the Usury Law, as amended." In the absence of any indication in CIRCULAR No. 494 as to which particular type of loan was meant by the Monetary Board, the more equitable construction is to limit CIRCULAR No. 494 to loans guaranteed by securities other than mortgage upon registered realty. WHEREFORE, the Court rules that while an escalation clause like the one in question can ordinarily be held valid, nevertheless, petitioner Banco Filipino cannot rely thereon to raise the interest on the borrower's loan from 12% to 17% per annum because Circular No. 494 of the Monetary Board was not the "law" contemplated by the parties, nor should said Circular be held as applicable to loans secured by registered real estate in the absence of any such specific indication and in contravention of the policy behind the Usury Law. The judgment appealed from is, therefore, hereby affirmed in so far as it orders petitioner Banco Filipino to desist from enforcing the increased rate of interest on petitioner's loan. The Temporary Restraining Orders heretofore issued are hereby made permanent if the escalation clauses are Identical to the one herein and the loans involved have applied the increased rate of interest authorized by Central Bank Circular No. 494. SO ORDERED.
ANSELMO FERRAZZINI, plaintiff-appellee, vs. CARLOS GSELL, defendant-appellant.

William A. Kincaid and Thomas L. Hartigan for appellant. Ramon Sotelo for appellee. TRENT, J.: This action was brought to recover damages for an alleged wrongful discharge of the plaintiff, who had been employed by the defendant for an indefinite time to work in the latter's industrial enterprises in the city of Manila. The defendant admitted that he discharged the plaintiff without giving him the "written advice of six months in advance" as provided in the contract, but alleged that the discharge was lawful on account of absence, unfaithfulness, and disobedience of orders. The defendant sought affirmative relief for a further alleged breach of the contract by the plaintiff after his discharge. From a judgment in favor of the plaintiff the defendant appealed and now urges that the trial court erred (1) in finding that the plaintiff's discharge was not justified and (2) in declining to consider the counterclaim and enter judgment in accordance therewith. 1. The plaintiff engaged his "skilled service" to the defendant for the entire existence "of this agreement" at a fixed monthly salary and agreed "to devote his entire time and efforts to the best of his knowledge and skill exclusively in carrying out in the most satisfactory manner possible all of the work which may be entrusted to him during the existence of this contract and undertaking, furthermore, to exercise a strict discretion in all matters pertaining to the work so entrusted to him and the whole thereof, . . . ." The relation of master and servant, which was created by the contract, cast certain duties and obligations upon the parties, which they were bound to discharge and fulfill; the foremost, on the part of the master, were those of furnishing the servant with a reasonably safe place to work, to pay him for his services, and not to discharge him until the expiration of six months after notice; and the foremost, on the part of the servant, were those of loyalty, faithfulness, and obedience to all reasonable orders not inconsistent with the contract. Consequently, if the plaintiff's discharge were without just cause, it was in violation of the contract of service and he is entitled to recover. Otherwise, he is not, because the breach on his part must necessarily have occurred before his discharge. Hence, the defendant must prove justification for his act for the reason that it was in contravention of the six-months clause in the contract. In order to justify the dismissal of the plaintiff, the defendant must show that the plaintiff was guilty of conduct which can be construed to be a breach of some express or implied provision in the contract of service. If it has been shown that the plaintiff's conduct was inconsistent with the relation of master and servant or incompatible with the due and faithful performance of his duties, his discharge was justified. In view of the fact that the determination of these questions necessarily requires a careful review of the evidence and in view of the further fact that we cannot accept the trial court's findings upon these important points, we think it advisable to set forth briefly the substance of all of the material testimony submitted by both parties. ANSELMO FERRAZZINI: On Friday evening at supper there was some talk about Mr. Gsell measuring the goods for the umbrellas. Then I said that if Mr. Gsell does this, it is my idea that he has no confidence in his employees. I was talking to everybody in general. There were present Mr. Specht, Mr. Alberto Ferrazzini and Mr. Inhelder. Mr. Specht was an employee of the defendant at the time. I do not remember telling Specht that he was not receiving sufficient salary. The only thing I remember distinctly is that i said `that Mr. Gsell does not seem to have any confidence in us.'

Q. Is it not a fact that shortly, or sometime before your discharge, you have been in the habit of leaving the factory for considerable periods in the morning to go outside for the purpose of taking a drink? A. As long as I have been with the firm of Carlos Gsell I was allowed in the morning ten or fifteen minutes during the hot season to absent myself to have a drink of beer or whisky and soda; and the same in the afternoon. Q. Is it not a fact that Mr. Bender, the manager of the factory, had repeated spoken to you, or had several times spoken to you about your habit of leaving the factory for the purpose of taking a drink, and had prohibited you from doing it, forbade you to do it? A. He merely told me not to do it in such an ostentatious manner. Mr. Bender told me that Mr. Gsell did not like to see me go out in the forenoon and afternoon; I told him that Mr. Gsell himself had told me on one occasion that if I had to have a drink I could go out for it and it would be all right; this was in the presence of Mr. Landvatter. Q. Then, am I to understand that when you went out to take a drink it was because you must have one? A. Yes, of course. Q. Is it not a fact that Mr. Bender had conversations with you, at least once in the month of March, regarding this matter? A. I don't remember it. Q. Were not you frequently spoken to about it? A. No, sir. CARLOS GSELL: The first reason that led to his dismissal was because several months, through April and May, he had the habit of going out in the morning and afternoon for having a drink; not one but many drinks, because he was out sometimes an hour and an hour and a half; and as I have a factory with 400 working people I have to see that certain discipline is maintained in the factory. I gave instructions to the manager. Mr. Bender, to see that this habit would be dropped, but he (the plaintiff) would not do so. Now what made me pleased to dismiss him was because on a certain night at the mess where he ate with other employees of my house, he provoked one of my employees, a new arrival, and said that all the control I had in the factory was one of mistrust; he said I was suspicious; that I measured the cloth in my office for the umbrellas and that he would not support such treatment from my side; at the same time he said to this newly arrived employee that the salary that he, the new man, got under the contract was not sufficient to live on and that he should not continue to work for me. I asked the plaintiff about the conversation which he had at the mess and he did not deny it. He said that he did not mean it to be so bad. The factory was prejudiced on account of the plaintiff absenting himself, because sometimes I wanted to speak to him, tell him something, and he was not there. I had to wait for him,

and then when he came back it was noon perhaps, and it could not be done. I gave instructions to Mr. Bender, the manager, to stop the plaintiff's going out without permission. I did not exactly authorized the plaintiff to go out to drink. I always wanted to stop this. The plaintiff was the older of those who have gone out to drink. The plaintiff held a responsible position. In the first place it was his duty to make repairs to the machinery in all the departments; later he was entrusted with the various departments not at the same time; once he had the bleaching department; once he had to help out in the umbrella factory; and then he was in charge of the hat factory. The plaintiff had other employees under him. CARL BENDER: I came to the Philippine Islands in the middle of March as the defendant's manager. I saw that the plaintiff was frequently out of the factory. I told him that we was not allowed to leave the factory without my permission. HE kept up the habit of going out in the morning and afternoon for an hour or more and I told him the second time. He told me that he had permission from the former manager to go out and take a drink. I again told him he must not go out without my permission. Notwithstanding these orders, he was out one whole Saturday afternoon and I reported him to the defendant. The plaintiff went out without permission some thirty-five times after I ordered him not to do so. I had the other employees search for him, but they could not find him. He would go out four or five times a week. HERMAN INHELDER: I was present at the mess in June when that conversation took place. We were discussing several things, including the business and the way the umbrella factory was run. The plaintiff spoke in a manner that indicated that Mr. Gsell did not trust Mr. Specht. I did not want to have this kind of a conversation going on there and I told the plaintiff he had better leave the house. Q. Did the plaintiff say anything with respect to the amount of salary, which Mr. Specht was receiving? If so, what? A. I won't pretend that Mr. Ferrazzini said it that night, about the salary, but he said it on several occasions before, and well what he did say was that Mr. Specht ought not to work so much for such a small salary. ALBERTO FERRAZZINI: I was present when the conversation took place in the mess one evening of June last. A discussion arose about Mr. Gsell exercising control over the merchandise or goods. Then the plaintiff said that this seemed to show that Gsell had no confidence in Mr. Specht. Mr. Specht was in charge of the umbrella department. The conversation was then carried on in German and I could not understand what they said. HANS SPECHT: I am foreman of the umbrella factor of the defendant. During the conversation at the mass the plaintiff told me that the defendant had no confidence in me. I protested and then the plaintiff tried to prove it by stating that the defendant was investigating things in the umbrella factory, verifying the goods for the umbrellas. The plaintiff said nothing about my salary at that time, but on a previous occasion he told me that I was foolish at my age to work for such a small salary. I reported the matter to the defendant. The plaintiff admits that he stated to those present at the mess that if the defendant

measured the cloth for the umbrellas, "It is my idea that he has no confidence in his employees." Mr. Specht, the foreman f the umbrella factory, says that "During the conversation at the mess, the plaintiff told me that the defendant had no confidence in me." The plaintiff testified that he did not remember telling Specht that he (Specht) was not receiving sufficient salary, while Inhelder testified positively that the plaintiff stated on several occasions that Specht ought not to work so much for such a small salary, and Specht also testified positively that "he (the plaintiff) told me that I was foolish at my age to work for such a small salary." As to the plaintiff's absenting himself during working hours for the purpose of drinking, we have, on the one hand, the plaintiff's testimony to the effect that as long as he had been with the firm of Gsell he had been "allowed in the morning ten or fifteen minutes during the hot season to absent himself to have a drink of beer or whiskey, and the same in the afternoon," and that "the manager merely told me not to do it in such an ostentatious manner." While, on the other hand, we have the testimony of the defendant wherein he states that he instructed his manager, Mr. Bender, to direct the plaintiff to discontinue his habit of drinking during working hours, and the testimony of the manager (Bender) to the effect that he expressly directed the plaintiff not to go out without permission. But the plaintiff violated his express order some thirty-five times, keeping up the habit of going out (for the purpose of drinking) in the morning and afternoon for an hour or more at a time. All of the foregoing show a course of conduct on the part of the plaintiff inconsistent with the due and faithful performance of his duties as an employee of the defendant. He sought to create a feeling of unrest among the employees by inducing them to believe that the defendant had no confidence in them and that at least one employee was not receiving sufficiently salary. If it were true that the defendant was measuring the cloth for the umbrellas, he had a right to do so and this fact would not justify the plaintiff in saying that the defendant had no confidence in the employees. Likewise, if it be true that the defendant or his manager did at first authorize the plaintiff to absent himself during working hours for the purpose of drinking, the defendant had a perfect right to withdraw this permission at anytime he saw fit to do so. In fact, the defendant, through his manager, expressly directed the plaintiff to cease leaving the factory for that purpose, but the plaintiff violated this order numerous times. The plaintiff, being at times foreman and at other times in charge of important departments of the factory wherein some four hundred employees were at work, it cannot be questioned but that the defendant not only had a right to prohibit drinking during working hours, but it was his duty to do so for his own interests and the safety of his other employees. But it is intimated in the record that the defendant discharged the plaintiff on account of the conversation at the mess. If it be true that the defendant gave this as his sole reason for so acting at the time he discharged the plaintiff, yet he would not be prevented from setting up at the trial the fact that the plaintiff continued to disobey his orders with reference to absenting himself for the purpose of drinking. The defendant was, at the time he discharged the plaintiff, authorized to take into consideration the latter's whole course of conduct in determining whether the contract of employment should be terminated. We are, therefore, convinced that real errors was committed by the trial court in its findings of fact and that the record fully justifies a reversal of such findings, and a declaration to the effect that the defendant was justified in terminating the contract of employment. 2. At the opening of the trial in the court below and before any testimony had been taken, counsel for the defendant stated: I desire to amend my answer at this time by the addition of the following paragraph: The defendant further alleges for a second and further defense to the complaint herein, and for a counterclaim thereto, that the plaintiff has engaged in business in the Philippine

