chapter 18 foreign corporations
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Chapter 18 Foreign CorporationsTRANSCRIPT
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Chapter XVIII – Foreign Corporations
Definition, status
— Sec 123: a foreign corporation is one formed, organized, or existing under any
laws other than those of the Phils and whose laws allow Filipino citizens and
corporations to do business in its own country or state
Not doing business no need for license
to sue and be sued
Doing business need license
Jack: doing business is extending the business of the foreign entity to the RP, on a
continuing and permanent basis, in order to make profits! That’s all it is!
Call cases (except Merrill Lynch and TopWeld, are exceptions to doing business!
Compare with Agilent. Compare Wells and Mentholatum.
Set aside cases of foreign corporation enforcing IPRs from the other cases (Le
Chemise, Gelhaar, Columbia, Puritan)
Methods of investment
Permitted areas of investment
1. partially nationalized areas
2. preferred areas; incentives for investment
3. non-preferred areas of investment
Legal Requirements prior to transaction of business
1. BOI Certificate
2. SEC license to do business
3. Certificate from appropriate government agency
Effect of failure to secure SEC license
Marshall Wells v Elser. F: Marshall Wells Co. (foreign) sued Henry Elser Co
(local) for the unpaid balance on the sale of goods. Elser Co files a demurrer,
contending that Marshall has no legal capacity to sue, not having complied with
the laws required of foreign corporations doing business in the RP and not
authorized to do business in RP. TC sustains demurrer.I: W/n the obtaining of the license to do business is a condition precedent to
maintaining any kind of action in RP courts.
H: The object of the statute was to subject the foreign corporation doing
businesss in the Philippines to the jurisdiction of its courts. Its object was not to
prevent the foreign corporation from performing single acts, but to prevent it
from acquiring a domicile for the purpose of business without taking the steps
necessary to render it amenable to suit in the local courts. The effect of the
statute preventing foreign corporations from doing business and bringing action
in the courts except on compliance with elaborate requirements must not be
unduly extended or improperly applied.
Thus confronted with the option of construing the law to mean that any
corporation in the US, which might ant to sell to a person in the Phils must sent
some representative here before the sale and go through the complicated
formulae provided by the corporation law with regard to obtaining of the license,
before the sale was made in order to avoid being swindled by Filipinos, there
can be no other construction. The law simply means that no foreign corporation
shall be permitted to transact business in the Phils unless it shall have the
license required by law, and until it complies with the law, shall not be permitted
to maintain any suit in the local courts.
The non-compliance of a foreign corporation with the requirements of thestatute may be pleaded as an affirmative defense. Thereafter it must appear
from the evidence, first—that the plaintiff is a foreign corporation, and second—
that it is doing business in the Phils, and third—that it has not obtained the
proper license.
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— To subject foreign corporations doing business in the RP to the jurisdiction of
the courts; and to prevent it from acquiring domicile without taking steps to
make it amenable to suits
— Requirement to obtain license applies only to foreign corporations doing
business in RP
Marshall Wells + Metholatum = isolated txns NOT doing business
Columbia Pictures v CA. F: Columbia Pictures et al lodged a formal complaint
with the NBI for violation of PD No. 49, as amended, and sought its assistance in
their anti-film piracy drive. Agents of the NBI and private researchers made
discreet surveillance on various video establishments in Metro Manila including
Sunshine Home Video Inc. NBI Senior Agent Lauro C. Reyes applied for a search
warrant with the courta quo against Sunshine seeking the seizure, among others,
of pirated video tapes of copyrighted films all of which were enumerated in a list
attached to the application; and, television sets, video cassettes and/or laser disc
recordings equipment and other machines and paraphernalia used or intended to
be used in the unlawful exhibition, showing, reproduction, sale, lease or dispositionof videograms tapes in the premises above described.TC granted and issued the
SW. The search warrant was served to Sunshine and/or their representatives. In
the course of the search of the premises indicated in the search warrant, the NBI
Agents found and seized various video tapes of duly copyrighted motion
pictures/films owned or exclusively distributed by private complainants, and
machines, equipment, television sets, paraphernalia, materials, accessories all of
which were included in the receipt for properties accomplished by the raiding
team.Sunshine filed a motion to lift warrant but was denied by the TC. Sunshine
contended that being foreign corporations, Columbia Pictures et al should have
such license to be able to maintain an action in Philippine courts. In so
challenging petitioners’ personality to sue, Sunshine pointed to the fact thatpetitioners are the copyright owners or owners of exclusive rights of distribution in
the Philippines of copyrighted motion pictures or films, and also to the appointment
of Atty. Rico V. Domingo as their attorney-in-fact, as being constitutive of “doing
business in the Philippines” under BOI Rules. As foreign corporations doing
business in the Philippines, Section 133 of the Corporation Code denies them the
right to maintain a suit in Philippine courts in the absence of a license to do
business, and thus have no right to ask for the issuance of a search warrant.
