G.R. No. 162839             October 12, 2006




A contract that misuses a purported fixed-term employment to block the acquisition of tenure by the employees deserves to be struck down for being contrary to law, morals, good customs, public order and public policy.

The Case

Before us is a Petition for Review1 under Rule 45 of the Rules of Court, seeking to reverse the September 18, 2003 Decision2 of the Court of Appeals (CA) in CA-GR SP No. 73416, as well as its March 15, 2004 Resolution3 denying petitioner’s Motion for Reconsideration. The decretal portion of the Decision states:

"WHEREFORE, the challenged decision of November 27, 2001 and resolution of July 22, 2002 of the National Labor Relations Commission are SET ASIDE, and the decision of the Labor Arbiter of December 29, 1999 in NLRC NCR CASE NO. 00-03-02732-98 is REINSTATED and AFFIRMED in all respect."4

The Facts

The factual antecedents are narrated by the CA as follows:

"Innodata Philippines, Inc., is engaged in the encoding/data conversion business. It employs encoders, indexers, formatters, programmers, quality/quantity staff, and others, to maintain its business and do the job orders of its clients.

"Estrella G. Natividad and Jocelyn L. Quejada were employed as formatters by Innodata Philippines, Inc. They [worked] from March 4, 1997, until their separation on March 3, 1998.

"Claiming that their job was necessary and desirable to the usual business of the company which is data processing/conversion and that their employment is regular pursuant to Article 280 of the Labor Code, [respondents] filed a complaint for illegal dismissal and for damages as well as for attorney’s fees against Innodata Phils., Incorporated, Innodata Processing Corporation and Todd Solomon. [Respondents] further invoke the stare decicis doctrine in the case of Juanito Villanueva vs. National Labor Relations Commission, et al., G.R. No. 127448 dated September 17, 1998 and the case of Joaquin Servidad vs. National Labor Relations Commission, et al., G.R. No. 128682 dated March 18, 1999, arguing that the Highest Court has already ruled with finality that the nature of employment at [petitioner] corporation is regular and not on a fixed term basis, as the job in the company is necessary and desirable to the usual business of the corporation.

"On the other hand, [petitioner] contends that [respondents’] employment contracts expired, for [these were] only for a fixed period of one (1) year. [Petitioner] company further invoked the Brent School case by saying that since the period expired, [respondents’] employment was likewise terminated.

"After examination of the pleadings filed, Labor Arbiter Donato G. Quinto rendered a judgment in favor of complainants, the dispositive portion of which reads:

‘WHEREFORE, foregoing premises considered, judgment is hereby rendered:

(1) Holding complainants Estella G. Natividad and Jocelyn Quejada to have been illegally dismissed by [Petitioners] Innodata Philippines Incorporated and Innodata Processing Corporation and ordering said [petitioners] to reinstate them to their former position without los[s] of seniority rights, or to a substantially equivalent position, and to pay them jointly and severally, backwages computed from the time they were illegally dismissed on March 3, 1998 up to the date of this decision in the amount of P112,535.28 EACH, or in the total amount of P225,070.56 for the two of them;

(2) Further, [petitioners] are ordered to pay, jointly and severally, [respondents] attorney’s fees in the amount equivalent to 10% of their respective awards; and

(3) All other claims are hereby dismissed for lack of merit.


"Not satisfied, [petitioner] corporation interposed an appeal in the National Labor Relations Commission, which reversed and set aside the Labor Arbiter’s decision and dismissed [respondents’] complaint for lack of merit. It declared that the contract between [respondents] and [petitioner] company was for a fixed term and therefore, the dismissal of [respondents], at the end of their one year term agreed upon, was valid.

"A motion for reconsideration was filed but was denied in an order dated July 22, 2002."5

Ruling of the Court of Appeals

The CA ruled that respondents were regular employees in accordance with Section 280 of the Labor Code. It said that the fixed-term contract prepared by petitioner was a crude attempt to circumvent respondents’ right to security of tenure.

Hence, this Petition.6


Petitioner raises the followings issues for the Court’s consideration:


"Whether or not the Court of Appeals committed serious reversible error when it did not take into consideration that fixed-term employment contracts are valid under the law and prevailing jurisprudence.


"Whether or not the Court of Appeals committed serious reversible error when it failed to take into consideration the nature of the business of petitioner vis-à-vis its resort to fixed-term employment contracts.


"Whether or not the Court of Appeals seriously erred when it failed to consider the fixed-term employment contracts between petitioner and respondents as valid.


"Whether or not the Court of Appeals seriously erred when it held that regularity of employment is always premised on the fact that it is directly related to the business of the employer.


