Ima's Foreign Corporations

8/19/2019 Ima's Foreign Corporations

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FOREIGN CORPORATIONS AND THE

CONCEPT OF "DOING BUSINESS INTHE PHILIPPINES"1

NATURE OF CORPORATE CREATURE

A corporation is essentially a creature of the state under the laws of whichit has been granted its juridical personality; and strictly speaking, beyond theterritories of such creating state, a corporation has no legal existence, since thepowers 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 itsexistence to the laws of another state, and generally, has no legal existencewithin the state in which it is foreign.3

It is a fundaental rule of international jurisdiction that no state can by itslaws, and no court !which is only a creature of the state" can by its judgents or decrees, directly bind or affect property or persons beyond the liits of thatstate.# $owe%er, under the doctrine of coity in international laws, &a corporationcreated by the laws of one state is usually allowed to transact business in other states and to sue in the courts of the forum.&'

(he legal standing of foreign corporations in the host state therefore isfounded on international law on the basis of consent ,) and the extent by which ahosting state can enforce its laws and jurisdiction o%er corporations created byother states has been the subject of jurisprudential rules and unicipallegislations, especially in the fields of taxation,* foreign in%estents, and capacityto obtain reliefs in local courts and adinistrati%e bodies.

+onsent, as a reuisite for jurisdiction o%er foreign corporations, isfounded on considerations of due process and fair play. As held in Pennoyer v.Neff ,- the jurisdiction of courts to render judgent in personam is grounded ontheir de facto power o%er the defendants person. (herefore his presence within

1(his chapter is based on the article entitled Philippine Doctrine of “Doing Business' for Foreign Corporations,/ published in two0part series in ($ A456 57I, 8art I 0 7ol. 7II !9o.

#, April, 1::3", 8art II 0 7ol. 7II !9o. ), une, 1::3".2Marshall-ells Co. v. !enry . "lser # Co.$ #) 8hil. *


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the territorial jurisdiction of a court is prereuisite to its rendition of judgentpersonally binding hi. &nternational hoe Co. v. tate of ashington: expandedthe co%erage by stating that due process reuires only that in order to subject adefendant to a judgent in personam, if he not be present within the territory of the foru, he ust ha%e certain iniu contacts with it such that the

aintenance of the suit does not offend &traditional notions of fair play andsubstantial justice.&

&nternational hoe Co. held that &BsCince the corporate personality is afiction, although a fiction intended to be acted upon as though it were a fact, it isclear that unlike an indi%idual its DpresenceE without, as well as within, the 6tate of its origin can be anifested only by acti%ities carried on in its behalf by those whoare authoriFed to act for it. (o say that a corporation is so DpresentE there as tosatisfy due process reuireents . . . is to beg the uestion to be decided. ?or the ters DpresentE or DpresenceE are erely used to syboliFe those acti%ities of the corporations agent with the 6tate which courts will dee to be sufficient tosatisfy the deands of due process.& (hus, it deeed that &presence& in a foru

state will not be doubted when the acti%ities of the corporation there ha%e notonly been continuous and systeatic, but also gi%e rise to liabilities sued on,e%en though no consent to be sued or authoriFation to an agent to accept ser%iceof process has been gi%en.

A foreign corporation ay be subjected to jurisdiction by reason of consent, ownership of property within the 6tate, or by reason of acti%ities withinor ha%ing an effect within the state. 1.6. 31


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would still ha%e legal standing to sue in local courts and adinistrati%e agenciesto obtain relief.

In such an instance, the jurisdiction by local courts and adinistrati%ebodies o%er a foreign corporation seeking relief would be the clear consentanifested by the filing of the suit.

(he 8hilippine 6upree +ourt has held that &the recognition of the legalstatus of a foreign corporation is a atter affecting the policy of the foru, anddistinction drawn in our +orporation aw between the standing of a corporationwhich does not engage in business in the 8hilippines and does not reuire alicense to sue, and a foreign corporation which engages in business in the8hilippines, and is reuired to obtain a license to sue, is an expression of thatpolicy.&12 A state ay therefore restrict the right of a foreign corporation to engagein business within its liits, and to sue in its courts.13

@utside of consent, the concept of &doing business& therefore becoesthe crucial point to deterine whether foreign corporations and ultinational

enterprises ha%e coe within the territorial jurisdictions of the host countries andconseuently to deterine to what extent they are bound to obtain licenseswithin %arious host countries before they can sue with local courts andadinistrati%e bodies.

DEFINITION OF "FOREIGN CORPORATIONS"

6ection 123 of +orporation +ode defines a &foreign corporation& as &onefored, organiFed or existing under any laws other than those of the 8hilippinesand whose laws allow ?ilipino citiFens and corporation to do business in its owncountry or state.& It is unfortunate that the present 8hilippine definition of foreign

corporation contains the policy of reciprocity as part of the definition, since itleads to an absurd iplication that corporate entities organiFed in countries thatdo not grant reciprocity rights to ?ilipinos and 8hilippine entities are not &foreigncorporations.& It is clear that despite the language of 6ection 123, all corporationsorganiFed other than under 8hilippine laws are foreign corporations, irrespecti%eof the issue of reciprocity.