Islands since leaving the service of the defendant and without the defendant's request or consent, in violation of his contract with the defendant; wherefore, the defendant demands judgment against the plaintiff for the sum of ten thousand pesos. By the COURT: If the plaintiff does not claim any time to answer the new pleadings, the court will grant the amendment as asked for. By Mr. SOTELO: I note my exception to the admission of a counterclaim at this time; I have no time to prepare myself to meet it. By the COURT: The court has stated that if counsel for the plaintiff requires time to answer or meet this counterclaim he will be granted time to do so. By Mr. SOTELO: The attorney for the plaintiff answers to the court that much time has been lost already since the filing of the complaint and the trial, and he wants to go to trial in order that the plaintiff may get what he is justly entitled to. Testimony in support of the counterclaim was duly introduced before the close of the trial. In the final decision the court said: The court is of the opinion that the defendant's so-called amendment to his answer, dictated by counsel to the official stenographer, and not `upon motion filed in court, and after notice to the adverse party and an opportunity to be heard,' must be disregarded in the consideration of this case. This is manifest error. The verbal petition was expressly granted and the proferred amendment accepted by the court. Plaintiff's counsel noted his exception to this ruling and signified his willingness to proceed with the trial. All thereafter considered the answer as thus amended. We must, therefore, dispose of the defendant's counterclaim upon the merits. That portion of the contract upon which the defendant's counterclaimed is based reads as follows: That during the term of this contract, and for the period of five years after the termination of the employment of the said party of the second part, whether this contract continue in force for the period of one, two, three or more years, or be sooner terminated, the said party of the second party shall not engage or interest himself in any business enterprises similar to or in competition with those conducted, maintained or operated by the said party of the first day in the Philippines, and shall not assist, aid or encourage any such enterprise by the furnishing of information, advice or suggestions of any kind, and shall not enter into the employ of any enterprises in the Philippine Islands, whatever, save and except after obtaining special written permission therefor from the said party of the first part. It is further stipulated and agreed that the said party of the second part is hereby obligated and bound to pay unto the party of the first part the sum of ten thousand pesos, Philippine currency (P10,000) as liquidated damages for each and every breach of the present clause of this contract, whether such breach occurred during the employment of the said party of the second part or at any time during the period of five years from and after the termination

of said employment, and without regard to the cause of the termination of said employment. The plaintiff admits that he entered the employment of Mr. Whalen in the Philippine Islands as a foreman on some construction work for a cement factory within a few days after his discharge and without the consent, either written or verbal, of the defendant. This work was entirely different and disassociated from that engaged in by the defendant Gsell, yet this act of the plaintiff was a technical violation of the above-quoted provisions of the contract wherein he expressly agreed and obligated himself "not to enter into the employment of any enterprise in the Philippine Islands, whatever, save and except after obtaining special written permission therefor" from the defendant. The question now arises whether these provisions of the contract are valid and binding upon the plaintiff. Counsel for the defendant in their printed brief say: There is no doubt as to the validity of the contract, Gsell vs. Koch (16 Phil. Rep., 1) has settled that question in a similar contract and that decision has never been criticised, but is cited as recently as 1914 with approved. (Lambert vs. Fox, 26 Phil. Rep., 588). An examination of these cases, as well as others in point, is necessary in order to determine whether or not the question has been settled, and if we find that it is still an open one in this jurisdiction, we must proceed with the case. In pursuing this inquiry it is well to bear in mind (1) that the case under consideration has been tried in both courts exclusively upon the theory that the local law alone is applicable to the contract and (2) that the business in which the plaintiff became engaged was entirely different and distinct from that conducted, maintained or operated by the defendant 4vYE62. In Gsell vs. Koch, supra, a demurrer was sustained upon the ground that the allegations in the complaint did not constitute a cause of action, and after defendant declined to amend, judgment was entered dismissing the action. On appeal this order was reversed and the record returned with instructions to direct the defendant to answer. The paragraph in the written contract, upon which the judgment of this court rests, reads: Third. The said Pedro Koch binds himself to pay in cash to Mr. Gsell the sum of ten thousand pesos if, after leaving the firm of C. Gsell, and against the latter's will, he shall engage directly or indirectly in carrying on any business in which the said Carlos Gsell is at present engaged, or within the two and one-half years fixed for the duration of the present contract in these Islands, either as an employee or member of a firm or company, or on his own account; and he furthermore binds himself to pay in cash to Mr. Gsell an equal sum of ten thousand pesos for each violation of any secret of the business entrusted him. The plaintiff in that case was engaged solely and exclusively in the manufacture of umbrellas, matches, and hats. The secret process for making straw hats had cost the plaintiff some P20,000 and the defendant Koch, after having entered the hat factory under a contract of employment and after having learned the secret process employed by the plaintiff, left the plaintiff's service and engaged in the manufacture of straw hats in violation of the above-quoted provisions of the contract, using the trade secrets which he had thus learned. The provisions in the contract against the engaging in the manufacturing of straw hats in the Philippine Islands were held to be reasonably necessary for the protection of the plaintiff and not oppressive in so far as the defendant was concerned. In the case under consideration the contract goes far beyond that which formed the basis of the action in the

case just cited. Here the plaintiff Ferrazzini was prohibited from engaging in any business or occupation whatever in the Philippine Islands for a period of five years after the termination of this contract of employment without special written permission from the defendant. This plaintiff became engaged, as we have said, as a foreman in a cement factory, while the defendant in the other case became engaged in identically the same business which his employer was carrying on, that is, the manufacture of straw hats. Consequently, the reasons which support the validity of the contract in the one case are not applicable to the other. The same is true of the case of Fornow vs. Hoffmeister (6 Phil. Rep., 33), wherein the decision rests solely upon the question whether the contract was in violation of the contract labor laws. No other question was submitted or decided in that case. Therefore, whether the clause under consideration is valid and enforcible is still an open question. Articles 1091 and 1255 of the Civil Code read: ART. 1091. Obligations arising from contracts have legal force between the contracting parties, and must be fulfilled in accordance with their stipulations." ART. 1255. The contracting parties may make the agreement and establish the clauses and conditions which they may deem advisable, provided they are not in contravention of law, morals, or public order. Hence, the policy of the law requires that the freedom of persons to enter into contracts shall not be lightly interfered with, but if a contract be not founded upon a legal consideration (causa) or if it conflicts with the morals of the times or contravenes some established interest of society, the courts will not aid in its enforcement. Passing over the question whether "consideration" of the American law and the "causa" of the civil law are equivalent and whether there was adequate or legal consideration or "causa" on which the contract was founded, we will limit our further inquiry to the determination of the question whether that part of the contract under consideration is against public policy (orden publico). Manresa, Vol. 8 p. 606, says: Public policy (orden publico) which does not here signify the material keeping of public order represents in the law of persons the public, social and legal interest, that which is permanent and essential of the institutions, that which, even if favoring an individual in whom the right lies, cannot be left to his own will. It is an idea which, in cases of the waiver of any right, is manifested with clearness and force. Thus the jurisprudence on the subject of mortgages contains an interesting declarations on this point in a resolution of January 24, 1898, wherein it was held that: `The power of the husband to give marital permission cannot be validly conferred upon any attorney-in-fact, as the legislator has willed that, for reasons of the interest of society and of family government and discipline it should be vested only in the husband, being personal to him in the highest sense and therefore not capable of being transmitted.' Mucius Scaevola's (vol. 20, p., 505) conclusion is that:

Agreements in violation of orden publico must be considered as those which conflict with law, whether properly, strictly and wholly a public law (derecho) or whether a law of the person, but law which in certain respects affects the interest of society. Articles 1893 and 1895 of Merrick's Revised Civil Code of Louisiana, a civil law state, read: ART. 1893. An obligation without a cause, or with a false or unlawful cause, can have no effect. ART. 1895. Illegal or immoral cause. The cause is unlawful, when it is forbidden by law, when it is contra bonos mores or to public order. In Fabacher vs. Bryant & Mather (46 La. Ann., 820), the plaintiff and one Thomas Egan were engaged in the business of hauling cotton for the presses in the city of New Orleans. Both of these men were members of the Draymen's Association which had adopted a tariff of charges and undertook to distribute among the members the hauling of the various presses. The owners of the press were not consulted either as to the prices to be paid or as to those who should do the hauling. They could not obtain draymen outside of the union. They had to engage those designated by the union. The defendants employed Egan on the latter's representation that he had been so designated. Later the defendants employed the plaintiff upon the same representations. Finally, after investigation, the defendants declined to permit the plaintiff to do the work and carried out their contract with Egan. The plaintiff thereupon instituted this action for damages based upon the breach of his contract by the defendants. On the setting aside of a verdict in favor of the plaintiff by the trial court and an appeal having been duly entered, the Supreme Court affirmed the judgment, directing the dismissal of the case, holding that the plaintiff's contract was plainly repugnant to public policy, citing articles 1893 and 1895 supra. (India Bagging Association vs. Kock, 14 La. ann., 168; Gravier vs. Carraby, 17 La., 118, 142, and cases collected in 20 Hennen's Digest, p. 1007, No. 1.) In India Bagging Association vs. Kock, supra, an association of eight commercial firms in New Orleans, holders of 7,410 bales of India cotton bagging, was formed, the members binding themselves for the term of three months not to sell any bagging, nor offer to sell any, except with the consent of the majority of them expressed at a meeting; under the penalty of ten dollars for every bale sold or offered for sale. This action was brought against one of the members by the manager of the association for the recovery of a penalty of $7,400 for having sold 740 bales of bagging in contravention of the articles of the association. From a judgment in favor of the association the defendant member appealed and the Supreme Court reversed the judgment saying: The agreement between the parties was palpably and unequivocably a combination in restraint of trade, and to enhance the price in the market of an article of primary necessity to cotton planters. Such combination are contrary to public order, and cannot be enforced in a court of justice. By "public policy," as defined by the courts in the United States and England, is intended that principle of the law which holds that no subject or citizen can lawfully do that which has a tendency to be injurious to the public or against the public good, which may be termed the "policy of the law," or "public policy in relation to the administration of the law." (Words & Phrases Judicially Defined, vol. 6, p. 5813, and cases cited.) Public policy is the principle under which freedom of contract or private dealing is restricted by law for the good of the public. (Id., Id.) In determining whether a contract is contrary to public policy the nature of

the subject matter determines the source from which such question is to be solved. (Hartford Fire Ins. Co. vs. Chicago, M. & St. P. Ry. Co., 62 Fed. 904, 906.) The foregoing is sufficient to show that there is no difference in principle between the public policy (orden publico) in the two jurisdictions (the United States and the Philippine Islands) as determined by the Constitution, laws, and judicial decisions. In the United States it is well settled that contracts in undue or unreasonable restraint of trade are unenforcible because they are repugnant to the established public policy in that country. Such contracts are illegal in the sense that the law will not enforce them. The Supreme Court of the United States, in Oregon Steam Navigation Co. vs. Winsor (20 Wall., 64), quoted with approval in Gibbs vs. Consolidated Gas Co. of Baltimore (130 U. S., 396), said: Cases must be judged according to their circumstances, and can only be rightly judged when the reason and grounds of the rule as carefully considered. There are two principal grounds on which the doctrine is founded that a contract in restraint of trade is void as against public policy. One is, the injury to the public by being deprived of the restricted party's industry; and the other is, the injury to the party himself by being precluded from pursuing his occupation, and thus being prevented from supporting himself and his family. And in Gibbs vs. Consolidated Gas Co. of Baltimore, supra, the court stated the rule thus: Pubic welfare is first considered, and if it be not involved, and the restraint upon one party is not greater than protection to the other party requires, that contract may be sustained. The question is, whether, under the particular circumstances of the case and the nature of the particular contract involved in it, the contract is, or is not, unreasonable. Chapter 5, title 13, book 2, of our Penal Code makes it a crime for a person to solicit any gift or promise as a consideration for agreeing to refrain from taking part in any public, auction, or attempting to cause bidders to stay away from such auction by means of threats, gifts, promises or any other artifice, with intent to affect the price of the thing auctioned (Art. 542), or to combine for the purpose of lowering or raising wages to an abusive extent, or to regulate the conditions of labor (Art. 543), or by spreading false rumors, or by making use of any other artifice, succeeds in altering the prices which would naturally be obtained in free competition for merchandise, stocks, public and private securities, or any other thing which may be the object of trade and commerce (Art. 544). And Act No. 98, as amended, of the Philippine Commission likewise makes it a crime for any person or corporation, engaged as a common carrier, to subject any particular person, firm, company, corporation, or locality, or any particular kind of traffic to any undue or unreasonable prejudice or discrimination. To this extent the Legislature has expressly covered the subject and left to the courts to determine in each case whether any other particular agreement or contract is contrary to public policy PrSS4XJfHp. It needs no argument to show that an agreement or contract entered into for the purpose of accomplishing any of the prohibited acts mentioned in the above cited provisions of the Penal Code or in Act No. 98 would be unenforcible as being in violation of positive law. Those falling within the provisions of articles 542 and 544 of the Penal Code and Act No. 98 would clearly be agreements or contracts in undue or unreasonable restraint of trade. The

meaning given to the word "trade" would determine the question whether those coming within the provisions of article 543 would or would not be the same. If the commercial meaning of the word should govern, and in this sense t has reference to the business of selling or exchanging some tangible substance or commodity for money, or the business of dealing by way of sale in commodities, it would appear that such would not be contract in restraint of trade. This may be the most common significance of the word "trade." but it is not the only one, nor the most comprehensive meaning in which the word is properly used. In the broader sense, it is any occupation or business carried on for subsistence or profit. Anderson's Dictionary of Law gives the following definition: "Generally equivalent to occupation, employment, or business, whether manual or mercantile; any occupation, employment or business carried on for profit, gain, or livelihood, not in the liberal arts or in the learned professions." In Abbott's Law Dictionary the word is defined as "an occupation, employment or business carried on for gain or profit." Among the definitions given in the Encyclopaedic Dictionary is the following: "The business which a person has learnt, and which he carries on for subsistence or profit; occupation; particularly employment, whether manual or mercantile, as distinguished from the liberal arts or the learned professions and agriculture." Bouvier limits the meaning to commerce and traffic and the handicraft of mechanics. (In re Pinkney, 47 Kan., 89.) We are inclined to adopt and apply the broader meaning given by the lexicographers. The contract under consideration, tested by the law, rules and principles above set forth, is clearly one in undue or unreasonable restraint of trade and therefore against public policy. It is limited as to time and space but not as to trade. It is not necessary for the protection of the defendant, as this is provided for in another part of the clause. It would force the plaintiff to leave the Philippine Islands in order to obtain a livelihood in case the defendant declined to give him the written permission to work elsewhere in this country. The foregoing are our reasons upon which the short decision and order for judgment, heretofore filed,
[1]

were based.

