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FOREIGN CORPORATIONS AND THE CONCEPT OF "DOING BUSINESS IN THE PHILIPPINES"1

NATURE OF CORPORATE CREATURE


A corporation is essentially a creature of the state under the laws of which it has been granted its juridical personality; and strictly speaking, beyond the territories of such creating state, a corporation has no legal existence, since the powers of the creating laws do not extend beyond the territorial jurisdiction of the state under which it is created.2 A foreign corporation is one which owes its existence to the laws of another state, and generally, has no legal existence within the state in which it is foreign.3 It is a fundamental rule of international jurisdiction that no state can by its laws, and no court (which is only a creature of the state) can by its judgments or decrees, directly bind or affect property or persons beyond the limits of that state.4 However, under the doctrine of comity in international laws, "a corporation created by the laws of one state is usually allowed to transact business in other states and to sue in the courts of the forum."5 The legal standing of foreign corporations in the host state therefore is founded on international law on the basis of consent,6 and the extent by which a hosting state can enforce its laws and jurisdiction over corporations created by other states has been the subject of jurisprudential rules and municipal legislations, especially in the fields of taxation,7 foreign investments, and capacity to obtain reliefs in local courts and administrative bodies. Consent, as a requisite for jurisdiction over foreign corporations, is founded on considerations of due process and fair play. As held in Pennoyer v. Neff,8 the jurisdiction of courts to render judgment in personam is grounded on their de facto power over the defendant's person. Therefore his presence within the territorial jurisdiction of a court is prerequisite to its rendition of judgment
This chapter is based on the article entitled Philippine Doctrine of Doing Business' for Foreign Corporations, published in two-part series in THE LAWYERS REVIEW, Part I - Vol. VII (No. 4, April, 1993), Part II - Vol. VII (No. 6, June, 1993). 2 Marshall-Wells Co. v. Henry W. Elser & Co., 46 Phil. 70, at p. 74 (1924). 3 Avon Insurance PLC v. Court of Appeals, 278 SCRA 312, 86 SCAD 401 (1997). 4 Times, Inc. v. Reyes, 39 SCRA 303 (1971), citing Perkins v. Dizon, 69 Phil. 186 (1939). 5 Ibid, citing Paul v. Virginia, 8 Wall. 168 (1869); Sioux Remedy Co. v. Cgpe and Cope, 235 U.S. 197 (1914); Cyclone Mining Co. v. Baker Light & Power Co., 165 Fed. 996 (1908). 6 SALONGA, PRIVATE INTERNATIONAL LAW, 1979 ed., p. 344. 7 The chapter does not cover nor discuss the concept of "doing business" in the field of taxation, as the subject is itself a technical matter that deserves a separate discussion. 8 95 U.S. 714, 733, 24 L.Ed. 565 (1877).
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personally binding him. International Shoe Co. v. State of Washington9 expanded the coverage by stating that due process requires only that in order to subject a defendant to a judgment in personam, if he not be present within the territory of the forum, he must have certain minimum contacts with it such that the maintenance of the suit does not offend "traditional notions of fair play and substantial justice." International Shoe Co. held that "[s]ince the corporate personality is a fiction, although a fiction intended to be acted upon as though it were a fact, it is clear that unlike an individual its presence without, as well as within, the State of its origin can be manifested only by activities carried on in its behalf by those who are authorized to act for it. To say that a corporation is so present there as to satisfy due process requirements . . . is to beg the question to be decided. For the terms present or presence are merely used to symbolize those activities of the corporation's agent with the State which courts will deem to be sufficient to satisfy the demands of due process." Thus, it deemed that "presence" in a forum state will not be doubted when the activities of the corporation there have not only been continuous and systematic, but also give rise to liabilities sued on, even though no consent to be sued or authorization to an agent to accept service of process has been given. A foreign corporation may be subjected to jurisdiction by reason of consent, ownership of property within the State, or by reason of activities within or having an effect within the state.10 For example, the filing of an action by a foreign corporation before Philippine courts would mean that by voluntary appearance, the local courts have actually obtained jurisdiction over the "person" of the foreign corporation.11 Another basis by which a host state is deemed to have authority over a foreign corporation is under the doctrine of "doing business" within the territorial jurisdiction of the host state. It is an established doctrine that when a foreign corporation undertakes business activities within the territorial jurisdiction of a host state, then it ascribes to the host state standing to enforce its laws, rules and regulations. In the same manner, in order to regulate the basis by which a foreign corporation seeks to do business and the manner by which it would seek redress within the judicial and administrative authorities within the host state, have given rise to the requirement that a license be obtained under the penalty that failure to do so would not give it legal standing to sue in local courts and administrative bodies exercising quasi-judicial powers. On the other hand, when a foreign corporation's activities within the host state do not fall within the concept of "doing business," the requirements of obtaining a license to engage in business are generally not applicable to it, and it would still have legal standing to sue in local courts and administrative agencies to obtain relief.
326 U.S. 310, 66 S.Ct. 154, 90 L.Ed. 95 (1945). SALONGA, supra, citing Goodrich (Scoles), 136. 11 Communication Materials and Design, Inc. v. Court of Appeals , 260 SCRA 673, 73 SCAD 374 (1996).
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In such an instance, the jurisdiction by local courts and administrative bodies over a foreign corporation seeking relief would be the clear consent manifested by the filing of the suit. The Philippine Supreme Court has held that "the recognition of the legal status of a foreign corporation is a matter affecting the policy of the forum, and distinction drawn in our Corporation Law between the standing of a corporation which does not engage in business in the Philippines and does not require a license to sue, and a foreign corporation which engages in business in the Philippines, and is required to obtain a license to sue, is an expression of that policy."12 A state may therefore restrict the right of a foreign corporation to engage in business within its limits, and to sue in its courts.13 Outside of consent, the concept of "doing business" therefore becomes the crucial point to determine whether foreign corporations and multinational enterprises have come within the territorial jurisdictions of the host countries and consequently to determine to what extent they are bound to obtain licenses within various host countries before they can sue with local courts and administrative bodies.

DEFINITION OF "FOREIGN CORPORATIONS"


Section 123 of Corporation Code defines a "foreign corporation" as "one formed, organized or existing under any laws other than those of the Philippines and whose laws allow Filipino citizens and corporation to do business in its own country or state." It is unfortunate that the present Philippine definition of foreign corporation contains the policy of reciprocity as part of the definition, since it leads to an absurd implication that corporate entities organized in countries that do not grant reciprocity rights to Filipinos and Philippine entities are not "foreign corporations." It is clear that despite the language of Section 123, all corporations organized other than under Philippine laws are foreign corporations, irrespective of the issue of reciprocity. Although wrongly placed, the inclusion of the element of reciprocity in the definition of foreign corporations emphasizes the Philippines' policy that unless our own nationals are granted business access in a foreign state, then the corporate entities of such foreign state would likewise not be granted legal business access in Philippine territory. This is clear in the succeeding sentence of Section 123 that provides that foreign corporations from state that grant reciprocity rights to Philippine nationals "shall have the right to transact business in the Philippines after it shall have obtained a license to transact business in this country in accordance with this Code and a certificate of authority from the appropriate government agency."

12 13

Mentholatum Co., Inc. v. Mangaliman, 72 Phil. 524, 530 (1941). Marshall-Wells Co. v. Henry W. Elser & Co., 46 Phil. 70, 74.

REQUISITES FOR OBTAINING LICENSE DO BUSINESS IN PHILIPPINES

TO

A foreign corporation shall be granted a license to transact business by filing a verified application with the SEC setting forth specifically required data, including certified copies of its articles of incorporation and by-laws.14 1. Designation of Local Agent Among the things to be stated in the verified application are the name and address of the foreign corporation's resident agent authorized to accept summons and process in all legal proceedings and, pending the establishment of a local office, all notices affecting the corporation.15 Obviously, this requirement insures that proper jurisdiction may be obtained over a foreign corporation in the event of suits and other proceedings. A written power of attorney must be filed by the foreign corporation with the SEC designating some person who must be a resident of the Philippines, on whom any summons and other legal processes may be served in all actions or other legal proceedings against such corporation, and consenting that service upon such resident agent shall be admitted and held as valid as if served upon the duly authorized officers of the foreign corporation at its home office.16 2. Agreement on Service of Summons with SEC In consideration of its being granted a license to do business in the Philippines, the foreign corporation shall execute and file with the SEC an agreement or stipulation agreeing that if at any time said corporation shall cease to transact business in the Philippines or shall be without any resident agent in the Philippines on whom any summons or other legal processes may be served, then in any action or proceeding arising out of any business or transaction which occurred in the Philippines, service of any summons or other legal process may be made upon the SEC and that such service shall have the same force and effect as if made upon the duly authorized officers of the foreign corporation at its home office.17 Whenever such service of summons or other process shall be made upon the SEC, it must, within ten (10) days thereafter, transmit by mail a copy of such summons or other legal process to the corporation at its home or principal office. The sending of such copy by the SEC shall be a necessary part of and shall complete such service.18 3. Effect of Failure to Appoint or Maintain Agent
Sec. 125, Corporation Code. Ibid. Sec. 127 of the Corporation Code provides that the resident agent may either be an individual residing in the Philippines who must be of good moral character and sound financial standing or a domestic corporation lawfully transacting business in the Philippines. 16 Sec. 128, Corporation Code. 17 Ibid. 18 Ibid.
15 14

The failure to appoint and maintain a resident agent in the Philippines or failure, after change of its resident agent or of his address, to submit to the SEC a statement of such change, are grounds for revocation of a license granted to a foreign corporation to do business.19 4. Oath on Reciprocity Compliance Attached to the application shall also be a duly executed certificate under oath by the authorized official or officials of the jurisdiction of incorporation, attesting to the fact that the laws of the country or state of the applicant allow Filipino citizens and corporations to do business therein.20 5. Deposit of Securities Within sixty (60) days from issuance of the license to do business, such foreign corporation shall deposit with the SEC, for the benefit of its present and future creditors, Philippine securities21 in the actual market value of at least P100,000.00, subject to further deposit of additional securities every six months after each fiscal year equivalent in actual market value to two percent (2%) of the amount by which the foreign corporation's gross income for that fiscal year exceeds P5,000,000.00. Furthermore, the SEC may require further securities in the event the deposit has decreased by at least ten percent (10%) of the actual market value at the time they were deposited.22 6. Effects of Being Issued License When a foreign corporation is issued the license to do business in the Philippines, it may commence to transact its business in the Philippines and continue to do so for as long as it retains its authority to act as a corporation under the laws of the country or state of its incorporation, unless such license is sooner surrendered, revoked, suspended, or annulled.23 The Corporation Code therefore takes pain to ensure that in allowing a foreign corporation to engage in business activities in the Philippines, proper safeguards are taken to allow obtaining jurisdiction over such foreign corporation in case of suit and that proper securities are present within Philippine jurisdiction to answer for a foreign corporation's obligations to locals. The Supreme Court has held: "The purpose of the law is to subject the foreign corporation doing business in the Philippines to the jurisdiction of our courts. It is not to prevent the
Sec. 134, Corporation Code. Sec. 128, Corporation Code. 21 Sec. 126, Corporation Code enumerates them to consist of bonds or other evidence of indebtedness of the Philippine Government, its political subdivisions and instrumentalities, or government-owned or controlled corporations and entities, shares of stocks in "registered enterprises," shares of stocks of listed domestic entities, or shares of stock in domestic insurance companies and banks, or any combination of these kinds of securities 22 Sec. 126, Corporation Code. 23 Sec. 126, Corporation Code.
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foreign corporation from performing single or isolated acts, but to bar it from acquiring a domicile for the purpose of business without first taking steps necessary to render it amenable to suits in the local courts."24 Such strict rules are necessary since a foreign corporation doing business in the Philippines is bound by all laws, rules and regulations applicable to domestic corporations of the same class, except for matters that go into creation, formation, organization or dissolution of corporations or such as to fix relations, liabilities, responsibilities or duties of stockholders, members, or officers of corporation to each other or to the corporation, or simple intra-corporate disputes.25 a. Licensed Foreign Corporation Deemed Domesticated The harmony and balance sought to be achieved by our "doing business" requirements for obtaining license are best exemplified by the fact that once a foreign corporation has obtained a license to do business, then it is deemed domesticated, and should be subject to no harsher rules that is required of domestic corporations. Such policy is exemplified in the case of Claude Neon Lights, Fed. Inc. v. Phil. Adv. Corp.,26 where the Supreme Court refused the issuance of a writ of attachment on properties in the Philippines of a foreign corporation licensed to do business in the Philippines on the mere allegation that "it is not residing in the Philippine Islands." The Court held that having regard for the reason of the law allowing issuance of writs of attachments for the protection of creditors of a nonresident, the same reason does not apply to a foreign corporation doing business in the Philippines and licensed to do so by Philippine authority. The Court held that unlike a natural person who does not reside in the Philippines, such foreign corporation is required by law to appoint a resident agent for service of process; must prove to the satisfaction of the Government before it does business here, that it is solvent and in sound financial condition; has had to pay license fee and its business subject at anytime to investigation by the Government authorities; and that his right to continue do business is subject to revocation by the Government; and books and papers subject to examination at any time by the Government; and is bound by all laws, rules and regulations applicable to domestic corporations; all designed to protect the creditors and the public. The Court further held:

Eriks Pte. Ltd. v. Court of Appeals, 267 SCRA 567, 76 SCAD 70 (1997). The Court also held in that case: "It was never the intent of the legislature to bar court access to a foreign corporation or entity which happens to obtain an isolated order for business in the Philippines. Neither, did it intend to shield debtors from their legitimate liabilities or obligations. But it cannot allow foreign corporations or entities which conduct regular business any access to courts without the fulfillment by such corporation of the necessary requisites to be subjected to our government's regulation and authority. By securing a license, the foreign entity would be giving assurance that it will abide by the decisions of our courts, even if adverse to it." 25 Sec. 129, Corporation Code. 26 57 Phil. 607 (1932).

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A natural person not residing in the Philippines can evade service of summons and other legal processes, the foreign corporation licensed to do business in Philippines cannot. Corporations, as a rule, are less mobile than individuals. This is specially true of foreign corporations that are carrying on business by proper authority in [the Philippines]. They possess, as a rule, great capital which is seeking lucrative and more or less permanent investment in young and developing countries like our Philippines.27

CONSEQUENCES OF NOT OBTAINING A LICENSE TO DO BUSINESS


1. On Standing to Sue and Be Sued Under Section 133 of the Corporation Code provides that a foreign corporation doing business in the Philippines without first obtaining the license to do business: (a) Shall not be permitted to maintain or intervene in any action, suit or proceeding in any court or administrative agency of the Philippines; (b) But such foreign corporation may be sued or proceeded against before Philippine courts or administrative tribunals on any valid cause of action recognized under Philippine laws. In addition, Section 134 makes it a ground for revocation of license, when a foreign corporation transacts business in the Philippines as agent of or acting for and in behalf of any foreign corporation or entity not duly licensed to do business in the Philippines. It seems clearly implied from the languages of both Sections 133 and 134, that the failure of a foreign corporation to obtain a license to do business when one is required, does not affect the validity of the transactions of such foreign corporation, but simply removes the legal standing of such foreign corporation to sue. Although such foreign corporation may still be sued, the Corporation Code fails to indicate that once sued, if such foreign corporation can interpose counterclaims in the same suit. 2. On Validity of Contract Home Insurance Company v. Eastern Shipping Lines,28 established the Philippine doctrine on the legal effect on the contract itself when a foreign corporation engages in business in the Philippines without obtaining the required license.

27 28

Ibid, at p. 612. 123 SCRA 424 (1983).

In that case, Home Insurance Company, a foreign corporation, which admittedly had engaged in business in the Philippines, had issued the subject insurance contracts in the Philippines without obtaining the necessary license. Subsequently, it obtained the license before filing the cases for collection under the insurance contracts. The lower court dismissed the complaint and declared that pursuant to its understanding of the basic public policy reflected in the Corporation Law, the insurance contracts executed before a license was secured must be held null and void, and the subsequent procurement of the license did not validate the contracts. The Supreme Court, although it recognized there were conflicting schools of thought both here and abroad which are divided on whether such contracts are void or merely voidable, took its cue from the doctrine laid down in MarshallWells Co. v. Elser29 that the doctrine under Section 69 of the then Corporation Law "was to subject the foreign corporation doing business in the Philippines to the jurisdiction of our courts . . . and not to prevent the foreign corporation from performing single acts, but to prevent it from acquiring domicile for the purpose of business without taking the necessary steps to render it amenable to suit in the local courts." In addition, the Court took into consideration the philosophy discussed in General Corporation of the Philippines v. Union Insurance Society of Canton Ltd.,30 that the fact of doing business in the Philippines, and not the non-obtaining of the license, is the more crucial point:
The test is whether a foreign corporation was actually doing business here. Otherwise, a foreign corporation illegally doing business here because of its refusal or neglect to obtain the corresponding license and authority to do business may successfully though unfairly plead such neglect or illegal act so as to avoid service and thereby impugn the jurisdiction of the local courts. It would indeed be anomalous and quite prejudicial, even disastrous, to the citizens in this jurisdiction who in all good faith and in the regular course of business accept and pay for shipments of goods from America, relying for their protection on duly executed foreign marine insurance policies made payable in Manila and duly endorsed and delivered to them, that when they go to court to enforce said policies, the insurer who all along has been engaging in this business of issuing similar marine policies, serenely pleads immunity to local jurisdiction because of its refusal or neglect to obtain the corresponding license to do business here thereby compelling the consignee or purchasers of the goods insured to go to America and sue in its courts for redress.

