What is a Non-disclosure Agreement?

A non-disclosure agreement (also known as NDA) is an agreement entered between two contracting parties namely: disclosing party and receiving party, who wish to share confidential information to each other.  The NDA as a legal document is being executed to prohibit the receiving party from divulging such confidential information to any third person, otherwise, damages or any right of action may be claimed by the disclosing party.

Non-disclosure agreements are utilized in employment contracts, independent contractorship agreements, and business opportunity transactions, whereby the receiving party is authorized to receive proprietary information from the disclosing party.  Such proprietary information may include contact information of clients, marketing plans and business plans which cannot be known to outside competitors, trade secrets, marketing and business proposals, intellectual property or inventions that cannot be made public in the meantime.

Executing a non-disclosure agreement is the modern trend so as to protect the interest of the disclosing party from loss of revenues due to the disclosure or theft of proprietary or confidential information which may be claimed by competitors or any interested persons.

The following are the usual items contained in a non-disclosure agreement:

• The parties to the agreement, including their addresses or contact information; 
• Coverage of the confidential information that cannot be disclosed to third persons; 
• Information which is excluded from the coverage; 
• Obligations of the receiving party regarding the use of the confidential information ;
• Circumstances where disclosure of confidential information is permitted (i.e. court order, or order from the proper governmental agency); 
• The duration of the confidentiality, the law governing the confidentiality, and the venue of action in case of breach.

Law on Business Organizations in the Philippines

The following are the different types of business organizations that one may choose in putting up a business in the Philippines:

a) Sole Proprietorship -- It is the oldest form of business which is owned and usually controlled by one person.

Advantages:

(i) Easiest to form;
(ii) Owner is entitled to all the profits;
(iii) All decisions are the owner’s to make;
(iv) The owner may end the business at any time.

Disadvantages:

(i) Owner usually operates with a limited amount of capital;
(ii) The danger of unlimited liability;
(iii) Owner may not be skilled in running the business.


b) Partnership -- Governed by the Civil Code of the Philippines. There is a partnership when two or more persons contribute money, property or industry to a common fund with the intention of dividing the profits among themselves.

Advantages:

(i) Easy to form;
(ii) Direct rewards;
(iii) Improved growth possibilities;
(iv) Easier to execute decisions than in a corporation; More difficult than it would in a sole proprietorship.

Disadvantages:

(i) Unlimited liability;
(ii) Instability;
(iii) Difficulty in obtaining long term capital;
(iv) Firm is tied to the acts and judgments of one partner as agent
(v) Difficulty in severing partnership ties.

c) Corporation -- Governed by Governed by Batas Pambansa Blg. 68, also known as “Corporation Code of the Philippines”. A Corporation is an artificial being, created by operation of law, having the right of succession, and the powers, attributes and properties expressly authorized by law or incident to its existence.

Advantages:

(i) Limited liability;
(ii) Continuity of existence;
(iii) Selling stock in the corporation;
(iv) Professionalism.

Disadvantages:

(i) Complicated to form;
(ii) Activities limited by charter and various laws;
(iii) Extensive government regulations;
(iv) Double taxation which implies that a corporation can be taxed while its stockholders may also be taxed on the basis of the dividends received.


Related Articles:

Tips on Incorporating under Philippine Laws

Philippine Insurance Law (Insurable Interest in Group Insurance)

Any person so related to another either by contract or commercial relation may lawfully procure insurance on the other’s life. Thus, an employer may insure the life of the employee and vice versa.

The primary aim of group insurance is to provide the employer with a means of procuring insurance protection for his employees and their families at the lowest possible cost, and in so doing, the employer creates goodwill with his employees, enables the employees to carry a larger amount of insurance, and helps to attract and hold a permanent class of employees.

A group insurance is essentially a single insurance contract that provides coverage for many individuals. It provides life or health insurance coverage for the employees of the employer. In order to validly claim benefits from the group insurance, employees must be actively at work and must have completed a specified period of continuous employment, otherwise, the insurable interest ceases. Generally, group insurance have non-forfeiture clauses, except for term insurance (provides protection for a limited period, i.e. 5, 10, 15 years). If an employee’s group insurance terminates because he leaves the employer, the employee has the privilege of converting the group insurance within one month following the termination of employment into any standard form of insurance, except for a term insurance.