G.R. No. L-21127

February 9, 1924

ALFONSO DEL CASTILLO, plaintiff-appellant, vs. SHANNON RICHMOND, defendant-appellee. F.R. Feria for appellant. Manly, Goddard and Lockwood for appellee.

JOHNSON, J.: This action was commenced in the Court of First Instance of the Province of Albay on the 18th day of October, 1922. Its purpose was to have declared null and of no effect the following contract executed and delivered on the 20th day of July, 1915:

CONTRACT FOR RENDERING SERVICES Know all men by these presents: That Shannon Richmond, of lawful age and a resident of the district of Legaspi, and Alfonso del Castillo, also of lawful age and a resident of the district of Daraga of the municipality and Province of Albay, Philippine Islands, have covenanted and agreed one with the other as follows: 1. That Alfonso del Castillo, in consideration of a monthly remuneration of P125 to be paid to him by Shannon Richmond, agrees to enter the employ of said Shannon Richmond beginning this date, as pharmacist, and to take charge of the prescription department of the drugstore known as the Botica Americana situated in the district of Legaspi of the municipality and Province of Albay, Philippine Islands, and to perform all the duties and obligations as such pharmacist together with such other duties in connection with the same that by custom correspond to the pharmacist in a drugstore of this kind. 2. That in consideration of the performance of the duties and obligations above indicated by the said Alfonso del Castillo, Shannon Richmond hereby agrees to pay the said Alfonso del Castillo the salary of P125 each month. 3. That in consideration of the fact that the said Alfonso del Castillo has just graduated as a pharmacist and up to the present time has not been employed in the capacity of a pharmacist and in consideration of this employment and the monthly salary mentioned in this contract, the said Alfonso del Castillo also agrees not to open, nor own nor have any interest directly or indirectly in any other drugstore either in his own name or in the name of another; nor have any connection with or be employed by any other drugstore situated within a radius of our miles from the district of Legaspi, municipality and Province of Albay, while the said Shannon Richmond or his heirs may own or have open a drugstore, or have an interest in any other one within the limits of the districts of Legaspi, Albay, and Daraga of the municipality of Albay, Province of Albay. 4. That either of the parties to this contract may terminate his relations as employer and employee with or without reason, and upon thirty days' notice; remaining, nevertheless, in full force and effect all the other conditions and agreements stipulated in this contract. 5. That the said Alfonso del Castillo furthermore agrees not to divulge or make use of any of the business secrets or private formulas of the said Shannon Richmond. In these terms, we execute this contract for the rendering of services on this 20th day of July, 1915, in the district of Legaspi, municipality and Province of Albay Philippine Islands. (Sgd.) "SHANNON RICHMOND "ALFONSO DEL CASTILLO Signed in the presence of:

(Sgd.) "M. GOYENA "L. AZANA" The said contract was acknowledge before a notary on the same day of its execution. The plaintiff alleges that the provisions and conditions contained in the third paragraph of said contract constitute an illegal and unreasonable restriction upon his liberty to contract, are contrary to public policy, and are unnecessary in order to constitute a just and reasonable protection to the defendant; and asked that the same be declared null and void and of no effect. The defendant interposed a general and special defense. In his special defense he alleges "that during the time the plaintiff was in the defendant's employ he obtained knowledge of his trade and professional secrets and came to know and became acquainted and established friendly relations with his customers so that to now annul the contract and permit plaintiff to establish a competing drugstore in the town of Legaspi, as plaintiff has announced his intention to do, would be extremely prejudicial to defendant's interest." The defendant further, in an amended answer, alleges "that this action not having been brought within four years from the time the contract referred to in the complaint was executed, the same has prescribed." During the trial of the cause an effort was made to sustain the allegations of the complaint that paragraph 3 of the said contract constituted an illegal and unreasonable restriction upon the right of the plaintiff to contract and was contrary to public policy. The lower court found that it was unnecessary to pass upon the question of prescription presented by the defendant. Upon a consideration of the merits, the court a quo concluded "that the contract the annulment of which is sought by the plaintiff is neither oppressive to him, nor unreasonably necessary to protect the defendant's business, nor prejudicial to the public interest." From that judgment the plaintiff appealed to this court. In this court the appellant still insists that said contract is illegal, unreasonable, and contrary to public policy. From a reading of paragraph 3 of the contract above quoted, it will be seen that the only restriction placed upon the right of the plaintiff is, that he shall "not open, nor own, nor have any interest directly or indirectly in any other drugstore either in his own name or in the name of another; nor have any connection with or be employed by any other drugstore as pharmacist or in any capacity in any drugstore situated within a radius of four miles from the district of Legaspi, municipality and Province of Albay, while the said Shannon Richmond or his heirs may own or have open a drugstore, or to have an interest in any other one within the limits of the districts of Legaspi, Albay, and Daraga of the municipality of Albay, Province of Albay." It will be noted that the restrictions placed upon the plaintiff are strictly limited (a) to a limited district or districts, and (b) during the time while the defendant or his heirs may own or have open a drugstore, or have an interest in any other one within said limited district. The law concerning contracts which tend to restrain business or trade has gone through a long series of changes from time to time with the changing conditions of trade and commerce. With trifling exceptions, said changes have been a continuous development of a general rule. The early cases show plainly a disposition to avoid and annul all contract which prohibited or restrained any one from using a lawful trade "at any time or at any place," as being against the benefit of the state. Later, however, the rule became well established that if the restriant was limited to "a certain time" and within "a certain place," such contracts were valid and not "against the benefit of the state." Later cases, and we think the rule is now well established, have held that a contract in restraint of trade is valid providing there is a limitation upon either time or place. A contract, however, which restrains a man from entering into a business or trade without either a limitation as to time or place, will be held invalid. (Anchor Electric Co. vs.Hawkes, 171 Mass., 101; Alger vs. Thacher, 19 Pickering [Mass.] 51;

Taylor vs. Blanchard, 13 Allen [Mass.], 370; Lufkin Rule Co. vs. Fringeli, 57 Ohio State, 596; Fowle vs. Park, 131 U.S., 88, 97; Diamond Match Co. vs. Roeber, 106 N.Y., 473; National Benefit Co. vs. Union Hospital Co., 45 Minn., 272; Swigert and Howard vs. Tilden, 121 Iowa, 650.) The public welfare of course must always be considered, and if it be not involved and the restraint upon one party is not greater than protection to the other requires, contracts like the one we are discussing will be sustained. The general tendency, we believe, of modern authority, is to make the test whether the restraint is reasonably necessary for the protection of the contracting parties. If the contract is reasonably necessary to protect the interest of the parties, it will be upheld. (Ollendorff vs. Abrahamson, 38 Phil., 585.) In that case we held that a contract by which an employee agrees to refrain for a given lenght of time, after the expiration of the term of his employment, from engaging in a business, competitive with that of his employer, is not void as being in restraint of trade if the restraint imposed is not greater than that which is necessary to afford a reasonable protection. In all cases like the present, the question is whether, under the particular circumstances of the case and the nature of the particular contract involved in it, the contract is, or is not, unreasonable. Of course in establishing whether the contract is a reasonable or unreasonable one, the nature of the business must also be considered. What would be a reasonable restriction as to time and place upon the manufacture of railway locomotive engines might be a very unreasonable restriction when imposed upon the employment of a day laborer. Considering the nature of the business in which the defendant is engaged, in relation with the limitation placed upon the plaintiff both as to time and place, we are of the opinion, and so decide, that such limitation is legal and reasonable and not contrary to public policy. Therefore the judgment appealed from should be and is hereby affirmed, with costs. So ordered. G.R. No. L-13505 February 4, 1919

GEO. W. DAYWALT, plaintiff-appellant, vs. LA CORPORACION DE LOS PADRES AGUSTINOS RECOLETOS, ET AL., defendants-appellees. C. C. Cohn and Thos. D. Aitken for appellant. Crossfield & O'Brien for appellee. STREET, J.: In the year 1902, Teodorica Endencia, an unmarried woman, resident in the Province of Mindoro, executed a contract whereby she obligated herself to convey to Geo. W. Daywalt, a tract of land situated in the barrio of Mangarin, municipality of Bulalacao, now San Jose, in said province. It was agreed that a deed should be executed as soon as the title to the land should be perfected by proceedings in the Court of Land Registration and a Torrens certificate should be produced therefore in the name of Teodorica Endencia. A decree recognizing the right of Teodorica as owner was entered in said court in August 1906, but the Torrens certificate was not issued until later. The parties, however, met immediately upon the entering of this decree and made a new contract with a view to carrying their original agreement into effect. This new contract was executed in the form of a deed of conveyance and bears date of August 16, 1906. The stipulated price was fixed at P4,000, and the area of the land enclosed in the boundaries defined in the contract was stated to be 452 hectares and a fraction.

The second contract was not immediately carried into effect for the reason that the Torrens certificate was not yet obtainable and in fact said certificate was not issued until the period of performance contemplated in the contract had expired. Accordingly, upon October 3, 1908, the parties entered into still another agreement, superseding the old, by which Teodorica Endencia agreed upon receiving the Torrens title to the land in question, to deliver the same to the Hongkong and Shanghai Bank in Manila, to be forwarded to the Crocker National Bank in San Francisco, where it was to be delivered to the plaintiff upon payment of a balance of P3,100. The Torrens certificate was in time issued to Teodorica Endencia, but in the course of the proceedings relative to the registration of the land, it was found by official survey that the area of the tract inclosed in the boundaries stated in the contract was about 1.248 hectares of 452 hectares as stated in the contract. In view of this development Teodorica Endencia became reluctant to transfer the whole tract to the purchaser, asserting that she never intended to sell so large an amount of land and that she had been misinformed as to its area. This attitude of hers led to litigation in which Daywalt finally succeeded, upon appeal to the Supreme Court, in obtaining a decree for specific performance; and Teodorica Endencia was ordered to convey the entire tract of land to Daywalt pursuant to the contract of October 3, 1908, which contract was declared to be in full force and effect. This decree appears to have become finally effective in the early part of the year 1914.1 The defendant, La Corporacion de los Padres Recoletos, is a religious corporation, with its domicile in the city of Manila. Said corporation was formerly the owner of a large tract of land, known as the San Jose Estate, on the island of Mindoro, which was sold to the Government of the Philippine Islands in the year 1909. The same corporation was at this time also the owner of another estate on the same island immediately adjacent to the land which Teodorica Endencia had sold to Geo. W. Daywalt; and for many years the Recoletos Fathers had maintained large herds of cattle on the farms referred to. Their representative, charged with management of these farms, was father Isidoro Sanz, himself a members of the order. Father Sanz had long been well acquainted with Teodorica Endencia and exerted over her an influence and ascendency due to his religious character as well as to the personal friendship which existed between them. Teodorica appears to be a woman of little personal force, easily subject to influence, and upon all the important matters of business was accustomed to seek, and was given, the advice of father Sanz and other members of his order with whom she came in contact. Father Sanz was fully aware of the existence of the contract of 1902 by which Teodorica Endencia agreed to sell her land to the plaintiff as well as of the later important developments connected with the history of that contract and the contract substituted successively for it; and in particular Father Sanz, as well as other members of the defendant corporation, knew of the existence of the contract of October 3, 1908, which, as we have already seen finally fixed the rights of the parties to the property in question. When the Torrens certificate was finally issued in 1909 in favor of Teodorica Endencia, she delivered it for safekeeping to the defendant corporation, and it was then taken to Manila where it remained in the custody and under the control of P. Juan Labarga the procurador and chief official of the defendant corporation, until the deliver thereof to the plaintiff was made compulsory by reason of the decree of the Supreme Court in 1914. When the defendant corporation sold the San Jose Estate, it was necessary to bring the cattle off of that property; and, in the first half of 1909, some 2,368 head were removed to the estate of the corporation immediately adjacent to the property which the plaintiff had purchased from Teodorica Endencia. As Teodorica still retained possession of said property Father Sanz entered into an arrangement with her whereby large numbers of cattle belonging to the defendant corporation were pastured upon said land during a period extending from June 1, 1909, to May 1, 1914.