Home Insurance Company therefore held that contracts entered into by a foreign corporation doing business in the Philippines without the requisite license
29 30

46 Phil. 70 (1924). 87 Phil. 313 (1950).

remain valid and enforceable and "[t]he requirement of registration affects only the remedy,"31 and that "the lack of capacity at the time of the execution of the contracts was cured by the subsequent registration."32 The Court also noted that under both Sections 68 and 69 of the old Corporation Law (now Sections 133 and 144 of the Corporation Code), penal sanctions are imposed for failure to comply with the registration requirements, then "[t]he penal sanction for the violation and the denial of access to our courts and administrative bodies are sufficient from the viewpoint of legislative policy." 33 The Home Insurance Company doctrine was reiterated in Eriks Pte. Ltd. v. Court of Appeals,34 where the Supreme Court expressly held "subsequent acquisition of the license will cure the lack of capacity at the time of the execution of the contract."

CONFLICTING RULINGS OF SUPREME COURT


Based on the foregoing, it is therefore with serious doubt that we consider the doctrinal pronouncements of the Supreme Court on the legal effects of nonobtaining of the license when a foreign corporation engages in business in the Philippines. 1. Pari Delicto Ruling In Top-Weld Manufacturing v. ECED, S.A.,35 a local company entered into separate licensing and technical assistance agreements with two Swiss corporations, by virtue of which the local company was constituted a licensee to manufacture welding products under specifications, with raw materials to be purchased from suppliers designated by the licensors. In addition, distributorship agreements were entered into with another Panamanian company. When the local company found out that the foreign entities were negotiating with another group to replace it as their licensee and distributor, it instituted an action seeking to enjoin the foreign corporations from negotiating with third persons or from actually carrying out the transfer of their distributorship and franchising rights, and from terminating the existing contracts. The local company invoked the provisions of Section 4(9) of Rep. Act No. 5455, known as the Foreign Business Regulation Act, which prohibited aliens or foreign firms from terminating any franchise, licensing or other agreements that they have with a resident of the Philippines except for violation thereof or other just cause and upon payment of just compensation and reimbursement and other expenses incurred by the licensee in developing a market for the products.
Supra, at p. 438. Ibid, at p. 439. 33 Ibid. The feasibility of imposing the criminal penalty under Section 144 of the Corporation Code against the officers of the foreign corporation seems of doubtful application. See discussions on the matter in Chapter 19. 34 267 SCRA 567, 76 SCAD 70 (1997). 35 138 SCRA 118 (1985).
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The Supreme Court held that although the foreign corporations did not obtain the necessary license, it did not exempt them from BOI requirements under the law for "[t]o accept this view would open the way for an interpretation that by doing business in the country without first securing the required written certificate from the Board of Investments, a foreign corporation may violate or disregard the safeguards which the law, by its provisions, seeks to establish." 36 However, the Court nevertheless decreed that the local company could not invoke the provisions of Rep. Act No. 5455, thus:
As between the parties themselves, R.A. No. 5455 does not declare as void or invalid the contracts entered into without first securing a license or certificate to do business in the Philippines. Neither does it appear to intend to prevent the courts from enforcing contracts made in contravention of its licensing provisions. There is no denying, though, that an illegal situation, as the appellate court has put it, was created when the parties voluntarily contracted without such license. The parties are charged with knowledge of the existing law at the time they enter into the contract and at the time it is to become operative. . . In this case, the record shows that, at least, petitioner had actual knowledge of the applicability of R.A. No. 5455 at the time the contract was executed and at all times thereafter. . . . The very purpose of the law was circumvented and evaded when the petitioner entered into said agreements despite the prohibition of R.A. No. 5455. The parties in this case being equally guilty of violating R.A. No. 5455, they are in pari delicto, in which case it follows as a consequence that petitioner is not entitled to the relief prayed for in this case.37

The result in Top-Weld Manufacturing would be that a contract or transaction between a local and foreign corporation that would qualify the latter to be doing business in the Philippines without obtaining the requisite license would not be actionable at all in Philippine courts or administrative bodies. If the foreign corporation brings an action on said contract or transaction, it will be dismissed under Section 133 of the Corporation Code as a consequence of not obtaining the license. On the other hand, if the local counterpart brings an action on the contract, it would also be dismissed on grounds of pari delicto, under Top-Weld which held that "the law will not aid either party to an illegal agreement. It leaves the parties where it finds them."38 Although the Court acknowledged that "[a]s between the parties themselves, R.A. No. 5455 does not declare as void or invalid the contracts entered into without first securing a license or certificate to do business in the Philippines," yet at the same time it would apply the pari delicto doctrine because
36 37

Ibid, at p. 130. Ibid, at p. 131. Emphasis supplied. 38 Ibid, at p. 131, citing Bough v. Cantiveros, 40 Phil. 210 (1919).

it would "not aid either party to an illegal agreement. " The effect is to hold such a contract void. Such pronouncements in Top-Weld contravene the clear language in Section 133 that "a foreign corporation doing business in the Philippines without first obtaining the license to do business . . . may be sued or proceeded against before Philippine courts or administrative tribunals on any valid cause of action recognized under Philippine laws." Also, the pronouncements fail to consider the crucial point that obtaining the license is a duty imposed upon the foreign corporation doing business in the Philippines, not on the locals who deal with it, and precisely it is a duty imposed on foreign corporations in order to protect the locals. 2. Doctrine of Estoppel In Merrill Lynch Futures, Inc. v. Court of Appeals,39 the Supreme Court came out with a diametrically opposed ruling to the pari delicto principle of TopWeld Manufacturing. In that case, Merrill Lynch Futures, Inc., through a domestic corporation, was found to be engaging in business (commodity futures) in the Philippines without obtaining the proper license. It brought a suit in Philippine courts to enforce a claim against local investors. Although the Court found the foreign corporation to have engaged in business in the Philippines without the requisite license, it overturned the dismissal of the suit, on the ground that if the local investors knew that the foreign corporation had no license to do business in the Philippines, then they are estopped from using the lack of license to avoid their obligations, thus
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 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 . . .40

The Merrill Lynch doctrine of estoppel has been reiterated in National Sugar Trading Corporation v. Court of Appeals.41 In that case a complaint for specific performance and partial rescission of contract and damages was brought by a foreign corporation against the National Sugar Trading Corporation
211 SCRA 824 (1992). Ibid, at p. 837. The "estoppel" doctrine was also reiterated in Georg Grotjahn GMBH & Co. v. Isnani, 235 SCRA 216, 54 SCAD 289 (1994). 41 246 SCRA 465, 63 SCAD 31 (1995)
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(NASUTRA) with the Regional Trial Court. Although the complaint alleged that the foreign corporation was not engaged in business in the Philippines, NASUTRA, after filing an answer, had moved to dismiss the complaint on the ground that the foreign corporation was actually engaged in business in the Philippines and had not obtained a license, and thereby has no standing to sue in Philippine courts. Although the issue brought before the Supreme Court was whether the foreign corporation was engaged in business in the Philippines without a license, and in fact the Court held that "[w]hether a foreign corporation is doing business in the Philippine must be determined in the light of the peculiar circumstances of each case . . . [and] is essentially a question of fact," nevertheless the resolution of such issue was rendered irrelevant because the Court applied the Merrill Lynch estoppel doctrine. It held Petitioners do not dispute private respondent's claim that NASUTRA entered into the Contract of Purchase and Sale of Sugar with the latter in 1980 . . . In fact, in its Motion to Dismiss filed below, petitioner SRA admits the partial delivery of the sugar and the issuance of SRA Resolution No. 68-87-A recognizing payment and receipt by NASUTRA of the purchase price for the said sugar, and NASUTRA's existing obligation over the undelivered portion . . . Given these preliminary facts and assuming that petitioner NASUTRA was aware from the outset that private respondent had no license to do business in this country, it would appear quite inequitable for NASUTRA, a state-owned corporation, to evade payment of an otherwise legitimate indebtedness due and owing to private respondent upon the plea that the latter should have obtained a license first before perfecting a contract with the Philippine government.42

In addition, the Court took into serious consideration the fact that the foreign corporation did not actually "sell sugar and derive income from the Philippines," but actually bought sugar from the Philippine government and allegedly paid for it in full. The theory therefore would seem that the activity to be undertaken in the Philippines to be considered engaged in business is one that is for profit-making activity and not one where the foreign corporation merely seeks to enter into a purchase or acquisition transaction which by itself it does not derive profit. The Court then went on to quote from Antam Consolidated, Inc. v. Court of Appeals,43 which it deemed similar in facts and held that the doctrine of lack of capacity to sue based on failure to acquire a local license is based on considerations of sound public policy. The license requirement was imposed to subject the foreign corporation doing business in the Philippines to the jurisdiction of its courts and never intended to favor domestic corporation who
42

Ibid, at pp. 469-470 citing Merrill Lynch Futures, Inc. v. Court of Appeals, 211 SCRA 824 143 SCRA 288 (1986).

(1992).

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enter into solitary transactions with unwary foreign firms and then repudiate their obligations simply because the latter are not licensed to do business in the country. The rulings of the Supreme Court would also imply that when a foreign corporation doing business in the Philippines has not obtained the requisite license is sued, then by the principle of estoppel, it may interpose the proper counterclaims. 3. Revoking Pari-Delicto Ruling Favor of Estoppel Doctrine in

Recently, the Top-Weld doctrine of pari delicto seems to have been revoked in favor of the estoppel doctrine in Communication Materials and Design, Inc. v. Court of Appeals,44 where the Supreme Court in applying directly the Top-Weld doctrine found that the contract of a foreign corporation with a local broker or agent as having highly restrictive terms and conditions as to constitute the foreign corporation as doing business in the Philippines. In that case, although the foreign corporation was held doing business in the Philippines, the Court refused to allow the plea of the local company that not having been licensed to do business in the Philippines, the foreign corporation has no standing to sue. The Court, invoking the Merrill Lynch doctrine held:
A foreign corporation doing business in the Philippines may sue in Philippine courts although not authorized to do business here against a Philippine citizen or entity who had contracted with and benefited by said corporation. To put it another way, 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 a 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.

The Court held that the doctrine of lack of capacity to sue based on the failure to acquire a local license is based on considerations of sound public policy. The license requirement was imposed to subject the foreign corporation doing business in the Philippines to the jurisdiction of its courts. It was never intended to favor domestic corporations who enter into solitary transactions with

44

260 SCRA 673, 73 SCAD 374 (1996).

unwary foreign firms and then repudiate their obligations simply because the latter are not licensed to do business in this country.45 4. Problems with Estoppel Doctrine The problem with the Merrill Lynch estoppel doctrine is that it basically lacks one of the essential ingredients that constitutes the element of estoppel, which is that by the action or representation of one party ( i.e., the local entity or individual), the other party (i.e., the foreign corporation), has been held to believe that he would be entitled to relief on the contract entered into in the course of doing business in the Philippines without a license. When a foreign entity engages in business in the Philippines and fails to obtain the requisite license, then the simple act of a local entering into a contract with such foreign corporation cannot reasonably give rise to estoppel or the belief therefore on the part of the foreign entity that he would be allowed to secure reliefs from local courts since the provisions of Section 133 of the Corporation Code, which is deemed to be part of such contract, prevents such belief from having a reasonable basis. The Merrill Lynch estoppel doctrine effectively removes the sanction provided for by law on the failure of a foreign corporation to obtain a license before it engages in business in the Philippines, and therefore there would be less motive on the part of such foreign corporation to obtain the license since it can always sue in Philippine courts. Eriks Pte. Ltd. v. Court of Appeals,46 has answered the issue that to prevent a foreign corporation to sue on a contract would be unjust enrichment for the local counterpart, albeit not in express reference to the estoppel doctrine. In that case it was argued by the foreign corporation that its denial of access to Philippine courts would afford unjust enrichment to the defendant. The Court held: "a judgment denying a foreign corporation relief from our courts for failure to obtain the requisite license to do business, should not be construed as an attempt to foreclose the ultimate right to collect on an obligation. . . Res judicata does not set in a case dismissed for lack of capacity to sue, because there has been no determination on the merits. Moreover, this Court has ruled that subsequent acquisition of the license will cure the lack of capacity at the time of the execution of the contract."

CONCEPT OF "DOING BUSINESS" UNDER FOREIGN INVESTMENT ACT OF 1991


The Foreign Investment Act of 199147 now governs foreign investments in the Philippines that do not seek BOI incentives. The Act has repealed Book II of the Omnibus Investments Code of 1987.48
Quoting from National Sugar Trading Corp. v. Court of Appeals , 246 SCRA 465, 63 SCAD 31 (1995). 46 267 SCRA 567, 76 SCAD 70 (1997). 47 Rep. Act No. 7042.
45

1. Statutory Definition of "Doing Business" Instead of defining a "foreign corporation," the Act refers to a "nonPhilippine national" as an entity not falling within the definition of "Philippine National." A Philippine national means
a corporation organized under the laws of the Philippines of which at least sixty percent (60%) of the capital stock outstanding and entitled to vote is owned and held by citizens of the Philippines . . . Provided, That where a corporation and its non-Filipino stockholders own stocks in a SEC registered enterprise, at least sixty percent (60%) of the capital stock outstanding and entitled to vote of both corporations must be owned and held by citizens of the Philippines and at least sixty percent (60%) of the members of the Board of Directors of both corporations must be citizens of the Philippines, in order that the corporation shall be considered a Philippine national.49

Under the negative list concept of the Act, a non-Philippine national, upon registration with the SEC, may do business in the Philippines or invest in a domestic enterprise up to one hundred percent (100%) of its capital, unless participation of non-Philippine nationals in the enterprise is prohibited or limited to a smaller percentage by existing law and/or under the negative lists of the Act.50 Although the Act has removed the requirement of registration with the BOI for foreign investors to do business in the Philippines outside the negative lists, nevertheless it confirms the need for such foreign corporation, before engaging in business in the Philippines, to register with, and obtain a license to do business from, the SEC. Under the Implementing Rules and Regulations issued by the Department of Trade and Industry, a foreign corporation is defined as "one which is formed, organized or existing under laws other than those of the Philippines."51 The Act defines "doing business" to include the following by express enumeration: (a) Soliciting orders, service contracts, opening offices, whether called liaison offices or branches; (b) 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;

48 49

Executive Order No. 226. Sec. 3(a), Foreign Investment Act of 1991. 50 Sec. 5, Foreign Investment Act of 1991. 51 Sec. 1(c), Implementing Rules and Regulations of FIA 91.

(c) Participating in the management, supervision or control of any domestic business, firm, entity or corporation in the Philippines; and (d) Any other act or acts that imply a continuity of commercial dealings or arrangements, and contemplate to that extent the performance of acts or works, or the exercise of some of the functions normally incident to, and in progressive prosecution of, commercial gain or of the purpose or object of the business organization.52 On the other hand, the Act makes clear that "doing business" does not include the following acts and activities: (a) Mere investment as a shareholder by a foreign entity in a domestic corporation duly registered to do business, and/or the exercise of rights as such investor; (b) Having a nominee director or officer to represent its interests in such corporation; and (c) Appointing a representative or distributor domiciled in the Philippines which transacts business in its own name and for its own account.53 The DTI Implementing Rules and Regulations, in defining "doing business," not only carries the same language as appearing in the Act, but also includes the following items as not being included in the term "doing business": (a) The publication of a general advertisement through any print or broadcast media; (b) Maintaining a stock of goods in the Philippines solely for the purpose of having the same processed by another entity in the Philippines; (c) Consignment by a foreign entity of equipment with a local company to be used in the processing of products for export; (d) Collecting information in the Philippines; and (e) 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.54
52 53

Sec. 3(d), Foreign Investment Act of 1991; emphasis supplied. Ibid. 54 Sec. 1(f), Implementing Rules and Regulations of FIA 91.