Upon MR, the TC granted the same, holding that the master tapes of the
copyrighted films from which the pirated films were allegedly copies, were never
presented in the proceedings for the issuance of the search warrants in
question. The orders of the Court granting the search warrants and denying
the urgent motion to lift order of search warrants were, therefore, issued in error
and was set aside. Petitioners appealed.H: The obtainment of a license prescribed by Section 125 of the Corporation
Code is not a condition precedent to the maintenance of any kind of action in
Philippine courts by a foreign corporation. However, under the aforequoted
provision, no foreign corporation shall be permitted to transact business in the
Philippines, as this phrase is understood under the Corporation Code, unless it
shall have the license required by law, and until it complies with the law in
transacting business here, it shall not be permitted to maintain any suit in local
courts. As thus interpreted, any foreign corporation not doing business in the
Philippines may maintain an action in our courts upon any cause of action,
provided that the subject matter and the defendant are within the jurisdiction of
the court. It is not the absence of the prescribed license but “doing business” inthe Philippines without such license which debars the foreign corporation from
access to our courts. In other words, although a foreign corporation is without
license to transact business in the Philippines, it does not follow that it has no
capacity to bring an action. Such license is not necessary if it is not engaged in
business in the Philippines. it is recognized that a foreign corporation is “doing,”
“transacting,” “engaging in,” or “carrying on” business in the State when, and
ordinarily only when, it has entered the State by its agents and is there engaged
in carrying on and transacting through them some substantial part of its
ordinary or customary business, usually continuous in the sense that it may be
distinguished from merely casual, sporadic, or occasional transactions and
isolated acts. Jurisprudence has, however, held that the term implies acontinuity of commercial dealings and arrangements, and contemplates, to that
extent, the performance of acts or works or the exercise of some of the
functions normally incident to or in progressive prosecution of the purpose and
subject of its organization.
Based on Article 133 of the Corporation Code and gauged by such statutory
standards, petitioners are not barred from maintaining the present action.
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There is no showing that, under our statutory or case law, petitioners are doing,
transacting, engaging in or carrying on business in the Philippines as would require
obtention of a license before they can seek redress from our courts. No evidence
has been offered to show that petitioners have performed any of the enumerated
acts or any other specific act indicative of an intention to conduct or transact
business in the Philippines.
Accordingly, the certification issued by the SEC stating that its records do not show
the registration of petitioner film companies either as corporations or partnerships
or that they have been licensed to transact business in the Philippines, while
undeniably true, is of no consequence to petitioners’ right to bring action in the
Philippines. Verily, no record of such registration by petitioners can be expected to
be found for, as aforestated, said foreign film corporations do not transact or do
business in the Philippines and, therefore, do not need to be licensed in order to
take recourse to our courts. As a general rule, a foreign corporation will not be
regarded as doing business in the State simply because it enters into contracts
with residents of the State, where such contracts are consummated outside the
State. In fact, a view is taken that a foreign corporation is not doing business in the
state merely because sales of its product are made there or other business
furthering its interests is transacted there by an alleged agent, whether a
corporation or a natural person, where such activities are not under the direction
and control of the foreign corporation but are engaged in by the alleged agent as
an independent business.
In accordance with the rule that “doing business” imports only acts in furtherance
of the purposes for which a foreign corporation was organized, it is held that the
mere institution and prosecution or defense of a suit, particularly if the transaction
which is the basis of the suit took place out of the State, do not amount to the
doing of business in the State. The institution of a suit or the removal thereof is
neither the making of a contract nor the doing of business within a constitutional
provision placing foreign corporations licensed to do business in the State under
the same regulations, limitations and liabilities with respect to such acts as
domestic corporations. Merely engaging in litigation has been considered as not a
sufficient minimum contact to warrant the exercise of jurisdiction over a foreign
corporation.
As to Sunshine’s contention that petitioners have no legal personality to sue,
among the grounds for a motion to dismiss under the Rules of Court are lack of
legal capacity to sue and that the complaint states no cause of action. Lack of
legal capacity to sue means that the plaintiff is not in the exercise of his civil
rights, or does not have the necessary qualification to appear in the case, or
does not have the character or representation he claims. On the other hand, a
case is dismissible for lack of personality to sue upon proof that the plaintiff isnot the real party-in-interest, hence grounded on failure to state a cause of
action. The term “lack of capacity to sue” should not be confused with the term
“lack of personality to sue.” While the former refers to a plaintiff’s general
disability to sue, such as on account of minority, insanity, incompetence, lack of
juridical personality or any other general disqualifications of a party, the latter
refers to the fact that the plaintiff is not the real party- in-interest.
Correspondingly, the first can be a ground for a motion to dismiss based on the
ground of lack of legal capacity to sue; whereas the second can be used as a
ground for a motion to dismiss based on the fact that the complaint, on the face
thereof, evidently states no cause of action.
Applying the above discussion to the instant petition, the ground available for
barring recourse to our courts by an unlicensed foreign corporation doing or
transacting business in the Philippines should properly be “lack of capacity to
sue,” not “lack of personality to sue.” Certainly, a corporation whose legal rights
have been violated is undeniably such, if not the only, real party-in-interest to
bring suit thereon although, for failure to comply with the licensing requirement,
it is not capacitated to maintain any suit before our courts.
— Columbia: ownership of copyright or distribution rights and enforcement of
IPR≠ doing business
— Entering into contracts with residents in the RP≠ doing business
General Garments Corp v Director of Patents. F: General Garments Corp is
the owner of the trademark “Puritan” for assorted men’s wear and underwear.
The Puritan Sportswear Corporation of Pennsylvania, filed a petition for
cancellation of the trademark registered in the name of General Garments
Corporation, alleging ownership and prior use of the name. General Garments
contends that Puritan being a foreign corporation which is not licensed to do
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and is not doing business in the RP, is not considered a person under RP laws and
consequently not comprehended within the term “any person” under the Trademark
Law then in force. MTD was denied by the Director of Patents.
I: W/N Puritan Sportswear Corp, not licensed to do business and not doing
business in the RP, has legal capacity to maintain a suit in the Phil. Patent Office.
H: The fact that it may not transact business in the Phils unless it obtains a license
or maintains a suit does not make the respondent any less a juridical person. Anexception to the license requirement is where a foreign corporation sues on an
isolated transaction. It cites the Marshall Wells case (supra)
It should be pointed out that Puritan is not suing in the courts to recover a debt
claim or demand—which would require a license—but filed a petition to cancel the
trademark registered by General Garments. A foreign corporation which has never
done business in the Phils and which is unlicensed and unregistered to do so, but
is widely and favorable known in the Phils through the use therein of its products
bearing its corporate name has a legal right to maintain an action. The purpose of
such a suit is to protect its reputation, corporate name, and goodwill, which has
been established through the natural development of its trade, in the doing ofwhich it does not seek to enforce any legal or contract rights arising from, or
growing out of any business transacted in the Phils.
