Ollendorff vs. Abrahamson

A contract in restraint of trade is valid and enforceable where the restraint imposed is no greater than is reasonably necessary for the protection of the party in whose favor it is imposed. The validity of such restraints is determined by the intrinsic reasonableness of the restriction in each case, rather than by any fixed rule, and such restrictions may be upheld when not contrary to public policy.

The plaintiff, William Ollendorff, was engaged in the business of manufacturing ladies' embroidered underwear for export in Manila and elsewhere in the Philippine Islands. He imported materials, adopted decorative designs embroidered by Filipino needle workers, and finished the garments in his factory. The defendant, Ira Abrahamson, had a general knowledge of the Philippine embroidery business before his employment, having been engaged in similar work for several years. The parties entered into an employment contract on September 10, 1915, which included a covenant restricting the defendant from engaging in a similar or competitive business within the Philippine Islands for five years.

William Ollendorff was engaged in the business of manufacturing ladies' embroidered underwear for export, employing some fifteen thousand home workers and eight hundred factory workers, with some two and a half million pesos invested in his business. On September 10, 1915, Ollendorff and Ira Abrahamson entered into a contract of employment for a term of two years, at a salary of fifty pesos per week. The contract contained a clause by which Abrahamson bound himself, his heirs, successors and assigns, that he would not enter into or engage himself directly or indirectly, nor permit any other person under his control to enter in or engage in a similar or competitive business to that of Ollendorff anywhere within the Philippine Islands for a period of five years from the date of the agreement.

Under the terms of this agreement, Abrahamson entered Ollendorff's employ and worked for him until April, 1916, when, on account of ill health, he left the plaintiff's employ and went to the United States. While in the plaintiff's establishment, Abrahamson had full opportunity to acquaint himself with the plaintiff's business methods and business connections, the duties performed by him being such as to make it necessary that he should have this knowledge. Some months after his departure for the United States, Abrahamson returned to Manila as the manager of the Philippine Underwear Company, a corporation. This corporation did not maintain a factory in the Philippine Islands but sent material and embroidery designs from New York to its local representative, who employed Filipino needle workers to embroider the designs and make up the garments in their homes. The only difference between the plaintiff's business and that of the firm by which the defendant was employed was the method of doing the finishing work. The defendant admitted that both firms turned out the same class of goods and that they were exported to the same market. It also clearly appeared from the evidence that the defendant had employed to work for his firm some of the same workers employed by the plaintiff.

Shortly after the defendant's return to Manila and the commencement of his duties as local manager, the plaintiff commenced this action, the principal purpose of which was to prevent by injunction any further breach of the non-compete clause of the defendant's contract of employment. The lower court granted a preliminary injunction, and upon trial the injunction was made perpetual. The court below found from the evidence that the business was "very similar" to that of the plaintiff.

• Competitive Business: The plaintiff argued that the defendant's employment with the Philippine Underwear Company constituted a breach of the non-compete clause, as the business was conducted in open competition with the plaintiff's business within the meaning of the contract.

• Lack of Substantiation: The defendant argued that the plaintiff failed to substantiate the averments of his complaint to the effect that the business in which the defendant was employed is competitive with that of the plaintiff.
• Lack of Mutuality: The defendant contended that the contract was void for lack of mutuality, based on the part of the agreement which authorized the plaintiff to discharge the defendant before the expiration of the stipulated term should the defendant fail to comply with its conditions to the plaintiff's satisfaction.
• Unreasonable Restraint of Trade: The defendant argued that the contract was void as constituting an unreasonable restraint of trade.
• Absence of Pecuniary Damage: The defendant contended that the plaintiff failed to show that he had suffered any estimable pecuniary damage, and that even assuming such damage, it was not of such a character as to warrant the court in restraining by injunction its continuance.
• Irreparable Damage Not Proven: The defendant further contended that in no event was it proper to enforce such a contract by injunction because it had not been alleged and proved that the continuance of the acts complained of would cause the plaintiff "irreparable damage."

• Competitive Business: Whether the business in which the defendant was employed was competitive with that of the plaintiff within the meaning of the contract.
• Lack of Mutuality: Whether the contract was void for lack of mutuality.
• Unreasonable Restraint of Trade: Whether the contract was void as constituting an unreasonable restraint of trade.
• Pecuniary Damage: Whether the plaintiff's failure to prove estimable pecuniary damage barred the action.
• Propriety of Injunction: Whether it was proper to enforce such a contract by injunction absent proof of irreparable damage.