Although wrongly placed, the inclusion of the eleent of reciprocity in thedefinition of foreign corporations ephasiFes the 8hilippines policy that unlessour own nationals are granted business access in a foreign state, then thecorporate entities of such foreign state would likewise not be granted legal

business access in 8hilippine territory. (his is clear in the succeeding sentence of 6ection 123 that pro%ides that foreign corporations fro state that grantreciprocity rights to 8hilippine nationals &shall ha%e the right to transact businessin the 8hilippines after it shall ha%e obtained a license to transact business in thiscountry in accordance with this +ode and a certificate of authority fro theappropriate go%ernent agency.&

12Mentholatum Co.$ &nc. v. Mangaliman, *2 8hil. '2#, '3< !1:#1".13Marshall-ells Co. v. !enry . "lser # Co.$ #) 8hil. *


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REQUISITES FOR OBTAINING LICENSE TODO BUSINESS IN PHILIPPINES

A foreign corporation shall be granted a license to transact business byfiling a %erified application with the 6+ setting forth specifically reuired data,including certified copies of its articles of incorporation and by0laws. 1#

1. Designation of Loa! Agent

Aong the things to be stated in the %erified application are the nae andaddress of the foreign corporations resident agent authoriFed to acceptsuons and process in all legal proceedings and, pending the establishent of a local office, all notices affecting the corporation.1' @b%iously, this reuireentinsures that proper jurisdiction ay be obtained o%er a foreign corporation in thee%ent of suits and other proceedings.

A written power of attorney ust be filed by the foreign corporation with

the 6+ designating soe person who ust be a resident of the 8hilippines, onwho any suons and other legal processes ay be ser%ed in all actions or other legal proceedings against such corporation, and consenting that ser%iceupon such resident agent shall be aditted and held as %alid as if ser%ed uponthe duly authoriFed officers of the foreign corporation at its hoe office.1)

. Ag#ee$ent on Se#%ie of S&$$ons 'it( SEC

In consideration of its being granted a license to do business in the8hilippines, the foreign corporation shall execute and file with the 6+ anagreeent or stipulation agreeing that if at any tie said corporation shall ceaseto transact business in the 8hilippines or shall be without any resident agent in

the 8hilippines on who any suons or other legal processes ay be ser%ed,then in any action or proceeding arising out of any business or transaction whichoccurred in the 8hilippines, ser%ice of any suons or other legal process aybe ade upon the 6+ and that such ser%ice shall ha%e the sae force andeffect as if ade upon the duly authoriFed officers of the foreign corporation at itshoe office.1*

hene%er such ser%ice of suons or other process shall be ade uponthe 6+, it ust, within ten !1


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). Effet of Fai!e to A**oint o# +aintain Agent

(he failure to appoint and aintain a resident agent in the 8hilippines or failure, after change of its resident agent or of his address, to subit to the 6+a stateent of such change, are grounds for re%ocation of a license granted to aforeign corporation to do business.1:

,. Oat( on Rei*#oit- Co$*!iane

Attached to the application shall also be a duly executed certificate under oath by the authoriFed official or officials of the jurisdiction of incorporation,attesting to the fact that the laws of the country or state of the applicant allow?ilipino citiFens and corporations to do business therein.2<

. De*osit of Seities

ithin sixty !)


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has heldH &(he purpose of the law is to subject the foreign corporation doingbusiness in the 8hilippines to the jurisdiction of our courts. It is not to pre%ent theforeign corporation fro perforing single or isolated acts, but to bar it froacuiring a doicile for the purpose of business without first taking stepsnecessary to render it aenable to suits in the local courts.& 2#

6uch strict rules are necessary since a foreign corporation doing businessin the 8hilippines is bound by all laws, rules and regulations applicable todoestic corporations of the sae class, except for atters that go into creation,foration, organiFation or dissolution of corporations or such as to fix relations,liabilities, responsibilities or duties of stockholders, ebers, or officers of corporation to each other or to the corporation, or siple intra0corporatedisputes.2'

a. Licensed Foreign Corporation Deemed Domesticated

(he harony and balance sought to be achie%ed by our &doing business&reuireents for obtaining license are best exeplified by the fact that once aforeign corporation has obtained a license to do business, then it is deeeddoesticated, and should be subject to no harsher rules that is reuired of doestic corporations.