The lawful entry into the Phils of goods bearing the trademark since 1949 should
entitle the owner to the right to use the same to the exclusion of others. The law is
not only for the protection of the owner of the trademark but also for the protection
of purchasers from confusion or deception.
General Garments invokes the Mentholatum ruling in support of his case, but the
SC held that Congress, in seeking to purposely counteract the effects of the case,
enacted RP 638 and inserted Sec 21-A in the Trademark Law, to allow foreigncorporations to bring an action in RP courts for infringement of a mark or trade
name, or unfair competition, or false designation of origin and false description,
whether or not it has been licensed to do business in the RP.
Le Chemise Lacoste v Fernandez. F: La Chemise Lacoste is a French
corporation and not doing business in the RP, and is also the actual owner of the
trademarks Lacoste and Crocodile Device. Hemandas & Co secured a
registration of the trademarks in its name from the Phil Patent Office of the
trademarks owned by Le Chemise. Hemandas then assigned all its rights title
and interest in the trademark to Gobindram Hemandas. Le Chemise filed its
own application for registration of the trademarks Crocodile Device and
Lacoste, and the Patent Office approved the former was but rejected the latter.
Le Chemise then filed a letter-complaint with the NBI alleging acts of unfaircompetition committed by Hemandas and requesting their apprehension and
prosecution. The NBI secured search warrants, but Hemandas files a MTQ the
warrant alleging that his trademarks is different from Le Chemise. Search
warrants were recalled and items seized returned to Hemandas. Le Chemise
questions the quashal.
I: W/n petitioner has no legal capacity to sue because it is not doing business in
the Philippines and is not licensed to do so, and that it failed to allege certain
facts in its petition relative to its capacity to sue.
H: In Leviton case, which is relied on by Hemandas, it was ruled that it is not
enough for a foreign corporation to merely allege that it is a foreign corporation.Compliance with the requirements under the law or statute from which it seeks
relief and upon which the grounds of the illegal act are alleged, is necessary. It
is therefore necessary for the foreign corporation to comply with these
requirements or aver why it should be exempted from them. The foreign
corporation may have the right to sue before RP courts, but our rules on
pleadings require that the qualifying circumstances necessary for the assertion
of that right be affirmatively pleaded. Since the present case involves a criminal
offense, the Leviton case is inapplicable. Le Chemise may still sue even if it
failed to allege material facts. A foreign corporation not doing business needs
no license to sue before RP courts for infringement of trademark and unfair
competition. A foreign corporation favorable known in the Phils through the useof its products bearing its corporate name has a legal right to maintain action in
the Philippines to restrain the formation in BF of a corporation bearing the same
name as the foreign corporation; the sole purpose of its suit is to protect its
reputation, corporate name, goodwill whenever the same has established
themselves. A corporate and trade name are property rights, rights in rem,
which the owner may assert and protect against the whole world, in any courts
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of the world—even in jurisdictions where it does not transact business. Since it is
the trademark and not the mark that is to be protected, a trademark acknowledges
no territorial boundaries or municipalities or states or nations, but extends to every
market where the trader’s goods have become known and identified.
The letter-complaint that preceded the petition was filed with the NBI. If prosecution
would follow after the PI then the information shall be in the name of the People ofthe RP and no longer the petitioner which is only an aggrieved party, since a
criminal act is an act against the State. Le Chemise capacity to sue, would then be
of no significance.
The Mentholatum case relied upon by Hemandas is also not on all fours with the
present case. The foreign corporation in Mentholatum is in fact doing business in
the RP but without the requisite license. In the present case, Le Chemise is a
foreign corporation not doing business in the RP. It has an exclusive distributor,
Rustans Commercial, which is an independent entity which buys and sells the
products of Le Chemise, and is in other words not a mere agent or conduit of Le
Chemise. BOI rules also support a finding that Le Chemise is not doing business.Rustans is a middleman acting and transacting business in its own name and
account.
In upholding the rights of Le Chemise, SC held that we are recognizing our duties
and rights of foreign states to which the Philippines and France are parties. We are
simply interpreting and enforcing a solemn international commitment of the
Philippines embodied in a multilateral treaty, the Paris Convention for the
Protection of Industrial Property to which we are a party. The convention has
extraterritorial application, and is essentially a compact between the member
countries to accord to member-countries’ citizens the same rights comparable to
those accorded their own citizens by domestic law. The underlying principle is thatforeign nationals should be given the same treatment in each of the member-
countries as that country makes available to its own citizens. It is not premised
upon the idea that the trademark and related laws shall be given extra-territorial
application, but on exactly the converse that each nation’s law shall have only
territorial application. A treaty or convention is not a mere moral obligation to be
enforced but creates a legally binding obligation on the parties founded on the
generally accepted principles of international law of pacta sunt servanda, which
has been adopted as the law of the law.
— Foreign corporation not doing business has personality to commence
criminal proceedings for violation of RPC
— Mentholatum does not apply! Le Chemise’s exclusive distributor buys and
then sells it shirts for its own account and for its own profit and is not anagent or conduit of Le Chemise
— Not every sale to an exclusive agent in RP constitutes doing business! The
agent must sell or transact in the foreign corporation’s name and for the
foreign entity’s own account to constitute doing business
— Villanueva: but buying the products to be resold in the RP from foreign
entities involve the foreign entity as direct parties!