Under the first cause stated in the complaint in the present action the plaintiff seeks to recover from the defendant corporation the sum of P24,000, as damages for the use and occupation of the land in question by reason of the pasturing of cattle thereon during the period stated. The trial court came to the conclusion that the defendant corporation was liable for damages by reason of the use and occupation of the premises in the manner stated; and fixed the amount to be recovered at P2,497. The plaintiff appealed and has assigned error to this part of the judgment of the court below, insisting that damages should have been awarded in a much larger sum and at least to the full extent of P24,000, the amount claimed in the complaint. As the defendant did not appeal, the property of allowing damages for the use and occupation of the land to the extent o P2,497, the amount awarded, is not now in question an the only thing here to be considered, in connection with this branch of the case, is whether the damages allowed under this head should be increased. The trial court rightly ignored the fact that the defendant corporation had paid Teodorica Endencia of ruse and occupation of the same land during the period in question at the rate of P425 per annum, inasmuch as the final decree of this court in the action for specific performance is conclusive against her right, and as the defendant corporation had notice of the rights of the plaintiff under this contract of purchase, it can not be permitted that the corporation should escape liability in this action by proving payment of rent to a person other than the true owner. With reference to the rate of which compensation should be estimated the trial court came to the following conclusion: As to the rate of the compensation, the plaintiff contends that the defendant corporation maintained at leas one thousand head of cattle on the land and that the pasturage was of the value of forty centavos per head monthly, or P4,800 annually, for the whole tract. The court can not accept this view. It is rather improbable that 1,248 hectares of wild Mindoro land would furnish sufficient pasturage for one thousand head of cattle during the entire year, and, considering the locality, the rate of forty centavos per head monthly seems too high. The evidence shows that after having recovered possession of the land the plaintiff rented it to the defendant corporation for fifty centavos per hectares annually, the tenant to pay the taxes on the land, and this appears to be a reasonable rent. There is no reason to suppose that the land was worth more for grazing purposes during the period from 1909 to 1913, than it was at the later period. Upon this basis the plaintiff is entitled to damages in the sum of p2,497, and is under no obligation to reimburse the defendants for the land taxes paid by either of them during the period the land was occupied by the defendant corporation. It may be mentioned in this connection that the Lontok tract adjoining the land in question and containing over three thousand hectares appears to have been leased for only P1,000 a year, plus the taxes. From this it will be seen that the trial court estimated the rental value of the land for grazing purposes at 50 centavos per hectare per annum, and roughly adopted the period of four years as the time for which compensation at that rate should be made. As the court had already found that the defendant was liable for these damages from June, 1, 1909, to May 1, 1914, or a period of four years and eleven months, there seems some ground for the contention made in the appellant's first assignment of error that the court's computation was erroneous, even accepting the rule upon which the damages were assessed, as it is manifest that at the rate of 50 centavos per hectare per annum, the damages for four years and eleven months would be P3,090. Notwithstanding this circumstance, we are of the opinion that the damages assessed are sufficient to compensate the plaintiff for the use and occupation of the land during the whole time it was used. There is evidence in the record strongly tending to show that the wrongful use of the land by the

defendant was not continuous throughout the year but was confined mostly to the reason when the forage obtainable on the land of the defendant corporation was not sufficient to maintain its cattle, for which reason it became necessary to allow them to go over to pasture on the land in question; and it is not clear that the whole of the land was used for pasturage at any time. Considerations of this character probably led the trial court to adopt four years as roughly being the period during which compensation should be allowed. But whether this was advertently done or not, we see no sufficient reason, in the uncertainty of the record with reference to the number of the cattle grazed and the period when the land was used, for substituting our guess for the estimate made by the trial court. In the second cause of action stated in the complaint the plaintiff seeks to recover from the defendant corporation the sum of P500,000, as damages, on the ground that said corporation, for its own selfish purposes, unlawfully induced Teodorica Endencia to refrain from the performance of her contract for the sale of the land in question and to withhold delivery to the plaintiff of the Torrens title, and further, maliciously and without reasonable cause, maintained her in her defense to the action of specific performance which was finally decided in favor of the plaintiff in this court. The cause of action here stated is based on liability derived from the wrongful interference of the defendant in the performance of the contract between the plaintiff and Teodorica Endencia; and the large damages laid in the complaint were, according to the proof submitted by the plaintiff, incurred as a result of a combination of circumstances of the following nature: In 1911, it appears, the plaintiff, as the owner of the land which he had bought from Teodorica Endencia entered into a contract (Exhibit C) with S. B. Wakefield, of San Francisco, for the sale and disposal of said lands to a sugar growing and milling enterprise, the successful launching of which depended on the ability of Daywalt to get possession of the land and the Torrens certificate of title. In order to accomplish this end, the plaintiff returned to the Philippine Islands, communicated his arrangement to the defendant,, and made repeated efforts to secure the registered title for delivery in compliance with said agreement with Wakefield. Teodorica Endencia seems to have yielded her consent to the consummation of her contract, but the Torrens title was then in the possession of Padre Juan Labarga in Manila, who refused to deliver the document. Teodorica also was in the end contract with the plaintiff, with the result that the plaintiff was kept out of possession until the Wakefield project for the establishment of a large sugar growing and milling enterprise fell through. In the light of what has happened in recent years in the sugar industry, we feel justified in saying that the project above referred to, if carried into effect, must inevitably have proved a great success. The determination of the issue presented in this second cause of action requires a consideration of two points. The first is whether a person who is not a party to a contract for the sale of land makes himself liable for damages to the vendee, beyond the value of the use and occupation, by colluding with the vendor and maintaining him in the effort to resist an action for specific performance. The second is whether the damages which the plaintiff seeks to recover under this head are too remote and speculative to be the subject of recovery. As preliminary to a consideration of the first of these questions, we deem it well it dispose of the contention that the members of the defendants corporation, in advising and prompting Teodorica Endencia not to comply with the contract of sale, were actuated by improper and malicious motives. The trial court found that this contention was not sustained, observing that while it was true that the circumstances pointed to an entire sympathy on the part of the defendant corporation with the efforts of Teodorica Endencia to defeat the plaintiff's claim to the land, the fact that its officials may have advised her not to carry the contract into effect would not constitute actionable interference with such contract. It may be added that when one considers the hardship that the ultimate performance of that contract entailed on the vendor, and the doubt in which the issue was involved to the extent that the decision of the Court of the First Instance was unfavorable to the plaintiff and the Supreme Court itself was divided the attitude of the defendant corporation, as exhibited in the conduct of its procurador, Juan Labarga, and other members of the order of the Recollect Fathers, is not difficult to understand. To our mind a fair conclusion on this feature of the case is that father Juan

Labarga and his associates believed in good faith that the contract cold not be enforced and that Teodorica would be wronged if it should be carried into effect. Any advice or assistance which they may have given was, therefore, prompted by no mean or improper motive. It is not, in our opinion, to be denied that Teodorica would have surrendered the documents of title and given possession of the land but for the influence and promptings of members of the defendants corporation. But we do not credit the idea that they were in any degree influenced to the giving of such advice by the desire to secure to themselves the paltry privilege of grazing their cattle upon the land in question to the prejudice of the just rights of the plaintiff. The attorney for the plaintiff maintains that, by interfering in the performance of the contract in question and obstructing the plaintiff in his efforts to secure the certificate of tittle to the land, the defendant corporation made itself a co-participant with Teodorica Endencia in the breach of said contract; and inasmuch as father Juan Labarga, at the time of said unlawful intervention between the contracting parties, was fully aware of the existence of the contract (Exhibit C) which the plaintiff had made with S. B. Wakefield, of San Francisco, it is insisted that the defendant corporation is liable for the loss consequent upon the failure of the project outlined in said contract. In this connection reliance is placed by the plaintiff upon certain American and English decisions in which it is held that a person who is a stranger to contract may, by an unjustifiable interference in the performance thereof, render himself liable for the damages consequent upon non-performance. It is said that the doctrine of these cases was recognized by this court in Gilchrist vs. Cuddy (29 Phil. Rep., 542); and we have been earnestly pressed to extend the rule there enunciated to the situation here presente. Somewhat more than half a century ago the English Court of the Queen's Bench saw its way clear to permit an action for damages to be maintained against a stranger to a contract wrongfully interfering in its performance. The leading case on this subject is Lumley vs. Gye ([1853], 2 El. & Bl., 216). It there appeared that the plaintiff, as manager of a theatre, had entered into a contract with Miss Johanna Wagner, an opera singer,, whereby she bound herself for a period to sing in the plaintiff's theatre and nowhere else. The defendant, knowing of the existence of this contract, and, as the declaration alleged, "maliciously intending to injure the plaintiff," enticed and produced Miss Wagner to leave the plaintiff's employment. It was held that the plaintiff was entitled to recover damages. The right which was here recognized had its origin in a rule, long familiar to the courts of the common law, to the effect that any person who entices a servant from his employment is liable in damages to the master. The master's interest in the service rendered by his employee is here considered as a distinct subject of juridical right. It being thus accepted that it is a legal wrong to break up a relation of personal service, the question now arose whether it is illegal for one person to interfere with any contract relation subsisting between others. Prior to the decision of Lumley vs. Gye [supra] it had been supposed that the liability here under consideration was limited to the cases of the enticement of menial servants, apprentices, and others to whom the English Statutes of Laborers were applicable. But in the case cited the majority of the judges concurred in the opinion that the principle extended to all cases of hiring. This doctrine was followed by the Court of Appeal in Bowen vs. Hall ([1881], 6 Q. B., Div., 333); and in Temperton vs. Russell ([1893], Q. B., 715), it was held that the right of action for maliciously procuring a breach of contract is not confined to contracts for personal services, but extends to contracts in general. In that case the contract which the defendant had procured to be breached was a contract for the supply of building material. Malice in some form is generally supposed to be an essential ingredient in cases of interference with contract relations. But upon the authorities it is enough if the wrong-doer, having knowledge of the existence of the contract relations, in bad faith sets about to break it up. Whether his motive is to benefit himself or gratify his spite by working mischief to the employer is immaterial. Malice in the sense of ill-will or spite is not essential.

Upon the question as to what constitutes legal justification, a good illustration was put in the leading case. If a party enters into contract to go for another upon a journey to a remote and unhealthful climate, and a third person, with a bona fide purpose of benefiting the one who is under contract to go, dissuades him from the step, no action will lie. But if the advice is not disinterested and the persuasion is used for "the indirect purpose of benefiting the defendant at the expense of the plaintiff," the intermedler is liable if his advice is taken and the contract broken. The doctrine embodied in the cases just cited has sometimes been found useful, in the complicated relations of modern industry, as a means of restraining the activities of labor unions and industrial societies when improperly engaged in the promotion of strikes. An illustration of the application of the doctrine in question in a case of this kind is found in South Wales Miners Federation vs. Glamorgan Coal Co. ([1905]), A. C., 239). It there appeared that certain miners employed in the plaintiff's collieries, acting under the order of the executive council of the defendant federation, violated their contract with the plaintiff by abstaining from work on certain days. The federation and council acted without any actual malice or ill-will towards the plaintiff, and the only object of the order in question was that the price of coal might thereby be kept up, a factor which affected the miner's wage scale. It was held that no sufficient justification was shown and that the federation was liable. In the United States, the rule established in England by Lumley vs. Gye [supra] and subsequent cases is commonly accepted, though in a few of the States the broad idea that a stranger to a contract can be held liable upon its is rejected, and in these jurisdictions the doctrine, if accepted at all, is limited to the situation where the contract is strictly for personal service. (Boyson vs. Thorn, 98 Cal., 578; Chambers & Marshall vs. Baldwin 91 Ky., 121; Bourlier vs. Macauley, 91 Ky., 135; Glencoe Land & Gravel Co. vs. Hudson Bros. Com. Co., 138 Mo., 439.) It should be observed in this connection that, according to the English and American authorities, no question can be made as to the liability to one who interferes with a contract existing between others by means which, under known legal cannons, can be denominated an unlawful means. Thus, if performance is prevented by force, intimidation, coercion, or threats, or by false or defamatory statements, or by nuisance or riot, the person using such unlawful means is, under all the authorities, liable for the damage which ensues. And in jurisdictions where the doctrine of Lumley vs. Gye [supra] is rejected, no liability can arise from a meddlesome and malicious interference with a contract relation unless some such unlawful means as those just indicated are used. (See cases last above cited.) This brings us to the decision made by this court in Gilchrist vs. Cuddy (29 Phil. Rep., 542). It there appeared that one Cuddy, the owner of a cinematographic film, let it under a rental contract to the plaintiff Gilchrist for a specified period of time. In violation of the terms of this agreement, Cuddy proceeded to turn over the film also under a rental contract, to the defendants Espejo and Zaldarriaga. Gilchrist thereupon restored to the Court of First Instance and produced an injunction restraining the defendants from exhibiting the film in question in their theater during the period specified in the contract of Cuddy with Gilchrist. Upon appeal to this court it was in effect held that the injunction was not improperly granted, although the defendants did not, at the time their contract was made, know the identity of the plaintiff as the person holding the prior contract but did know of the existence of a contract in favor of someone. It was also said arguendo, that the defendants would have been liable in damages under article 1902 of the Civil Code, if the action had been brought by the plaintiff to recover damages. The force of the opinion is, we think, somewhat weakened by the criticism contain in the concurring opinion, where it is said that the question of breach of contract by inducement was not really involved in the case. Taking the decision upon the point which was rally decided, it is authority for the proposition that one who buys something which