A review of the enumerated instances of activities not constituting doing business shows a common denominator that by themselves the activities do not bring any direct receipts or profits to the foreign corporation. This would be consistent with the ruling of the Supreme Court in National Sugar Trading Corporation v. Court of Appeals,55 that activities within Philippine jurisdiction that do not create earnings or profits to the foreign corporation do not constitute doing business in the Philippines. Such exceptions to the doing business concept are not found in the statutory definition of doing business, and do not conform to the public policy behind the requirement of getting a license, i.e., that foreign corporation are prevented from conducting activities in the Philippine before steps are taken to ensure that both the state and the locals would have a valid means of obtaining jurisdiction over their persons (which is achieved by the process of obtaining a license to do business). Thus, it has been held in Avon Insurance PLC v. Court of Appeals, 56 thus:
The purpose of the law in requiring that foreign corporations doing business in the country be licensed to do so, it to subject the foreign corporations doing business in the Philippines to the jurisdiction of the courts, otherwise, a foreign corporation illegally doing business here because of its refusal or neglect to obtain the required license and authority to do business may successfully though unfairly plead such neglect or illegal act so as to avoid service and thereby impugn the jurisdiction of the local courts. The same danger does not exist among foreign corporations that are indubitably not doing business in the Philippines. Indeed, if a foreign corporation does not do business here, there would be no reason for it to be subject to the States regulation. As we observed, in so far as the State is concerned, such foreign corporation has no legal existence. Therefore, to subject such foreign corporation to the courts jurisdiction would violate the essence of sovereignty.

2. Ruling on Indentors and Brokers The Supreme Court in Top-Weld Manufacturing, Inc. v. ECED S.A.,57 has ruled on operative function of exemption of a foreign corporation from obtaining a license to do business under Section 1(f)(1) and 1(f)(2) of the Rules and Regulations Implementing the Omnibus Investments Code of 1987, when it transacts business through middlemen, acting in their own names, such as indentors, commercial brokers or commercial merchants. In Top-Weld, the licensing and representative agreements entered into by the foreign corporation with locals were deemed to be "highly restrictive" in
55 56

246 SCRA 465, 63 SCAD 31 (1995). 278 SCRA 312, 86 SCAD 401 (1997). 57 138 SCRA 118 (1985).

nature as to reduce the locals to being mere conduits or extension of the foreign corporation in the Philippines. The Court held that the foreign corporations were doing business in the Philippine because the disputed contracts with the locals were entered into to carry out the purposes for which they were created, i.e., to manufacture and market welding products and equipment. The terms and conditions of the contracts as well as the conduct of the foreign corporations indicate that they established within the Philippines a continuous business, and not merely one of a temporary character. The Court in Top-Weld did indicate that the foreign corporations could be exempted from the requirements of Republic Act 5455 if the local company were an independent entity which buys and distributes products not only of the foreign corporation, but also of other manufactures or transacts business in its name and for its account and not in the name or for the account of the foreign principal. It held that a reading of the agreements between the foreign corporations and the local company shows that they are highly restrict in nature, thus making the local company a mere conduit or extension of the foreign corporations. In spite of the provisions of the Act and the Implementing Rules and Regulations, therefore, even when the local agents, brokers, or indentors of foreign corporation transact sales in their own names, but the covering licensing or representative agreements with foreign corporations contain highly restrictive terms as to render the locals merely conduits or extensions of foreign corporations, the latter would still be considered as "doing business" in the Philippines. The doctrine was reiterated in Communication Materials and Design, Inc. v. Court of Appeals,58 which found the following provisions in the Master Service Agreement of the foreign corporation with the local company as highly restrictive as to make the latter merely a conduit or extension of the foreign company: (a) It required the local technical representative to provide the employees of the technical and service center with the foreign corporation identification cards, and to correspond only on the foreign corporation's letterhead; (b) Local employees were instructed to answer telephone using the foreign corporation's name, and all calls being recorded and forwarded to the foreign company on a weekly basis; (c) The local company was obliged to provide the foreign company with a monthly report detailing the failure and repair of the products and to requisition materials and components from the foreign corporation; and

58

260 SCRA 673, 73 SCAD 374 (1996).

(d) The agreement provided for a "no competing product" clause.

LAW ON REGIONAL OR AREA HEADQUARTERS


The acts of a foreign corporation registered under Pres. Decree No. 218 as a regional or area headquarter, which includes acting as supervision, coordination, communications and coordination center for its home office's affiliates, the naming of its local agent and employment of Philippine national are acts pursuant to its primary purposes and functions as a regional/area headquarters for its home office, and are deemed to be "doing business" in the country, as defined under the Omnibus Investment Code of 1987, and would give it standing to sue in Philippine courts even without a separate license to do business.59 Regional headquarters are not regulated nor licensed under Section 123 of the Corporation Code, but under Executive Order No. 226 (otherwise known as the Omnibus Investment Code of 1987), and therefore do not need a separate license from the SEC in order to operate as an area or regional headquarters in the Philippines for a multinational company. No license is required since area or regional headquarters are established only to supervise, coordinate and communicate with their own affiliates, subsidiaries or branches in the Asia Pacific region, and are not allowed to do business in the Philippines like the branch or representative offices of foreign corporations licensed pursuant to the Corporation Code.60 Republic Act No. 8756, which amended the Omnibus Investment Code, has provided for the establishment within Philippine jurisdiction of regional operating headquarters, which means foreign entity which is allowed to derive income in the Philippines by performing qualifying services to its affiliates, subsidiaries or branches in the Philippines, in the Asia-Pacific Region and in other foreign markets. Once is has obtained the appropriate license as a regional operating headquarters, it does not need to acquire a separate license to do business in the Philippines.

JURISPRUDENTIAL TESTS OF "DOING BUSINESS"


1. Defining Isolated Transactions Whether a foreign corporation needs to obtain a license, and fails to do so, whether it should be denied legal standing to obtain remedies from local courts and administrative agencies, depends therefore on the issue whether it will engage in business in the Philippines. Not every activity undertaken in the Philippines amounts to doing business as to require the foreign corporation to obtain such license. The issue is exactly what "doing business" covers. No
59 60

Georg Grotjahn GMBH & Co. v. Isnani, 235 SCRA 216, 54 SCAD 289 (1994). SEC Letter reply to Atty. Cesar L. Villanueva, dated 31 January 1996.

definition is offered under the Corporation Code as to what constitutes doing business. Marshall-Wells Co. v. Henry W. Elser & Co.,61 was the earliest case decided by the Supreme Court directly in point. In that case, an Oregon corporation sued a domestic corporation in the then court of first instance of Manila, to recover the unpaid balance on a bill on sale of goods. The complaint was dismissed by the trial court on demurrer by the defendant since the complaint did not show that the plaintiff, being a foreign corporation, had complied with the legal requirement of foreign corporations obtaining the license to do business. Marshall-Wells then established the rule that obtaining of a license and the effect of not obtaining such license only applied to foreign corporations doing business in the Philippines; it had no application to foreign corporations not doing business in the Philippine. In construing what is not included in the term "doing business," Marshall-Wells did indicate that an "isolated" transaction would not place a foreign corporation within the term "doing business." The Supreme Court in Marshall-Wells discussed the rationale behind then Section 69 of the Corporation Law (now Section 133 of the Corporation Code), thus:
The object of the statute was to subject the foreign corporation doing business in the Philippines to the jurisdiction of its courts. The object of the statute was not to prevent the foreign corporation from performing single act, 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 implication of the law is that it was never the purpose of the Legislature to exclude a foreign corporation which happens to obtain an isolated order for business from the Philippines, from securing redress in the Philippine courts, and thus, in effect, to permit persons to avoid their contracts made with such foreign corporations."62

Subsequently, the Court rendered a decision in Western Equipment and Supply Co. v. Reyes,63 where from the stipulation of facts of the parties they had agreed that the foreign corporation, "had never engaged in business in the Philippine Islands." Under such an admitted fact it was easy for the Court to hold that a foreign corporation which has never done any business in the Philippines and which is unlicensed and unregistered to do business here, but is widely and favorably known in the Philippines through the use therein of its products bearing its corporate and trade name, has a legal right to maintain an action in the Philippines to restrain the residents and inhabitants from organizing a corporation bearing the same name as the foreign corporation.
61 62

46 Phi. 70 (1924). Ibid, at p. 75. Emphasis supplied. 63 51 Phil. 115 (1927).

Western Equipment did not define what constitutes "doing business" since it was stipulated by the parties that the foreign corporation has done no business in the Philippines. It supported the doctrine that foreign corporation can bring an action in the Philippines to protect its reputation, corporate name and goodwill which have been established through the natural development of its trade over a long period of years, in the doing of which it does not seek to enforce any legal or contract rights arising from, or growing out of, any business which it has transacted in the Philippines.64 2. Twin Characterization Test In 1941, the Supreme Court in Mentholatum Co., Inc. v. Mangaliman,65 began to fashion a jurisprudential test of what constitutes "doing business" in the Philippines for foreign corporations. In that case, Mentholatum Company, an American corporation, and its exclusive Philippine distributing agent, PhilippineAmerican Drug Company, instituted an action for infringement of trademark and unfair competition against defendants Mangaliman. Mentholatum had in previous years registered the trademark "Mentholatum" for its products consisting of medicament and salve. The defendants Mangaliman had prepared a medicament and salve named "Mentholiman" which they sold to the public packed in containers of the same size, color and shape as "Mentholatum". Although the trial court found for the plaintiffs, on appeal the Court of Appeals reversed the decision, holding that the activities of Mentholatum were business transactions in the Philippines, and that, by Section 69 of the Corporation Law, it could not maintain any action. In a petition for certiorari filed with the Supreme Court, the plaintiffspetitioners claimed that although Mentholatum may be covered by the provision of then Section 69 of the Corporation Law on the effects of doing business without a license, the complaint was also filed by Philippine-American Drug Company, a domestic corporation, which had sufficient interest and standing to maintain the complaint. In addition, it was shown that Mentholatum itself had not sold any of its products in the Philippines, and it was Philippine-American Drug Co., Inc. and fifteen other local entities which imported the products and sold them locally. It determining whether Mentholatum fell under the category of doing business in the Philippines, which thereby required it to obtain a license to do business, the Court held:
No general rule or governing principle can be laid down as to what constitutes doing or engaging in or transacting business. Indeed, each case must be judged in the light of its peculiar environmental circumstances. The true test, however, seems to be whether the foreign corporation is continuing a body or substance of the business or enterprise for which it was organized or whether it has substantially retired from it
64 65

Ibid, at p. 128. 72 Phil. 524 (1941).

and turned it over to another. . . The term 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 progressive prosecution of, the purpose and object of its organization.66

In deciding that Mentholatum was indeed engaged in business in the Philippines, the Supreme Court took cognizance of the allegation in the complaint that clearly stated that the "Philippine-American Drug Co., Inc., is the exclusive distributing agent in the Philippine Islands of the Mentholatum Co., Inc., in the sale and distribution of its products known as the Mentholatum." The Court therefore concluded that whatever transactions the Philippine-American Drug Company had executed in view of the law, the Mentholatum did itself. The Court held therefore that since Mentholatum is a foreign corporation doing business in the Philippine without a license, it may not prosecute the action for violation of trademark and unfair competition. In addition, neither may the PhilippineAmerican Drug Company maintain the action for the reason that the distinguishing features of the agent being its representative character and derivative authority, and could not, to the advantage of its principal, claim an independent standing in court apart from Mentholatum. What is significant in Mentholatum is its drawing of the two tests to determine whether a foreign corporation is engaged in business in the Philippines: First, it considered as the "true test" of doing business in the Philippines as to whether a foreign corporation is maintaining or continuing in the Philippines "the body or substance of the business or enterprise for which it was organized or whether is has substantially retired from it and turned it over to another." Second, it defined "doing business" to necessarily imply "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 progressive prosecution of, the purpose and object of its organization." Taken together, the characterization by Mentholatum of "doing business" in the Philippines covers transactions or series of transactions in pursuit of the main business goals of the corporation, and done with intent to continue the same in the Philippines. It re-affirmed the early characterization of Marshall-Wells that an "isolated transaction" by a foreign corporation cannot qualify as "doing business" since it lacks the element of continuity. Notice that the element of profit results did not figure into the test.
66

Ibid, at pp. 528-529, citing Traction Cos. v. Collectors of Int. Revenue [C.C.A. Ohio] 223 F. 984, 987; Griffin v. Implement Dealer's Mut. Fire Ins. Co., 241 N.W. 75, 77; Pauline Oil & Gas Co. v. Mutual Tank Line Co., 246 P. 851, 852, 118 Okl. 111; Automotive Material Co., v. American Standard Metal Products Corp., 158 N.E. 698, 703, 327 Ill. 367). Emphasis supplied.

Commissioner of Internal Revenue v. British Overseas Airways Corp. ,67 held that when an international airline maintains a general sales agent in the Philippines, which engaged in the selling and issuing of tickets, breaking down the whole trip into series of tripeach trip in the series corresponding to a different airline company, receiving the fare from the whole trip, and allocating to the various airline companies on the basis of their participation in the services rendered through the mode of interline settlement, then those activities constitute doing business in the Philippines for which it could be held liable for income tax liabilities as a resident foreign corporation under the Philippine Tax Code.68 Top-Weld Manufacturing, Inc. v. ECED, S.A.,69 summarized it well when it held that:
There is no general rule or governing principle laid down as to what constitutes "doing" or "engaging in" or "transacting" business in the Philippines. Each case must be judged in the light of its peculiar circumstances. (Mentholatum Co. v. Mangaliman, 72 Phil. 524). Thus, a foreign corporation with a settling agent in the Philippines which issues twelve marine policies covering different shipments to the Philippines (General Corporation of the Philippines v. Union Insurance Society of Canton, Ltd. 87 Phil 313) and a foreign corporation which had been collecting premiums on outstanding policies (Manufacturing Life Insurance Co., v. Meer, 89 Phil. 351) were regarded as doing business here. The acts of these corporations should be distinguished from a single or isolated business transaction or occasional, incidental and casual transactions which do not come within the meaning of the law. Where a single act or transaction, however, is not merely incidental or casual but indicates the foreign corporation's intention to do other business in the Philippines, said single act or transaction constitutes "doing" or "engaging in" or "transacting" business in the Philippines (Far East International Import and Export Corporation v. Nankai Kogyo, Co., 6 SCRA 725).

In Top-Weld Manufacturing the Court considered the foreign corporation as doing business in the Philippines when it entered into the disputed contracts which were in accordance with the purpose for which it was created, namely, to manufacture and market welding products and equipment. The terms and conditions of the contracts, as well as the conduct thereof, indicate the establishment within the country of a continuous business, and not merely one of a temporary character. 3. Essence of Intent to Pursue Continuity of Transactions
67 68

149 SCRA 395 (1987). Reiterated in Commissioner of Internal Revenue v. Japan Air Lines, Inc. , 202 SCRA 450 138 SCRA (1985).

(1991).