Application of the Law

Case: On June 9, 2005, Mr. John Bartolome insured the life of his best friend Noel Lim under the group insurance of Mr. Bartolome’s travel agency called Lucky Charm Travel Agency, designating himself as the irrevocable beneficiary. Other than being his best friend, John Bartolome is not related to Noel Lim. On July 10, 2007, after the lapse of more than two years, Noel Lim dies. Is John Bartolome entitled to the proceeds of the policy, considering that all premiums have been paid and considering further that no misrepresentation or concealment material to the risk has been employed?

Legal Opinion: No, because the policy is void and unenforceable unless the person who procures it has an insurable interest in the life of the insured. An insurable interest must be present either in the person taking out the insurance or the beneficiary. Being best friends does not automatically create an insurable interest. There must be an actual expectation of pecuniary benefit to sustain an insurance (i.e. a corporation has an insurable interest in the life of a key man, such as an officer of the firm). In the instant case, John Bartolome has no insurable interest in the life of Noel Lim.

References:

The Law on Insurance by Hector de Leon, 1994 Edition.

Pineda et al. vs. Hon. Court of Appeals et al., G.R. No. 105562, September 27, 1993.

New Insurance Reviewer, by Cesario P. Tiopianco, 1986 Edition.

Philippine Insurance Law

The Law

A “Contract of Insurance” is an agreement whereby one undertakes for a consideration to indemnify another against loss, damage or liability arising from an unknown or contingent event.

Discussion of the Law

The essential elements of an insurance contract are:
(a) Insurable interest;
(b) Existence of risk;
(c) Assumption of such risk by the insurer;
(d) Said assumption being part of a general scheme to distribute actual losses among those bearing similar risks;
(e) Payment of premium.

Application of the Law

Case: American-Fortune Life and General Insurance Co., Inc. (Am-Fortune) issued Fire Insurance Policy No. 136171 in favor of Mr. John Michael Roxas on his five-star hotel building in Makati City, together with all its effects therein. The insurance was for P8M covering the period from 23 January 2008 to 23 January 2009. On 23 January 2008, of the total premium of P10,000 Mr. Roxas only paid P5,000.00 thus leaving a considerable balance unpaid.
On 8 March 2008, the insured building was completely destroyed by fire. On March 10, 2008 Mr. Roxas paid the balance of the premium. On the same day, Mr. Roxas filed with Am-Fortune a claim on the fire insurance policy.

Am-Fortune denied the claim of Mr. Roxas, for the premium has not yet been fully paid in violation of Policy Condition No. 2 of the Contract which states:

1. ‘This policy of insurance witnesseth, that only after payment to the Company in accordance with Policy Condition No. 2 of the total premiums by the insured as stipulated above for the period aforementioned for insuring against Loss or Damage by Fire or Lightning as herein appears, the Property herein described x x x

2. This policy including any renewal thereof and/or any endorsement thereon is not in force until the premium has been fully paid to and duly receipted by the Company in the manner provided herein.

Any supplementary agreement seeking to amend this condition prepared by agent, broker or Company official, shall be deemed invalid and of no effect.’
Is Mr. Roxas entitled to claim under the fire insurance policy?

Legal Opinion:

No, Mr. Roxas is not entitled to claim under the fire insurance policy. This is fully supported by Section 77 of the Insurance Code which provides –
Sec. 77. An insurer is entitled to payment of the premium as soon as the thing insured is exposed to the peril insured against. Notwithstanding any agreement to the contrary, no policy or contract of insurance issued by an insurance company is valid and binding unless and until the premium thereof has been paid, except in the case of a life or an industrial life policy whenever the grace period provision applies.

The rule that contracts of insurance will be construed in favor of the insured and most strongly against the insurer should not be permitted to have the effect of making a plain agreement ambiguous and then construe it in favor of the insured. In addition, it is elemental law that the payment of premium is requisite to keep the policy of insurance in force. If the premium is not paid in the manner prescribed in the policy as intended by the parties the policy is ineffective. Partial payment even when accepted as a partial payment will not keep the policy alive even for such fractional part of the year as the part payment bears to the whole payment.