6uch policy is exeplified in the case of Claude Neon ights$ Fed. &nc. v.Phil. %dv. Corp.,2) where the 6upree +ourt refused the issuance of a writ of attachent on properties in the 8hilippines of a foreign corporation licensed to dobusiness in the 8hilippines on the ere allegation that &it is not residing in the8hilippine Islands.& (he +ourt held that ha%ing regard for the reason of the lawallowing issuance of writs of attachents for the protection of creditors of a non0resident, the sae reason does not apply to a foreign corporation doing business

in the 8hilippines and licensed to do so by 8hilippine authority.(he +ourt held that unlike a natural person who does not reside in the

8hilippines, such foreign corporation is reuired by law to appoint a residentagent for ser%ice of process; ust pro%e to the satisfaction of the o%ernentbefore it does business here, that it is sol%ent and in sound financial condition;has had to pay license fee and its business subject at anytie to in%estigation bythe o%ernent authorities; and that his right to continue do business is subjectto re%ocation by the o%ernent; and books and papers subject to exainationat any tie by the o%ernent; and is bound by all laws, rules and regulations

2#"ri*s Pte. td. v. Court of %ppeals, 2)* 6+5A ')*, *) 6+A= *< !1::*". (he +ourt alsoheld in that caseH &It was ne%er the intent of the legislature to bar court access to a foreigncorporation or entity which happens to obtain an isolated order for business in the 8hilippines.9either, did it intend to shield debtors fro their legitiate liabilities or obligations. ut it cannotallow foreign corporations or entities which conduct regular business any access to courts withoutthe fulfillent by such corporation of the necessary reuisites to be subjected to our go%ernentsregulation and authority. y securing a license, the foreign entity would be gi%ing assurance that itwill abide by the decisions of our courts, e%en if ad%erse to it.&

2'6ec. 12:, +orporation +ode.2)'* 8hil. )


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applicable to doestic corporations; all designed to protect the creditors and thepublic. (he +ourt further heldH

A natural person not residing in the 8hilippines cane%ade ser%ice of suons and other legal processes, the

foreign corporation licensed to do business in 8hilippinescannot. +orporations, as a rule, are less obile thanindi%iduals. (his is specially true of foreign corporations thatare carrying on business by proper authority in Bthe8hilippinesC. (hey possess, as a rule, great capital which isseeking lucrati%e and ore or less peranent in%estent inyoung and de%eloping countries like our 8hilippines.2*

CONSEQUENCES OF NOT OBTAINING A LICENSE TO DO BUSINESS

1. On Stan0ing to S&e an0 Be S&e0>nder 6ection 133 of the +orporation +ode pro%ides that a foreign

corporation doing business in the 8hilippines without first obtaining the license todo businessH

!a" 6hall not be peritted to aintain or inter%ene in any action,suit or proceeding in any court or adinistrati%e agency of the 8hilippines;

!b" ut such foreign corporation ay be sued or proceededagainst before 8hilippine courts or adinistrati%e tribunalson any %alid cause of action recogniFed under 8hilippinelaws.

In addition, 6ection 13# akes it a ground for re%ocation of license, whena foreign corporation transacts business in the 8hilippines as agent of or actingfor and in behalf of any foreign corporation or entity not duly licensed to dobusiness in the 8hilippines.

It sees clearly iplied fro the languages of both 6ections 133 and 13#,that the failure of a foreign corporation to obtain a license to do business whenone is reuired, does not affect the %alidity of the transactions of such foreigncorporation, but siply reo%es the legal standing of such foreign corporation to

sue. Although such foreign corporation ay still be sued, the +orporation +odefails to indicate that once sued, if such foreign corporation can interposecounterclais in the sae suit.

. On a!i0it- of Cont#at

2*&,id , at p. )12.


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!ome &nsurance Company v. "astern hipping ines ,2- established the8hilippine doctrine on the legal effect on the contract itself when a foreigncorporation engages in business in the 8hilippines without obtaining the reuiredlicense.

In that case, $oe Insurance +opany, a foreign corporation, which

adittedly had engaged in business in the 8hilippines, had issued the subjectinsurance contracts in the 8hilippines without obtaining the necessary license.6ubseuently, it obtained the license before filing the cases for collection under the insurance contracts. (he lower court disissed the coplaint and declaredthat pursuant to its understanding of the basic public policy reflected in the+orporation aw, the insurance contracts executed before a license was securedust be held null and %oid, and the subseuent procureent of the license didnot %alidate the contracts.

(he 6upree +ourt, although it recogniFed there were conflicting schoolsof thought both here and abroad which are di%ided on whether such contracts are%oid or erely %oidable, took its cue fro the doctrine laid down in Marshall-ells Co. v. "lser 2: that the doctrine under 6ection ): of the then +orporationaw &was to subject the foreign corporation doing business in the 8hilippines tothe jurisdiction of our courts . . . and not to pre%ent the foreign corporation froperforing single acts, but to pre%ent it fro acuiring doicile for the purpose of business without taking the necessary steps to render it aenable to suit in thelocal courts.&

In addition, the +ourt took into consideration the philosophy discussed in1eneral Corporation of the Philippines v. 2nion &nsurance ociety of Cantontd.,3


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to obtain the corresponding license to do business herethereby copelling the consignee or purchasers of the goodsinsured to go to Aerica and sue in its courts for redress.