What constitutes doing business
— Isolated transaction: set apart from common business; no intention to
engage in a progressive pursuit of the business or corporate purpose
Litton Mills v CA. F: Petitioner Litton Mills, Inc. (Litton) entered into an
agreement with Empire Sales Philippines Corporation (Empire), as local agent
of Gelhaar Uniform Company (Gelhaar), an American corporation, whereby
Litton agreed to supply Gelhaar 7,770 dozens of soccer jerseys. The
agreement stipulated that before it could collect from the bank on the letter of
credit, Litton must present an inspection certificate issued by Gelhaar’s agent in
the Philippines, Empire Sales, that the goods were in satisfactory condition.
Litton then sent four shipments totaling 4,770 dozens of the soccer jerseys. A
fifth shipment of 2,110 dozens of the jerseys, was inspected by Empire, but
Empire refused to issue the required certificate of inspection. Alleging that
Empire’s refusal to issue a certificate was without valid reason, Litton filed a
complaint for specific performance to compel Empire to issue the inspection
certificate covering the 2,110 dozen jerseys plus damages. The trial court
issued the writ and the next day, Empire issued the inspection certificate, so
that the cargo was shipped on time. The law firm of Sycip, Salazar, Feliciano
and Hernandez entered a special appearance for the purpose of objecting to
the jurisdiction of the court over Gelhaar, and moved to dismiss the case and to
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quash the summons on the ground that Gelhaar was a foreign corporation not
doing business in the Philippines, and as such, was beyond the reach of the local
courts. It contended that Litton failed to allege and prove that Gelhaar was doing
business in the Philippines.
H: We sustain petitioner’s contention based on the first ground, namely, that the
trial court acquired jurisdiction over Gelhaar by service of summons upon its agent
as required by of Rule 14, § 14. But, it should be noted, in order that service may
be effected in the manner above stated,said section also requires that the foreign
corporation be one which is doing business in the Philippines.This is asine qua
nonrequirement.This fact must first be established in order that summons can be
made and jurisdiction acquired. The fact of doing business must then, in the first
place, beestablishedbyappropriate allegations in the complaint. Hence, a court
need not go beyond the allegations in the complaint to determine whether or not a
defendant foreign corporation is doing business for the purpose of Rule 14, § 14. In
the case at bar, the allegation that Empire, for and in behalf of Gelhaar, ordered
7,770 dozens of soccer jerseys from Litton and for this purpose Gelhaar caused
the opening of an irrevocable letter of credit in favor of Litton is a sufficient
allegation that Gelhaar was doing business in the Philippines.
Gelhaar contends that the contract with Litton was a single, isolated transaction
and that it did not constitute “doing business.” where a single act or transaction of a
foreign corporation is not merely incidental or casual but is of such character as
distinctly to indicate a purpose on the part of the foreign corporation to do other
business in the state, such act will be considered as constituting doing business.
This Court referred to acts which were in the ordinary course of business of the
foreign corporation.
In the case at bar, the trial court was certainly correct in holding that Gelhaar’s act
in purchasing soccer jerseys to be within the ordinary course of business of thecompany considering that it was engaged in the manufacture of uniforms. The acts
noted above are of such a character as to indicate a purpose to do business.
In accordance with Rule 14, § 14, service upon Gelhaar could be made in three
ways: (1) by serving upon the agent designated in accordance with law to accept
service of summons; (2) if there is no resident agent, by service on the government
official designated by law to that effect; and (3) by serving on any officer or agent of
said corporation within the Philippines.6 Here, service was made through
Gelhaar’s agent, the Empire Sales Philippines Corp. There was, therefore, a
valid service of summons on Gelhaar, sufficient to confer on the trial court
jurisdiction over the person of Gelhaar.
— Single transaction most not simply be casual or incidental to constitute
doing business… it must be in the ordinary course of the business of the
foreign corporation
Mentholatum v Mangaliman. F: MEntholatum Co Inc, a Kansas corporation
which manfactures “Mentholatum” (a medicament and salve adapted for the
treatment of colds, nasal irritations etc) and its distributing agent Philam Drug
Co filed an action against Mangaliman et al for infringement of trademark and
unfair competition. They allege that the Mangaliman et al prepared a
medicament and salve named “Mentoliman” which they sold in a container of
the same size, color, shape as “Mentholatum,” and allege damages and
diminutions of sales and loss of goodwill and reputation. TC ruled ifo
Mentholatum Co. CA reverses, holding that the activities of Mentholatum were
business transactions in the Philippines through its agent PhilAm Drug, and that
under the Corpo Law they cannot maintain their suit. Mentholatum claims that
they have not personally sold any of their products in the RP and that the
Philam Drug Co was merely an importer of the products, their sales not being
for the account of Mentholatum but for their own. Mangaliman countered that
PhilAm Drug is the exclusive distributor of Mentholatum and that because of
this arrangement, the acts of the former became acts of the latter, and thus
Mentholatum is engaged in doing business in the RP and would require a
license before it can sue.
I: W/N Mentholatum is doing business in the RP; W/N Mentholatum Inc could
prosecute their action without having secured the license; W/N the PhilAm Drug
co could by itself maintain the suit.
H: There is no general rule regarding what constitutes doing business in the
Phils. The true test is whether the foreign corporation is continuing the body or
substance of the business or enterprise for which it was organized or whether it
has substantially retired from it and turned it over to another, thus implying a
continuity of dealings and arrangements, and contemplates the performance of
acts and exercise of functions normally incident to the purpose and object of its
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organization. In this case, as stipulated in their respective pleadings, whatever
transactions of PhilAm Drug had executed in view of the law, the Mentholatum Co.
being a foreign corporation doing business without the license, may not prosecute
the action. Neither may the PhilAm Drug maintain the action for the reason that the
distinguishing features of the agent being his representative character and
derivative authority, it cannot, to the advantage of its principal, claim an
independent standing in court.