References:

P.D. 1460, Insurance Code

3 Basic Commercial Laws with Introductory Features by Jose N. Nolledo, 1995 Edition.

Sps. Tibay et al. vs. Court of Appeals et al., G.R. No. 119655, May 24, 1996.

Loan agreements and stipulations for commercial documents

The following will highlight important stipulations of different commercial documents mentioned. These stipulations will give the reader an overview on how financing institutions (such as banks) shape our developing economy by providing loan accommodation to applicants in need of financial assistance.

I. Promissory Note:

1. Principal amount of the loan. However, except as the Monetary Board may otherwise prescribe for reasons of national interest, the total amount of loans, credit accommodations and guarantees as may be defined by the Monetary Board that may be extended by a bank to a corporation shall at no time exceed twenty percent (20%) of the net worth of such bank.

2. Amount of interest. The amount of the interest that will be charged will be based on the transfer pool rate after considering the cost of money and interest expenses, giving both the lender and the borrower a win-win situation. Based on the current banking practice, the amount of interest would range from 9% to 13% depending on the inflation rates, transfer pool rates and cost of money as determined by the Treasury Department.

3. Authority given to the bank (lender) to set-off from the borrower’s account any existing deposits which he may have in the bank (lender), in order to pay the principal loan in case of default.

4. Amount of attorney’s fees and penalty charges in case the borrower defaults in payment of the principal obligation. This stipulation is intended to protect the interest of the bank (lender) against defaulting corporations.

II. Credit Line Agreement:


1. A voluntary undertaking that the borrower is desirous to obtain credit accommodation from the lender, freely accepting the terms and conditions set forth in the agreement; and that the lender is willing to extend such credit accommodation.

2. Principal amount of the credit line agreement;

3. The kind of credit line that would fit the needs of the borrower. Under the LC/TR Line (Letter of Credit/Trust Receipt) Line, a bank extends to a borrower a loan covered by the letter of credit, with the trust receipt as security of the loan. A trust receipt is a “security transaction intended to aid in financing importers and retail dealers who do not have sufficient funds or resources to finance the importation or purchase of merchandise, and who may not be able to acquire credit except through utilization, as collateral, of the merchandise imported or purchased. This is a requirement in case the need of the borrower involves importation of goods. However, this credit line may also be utilized in the export of goods. Of course, the bank gets minimal commission for opening a credit line from the bank and additional commission on the remittances (in case the credit line involves importation of goods). A trust receipt is a requirement in the importation of goods. In the export of goods, the bank may agree on a simple loan agreement with a letter of credit.

4. Collaterals, which may involve bank deposits, chattels or real property;

5. An authority given by the borrower/client to the bank to debit all notes unpaid at maturity from the client’s current account with the bank;

6. The term of the credit line and the interest to be charged for opening a credit line;

7. An authority in favor of the bank to sell properties which were utilized as collaterals, to apply the proceeds thereof to the due and demandable principal loan amount, interest and charges;

8. List of subsidiaries and affiliates of the client which will benefit from the credit line, with an additional stipulation that all the subsidiaries and affiliates will also be solidarily liable with the client;

9. Effectivity of service of correspondences to the client/borrower;

10. A stipulation that the books of the bank concerning the principal amount and computation of the interest shall be conclusive;

11. Attorney’s fees, penalty charges and costs of the suit, in case the bank is compelled to hire the services of counsel to litigate the collection of the principal amount; and

12. Venue in case of litigation.

III. Real Estate Mortgage:

1. The parties in the real estate mortgage;

2. Principal amount of the credit accommodation;

3. Description and list of the real properties subject of the mortgage;

4. A stipulation that the mortgage will also bind the successors in interest of the mortgagor/borrower;

5. A voluntary undertaking that the real property would stand as a security to pay the principal amount of the loan;

6. Payment of expenses in connection with the mortgage, such as the documentary stamp tax, cancellation of the mortgage, notarial fee and taxes assessed on the real property;