!ome &nsurance Company therefore held that contracts entered into by a

foreign corporation doing business in the 8hilippines without the reuisite licensereain %alid and enforceable and &BtChe reuireent of registration affects onlythe reedy,&31 and that &the lack of capacity at the tie of the execution of thecontracts was cured by the subseuent registration.&32

(he +ourt also noted that under both 6ections )- and ): of the old+orporation aw !now 6ections 133 and 1## of the +orporation +ode", penalsanctions are iposed for failure to coply with the registration reuireents,then &BtChe penal sanction for the %iolation and the denial of access to our courtsand adinistrati%e bodies are sufficient fro the %iewpoint of legislati%e policy.& 33

(he !ome &nsurance Company doctrine was reiterated in "ri*s Pte. td. v.Court of %ppeals,3# where the 6upree +ourt expressly held &subseuentacuisition of the license will cure the lack of capacity at the tie of the executionof the contract.&

CONFLICTING RULINGS OF SUPRE+E COURT

ased on the foregoing, it is therefore with serious doubt that we consider the doctrinal pronounceents of the 6upree +ourt on the legal effects of non0obtaining of the license when a foreign corporation engages in business in the8hilippines.

1. Pari Delicto R&!ing

In (op-eld Manufacturing v. "C"D$ .%.,3' a local copany entered intoseparate licensing and technical assistance agreeents with two 6wisscorporations, by %irtue of which the local copany was constituted a licensee toanufacture welding products under specifications, with raw aterials to bepurchased fro suppliers designated by the licensors. In addition, distributorshipagreeents were entered into with another 8anaanian copany.

hen the local copany found out that the foreign entities werenegotiating with another group to replace it as their licensee and distributor, itinstituted an action seeking to enjoin the foreign corporations fro negotiatingwith third persons or fro actually carrying out the transfer of their distributorship

31upra, at p. #3-.32&,id , at p. #3:.33&,id . (he feasibility of iposing the criinal penalty under 6ection 1## of the +orporation

+ode against the officers of the foreign corporation sees of doubtful application. 6eediscussions on the atter in +hapter 1:.

3#2)* 6+5A ')*, *) 6+A= *< !1::*".3'13- 6+5A 11- !1:-'".


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and franchising rights, and fro terinating the existing contracts. (he localcopany in%oked the pro%isions of 6ection #!:" of 5ep. Act 9o. '#'', known asthe ?oreign usiness 5egulation Act, which prohibited aliens or foreign firsfro terinating any franchise, licensing or other agreeents that they ha%e witha resident of the 8hilippines except for %iolation thereof or other just cause and

upon payent of just copensation and reiburseent and other expensesincurred by the licensee in de%eloping a arket for the products.

(he 6upree +ourt held that although the foreign corporations did notobtain the necessary license, it did not exept the fro @I reuireentsunder the law for &BtCo accept this %iew would open the way for an interpretationthat by doing business in the country without first securing the reuired writtencertificate fro the oard of In%estents, a foreign corporation ay %iolate or disregard the safeguards which the law, by its pro%isions, seeks to establish.& 3)

$owe%er, the +ourt ne%ertheless decreed that the local copany could notin%oke the pro%isions of 5ep. Act 9o. '#'', thusH

As between the parties thesel%es, 5.A. 9o. '#'' doesnot declare as %oid or in%alid the contracts entered into withoutfirst securing a license or certificate to do business in the8hilippines. 9either does it appear to intend to pre%ent thecourts fro enforcing contracts ade in contra%ention of itslicensing pro%isions. (here is no denying$ though$ that an“illegal situation$3 as the appellate court has put it$ 0as created 0hen the parties voluntarily contracted 0ithout such license.

(he parties are charged with knowledge of the existinglaw at the tie they enter into the contract and at the tie it isto becoe operati%e. . . In this case, the record shows that, at

least, petitioner had actual knowledge of the applicability of 5.A. 9o. '#'' at the tie the contract was executed and at allties thereafter. . . . (he %ery purpose of the law wascircu%ented and e%aded when the petitioner entered intosaid agreeents despite the prohibition of 5.A. 9o. '#''. (he

parties in this case ,eing e4ually guilty of violating ).%. No.5655$ they are in pari delicto$ in 0hich case it follo0s as aconse4uence that petitioner is not entitled to the relief prayed for in this case.3*

(he result in (op-eld Manufacturing would be that a contract or transaction between a local and foreign corporation that would ualify the latter to

be doing business in the 8hilippines without obtaining the reuisite license 0ould not ,e actiona,le at all in Philippine courts or administrative ,odies . If the foreigncorporation brings an action on said contract or transaction, it will be disissedunder 6ection 133 of the +orporation +ode as a conseuence of not obtainingthe license. @n the other hand, if the local counterpart brings an action on thecontract, it would also be disissed on grounds of pari delicto$ under (op-eld

3)&,id , at p. 13


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which held that &the law will not aid either party to an illegal agreeent. It lea%esthe parties where it finds the.&3-

Although the +ourt acknowledged that &BaCs between the partiesthesel%es, ).%. No. 5655 does not declare as void or invalid the contractsentered into 0ithout first securing a license or certificate to do ,usiness in the

Philippines,& yet at the sae tie it would apply the pari delicto doctrine becauseit would &not aid either party to an illegal agreement.& (he effect is to hold such acontract void .

