Century Properties, Inc. vs. Babiano

A forfeiture clause in an employment contract providing that commissions are forfeited upon breach of a non-compete clause is enforceable when the clause is clear, unambiguous, and not contrary to law, morals, public order, or public policy, and the employee's breach occurs during the subsistence of the employment relationship. Separately, the existence of an employer-employee relationship is determined by law and the four-fold test, not by the label the parties assign to their contract.

Century Properties, Inc. (CPI) is a real estate development company engaged in marketing and selling property projects. Babiano was hired by CPI in October 2002 as Director of Sales and eventually promoted to Vice President for Sales effective September 1, 2007, a managerial position involving recruitment, training, and sales target management. Concepcion was hired by CPI as a Sales Agent and was promoted over the years, eventually becoming Project Director on September 1, 2007. Both respondents' engagements with CPI involved commission-based compensation structures governed by written contracts containing specific stipulations on confidentiality, non-competition, and the nature of the parties' relationship.

On October 2, 2002, CPI hired Babiano as Director of Sales; he was promoted to Project Director in June 2006 and then to Vice President for Sales effective September 1, 2007. His employment contract provided for a monthly salary of P70,000.00, an allowance of P50,000.00, and a 0.5% override commission for completed sales. The contract included a "Confidentiality of Documents and Non-Compete Clause" barring him from working in any capacity with a direct competitor "while [he is] employed and for a period of one year from date of resignation or termination from [CPI]," with a stipulation that breach of any term would result in forfeiture of "forms of compensation including commissions and incentives." Concepcion, for her part, was initially hired as Sales Agent by CPI and was promoted to Sales Officer in June 2003, Sales Director in August 2006, and Project Director on September 1, 2007. She signed an employment agreement denominated "Contract of Agency for Project Director" providing that she would report directly to Babiano and receive a monthly subsidy of P60,000.00, 0.5% commission, and cash incentives. On March 31, 2008, she executed a similar contract with CPI with a reduced monthly subsidy of P50,000.00. Both contracts stipulated that no employer-employee relationship existed between Concepcion and CPI.

After receiving reports that Babiano had provided a competitor with information regarding CPI's marketing strategies, spread false information about CPI and its projects, recruited CPI personnel to join the competitor, and been absent without official leave for five days, CPI sent him a Notice to Explain on February 23, 2009. On February 25, 2009, Babiano tendered his resignation and revealed that he had been accepted as Vice President of First Global BYO Development Corporation, a competitor of CPI. In his resignation letter, Babiano admitted that on February 12, 2009, he sought employment from First Global, and five days later was admitted thereto as vice president — at which time he was still employed by CPI. On March 3, 2009, CPI served Babiano a Notice of Termination for incurring AWOL, violating the non-compete clause by joining a competitor while still employed and providing it with information regarding CPI's marketing strategies, and recruiting CPI personnel to join a competitor. Concepcion, for her part, resigned as CPI's Project Director through a letter dated February 23, 2009, effective immediately.

On August 8, 2011, respondents filed a complaint for non-payment of commissions and damages against CPI and Antonio before the NLRC, claiming that their repeated demands for the payment and release of their commissions remained unheeded. CPI maintained that Babiano was merely its agent, that his termination was for just cause with due process, and that his commissions were validly forfeited under the non-compete clause. On Concepcion's claims, CPI asserted that the NLRC lacked jurisdiction because no employer-employee relationship existed between them. The Labor Arbiter dismissed the complaint, finding that Babiano's commissions were properly forfeited and that the LA had no jurisdiction over Concepcion's claim. The NLRC reversed, holding the forfeiture clause confiscatory and unreasonable, finding Concepcion to be an employee under the four-fold test, and awarding unpaid commissions limited to the three-year prescriptive period. The CA affirmed with modification, increasing the awards and holding that the non-compete clause applied only to post-employment acts. The Supreme Court partially reversed.

• Forfeiture of Babiano's Commissions: CPI argued that Babiano's unpaid commissions were properly forfeited under the "Confidentiality of Documents and Non-Compete Clause" of his employment contract, which expressly provided that breach of any term would result in forfeiture of all forms of compensation including commissions and incentives.
• No Employer-Employee Relationship with Concepcion: CPI asserted that the NLRC lacked jurisdiction over Concepcion's money claims because no employer-employee relationship existed between them, as clearly stipulated in her engagement contract, and that she should have litigated her claims in an ordinary civil action.
• Finality of NLRC Award to Concepcion: CPI contended that Concepcion's failure to assail the NLRC ruling awarding her P470,754.62 rendered the same final and binding upon her, such that the CA erred in increasing her monetary award to P591,953.05.