69

The lack of intent to pursue with continuity transactions in the Philippines has been found crucial by the Supreme Court in determining whether the foreign corporation is engaged in business in the Philippines. Litton Mills, Inc. v. Court of Appeals,70 clearly held that it is not really the fact that there is only a single act done that is material for determining whether a corporation is engaged in business in the Philippines, since other circumstances must be considered. 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 business. 4. Extension of Credit as Essential Indication of Intent Eriks Pte. Ltd. v. Court of Appeals,71 found the extension of credit terms to be indicative of intent to do business in the Philippines for an indefinite period, thus: "More than the sheer number of transactions entered into, a clear and unmistakable intention on the part of petitioner to continue the body of its business in the Philippines is more than apparent. . . Further, its grant and extension of 90-day credit terms to private respondent for every purchase made, unarguably shows an intention to continue transaction with private respondent, since in the usual course of commercial transactions, credit is extended only to customers in good standing or to those on whom there is an intention to maintain long-term relationship. . . What is determinative of doing business is not really the number or the quantity of the transactions, but more importantly, the intention of an entity to continue the body of its business in the country. The number and quantity are merely evidence of such intention." In the case of foreign movie companies who have registered intellectual property rights over their movies in the Philippines, it was held that the appointment of local lawyer to protect such rights for piracy is not deemed to be doing business.72 The Court held: "We fail to see how exercising one's legal and property rights and taking steps for the vigilant protection of said rights, particularly the appointment of an attorney-in-fact, can be deemed by and of themselves to be doing business here."73 5. Contract Test In 1955, in Pacific Vegetable Oil Corp. v. Singzon,74 the Supreme Court began fashion what seemed like a second branch of judicial characterization of what constitutes "doing business," which essentially is a contract test. In that case, a suit was filed by a foreign corporation against the defendant to recover damages suffered as a consequence of the failure of the defendant to deliver copra which was ordered through a contract negotiated and perfected in
70

256 SCRA 696, 75 SCAD 160 (1996). 267 SCRA 567, 76 SCAD 70 (1997). 72 Columbia Pictures, Inc. v. Court of Appeals, 261 SCRA 144, 73 SCAD 674 (1996). 73 Ibid. 74 Advanced Decisions Supreme Court, April 1955 Vol., p. 100-A.
71

the United States, under "c.i.f. Pacific Coast" terms. The lower court dismissed the complaint holding that plaintiff had no personality to institute the case because at the time the case was filed the plaintiff had no license to do business in the Philippines, and even it afterwards obtained such license, the belated act did not have the effect of curing the defect that existed when the case was instituted. On appeal, the Supreme Court held that the plaintiff was not doing business in the Philippines under the contract, and there was no necessity for it to obtain a license before it can maintain the suit. In holding that the plaintiff foreign corporation was not doing business in the Philippines by virtue of the contract covering copra to be processed and delivered from the Philippines, the Supreme Court took cognizance of the fact that the subject contract was entered into in the United States by the parties; that payment of the price was to be made at San Francisco, California, through a letter of credit to be opened at a bank thereat; and with respect to the delivery of the copra, it was stipulated to be at "c.i.f., Pacific Coast" which meant that delivery is to be made only at the port of destination since the seller (defendant) obliged himself to take care of the freight until the goods have reached destination. Thus, although it was found by the Supreme Court that the plaintiff foreign corporation had also bought copra from other exporters in the Philippines, it took note of the fact that those transactions were undertaken under similar circumstances. The Pacific Vegetable Oil doctrine does not consider the twin characterization tests of Mentholatum of substance of the transactions pertaining to the main business of the corporation and the continuity or intent to continue such activities. It would seem that even if the twin characterization tests of Mentholatum obtained in a case, under the Pacific Vegetable Oil doctrine, so long as the perfection and consummation of a series of transactions are done outside Philippine territorial jurisdiction, the same would not constitute doing business in the Philippines, even if the products themselves should be manufactured or processed in the Philippines by locals. The implication of this doctrine is that if the salient points of a contract do not find themselves in the Philippines, Philippine authorities have no business subjecting the parties to local registration and licensing requirements. The doctrine had a follow-up in Aetna Casualty & Surety Company v. Pacific Star Line.75 In that case, a foreign insurance company, as subrogee of the insured, instituted civil actions in the then court of first instance of Manila to recover sums pertaining to damages on stolen cargo it insured, against local companies which handled the goods. In their amended answers, the defendants alleged that plaintiff is a foreign corporation not duly licensed to do business in the Philippines and, therefore, without capacity to sue. Upon stipulation of facts showing that plaintiff was not licensed to engage in business in the Philippines, and that in fact it had filed thirteen (13) other civil cases in the Philippines of similar nature, the trial court dismissed the complaint
75

80 SCRA 635 (1977).

ruling that although a foreign corporation may file a suit in the Philippines in isolated cases, but where the plaintiff has been filing actions in the Philippines not just in isolated instances, but in numerous cases and therefore has been doing business in the country without obtaining a license. On appeal, the Supreme Court held that the foreign insurance company was not doing business in the Philippines, and therefore was not prohibited from maintaining a suit in Philippine courts. The Court found that the contract of insurance was entered into in New York; that payment was made to the consignee in its New York branch and that since the corporation "was merely collecting a claim assigned to it by the consignee, it is not barred from filing the instant case although it has not secured a license to transact insurance business in the Philippines."76 Subsequently, in Universal Shipping Lines, Inc. v. Intermediate Appellate Court,77 it was held that a foreign insurance company may sue in Philippine courts upon the marine insurance policies issued by it abroad to cover international-bound cargoes shipped by a Philippine carrier, even if it has no license to do business in the Philippines, "for it is not the lack of the prescribed license (to do business in the Philippines) but doing business without such license, which bars a foreign corporation from access to our courts." 78 The Supreme Court considered the activities as not doing business in the Philippines. The Rules and Regulations implementing the Omnibus Investments Code of 1987,79 expressly included in the definition of "doing business" the "soliciting of orders, purchases (sales) or service contracts." In fact, it provided that "Concrete and specific solicitations by a foreign firm or by an agent of such foreign firm, not acting independently of the foreign firm, amounting to negotiations or fixing of the terms and conditions of sales or service contracts, regardless of where the contracts are actually reduced to writing, shall constitute doing business even if the enterprise has no office or fixed place of business in the Philippines." In addition, the Rules and Regulations expressly provided that " The arrangements agreed upon as to manner, time and terms of delivery of the goods or the transfer of title thereto is immaterial." Effectively therefore, the Board of Investments, by the implementing Rules and Regulations, had attempted to override the Pacific Vegetable doctrine. The Implementing Rules and Regulations to the Foreign Investment Act of 1991, while retaining "soliciting orders" as doing business in the Philippines has dropped entirely the explicit provisions seeking to override the Pacific Vegetable doctrine. However, its retaining "soliciting orders" as constituting doing business in the Philippines indicates a bias against the Pacific Vegetable doctrine.

76 77

Ibid, at p. 644. 188 SCRA 170 (1990) 78 Ibid, at p. 173. 79 Executive Order No. 226.

In addition, the Supreme Court in Communication Materials and Design, Inc. v. Court of Appeals,80 has held that "[i]n determining whether a corporation does business in the Philippines, or not, aside from their activities within the forum, reference may be made to the contractual agreements entered into by it with other entities in the country." It referred to the case of Top-Weld Manufacturing, Inc. v. ECED S.A.,81 where the highly restrictive terms in the License and Technical Agreement and the Distributor Agreement with locals became the basis of treating the foreign corporations as doing business in the country; and to the case of Merill Lynch Futures, Inc. v Court of Appeals,82 where the futures contract entered into by the foreign corporation with locals weighed heavily in the Court's ruling finding it engaging in business in the Philippines. 6. Evolving Role of Contract Test As the contract test is evolving in Philippine jurisprudence, it seems to provide a premise upon which the twin characterization test of Mentholatum should be applied, requiring that the transactions or series of transactions that should be the basis for determining whether a foreign corporation is transacting business in the Philippines, would require that the salient features of such contract must find their fulfillment within Philippine shores. This clearly was the implication in the more recent case of Columbia Pictures, Inc. v. Court of Appeals.83 In that case, the Court reviewed the general concept of doing business by applying the twin characterization tests:
No general rule or governing principles can be laid down as to what constitutes "doing" or "engaging in" or "transacting" business. Each case must be judged in the light of its own peculiar environmental circumstances. The true test, however, seems to be whether the foreign corporation is continuing the body or substance of the business or enterprise for which it was organized whether it has substantially retired from it and turned it over to another. As a general proposition upon which many authorities agree in principle, subject to such modifications as may be necessary in view of the particular issue or of the terms of the statute involved, 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 transitions and isolated acts.
80 81

260 SCRA 673, 73 SCAD 374 (1996). 138 SCRA 118 (1985). 82 211 SCRA 824 (1992). 83 261 SCRA 144, 73 SCAD 674 (1996).

The Court held that although Section 1(g) of the Implementing Rules and Regulations of the Omnibus Investments Code lists among others the "soliciting orders, purchases (sales) or service contracts, and the appointing of representative or distributor who is domiciled in the Philippines," as constituting doing business, the mere fact that foreign movie companies are copyright owners or owners of exclusive distribution rights in the Philippines of motion pictures or films did "not convert such ownership into an indicium of doing business which would require them to obtain a license before they can sue upon a cause of action in local courts, such as in this case seeking protection for the intellectual properties." The Court stressed that 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 products are made there or other business furthering its interest is transacted there by an alleged agent, whether a corporation or a natural person, whether 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. It is generally held that sales made to customers in the State by an independent dealer who has purchased and obtained title from the corporation of the products sold are not a doing of business by the corporation. Likewise, a foreign corporation which sells its products to person styled "distributing agents" in the State, for distribution by them, is not doing business in the State so as to render it subject to service of process therein, where the contract with these purchasers is that they shall buy exclusively from the foreign corporation such goods as it manufactures and shall sell them at trade prices established by it." As discussed hereunder, the contract test has also been applied as part of the jurisprudential ruling subjecting the foreign corporation not doing business in the Philippines to the jurisdiction of local courts on isolated contracts that have been entered into or performed within Philippine territorial jurisdiction.84 7. Reinsurance Not Per Se Doing Business Avon Insurance PLC v. Court of Appeals,85 held that the nature of the reinsurance business cannot not necessarily mean that a foreign reinsurance company can be deemed being engaged in business in the Philippines. The Supreme Court recognized existence of authority to the effect that a reinsurance company is not doing business in a certain state merely because the property or lives which are insured by the original insurer company are located in that state,86 thus: The reason for this is that a contract of reinsurance is generally a separate and distinct arrangement for the original contract of insurance, whose contracted
Hyopsung Maritime Co., Ltd. v. Court of Appeals , 165 SCRA 258 (1988); Signetics Corporation v. Court of Appeals, 225 SCRA 737, 44 SCAD 357 (1993). 85 278 SCRA 312 (1997). 86 Citing Moris Co. v. Scandinavia Ins. Co., 279 U.S. 405 (1929).
84

risk is insured in the reinsurance agreement. Hence, the original insured has generally no interests in the contract of reinsurance.

DOCTRINE ON ISOLATED TRANSACTIONS


The doctrine is that for isolated transactions, foreign corporation are not required to obtain a license in order to obtain relief from local courts or agencies. In one case,87 the Court held that the phrase "isolated transaction" has a definite and fixed meaning, i.e., "a transaction or series of transactions set apart from the common business of a foreign enterprise in the sense that there is no intention to engage in a progressive pursuit of the purpose and object of the business organization." The Court held that it was never the intent of the legislature to bar court access to a foreign corporation or entity which happens to obtain an isolated order for business in the Philippines. "Neither, did it intend to shield debtors from their legitimate liabilities or obligations. But it cannot allow foreign corporations or entities which conduct regular business any access to courts without the fulfillment by such corporation of the necessary requisites to be subjected to our government's regulation and authority. By securing a license, the foreign entity would be giving assurance that it will abide by the decisions of our courts, even if adverse to it."88 In Eastboard Navigation, Ltd. v. Juan Ysmael and Co., Inc.,89 it was held that when a foreign shipping company entered into a charter party arrangement with a local company for a vessel to load cargo of scrap iron in the Philippines for Buenos Aires, the transaction entered into in the Philippines was held not to qualify it to be considered as being engaged in business, although on a previous occasion its vessel was chartered by the National Rice and Corn Corporation to carry rice cargo from abroad to the Philippines, since the two transactions were not related. It was held therefore, that such foreign corporation had capacity to sue in the Philippines even without a license. In Antam Consolidated, Inc. v. Court of Appeals,90 the Supreme Court sustained the lower court in not dismissing a complaint filed by a foreign corporation on the basis of three contracts of purchase and sale of coconut oil from local companies. The Court found that from the facts alone it could be deduced that there was only one agreement between the petitioners and the respondent and that was the delivery by the former of 500 long tons of crude coconut oil to the latter, who in turn, must pay the corresponding price for the same. The only reason why the respondent entered into the second and third transactions with the petitioners was because it wanted to recover the loss it sustained from the failure of the petitioners to deliver the crude coconut oil under
87 88

Ericks Pte. Ltd. v. Court of Appeals, 267 SCRA 567, 76 SCAD 70 (1997). Ericks Pte. Ltd. v. Court of Appeals, 267 SCRA 567, 76 SCAD 70 (1997). 89 102 Phil. 1 (1957). 90 143 SCRA 288 (1986).

the first transaction and in order to give the latter a chance to make good on their obligation. The Court discussed the policy behind the rule:
The doctrine of lack of capacity to sue based on failure to first acquire a local license is based on consideration of sound public policy. It was never intended to favor domestic corporations who enter into solitary transactions with unwary foreign firms and then repudiate their obligations simply because the latter are not licensed to do business in this country.91

The auxiliary rule in Antam Consolidated is similar in principle to the provision of Section 1(f)(8) of the Implementing Rules to the Foreign Investment Act that does not consider as "doing business" the performance of services auxiliary to an existing isolated contract of sale which are not on a continuing basis. The principle that a foreign corporation not engaged in business in the Philippines may not be denied the right to file an action in Philippine courts for isolated transactions has been reiterated in other cases, such as (a) one involving the collision of two vessels at the harbor of Manila in Dampfschieffs Rhederei Union v. La Campaia Transatlantica;92 (b) the loss of goods bound for Hongkong but erroneously discharged in Manila in The Swedish East Asia Co., Ltd. v. Manila Port, Service;93 (c) infringement of trade name in General Garments Corporation v. Director of Patents94 and Universal Rubber Products, Inc. v. Court of Appeals;95 (d) the recovery of damages sustained by cargo shipped to the Philippines in Bulakhidas v. Navarro;96 (e) the sale to the government of road construction equipment and spare parts with no intent of continuity of transaction in Gonzales v. Raquiza;97 and (f) the recovery on a Hongkong judgment against a resident in Manila in Hang Lung Bank, Ltd. v. Saulog.98 In Hang Lung Bank, Ltd. v. Saulog99 the Supreme Court added a particular point in the rationale for the allowing foreign corporations not doing business in the Philippines to sue in our courts: "Otherwise we will be hampering the growth and development of business relations between Filipino citizens and foreign nationals. Worse, we will be allowing the law to serve as a protective shield for unscrupulous Filipino citizens who have business relationships abroad."100
91 92

Ibid, at p. 297. 8 Phil. 766 (1907). 93 25 SCRA 633 (1968). 94 41 SCRA 50 (1971). 95 130 SCRA 104 (1984). 96 142 SCRA 1 (1986). 97 180 SCRA 254 (1989). 98 201 SCRA 137 (1991). 99 201 SCRA 137 (1991). 100 Ibid, at p. 7145.

SPECIAL RULES PERTAINING TO ACTIONS ON CORPORATE NAMES, TRADENAMES AND TRADEMARKS


Justice Moran rendered a dissenting opinion in Mentholatum that the provisions of Section 69 of the Corporation Law do not apply to suits brought by foreign corporations for infringement of trademarks and unfair competition, the theory being that "the right to the use of the corporate name and trade name of a foreign corporation is a property right, a right in rem, which it may assert and protect in any of the courts of the world even in countries where it does not personally transact any business," and that "trade mark does not acknowledge any territorial boundaries but extends to every mark where the traders' goods have become known and identified by the use of the mark."101 Although Western Equipment had previously held that the right to the use of the corporate name and trade name of a foreign corporation is a property right, a right in rem, which it may assert and protect in any of the courts of the world even in countries where it does not personally transact any business, the same ruling could not then apply in Mentholatum, since unlike in Western Equipment where there was an expressed finding or stipulation that the foreign corporation never engaged in business in the Philippines, in Mentholatum the foreign corporation was found to have engaged in business in the Philippines without obtaining the requisite license; therefore, by public policy expressed in Section 69 of the then Corporation Law, the Court declared In Mentholatum that it could not sue in Philippine courts. The remarks of Justice Moran in his dissenting opinion state only the positive rule discussed in Western Equipment that when a foreign corporation does not do business in the country, it needs no license to bring suit to enforce its rights within the local courts. However, the remarks forget that the purpose of then Section 69 of the Corporation Law was that when a foreign corporation indeed does business in the Philippines without obtaining a license, there is a public policy of prohibiting it from seeking any remedy from Philippine courts and administrative bodies. However, the matter as to trademarks and tradenames had become moot with the adoption of Section 21-A102 of then Republic Act No. 166 (The Trademark Law), which expressly provided that a foreign corporation, whether licensed to do business or not in the Philippines, with a mark or tradename registered in the Philippines, may bring an action before Philippine courts for infringement, unfair competition, false designation of origin and false description,
at pp. 530-531. Sec. 21-A states: "Any foreign corporation or juristic person to which a mark or tradename has been registered or assigned under this Act may bring an action hereunder for infringement, for unfair competition, or false designation of origin and false description, whether or not it has been licensed to do business in the Philippines under Act numbered Fourteen Hundred and Fifty-Nine, as amended, otherwise known as the Corporation Law, at the time it brings the complaint; Provided, That the country of which the said foreign corporation or juristic person is a citizen, or in which it is domiciled, by treaty, convention or law, grants a similar privilege to corporate or juristic persons of the Philippines."
102 101

if the country of which the foreign corporation is a citizen, or in which it is domiciled, by treaty, convention, or law, grants a similar privilege to corporations or juristic persons of the Philippines. In Leviton Industries v. Salvador103 the Supreme Court held that pursuant to the terms of Section 21-A of Rep. Act No. 166, failure of a foreign corporation to allege in its complaint two essential conditions, namely, that the trademark or tradename has been registered with the Philippine Patent Office and that the country of which the foreign corporation is a domiciliary grants similar privileges to Philippine corporations, would be fatal to its cause of action and would subject the complaint to dismissal. Previously it was held in General Garments Corporation v. Director of Patents,104 that when the action brought by a foreign corporation is not one under Section 21-A, but rather under Section 17 of Rep. Act. No. 166 for the administrative cancellation of the trademark which is alleged to have been infringed, then registration of the trademark with the Philippine Patent Office would not be necessary. Subsequently, in La Chemise Lacoste, S.A. v. Fernandez, 105 it was held that a foreign corporation not doing business in the Philippines, has personality to commence criminal proceedings for violation of Article 189 of the Revised Penal Code for unfair competition on the use of trademarks and tradenames, without having to allege the qualifying circumstances under Section 21-A of Rep. Act No. 166. In that case, the Court also took judicial cognizance of the Philippine duties and obligations under the Paris Convention for the Protection of Industrial Property to assure the nationals of "countries of the Union" have an effective protection against unfair competition in the same way that they are obliged to similarly protect Filipino citizens and firms. The current legislation is reflected in Converse Rubber Corporation v. Universal Rubber Products, Inc.,106 which struck down the reasoning of the Director of Patents when he concluded that a foreign corporation not licensed to do business in the country is actually not doing business on its own in the Philippines, and therefore has no name to protect in the forum. The Court held that a foreign corporation has a right to maintain an action in the forum even if it is not licensed to do business and is not actually doing business on its own therein to protect its corporate and tradenames, since it is a property right in rem, which it may assert to protect against all the world, in any of the courts of the worldeven in jurisdiction where it does not transact businessjust the same as it may protect its tangible property, real or personal, against trespass, or conversion.107
114 SCRA 420 (1982). 41 SCRA 50 (1971). 105 129 SCRA 373 (1984). 106 147 SCRA 154 (1987). 107 Ibid, at pp. 164-165. This is a reiteration of the same doctrine held in Converse Rubber Corporation v. Jacinto Rubber & Plastic Co., Inc., 97 SCRA 158 (1980) and Universal Rubber Products, Inc. v. Court of Appeals., 130 SCRA 104 (1984). To the same effect were the rulings in
104 103

