Non-Involvement Clause In a Contract

Category: Obligations and Contracts

Non-Involvement Clause In a Contract

Non-involvement clause in a contract; valid, provided there is limitation as to time, place and trade.

In Daisy Tiu v. Platinum Plans, Inc., G.R. No. 163512, February 28, 2007, the petitioner was employed as Division Marketing Director of the respondent, a pre-need company. In 1995, she stopped working and became the Vice President for Sales of Professional Pension Plans, Inc., another pre-need company. She was sued for damages for violating her contract with respondent which prohibited her in a business of the same nature within two (2) years separation, whether voluntary or involuntary. The RTC and the CA held her liable. Before the SC, the petitioner contended that the non-involvement clause is offensive to public policy since the restraint imposed is much greater than what is necessary to afford respondent a fair and reasonable protection. She added that since the products sold in the pre-need industry are more or less the same, the transfer to a rival company is acceptable. She likewise argued that a strict application of the non-involvement clause would deprive her of the right to engage in the only work she knows.

Respondent countered that the validity of a non-involvement clause has been sustained by the Supreme Court in a long line of cases. It contended that the inclusion of the two-year non-involvement clause in the contract of employment was reasonable and needed since her job gave her access to the company’s confidential marketing strategies. It added that the non-involvement clause merely enjoined her from engaging in pre-need business akin to respondents within two years from her separation from respondent. She had not been prohibited from marketing other service plans. In brushing aside respondent’s contention, the SC

Held: As early as 1916, the validity of a non-involvement clause has already been discussed. In Ferazzini v. Gsell, 34 Phil. 697 (1916), it was held that such clause was unreasonable restraint of trade and therefore against public policy. In Ferrazzini, the employee was prohibited from engaging in any business or occupation in the Philippines for a period of five years after the termination of his employment contract and must first get the written permission of his employer if her were to do so. The Court ruled that while the stipulation was indeed limited as to time and space, it was not limited as to trade. Such prohibition, in effect, forced an employee to leave the Philippines to work should his employer refuse to give a written permission.

In G. Martini, Ltd. v. Glaiserman, 39 Phil. 120 (1918), a similar stipulation was declared as void for being unreasonable restraint of trade. There, the employee was prohibited from engaging in any business similar to that of his employer for a period of one year. Since the employee was employed only in connection with the purchase and export of abaca, among the many business of the employer, the restraint was considered too broad since it effectively prevented the employee from working in any other business similar to his employer even if his employment was limited only to one of its multifarious business activities.

However, in Del Castillo v. Richmond, 45 Phil. 679 (1974), a similar stipulation was upheld as legal, reasonable, and not contrary to public policy. In the said case, the employee was restricted from opening, owning or having any connection with any other drugstore within a radius of four miles from the employer’s place of business during the time the employer was operating his drugstore. A contract in restraint of trade is valid provided there is a limitation upon either time or place and the restraint upon one party is not greater than the protection the other party requires.

Finally, in Consulta v. Court of Appeals, G.R. No. 145443, March 18, 2005, 453 SCRA 732, a non-involvement clause was held in accordance with Article 1306 of the Civil Code. While the complainant in that case was an independent agent and not an employee, she was prohibited for one year from engaging directly or indirectly in activities of other companies that compete with the business of her principal. The restriction did not prohibit the agent from engaging in any other business, or from being connected with any other company, for as long as the business or company did not compete with the principal’s business. Further, the prohibition applied only for one year after the termination of the agent’s contract and was therefore a reasonable restriction designed to prevent acts prejudicial to the employer.

Conformably with the aforementioned pronouncements, a non-involvement clause is not necessarily void for being in restraint of trade as long as there are reasonable limitations as to time, trade, and place.

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

In this case what makes the non-involvement clause valid is that, she had been privy to confidential and highly sensitive marketing strategies of respondent’s business. To allow her to engage in a rival business soon after she leaves would make respondent’s trade secrets vulnerable especially in a highly competitive marketing environment. In sum, the non-involvement clause is not contrary to public welfare and not greater than is necessary to afford a fair and reasonable protection to respondent. (Ollendorff v. Abrahamsom, 38 Phil. 585 (1918)).

In any event, Article 1306 of the Civil Code provides that parties to a contract may establish such stipulations, clauses, terms and conditions as they may deem convenient, provided they are not contrary to law, morals, good customs, public order, or public policy.

Article 1159 of the same Code also provides that obligations arising from contracts have the force of law between the contracting parties and should be complied with in good faith. Courts cannot stipulate for the parties nor amend their agreement where the same does not contravene law, morals, good customs, public order or public policy, for to do so would be to alter the real intent of the parties, and would run contrary to the function of the courts to give force and effect thereto. (Phil. Communications Satellite Corp. v. Telecom, Inc., G.R. Nos. 147324 and 147334, May 25, 2004, 429 SCRA 153).