6uch pronounceents in (op-eld contra%ene the clear language in6ection 133 that &a foreign corporation doing business in the 8hilippines withoutfirst obtaining the license to do business . . . may ,e sued or proceeded against ,efore Philippine courts or administrative tri,unals on any valid cause of actionrecogni+ed under Philippine la0s.& Also, the pronounceents fail to consider thecrucial point that obtaining the license is a duty iposed upon the foreigncorporation doing business in the 8hilippines, not on the locals who deal with it,and precisely it is a duty iposed on foreign corporations in order to protect thelocals.

. Dot#ine of Esto**e!

In Merrill ynch Futures$ &nc. v. Court of %ppeals ,3: the 6upree +ourtcae out with a diaetrically opposed ruling to the pari delicto principle of (op-eld Manufacturing.

In that case, Jerrill ynch ?utures, Inc., through a doestic corporation,was found to be engaging in business !coodity futures" in the 8hilippineswithout obtaining the proper license. It brought a suit in 8hilippine courts to

enforce a clai against local in%estors. Although the +ourt found the foreigncorporation to ha%e engaged in business in the 8hilippines without the reuisitelicense, it o%erturned the disissal of the suit, on the ground that if the localin%estors knew that the foreign corporation had no license to do business in the8hilippines, then they are estopped fro using the lack of license to a%oid their obligations, thusK

(he rule is that a party is estopped to challenge thepersonality of a corporation after ha%ing acknowledged thesae by entering into a contract with it. And the &doctrine of estoppel to deny corporate existence applies to foreign as wellas to doestic corporations;& Lone who has dealt with acorporation of foreign origin as corporate entity is estopped todeny its corporate existence and capacity.& (he principle &willbe applied to pre%ent a person contracting with a foreigncorporation fro later taking ad%antage of its noncopliance

3-&,id , at p. 131, citing Bough v. Cantiveros, #< 8hil. 21< !1:1:".3:211 6+5A -2# !1::2".


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with the statutes, chiefly in cases where such person hasrecei%ed the benefits of the contract . . .#<

(he Merrill ynch doctrine of estoppel has been reiterated in National ugar (rading Corporation v. Court of %ppeals.#1 In that case a coplaint for

specific perforance and partial rescission of contract and daages was broughtby a foreign corporation against the 9ational 6ugar (rading +orporation!9A6>(5A" with the 5egional (rial +ourt. Although the coplaint alleged thatthe foreign corporation was not engaged in business in the 8hilippines,9A6>(5A, after filing an answer, had o%ed to disiss the coplaint on theground that the foreign corporation was actually engaged in business in the8hilippines and had not obtained a license, and thereby has no standing to sue in8hilippine courts.

Although the issue brought before the 6upree +ourt was whether theforeign corporation was engaged in business in the 8hilippines without a license,and in fact the +ourt held that &BwChether a foreign corporation is doing business

in the 8hilippine ust be deterined in the light of the peculiar circustances of each case . . . BandC is essentially a uestion of fact,& ne%ertheless the resolutionof such issue was rendered irrele%ant because the +ourt applied the Merrill ynch estoppel doctrine. It held 0

8etitioners do not dispute pri%ate respondents clai that9A6>(5A entered into the +ontract of 8urchase and 6ale of 6ugar with the latter in 1:-< . . . In fact, in its Jotion to=isiss filed below, petitioner 65A adits the partial deli%eryof the sugar and the issuance of 65A 5esolution 9o. )-0-*0ArecogniFing payent and receipt by 9A6>(5A of the

purchase price for the said sugar, and 9A6>(5As existingobligation o%er the undeli%ered portion . . . i%en thesepreliinary facts and assuing that petitioner 9A6>(5A wasaware fro the outset that pri%ate respondent had no licenseto do business in this country, it would appear uite ineuitablefor 9A6>(5A, a state0owned corporation, to e%ade payentof an otherwise legitiate indebtedness due and owing topri%ate respondent upon the plea that the latter should ha%eobtained a license first before perfecting a contract with the8hilippine go%ernent.#2

In addition, the +ourt took into serious consideration the fact that the

foreign corporation did not actually &sell sugar and deri%e incoe fro the8hilippines,& but actually ,ought sugar fro the 8hilippine go%ernent andallegedly paid for it in full. (he theory therefore would see that the acti%ity to be

#


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undertaken in the 8hilippines to be considered engaged in business is one that isfor profit0aking acti%ity and not one where the foreign corporation erely seeksto enter into a purchase or acuisition transaction which by itself it does notderi%e profit. (he +ourt then went on to uote fro %ntam Consolidated$ &nc. v.Court of %ppeals,#3 which it deeed siilar in facts and held that the doctrine of

lack of capacity to sue based on failure to acuire a local license is based onconsiderations of sound public policy. (he license reuireent was iposed tosubject the foreign corporation doing business in the 8hilippines to the

jurisdiction of its courts and ne%er intended to fa%or doestic corporation whoenter into solitary transactions with unwary foreign firs and then repudiate their obligations siply because the latter are not licensed to do business in thecountry.