Converse Rubber Corporation recognized that such ruling is in consonance with the Convention of the Union of Paris for the Protection of Industrial Property to which the Philippines became a party on 27 September 1965. Article 8 thereof provides that "A trade name shall be protected in all the countries of the Union without the obligation of filing or registration, whether or not it forms part of the trademark."108 The mandate of the Convention finds its implementation in Section 37 of Rep. Act No. 166. Nevertheless, the Supreme Court has also held that when a foreign corporation seeks to obtain the extraordinary writ of preliminary injunction against a local company alleged to be using its tradename, the fact that it is not engaged in business in the Philippines would show that the matter should be decided on the merits and that in the meantime no preliminary injunction should be granted since, not being engaged in business in the Philippines, no grave or irreparable damage can be shown to be caused in the writ of injunction is not issued.109 In 1997, the Intellectual Property Code was promulgated to consolidate all laws relating to intellectual properties. Section 160 of the Code, which effectively replaced Section 21-A of The Trademark Law, provides that Any foreign national or judicial person who meets the requirements of Section 3110 of this Act and does not engage in business in the Philippines may bring a civil or administrative action hereunder for opposition, cancellation, infringement, unfair competition, or false designation of origin and false description, whether or not it is licensed to do business in the Philippine under existing laws. The wordings of Section 160 do not seem to comprehend the thrust of Section 21-A of The Trademark Law, and the new qualification that such foreign corporation must not be engaged in business in the Philippines contradicts the provision that dispenses with the need to obtain a license to do business in the Philippines to qualify a foreign corporation to seek remedy under the Code. It can therefore be reasonably anticipated that the courts will eventually interpret Section 160 of the Code to have the same meaning and application as Section 21-A of The Trademark Law, which would qualify any foreign corporation, even when doing business in the Philippines without appropriate license, to be able to obtain remedies and reliefs under the Code.

Puma Sportschuhfabriken Rudolf Dassler, K.G. v. Intermediate Appellate Court , 158 SCRA 233 (1988) and Philips Export B.V. v. Court of Appeals, 206 SCRA 457 (1992). 108 Ibid, at p. 165. 109 Philip Morris, Inc. v. Court of Appeals, 224 SCRA 576, 43 SCAD 400 (1993). 110 Section 3 provides: . . .Any person who is a national or who is domiciled or has a real and effective industrial establishment in a country which is a party to any convention, treaty or agreement relating to intellectual property rights or the repression of unfair competition, to which the Philippines is also a party, or extends reciprocal rights to nationals of the Philippines by law, shall be entitled to benefits to the extent necessary to give effect to any provision of such convention, treaty or reciprocal law, in addition to the rights to which any owner of an intellectual property right is otherwise entitled by this Act.

TRANSACTIONS AND CONTRACTS WITH AGENTS, BROKERS AND INDENTORS


In Mentholatum, it was held that the sale of the products of a foreign corporation through a local company was equivalent to the foreign corporation doing business in the Philippines, because the actions of the agent in the Philippines pertain to its foreign principal, and thereby without obtaining a license in the Philippines, both the foreign corporation and the agent have no capacity to sue in Philippine courts. La Chemise Lacoste, S.A. v. Fernandez,111 clarified that not every sale to an exclusive agent in the Philippines by a foreign corporation would constitute the latter as doing business in the Philippines. It held that the principle in Mentholatum is applicable only when it is found that the local company or representative is selling the foreign company's products in the latter's name or for the latter's account. In that case, the marketing of the products of the French company in the Philippines "is done through an exclusive distributor, Rustan Commercial Corporation. The latter is an independent entity which buys and then markets not only products of the petitioner but also many other products bearing equally well-known and established trademarks and tradenames. In other words, Rustan is not a mere agent or conduit of the petitioner."112 In addition, the Court in La Chemise Lacoste took cognizance of "the rules and regulations promulgated by the Board of Investments pursuant to its rulemaking power under Presidential Decree No. 1789, otherwise known as the Omnibus Investment Code," which define "doing business" as one which excludes "a foreign firm which does business through middlemen acting on their own names, such as indentors, commercial brokers or commission merchants . . . Appointing [of] a representative or distributor who is domiciled in the Philippines [who] has an independent status, i.e., it transacts business in its name and for its account, and not in the name or for the account of a principal."113 In Schmid & Oberly, Inc. v. RJL Martinez Fishing Corp.114 a local fishing company, RJL Martinez Fishing Corp. filed an action against Schmid & Oberly, Inc. to recover the purchase prices of twelve (12) generators it had bought on the theory that Schmid was the vendor of the generators, as such vendor, was liable under its warranty against hidden defects. The generators were ordered by RJL Martinez Fishing Corp. from Schmid & Oberly who arranged to have them imported from abroad from Nagata Co. of Japan. Schmid & Oberly, Inc. by way of defense allege that being merely indentor in the sale between Nagata Co., the exporter and RJL Martinez, the importer, it was not liable on the contract, much less for warranty for hidden defects. The Court took cognizance of the fact that under the Rules and Regulations to Implement Pres. Decree 1789 (the Omnibus Investment Code),
111 112

129 SCRA 373 (1984). Ibid, at p. 383. 113 Ibid, at pp. 383-384. 114 166 SCRA 493 (1988).

"indentors' are defined together with "commercial brokers" and "commission merchants": "A foreign firm which does business through the middlemen acting in their own names, such as indentors, commercial brokers or commission merchants, shall not be deemed doing business in the Philippines. But such indentors, commercial brokers or commission merchants shall be the ones deemed to be doing business in the Philippines." The Court therefore recognized that foreign corporations who sell their products in the Philippines through commercial brokers, commercial merchants or indentors, are not deemed to be doing business in the Philippines, and are not required to obtain a license to do business in the country. "Thus, the chief feature of a commercial broker and a commercial merchant is that in effecting a sale, they are merely intermediaries or middlemen, and act in a certain sense as the agent of both parties to the transaction. . . It would appear that there are three parties to an indent transaction, namely, the buyer, the indentor, and the supplier who is usually a non-resident manufacturer residing in the country where the goods are to be bought. . . An indentor may therefore be best described as one who, for compensation, acts as a middlemen in bringing about a purchase and sale of goods between a foreign supplier and a local purchaser."115 From the reasoning in Schmid & Oberly it is clear therefore that the sales in an indent contract is between the local purchaser and the foreign seller, and the indentor merely is an agent for both. That would mean that, had it not been for the provisions of the Implementing Rules and Regulations to the Omnibus Investment Code, the foreign corporation is indeed doing business in the Philippines, and for which it needs to obtain the license. It is with curiosity to note therefore why such a foreign corporation would not be considered being engaged in business in the Philippines for in such a case an important part of the contract (delivery of the subject matter) takes part within Philippine territory under the contract theory of Pacific Vegetable. Likewise, such transactions conform to the twin characterization enunciated in Mentholatum. In fact, the Supreme Court turned down the contention in Schmid & Oberly to hold the local indentor liable for the penal provisions of the then Section 69 of the Corporation Law:
Finally, the afore-quoted penal provision in the Corporation Law finds no application to SCHMID and its officers and employees relative to the transactions in the instant case. What the law seeks to prevent, through said provision, is the circumvention by foreign corporations of licensing requirements through the device of employing local representatives. An indentor, acting in his own name, is not, however, covered by the above-quoted provision. In fact, the provision of the Rules and Regulations implementing the Omnibus Investment Code quoted above, which was copied from the Rules implementing Republic Act No. 5455,
115

Ibid, at p. 502.

recognizes the distinct role of an indentor, such that when a foreign corporation does business through such indentor, the foreign corporation is not deemed doing business in the Philippines.116

In other words, had it not been for the implementing rule provision, a foreign corporation selling its products in the Philippines would be doing business here for indeed the contract is strictly between the foreign exporter and the local buyer, with the indentor merely acting as agent for both. The implementing rules has therefore afforded foreign corporations the route of "circumvention by foreign corporations of licensing requirements through the device of employing local [indentors]." Indeed, this is the logic of Schmid & Oberly since it expressly found the indentor not to be liable on the warranty on hidden defects since it was not considered the seller of the products. What is not explained in Schmid & Oberly, though, is how the Supreme Court could accept that an administrative rule and regulation provision can override clear statutory requirements for foreign corporations engaging in business in the Philippines from obtaining a license. It is a settled principle in our jurisdiction, that rules and regulations issued by administrative agencies cannot amend the law or go beyond the limits of the law which they seek to implement.117 Further, it is to be noted that the present applicable Implementing Rules and Regulations of the Foreign Investment Act of 1991 have totally dropped the provisions exempting from the definition of doing business transactions by foreign corporations done through indentors, commercial brokers or commission merchants. However, the rules and regulations have retained the provision excluding from "doing business" the appointing of a representative or distributor domiciled in the Philippines which transact business in the representative's or distributor's own name and account. Both the La Chemise Lacoste and the Schmid & Oberly rulings overlooked the fact that although the sales made by middlemen, distributors or representatives "in their own name or for their own accounts" in the Philippines do not pertain to the foreign principals abroad, nevertheless the purchase and importation by such middlemen, distributors or representatives of such products from abroad undeniably constitute a body of transactions in the Philippines of which their foreign principals are direct parties. And yet in Wang Laboratories, Inc. v. Mendoza,118 the Supreme Court treated differently a foreign corporation being represented in the Philippines by a independent distributor. In that case, although the foreign corporation Wang Laboratories, Inc. had an exclusive distributor in the Philippines, and a local firm had entered into direct contract with the local distributor, the Supreme Court refused allow the motion to dismiss filed by the foreign corporation on the ground
Ibid, at p. 505. U.S. v. Barrias, 11 Phil. 327 (1908); Young v. Rafferty, 33 Phil. 276 (1916); Olsen v. Aldenese, 43 Phil. 64 (1922) ; Santos v. Estenzo, 109 Phil. 419 (1960), 118 156 SCRA 44 (1987).
117 116

that not doing business in the Philippines, the court below had not obtained jurisdiction over the person of the foreign corporation, by serving summons on its local exclusive distributor. In finding that Wang Laboratories, Inc. was doing business in the Philippines, the court took into consideration the appointment of the local distributor as indicated of doing business, and various advertisements showing the local company to be the representative of the foreign corporation and that admission in the reply to the opposition to the motion to dismiss by the foreign corporation that "it deals exclusively with [the local company] in the sale of its products in the Philippines,"119 clearly indicating that the sales and deliveries by foreign corporation to its distributor in the Philippines constitutes doing business, regardless of whether the distributor sells the same products to the public for its own account. The subsequent case of Granger Associates v. Microwave Systems, Inc., which did not expressly overrule La Chemise Lacoste and Schmid & Oberly, offer us further insight.
120

In that case, Granger Associates, an American corporation with no license to do business in the Philippines, entered into a series of agreements with the local company, Microwave Systems, Inc., principally constituting the local company as the licensee to manufacture and sell the licensor's products in the Philippines, together with a loan extended to the licensee. An action was latter on brought by Granger Associates against the local company to collect sums not paid on the agreements. The local company invoked Section 133 of the Corporation Code to dismiss the complaint on the ground that Granger Associates, having done business in the Philippines without obtaining a license, has no authority to maintain the suit. Granger Associates argued that the various transactions with the local company "were mere facets of the basic agreement licensing MSI to manufacture and sell Granger's products in the Philippines [and] [a]ll subsequent agreements were merely auxiliary to the first contract and should not be considered separate transactions coming within the concept of `doing business in the Philippines.'"121 Although the Court found that many agreements entered into dealt on other matters as to constitute doing business, the Court went on to hold that "Even if it be assumed for the sake of argument that the subject matter of the first contract is of the same kind as that of the subsequent agreements, that fact alone would not necessarily signify that all such agreements are merely auxiliary to the first. As long as it can be shown that the parties entered into a series of agreements, as in successive sales of the foreign company's regular products, that company shall be deemed as doing business in the Philippines ."122 The Court also found that Granger Associates saw to it that it was assured of at least one seat in the board of directors of the local company, "without prejudice to the right of Granger to request additional seats as its interest may
119 120

Ibid, at p. 51. 189 SCRA 631 (1990). 121 Ibid, at p. 635. 122 Ibid, at p. 637. Emphasis supplied.

require." The fact that it was directly involved in the business of the local company was also manifested in another stipulation where Granger Associates "acknowledged and confirmed" the transfer of a block of stocks from one shareholder to another group of investors. Such approval was considered by the Court as not normally given except by a stockholder enjoying substantial participation in the management of the business of the company.123 Although the rules and regulations of the Board of Investments provide that mere investment in a local company by a foreign corporation should not be construed as doing business in the Philippines, however the Court in Granger Associates found that the investment of the foreign company was quite substantial, "enabling it to participate in the actual management and control of MSI [and] it appointed a representative in the board of directors to protect its interest, and this director was so influential that, at his request, the regular board meeting was converted into an annual stockholder's meeting to take advantage of his presence."124 Noteworthy are the statements of the Court that "At any rate, the administrative regulation, which is intended only to supplement the law, cannot prevail against the law itself as the court has interpreted it. It is axiomatic that the delegate, in exercising the power to promulgate implementing regulations, cannot contradict the law from which the regulations derive their very existence . The courts, for their part, interpret the administrative regulations in harmony with the law that authorized them in the first place and avoid as much as possible any construction that would annul them as an invalid exercise of legislative power."125 On the argument that a foreign corporation must be shown to have dealt with the public in general to be considered as transacting business in the Philippines, the Court held that "it is the performance by a foreign corporation of the acts for which it was created, regardless of volume of business, that determines whether a foreign corporation needs a license or not."126 Finally, Granger Associates reiterated the rationale of the doctrine:
The purpose of the rule requiring foreign corporations to secure a license to do business in the Philippines is to enable us to exercise jurisdiction over them for the regulation of their activities in this country. If a foreign corporation operates in the Philippines without submitting to our laws, it is only just that it no be allowed to invoke them in our courts when it should need them later for its own protection. While foreign investors are always welcome in this land to collaborate with use for our mutual benefit, they must be prepared as an indispensable

Ibid, at p. 638. Ibid, at p. 639. 125 Ibid, at pp. 639-640. Emphasis supplied. 126 Ibid, at p. 640, citing Tabios, Severino S., Fundamentals of Doing Business by a Foreign Corporation in the Philippines, 142 SCRA 10.
124

123

condition to respect and be bound by Philippine law in proper cases, as in the one at bar.127

Granger Associates therefore does not consider it crucial that a foreign corporation does not deal with, or sell directly to, the public by using a middleman, a commercial broker, an indentor, or a distributor; rather, it considers crucial "the performance by a foreign corporation of the acts for which it was created, regardless of volume of business." By dealing with its products with local brokers, indentors, or distributors, regardless of what the latter do with the products subsequently, a foreign corporation is performing acts integral to its purpose. However, under the Foreign Investment Act of 1991, the policy of the State (not by administrative fiat) has been declared on the matter when the law itself provided that not included in the definition of "doing business" is the act of "appointing a representative or distributor domiciled in the Philippines which transacts business in its own name and for its own account."128 Taking the rationale of the ruling in Granger Associates, the following exceptions to "doing business" provided for in the Implementing Rules and Regulations to the Act are of doubtful validity and are beyond the language of the Act itself: (a) Maintaining stock of goods in the Philippines solely for the purpose of having the same processed by another entity in the Philippines; and (b) Consignment by a foreign entity of equipment with a local company to be used in the processing of products for export. By way of obiter in Phil. Products Co. v. Primateria Societe Anonyme Pour Le Commerce Exterieur: Primnaterial (Phil.), Inc.129 since the foreign corporation therein was held liable for the judgment, it was held by the Supreme Court that "[i]n the absence of express legislation," agents or representatives of foreign corporations may be held personally liable for acts and contracts entered into in behalf of such corporations only when "premised on the inability to sue the principal or non-liability of such principal."130 Lately, Hanh v. Court of Appeals,131 held that when a foreign car company has an agent or distributor in the Philippines, it will be considered doing business in the country, and the trial court acquired jurisdiction over the foreign corporation by virtue of the service of summons on the Department of Trade and Industry. Otherwise, if the representative is not the agent of the foreign company but an independent dealer, the foreign corporation is not considered doing business in the Philippines within the meaning of the Foreign Investments Act of 1991 an the
127 128

Ibid, at p. 642. Sec. 3(d), Rep. Act No. 7042. 129 15 SCRA 301 (1965). 130 Ibid, at p. 306. 131 266 SCRA 537, 78 SCAD 20 (1997).