• Competitive Business: Yes. The business in which the defendant was engaged was not only very similar to that of the plaintiff, but was conducted in open competition with that business within the meaning of the contract. When two concerns operate in the same field, produce the same class of goods, and dispose of them in the same market, their businesses are of necessity competitive.
• Lack of Mutuality: No. The question was largely academic, as the defendant left the plaintiff's employ at his own request before the expiration of the stipulated term. Even assuming the particular clause to be invalid, this would not necessarily affect the rest of the agreement, as the inclusion of one or more invalid pacts does not of necessity invalidate the whole contract.
• Unreasonable Restraint of Trade: No. The contract was not void as constituting an unreasonable restraint of trade. The Court adopted the modern rule that the validity of restraints upon trade or employment is determined by the intrinsic reasonableness of the restriction in each case, and the restraint imposed upon the defendant was not unreasonable.
• Pecuniary Damage: No. The admitted fact that the plaintiff failed to establish proof of pecuniary damage by reason of the breach prior to the issuance of the preliminary injunction was a bar to any money judgment for damages, but did not justify permitting the defendant to continue to break his contract. The injury was a continuous one.
• Propriety of Injunction: Yes. Any continuing breach of a valid negative covenant is irreparable by the ordinary process of courts of law. The obligation imposed upon the defendant was negative in character, and unless voluntarily complied with, there was no way to enforce the contract except by the injunctive power of judicial process.

• Competitive Business: The Court examined the evidence and found that the business in which the defendant was engaged was not only very similar to that of the plaintiff but was conducted in open competition with it. The defendant himself expressly admitted on cross-examination that the firm by which he was employed put out the same class of goods as that which the plaintiff was engaged in producing. The Court reasoned that when two concerns operate in the same field, produce the same class of goods, and dispose of them in the same market, their businesses are of necessity competitive. The defendant having engaged in a business directly competitive with that of the plaintiff within five years from the date of his contract, under the terms of which he expressly agreed to refrain from doing that very thing, his conduct constituted a breach of that agreement.

• Lack of Mutuality: The Court found this question largely academic because the defendant left the plaintiff's employ at his own request before the expiration of the stipulated term. Had the plaintiff sought to discharge the defendant without just cause before the expiration of the term, it might have been a serious question whether he could lawfully do so, notwithstanding the terms in which the contract was drawn, citing Civil Code, article 1256. However, even assuming this particular clause of the contract to be invalid, this would not necessarily affect the rest of the agreement, as the inclusion in an agreement of one or more pacts which are invalid does not of necessity invalidate the whole contract.

• Unreasonable Restraint of Trade: The Court noted that no statutory expression of the legislative will was cited to which such an agreement was directly obnoxious. The rule in this jurisdiction is that the obligations created by contracts have the force of law between the contracting parties and must be enforced in accordance with their tenor (Civil Code, art. 1091). The only limitation upon the freedom of contractual agreement is that the pacts established shall not be contrary to "law, morals or public order" (Civil Code, art. 1255). The Court adopted the modern rule that the validity of restraints upon trade or employment is to be determined by the intrinsic reasonableness of the restriction in each case, rather than by any fixed rule, and that such restrictions may be upheld when not contrary to public policy. Examining the contract in question, the Court found that the restraint imposed upon the defendant was not unreasonable, as the purpose of such restrictions is the protection of the employer, and if they do not go beyond what is reasonably necessary to effectuate this purpose, they should be upheld.

• Pecuniary Damage: The Court held that the obligation imposed upon the defendant by the particular clause of his contract was negative in character. Unless the defendant voluntarily complied with his undertaking, there was no way by which the contract could be enforced except by the injunctive power of judicial process. The admitted fact that the plaintiff failed to establish proof of pecuniary damage by reason of the breach prior to the issuance of the preliminary injunction was a bar to any money judgment for damages, but would not justify permitting the defendant to continue to break his contract over the plaintiff's objection. The injury was a continuous one, and the fact that the court may not be able to give damages for that part of the breach which had already taken place when its aid was invoked was no reason why it should countenance a continuance of such disregard of the plaintiff's rights.

• Propriety of Injunction: The Court held that with respect to the contention that an injunction may only be granted to prevent irreparable injury, any continuing breach of a valid negative covenant is irreparable by the ordinary process of courts of law. Injunctive relief is granted in such cases upon the ground that the parties cannot be placed in statu quo, and that damages at law can afford no adequate compensation, the injury being a continuous one irreparable by the ordinary process of courts of law. The Court cited the definition of "irreparable injury" from Gilchrist vs. Cuddy: not such injury as is beyond the possibility of repair or beyond possible compensation in damages, nor necessarily great injury or great damage, but that species of injury, whether great or small, that ought not to be submitted to on the one hand or inflicted on the other, and because it is so large on the one hand or so small on the other, is of such constant and frequent recurrence that no fair or reasonable redress can be had therefor in a court of law.