"Whether or not the Court of Appeals committed serious reversible error in setting aside the Decision of the National Labor Relations Commission, dated 27 November 2001 and Resolution of 22 July 2002, respectively[,] and reinstated the decision of the Labor Arbiter dated 29 December 1999."7

The foregoing issues may be reduced into one question: whether the alleged fixed-term employment contracts entered into by petitioner and respondents are valid.

The Court’s Ruling

The Petition has no merit.

Sole Issue:
Validity of the Fixed-Term Contract

Petitioner contends that the regularity of the employment of respondents does not depend on whether their task may be necessary or desirable in the usual business of the employer. It argues that the use of fixed-term employment contracts has long been recognized by this Court.

Petitioner adds that Villanueva v. NLRC8 and Servidad v. NLRC9 do not apply to the present factual circumstances. These earlier cases struck down the employment contracts prepared by herein Petitioner Innodata for being "devious, but crude, attempts to circumvent [the employee’s] right to security of tenure x x x." Petitioner avers that the present employment contracts it entered into with respondents no longer contain the so-called "double-bladed" provisions previously found objectionable by the Court.

Petitioner’s contentions have no merit.

While this Court has recognized the validity of fixed-term employment contracts in a number of cases,10 it has consistently emphasized that when the circumstances of a case show that the periods were imposed to block the acquisition of security of tenure, they should be struck down for being contrary to law, morals, good customs, public order or public policy.11

In a feeble attempt to conform to the earlier rulings of this Court in Villanueva12 and Servidad,13 petitioner has reworded its present employment contracts. A close scrutiny of the provisions, however, show that the double-bladed scheme to block the acquisition of tenurial security still exists.

To stress, Servidad struck down the following objectionable contract provisions:

"Section 2. This Contract shall be effective for a period of 1 [year] commencing on May 10, 1994, until May 10, 1995 unless sooner terminated pursuant to the provisions hereof.

"From May 10, 1994 to November 10, 1994, or for a period of six (6) months, the EMPLOYEE shall be contractual during which the EMPLOYER can terminate the EMPLOYEE’S services by serving written notice to that effect. Such termination shall be immediate, or at whatever date within the six-month period, as the EMPLOYER may determine. Should the EMPLOYEE continue his employment beyond November 10, 1994, he shall become a regular employee upon demonstration of sufficient skill in the terms of his ability to meet the standards set by the EMPLOYER. If the EMPLOYEE fails to demonstrate the ability to master his task during the first six months he can be placed on probation for another six (6) months after which he will be evaluated for promotion as a regular employee."14

In comparison, the pertinent portions of the present employment contracts in dispute read as follows:


1. The EMPLOYER hereby employs, engages and hires the EMPLOYEE, and the EMPLOYEE hereby accepts such appointment as FORMATTER effective March 04, 1997 to March 03, 1998, a period of one (1) year.

x x x x x x x x x


7.1 This Contract shall automatically terminate on March 03, 1998 without need of notice or demand.

x x x x x x x x x

7.4 The EMPLOYEE acknowledges that the EMPLOYER entered into this Contract upon his express representation that he/she is qualified and possesses the skills necessary and desirable for the position indicated herein. Thus, the EMPLOYER is hereby granted the right to pre-terminate this Contract within the first three (3) months of its duration upon failure of the EMPLOYEE to meet and pass the qualifications and standards set by the EMPLOYER and made known to the EMPLOYEE prior to execution hereof. Failure of the EMPLOYER to exercise its right hereunder shall be without prejudice to the automatic termination of the EMPLOYEE’s employment upon the expiration of this Contract or cancellation thereof for other causes provided herein and by law."15 (Emphasis supplied)

Like those in Villanueva and Servidad, the present contracts also provide for two periods. Aside from the fixed one-year term set in paragraph 1, paragraph 7.4 provides for a three-month period during which petitioner has the right to pre-terminate the employment for the "failure of the employees to meet and pass the qualifications and standards set by the employer and made known to the employee prior to" their employment. Thus, although couched in ambiguous language, paragraph 7.4 refers in reality to a probationary period.

