Non-compete agreements in the Philippines exist in a legal gray area. Without explicit legislation, their enforceability depends on a century of Supreme Court decisions that weigh contractual freedom against public policy.
Courts set the standard
The Civil Code permits parties to include terms they consider convenient, provided those terms don’t violate law, morals, or public order. Non-compete clauses fall under this principle—but only if they pass a reasonableness test.
The first major ruling came in 1916. In Ferrazzini v Gsell, the court invalidated a five-year ban on employment with any enterprise in the country. The restriction was too broad, forcing the employee to leave the Philippines to find work. It wasn’t limited to a specific trade and offered no protection to the employer that justified such a sweeping prohibition.
Related: Saskatchewan employer convicted under foreign worker law
Two years later, the court ruled differently in Ollendorff v Abrahamson. The agreement barred the employee from working in a similar or competitive business anywhere in the country for five years. Unlike the blanket ban in Ferrazzini, this restriction targeted only direct competitors. The court upheld it, adopting a flexible approach that evaluates each case individually rather than applying rigid standards. A restraint is valid, the justices explained, if it protects the employer without harming public welfare.
The same year, G Martini (Ltd) v Glaiserman tested that principle again. The contract prohibited the employee from engaging in any business similar to the employer’s for one year. The court voided it because the employer operated across multiple commercial sectors, and the ban wasn’t limited to any specific branch. The restriction also applied even if the employee quit due to the employer’s misconduct. The court found no reasonable justification for such a broad limitation.
By 1924, the reasonableness standard was firmly in place. In Del Castillo v Richmond, the court repeated that the validity of a non-compete clause depends on the circumstances. The nature of the business also matters—what works for a niche firm may not suit a conglomerate.
Related: Vancouver student abuse case reaches partial settlement
These cases illustrate how the court’s approach shifted over time. Early decisions favored employees, but later rulings acknowledged that some restrictions help businesses protect trade secrets or client relationships. The central issue became whether the clause was narrow enough to serve that purpose without suppressing competition or trapping workers.
Modern rulings refine the test
The Supreme Court revisited the issue in 2006. In Rivera v Solidbank Corp, an employee had agreed not to work for a competitor for one year after leaving. The court ruled the clause unreasonable because it lacked geographical limits. The justices remanded the case to the trial court to consider whether the covenant protects a legitimate business interest and whether it creates an undue burden on the employee.
These rulings provide a framework, but they also leave room for interpretation. What qualifies as a legitimate business interest? How much burden is too much? The answers depend on the specifics of each case—industry norms, the employee’s role, and the scope of the restriction. A one-year ban on poaching clients might be acceptable for a sales executive, but a lifetime prohibition on working in the same field would likely fail.
Related: TRU law school gets $1.4M legacy gift
The absence of legislation keeps the rules flexible. Courts have addressed the gap, but their decisions don’t always align. A clause that survives in one case might be struck down in another, even with nearly identical language. Parties involved often use past rulings as a rough guide rather than a definitive rulebook.
Until lawmakers act, the Supreme Court’s precedents remain the final authority. Non-compete agreements in the Philippines will continue to be judged case by case, with reasonableness as the deciding factor.
The decision cited Ferrazzini, Ollendorff, G Martini, and Del Castillo in shaping its analysis.