he knows has been sold to some other person can be restrained from using that thing to the prejudice of the person having the prior and better right. Translated into terms applicable to the case at bar, the decision in Gilchrist vs. Cuddy (29 Phil. Rep., 542), indicates that the defendant corporation, having notice of the sale of the land in question to Daywalt, might have been enjoined by the latter from using the property for grazing its cattle thereon. That the defendant corporation is also liable in this action for the damage resulting to the plaintiff from the wrongful use and occupation of the property has also been already determined. But it will be observed that in order to sustain this liability it is not necessary to resort to any subtle exegesis relative to the liability of a stranger to a contract for unlawful interference in the performance thereof. It is enough that defendant use the property with notice that the plaintiff had a prior and better right. Article 1902 of the Civil Code declares that any person who by an act or omission, characterized by fault or negligence, causes damage to another shall be liable for the damage so done. Ignoring so much of this article as relates to liability for negligence, we take the rule to be that a person is liable for damage done to another by any culpable act; and by "culpable act" we mean any act which is blameworthy when judged by accepted legal standards. The idea thus expressed is undoubtedly broad enough to include any rational conception of liability for the tortious acts likely to be developed in any society. Thus considered, it cannot be said that the doctrine of Lumley vs. Gye [supra] and related cases is repugnant to the principles of the civil law. Nevertheless, it must be admitted that the codes and jurisprudence of the civil law furnish a somewhat uncongenial field in which to propagate the idea that a stranger to a contract may sued for the breach thereof. Article 1257 of the Civil Code declares that contracts are binding only between the parties and their privies. In conformity with this it has been held that a stranger to a contract has no right of action for the nonfulfillment of the contract except in the case especially contemplated in the second paragraph of the same article. (Uy Tam and Uy Yet vs. Leonard, 30 Phil. Rep., 471.) As observed by this court in Manila Railroad Co. vs. Compaia Transatlantica, R. G. No. 11318 (38 Phil. Rep., 875), a contract, when effectually entered into between certain parties, determines not only the character and extent of the liability of the contracting parties but also the person or entity by whom the obligation is exigible. The same idea should apparently be applicable with respect to the person against whom the obligation of the contract may be enforced; for it is evident that there must be a certain mutuality in the obligation, and if the stranger to a contract is not permitted to sue to enforce it, he cannot consistently be held liable upon it. If the two antagonistic ideas which we have just brought into juxtaposition are capable of reconciliation, the process must be accomplished by distinguishing clearly between the right of action arising from the improper interference with the contract by a stranger thereto, considered as an independent act generate of civil liability, and the right of action ex contractu against a party to the contract resulting from the breach thereof. However, we do not propose here to pursue the matter further, inasmuch as, for reasons presently to be stated, we are of the opinion that neither the doctrine of Lumley vs. Gye [supra] nor the application made of it by this court in Gilchristvs. Cuddy (29 Phil. Rep., 542), affords any basis for the recovery of the damages which the plaintiff is supposed to have suffered by reason of his inability to comply with the terms of the Wakefield contract. Whatever may be the character of the liability which a stranger to a contract may incur by advising or assisting one of the parties to evade performance, there is one proposition upon which all must agree. This is, that the stranger cannot become more extensively liable in damages for the nonperformance of the contract than the party in whose behalf he intermeddles. To hold the stranger liable for damages in excess of those that could be recovered against the immediate party to the contract would lead to results at once grotesque and unjust. In the case at bar, as Teodorica

Endencia was the party directly bound by the contract, it is obvious that the liability of the defendant corporation, even admitting that it has made itself coparticipant in the breach of the contract, can in no even exceed hers. This leads us to consider at this point the extent of the liability of Teodorica Endencia to the plaintiff by reason of her failure to surrender the certificate of title and to place the plaintiff in possession. It should in the first place be noted that the liability of Teodorica Endencia for damages resulting from the breach of her contract with Daywalt was a proper subject for adjudication in the action for specific performance which Daywalt instituted against her in 1909 and which was litigated by him to a successful conclusion in this court, but without obtaining any special adjudication with reference to damages. Indemnification for damages resulting from the breach of a contract is a right inseparably annexed to every action for the fulfillment of the obligation (art. 1124, Civil Code); and its is clear that if damages are not sought or recovered in the action to enforce performance they cannot be recovered in an independent action. As to Teodorica Endencia, therefore, it should be considered that the right of action to recover damages for the breach of the contract in question was exhausted in the prior suit. However, her attorneys have not seen fit to interpose the defense of res judicata in her behalf; and as the defendant corporation was not a party to that action, and such defense could not in any event be of any avail to it, we proceed to consider the question of the liability of Teodorica Endencia for damages without refernce to this point. The most that can be said with refernce to the conduct of Teodorica Endencia is that she refused to carry out a contract for the sale of certain land and resisted to the last an action for specific performance in court. The result was that the plaintiff was prevented during a period of several years from exerting that control over the property which he was entitled to exert and was meanwhile unable to dispose of the property advantageously. Now, what is the measure of damages for the wrongful detention of real property by the vender after the time has come for him to place the purchaser in possession? The damages ordinarily and normally recoverable against a vendor for failure to deliver land which he has contracted to deliver is the value of the use and occupation of the land for the time during which it is wrongfully withheld. And of course where the purchaser has not paid the purchaser money, a deduction may be made in respect to the interest on the money which constitutes the purchase price. Substantially the same rule holds with respect to the liability of a landlord who fails to put his tenant in possession pursuant to contract of lease. The measure of damages is the value of the leasehold interest, or use and occupation, less the stipulated rent, where this has not been paid. The rule that the measure of damages for the wrongful detention of land is normally to be found in the value of use and occupation is, we believe, one of the things that may be considered certain in the law (39 cyc., 1630; 24 Cyc., 1052 Sedgewick on Damages, Ninth ed., sec. 185.) almost as wellsettled, indeed, as the rule that the measure of damages for the wrongful detention of money is to be found in the interest. We recognize the possibility that more extensive damages may be recovered where, at the time of the creation of the contractual obligation, the vendor, or lessor, is aware of the use to which the purchaser or lessee desires to put the property which is the subject of the contract, and the contract is made with the eyes of the vendor or lessor open to the possibility of the damage which may result to the other party from his own failure to give possession. The case before us is not this character, inasmuch as at the time when the rights of the parties under the contract were determined, nothing was known to any to them about the San Francisco capitalist who would be willing to back the project portrayed in Exhibit C. The extent of the liability for the breach of a contract must be determined in the light of the situation in existence at the time the contract is made; and the damages ordinarily recoverable are in all

events limited to such as might be reasonable are in all events limited to such as might be reasonably foreseen in the light of the facts then known to the contracting parties. Where the purchaser desires to protect himself, in the contingency of the failure of the vendor promptly to give possession, from the possibility of incurring other damages than such as the incident to the normal value of the use and occupation, he should cause to be inserted in the contract a clause providing for stipulated amount to the paid upon failure of the vendor to give possession; and not case has been called to our attention where, in the absence of such a stipulation, damages have been held to be recoverable by the purchaser in excess of the normal value of use and occupation. On the contrary, the most fundamental conceptions of the law relative to the assessment of damages are inconsistent with such idea. The principles governing this branch of the law were profoundly considered in the case Hadley vs. Baxendale (9 Exch., 341), decided in the English Court of Exchequer in 1854; and a few words relative to the principles governing will here be found instructive. The decision in that case is considered a leading authority in the jurisprudence of the common law. The plaintiffs in that case were proprietors of a mill in Gloucester, which was propelled by steam, and which was engaged in grinding and supplying meal and flour to customers. The shaft of the engine got broken, and it became necessarily that the broken shaft be sent to an engineer or foundry man at Greenwich, to serve as a model for casting or manufacturing another that would fit into the machinery. The broken shaft could be delivered at Greenwich on the second day after its receipts by the carrier it. It was delivered to the defendants, who were common carriers engaged in that business between these points, and who had told plaintiffs it would be delivered at Greenwich on the second day after its delivery to them, if delivered at a given hour. The carriers were informed that the mill was stopped, but were not informed of the special purpose for which the broken shaft was desired to forwarded, They were not told the mill would remain idle until the new shaft would be returned, or that the new shaft could not be manufactured at Greenwich until the broken one arrived to serve as a model. There was delay beyond the two days in delivering the broken shaft at Greenwich, and a corresponding delay in starting the mill. No explanation of the delay was offered by the carriers. The suit was brought to recover damages for the lost profits of the mill, cause by the delay in delivering the broken shaft. It was held that the plaintiff could not recover. The discussion contained in the opinion of the court in that case leads to the conclusion that the damages recoverable in case of the breach of a contract are two sorts, namely, (1) the ordinary, natural, and in a sense necessary damage; and (2) special damages. Ordinary damages is found in all breaches of contract where the are no special circumstances to distinguish the case specially from other contracts. The consideration paid for an unperformed promise is an instance of this sort of damage. In all such cases the damages recoverable are such as naturally and generally would result from such a breach, "according to the usual course of things." In case involving only ordinary damage no discussion is ever indulged as to whether that damage was contemplated or not. This is conclusively presumed from the immediateness and inevitableness of the damage, and the recovery of such damage follows as a necessary legal consequence of the breach. Ordinary damage is assumed as a matter of law to be within the contemplation of the parties. Special damage, on the other hand, is such as follows less directly from the breach than ordinary damage. It is only found in case where some external condition, apart from the actual terms to the contract exists or intervenes, as it were, to give a turn to affairs and to increase damage in a way that the promisor, without actual notice of that external condition, could not reasonably be expected to foresee. Concerning this sort of damage, Hadley vs.Baxendale (1854) [supra] lays down the definite and just rule that before such damage can be recovered the plaintiff must show that the

particular condition which made the damage a possible and likely consequence of the breach was known to the defendant at the time the contract was made. The statement that special damages may be recovered where the likelihood of such damages flowing from the breach of the contract is contemplated and foreseen by the parties needs to be supplemented by a proposition which, though not enunciated in Hadley vs. Baxendale, is yet clearly to be drawn from subsequent cases. This is that where the damage which a plaintiff seeks to recover as special damage is so far speculative as to be in contemplation of law remote, notification of the special conditions which make that damage possible cannot render the defendant liable therefor. To bring damages which would ordinarily be treated as remote within the category of recoverable special damages, it is necessary that the condition should be made the subject of contract in such sense as to become an express or implied term of the engagement. Horne vs. Midland R. Co. (L. R., 8 C. P., 131) is a case where the damage which was sought to be recovered as special damage was really remote, and some of the judges rightly places the disallowance of the damage on the ground that to make such damage recoverable, it must so far have been within the contemplation of the parties as to form at least an implied term of the contract. But others proceeded on the idea that the notice given to the defendant was not sufficiently full and definite. The result was the same in either view. The facts in that case were as follows: The plaintiffs, shoe manufacturers at K, were under contract to supply by a certain day shoes to a firm in London for the French government. They delivered the shoes to a carrier in sufficient time for the goods to reach London at the time stipulated in the contract and informed the railroad agent that the shoes would be thrown back upon their hands if they did not reach the destination in time. The defendants negligently failed to forward the good in due season. The sale was therefore lost, and the market having fallen, the plaintiffs had to sell at a loss. In the preceding discussion we have considered the plaintiff's right chiefly against Teodorica Endencia; and what has been said suffices in our opinion to demonstrate that the damages laid under the second cause of action in the complaint could not be recovered from her, first, because the damages laid under the second cause of action in the complaint could not be recovered from her, first, because the damages in question are special damages which were not within contemplation of the parties when the contract was made, and secondly, because said damages are too remote to be the subject of recovery. This conclusion is also necessarily fatal to the right of the plaintiff to recover such damages from the defendant corporation, for, as already suggested, by advising Teodorica not to perform the contract, said corporation could in no event render itself more extensively liable than the principle in the contract. Our conclusion is that the judgment of the trial court should be affirmed, and it is so ordered, with costs against the appellant. G.R. No. L-15127 May 30, 1961

EMETERIO CUI, plaintiff-appellant, vs. ARELLANO UNIVERSITY, defendant-appellee. G.A.S. Sipin, Jr., for plaintiff-appellant. E. Voltaire Garcia for defendant-appellee. CONCEPCION, J.:

Appeal by plaintiff Emeterio Cui from a decision of the Court of First Instance of Manila, absolving defendant Arellano University from plaintiff's complaint, with costs against the plaintiff, and dismissing defendant's counter claim, for insufficiency of proof thereon. In the language of the decision appealed from: The essential facts of this case are short and undisputed. As established by the agreement of facts Exhibits X and by the respective oral and documentary evidence introduced by the parties, it appears conclusive that plaintiff, before the school year 1948-1949 took up preparatory law course in the defendant University. After finishing his preparatory law course plaintiff enrolled in the College of Law of the defendant from the school year 1948-1949. Plaintiff finished his law studies in the defendant university up to and including the first semester of the fourth year. During all the school years in which plaintiff was studying law in defendant law college, Francisco R. Capistrano, brother of the mother of plaintiff, was the dean of the College of Law and legal counsel of the defendant university. Plaintiff enrolled for the last semester of his law studies in the defendant university but failed to pay his tuition fees because his uncle Dean Francisco R. Capistrano having severed his connection with defendant and having accepted the deanship and chancellorship of the College of Law of Abad Santos University, plaintiff left the defendant's law college and enrolled for the last semester of his fourth year law in the college of law of the Abad Santos University graduating from the college of law of the latter university. Plaintiff, during all the time he was studying law in defendant university was awarded scholarship grants, for scholastic merit, so that his semestral tuition fees were returned to him after the ends of semester and when his scholarship grants were awarded to him. The whole amount of tuition fees paid by plaintiff to defendant and refunded to him by the latter from the first semester up to and including the first semester of his last year in the college of law or the fourth year, is in total P1,033.87. After graduating in law from Abad Santos University he applied to take the bar examination. To secure permission to take the bar he needed the transcripts of his records in defendant Arellano University. Plaintiff petitioned the latter to issue to him the needed transcripts. The defendant refused until after he had paid back the P1,033 87 which defendant refunded to him as above stated. As he could not take the bar examination without those transcripts, plaintiff paid to defendant the said sum under protest. This is the sum which plaintiff seeks to recover from defendant in this case. Before defendant awarded to plaintiff the scholarship grants as above stated, he was made to sign the following contract covenant and agreement: "In consideration of the scholarship granted to me by the University, I hereby waive my right to transfer to another school without having refunded to the University (defendant) the equivalent of my scholarship cash. (Sgd.) Emeterio Cui". It is admitted that, on August 16, 1949, the Director of Private Schools issued Memorandum No. 38, series of 1949, on the subject of "Scholarship," addressed to "All heads of private schools, colleges and universities," reading: 1. School catalogs and prospectuses submitted to this, Bureau show that some schools offer full or partial scholarships to deserving students for excellence in scholarship or for leadership in extra-curricular activities. Such inducements to poor but gifted students should be encouraged. But to stipulate the condition that such scholarships are good only if the

students concerned continue in the same school nullifies the principle of merit in the award of these scholarships. 2. When students are given full or partial scholarships, it is understood that such scholarships are merited and earned. The amount in tuition and other fees corresponding to these scholarships should not be subsequently charged to the recipient students when they decide to quit school or to transfer to another institution. Scholarships should not be offered merely to attract and keep students in a school. 3. Several complaints have actually been received from students who have enjoyed scholarships, full or partial, to the effect that they could not transfer to other schools since their credentials would not be released unless they would pay the fees corresponding to the period of the scholarships. Where the Bureau believes that the right of the student to transfer is being denied on this ground, it reserves the right to authorize such transfer. that defendant herein received a copy of this memorandum; that plaintiff asked the Bureau of Private Schools to pass upon the issue on his right to secure the transcript of his record in defendant University, without being required to refund the sum of P1,033.87; that the Bureau of Private Schools upheld the position taken by the plaintiff and so advised the defendant; and that, this notwithstanding, the latter refused to issue said transcript of records, unless said refund were made, and even recommended to said Bureau that it issue a written order directing the defendant to release said transcript of record, "so that the case may be presented to the court for judicial action." As above stated, plaintiff was, accordingly, constrained to pay, and did pay under protest, said sum of P1,033.87, in order that he could take the bar examination in 1953. Subsequently, he brought this action for the recovery of said amount, aside from P2,000 as moral damages, P500 as exemplary damages, P2,000 as attorney's fees, and P500 as expenses of litigation. In its answer, defendant reiterated the stand it took, vis-a-vis the Bureau of Private Schools, namely, that the provisions of its contract with plaintiff are valid and binding and that the memorandum above-referred to is null and void. It, likewise, set up a counterclaim for P10,000.00 as damages, and P3,000 as attorney's fees. The issue in this case is whether the above quoted provision of the contract between plaintiff and the defendant, whereby the former waived his right to transfer to another school without refunding to the latter the equivalent of his scholarships in cash, is valid or not. The lower court resolved this question in the affirmative, upon the ground that the aforementioned memorandum of the Director of Private Schools is not a law; that the provisions thereof are advisory, not mandatory in nature; and that, although the contractual provision "may be unethical, yet it was more unethical for plaintiff to quit studying with the defendant without good reasons and simply because he wanted to follow the example of his uncle." Moreover, defendant maintains in its brief that the aforementioned memorandum of the Director of Private Schools is null and void because said officer had no authority to issue it, and because it had been neither approved by the corresponding department head nor published in the official gazette. We do not deem it necessary or advisable to consider as the lower court did, the question whether plaintiff had sufficient reasons or not to transfer from defendant University to the Abad Santos University. The nature of the issue before us, and its far reaching effects, transcend personal equations and demand a determination of the case from a high impersonal plane. Neither do we deem it essential to pass upon the validity of said Memorandum No. 38, for, regardless of the same, we are of the opinion that the stipulation in question is contrary to public policy and, hence, null and void. The aforesaid memorandum merely incorporates a sound principle of public policy. As the Director of Private Schools correctly pointed, out in his letter, Exhibit B, to the defendant,

There is one more point that merits refutation and that is whether or not the contract entered into between Cui and Arellano University on September 10, 1951 was void as against public policy. In the case of Zeigel vs. Illinois Trust and Savings Bank, 245 Ill. 180, 19 Ann. Case 127, the court said: 'In determining a public policy of the state, courts are limited to a consideration of the Constitution, the judicial decisions, the statutes, and the practice of government officers.' It might take more than a government bureau or office to lay down or establish a public policy, as alleged in your communication, but courts consider the practices of government officials as one of the four factors in determining a public policy of the state. It has been consistently held in America that under the principles relating to the doctrine of public policy, as applied to the law of contracts, courts of justice will not recognize or uphold a transaction which its object, operation, or tendency is calculated to be prejudicial to the public welfare, to sound morality or to civic honesty (Ritter vs. Mutual Life Ins. Co., 169 U.S. 139; Heding vs. Gallaghere 64 L.R.A. 811; Veazy vs. Allen, 173 N.Y. 359). If Arellano University understood clearly the real essence of scholarships and the motives which prompted this office to issue Memorandum No. 38, s. 1949, it should have not entered into a contract of waiver with Cui on September 10, 1951, which is a direct violation of our Memorandum and an open challenge to the authority of the Director of Private Schools because the contract was repugnant to sound morality and civic honesty. And finally, in Gabriel vs. Monte de Piedad, Off. Gazette Supp. Dec. 6, 1941, p. 67 we read: 'In order to declare a contract void as against public policy, a court must find that the contract as to consideration or the thing to be done, contravenes some established interest of society, or is inconsistent with sound policy and good morals or tends clearly to undermine the security of individual rights. The policy enunciated in Memorandum No. 38, s. 1949 is sound policy. Scholarship are awarded in recognition of merit not to keep outstanding students in school to bolster its prestige. In the understanding of that university scholarships award is a business scheme designed to increase the business potential of an education institution. Thus conceived it is not only inconsistent with sound policy but also good morals. But what is morals? Manresa has this definition. It is good customs; those generally accepted principles of morality which have received some kind of social and practical confirmation. The practice of awarding scholarships to attract students and keep them in school is not good customs nor has it received some kind of social and practical confirmation except in some private institutions as in Arellano University. The University of the Philippines which implements Section 5 of Article XIV of the Constitution with reference to the giving of free scholarships to gifted children, does not require scholars to reimburse the corresponding value of the scholarships if they transfer to other schools. So also with the leading colleges and universities of the United States after which our educational practices or policies are patterned. In these institutions scholarships are granted not to attract and to keep brilliant students in school for their propaganda mine but to reward merit or help gifted students in whom society has an established interest or a first lien. (Emphasis supplied.) WHEREFORE, the decision appealed from is hereby reversed and another one shall be entered sentencing the defendant to pay to the plaintiff the sum of P1,033.87, with interest thereon at the legal rate from September 1, 1954, date of the institution of this case, as well as the costs, and dismissing defendant's counterclaim. It is so ordered.

G.R. No. L-82499 October 13, 1989 CAPITOL MEDICAL CENTER, INC., and DRA. THELMA NAVARRETE CLEMENTE, petitioners, vs. THE COURT OF APPEALS, HON. IGNACIO SALVADOR, in his capacity as Presiding Judge of

Branch 77 of the Regional Trial Court of the National Capital Region (Quezon City), MONINA REYES-VALENZUELA, PABLO L. DAMASO, LINA M. ABLANG, MA. TERESITA ROQUE, AMBROSIO LAZOL, DIOSDADO YAP, FLORDELIZA SINGSON, SARAH P. PELOBELLO JOEL H. GILLEGO, AGNES A. DE VEGA, NORAIDA Y. MAGALONG, AUGENCIO PAPA, IMELDA SIMBILLO, MAXIMO CALDERON and ROSALIE FLORIDA C. ILAGA,respondents. Samson S. Alcantara for petitioners. Law Firm of Raymundo A. Armovit for private respondents.

GRINO-AQUINO, J.: At bottom, the only issue in this case is whether a school that, after due notice to the Secretary of Education, Culture and Sports, closed at the end of the first semester of the school year 1987-1988, because its teachers and students declared a strike, refusing to hold classes and take examinations, may be forced to reopen by the courts at the instance of the striking students. Some fourteen (14) years ago, the petitioner Capitol Medical Center, Inc. (or CMCI), a hospital corporation, organized, opened, and operated the Capitol Medical Center College (CMCC or "the College") beside its hospital, the Capitol Medical Center (hereafter "the Hospital") in Quezon City. It offered a four-year nursing course, a two-year midwifery course, and a two-year medical secretarial course. In the first semester of the school year 1987-88, 900 students were enrolled in various courses in the college. Half-way through the first semester in 1987, the college faculty, led by the Dean of Nursing, demanded that they be granted vacation and sick leave privileges similar to those enjoyed by hospital personnel. Dialogues were held but no agreement was reached between the faculty and the school administration, headed by the president, Dr. Thelma Navarette-Clemente, who was concurrently also the chairman of the CMCI Board. At a meeting of the CMCI Board on September 15, 1987, Dr. Clemente reported the deteriorating relationship between the CMCC administration and the teachers, which, from a simple disagreement, had degenerated into open hostility. She feared that the situation may give rise to mass action by the students, because the faculty, exercising their moral influence over the students, had enlisted the latter's sympathy and support for their cause. The Board resolved to authorize her, as president of the College, to close it at the end of the first semester if the antagonism of the faculty and students toward the college administration should become uncontrollable. The minutes of that meeting of the CMC Board disclose the following action taken by the Board: CMC College
The chairman rported on the developing antagonism between the Dean and a good number of the Faculty on the one hand, and the CMC Administration on the other hand on economic matters, more particularly the demand of the faculty for similar vacation and sick leave privileges as hospital personnel, and that despite of dialogs (sic), the faculty does not show any conformity to the difference. She fears that this antagonisms might later on develop into mass actions and demonstrations, wherein students who are under

the influence of the dean and the faculty will show by concrete manifestation sympathy for the faculty demands.

After a thorough discussion of the possible effect of these mass demonstrations especially if done in front of hospital premises, on patients confined in the hospital, and the possibility of this antagonism being manifested during the making of the rounds of patients by CMCC Nursing Students when being conducted Related Learning Experiences (RLE) the board unanimously approved the following resolution: Res. No. 87-86 to authorize the Chairman in his (sic) capacity as President of CMC College, to close the college at the end of the first semester, should the antagonism described by her become uncontrollable. (p. 79, Rollo.) During the next thirty (30) days, the rift between the administration and the faculty aggravated. The school administration scheduled the holding of the final semestral examinations on October 14 to 19, 1987, but the teachers defiantly and - unilaterally "postponed" them. On the scheduled dates for the examinations, the students joined their teachers in a noisy demonstration in front of the hospital (Annexes O,P,Q, and R, pp. 146-147, Rollo). As the demonstrations disturbed the peace and quiet of the hospital and fearful of possible subversive action by hostile student nurses which might endanger the safety and lives of the patients in the hospital, an emergency special meeting was held by the CMCI Board on October 17, 1987. It unanimously resolved "to close the school effective at the end of the first semester of this school year, 1987-88" (p. 269, Rollo). Starting on that date, the following announcement was posted in several places on the school premises: ANNOUNCEMENT ALL STUDENTS, PLEASE BE INFORMED OF THE TOTAL CLOSURE OF CAPITOL MEDICAL CENTER COLLEGE AFTER THE END OF THE FIRST SEMESTER OF SCHOOL YEAR 1987-88. PLEASE SEE POSTED LETTER INFORMING THE DECS OF SAID DECISION, BSN I-IV, MID-WIFERY I-II AND JUNIOR SECRETARIAL STUDENTS ARE THEREFORE ADVISED TO SEEK THEIR EVENTUAL TRANSFER TO OTHER SCHOOLS FOR THE SECOND SEMESTER. HERE IS A PARTIAL LIST OF SCHOOLS WILLING TO ACCEPT STUDENTS TRANSFEREES: 1. ARELLANO UNIVERSITY 2. DE OCAMPO COLLEGE OF NURSING 3. FATIMA COLLEGE OF NURSING 4. ST. JUDE COLLEGE OF NURSING 5. DE LOS SANTOS COLLEGE OF NURSING 1. 2. FAMILY CLINIC COLLEGE OF NURSING CMC COLLEGE ADMINISTRATION

(p. 131, Rollo.) On October 20,1987, Dr. Clemente informed the Department of Education, Culture & Sports (DECS) that the school would be permanently closed at the end of the first semester. CAPITOL MEDICAL CENTER, INC. October 20, 1987 The Honorable Lourdes R. Quisumbing Secretary of Education Culture and Sports Manila Through the Regional Director Mrs. Modesta Boquiren National Capital Region Quezon City Dear Madam Secretary: Greetings! Please be informed that in an emergency special meeting of our Board of Directors held on October 17, 1987 it was unanimously resolved to close the Capitol Medical Center College, effective at the end of first semester of this school year 1987-1988. The recurring problems between our corporation on the one hand and the Dean, Faculty and student body of the college, on the other hand, which was has resulted in the non- holding up to now, of final examinations for the first semester of this school year, has gotten out of hand. Kindly advise us of the procedure to effect the immediate closure resolution of our board. Thank you. Very truly yours, (SGD) THELMA NAVARRETE-CLEMENTE M.D., M.H.A., Chairman of the Board and President (p. 269, Rollo; italics ours.)