• Rule of Reasonableness in Restraint of Trade — The validity of restraints upon trade or employment is determined by the intrinsic reasonableness of the restriction in each case, rather than by any fixed rule. Such restrictions may be upheld when not contrary to public policy, and if the restraint is no greater than is reasonably necessary for the protection of the party in whose favor it is imposed, it is upheld; if it goes beyond this, it is declared void. The Court applied this rule to uphold the non-compete clause, finding that the restraint imposed upon the defendant was not unreasonable given his access to the plaintiff's business methods and connections.

• Negative Covenant Enforcement by Injunction — A continuing breach of a valid negative covenant is irreparable by the ordinary process of courts of law. Where the undertaking is negative in character and the defendant is violating the obligation imposed upon him, the court may interfere without requiring proof of actual damage. The Court applied this doctrine to affirm the perpetual injunction, holding that the injury done by the defendant's continued breach was continuous and could not be adequately compensated by damages.

• Irreparable Injury Defined — "Irreparable injury" does not mean such injury as is beyond the possibility of repair or beyond possible compensation in damages, nor necessarily great injury or great damage, but that species of injury, whether great or small, that ought not to be submitted to on the one hand or inflicted on the other, and because it is so large on the one hand or so small on the other, is of such constant and frequent recurrence that no fair or reasonable redress can be had therefor in a court of law. The Court applied this definition to justify injunctive relief for the continuous breach of the negative covenant.

• "Following this opinion, we adopt the modern rule that the validity of restraints upon trade or employment is to be determined by the intrinsinc reasonableness of restriction in each case, rather than by any fixed rule, and that such restrictions may be upheld when not contrary to afford a fair and reasonable protection to the party in whose favor it is imposed." — This passage articulates the controlling doctrine on the validity of restraints on trade, establishing the rule of reasonableness as the standard for evaluating non-compete clauses in employment contracts.

• "If there is one thing more than another which is essential to the trade and commerce of this country, it is the inviolability of contract deliberately entered into; and to allow a person of mature age, and not imposed upon, to enter into a contract, to obtain the benefit of it, and then to repudiate it and the obligation which he has undertaken, is prima facie, at all events, contrary to the interest of any and every country." — This quotation, adopted from Underwood vs. Barker, underscores the public policy favoring the inviolability of contracts and the enforcement of deliberately undertaken obligations.

• "With respect to the contention that an injunction may only be granted to prevent irreparable injury, the answer is that any continuing breach of a valid negative covenant is irreparable by the ordinary process of courts of law." — This passage states the core rationale for affirming the injunction, establishing that a continuing breach of a negative covenant is deemed irreparable as a matter of law.

• Gibbs vs. Consolidated Gas Co. of Baltimore, 130 U.S. 396 — Cited as authority for the modern rule that the validity of contracts in restraint of trade is determined by whether, under the particular circumstances of the case and the nature of the particular contract, the contract is or is not unreasonable.
• Gilchrist vs. Cuddy, 29 Phil. Rep. 542 — Cited with approval for the definition of "irreparable injury" as that species of injury, whether great or small, of such constant and frequent recurrence that no fair or reasonable redress can be had therefor in a court of law.
• Liongson vs. Martinez, 36 Phil. Rep. 948 — Acknowledged for the rule that an injunction should never issue when an action for damages would adequately compensate the injuries caused, but distinguished because the injury in the present case was continuous and could not be measured by any certain pecuniary standard.
• Underwood vs. Barker, 68 Law J. Ch. 201 — Quoted for the principle that the inviolability of contract deliberately entered into is essential to trade and commerce, and that public policy holds a person to his bond.
• Wahle vs. Reinbach, 76 Ill. 322 — Cited with approval in Gilchrist vs. Cuddy for the definition of "irreparable injury."

• Article 1091, Civil Code — Provides that obligations created by contracts have the force of law between the contracting parties and must be enforced in accordance with their tenor. The Court applied this provision to uphold the enforceability of the non-compete clause.
• Article 1255, Civil Code — Provides that the only limitation upon the freedom of contractual agreement is that the pacts established shall not be contrary to law, morals, or public order. The Court applied this provision to determine that the contract was not contrary to public policy.
• Article 1256, Civil Code — Cited in the discussion of mutuality, regarding the validity of the clause authorizing the plaintiff to discharge the defendant for failure to comply with conditions to the plaintiff's satisfaction.
• Article 1908, Civil Code — Cited as an example of a situation where damages cannot be measured by any certain pecuniary standard, analogous to the injury caused by the defendant's breach.

Arellano, C.J., Torres, Johnson, Street and Avanceña, JJ., concurred. Malcolm, J., concurred in the result.