7. While the property is in the possession of the mortgagor, an undertaking that all expenses in the repair of the improvements shall be borne by the mortgagor;

8. In case of insolvency by the mortgagor/borrower, an automatic appointment of the bank as receiver to take charge of the property subject of the mortgage;

9. In case of breach of any of the conditions of the mortgage, an automatic appointment of the bank as Attorney-in-Fact to do acts of administration and acts of strict dominion over the mortgaged property;

10. An authority given by the borrower/client to the bank to debit all notes unpaid at maturity from the client’s current account with the bank;

11. Penalty interests, attorney’s fees, and other expenses relative to the foreclosure of the real property;

12. A prohibition that the mortgaged property will not be encumbered, leased and mortgaged without the written consent of the mortgagor;

13. Possibility of changes in the interest rates and bank charges with advance notice to the mortgagor/borrower;

14. A stipulation of the mortgagor’s waiver under Article 13 of Rule 39 of the Rules of Court;

15. A stipulation that the mortgaged property is clean from all prior liens and encumbrances;

16. Signature of the parties and their respective witnesses to the mortgaged contract;

17. The mortgage must be notarized and annotated in the Registry where the real property is located.

III. Chattel Mortgage:

1. Same Stipulations as in the real estate mortgage

2. Affidavit of Good faith - It is an oath wherein the parties “severally swear that the mortgage is made for the purpose of securing the obligations specified in the conditions thereof and for no other purposes and that the same is just and valid obligation and one not entered into for the purpose of fraud.”

IV. Surety Agreement:
It is customary in the banking institution that at least 51% of the stockholders acquiring a controlling interest in the corporation must sign the surety agreement. In the surety agreement, the signatories will be solidarily liable with the corporation with respect to the credit line granted in favor of the corporation. It is a common banking practice to require the JSS (“Joint and Solidary Signature”) of a major stockholder or corporate officer, as an additional security for loans granted to corporations. There are at least two reasons for this: (1) In case of default, the creditor’s recourse, which is normally limited to the corporate properties under the veil of separate corporate personality, would extend to the personal assets of the surety; (2) Such surety would be compelled to ensure that the loan would be used for the purpose agreed upon, and that it would be paid by the corporation.

Some banks will grant a continuing suretyship agreement with Corporations whom the bank considers as a valued client. The criteria for the grant of the continuing suretyship agreement will be based on the following:
1. Number of years in the business
2. Status in the industry
3. Satisfactory credit.

The continuing surety agreement credit line program will allow corporations to avail of the credit line even before the 6-month waiting period.

V. Trust Receipt:

1. The description of the merchandise with reference to the bill of lading

2. The term of the trust receipt

3. An undertaking of the entrustee that he merely holds the merchandise subject of the trust receipt in trust from the entrustor (bank) and that the entrustee is authorized to sell the goods and apply the proceeds for the full payment of his liability with the bank.

VI. Letter of Credit:

1. A notice that the bank has granted a credit line in favor of the corporation/borrower.

2. Percentage commission for opening a credit line plus commission for the remittances, if any. In the banking sector, this is called the compensating business with the client.

Commercial documents necessary for loan availment by companies

First, let us define some of the terms in line with the commercial documents which are necessary in the processing of loan availments:

Loan – it is a transaction wherein the owner of the property, called the LENDER, allows another party, the BORROWER, to use the property. The borrower customarily promises to return the property after a specified period with payment for its use, called INTEREST. The documentation of the promise is called a PROMISSORY NOTE when the property is cash.

Collateral -- ASSET pledged to a lender until the loan is repaid. If the borrower defaults, the lender has the legal right to seize the collateral and sell it to pay off the loan.

Letter of credit – (L/C) An instrument or document issued by a bank guaranteeing the payment of a customer’s draft up to a stated amount for a specified period. It substitutes the bank’s credit for the buyer and eliminates the seller’s risk. A “confirmed letter of credit” is provided by a correspondent bank and guaranteed by the issuing bank. A “commercial letter of credit” is normally drawn in favor of a third party, called the beneficiary.

