GR L 45173; (April, 1939) (Digest)
G.R. No. L-45173; April 27, 1939
RED LINE TRANSPORTATION CO., INC., plaintiff-appellee, vs. BACHRACH MOTOR COMPANY, INC., and RURAL TRANSIT COMPANY, INC., defendants-appellants.
FACTS
Red Line Transportation Co., Inc. (successor-in-interest of Interprovincial Transportation Company) filed an injunction suit against Bachrach Motor Company, Inc. and Rural Transit Company, Inc. to restrain them from operating a passenger and express transportation service between Ilagan and Tuguegarao, and for an accounting of revenues from such operation. The suit was based on a “Mutual Deed of Sale” executed on January 23, 1930, between Rural Transit Company and Alfredo Zuraek (representing Interprovincial Transportation Company). The contract involved a mutual sale and assignment of certificates of public convenience and auto-trucks. Crucially, it contained a restrictive covenant whereby Rural Transit agreed not to operate, apply to operate, or purchase any certificate for routes north of Ilagan (territory assigned to Interprovincial), and Interprovincial agreed not to operate, apply to operate, or purchase any certificate for routes south of Ilagan (territory assigned to Rural Transit). The contract was approved by the Public Service Commission on January 24, 1930. The defendants allegedly violated this agreement by operating in the territory north of Ilagan.
ISSUE
Is the restrictive covenant in the “Mutual Deed of Sale,” which divides territories between two public service operators and restricts their right to operate or apply for new routes in each other’s territories, valid and enforceable?
RULING
No. The Supreme Court declared the restrictive covenant void as against public policy. The agreement constitutes a contract in restraint of trade that is contrary to public interest. Public service companies, such as transportation operators, have a duty to serve the public equally and cannot make contracts that impair the free flow of trade, commerce, and communication or prevent proper competition. The contract effectively created a division of territory and a monopoly, which restricts the regulatory power of the Public Service Commission to promote public convenience and interest. The test for validity is whether public interest and welfare are not involved, the restraint is reasonably necessary for the protection of the contracting parties, and it will not affect public service. The agreement fails this test. The judgment of the lower court was reversed.
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