(he rulings of the 6upree +ourt would also iply that when a foreigncorporation doing business in the 8hilippines has not obtained the reuisitelicense is sued, then by the principle of estoppel, it ay interpose the proper counterclais.

). Re%o2ing Pa#i3De!ito R&!ing inFa%o# of Esto**e! Dot#ine

5ecently, the (op-eld doctrine of pari delicto sees to ha%e beenre%oked in fa%or of the estoppel doctrine in Communication Materials and Design$ &nc. v. Court of %ppeals,## where the 6upree +ourt in applying directlythe (op-eld doctrine found that the contract of a foreign corporation with a localbroker or agent as ha%ing highly restricti%e ters and conditions as to constitutethe foreign corporation as doing business in the 8hilippines.

In that case, although the foreign corporation was held doing business in

the 8hilippines, the +ourt refused to allow the plea of the local copany that notha%ing been licensed to do business in the 8hilippines, the foreign corporationhas no standing to sue. (he +ourt, in%oking the Merrill ynch doctrine heldH

A foreign corporation doing business in the 8hilippinesay sue in 8hilippine courts although not authoriFed to dobusiness here against a 8hilippine citiFen or entity who hadcontracted with and benefited by said corporation. (o put itanother way, a party is estopped to challenge the personalityof a corporation after ha%ing acknowledged the sae byentering into a contract with it. And the doctrine of estoppel to

deny corporate existence applies to a foreign as well as todoestic corporations. @ne who has dealt with a corporationof foreign origin as a corporate entity is estopped to deny itscorporate existence and capacity. (he principle will be appliedto pre%ent a person contracting with a foreign corporation frolater taking ad%antage of its noncopliance with the statutes

#31#3 6+5A 2-- !1:-)".##2)< 6+5A )*3, *3 6+A= 3*# !1::)".


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chiefly in cases where such person has recei%ed the benefitsof the contract.

(he +ourt held that the doctrine of lack of capacity to sue based on thefailure to acuire a local license is based on considerations of sound public

policy. (he license reuireent was iposed to subject the foreign corporationdoing business in the 8hilippines to the jurisdiction of its courts. It was ne%er intended to fa%or doestic corporations who enter into solitary transactions withunwary foreign firs and then repudiate their obligations siply because thelatter are not licensed to do business in this country.#'

,. P#o4!e$s 'it( Esto**e! Dot#ine

(he proble with the Merrill ynch estoppel doctrine is that it basicallylacks one of the essential ingredients that constitutes the eleent of estoppel,which is that by the action or representation of one party ! i.e., the local entity or indi%idual", the other party !i.e.$ the foreign corporation", has been held to belie%ethat he would be entitled to relief on the contract entered into in the course of doing business in the 8hilippines without a license. hen a foreign entityengages in business in the 8hilippines and fails to obtain the reuisite license,then the siple act of a local entering into a contract with such foreigncorporation cannot reasonably gi%e rise to estoppel or the belief therefore on thepart of the foreign entity that he would be allowed to secure reliefs fro localcourts since the pro%isions of 6ection 133 of the +orporation +ode, which isdeeed to be part of such contract, pre%ents such belief fro ha%ing areasonable basis.

(he Merrill ynch estoppel doctrine effecti%ely reo%es the sanction

pro%ided for by law on the failure of a foreign corporation to obtain a licensebefore it engages in business in the 8hilippines, and therefore there would beless oti%e on the part of such foreign corporation to obtain the license since itcan always sue in 8hilippine courts.

"ri*s Pte. td. v. Court of %ppeals,#) has answered the issue that topre%ent a foreign corporation to sue on a contract would be unjust enrichent for the local counterpart, al,eit not in express reference to the estoppel doctrine. Inthat case it was argued by the foreign corporation that its denial of access to8hilippine courts would afford unjust enrichent to the defendant. (he +ourtheldH &a judgent denying a foreign corporation relief fro our courts for failure toobtain the reuisite license to do business, should not be construed as an

attept to foreclose the ultiate right to collect on an obligation. . . )es 7udicatadoes not set in a case disissed for lack of capacity to sue, because there hasbeen no deterination on the erits. Joreo%er, this +ourt has ruled thatsubseuent acuisition of the license will cure the lack of capacity at the tie of the execution of the contract.&

#'8uoting from National ugar (rading Corp. v. Court of %ppeals , 2#) 6+5A #)', )3 6+A=31 !1::'".

#)2)* 6+5A ')*, *) 6+A= *< !1::*".