Trust Receipt – A commercial document whereby the bank releases the goods in the possession of the entrustee but retains ownership thereof while the entrustee shall sell the goods and apply the proceeds for the full payment of his liability with the bank. It is a security arrangement to which a bank acquired ownership of the imported personal property . It is a security transaction intended to aid in financing importers and retail dealers who do not have sufficient funds or resources to finance the importation or purchase of merchandise, and who may not be able to acquire credit except through utilization, as collateral, of the merchandise imported or purchased.

The failure of the entrustee to return the goods covered by the trust receipt or of the proceeds from the sale thereof shall constitute the crime of estafa.
Promissory note – It is a written promise committing the maker to pay the payee a specified sum of money either on demand or at a fixed or determinable future date, with or without interest.

Mortgage – A debt instrument by which the borrower (mortgagor) gives the lender (mortgagee) a lien on the property as security for the repayment of a loan. The borrower has use of the property, and the lien is removed when the obligation is fully paid. A mortgage normally involves real estate which is called Real Estate Mortgage. For personal property, such as machines, equipment, or tools, the lien is called a chattel mortgage.

Credit – that which is extended to a buyer or borrower on the seller or lender’s belief that that which is given will be repaid. The document evidencing the credit line given to a borrower is called Credit line agreement.

Surety – one who undertakes to pay money or perform other acts in the event the principal fails to do so; A surety is directly and immediately liable for the debt. The document evidencing such is called a surety agreement.

Deposits- Cash, checks or drafts placed with a financial institution for credit to a customer’s account.


The following are the commercial documents which are usually necessary and required in the processing of loan availment in favor of the borrower (corporation):
1. Promissory Note --
2. Credit Line Agreement
3. Real Estate Mortgage
4. Chattel Mortgage
5. Surety Agreement
6. Letter of Credit
7. Trust Receipt

As part of the regulation of the government, the bank (a person extending “credit” must give the debtor (borrower) in writing, a recital of the following upon extending a loan:
1. Cash price;
2. Amount credited if on installment price;
3. Difference between cash and installment price; and
4. Recital of finance charges and what these charges bear to the amount to be financed in percentage.

There are additional charges imposed for the application of loan such as notarial fees, insurance fees, documentary stamp tax, and handling fees. Non-compliance would authorize the debtor to recover any interest payment made.

Requirements of banks for loan accommodation

Generally, the loan accommodation given to entities are based on the latter’s needs in business. In this regard, the needs will be based on the nature of the business as assessed by the bank. In the usual banking practice, the following are the pre-qualifying documents which are required by the bank before a loan will be extended:

I. Collateral – Accepted collaterals may be in the form of real property, chattels (machineries or fixtures), placements and deposits of the bank.

a) Real property – this is the most secured interest which is regularly accepted by banks as collateral. In case the loan will be approved on the basis of the real property as collateral, the bank will usually grant loan which is equivalent to 60% of the value of the property as assessed by an internal appraiser of the bank. In case the property has improvements, such as building, the real property must be insured against fire.
Except as the Monetary Board may otherwise prescribe, loans and other credit accommodations against real estate shall not exceed 75% of the appraised value of the respective real estate security, plus 60% of the appraised value of the insured improvements, and such loans may be made to the owner of the real estate or to his assignees.

b) Chattels – this is also considered as an accepted secured interest. However, corporations are discouraged to offer chattels as collaterals as these do not have long-term value, unlike real property which increases in value every year. In case the loan will be approved on the basis of the chattel as collateral, the bank will usually grant loan which is equivalent to 50% of the value of the property as assessed by an internal appraiser of the bank.
Except as the Monetary Board may otherwise prescribe, loans and other credit accommodations on security of chattels and intangible properties such as, but not limited to, patents, trademarks, trade names, and copyrights shall not exceed 75% of the appraised value of the security, and such loans and other credit accommodations may be made to the title-holder of the chattels and intangible properties or his assignees.

c) Deposits – this is the most convenient collateral which can be offered by the borrower to the lender. In case the loan will be approved on the basis of the existing deposits as collateral, the bank will grant the loan which is equivalent to 90%-100% of the deposit.