— Sale of products of a foreign entity through a local distributor is equivalent to
doing business; isolated transaction is not doing business
— Mentholatum tests:
(1)substance test: continuing the substance of the business and purpose for
which it was organized
(2)continuity test: continuity of dealings and arrangements, or acts normally
incidental to the purpose and object
Agilent Technologies Singapore v. Integrated Silicon Technology Phils. F:
Petitioner Agilent Technologies Singapore (Pte.), Ltd. (“Agilent”) is a foreigncorporation, which, by its own admission, is not licensed to do business in the
Philippines. Respondent Integrated Silicon Technology Philippines Corporation
(“Integrated Silicon”) is a private domestic corporation, 100% foreign owned, which
is engaged in the business of manufacturing and assembling electronics
components. A 5-year Value Added Assembly Services Agreement (“VAASA”), was
entered into on April 2, 1996 between Integrated Silicon and the Hewlett-Packard
Singapore (Pte.) Ltd., Singapore Components Operation (“HP-Singapore”). Under
the terms of the VAASA, Integrated Silicon was to locally manufacture and
assemble fiber optics for export to HP-Singapore. HP-Singapore, for its part, was
to consign raw materials to Integrated Silicon; transport machinery to the plant of
Integrated Silicon; and pay Integrated Silicon the purchase price of the finishedproducts. HP-Singapore assigned all its rights and obligations in the VAASA to
Agilent. Integrated Silicon sues Agilent and its officers for specific performance,
alleging that Agilent breached the parties’ oral agreement to extend the VAASA.
Integrated Silicon thus prayed that defendant be ordered to execute a written
extension of the VAASA for a period of five years as earlier assured and promised.
Agilent then filed a separate complaint for specific performance against Integrated
Silicon, Teoh Kang Seng, Teoh Kiang Gong, Anthony Choo, Joanne Kate M.
dela Cruz, Jean Kay M. dela Cruz and Rolando T. Nacilla, and prayed for the
immediate return and delivery to plaintiff its equipment, machineries and the
materials to be used for fiber-optic components which were left in the plant of
Integrated Silicon.TC denied MTD of Silicon. CA reverses. Integrated Silicon et
al argue that since Agilent is an unlicensed foreign corporation doing business
in the Philippines, it lacks the legal capacity to file suit, assailing various acts of
Agilent, purportedly in the nature of “doing business” in the Philippines.
H: A foreign corporation without a license is notipso facto incapacitated from
bringing an action in Philippine courts. A license is necessary only if a foreign
corporation is “transacting” or “doing business” in the country. The Corporation
Code provides:
Sec. 133. Doing business without a license. — No foreign
corporation transacting business in the Philippines without a license,
or its successors or assigns, shall be permitted to maintain or
intervene in any action, suit or proceeding in any court oradministrative agency of the Philippines; but such corporation may
be sued or proceeded against before Philippine courts or
administrative tribunals on any valid cause of action recognized
under Philippine laws.
The aforementioned provision prevents an unlicensed foreign corporation
“doing business” in the Philippines from accessing our courts. In a number of
cases, however, we have held that an unlicensed foreign corporation doing
business in the Philippines may bring suit in Philippine courts against a
Philippine citizen or entity who had contracted with and benefited from said
corporation. Such a suit is premised on the doctrine of estoppel. A party is
estopped from challenging the personality of a corporation after having
acknowledged the same by entering into a contract with it. This doctrine of
estoppel to deny corporate existence and capacity applies to foreign as well as
domestic corporations. The application of this principle prevents a person
contracting with a foreign corporation from later taking advantage of its
noncompliance with the statutes chiefly in cases where such person has
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received the benefits of the contract.
The principles regarding the right of a foreign corporation to bring suit in Philippine
courts may thus be condensed in four statements:
(1) if a foreign corporation does business in the Philippines without a license, it
cannot sue before the Philippine courts;
(2) if a foreign corporation is not doing business in the Philippines, it needs nolicense to sue before Philippine courts on an isolated transaction or on a cause of
action entirely independent of any business transaction;
(3) if a foreign corporation does business in the Philippines without a license, a
Philippine citizen or entity which has contracted with said corporation may be
estopped from challenging the foreign corporation’s corporate personality in a suit
brought before Philippine courts; and
(4) if a foreign corporation does business in the Philippines with the required
license, it can sue before Philippine courts on any transaction.
InMentholatum, the Court discoursed on the two general tests to determine
whether or not a foreign corporation can be considered as “doing business” in thePhilippines. The first of these is the substance test, thus: The true test [for doing
business], however, seems to be whether the foreign corporation is continuing the
body of the business or enterprise for which it was organized or whether it has
substantially retired from it and turned it over to another.
The second test is the continuity test, expressed thus: The term [doing business]
implies a continuity of commercial dealings and arrangements, and contemplates,
to that extent, the performance of acts or works or the exercise of some of the
functions normally incident to, and in the progressive prosecution of, the purpose
and object of its organization.
Although each case must be judged in light of its attendant circumstances, jurisprudence has evolved several guiding principles for the application of these
tests. For instance, considering that it transacted with its Philippine counterpart for
seven years, engaging in futures contracts, this Court concluded that the foreign
corporation inMerrill Lynch Futures, Inc. v. Court of Appeals and Spouses Lara,
was doing business in the Philippines. InTop-Weld Manufacturing v. ECED, IRTI,
et al. both involved the License and Technical Agreement and Distributor
Agreement of foreign corporations with their respective local counterparts that
were the primary bases for the Court’s ruling that the foreign corporations were
doing business in the Philippines. In particular, the Court cited the highly
restrictive nature of certain provisions in the agreements involved, such that…
the Philippine entity is reduced to a mere extension or instrument of the foreign
corporation.