• Unpaid Commissions: Respondents claimed that their repeated demands for the payment and release of their commissions remained unheeded, necessitating the filing of a complaint for non-payment of commissions and damages.
• Confiscatory Forfeiture Clause: Respondents, as adopted by the NLRC, contended that the forfeiture of all earned commissions under the non-compete clause was confiscatory and unreasonable, hence contrary to law and public policy, and that earned commissions should have been released.
• Employer-Employee Relationship: Respondents, as affirmed by the NLRC and CA, maintained that Concepcion was an employee of CPI, given CPI's exercise of the power to hire, pay wages, dismiss, and control her performance.

• Validity of Forfeiture Clause: Whether the "Confidentiality of Documents and Non-Compete Clause" in Babiano's employment contract may be invoked by CPI to forfeit his unpaid commissions for breach committed during the employment relationship.
• Employer-Employee Relationship with Concepcion: Whether an employer-employee relationship existed between Concepcion and CPI notwithstanding the stipulation in her contract that no such relationship exists.
• Recomputation of Concepcion's Award: Whether the CA erred in increasing Concepcion's monetary award despite her failure to appeal the NLRC's original computation.

• Validity of Forfeiture Clause: Yes. The non-compete clause was clear and unambiguous, applied during the pendency of employment, and was not contrary to law, morals, public order, or public policy; Babiano's breach while still employed justified forfeiture of his commissions.
• Employer-Employee Relationship with Concepcion: Yes. The four-fold test established an employer-employee relationship, the label of the contract as "Contract of Agency" notwithstanding, as employment status is defined by law and not by the parties' stipulation.
• Recomputation of Concepcion's Award: No. The CA did not err in recomputing Concepcion's unpaid commissions, as her right to earned commissions is a substantive right that cannot be impaired by an erroneous computation, and equity permits setting aside the technical rule against granting affirmative relief to a non-appealing party.

• Validity of Forfeiture Clause: Under Article 1370 of the Civil Code, when the terms of a contract are clear and leave no doubt upon the intention of the contracting parties, the literal meaning of its stipulations shall control. The non-compete clause in Babiano's employment contract expressly barred him from working with a direct competitor "while [he is] employed and for a period of one year from date of resignation or termination," and expressly provided that breach of any term would result in forfeiture of commissions and incentives. The clause was not ambiguous, and the parties' intention to be bound thereby was evident from their signatures. As Vice President for Sales, Babiano held a highly sensitive and confidential managerial position; allowing him to freely move to direct competitors during employment would expose CPI's trade secrets in a highly competitive environment. Obligations arising from contracts have the force of law between the parties and must be complied with in good faith, provided the stipulations are not contrary to law, morals, public order, or public policy. The CA erred in limiting the clause only to post-employment acts. A judicious review of the records showed that Babiano sought employment from First Global on February 12, 2009, and was accepted five days later, while he was still employed by CPI and had not yet resigned. This constituted a glaring violation of the non-compete clause, justifying the forfeiture of his unpaid commissions.

• Employer-Employee Relationship with Concepcion: The existence of an employer-employee relationship is determined by the four-fold test: (a) the power to hire, (b) the payment of wages, (c) the power of dismissal, and (d) the power of control — the last being the most important indicator. All four elements were present: CPI continuously hired and promoted Concepcion from October 2002 until her resignation in February 2009; the monthly "subsidy" and cash incentives were remuneration in the concept of wages, regularly given without qualification; CPI had the power to dismiss Concepcion, as her contract expressly granted CPI "the right to discontinue [her] service anytime," and CPI actually exercised this power by accepting her resignation; and CPI possessed the power of control, as Concepcion did not exercise independent discretion in performing her duties as Project Director but was subject to the direct supervision of Babiano. The designation of the contract as "Contract of Agency for Project Director" was not conclusive, as employment status is defined and prescribed by law and not by what the parties say it should be. The labor tribunals therefore correctly assumed jurisdiction over Concepcion's money claims.

• Recomputation of Concepcion's Award: As a general rule, a party who has not appealed cannot obtain any affirmative relief other than what was granted in the appealed decision. However, jurisprudence admits an exception when strict adherence to the rule would impair the substantive rights of the parties. Concepcion's right to her earned commissions is a substantive right that cannot be impaired by an erroneous computation. The CA correctly pointed out that the NLRC failed to account for all unpaid commissions due to Concepcion for the period of August 9, 2008 to August 8, 2011. Following the dictates of equity and to avoid piecemeal dispensation of justice, the CA properly recomputed Concepcion's unpaid commissions notwithstanding her failure to appeal the NLRC's computation.

