G.R. No. L-23893; October 29, 1968
VILLA REY TRANSIT, INC., plaintiff-appellant, vs. EUSEBIO E. FERRER, PANGASINAN TRANSPORTATION CO., INC. and PUBLIC SERVICE COMMISSION, defendants. EUSEBIO E. FERRER and PANGASINAN TRANSPORTATION CO., INC., defendants-appellants. PANGASINAN TRANSPORTATION CO., INC., third-party plaintiff-appellant, vs. JOSE M. VILLARAMA, third-party defendant-appellee.

FACTS

Prior to 1959, Jose M. Villarama operated a bus service under the name Villa Rey Transit, holding certificates of public convenience. On January 8, 1959, he sold these certificates to Pangasinan Transportation Co., Inc. (Pantranco) for P350,000. The contract contained a stipulation that Villarama “shall not for a period of 10 years from the date of this sale, apply for any TPU service identical or competing with the buyer.”
On March 6, 1959, a corporation named Villa Rey Transit, Inc. (the Corporation) was organized. Jose M. Villarama was not an incorporator or stockholder, but his wife, Natividad R. Villarama, was an incorporator and treasurer. The Corporation’s finances were controlled and disbursed by Jose M. Villarama as if they were his private funds.
On April 7, 1959, the Corporation bought five certificates of public convenience, buses, and equipment from Valentin Fernando for P249,000, subject to PSC approval. The parties immediately applied for PSC approval. On May 19, 1959, the PSC granted a provisional permit to the Corporation.
On July 7, 1959, the Sheriff of Manila levied on two of these five certificates (PSC Cases Nos. 59494 and 63780) pursuant to a writ of execution in favor of Eusebio Ferrer against Valentin Fernando. On July 16, 1959, the Sheriff sold these certificates at public auction to Ferrer. Ferrer then sold them to Pantranco, and they jointly applied for PSC approval.
The PSC scheduled a joint hearing for the applications for approval of sale filed by Fernando and the Corporation, and by Ferrer and Pantranco. On July 22, 1959, the PSC issued an order allowing Pantranco to operate the lines provisionally. The Corporation challenged this order in the Supreme Court, which ruled that the Corporation should be the provisional operator until ownership was settled.
On November 4, 1959, the Corporation filed a complaint in the Court of First Instance of Manila to annul the sheriff’s sale to Ferrer and the subsequent sale to Pantranco. Pantranco filed a third-party complaint against Jose M. Villarama, alleging that Villarama and the Corporation were one and the same, and that Villarama was bound by the non-competition clause in the January 8, 1959 sale to Pantranco.
The trial court declared the sheriff’s sale and the subsequent sale to Pantranco null and void, declared the Corporation the lawful owner of the certificates, ordered Ferrer and Pantranco to jointly and severally pay the Corporation P5,000 as attorney’s fees, and dismissed the case against the PSC. All private parties appealed.

ISSUE

1. Does the non-competition stipulation in the deed of sale between Villarama and Pantranco apply to new lines only, or does it include existing lines?
2. Assuming the stipulation covers all kinds of lines, is it valid and enforceable?
3. If valid, did the stipulation bind the Corporation?

RULING

1. The non-competition stipulation applies to both new and existing lines. The clause prohibits Villarama from “apply[ing] for any TPU service identical or competing with the buyer.” The term “apply” is not limited to new applications but includes any step to operate a competing service, including acquiring existing lines.
2. The stipulation is valid and enforceable. It is a reasonable restraint of trade ancillary to the sale of a business and its goodwill, intended to protect the purchaser’s investment. The 10-year period and territorial scope (the routes covered by the sold certificates) are reasonable under the circumstances.
3. The stipulation binds the Corporation. The evidence shows that Jose M. Villarama, though not a formal stockholder, was the actual owner and manager of the Corporation. He controlled its finances and operations. The Corporation was merely an instrumentality or alter ego of Villarama, used to circumvent his contractual obligation not to compete with Pantranco. Therefore, the Corporation is bound by the non-competition clause, and its acquisition of the certificates from Fernando violated that clause.
Given this conclusion, the Court found it unnecessary to resolve the other issues raised regarding the validity of the sheriff’s sale. The decision of the trial court was reversed. The Corporation was declared not the lawful owner of the certificates, and the award of attorney’s fees was set aside.