The case law definition has evolved into a statutory definition, having been
adopted with some qualifications in various pieces of legislation. The Foreign
Investments Act of 1991 (the “FIA”; Republic Act No. 7042, as amended), Sec 3
(d) defines “doing business” as those which “include soliciting orders, service
contracts, opening offices, whether called “liaison” offices or branches;
appointing representatives or distributors domiciled in the Philippines or who in
any calendar year stay in the country for a period or periods totaling one
hundred eighty (180) days or more; participating in the management,
supervision or control of any domestic business, firm, entity, or corporation in
the Philippines; and any other act or acts that imply a continuity of commercial
dealings or arrangements, and contemplate to that extent the performance ofacts or works, or the exercise of some of the functions normally incident to, and
in the progressive prosecution of, commercial gain or of the purpose and object
of the business organization.” An analysis of the relevant case law, in
conjunction with Section 1 of the Implementing Rules and Regulations of the
FIA (as amended by Republic Act No. 8179), would demonstrate that the acts
enumerated in the VAASA do not constitute “doing business” in the Philippines.
The IRR of the FIA (as amended by Republic Act No. 8179) provides that the
following shall not be deemed “doing business”:
a. Mere investment as a shareholder by a foreign entity in domesticcorporations duly registered to do business, and/or the exercise
of rights as such investor;
b. Having a nominee director or officer to represent its interest in
such corporation;
c. Appointing a representative or distributor domiciled in the
Philippines which transacts business in the representative’s or
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distributor’s own name and account;
d. The publication of a general advertisement through any print or
broadcast media;
e. Maintaining a stock of goods in the Philippines solely for the
purpose of having the same processed by another entity in the
Philippines;
f. Consignment by a foreign entity of equipment with a local company
to be used in the processing of products for export;
g. Collecting information in the Philippines; and
h. Performing services auxiliary to an existing isolated contract of sale
which are not on a continuing basis, such as installing in the
Philippines machinery it has manufactured or exported to the
Philippines, servicing the same, training domestic workers to
operate it, and similar incidental services.
By and large, to constitute “doing business”, the activity to be undertaken in the
Philippines is one that is for profit-making. By the clear terms of the VAASA,
Agilent’s activities in the Philippines were confined to (1) maintaining a stock ofgoods in the Philippines solely for the purpose of having the same processed by
Integrated Silicon; and (2) consignment of equipment with Integrated Silicon to be
used in the processing of products for export. As such, we hold that, based on the
evidence presented thus far, Agilent cannot be deemed to be “doing business” in
the Philippines. Respondents’ contention that Agilent lacks the legal capacity to
file suit is therefore devoid of merit. As a foreign corporation not doing business in
the Philippines, it needed no license before it can sue before our courts.
— Jqck: Agilent sums up everything; it’s the controlling doctrine now
Merrill Lynch Futures v CA. F: Merrill Lynch Futures, Inc. a non-resident foreigncorporation not doing business in the Philippines, sued the Spouses Pedro M. Lara
and Elisa G. Lara for the recovery of a debt and interest thereon. Merrill Lynch is a
"futures commission merchant" duly licensed to act as such in the futures markets
and exchanges in the United States, and essentially functioning as a broker…
(executing) orders to buy and sell futures contracts received from its customers on
U.S. futures exchanges.
It also defined a "futures contract" as a "contractual commitment to buy and sell
a standardized quantity of a particular item at a specified future settlement date
and at a price agreed upon, with the purchase or sale being executed on a
regulated futures exchange." It entered into a Futures Customer Agreement
with the defendant spouses, in virtue of which it agreed to act as the latter's
broker for the purchase and sale of futures contracts in the U.S. and that
pursuant to the contract, orders to buy and sell futures contracts were
transmitted to ML FUTURES by the Lara Spouses "through the facilities of
Merrill Lynch Philippines, Inc., a Philippine corporation and a company servicing
plaintiffs customers. Later, the Laras would reaffirm their lack of awareness that
Merrill Lynch Philippines, Inc.(formerly registered as Merrill Lynch, Pierce,
Fenner & Smith Philippines, Inc. ) did not have a license, claiming that they
learned of this only from inquiries with the Securities and Exchange
Commission which elicited the information that it had denied said corporation's
application to operate as a commodity futures trading advisor. Lara Spouses
actively traded in futures contracts, including "stock index futures" for four years
or so,i.e., from 1983 to October, 1987. A loss amounting to US$160,749.69
was incurred in respect of three (3) transactions involving "index futures," andafter setting this off against an amount of US$75,913.42 then owing by ML
FUTURES to the Lara Spouses, said spouses became indebted to ML
FUTURES for the ensuing balance of US$84,836.27. Lara Spouses however
refused to pay this balance, "alleging that the transactions were null and void
because Merrill Lynch Philippines, Inc., the Philippine company servicing
accounts of plaintiff… had no license to operate as a 'commodity and/or
financial futures broker. Lara files a MTD, and TC sustains the motion. CA
affirms, holding that the Trial Court had seen "through the charade in the
representation of MLPI and the plaintiff that MLPI is only a trading advisor and
in fact it is a conduit in the plaintiff's business transactions in the Philippines,”
citing the ruling in Mentholatum v Mangaliman.
I: W/n (a) ML FUTURES is prohibited from suing in Philippine Courts because
doing business in the country without a license, and that (b) it is not a real party
in interest since the Lara Spouses had not been doing business with it, but with
another corporation, Merrill Lynch, Pierce, Fenner & Smith, Inc.