• Literal Interpretation of Contracts (Article 1370, Civil Code) — When the terms of a contract are clear and leave no doubt upon the intention of the contracting parties, the literal meaning of its stipulations shall control. Courts cannot make for the parties better or more equitable agreements than they themselves have been satisfied to make, or rewrite contracts because they operate harshly. Applied to uphold the forfeiture clause in Babiano's employment contract, the language of which was plain and unambiguous.

• Four-Fold Test for Employer-Employee Relationship — The existence of an employer-employee relationship is determined by: (a) the power to hire (selection and engagement), (b) the payment of wages, (c) the power of dismissal, and (d) the power of control. The control test — whether the employer reserves the right to control not only the end achieved but also the manner and means used in reaching that end — is the most important indicator. Applied to find that Concepcion was an employee of CPI despite the contract's label as an agency agreement.

• Employment Status Defined by Law, Not by Parties' Stipulation — The existence of an employer-employee relationship cannot be negated by expressly repudiating it in a contract when the terms of the agreement clearly show otherwise. Employment status is defined and prescribed by law and not by what the parties say it should be. Applied to disregard the stipulation in Concepcion's contract that no employer-employee relationship existed.

• Exception to the Rule on Non-Appealing Parties — A party who has not appealed is generally deemed to have acquiesced to the judgment and cannot obtain affirmative relief. However, when strict adherence to the technical rule will impair a substantive right, equity dictates that the court set aside the rule to allow full and just adjudication. Applied to permit the CA's recomputation of Concepcion's unpaid commissions despite her failure to appeal.

• "Courts cannot make for the parties better or more equitable agreements than they themselves have been satisfied to make, or rewrite contracts because they operate harshly or inequitably as to one of the parties, or alter them for the benefit of one party and to the detriment of the other, or by construction, relieve one of the parties from the terms which he voluntarily consented to, or impose on him those which he did not." — This passage, quoting Norton Resources and Development Corporation vs. All Asia Bank Corporation, articulates the foundational principle of literal contract interpretation that governed the Court's enforcement of the forfeiture clause.

• "For, the employment status of a person is defined and prescribed by law and not by what the parties say it should be." — This passage, quoting Insular Life Assurance Co., Ltd. vs. NLRC, establishes the controlling doctrine that contractual labels cannot override the legal determination of employment status under the four-fold test.

• "However, when strict adherence to such technical rule will impair a substantive right, such as that of an illegally dismissed employee to monetary compensation as provided by law, then equity dictates that the Court set aside the rule to pave the way for a full and just adjudication of the case." — This passage, quoting Global Resource for Outsourced Workers, Inc. vs. Velasco, defines the equitable exception permitting affirmative relief for non-appealing parties when substantive rights are at stake.

• Norton Resources and Development Corporation vs. All Asia Bank Corporation, 620 Phil. 381 (2009) — Cited as controlling authority for the rule on literal interpretation of contracts under Article 1370 of the Civil Code; followed and applied to uphold the forfeiture clause.
• Insular Life Assurance Co., Ltd. vs. NLRC, 350 Phil. 918 (1998) — Cited for the doctrine that employment status is defined by law and not by the parties' contractual stipulation; followed in determining that Concepcion was an employee despite the "Contract of Agency" label.
• Global Resource for Outsourced Workers, Inc. vs. Velasco, 693 Phil. 158 (2012) — Cited for the exception to the rule that a non-appealing party cannot obtain affirmative relief; followed to permit the CA's recomputation of Concepcion's commissions.
• Television and Production Exponents, Inc. vs. Servana, 566 Phil. 564 (2008) — Cited for the formulation of the control test as the most important indicator of an employer-employee relationship.
• South Davao Development Co., Inc. vs. Gama, 605 Phil. 604 (2009) — Cited for the four-fold test elements determining the existence of an employer-employee relationship.

• Article 1370, Civil Code — Provides that if the terms of a contract are clear and leave no doubt upon the intention of the contracting parties, the literal meaning of its stipulations shall control. Applied to enforce the forfeiture clause in Babiano's employment contract as written.
• Article 291 (now Article 306), Labor Code — Provides a prescriptive period of three years for money claims arising from employer-employee relationships. Applied by the NLRC and CA to limit the award of unpaid commissions to the period August 9, 2008 to August 8, 2011.

Justice Teresita J. Leonardo-De Castro (Acting Chairperson) and Justice Alfredo Benjamin S. Caguioa concurred. Chief Justice Maria Lourdes P. A. Sereno was on official leave.