II. Articles of the Incorporation, By-laws, SEC Certificate of Incorporation - This will inform the bank of the borrower’s background, including the company history, nature of its business, products being offered, and the company’s ownership/management.

III. Financial statements for the past two (2) to three (3) years – These documents determine the financial standing of the entity. Cash flows will be reviewed to determine whether the entity is able to cover short term and long term debts. This is based on Section 40 of the General Banking Law of 2000 wherein the bank may demand from its credit applicants a statement of their assets and liabilities and of their income and expenditures and such information as may be prescribed by law or by rules and regulations of the Monetary Board to enable the bank to properly evaluate the credit application which includes the corresponding financial statements submitted for taxation purposes to the Bureau of Internal Revenue. The bank will usually request the applicant to wait for six (6) months to determine whether the applicant is qualified for the loan accommodation or not. The six-month period will provide time for the bank to make an appraisal of the property being offered as collateral and provide a credit investigation of the company through plant visits and research.

It is customary in all banking institutions to execute a credit investigation report wherein it will provide the bank with facts to determine whether the applicant is financially qualified to be given a loan accommodation. The credit investigation report is considered an internal confidential document which must not be furnished to the client.

Nevertheless, the loan accommodation will be based on the value of the collaterals as appraised by the bank (lender).

Role of Banks in Financing

The General Banking Law of 2000 (Republic Act 8791) was enacted based on the following State Policy:

“The State recognizes:

"1. The vital role of banks in providing an environment conducive to the sustained development of the national economy; and

"2. The fiduciary nature of banks that requires high standards of integrity and performance;

“In furtherance thereof, the State shall promote and maintain a stable and efficient banking and financial system that is globally competitive, dynamic and responsive to the demands of a developing economy.

The term “bank” generally is a corporation formed for the purposes of maintaining savings account and checking accounts, issuing loans and credit, and dealing in negotiable securities issued by governmental entities and corporations. Banks earn money by investing their customers’ deposits. In order to protect the customers against loss, banks are strictly regulated by the Bangko Sentral ng Pilipinas.

Loan stipulations between entities and banks are regulated by the General Banking Law of 2000. However, the parties are free to stipulate additional clauses, terms and provisions as they may seem convenient, provided these stipulations are not contrary to law (i.e. General Banking Law of 2000), morals, good customs, public order and public policy.

The diligence required in banks before granting loans to prospective applicants has been enunciated by the Supreme Court in the following cases:

a) Citibank N.A. vs. Spouses Cabamongan, et al, G.R. 146918, May 2, 2006. “x x x since the banking business is impressed with public interest, of paramount importance thereto is the trust and confidence of the public in general. Consequently, the highest degree of diligence, [Bank of the Philippine Islands vs. Court of Appeals, 383 Phil. 538, 554 (2000); Philippine Bank of Commerce v. Court of Appeals, 336 Phil. 667, 681 (1997)] is expected, and high standards of integrity and performance are even required of it. [Sec. 2 of Republic Act 8791, otherwise known as “The General Banking Law of 2000”] By the nature of its functions, a bank is ‘under obligation to treat the accounts of its depositors with meticulous care, [Westmont Bank vs. Ong, G.R. No. 132560, January 30, 2002, 375 SCRA 212,221; Citytrust Banking Corp. v. Intermediate Appellate Court, May 27, 1994, 232 SCRA 559, 564.] always having in mind the fiduciary nature of their relationship. [Simex International (Manila), Inc. Court of Appeals, March 19, 1990, 183 SCRA 360, 367].

b) Development Bank vs. Court of Appeals, 331 SCRA 267 (2000). “While an innocent mortgagee is not expected to conduct an exhaustive investigation on the history of the mortgagor’s title, in the case of a banking institution, it must exercise due diligence before entering into said contract, and cannot rely upon what is or is not annotated on the title. Judicial notice is taken of the standards practiced for banks, before approving a loan, to send representatives to the premises of the land offered as collateral and to investigate who are the real owners thereof.

c) Ibaan Rural Bank vs. Court of Appeals, 321 SCRA 88 (2000). “Banks, being greatly affected with public interest, are expected to exercise a degree of diligence in the handling of its affairs higher than expected of an ordinary business firm.”