Rules and Regulations implementing the Omnibus Investment Code of 1987, 132 and the trial court did not acquire jurisdiction over the foreign corporation. The Court found the following allegations in the complaint to be sufficient to show that the foreign corporation was doing business in the Philippines through its local representative: the local representative took orders for the cars and transmitted them to the foreign company; that the foreign company upon receipt of the orders, fixed the downpayment and pricing charges, notified the local representative of the scheduled production month for the orders, and reconfirmed the orders by signing and returning to him the acceptance sheets; all documents and invoice being in the forms of the foreign company; payment was made by the buyer directly to the foreign company; title to the cars purchased passed directly to the buyer and the local representative never paid for the purchase price of the cars sold in the Philippines, and merely received commissions.

FOREIGN CORPORATIONS AS PARTIES DEFENDANTS


Section 12, Rule 14 of the 1997 Rules of Civil Procedure133 provides for the manner of service upon foreign corporations by allowing service of summons to be made on its resident agent designated in accordance with law for that purpose, or, if there be no such agent, on the government official designated by law to that effect, or on any of its officers or agents within the Philippines." However, in order to obtain jurisdiction over a foreign corporation under the section, it specifically provides that such foreign corporation must have "transacted business in the Philippines." The phrase would only emphasize the fact that as a matter of principle our laws take effect, and courts have jurisdiction over, foreign corporations, in the absence of consent, on the nexus of their doing business in the Philippines. Generally, our laws would have no binding effect on foreign corporations who do not have "presence" in the Philippines, otherwise any judgment rendered would be a violation of due process. Hanh v. Court of Appeals,134 reiterated the rule that for purposes of having summons served on a foreign corporation in accordance with Rule 14, Section 14 of the Rules of Court, it is sufficient that it be alleged in the complaint that the foreign corporation is doing business in the Philippines. The court need not go beyond the allegations of the complaint in order to determine whether it has jurisdiction. A determination that the foreign corporation is doing business is only tentative and is made only for the purpose of enabling the local court to acquire jurisdiction over the foreign corporation through service of summons. Such determination does not foreclose a contrary finding should evidence later show that it is not transacting business in the country. 1. Nexus of "Doing Business in the Philippines"
132 133

E.O. No. 226. Replaced Section 14, Rule 14 of the Rules of Court. 134 266 SCRA 537, 78 SCAD 240 (1997).

Perkins v. Dizon,135 had clearly discussed the general principle when it held that "when the defendant is a non-resident and refuses to appear voluntarily, the court cannot acquire jurisdiction over his person even if the summons be served by publication, for he is beyond the reach of judicial process. No tribunal established in one State can extend its process beyond its territory so as to subject to its decisions either persons or property located in another State . . . and a personal judgment upon constructive or substituted service against a nonresident who does not appear is wholly invalid."136 The basic premise as it applies to foreign corporation is laid down in Times, Inc. v. Reyes,137 that "a fundamental rule of international jurisdiction [is] that no state can by its laws, and no court which is only a creature of the state, can by its judgments or decrees, directly bind or affect property or persons beyond the limits of that state."138 In addition, Times, Inc. held that a foreign corporation may, by writ of prohibition, seek relief against the wrongful assumption of jurisdiction by a trial court which refuses to dismiss an action filed against said foreign corporation where no proper jurisdiction has been obtained. "And a foreign corporation seeking a writ of prohibition against further maintenance of a suit, on the ground of want of jurisdiction, is not bound by the ruling of the court in which the suit was brought, on a motion to quash service of summons, that it has jurisdiction." 139 In Pacific Micronisian Line, Inc. v. Del Rosario,140 the then Workmen's Compensation Commission sought to obtain jurisdiction over the foreign corporation, Pacific Micronisian Line, by service of summons to its agent in the Philippines. The foreign corporation filed a special appearance with the Commission for the sole purpose of asking the dismissal of the claim on the ground that the Commission had no jurisdiction over it because it is a foreign corporation not domiciled in this country, it is not licensed to engage and is not engaging in business therein, has no office in the Philippines, and is not represented by any agent authorized to receive summons or any other judicial process in its name and behalf. In construing the proper service of summons for a foreign corporation under the old Section 14, Rule 14 of the Rules of Court, the Court held that "in order that services 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 a sine qua non requirement. This fact must first be established in order that summons can be made and jurisdiction acquired. This is not only clear in the rule but is reflected in a recent decision of this Court. We there said that `as long as a foreign private corporation does or engages in

135 136

69 Phil. 186 (1939). Ibid, at p. 189. 137 39 SCRA 303 (1971). 138 Ibid, at p. 313, citing Perkins v. Dizon, 69 Phil. 186 (1939); 14 Am Jur. 418. 139 Ibid, at p. 315. 140 96 Phil. 23 (1954).

business in this jurisdiction, it should and will be amenable to process and the jurisdiction of local courts.'"141 Pacific Micronisian therefore recognized the doctrine that the law of a state cannot become operative upon a foreign corporation until it comes within the state to "do business."142 In that case, the Court did not consider as doing business the act of the foreign corporation which is exclusively engaged in the business of carrying goods and passengers by sea between Guam and the Trust Territories of the Pacific Islands, in having a local agent in the Philippines secure the services of an individual to act as cook and chief steward in one of the vessels. It was noted that the foreign corporation had never sent its ships to the Philippines, nor has it transported nor even solicited the transportation of passengers and cargoes to and from the Philippines, nor does it have properties or office in the Philippines. Since the act was considered an isolated one, incidental, or casual, and "not of a character to indicate a purpose to engage in business" within the meaning of the rule, then it follows that the agent in the Philippines who recruited the individual cannot be authorized to receive service of summons. a. Valid Service of Summons Premised Upon Doing Business General Corporation. of the Philippines v. Union Insurance Society. of Canton, Ltd.,143 clearly stated that the provisions of Section 14, Rule 14 of the old Rules of Court providing for the methods of service of summons employing the phrase "doing business in the Philippines" makes no distinction as to whether said business was being done or engaged in legally with the corresponding authority and license of the Government, or perhaps, illegally, without the benefit of any such authority or license. "As long as a foreign private corporation does or engages in business in this jurisdiction, it should and will be amenable to process and the jurisdiction of the local courts, this for the protection of the citizens, and service upon any agent of said foreign corporation constitutes personal service upon the corporation and accordingly judgment may be rendered against said foreign corporation."144 General Corporation of the Philippines held that where a foreign insurance corporation engages in regular marine insurance business here by issuing marine insurance policies abroad to cover foreign shipments to the Philippines, said policies being made payable in the Philippines, and said insurance company appoints and keeps an agent in the Philippines to receive and settle claims flowing from said policies, then said foreign corporation will be regarded as doing business in the Philippines.

Ibid, at pp. 27-28, quoting also General Corporation of the Philippines v. Union Insurance Society of Canton, Ltd.,49 Off. Gaz., 73, September 14, 1950. 142 Ibid, at p. 28, quoting THOMPSON ON CORPORATIONS, Vol. 8, 3rd Ed., pp. 843-844. 143 87 Phil. 313 (1950). 144 Ibid, at p. 318, citing FISHER, PHILIPPINE LAW OF STOCK CORPORATION, pp. 451, 456.

141

Subsequently, in Salonga v. Warner Barnes & Co., Ltd.145 the Supreme Court without even discussing the issue of whether a foreign insurance was engaged in business in the Philippines or not held that under Section 14, Rule 14 of the Rules of Court, "if the defendant is a foreign corporation and it has not designated an agent in the Philippines on whom service may be made in case of litigation, such service may be made on any agent it may have in the Philippines . . . [including] a settling agent who may serve the purpose."146 b. Service of Summons on Counsel In Johnlo Trading Co. v. Flores,147 and Johnlo Trading Co. v. Zulueta,148 the Supreme Court held that when a foreign corporation does business in the Philippines, and has entered into certain contracts through its counsel and benefitted from such contracts, a suit in local courts against such foreign corporation would justify the service of summons upon such counsel even when said counsel has not been expressly authorized by the foreign corporation to receive summons because "courts will not sanction a doctrine that a corporation can deny the power of an agent when an advantage is to be obtained by such denial, and share in the fruits of the contract when it is to its interest to consider such contract binding."149 In those cases, it was found that the counsel had acted in a representative capacity in and outside of court, "so much so that he undertook to settle claims that had been filed against it."150 However, it should be noted that in Johnlo Trading Co. other than the counsel, there was no other representative or officer of the foreign corporation in the Philippines upon which summons could be serve upon the foreign corporation, thus:
Granting, however, for the sake of argument that Balcoff merely acted as counsel for the petitioner, still we are of the opinion that, upon the strength of the authorities we have quoted above, the service made upon him of the summons intended for the petitioner can be deemed sufficient in contemplation of law, or within the meaning of Section 14, Rule 7, of our Rules of Court, to bind his client Johnlo Trading Company, upon the theory that, as the only person in the Philippines charged with the duty of settling claims against it, he must be presumed . . . to communicate to his client the service made upon him of any process that may result in a judgment and execution that may deprive it of its property, and the probabilities are, under such circumstances, that the corporation will be duly informed of the pendency of the suit. And this is a very realistic interpretation of the law, for it goes on the assumption that men holding such relationship "will be
145 146

88 Phil. 125 (1951). Ibid, at p. 134. 147 88 Phil. 741 (1951). 148 88 Phil. 750 (1951). 149 Ibid, at p. 753. 150 Ibid, at p. 746.

prompt to protect their own interest, and diligent in the discharged (sic) of their duties to those who have reposed confidence in them."151

In the absence of such special circumstance in Johnlo Trading Co. then the general rule would apply that counsel has no authority merely by virtue of his general employment as such, to waive or admit service for his client of original process by which the court for the first time acquires jurisdiction of the client and that service upon an attorney representing a foreign corporation in the collection of other claims for which his service had not been engaged is invalid.152 c. Designating Local Agents Conclusive on Service of Summons In Poizat v. Morgan,153 the Supreme Court ruled that where a foreign corporation has designated a person to receive service of summons in judicial proceedings affecting the corporation, that designation is exclusive and service of summons is without force and effect unless made on him.154 d. Allegations on Dong Business Merely Preliminary Signetics Corporation v. Court of Appeals,155 clarified that the ruling of Pacific Micronisian that doing business "must first be established in order that summons can be made and jurisdiction acquired," does not require that evidence must first be adduced to prove doing business before summons can be served upon the foreign corporation. The Court held that the "fact of doing business must the, in the first place, be established by appropriate allegations in the complaint." Litton Mills, Inc. v. Court of Appeals,156 held that the trial 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 Section 14, Rule 14 of the old Rules of Court. Hyopsung Maritime Co., Ltd. v. Court of Appeals,157 reiterated that the sine qua non requirement for service of summons and other legal processes or any such agent or representative is that the foreign corporation is doing business in the Philippines. It also ruled that the voluntary appearance as a mode of service of summons which confers jurisdiction over the person of a foreign corporation must be one that has been authorized by the foreign corporation.

Ibid, at p. 746. Ibid, at pp. 743-744, quoting 5 AM. JUR. p. 313, and citing Taylor v. Granite State Provident Association, 136 N.Y. 343, 32 N.E. 9922, 32 American St. Rep. 749 and Moore v. Freeman's National Bank, 92 N.C. 590). 153 28 Phil. 597 (1914). 154 The doctrine was reiterated in H.B. Zachry Company International v. Court of Appeals , 232 SCRA 329, 51 SCAD 207 (1994). 155 225 SCRA 737, 44 SCAD 357 (1993). 156 256 SCRA 696, 75 SCAD 160 (1996). 157 165 SCRA 258 (1988).
152

151

Lately, French Oil Mills Machinery Co., Inc. v. Court of Appeals,158 seems to have declared the matter settled, thus:
When it is shown that a foreign corporation is doing business in the Philippines, summons may be served on (a) its resident agent designated in accordance with law; (b) if there is no resident agent, the government official designated by law to that effect; or (c) any of its officers or agent within the Philippines. The mere allegation in the complaint that a local company is the agent of the foreign corporation is not sufficient to allow proper service to such alleged agent. Although there is no requirement to first substantiate the allegation of agency, yet it is necessary that there must be specific allegations in the complaint that establishes the connection between the principal foreign corporation and its alleged agent with respect to the transaction in question. Nowhere in the case of Signetics Corporation v. Court of Appeals, did the Court state that if the complaint alleges that defendant has an agent in the Philippines, summons can validly be served thereto even without prior evidence of the truth of such factual allegation; it is only in the headnote of the reporter which is not part of the decision.

2. Consent to Jurisdiction of Local Courts Although doing business is the nexus by which local courts are granted the right to obtain jurisdiction over the "person" of foreign corporation, consent may also authorize local courts and administrative agencies to exercise jurisdiction over foreign corporations even when they are not doing business in the Philippines. In Far East International Import and Export Corp. v. Nankai Kogyo Co., Ltd. a suit was filed against a Japanese corporation in Philippine courts for specific performance, damages and issuance of a writ of injunction. The Japanese company, by special appearance, filed a motion to dismiss the complaint and dissolve the preliminary injunction on the ground that the court had no jurisdiction over said foreign corporation and over the subject matter and failure to state a cause of action. When the motion to dismiss was overruled on the ground that it did not appear indubitable, an answer was filed and invoked defenses and grounds for dismissal of the complaint other than lack of jurisdiction. In deciding that proper jurisdiction was obtained over the defendant foreign corporation, the Supreme Court held that when the defendant foreign corporation filed an answer which invoked grounds other than lack of jurisdiction, the act vested upon the trial court jurisdiction to take cognizance of the case.
159

The rule in Far East International therefore is that when a defendant foreign corporation objects to the jurisdiction of the court, but at the same time it alleges any non-jurisdictional grounds for dismissing the action, the court then
158 159

295 SCRA 462, 98 SCAD 407 (1998). 6 SCRA 725 (1962).

acquires jurisdiction over the person of the defendant. What was worse in Far East International is that the defendant foreign corporation presented evidence on the merits of the case. This affirmed the ruling in General Corporation of the Philippines v. Union Insurance Society of Canton, Ltd.,160 that the participation of counsel for a foreign corporation in the trial process, including the cross-examination of witnesses, agreement and objection to documentary evidence, and the introduction of witnesses and documentary evidence would prevent the plea of lack of jurisdiction over the person of such foreign corporation.161 In addition, Far East International discussed that the consequence of doing business in the Philippines would render a foreign corporation subject to jurisdiction of Philippine courts. It adopted the rule that a single act may bring the corporation within the purview of the statute where it is an act of the ordinary business of the corporation. In such a case, the single act or transaction 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, and to make the state a basis of operations for the conduct of a part of the corporation's ordinary business.162 The test therefore embodies the second tier of the Mentholatum tests that an act within the main purpose of the corporation which shows an intent to continue the business in the Philippines, would constitute doing business. In Far East International it was shown that the defendant foreign corporation had sent an officer in the Philippines to look into the operation of mines, thereby revealing the desire to continue engaging in business in the Philippine, after receiving the shipment of the scrap iron under consideration, making the Philippines a base of operations. In Avon Insurance PLC v. Court of Appeals,163 it was reiterated that the appearance of a foreign corporation to a suit is precisely to question the jurisdiction of the said tribunal over the person of the defendant, then such appearance is not equivalent to service of summons, nor does it constitute an acquiescence to the courts jurisdiction. 3. The Facilities Management Strain Based on the foregoing discussions, it is with serious reservation that we view the obiter in Facilities Management Corporation v. De la Osa,164 where Justice Makasiar had stated with logical simplicity that "Indeed, if a foreign corporation, not engaged in business in the Philippines, is not barred from seeking redress from courts in the Philippines a fortiori, that same corporation

160 161

87 Phil. 313 (1950). Ibid, at p. 321. 162 Ibid, at p. 734, citing 17 FLETCHER CYC. OF CORPORATIONS, sec. 8470, pp. 572-573. 163 278 SCRA 312, 327 (1997). 164 89 SCRA 131 (1979).

cannot claim exemption from being sued in Philippine courts for acts done against a person or persons in the Philippines."165 The logic is flawed because although the first part of the obiter is correct, the second part did not necessarily flow as a logical consequent of the first part. Although a foreign corporation not doing business in the Philippines is beyond the jurisdiction of our courts, nevertheless by filing a complaint in our courts, it voluntarily surrenders jurisdiction over its "person" to the courts. But the reverse does not necessarily follow. Since a foreign corporation is not doing business in the Philippines, short of voluntary surrender to local jurisdiction, there can be no legal basis by which our local processes may be served upon such corporation to allow local courts to have jurisdiction over its "person" as a party defendant in a case. In addition, the minimum requirement of "presence" as a notion of due process is not present in such a situation. After all, it was already held previously by the Supreme Court in Philippine Columbian Enterprises Co. v. Lantin,166 that "actions by foreign corporations are governed by rules different from those in actions against them."167 In that case, when the trial court refused to rule on a motion to dismiss a complaint filed by a Japanese corporation on the ground that the ground relief upon (that the plaintiff was doing business in the Philippines without a license) did not appear indubitable, the defendants refused such deferment and to file an answer since the filing of a counterclaim would be recognizing the legal capacity of the plaintiff corporation which they are precisely questioning. In setting aside such argument, the Court held that "A counterclaim partakes of the nature of a complaint and/or cause of action against the plaintiff, so that if the petitioners-defendants should file a counterclaim, the private respondent-plaintiff . . . would be a defendant thereto, in which case the said foreign corporation would not be maintaining a suit and, consequently, Section 69 of the Corporation Law would not apply." Clearly, therefore, the restrictive effects of Section 69 (now section 133) on failure to obtain the necessary license to do business have no application at all when a foreign corporation is sued as a defendant in Philippine courts. Fortunately, the pronouncements of Justice Makasiar in Facilities Management were merely obiter since the facts showed that the foreign corporation in that case was engaged in business in the Philippines without obtaining a license by the appointment of a liaison officer in the Philippines to recruit personnel. The Court took cognizance of the rules and regulations of the Board of Investments implementing Rep. Act No. 5455 enumerating the appointment of liaison officers in the Philippines as indicative of doing business in the country.