As the DECS did not reply promptly, Dr. Clemente on October 29, 1987, sent another letter to DECS Secretary Lourdes Quisumbing reinforcing CMCI's resolve to "cease operation of school immediately effective as of the end of the first semester of the current school year 1987-88." The letter reads as follows: October 29, 1987 The Honorable Lourdes R. Quisumbing Secretary of Education, Culture and Sports Manila

Dear Madam Secretary: Greetings! This is to reinforce our earlier letter, dated October 20, 1987, informing your honorable office of the corporate decision of our Board of Directors to cease operation of the Capitol Medical Center College immediately effective as of the end of the first semester of the current school year, 1987-1988. The decision as embodied in the corporate resolution contemplates in no uncertain terms theimmediate and total cessation of all education activities due to the following cogent reasons: 1. Mismanagement of the school administration and mishandling of corporate policies by the Dean, extending down to the lower administrative levels. 2. Failure of the school to produce the quality of education that may be reasonably expected or desired as evidenced by the poor quality of instruction it gives, the deficient program of guidance it maintains, and the poor performance of its graduates over the past few years. 3. The increasing costs of operation and maintenance of school facilities. 4. Considering the fact that the school is only a minor subsidiary of the hospital corporation, its continued operation and dependent existence will as projected, greatly impair the economic viability of the institution and ultimately affect health care delivery and other vital medical services of the hospital to the community and the general public. For the above reasons, we feel there are no legal impediments against the immediate and complete closure of the school under the purview of the Corporation Code.

Since there are quite a number of Nursing and Midwifery Schools in the community who would be more than willing to take in our students, we will help undertake arrangements with these schools for their transfer, together with the assistance of your good office of course. Finally, we are very well aware of the requirements of the Labor Laws concerning the faculty members and other support personnel who are already permanent with at least three years of service. We shall settle these in due time under its proper forum. Very truly yours, (SGD) THELMA NAVARRETE-CLEMENTE, M.D., M.H.A. President Chairman, Board of Directors (p. 270-271, Rollo; emphasis supplied.) The Department of Labor and Employment (DOLE) was likewise notified of the termination of the services of the faculty and other support personnel of the college "thirty days hence" as required by Article 284 of the Labor Code (p. 272, Rollo). It appears that on October 26, 1987, or three (3) days before Dr. Clemente wrote her second letter, DECS Regional Director Modesta Boquiren had written the following reply which was received later: October 26,1987 The Chairman of the Board and President CAPITOL MEDICAL CENTER COLLEGE Sct. Magbanua Cor. Panay Avenue, Quezon City Dear Madam: This has reference to your letter dated October 20, 1 987 requesting for a gradual phasing out of all courses effective June 1988 according to the following schedules: June 1988 - No 1st year June 1989 - No 2nd year June 1990 - No 3rd year June 1991 - No 4th year This Office interposes no objection to your request provided that the school administrators can comply with the requirements of the Department of Labor and Employment regarding the benefits of

faculty members and support personnel who are already permanent and who have already served the school for three or more years. Pursuant to regulations, after all the courses shall have been phased out, the school cannot reopen unless the corporate status is changed from a stock corporation to a non-stock corporation. Very truly yours, (SGD) Illegible MODESTA G. BOQUIREN Director (p. 256, Rollo; emphasis supplied.) Evidently, Director Boquiren failed to comprehend that Dr. Clemente did not request for permission to "gradually phase out" the school but merely informed the DECS of the school administration's decision to effect the "immediate and complete closure" of the school. As the DECS did not react to her second letter, CMCCI proceeded with the closure of the college. The teachers, students and their parents, a representative of the DECS and the school administration, thereafter, held a series of dialogues to persuade CMCCI to open the school for one more semester or until the end of the school year. An agreement was prepared by the DECS but CMCCI wanted to include a written stipulation binding the students and their parents to hold no more strikes, rallies, or demonstrations until the end of the school year. Since the latter did not sign the agreement, the school did not reopen. The college and the DECS have assisted in effecting the transfer of some 411 students to other schools (p. 15, Rollo). THE CASE On December 2, 1987, fifteen (15) students and parents purporting to represent the 900 students of the CMCC filed a class suit (Civil Case No. 52429) against "Capitol Medical Center College" and petitioner Dr. Clemente, in the Regional Trial Court of Quezon City praying for the reopening of the Capitol Medical Center College which had been closed effective at the end of the first semester of the school year 1987-1988 (p. 208, Rollo). As the complaint (Annex A) prayed for the issuance of a writ of preliminary mandatory injunction, the court set the hearing of the application on December 9, 1987. As agreed at the hearing, an opposition was filed by CMCC on December 14,1987 (p. 257, Rollo). On the same day, the lower court granted the writ of preliminary mandatory injunction and directed the defendants "to reopen (the) school and allow plaintiffs students to enroll in their respective course[s] ... " It fixed the plaintiffs' bond in the sum of P50,000 (pp. 85 and 273, Rollo). The order reads as follows: Plaintiffs' petition for the issuance of a Writ of Preliminary Mandatory Injunction having been heard by the Court, the plaintiffs appearing by their lawyer, Atty. Raymundo Armovit and the defendants by their attorney, Atty. Samson Alcantara

and no sufficient cause to the contrary being shown, the Court finds that this is a proper case for injunction and the writ prayed for should issue; WHEREFORE, the Court hereby orders that a Writ of Preliminary Mandatory Injunction issue against the defendants directing them to re-open school and allow plaintiffs' students to enroll in their respective courses of study and to perform such other acts in the tenor and under the terms and conditions set forth in paragraph 8 in the complaint filed in this action, upon the filing of an injunction bond in the amount of FIFTY THOUSAND PESOS (P50,000.00) within three (3) days from receipt of this order. (p. 84, Rollo.) The petitioners filed a motion for reconsideration of the above order (p. 87, Rollo) but the court denied their motion (p. 95, Rollo). In due time, the petitioners elevated the order to the Court of Appeals on a petition for certiorari with preliminary injunction (CA-G.R. SP No. 13626, p. 96, Rollo). The Court of Appeals issued a restraining order and directed the respondents to comment on the petition. After hearing the parties in oral argument, the Court of Appeals rendered a decision on February 15,1988 holding that the respondent RTC Judge did not abuse his discretion in issuing the order of preliminary mandatory injunction because the petitioners had no right to suddenly close the school for the enrollment of the students created a binding contract between them and the school for the latter to continue operating until the former shall have finished their courses (p. 120, Rollo). On February 26,1988, the petitioners filed a motion for reconsideration and re-hearing which was held on March 3,1988 (p. 127, Rollo). Nevertheless, on March 8,1988, the Court of Appeals denied petitioner's motion for reconsideration (p. 154, Rollo). Hence, this petition for review. The petition for review has merit. The sole object of a preliminary injunction, whether prohibitory or mandatory, is to preserve the status quo until the merits of the case can be heard. The status quo is the last actual peaceable uncontested status which preceded the controversy (Rodulfa vs. Alfonso, 76 Phil. 225). It may only be resorted to by a litigant for the preservation or protection of his rights or interests and for no other purpose during the pendency of the principal action (Calo vs. Roldan, 76 Phil. 445). It should only be granted if the party asking for it is clearly entitled thereto (Climaco vs. Macaraeg, 4 SCRA 930; Subido vs. Gopengco 27 SCRA 455; Police Commission vs. Bello, 37 SCRA 230). Inasmuch as a mandatory injunction tends to do more than to maintain the status quo, it is generally improper to issue such an injunction prior to the final hearing (Manila Electric Railroad and Light Co. vs. Del Rosario, 22 Phil. 433). It may, however, issue "in cases of extreme urgency; where the right is very clear; where considerations of relative inconvenience bear strongly in complainant's favor; where there is a willful and unlawful invasion of plaintiffs right against his protest and remonstrance, the injury being a continuing one; and where the effect of the mandatory injunction is rather to reestablish and maintain a pre-existing continuing relation between the parties, recently and arbitrarily interrupted by the defendant, than to establish a new relation. Indeed, the writ should not be denied the complainant when he makes out a clear case free from doubt and dispute." (Commissioner of Customs vs. Cloribel, et al., 19 SCRA 235.) The questions that we might ask are:

(1) What was the status quo before the private respondents filed their complaint "for specific performance" on December 2, 1987? (2) Do the private respondents have a clear legal right to demand the reopening of the school? The status quo on December 2, 1987 was that the school was already closed. CMCC was closed effective at the end of the first semester, i.e, the first week of November 1987. What was the status quo prior to the closure of the school? There were no classes. The school was deserted. The teachers and students were on strike; they refused to attend classes and held noisy rallies in front of the CMC hospital instead. That was the status quo before the private respondents filed Civil Case No. 52429. The writ of preliminary mandatory injunction was issued by the trial court not to restore that status quo, but to restore conditions preceding the status quo, i.e., to reopen and resume the holding of classes which the private respondents themselves (plaintiffs in Civil Case No. 52429) by their mass actions had disrupted. In issuing the writ of preliminary injunction for that purpose, the trial court committed a grave abuse of discretion for it allowed the writ to be used by the plaintiffs to undo the mischief that they themselves had initiated. The teachers, by refusing to teach, and the students, by refusing to attend classes, made the continued operation of the CMCC futile and untenable. The college had no reason to remain open under the situation which the private respondents themselves brought about. Did the private respondents have a clear legal right to reopen the school and to be readmitted therein? The Court of Appeals answered that question affirmatively on the theory that "the initial enrollment" of the students (meaning their enrollment in the first year of their chosen courses) created "a binding contract" between the students and the school, by which the latter became "legally and morally bound to continue operating the school until such enrollees shall have finished their courses. The Court of Appeals presumably, but erroneously, relied on paragraph 137, Sec. IV of the Manual of Regulations for Private Schools, which provides: Every student has the right to enroll in any school, college or university upon meeting its specific requirements and reasonable regulations, provided, that except in the case of academic delinquency and violation of disciplinary regulations, the student is presumed to be qualified for enrollment for the entire period he is expected to complete his course without prejudice to his right to transfer. The meaning of this provision is that the school, after having accepted a student for enrollment in a given course may not expel him or refuse to re-enroll him until he completes his course, except when he is academically deficient or has violated the rules of discipline. He is presumed to be qualified to study there for the entire period it will take to complete his course. However, there is no contract between him and the school for the latter to remain open for the entire duration of his course. Section VII, paragraph No. 137, of the Manual of Regulations for Private Schools provides:

137. When a student registers in a school, it is understood that he is enrolling for the entire school year for elementary and secondary courses, and for the entire semester for collegiate course. A student who transfers or otherwise withdraws, in writing, within two weeks after the beginning of classes and who has already paid the pertinent tuition and other school fees in full or for any length of time longer than one month may be charged ten per cent of the total amount due for the term if he withdraws within the first week of classes, or twenty per cent if within the second week of classes, regardless of whether or not he has actually attended classes. The student may be charged all the school fees in full if he withdraws anytime after the second week of classes. However, if the transfer or withdrawal is due to a justifiable reason, the student shall be charged the pertinent fees only up to and including the last month of attendance. The contract between the college and a student who is enrolled and pays the fees for a semester, is for the entire semester only, not for the entire course. The law does not require a school to see a student through to the completion of his course. If the school closes or is closed by proper authority at the end of a semester, the student has no cause of action for breach of contract against the school. Thus did this Court rule in "Alcuaz, et al. vs. Philippine School of Business Administration, Quezon City Branch, et al.," G.R. No. 76353, promulgated on May 2, 1988, a case which involved some students and teachers who had participated in mass actions and rallies in the respondent school and who were respectively denied re-admission for enrollment, and re-appointment to teaching positions in the school: It is beyond dispute that a student once admitted by the school is considered enrolled for one semester. It is provided in Paragraph 137 Manual of Regulations for Private Schools, that when a college student registers in a school, it is understood that he is enrolling for the entire semester. Likewise, it is provided in the Manual, that the 'written contracts' required for college teachers are for 'one semester.' It is thus evident that after the close of the first semester, the PSBA-QC no longer has any existing contract either with the students or with the intervening teachers. Such being the case, the charge of denial of due process is untenable. It is a time-honored principle that contracts are respected as the law between the contracting parties (Henson vs. Intermediate Appellate Court, et al., G.R. No. 72456, February 19,1987, citing: Castro vs. Court of Appeals, 99 SCRA 722; Escano vs. Court of appeals, 1 00 SCRA 197). The contract having been terminated, there is no more contract to speak of. The school cannot be compelled to enter into another contract with said students and teachers. The courts, be they the original trial court or the appellate court, have no power to make contracts for the parties.' (Henson vs. Intermediate Appellate Court, et al., supra. (p. 12 of the decision.) Significantly, in Alcuaz only some students and teachers left their classrooms to hold rallies in the school premises. The majority remained in the classrooms. The school did not cease to operate. In this case, however, all the teachers and students struck and abandoned their classes. In Alcuaz, the mass assemblies and barricades were held for three days. In the CMCC case, the "strike" began on October 14 and continued until the end of the semester. In Alcuaz, the school did not close but it nevertheless refused to re-admit the offending students and teachers. In this case, the school has closed completely.