Clearly, to avoid regularization, petitioner has again sought to resort alternatively to probationary employment and employment for a fixed term. Noteworthy is the following pronouncement of this Court in Servidad:

"If the contract was really for a fixed term, the [employer] should not have been given the discretion to dismiss the [employee] during the one year period of employment for reasons other than the just and authorized causes under the Labor Code. Settled is the rule that an employer can terminate the services of an employee only for valid and just causes which must be shown by clear and convincing evidence.

x x x x x x x x x

"The language of the contract in dispute is truly a double-bladed scheme to block the acquisition of the employee of tenurial security. Thereunder, [the employer] has two options. It can terminate the employee by reason of expiration of contract, or it may use ‘failure to meet work standards’ as the ground for the employee’s dismissal. In either case, the tenor of the contract jeopardizes the right of the worker to security of tenure guaranteed by the Constitution."16

In the interpretation of contracts, obscure words and provisions shall not favor the party that caused the obscurity.17 Consequently, the terms of the present contract should be construed strictly against petitioner, which prepared it.18

Article 1700 of the Civil Code declares:

"Art. 1700. The relations between capital and labor are not merely contractual. They are so impressed with public interest that labor contracts must yield to the common good. Therefore, such contracts are subject to the special laws on labor unions, collective bargaining, strikes and lockouts, closed shop, wages, working conditions, hours of labor and similar subjects."

Indeed, a contract of employment is impressed with public interest. For this reason, provisions of applicable statutes are deemed written into the contract. Hence, the "parties are not at liberty to insulate themselves and their relationships from the impact of labor laws and regulations by simply contracting with each other."19 Moreover, in case of doubt, the terms of a contract should be construed in favor of labor.20

Lastly, petitioner claims that it was constrained by the nature of its business to enter into fixed-term employment contracts with employees assigned to job orders. It argues that inasmuch as its business is that of a mere service contractor, it relies on the availability of job orders or undertakings from its clients. Hence, the continuity of work cannot be ascertained.

Petitioner’s contentions deserve little consideration.

By their very nature, businesses exist and thrive depending on the continued patronage of their clients. Thus, to some degree, they are subject to the whims of clients who may decide to discontinue patronizing their products or services for a variety of reasons. Being inherent in any enterprise, this entrepreneurial risk may not be used as an excuse to circumvent labor laws; otherwise, no worker could ever attain regular employment status.

Finally, it is worth noting that after its past employment contracts had been declared void by this Court, petitioner was expected to ensure that the subsequent contracts would already comply with the standards set by law and by this Court. Regrettably, petitioner failed to do so.

WHEREFORE, the Petition is DENIED, and the assailed Decision and Resolution are AFFIRMED. Costs against petitioner.


Ynares-Santiago, Austria-Martinez, Callejo, Sr., and Chico-Nazario, JJ., concur.


1 Rollo, pp. 3-27.

2 Id. at 32-37. Fifth Division. Penned by Justice Eugenio S. Labitoria (Division chair) with the concurrence of Justices Mercedes Gozo-Dadole and Rosmari D. Carandang (members).

3 Id. at 66.

4 Id. at 37.

5 CA Decision, pp. 1-3; rollo, pp. 32-34.

6 The case was deemed submitted for decision on May 10, 2005, upon receipt by this Court of petitioner’s Memorandum signed by Attys. Josabeth V. Alonso and Vladimir F. del Rosario. Respondents’ Memorandum, signed by Atty. Cezar F. Maravilla Jr., was received by the Court on April 19, 2005.

7 Petitioner’s Memorandum, pp. 6-7; rollo, pp. 654-655. (Uppercase in the original)

8 356 Phil. 638, September 10, 1998.

9 364 Phil. 518, March 18, 1999.

10 St. Theresa’s School of Novaliches Foundation v. NLRC, 351 Phil. 1038, April 15, 1998; Philippine Village Hotel v. NLRC, 230 SCRA 423, February 28, 1994; Philippine National Oil Co.-Energy Development Corporation v. NLRC, 220 SCRA 695, March 31, 1993; Brent School, Inc. v. Zamora, 181 SCRA 702, February 5, 1990.

11 Poseidon Fishing v. NLRC, GR No. 168052, February 20, 2006; Philips Semiconductors, Inc. v. Fadriquela, 427 SCRA 408, April 14, 2004; Pakistan International Airlines Corporation v. Ople, 190 SCRA 90, September 28, 1990; Brent School, Inc. v. Zamora, supra.

12 Supra note 8.

13 Supra note 9.

14 Servidad v. NLRC, supra, pp. 521-522.

15 Rollo, pp. 67-70.

16 Id. at. 524-525, per Purisima, J. (Italics supplied)

17 Civil Code, Art. 1377.

18 Philippine Federation of Credit Cooperatives, Inc. v. NLRC, 360 Phil. 254, 261, December 11, 1998.

19 Pakistan Airlines Corporation v. Ople, supra, p. 99, per Feliciano, J. See also Magsalin v. National Organization of Working Men, 451 Phil. 254, May 9, 2003; Bernardo v. NLRC, 369 Phil. 443, July 12, 1999.

20 Philippine Federation of Credit Cooperatives, Inc. v. NLRC, supra.

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