165 166

Ibid, at p. 139. 39 SCRA 376 (1971). 167 Ibid, at p. 385.

Unfortunately, FBA Aircraft, S.A. v. Zosa,168 subsequently affirmed the obiter in Facilities Management as its ratio decidendi in resolving the issue raised. In that case, a complaint with prayer for issuance of a writ preliminary attachment was filed against FBA Aircraft, Inc., a foreign corporation not engaged in business in the Philippines. A writ of attachment was issued and enforced against three aircrafts and engines in the Philippines. The complaint was subsequently dismissed "for lack of jurisdiction over the persons of the defendant and the writ of attachment dissolved." On the issue of whether a foreign corporation can be sued in the Philippines on the basis of an isolated transaction, the Supreme Court held on appeal, quoting from Facilities Management, that "if a foreign corporation, not engaged in business in the Philippines, is not barred from seeking redress from courts in the Philippines, a fortiori, that same corporation cannot claim exemption from being sued in Philippine courts for acts done against a person or persons in the Philippines." In addition, the Court held that since the foreign corporation's properties have been attached within the Philippines, extraterritorial service of summons clearly may be effected under Rule 14, Section 17 of the Rules of Court. The logical juxtaposition in Facilities Management cannot be the basis for allowing suit against a foreign corporation not doing business in the Philippines, for that would be a denial of due process. However, FBA Aircraft was correct in its resolution since indeed a writ of attachment has been obtained in the Philippines on properties of the foreign corporation, converting the action to one in rem. Later, in the case of Wang Laboratories, Inc. v. Mendoza,169 the Supreme Court, relying upon the Facilities Management pronouncement, held in sweeping terms that "the issue on the suability of foreign corporation whether or not doing business in the Philippine has already been laid to rest. The Court has categorically stated that although a foreign corporation is not doing business in the Philippines, it may be sued for acts done against persons in the Philippines."170 However, since the Court found in Wang Laboratories that the defendant foreign corporation was indeed engaged in business in the Philippines by having appointed an agent and installed its computer products in various establishments in the Philippines, the pronouncement should be taken as obiter. Recently in Royal Crown Internationale v. NLRC,171 the Court used the Facilities Management obiter as though it were gospel truth. In that case, a foreign corporation, through a local placement company, Royal Crown Internationale, hired the services on a Filipino architectural draftsman for work in Saudi Arabia. When the Filipino was terminated abroad, he brought a suit in the Philippines against both the foreign corporation and the placement agency for illegal termination. Service of summons upon the foreign corporation was served

168 169

110 SCRA 1 (1981). 156 SCRA 44 (1987). 170 Ibid, at pp. 52-53. Emphasis supplied. 171 178 SCRA 569 (1989).

by extra-territorial service under Section 17, Rule 14 of the Rules of Court. 172 From a judgment holding both the foreign corporation and the local placement agency jointly and severally liable to the Filipino, a petition for certiorari was with Supreme Court for nullification of such judgment on the ground, among others, that it cannot be held liable solidarily with the foreign corporation since the NLRC had not acquired jurisdiction over the latter through an extra-territorial service of summons. The Court held that "It is well-settled that service upon any agent of a foreign corporation, whether or not engaged in business in the Philippines, constitutes personal service upon that corporation, and accordingly, judgment may be rendered against said foreign corporation,"173 citing Facilities Management. Therefore we have a situation where the doctrine that a foreign corporation not doing business in the Philippines can be sued in Philippine courts for an isolated contract entered into in the Philippines is found in three cases (Facilities Management, FBA Aircraft and Wang Laboratories) where indeed the doctrine was not at all essential for the Supreme Court to resolve the jurisdiction over the foreign corporation since it was either truly engaged in business in the Philippines or the action is an action in rem; and in one case (Royal Crown Internationale) where the affected foreign corporation was not the one raising the issue (for indeed it was not "present") but a co-defendant local company. Lacking the nexus of "doing business" in the Philippines, and in the absence of consent, a foreign corporation cannot be made a defendant in Philippine courts in an action personam and judgment rendered against such foreign corporation would be void. a. Applying Control Test Hyopsung Maritime Co., Ltd. v. Court of Appeals,174 sought to qualify the Facilities Management rule. In that case which involved the suit filed in local courts against a foreign corporation, the Court mandated the principle that service of summons under Section 14, Rule 14 of the old Rules of Court "requires that the foreign corporation be one which is doing business in the Philippines. This is sine qua non requirement. This fact must first be established in order that summons can be made and jurisdiction acquired."175 The Court then provided that when the contract sued upon has entirely been executed outside of Philippine jurisdiction, the rule in Facilities Management is inapplicable, thus:
The present case must be distinguished from Facilities Management Corp. vs. de la Osa which involved the nonpayment by Facilities Management Corp (FMC in short), a
Now Sec. 15, Rule 14 o the 1997 Rules of Civil Procedure. Ibid, at p. 577. 174 165 SCRA 258 (1988). 175 Ibid, at p. 263 quoting from Pacific Micronesian Line, Inc. v. del Rosario, 96 Phil. 23 (1954).
173 172

non-resident foreign corporation, of overtime compensation, as well as swing shift and graveyard shift premiums to Leonardo de la Osa, a Filipino, successively employed as painter, houseboy, and cashier. Notably, de la Osa was hired in Manila by the Filipino agent of FMC and the contract of employment between him and FMC was originally executed and subsequently renewed in Manila. . . On the other hand, the present suit is for the recovery of damages based on a breach of contract which appears to have been entirely entered into, executed, and consummated in Korea. . . Simply put, the petitioner is beyond the reach of our courts.176

Hyopsung Maritime would therefore include the "contract test" of Pacific Vegetables as a requisite element for the application of the Facilities Management rule, i.e., that for a foreign corporation not doing business in the Philippines can be sued in local courts provided it is based on a contract or transaction which would wholly or partially executed or fulfilled within Philippine territory. In 1990 in Marubeni Nederland B.V. v. Tensuan177 the Supreme Court took a different approach. In that case, a suit was filed by a local against a Japanese corporation, on the basis of the limited and special appearance filed by counsel of the foreign corporation seeking dismissal of the complaint on the ground that the court a quo had no jurisdiction over the person of the petitioner "since it is a foreign corporation neither doing nor licensed to do business in the Philippines." The Court then clearly laid the "pivotal" issue to be "whether or not petitioner Marubeni Nederland B.V. can be considered as `doing business' in the Philippines and therefore subject to the jurisdiction of our courts," implying the minimum nexus to be "doing business" to allow our courts to have jurisdiction over the person of the defendant foreign corporation. In any event, the Court, relying on the provisions of rules and regulations implementing Rep. Act No. 5455 which considered as "doing business" soliciting of orders, purchases (sales) or service contracts in the Philippines, held Marubeni Nederland B.V. to be doing business in the Philippines, and with or without a license, was subject to the jurisdiction of local courts:
Even assuming for the sake of argument that Marubeni Nederlands B.V. is a different and separate business entity from Marubeni Japan and its Manila branch, in this particular transaction, at least, Marubeni Nederland B.V. through the foregoing acts, had effectively solicited orders, purchases (sales) or service contracts as well as constituted Marubeni Corporation, Tokyo, Japan and its Manila Branch as its representative in the Philippines to transact business for its account as principal. These circumstances, taken singly or in

176 177

Ibid, at pp. 263-264. Emphasis supplied. 190 SCRA 105 (1990).

combination, constitute doing business in the Philippines within the contemplation of the law.178

It is ironical that in 1990 in Marubeni Nederland B.V. the Supreme Court was still struggling with the issue of whether the defendant foreign corporation was "doing business in the Philippines" to warrant jurisdiction of the trial court over the "person" of the defendant, when there existed already the Facilities Management doctrine which allows court jurisdiction over foreign corporation even not engaged in business in the Philippines on an isolated transaction done in the Philippines. The logic of Facilities Management doctrine is that although an isolated transaction of a foreign corporation within Philippine jurisdiction does not amount to doing business as to require it to obtain a license and to sue on such isolated transaction, nevertheless, the entering by the foreign corporation of such isolated transaction within the Philippines is taken as a consent to be subject to the jurisdiction of Philippine courts. Therefore Facilities Management has reduced the "nexus" by which Philippine agencies and courts are deemed to have authority over foreign corporation from "doing business" to "engaging in an isolated transaction" in the Philippines. b. The Signetics Clarification The argument has reached full circle recently in Signetics Corporation v. Court of Appeals.179 In that case, an American corporation, Signetic Corporation, through a wholly-owned subsidiary, entered into a lease contract over a piece of land with a local company. In a case subsequently filed by a the local company against the American corporation for damages arising from the lease contract (there was a piercing of the veil of corporate fiction treating the local subsidiary and the parent American company as one), Signetics filed, by way of special appearance, a motion to dismiss the complaint on the ground of lack of jurisdiction over its person. It invoked Section 14, Rule 14 of the Rules of Court and the rule laid down in Pacific Micronisian Line, Inc. v. Del Rosario180 to the effect that the fact of doing business in the Philippines should first be established in order that summons could be validly made and jurisdiction acquired by the court over a foreign corporation. In affirming the denial of the motion to dismiss, the Supreme Court held that the doctrine in Pacific Micronisian Line should be interpreted to mean the fact of doing business must be established by appropriate allegations in the complaint, and thereafter extraterritorial service of summons may be done pursuant to the provisions of Section 17, Rule 14, of the Rules of Court. In addition, the Court held that even if Signetics were not doing business in the Philippines, under the Facilities Management doctrine "a foreign corporation, although not engaged in business in the Philippines, may still look
178 179

Ibid, at p. 110. 225 SCRA 737, 44 SCAD 357 (1993). 180 96 Phil. 23 (1954).

up to our courts for relief; reciprocally, such corporation may likewise be `sued in Philippine courts for acts done against a person or person in the Philippines." The Court went on to say that Signetics right to question the jurisdiction of the court over its person is now to be deemed a foreclosed matter since . . . If it is true, as Signetics claims, that its only involvement in the Philippines was through a passive investment in Sigfil, which it even later disposed of, and that TEAM Pacific is not its agent, then it cannot really be said to be doing business in the Philippines. It is a defense, however, that requires the contravention of the allegations of the complaint, as well as full ventilation, in effect, of the main merits of the case, which should not thus be within the province of a mere motion to dismiss. . .181

This was a curious proposition on the part of the Court, since by adopting the Facilities Management doctrine, whether or not a foreign corporation is engaged in business in the Philippines has now become legally irrelevant, and the fact of not doing business in the Philippines is not a proper defense for a suit brought in Philippine courts against a foreign corporation. The point that matters with the full adoption of the Facilities Management doctrine is whether the requirements of due process and fair play could be complied with against a foreign corporation not doing business in the Philippines, i.e., whether the proper process of obtaining jurisdiction over its "person" have been complied with. This point at least was recognized in Signetics Corporation when the Court went to stress that . . . provided that, in the latter case, it would not be impossible for court processes to reach the foreign corporation, a matter that can later be consequential in the proper execution of judgment. Verily, a State may not exercise jurisdiction in the absence of some good basis (and not offensive to traditional notions of fair play and substantial justice) for effectively exercising it, whether the proceedings are in rem, quasi in rem or in personam.182

c. Latest Word on the Matter Lately, in Avon Insurance PLC v. Court of Appeals,183 the Supreme Court seems to have discounted the absolute suability rule of Facilities Management, thus:
In the alternative, private respondents submits that foreign corporation not doing business in the Philippines are not exempt from suits leveled against them in courts, citing the case of Facilities Management Corporation vs. Leonardo Dela Osa, et al.,. . . We are not persuaded by the position taken by
181 182

Ibid, at p. 746. Ibid. 183 278 SCRA 312, 324, 86 SCAD 401, 412 (1997).

the private respondent. In Facilities Management case, the principal issue presented was whether the petitioner had been doing business in the Philippines, so that service of summons upon its agent as under Section 14, Rule 14 of the Rules of Court can be made in order that the Court of First Instance could assume jurisdiction over it. The Court ruled that the petitioner was doing business in the Philippines, and that by serving summons upon its resident agent, the trial court had effectively acquired jurisdiction. In that case, the court made no prescription as the absolute suability of foreign corporations not doing business in the country, but merely discounts the absolute exemption of such foreign corporations from liabilities particularly arising from acts done against a person or persons in the Philippines.