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CONCEPT OF "DOING BUSINESS" UNDERFOREIGN INEST+ENT ACT OF 1551

(he ?oreign In%estent Act of 1::1#* now go%erns foreign in%estents inthe 8hilippines that do not seek @I incenti%es. (he Act has repealed ook II of the @nibus In%estents +ode of 1:-*.#-

1. Stat&to#- Definition of "Doing B&siness"

Instead of defining a &foreign corporation,& the Act refers to a &non08hilippine national& as an entity not falling within the definition of &8hilippine9ational.& A 8hilippine national eans

a corporation organiFed under the laws of the 8hilippinesof which at least sixty percent !)


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!a" 6oliciting orders, ser%ice contracts, opening offices,whether called Lliaison/ offices or branches;

!b" Appointing representati%es or distributors doiciled in the8hilippines or who in any calendar year stay in thecountry for a period or periods totaling one hundred

eighty !1-


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!e" 8erforing ser%ices auxiliary to an existing isolatedcontract of sale which are not on a continuing basis, suchas installing in the 8hilippines achinery it hasanufactured or exported to the 8hilippines, ser%icingthe sae, training doestic workers to operate it, and

siilar incidental ser%ices.'#

A re%iew of the enuerated instances of acti%ities not constituting doingbusiness shows a coon denoinator that by thesel%es the acti%ities do notbring any direct receipts or profits to the foreign corporation. (his would beconsistent with the ruling of the 6upree +ourt in National ugar (rading Corporation v. Court of %ppeals$'' that acti%ities within 8hilippine jurisdiction thatdo not create earnings or profits to the foreign corporation do not constitute doingbusiness in the 8hilippines.

6uch exceptions to the doing business concept are not found in thestatutory definition of doing business, and do not confor to the public policy

behind the reuireent of getting a license, i.e.$ that foreign corporation arepre%ented fro conducting acti%ities in the 8hilippine before steps are taken toensure that both the state and the locals would ha%e a %alid eans of obtaining

jurisdiction o%er their persons !which is achie%ed by the process of obtaining alicense to do business". (hus, it has been held in %von &nsurance PC v. Court of %ppeals, ') thusH

(he purpose of the law in reuiring that foreigncorporations doing business in the country be licensed to doso, it to subject the foreign corporations doing business in the8hilippines to the jurisdiction of the courts, otherwise, a foreign

corporation illegally doing business here because of its refusalor neglect to obtain the reuired license and authority to dobusiness ay successfully though unfairly plead such neglector illegal act so as to a%oid ser%ice and thereby ipugn the

jurisdiction of the local courts.

(he sae danger does not exist aong foreigncorporations that are indubitably not doing business in the8hilippines. Indeed, if a foreign corporation does not dobusiness here, there would be no reason for it to be subject tothe 6tateEs regulation. As we obser%ed, in so far as the 6tate isconcerned, such foreign corporation has no legal existence.(herefore, to subject such foreign corporation to the courtsE

jurisdiction would %iolate the essence of so%ereignty.

. R&!ing on In0ento#s an0 B#o2e#s

'#6ec. 1!f", Ipleenting 5ules and 5egulations of ?IA D:1.''2#) 6+5A #)', )3 6+A= 31 !1::'".')2*- 6+5A 312, -) 6+A= #


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(he 6upree +ourt in (op-eld Manufacturing$ &nc. v. "C"D .%.$'* hasruled on operati%e function of exeption of a foreign corporation fro obtaining alicense to do business under 6ection 1!f"!1" and 1!f"!2" of the 5ules and5egulations Ipleenting the @nibus In%estents +ode of 1:-*, when ittransacts business through iddleen, acting in their own naes, such as

indentors, coercial brokers or coercial erchants.In (op-eld , the licensing and representati%e agreeents entered into by

the foreign corporation with locals were deeed to be &highly restricti%e& innature as to reduce the locals to being ere conduits or extension of the foreigncorporation in the 8hilippines.

(he +ourt held that the foreign corporations were doing business in the8hilippine because the disputed contracts with the locals were entered into tocarry out the purposes for which they were created, i.e., to anufacture andarket welding products and euipent. (he ters and conditions of thecontracts as well as the conduct of the foreign corporations indicate that theyestablished within the 8hilippines a continuous business, and not erely one of ateporary character.

(he +ourt in (op-eld did indicate that the foreign corporations could beexepted fro the reuireents of 5epublic Act '#'' if the local copany werean independent entity which buys and distributes products not only of the foreigncorporation, but also of other anufactures or transacts business in its nae andfor its account and not in the nae or for the account of the foreign principal. Itheld that a reading of the agreeents between the foreign corporations and thelocal copany shows that they are highly restrict in nature, thus aking the localcopany a ere conduit or extension of the foreign corporations.

In spite of the pro%isions of the Act and the Ipleenting 5ules and

5egulations, therefore, e%en when the local agents, brokers, or indentors of foreign corporation transact sales in their own naes, but the co%ering licensingor representati%e agreeents with foreign corporations contain highly restricti%eters as to render the locals erely conduits or extensions of foreigncorporations, the latter would still be considered as &doing business& in the8hilippines.