Before granting a loan or other credit accommodation, a bank must ascertain that the debtor is capable of fulfilling his commitments to the bank.

More of these on my next blog where I will give you insights on the different loan stipulations and agreements being done by banks in the Philippines.

Law on Obligations and Contracts (Part 3)

C O N T R A C T S

The Law
“Article 1305. A contract is a meeting of minds between two persons whereby one binds himself, with respect to the other, to give something or to render some service. (1254a)”
Discussion of the Law

Characteristics of a Contract

(1) Mutuality of Contracts. Its validity and performance cannot be left to the will of only one of the parties.

(2) Autonomy of Contracts. Parties are free to stipulate terms and provisions in a contract, as long as these terms and provisions are not contrary to law, morals, good customs, public order and public policy.

The following are valid stipulations in an employment contract:

a) Non-competition agreements – those that impose restrictions on an employer’s ability to compete with a former employer are valid as long as:
 It is supported by adequate consideration;
 The restraint is confined within the limits that are reasonably necessary for the protection of the employer’s business
 Restraint does not impose undue hardship on the employee.

b) Non-solicitation agreements – requirement to newly-hired employees to sign a non-solicitation agreement to obligate the employee not to solicit contacts and fellow employees of the employer. Non-solicitation agreements run for an indefinite period.

c) Confidentiality – imposes upon an employee a duty to keep confidential trade secrets and other confidential company information during employment and after employment. This may also run for an indefinite period.

A Yellow Dog Contract is a promise exacted from workers as a condition of employment that they are not to belong to, or attempts to foster, a union during their period of employment. This constitutes Unfair Labor Practice and considered an illegal stipulation.

(3) Relativity of Contracts. Contracts are binding only upon the parties and their successors-in-interest.

Exceptions:
 Stipulation in favor of a third person (stipulation pour autrui) as in a beneficiary of an insurance policy.
 Contracts creating real rights
 Third person liable to pay damages in case he induces a party to violate his contract.

A Stipulation pour autrui (stipulation in favor of a third person) will prosper as long as the following requisites are present:
 It must be for the benefit or interest of the third person;
 Such benefit must not be merely incidental;
 Contracting parties must clearly and deliberately conferred such benefit or interest upon the third person
 That the third person must have communicated his acceptance to the obligor before his revocation.

(4) Consensuality of Contracts. Contracts are perfected by mere consent. and no form is prescribed by law for their validity. Exception: (a) real contracts (such as pledge, chattel mortgage); (b) contracts covered under the Statute of Frauds.

(5) Obligatory Force of Contracts. By the obligatory force of contracts, it constitutes the law as between the parties who are compelled to perform under the threat of being sued in the courts of law.

Law on Obligations and Contracts (Part 2)

Nature and Effects of Obligations
The following are the rights available to a creditor in obligations to give:

If it is a determinate thing:
1. To compel specific performance
2. To recover damages in case of breach
3. Acquires personal right to the fruits of the thing from the time the obligation to deliver arises
4. Acquires real right over the thing once the thing has been delivered to him
5. Rights over the accessories and accessions.

If it is a generic thing:
1. To ask for performance of the obligation
2. To ask that the obligation be complied with at the expense of the debtor.

A determinate thing is one that is particularly designated or physically segregated from all others of the same class. A generic thing is one whose determination is confined to that of its nature, to the genus to which it pertains such as a horse, a chair. A contract of sale uses a determinate thing, while a contract of loan uses a generic thing.

The following are the obligations of the passive subject in:

a) Obligations to give a determinate thing:
1. To deliver the thing which he has obligated himself to give.
2. To take care of the thing with the proper diligence of a good father of a family.
3. To deliver all its accessories and accessions.
4. To pay damages in case of breach of obligation.

b) Obligations to do:
1. If the debtor fails to do what he is obliged to do, it will be done at his expense.
2. If the work is done in contravention of the tenor of the obligation, it will be re-done at debtor’s expense.
3. If the work is poorly done, it will be re-done at debtor’s expense.

