Banana contracts: Peeling away the legal aspects of ‘pole-vaulting’

Amicus Curiae
Glenn C. Aquino

Posted on October 24, 2014

A SILENT WAR has been raging in the Davao Regions of Mindanao. Like many wars, this sprung from a craving -- a craving for bananas by Japan, China, New Zealand, East Asia, and the Middle East. This insatiable demand for bananas has been causing a banana-growing frenzy, especially in the Davao Regions. Thus, in 1998, the Philippines became the fourth largest producer of bananas worldwide. By 2007, it even surpassed itself by becoming the third largest banana producer, next only to Ecuador and Costa Rica.

The cut-throat competition among banana exporters to bind by contract as many growers/suppliers as possible soon spurred the practice of “pole-vaulting,” the furtive trading of bananas outside of the usual grower-exporter contracts.

The typical growership agreement between exporter and grower is for three to five years. This contract binds the grower’s harvest exclusively to the exporter for a fixed price. In turn, the exporter is obliged to buy all the bananas produced by the grower, regardless of demand. This system benefits both parties because it gives the grower guaranteed income while ensuring for the exporter a regular and reliable volume for export.

The demand for bananas worldwide is greatest from January to May. However, this is also the season when our banana growers experience a decline in production. Thus, exporters bear the shortfall as they struggle to meet the worldwide demand. It is at these times when “pole-vaulting” occurs. Seeking to cash in on the high demand for bananas, fly-by-night spot buyers entice growers into breaking or short-changing their growership contracts, to sell their produce (regardless of the quality) to these spot buyers who offer a higher price. Even legitimate buyers/exporters themselves are often constrained to “pole-vault” when their own growers are unable to deliver the required volume.

By “pole-vaulting,” the grower, or the exporter as the case may be, inevitably breaches the growership agreement that obliges the parties to deal solely and exclusively with each other. For this breach, the law holds the offending party liable in damages to the other.

But what relief can be had against that stranger who induced the breach?

Generally, contracts take effect only between the parties, their assigns and heirs. Those who are not parties to the contract cannot invoke it in their defense, and corollarily, strangers cannot be held liable under the contract to which they are not parties.

There are exceptions to this general rule. In a contract with a stipulation pour autrui, for one, the contract may contain a favorable stipulation in favor of a third person, who may invoke his rights under that contract. Another exception is in contracts creating real rights.

And then, there is tortious interference, or malicious interference in contracts, where a stranger is bound to respect a valid contract between contracting parties, and may be held answerable for damages to one party if he induces the other to violate the contract. In actions for tortious interference, the following must be shown:

• Existence of a valid contract;

• Knowledge on the part of the third person of the existence of the contract; and

• The interference by the third person in the contractual relation is without legal justification.

An eminent jurist explains that in tortious interference, “it is enough if the intermeddler, having knowledge of the contract relation, in bad faith sets about to break it up. Whether his motive is to benefit himself or gratify his spite by working mischief to the other party to the contract, is immaterial. Malice in the sense of ill will or spite is not essential.” (Tolentino, Commentaries on the Civil Code, Vol. IV)

But what “legal justification” may excuse interfering in a contractual relation? In one case, our Supreme Court cited that: “If a party enters into contract to go for another upon a journey to a remote and unhealthful climate, and a third person, with a bona fide purpose of benefiting the one who is under contract to go, dissuades him from the step, no action will lie. But if the advice is not disinterested and the persuasion is used for ‘the indirect purpose of benefiting the defendant at the expense of the plaintiff,’ the intermeddler is liable if his advice is taken and the contract broken.”

In actions for unlawful interference, it is indispensable that there be an “inducement” by the defendant, which caused a party to breach the contract. The word “induce,” as used in Article 1314 of the Civil Code, has been held to refer to “where a person causes another to choose one course of conduct by persuasion or intimidation.” Thus, if the breach was caused not really by the inducement of the third person, but upon the own volition of one of the parties, the action for unlawful interference cannot prosper.

Glenn C. Aquino is a partner of the Angara Abello Concepcion Regala & Cruz Law Offices. He is resident partner of ACCRALAW’s Davao Branch.