If in Alcuaz, this Court recognized the right of the school to refuse admission to students guilty of breaches of discipline, and of the peace, its right to close when the entire faculty and student population have boycotted their classes, may not be denied. The irony for the school in this case is that it was forced to close by student action, and is now being forced to reopen by student action also, assisted by the lower court. We cannot sanction the order of the lower court which gave aid and comfort to the students who paralyzed the operation of the school by their mass actions forcing it to shut down altogether. We cannot approve a situation which would place a school at the mercy of its students. We, therefore, hold that the lower court gravely abused its discretion in compelling the CMCC to reopen and re-admit the striking students for enrollment in the second semester of their courses. Since their contracts with the school were terminated at the end of the first semester of 1987, and as the school has already ceased to operate, they have no "clear legal right" to re-enroll and the school has no legal obligation to reopen and readmit them. No provision in the Education Act of 1982, nor in the Manual of Regulations for Private Schools can be, or has been, cited to support the novel view that a school is obligated to remain open until its students have completed their courses therein. Indeed, neither is there a law or rule that obligates a student who has enrolled in a school, to remain there until he finishes his course. On the contrary he may transfer at any time to any school that is willing to accept him. But even if it can be supposed that the enrollment of a student creates an implied "binding contract" with the school to educate him for the entire course, since a contract creates reciprocal rights and obligations, the obligation of the school to educate a student would imply a corresponding obligation on the part of the student to study and obey the rules and regulations of the school. When students breach that supposed contract by refusing to attend their classes, preferring to take to the streets to mount a noisy demonstration against their school, the latter may cancel the contract and close its doors. Its action would neither be arbitrary nor unfair. It was the trial court that acted arbitrarily or with grave abuse of discretion in ordering the school to reopen and re-admit the striking students and teachers in spite of their refusal to desist from continuing their disruptive mass actions against the school. WHEREFORE, the petition for review is granted. The decision dated May 15,1988 of the Court of Appeals in CA-G.R. SP No. 13626 is hereby set aside. The order and writ of preliminary mandatory injunction issued by the Regional Trial Court of Quezon City, Branch 77, in Civil Case No. Q-52429 are hereby annulled and set aside. Costs against the private respondents. SO ORDERED. Narvasa, Gancayco and Medialdea, JJ., concur. CRUZ, J., concurring: I concur, but with the following reservation I made in the Alcuaz Case: I also have my misgivings about the ruling of the Court that a student's enrollment is from semester to semester and may be terminated at will by the school after each period. I submit that when a student is enrolled for a particular course, the implicit understanding is that he is entitled to remain in the school until he graduates, subject only to the usual academic, financial and other reasonable requirements.

Republic of the Philippines SUPREME COURT Manila EN BANC G.R. No. L-9506 June 30, 1956

SY SUAN and PRICE INCORPORATED, petitioners, vs. PABLO L. REGALA, respondent. Jose C. Reyes for petitioners. Zavalla, Bautista and Nuevas for respondent. ENDENCIA, J.: Appeal by certiorari against the decision of the Court of Appeals adjudging respondent Pablo L. Regala the sum of P6,998.85, with legal interest, said to be the unpaid balance due him from petitioners Sy Suan and Price Incorporated, as a result of their verbal contract whereby the said petitioners agreed to pay 10% of the value of the licenses which respondent might obtain from the defunct Import Control Commission for the importation of industrial starch for candy manufacture, plus P500 as attorney's fees, and costs. The facts of the case as found by the Court of Appeals are as follows: That on April 11, 1953, defendant Sy Suan, who was at the time president and general manager of his co-defendant [Price Incorporated] and owner of practically all the capital stock of said corporation, executed in favor of plaintiff a special power of attorney authorizing the latter to prosecute the former's applications for import licenses with the Import Control Office per Exhibit "B." At the time of the execution of the said power of attorney, defendants had pending in the Import Control Office the following applications: Application No. 001705 for industrial starch in the sum of $16,477.34 filed on April 6, 1953 in the name of defendant, Price Incorporated; Application No. 001797 for industrial starch in the sum of $21,678.48 filed on April 6, 1953 in the name of defendant Price Incorporated; and Application No. 001800 for industrial starch in the sum of $15,778.11 filed on April 6, 1953 in the name of defendant Price Incorporated (Exh. "A"). Pursuant to said special power of attorney, plaintiff followed up and prosecuted the above-mentioned applications with and through the different offices and divisions of the Import Control Office, conferring with the corresponding Import Control officials. On or about May 19, 1953, the Import Control Office issued the following licenses as a result of the effort made by the herein plaintiff: License No. 15030 on Application No. 001795; License No. 15029 of Application No. 001797; and License No. 15028 on Application No. 001800, the amount of which had been reduced to $11,838.50. Shortly before the execution of the special power of attorney above reffered to, plaintiff and defendant Sy Suan agreed verbally that plaintiff's services for securing the said licenses would be paid or compensated with ten (10%) per cent of the total value of the amounts approved on the said applications. On May 19, 1953, upon the release of the afore-

mentioned licenses, defendants paid the plaintiff the sum of P3,000.00 on account of the latter's services. Under the facts above set forth and from the briefs submitted, the main issue in this appeal is the validity of the parole contract of remuneration which petitioners assail as contravening public policy and interest, hence null and void ab initio. Petitioners argue that the 10% commission sought by respondent and granted by the Court of Appeals is in inimical to public policy in that it tends to increase the cost of production of candies which they manufacture; that this increase will necessarily be passed on to the consuming public by way of increased prices, thus frustrating the avowed purpose of the government to lighten the burden of the people and to place essential consumers goods such as candies within the reach of the masses; that if the giving of 10% to intermediaries in the procurement of import licenses is sanctioned, this practice would serve as a deterrent, rather than an incentive, to the creation of new industries encourage by the government, as it would syphon off a substantial percentage of the capital invested by the fledging industries to the private pockets of so-called "tenpercenters;" and that inasmuch as the granting of licenses depends solely upon the merits of each application, the intervention of such intermediaries would tend to influence and corrupt the judgment of the government agencies processing the application. Against this argument, respondent claims that the contract in question is not violative of sound public policy; that a contract should not be declared void as against public policy except when the cases is clear and free from doubt and the injury to the public is substantial and not theoretical or problematical; that the usual and most important function of courts of justice is rather to maintain and enforce contracts than to enable parties thereto to escape their obligation on the pretext of public policy, unless it clearly appears that they contravene public right or public welfare; and that contracts, when entered into freely and voluntarily, should be enforced by courts of justice. Upon careful consideration of the contentions of both parties, we find undeniable that the contract in question sought to be enforced by the respondent and assailed by the petitioners as null and void for being against public policy is what is commonly known as 10% contracts which the press decries and the public condemns as inimical to public interest. We can take judicial notice that this kind of contract sprouted as a result of the controls imposed by the government on imports and dollar allocations, despite the enunciated government policy that applications for imports and foreign exchange should be considered and acted upon strictly on the basis of merit of each application and without the intervention of intermediaries, which policy is revealed, by Sections 15 and 18 of Republic Act 650 which read: SEC. 15. The president may summarily bar firms or individuals from filing applications for import and/or from doing business in the Philippines for any of the following acts: 1. . . . . 2. . . . . 3. The payment to any public official, directly or indirectly, of any fee, premium or compensation other than those allowed by laws or regulations, in connection with the issuance or granting of quota allocations or licenses. SEC. 18. The penalty or fine of not less than two thousand pesos (P2,000) nor more than twenty thousand pesos (P20,000) or imprisonment of not less than two years nor more than

five years, or both such fine and imprisonment at the discretion of the Court shall be imposed upon persons who may be found guilty of the following acts: 1. . . . . 2. . . . . 3. The receiving or accepting by any public official or employee directly or indirectly, of fees, premiums or compensation of any kind other than those allowed by law or by the rules and regulations, for the performance of any act or service connected with the issuance of import license or quota allocation. If the granting of import licenses or quota allocations depended solely upon the merits of each application, there being a prohibition to firms or individuals applying for such licenses or quota allocations from paying "to any public official, directly or indirectly, of any fee, premium or compensation other than those allowed by law or regulations, in connection with the issuance or granting of quota allocations or licenses," and these officials are equally prohibited from "receiving or accepting, directly or indirectly, of fees, premiums or compensations of any kind other than those allowed by law or by the rules and regulations, for the performance of any act or service connected with the issuance of import license or quota allocation," certainly the intervention or intermediaries, such as herein respondent, would be unwarranted and uncalled for, as such intervention would not render an unmeritorious application deserving, nor undeserving applications meritorious, but would serve no other purpose than to influence or possibly corrupt, in unmeritorious cases, the judgment of the public official or officials performing an act or service connected with the issuance of import license or quota allocation an eventuality which the law precisely sought to avoid. The present case is similar to that of Mathew S. Tee vs. Tacloban Electric & Ice Plant Co., Inc., et al.,* L-11980, February 14, 1959. In that case, Mathew S. Tee was approached by the agents of the Tacloban Electric for him to secure dollar allocation from the Central Bank for the company, upon payment of the "standard fee" of 10% of the value of the allocation obtained. Tee filed the necessary papers, followed them up for six months, and finally obtained the allocation of $243,500.00 for the company. Upon failure to collect his 10%, Tee filed the appropriate action with the Court of First Instance of Manila, where defendants moved to dismiss the complaint, which was granted, on the ground that the contract was null and void ab initio as being against public morals and public policy. On appeal, we sustained the dismissal and held that said contract was really contrary to good customs, public order and public policy. The doctrine laid down in that case is certainly applicable to the present, as both involve the collection of 10% of the value of the license that may have been obtained. Respondent claims, however, that there is no evidence showing that the contract in question has violated any public policy. We do not agree to this, as the very contract in question is self-evident. As we have cited in the aforementioned case. It is a general rule that agreements against public policy are illegal and void. Under the principles relating to the doctrine of public policy, as applied to the law of contracts, courts of justice will not recognize or uphold any transaction which, in its object operation, or tendency, is calculated to be prejudicial to the public welfare, to sound morality, or to civic honesty. The test is whether the parties have stipulated for something inhibited by the law or inimical to, or inconsistent with, the public welfare. An agreement is against public policy if it is injurious to the interests of the public, contravenes some established interest of society, violates some public statute, is against good morals, ends to interfere with the public welfare or society, or as it is sometimes put, if it is at war with the interests of society and is in conflict

with the morals of the time. An agreement either to do anything which, or not to do anything the omission of which, is in any degree clearly injurious to the public and an agreement of such a nature that it cannot be carried into execution without reaching beyond the parties and exercising an injurious influence over the community at large are against public policy. There are many things which the law does not prohibit, in the sense of attaching penalties, but which are so mischievous in their nature and tendency that on grounds of public policy they cannot be admitted as the subject of a valid contract. The question whether a contract is against public policy depends upon its purpose and tendency, and not upon the fact that no harm results from it. In other words all agreements the purpose of which is to create a situation which tends to operate to the detriment of the public interest are against public policy and void, whether in the particular case the purpose of the agreement is or is not effectuated. For a particular undertaking to be against public policy actual injury need not be shown; it is enough if the potentialities for harm are present. (12 Am. Jur., pp. 662-664) On the other hand, Articles 1306 and 1409 of the new Civil Code provide: 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. ART. 1409. The following contracts are inexistent and void from the beginning: (1) Those whose cause, object or purpose is contrary to law, morals, good customs, public order or public policy. Wherefore, the decision of the Court of Appeals is hereby reversed, without costs.