In obligations to do, you will note that you cannot compel the passive subject to perform, otherwise, it will constitute involuntary servitude which is in violation of the Constitution. However, the passive subject may be held liable for damages.

The sources of liability (for damages) of a party in an obligation are as follows:

(1) Fraud. The fraud is incidental fraud (dolo incidente) which is fraud incident to the performance of an obligation. In fraud, there is an intent to evade the normal fulfillment of the obligation and to cause damage.
The fraud is causal (dolo causante) or when fraud used to induce a person to agree to a contract. This kind of fraud is a ground for annulment of the contract plus damages;

(2) Negligence. The negligence referred here, in the case of contracts (i.e. common carrier) is culpa contractual, the lack of diligence or carelessness. Negligence consists in the omission of that diligence which is required by the nature of the obligation and corresponds with the circumstances of the persons, or the time and of the place.

(3) Delay (Mora). The debtor can be held liable for the delay or default in the fulfillment of his obligation only after the creditor has made a demand, judicial or extrajudicial, on the debtor, except:
 When the law expressly provides that demand is not necessary;
 When the contract expressly stipulates that demand is not necessary;
 When time is of the essence;
 When demand would be useless.

In a contract of loan, if a particular rate of interest has been expressly stipulated by the parties, such stipulated interest shall be applied. If the exact rate of interest is not mentioned, the legal rate shall be payable (which is 12% per annum under Sec. 1 of the Usury Law).

It is only in contracts of loan, with or without security, that interest may be stipulated and demanded. This interest by way of compensation, must be in writing, otherwise, no interest by way of compensation may be collected.
The debtor in delay is also liable to pay legal interest by way of indemnity for damages, which interest may be agreed upon, and in the absence of any stipulation, the legal interest shall be 12% per annum.

In all cases, interest due shall earn legal interest from the time it is judicially demanded although the obligation may be silent upon this point.

(4) Contravention of the tenor of the obligation. Performance in contravention of the tenor or terms of the obligations means where performance is contrary to what is agreed upon or stipulated thus making the debtor liable for damages.

Law on Obligations and Contracts (Part 1)

To begin, the Law on Obligations and Contracts is defined as s a kind of positive law which deals with the nature and sources of obligations as well as the rights and duties arising from agreements in contracts.

Before discussing the particular concepts on the Law on Obligations and Contracts, it is important to know that in every obligation, one must always observe the general principles on human relations, to wit:

“ART. 19. Every person must, in the exercise of his rights and in the performance of his duties, act with justice, give everyone his due, and observe honesty and good faith.”

Failure to observe the above principle makes a person civilly liable.


O B L I G A T I O N

"Article 1156. An obligation is a juridical necessity to give, to do or not to do."

An obligation is a legal duty, however created, the violation of which may become the basis of an action of law.

Every obligation has four definite elements, without which no obligation can exist, to wit: (1) an active subject, also known as the obligee or creditor, who has the power to demand the prestation; (2) a passive subject, also known as the debtor, who is bound to perform the prestation; (3) an object or the prestation, which is an object or undertaking to give, to do or not to do; (4) The juridical or legal tie, the vinculum which binds the contracting parties. The juridical tie or vinculum is based on the sources of obligation arising from either the law or contract. Law is defined as a rule of conduct, just and obligatory, promulgated by the legitimate authority, for common observance and benefit. On the other hand, contract is defined as “meeting of minds between two persons whereby one binds himself, with respect to the other, to give something or render service.”
It is important to identify the prestation in a certain obligation. Once the prestation is identified, you can determine who the passive subject is whom the active subject can demand fulfillment of the obligation.

A contract of sale and a contract of loan are examples of prestations to give; A contract of labor or a service contract is an example of a prestation to do.

To illustrate: In an obligation to pay taxes, the passive subject is the taxpayer, the active subject is the government through the Bureau of Internal Revenue, the prestation is “to give,” specifically to pay taxes, the juridical tie is a source of obligation arising from law.

In an obligation to give Avon Products, the passive subject is the seller, the active subject is the buyer, the prestation is “to give,” specifically to deliver the Avon Products, and the juridical tie is a source of obligation arising from contract.