4. Contractual Stipulation on Venue When a contract between a local and a foreign corporation stipulates venue to be within the proper courts in the Philippines, the Supreme Court has recognized the same to be a consent to being sued in the Philippines even when the foreign corporation does no business in the Philippines. In Lingner & Fisher GMBH v. Intermediate Appellate Court,184 a stipulation was provided for in the licensing agreement entered into between a foreign corporation and a local company that read: "All legal settlements within the compass of this AGREEMENT shall fall under the jurisdiction of Philippine courts."185 In a suit brought against the foreign corporation, where summons was served upon its local counsel, the Supreme Court held that no evidence as to whether the foreign corporation was doing business in the Philippines was necessary to be adduced to make it amenable to the jurisdiction of the trial court since whether or not the foreign corporation is doing business in the Philippines "will not matter because the parties had expressly stipulated in the AGREEMENT that all controversies based on the AGREEMENT `shall fall under the jurisdiction of Philippine courts.' In other words, there was a covenant on venue to the effect that [the foreign corporation] can be sued by [the local company] before Philippine Courts in regards to a controversy related to the AGREEMENT."186 Nevertheless, the Supreme Court found service of summons upon the foreign corporation's counsel as improper, but directed that since there is no evidence to show that the foreign corporation was engaged in business for the case to come under Section 14, Rule 14 of the Rules of Court where doing business "is a sine qua non requirement,"187 then service of summons can be effected by extraterritorial service under Section 17, Rule 14, in relation to Rule 4

184 185

125 SCRA 522 (1983). Ibid, at p. 524. 186 Ibid, at p. 527. 187 Ibid.

of the Rules of Court, "which recognizes the principle that venue can be agreed upon by the parties."188 Lingner & Fisher GMBH therefore laid down the rule that "if a local plaintiff and a foreign corporation have agreed on Philippine venue, summons by publication can be made on the foreign corporation under the principle of liberal construction of the rules to promote just determination of actions."189

PROCEDURAL RULE ON PLEADING "DOING BUSINESS"


Early on, in Spreckels v. Ward,190 which actually involved the application of then Section 69 of the Corporation Law to a partnership considered as an "unregistered foreign corporation," the Supreme Court held that the provisions of Section 69 denying to unregistered foreign corporations the right to maintain suits for the recovery of any debt, claim or demand, "do not impose on all plaintifflitigants the burden of establishing by affirmative proof that they are not unregistered foreign corporations. The fact will not be presumed by the courts without some evidence tending to establish its existence." 191 In other words, the disqualification under Section 69 of the then Corporation Law was considered a matter of defense with burden of proof on the part of the party raising it. Marshall-Wells laid down the procedural doctrine that the noncompliance of a foreign corporation doing business in the Philippines of the requirement for it to obtain a license, may be pleaded as an affirmative defense; and the burden of proof is on the party relying on such defense to show that the plaintiff is a foreign corporation, that it is doing business in the Philippines, and that it has not obtained the license as required by law.192 The then rule that lack of authority of a foreign corporation to sue in Philippines courts for failure to obtain the license is a matter of affirmative defense and should be established by evidence was subsequently reiterated in In re Liquidation of the Mercantile Bank of China; The Fletcher American National Bank of Indianapolis v. Ang Cheng Lian.193 The rule was reversed in Atlantic Mutual Ins. Co. v. Cebu Stevedoring Co., Inc.,194 which now provides for the prevailing rule. In that case, two foreign insurance corporations sued Cebu Stevedoring Co., Inc. for recovery of sum of money by way of subrogation over the insurance claims on a local insured company for losses sustained on cargoes handled by the defendant. The trial court, on motion, dismissed the complaint for failing to state that the plaintiffs were duly licensed foreign corporation to transact
188 189

Ibid, at p. 528. Ibid. 190 12 Phil. 414 (1909). 191 Ibid, at p. 419. 192 46 Phil. 70, 76 (1924). 193 65 Phil. 385 (1938). 194 17 SCRA 1037 (1966).

business in the Philippines. On appeal, the plaintiffs contended that the requirement for allegation of licensed being obtained is required only if the plaintiff foreign corporation is engaged in business in the Philippines; but that if a foreign corporation is not doing business in the Philippines, it is not barred from seeking redress in Philippine courts in proper cases, as when it sues on an isolated transaction. However, although the Supreme Court sustained the principle upon which the plaintiffs appealed the dismissal, it nevertheless upheld the dismissal since the complaint filed with the lower court only alleged that the plaintiffs are foreign corporation, without further indicating that they are exempt from the requisite of a license because they are not engaged in business in the Philippines:
But merely to say that a foreign corporation not doing business in the Philippines does not need a license in order to sue in our court does not completely resolve the issue in the present case. The proposition, as stated, refers to the right to sue; the question here refers to pleading and procedure. It should be noted that insofar as the allegations in the complaint have a bearing on appellants' capacity to sue, all that is averred is that they are both foreign corporations existing under the laws of the United States. This averment conjures two alternative possibilities: either they are engaged in business in the Philippines or they are not so engaged. In the first, they must have been duly licensed in order to maintain this suit; if the second, if the transaction sued upon is singular and isolated, no such license is required. In either case, the qualifying circumstances is an essential part of the element of plaintiffs' capacity to sue and must be affirmatively pleaded.195

Atlantic Mutual went on to say that where the law denies to a foreign corporation the right to maintain suit unless it has previously complied with a certain requirement, then such compliance, or the fact that the suing corporation is exempt therefrom, becomes a necessary averment of the complaint. "These are matters peculiarly within the knowledge of appellants alone, and it would be unfair to impose upon appellee the burden of asserting and proving the contrary. It is enough that foreign corporations are allowed by law to seek redress in our courts under certain conditions: the interpretation of the law should not go so far as to include, in effect, an inference that those conditions have been met from the mere fact that the party suing is a foreign corporation."196 Commissioner of Customs v. K.M.K. Gani,197 held that "[t]he fact that a foreign corporation is not doing business in the Philippines must be disclosed if it desires to sue in Philippine courts under the `isolated transactions rule.' Without this disclosure, the court may choose to deny it the right to sue."198 In addition, it
195 196

Ibid, at p. 1040. Ibid, at p. 1041. 197 182 SCRA 591 (1990). 198 Ibid, at p. 596.

stated that the "isolated transaction rule" applies only to foreign corporations, and not a foreign partnership or a foreign "firm". In any event, Rule 8, Section 4, of the 1997 Rules of Civil Procedure now require that in case of foreign corporations, "facts showing the capacity of a party to sue or be sued . . . must be averred." New York Marine Managers, Inc. v. Court of Appeals,199 found occasion to reiterate the rule. The Court therein found the complaint filed by the foreign corporation to be fatally defective for failing to allege its duly authorized representative or resident agent in [Philippine] jurisdiction. It ruled that the signature of its counsel on the pleading was not enough: "The pleadings filed by counsel . . . do not suffice. True, a lawyer is generally presumed to be properly authorized to represent any cause in which he appears . . . But the presumption is disputable. Where said authority has been challenged or attacked by the adverse party the lawyer is required to show proof of such authority or representation in order to bind his client. The requirement of the production of authority is essential because the client will be bound by his acquiescence resulting from his knowledge that he was being represented by said attorney."200

IN SUMMARY
From all the foregoing, we can therefore summarize the current state of the Philippines doctrine of "doing business" as it applies to foreign corporations: 1. Coverage "Doing business" in the Philippines covers transactions or series of transactions that have the twin-characterization of: (a) in pursuit of the main business goals of the corporation; and (b) done with intent to continue the same in the Philippines; and in fact a single transaction showing such twin characterization would qualify as doing business.
199

249 SCRA 416 (1995). "The issue on whether a foreign corporation can seek the aid of Philippine courts for relief recoils to the basic question of whether it is doing business in the Philippines or has merely entered into an isolated transaction. This Court has held in a long line of cases that a foreign corporation not engaged in business in the Philippines may exercise the right to file an action in Philippine courts for an isolated transaction. However . . . to say merely that a foreign corporation to doing business in the Philippines does not need a license in order to sue in our courts does not completely resolve the issue. When the allegation in the complaint have a bearing on the plaintiff's capacity to sue and merely sate that the plaintiff is a foreign corporation existing under the laws of the United States, such averment conjures two alternative possibilities: either the corporation is engaged in business in the Philippines, or it is not so engaged. In the first, the corporation must have been duly licensed in order to maintain the suit; in the second, the transaction sued upon is singular and isolated, no such license is required. In either case . . . [it] cannot be inferred from the mere fact that the party suing is a foreign corporation. The qualifying circumstance being an essential part of the plaintiff's capacity to sue must be affirmatively pleaded . . . Failing in this requirement, the complaint filed by the [foreign corporation] with the trial court, it must be said, fails to show its legal capacity to sue." Ibid. 200 Ibid. Same ruling in Hahn v. Court of Appeals, 266 SCRA 537, 78 SCAD 240 (1997).

Except that there is an isolated body of jurisprudence that holds that even when such twin characterization is present in a series of transaction, when the main features of the contract, of perfection or execution, payment and effects of delivery are outside Philippine territorial jurisdiction, the same would not constitute doing business in the Philippines. However, the implementing rules of the BOI has tended to overcome such an isolated transaction doctrine by including in the definition of "doing business" the soliciting of orders in the Philippines. 2. Isolated Transaction Doctrine A transaction (or even series of transactions) that do not fall within the "doing business" definition is considered an "isolated transaction" not requiring the obtaining of license to authorize a foreign corporation to bring suit in the Philippine courts and administrative bodies to enforce the same or obtain relief. While generally a foreign corporation not doing business in the Philippines is beyond the jurisdiction of local courts and administrative bodies because of lack of "presence" to satisfy the requirements of due process, there is a body of jurisprudence that hold that an "isolated transaction" would constitute "presence" to make a foreign corporation amenable to local jurisdiction. Even when a foreign corporation is not engaged in business in the Philippines and is sued in the Philippine courts, although it may by special appearance object to the obtaining of jurisdiction over its person, nevertheless, if it alleges any non-jurisdictional grounds for dismissing the action, or participates in the trial proper and cross-examines witness, or presents its own witnesses, the court then acquires jurisdiction over the person of the defendant. Likewise, stipulating that venue of suits involving a contract would be in the proper courts of the Philippines is considered "consent" to allow jurisdiction over the person of the foreign corporation even when not doing business in the Philippines. The fact that a foreign corporation is not doing business in the Philippines must be alleged if it desires to sue in Philippine courts under the "isolated transactions rule." Without this disclosure, the court may choose to deny it the right to sue. 3. Consequences The consequences of failure of a foreign corporation to obtain a license when it conducts business in the Philippines would be: (a) To be denied access in Philippine courts and administrative bodies to obtain relief on the contracts and transactions it has entered into; (b) And yet to be amenable to suits on those contracts and transactions it has entered into;

(c) But that the subsequent obtaining of a license prior to filing of a suit would cure the defect and allow the foreign corporation to sue in local courts and administrative bodies on said contracts and transactions. Unfortunately, the Supreme Court has employed the pari delicto doctrine and likewise held the local counterparts without remedy also in case it enters into a contract or transaction with a foreign corporation that does not obtain the necessary license. The Supreme Court has also applied to estoppel doctrine to authorized a foreign corporation that has engaged in business in the Philippines without the requisite license to bring a suit against the local counterpart to enforce on a contract or transaction. By way of leave-taking, we should remember the philosophical approach of the Supreme Court in interpreting Section 69 of then Corporation Law, now Section 133 of the Corporation Code, that they "must be given a reasonable, not an unduly harsh, interpretation which does not hamper the development of trade relations and which fosters friendly commercial intercourse among countries." 201 "The objectives enunciated in the 1924 decision [in Marshall-Wells Co. v. Elser] are even more relevant today when we view commercial relations in terms of a world economy, when the tendency is to re-examine the political boundaries separating one nation from another insofar as they define the business requirements or restrict marketing conditions."202

DOMICILE AND RESIDENCE OF FOREIGN CORPORATIONS


The domicile of a corporation belongs to the state where it was incorporated, and in a strict technical sense, such domicile as a corporation may have is single in its essence and a corporation can have only one domicile which is the state of its creation.203 The residence of a corporation is necessarily where it exercises corporate functions or the place where its business is done.204 A foreign corporation licensed to do business in a state is a resident of any country where it maintains an office or agent for transaction of its usual and customary business for venue purposes; that a corporation may be domiciled in one state and resident in another; its legal domicile is the state of its creations presents no impediment to its residence in a real and practical sense in the state of its business activities. 205

Home Insurance Company v. Eastern Shipping Lines, 123 SCRA 424, 435 (1983). Ibid, at p. 435. 203 Northwest Orient Airlines v. Court of Appeals , 241 SCRA 192, 58 SCAD 797 (1995). 204 State Investment House, Inc. v. Citibank, N.A., 203 SCRA 9 (1991); Northwest Orient Airlines v. Court of Appeals , 241 SCRA 192, 58 SCAD 197 (1995). 205 Ibid.
202

201

Under our jurisprudence, pending extraterritorial service of summons to a foreign corporation, an attachment of a foreign corporation's properties in the Philippines may be maintained.206

RESIDENT AGENT
A resident agent may be either an individual residing in the Philippines, must be of good moral character and of sound financial standing, or a domestic corporation lawfully transacting business in the Philippines.207 The SEC shall require as a condition precedent to the issuance of the license that the foreign corporation file a written power of attorney designating some person who must be resident of the Philippines, on whom any summons and other legal processes may be served in all actions or other legal proceedings against such corporation, and consenting that service upon such resident agent shall be admitted and held as valid as if served upon the duly authorized officers of the foreign corporation at its home.208 Whenever such service of summons or other process is made upon the SEC, it must, within ten (10) days thereafter, transmit by mail a copy of such summons or other legal process to the corporation at its home or principal office. The sending of such copy by the SEC is a necessary part of and shall complete such service. All expenses incurred by the SEC for such service shall be paid in advance by the party as whose instance the service is made. In case of a change of address of the resident agent, it shall be his or its duty to immediately notify in writing the SEC.209

LAWS APPLICABLE TO FOREIGN CORPORATIONS


Any foreign corporation lawfully doing business in the Philippines shall be bound by all laws, rules and regulations applicable to domestic corporations of the same class, save and except such only provide for the creation, formation, organization or dissolution of corporations or such as fix the relations, liabilities,

FBA Aircraft v. Zosa, 110 SCRA 1 (1981). Sec. 127, Corporation Code. 208 The specific wordings required under Sec. 128 reads: "The (name of foreign corporation) does hereby stipulate and agree, in consideration of its being granted by the Securities and Exchange Commission a license to transact business in the Philippines, that if at any time said corporation shall cease to transact business in the Philippines, or shall be without any resident agent in the Philippines, or shall be without any resident agent in the Philippines on whom any summons or other legal processes may be served, then in any action or proceeding arising out of any business or transaction which occurred in the Philippines, service of any summons or legal process may be made upon the Securities and Exchange Commission and that such service shall have the same force and effect as if made upon the duly-authorized officers of the corporation at its home office." 209 Sec. 128, Corporation Code.
207

206

responsibilities, or duties of stockholders, members, or officers of corporations to each other or to the corporation.210 An illustration of this principle can be found in Grey v. Insular Lumber Co.211 In that case, the foreign corporation doing business in the Philippines was organized under the laws of New York. According to the then Stock Corporation Law of New York, only stockholders owning at least 3% of the shares of the corporation may inspect the books and records of the corporation. Plaintiff Grey held less than 3% of defendant corporation stockholdings. Grey invoked the provision of Philippine laws which allowed stockholders owning less than 3% of shares to inspect books and records of a corporation. The Supreme Court held that intramural matters such as the qualification to inspect corporate records are governed by the laws where the corporation was incorporated.

AMENDMENT OF ARTICLES OF INCORPORATION


Whenever the articles of incorporation or the by-laws of a foreign corporation authorized to transact business in the Philippines are amended, such foreign corporation shall, within sixty (60) days after such amendment becomes effective, file with the SEC, and in the proper cases with the appropriate government agency, a duly authenticated copy of the articles of incorporation or by-laws, as amended, indicating clearly in capital letters or by underscoring the change or changes made, duly certified by the authorized official or officials of the country or state of incorporation.212 The filing thereof shall not itself enlarge or alter the purpose or purposes for which such corporation is authorized to transact business in the Philippines.213

MERGER AND CONSOLIDATION


One or more foreign corporations authorized to transact business in the Philippines may merge or consolidate with any domestic corporation or corporations if such is permitted under Philippine laws and by the law of its incorporation. However the requirements on merger or consolidation as provided in the Corporation Code have to be complied with. 214 Whenever a foreign corporation authorized to transact business in the Philippines shall be a party to a merger or consolidation in its home country or state as permitted by the law of its incorporation, such foreign corporation shall, within sixty (60) days after such merger or consolidation becomes effective, file with the SEC, and in proper cases with the appropriate government agency, a copy of the articles of merger or consolidation duly authenticated by the proper
210 211

Sec. 129, Corporation Code. 67 Phil. 139 (1938). 212 Sec. 130, Corporation Code. 213 Ibid. 214 Sec. 132, Corporation Code.

officials or officials of the country or state under the laws of which such merger or consolidation was effected. If the absorbed corporation is the foreign corporation doing business in the Philippine, the latter shall at the same time file a petition for withdrawal of its license in accordance with this Title.215

REVOCATION OF LICENSE TO DO BUSINESS


The license of a foreign corporation may be revoked or suspended by the SEC upon any of the following grounds: (a) Failure to file its annual report or pay any fees as required by the Code; (b) Failure to appoint and maintain a resident agent in the Philippines as required by this Title; (c) Failure, after change of its resident agent or of his address, to submit to the SEC a statement of such change as required by the Code; (d) Failure to submit to the SEC an authenticated copy of any amendment to its articles of merger or consolidation within the time prescribed by the Code; (e) A misrepresentation of any material matter in any application, report, affidavit or other document submitted by such corporation pursuant to the Code; (f) Failure to pay any and all taxes, impost, assessments or penalties, if any, lawfully due to the Philippine Government or any of its agencies or political subdivisions; (g) Transacting business in the Philippines outside of the purpose or purposes for which such corporation is authorized under its license; (h) Transacting business in the Philippines as agent of or acting for and in behalf of any foreign corporation or entity not duly licensed to do business in the Philippines; or (i) Any other ground as would render it unfit to transact business in the Philippines.216 Upon the revocation of any such license to transact business in the Philippines, the SEC shall issue a corresponding certificate of revocation, furnishing a copy thereof to the appropriate government agency in the proper cases. The SEC shall also mail to the corporation at its registered office in the
215 216

Ibid. Sec. 134, Corporation Code.

Philippines a notice of such revocation accompanied by a copy of the certificate of revocation.217

WITHDRAWAL OF FOREIGN CORPORATION


A foreign corporation licensed to transact business in the Philippines by filing a petition for withdrawal of license. The petition for withdrawal or license has been published once a week for three (3) consecutive weeks in a newspaper of general circulation in the Philippines. However, the SEC will not issue the certificate of withdrawal unless all claims which have accrued in the Philippines have been paid, compromised or settled and all taxes, imposts, assessments and penalties, if any, lawfully due to the Philippine Government or any of its agencies or political subdivisions have been paid.218

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217 218

Sec. 135, Corporation Code. Sec. 136, Corporation Code.