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H: The ground that the plaintiff has no legal capacity to sue — may be understood
in two senses: one, that the plaintiff is prohibited or otherwise incapacitated by law
to institute suit in Philippine Courts; or two, although not otherwise incapacitated in
the sense just stated, that it is not a real party in interest. Now, the Lara Spouses
contend that ML Futures has no capacity to sue them because the transactions
subject of the complaint were had by them, not with the plaintiff ML FUTURES, but
withMerrill Lynch Pierce Fenner & Smith,Inc.
The facts on record adequately establish that ML FUTURES, operating in the
United States, had indeed done business with the Lara Spouses in the Philippines
over several years, had done so at all times through Merrill Lynch Philippines, Inc.
(MLPI), a corporation organized in this country, and had executed all these
transactions without ML FUTURES being licensed to so transact business here,
and without MLPI being authorized to operate as a commodity futures trading
advisor. The Laras did transact business with ML FUTURES through its agent
corporation organized in the Philippines, it being unnecessary to determine
whether this domestic firm was MLPI (Merrill Lynch Philippines, Inc.) or Merrill
Lynch Pierce Fenner & Smith (MLPI's alleged predecessor). The fact is that MLFUTURES did deal with futures contracts in exchanges in the United States in
behalf and for the account of the Lara Spouses, and that on several occasions the
latter received account documents and money in connection with those
transactions.
I: W/N ML FUTURES may sue in Philippine Courts to establish and enforce its
rights against said spouses, in light of the undeniable fact that it had transacted
business in this country without being licensed to do so. W/N the Lara Spouses are
now estopped to impugn ML FUTURES' capacity to sue them in the courts of the
forum.
H: The rule is that a party is estopped to challenge the personality of a corporation
after having acknowledged the same by entering into a contract with it. And the
"doctrine of estoppel” to deny corporate existence applies to foreign as well as to
domestic corporations; "one who has dealt with a corporation of foreign origin as a
corporate entity is estopped to deny its corporate existence and capacity." The
principle "will be applied to prevent a person contracting with a foreign corporation
from later taking advantage of its noncompliance with the statutes, chiefly in cases
where such person has received the benefits of the contract where such person
has acted as agent for the corporation and has violated his fiduciary obligations
as such, and where the statute does not provide that the contract shall be void,
but merely fixes a special penalty for violation of the statute… "
There would seem to be no question that the Laras received benefits generated
by their business relations with ML FUTURES. Those business relations,
according to the Laras themselves, spanned a period of seven (7) years; and
they evidently found those relations to be of such profitability as warranted their
maintaining them for that not insignificant period of time; otherwise, it is
reasonably certain that they would have terminated their dealings with ML
FUTURES much, much earlier. In fact, even as regards their last transaction, in
which the Laras allegedly suffered a loss in the sum of US$160,749.69, the
Laras nonetheless still received some monetary advantage, for ML FUTURES
credited them with the amount of US$75,913.42 then due to them, thus
reducing their debt to US$84,836.27. Given these facts, and assuming that the
Lara Spouses were aware from the outset that ML FUTURES had no license to
do business in this country and MLPI, no authority to act as broker for it, it
would appear quite inequitable for the Laras to evade payment of an otherwise
legitimate indebtedness due and owing to ML FUTURES upon the plea that it
should not have done business in this country in the first place, or that its agent
in this country, MLPI, had no license either to operate as a "commodity and/or
financial futures broker."
— Estoppel doctrine: if local parties knew that the foreign entity does not have
a license, yet it is doing business, and they still transacted with them—
estopped from invoking lack of license!
— Villanueva: Merrill Lynch lacks an element of estoppel—
action/representation by the local which induces the foreign to believe thathe would be entitled to relief… the simple act of entering into a contract
with a foreign entity does not of itself give rise to estoppel.
Topweld Manufacturing v ECED. F: TopWeld, a domestic corporation
engaged in manufacturing and selling welding supplies and equipment, entered
into separate contracts with 2 different foreign entities. The first contract is a
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License and Technical Assistance Agreement with the IRTI, a Swiss corporation,
which constituted TopWeld a licensee of IRTI to manufacture welding products
under certain specifications with raw materials to be purchased by TopWeld from
suppliers designated by IRTI. The second contract is a Distributor Agreement with
the ECED SA, a Panamanian corporation, which designated TopWeld as ECED’s
distributor in the RP of its welding products and equipment. Upon learning that the
two foreign corporations were negotiating with another group to replace TopWeld,
the latter sued IRTI, ECED and an American corporation, EUTECTIC, and also
Victor Gaerlan, the alleged representative of the three corporations. TopWeld
sought to restrain the corporations from negotiating with third parties and from
terminating its contract. TC grants petition and issues TRO. IRTI and ECED writes
TopWeld to inform it of their intent to sever their agreement. TopWeld amended its
complaint to ask the court to compel the ECED to deliver items covered by the
agreement and to prohibit them from importing into the RP any EUTECTIC
products. TC granted the amended prayer. CA reverses, holding that IRTI and
ECED, by entering into licensing and distributing agreements with TopWeld, were
doing business in the RP and thus should have required a certificate from the BOI.
It held that having not obtained the requisite certificate, the provisions of RA 5455prohibiting alien firms from terminating their franchise or licensing agreements with
domestic firms without payment of compensation and reimbursement of expenses
cannot be applied to them. They are not bound by the requirement on termination
and thus TopWeld cannot invoke the same. To impose a requirement would
perpetuate or condone an unlawful business operation. The CA finally held that
TopWeld ought to know whether or not IRTI and ECED were properly authorized to
engage in business in the RP. TopWeld appeals to SC.
I: W/n IRTI and ECED can be considered as doing business and thus subject to
the requirements of RA 5455.
H: IRTI and ECED are foreign corporations not licensed to do business in the Phils.SC reverted to the lack of a general rule as to what exactly constitutes doing or
engaging in business in the RP, and acknowledged that each case must be judged
in light of its peculiar circumstances. Acts of corporations should be distinguished
from single or isolate business transactions or occasional, incidental, or casual
transactions. Where a single act or transaction is not merely incidental or casual
but indicates the foreign corporation’s intention to do other business in the
Phils, said single act constitutes doing or engaging in business in the RP.
The SC concurs with the CA that the IRTI and ECED were doing business in
the RP. When they entered into the dispute contracts with TopWeld, they were
carrying out the purposes for which they were created—to manufacture and
market welding products and equipment. The terms and conditions of the
contracts indicate that they established within the RP, a continuous business,
and not merely one of a temporary character. This is buttressed by the
admission that they were negotiating with another domestic company. Their
acts enable them to enter into the mainstream of our economic life in
competition with local business interests, bringing them under the provisions of
RA 5455. IRTI and ECED contends exemption from RA 5455 because TopWeld
maintained an independent status during the existence of the contracts. But a
perusal of the agreements shows that they are highly restrictive, and in
assuming TopWeld to have an independent status, in essence it merely extends
to the Islands the business of IRTI and ECED.
As between the parties, RA 5455 does not declare void or invalid the contracts
entered without the license being secured. What is created is an illegal
situation between the parties having entered into agreements without the
license or certificate. In this case, TopWeld had actual knowledge of the
applicability of RA 5455 at the time of execution of the contract. It was
incumbent upon TopWeld to know whether or not IRTI and ECED were properly
authorized to engage in the RP. The very purpose of the law was circumvented
when they etered into the licensing and distributorship agreements, and the
parties being equally guilty and are in pari delicto, it follows that TopWeld is not
entitled to the relief prayed for.
— TopWeld: “pari delicto rule”—local company knew that the law it alleges to
have been violated by the foreign corporation is in force at the time of the
questioned contracts were consummated; while foreign corporation is doing
business without a license!
— The contracts cannot be voided!
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— Highly restrictive agreements which has the effect of reducing the local
corporation to mere conduits or extensions of the foreign corporation
Antam Consolidated v CA. F: Stokely (parent) and Capital City (subsidiary)
companies are foreign corporations not engaged and not licensed to do business
in the RP. Capital City and Comphil acting through broker Rothschild entered into a
contract wherein Comphil undertook to sell and deliver and Capital City agreed to
buy 500 long tons of crude coconut oil. Comphil failed to deliver the coconut oil so
that Capital decided to cover its oil needs in the open market, resulting in a loss of
$103,600. The parties entered into a second contract—designated as a “wash out”
of the first contract—wherein Comphil undertook to buy back the 500 long tons of
coconut oil at a higher price, the difference in price offsetting the loss sustained in
the first contract. Comphil failed to pay. A third contract was entered into, wherein
Comphil was to sell the same quantity of coconut oil at a discounted price from the
market value thereof, again offsetting the loss of $103,600 sustained by Capital
City. Again Comphil failed to deliver, and despite repeated demands Comphil
refused to settle its obligations to Capital City under the agreements. The
Tambuntings, former directors of Comphil, left the company and were replaced by5 employees of their pawnshop business, and caused the name of Comphil to be
changed to Banahaw Milling. The new directors also authorized Tambunting to sell
the oil mill of Comphil/Banahaw, which is the only substantial asset of Banahaw
and would thus leave it with no assets to satisfy claims of creditors. Unicom also
took over the assets and capital stock of Banahaw. Capital City alleged that all
petitioners evaded their obligation thereto through the devious scheme of using
Tambunting employees to replace the Tambuntings in the management of
Banahaw and disposing part of the assets and entire interests in
Comphil/Banahaw to Unicom. TC ordered the writ of attachment. Petitioners Antam
et al file MTD on the ground that petitioners are foreign corporations no licensed to
do business in the RP and has no personality to maintain the instant suit. TCdenies MTD, and Antam et al appeals. Antam claims Stokely and Capital city are
doing business in the RP, because it entered into three transactions/contracts with
them either as seller or buyer, and which are in the pursuit of the purpose and
object for which they are organized. They are thus required to obtain a license first
before maintaining any legal action against them.
H: the transactions are not a series of commercial dealings which signify an
intent on the part of Stokely and Capital City to do business in the RP, but
constitute an isolated one which does not fall under the category of “doing
business.” The records show that the only reason why the second and third
contracts were entered into was to recover the loss sustained from the failure of
Antam et al to deliver the crude coconut oil under the first contract. Instead of
outright demand, the foreign company even tried to push through with the
transaction to recover the amount lost. And again petitioners failed to make
good. It can be deduced therefore, that in reality there was only one agreement
—to deliver 500 long tons of coconut oil—and the 3 different transactions were
entered into in an effort to fulfill the basic agreement and in no way indicate an
intent to engage in a continuity of transactions with the petitioners which would
categorize it as a foreign corporation doing business in the RP.
It is a common ploy of defaulting companies sued by unlicensed foreign
companies not engaged in business in the RP to invoke lack of capacity to sue.
The doctrine of lack of capacity to sue based on failure to acquire a local
license is based on considerations of sound public policy. It was never intendedto favor domestic corporations who enter into solitary obligations simply
because the latter are not licensed to do business in the country.
— Antam: “auxiliary rule”—performance of services auxiliary to an existing
contract is not doing business!
How courts acquire jurisdiction over foreign corporations
Laws governing licensed foreign corporations
Merger of licensed foreign corporation
Withdrawal of foreign corporation
Revocation and suspension of license
Existing Licensed Foreign Corporations
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