(he doctrine was reiterated in Communication Materials and Design$ &nc.v. Court of %ppeals,'- which found the following pro%isions in the Jaster 6er%ice

Agreeent of the foreign corporation with the local copany as highly restricti%eas to ake the latter erely a conduit or extension of the foreign copanyH

!a" It reuired the local technical representati%e to pro%idethe eployees of the technical and ser%ice center withthe foreign corporation identification cards, and tocorrespond only on the foreign corporations letterhead;

'*13- 6+5A 11- !1:-'".'-2)< 6+5A )*3, *3 6+A= 3*# !1::)".


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!b" ocal eployees were instructed to answer telephoneusing the foreign corporations nae, and all calls beingrecorded and forwarded to the foreign copany on aweekly basis;

!c" (he local copany was obliged to pro%ide the foreign

copany with a onthly report detailing the failure andrepair of the products and to reuisition aterials andcoponents fro the foreign corporation; and

!d" (he agreeent pro%ided for a &no copeting product&clause.

LA6 ON REGIONAL OR AREA HEADQUARTERS

(he acts of a foreign corporation registered under 8res. =ecree 9o. 21-

as a regional or area headuarter, which includes acting as super%ision,coordination, counications and coordination center for its hoe officesaffiliates, the naing of its local agent and eployent of 8hilippine national areacts pursuant to its priary purposes and functions as a regionalMareaheaduarters for its hoe office, and are deeed to be &doing business& in thecountry, as defined under the @nibus In%estent +ode of 1:-*, and would gi%eit standing to sue in 8hilippine courts e%en without a separate license to dobusiness.':

5egional headuarters are not regulated nor licensed under 6ection 123of the +orporation +ode, but under xecuti%e @rder 9o. 22) !otherwise knownas the @nibus In%estent +ode of 1:-*", and therefore do not need a separate

license fro the 6+ in order to operate as an area or regional headuarters inthe 8hilippines for a ultinational copany. 9o license is reuired since area or regional headuarters are established only to super%ise, coordinate andcounicate with their own affiliates, subsidiaries or branches in the Asia 8acificregion, and are not allowed to do business in the 8hilippines like the branch or representati%e offices of foreign corporations licensed pursuant to the+orporation +ode.)<

5epublic Act 9o. -*'), which aended the @nibus In%estent +ode,has pro%ided for the establishent within 8hilippine jurisdiction of Lregionaloperating headuarters,/ which eans Lforeign entity which is allowed to deri%eincoe in the 8hilippines by perforing ualifying ser%ices to its affiliates,subsidiaries or branches in the 8hilippines, in the Asia08acific 5egion and inother foreign arkets./ @nce is has obtained the appropriate license as aregional operating headuarters, it does not need to acuire a separate licenseto do business in the 8hilippines.

':1eorg 1rot7ahn 1MB! # Co. v. &snani , 23' 6+5A 21), '# 6+A= 2-: !1::#".)


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7URISPRUDENTIAL TESTS OF "DOING BUSINESS"

1. Defining 8Iso!ate0 T#ansations9

hether a foreign corporation needs to obtain a license, and fails to do so,whether it should be denied legal standing to obtain reedies fro local courts

and adinistrati%e agencies, depends therefore on the issue whether it willengage in business in the 8hilippines. 9ot e%ery acti%ity undertaken in the8hilippines aounts to doing business as to reuire the foreign corporation toobtain such license. (he issue is exactly what &doing business& co%ers. 9odefinition is offered under the +orporation +ode as to what constitutes doingbusiness.

Marshall-ells Co. v. !enry . "lser # Co.,)1 was the earliest casedecided by the 6upree +ourt directly in point. In that case, an @regoncorporation sued a doestic corporation in the then court of first instance of Janila, to reco%er the unpaid balance on a bill on sale of goods. (he coplaintwas disissed by the trial court on deurrer by the defendant since thecoplaint did not show that the plaintiff, being a foreign corporation, hadcoplied with the legal reuireent of foreign corporations obtaining the licenseto do business.

Marshall-ells then established the rule that obtaining of a license and theeffect of not obtaining such license only applied to foreign corporations doingbusiness in the 8hilippines; it had no application to foreign corporations not doingbusiness in the 8hilippine. In construing what is not included in the ter &doingbusiness,& Marshall-ells did indicate that an &isolated& transaction would notplace a foreign corporation within the ter &doing business.&

(he 6upree +ourt in Marshall-ells discussed the rationale behind then

6ection ): of the +orporation aw !now 6ection 133 of the +orporation +ode",thusH

(he object of the statute was to subject the foreigncorporation doing business in the 8hilippines to the jurisdictionof its courts. (he object of the statute was not to pre%ent theforeign corporation fro perforing single act, but to pre%ent itfro acuiring a doicile for the purpose of business withouttaking the steps necessary to render it aenable to suit in thelocal courts. (he implication of the la0 is that it 0as never the

purpose of the egislature to e/clude a foreign corporation

0hich happens to o,tain an isolated order for ,usiness fromthe Philippines$ from securing redress in the Philippine courts$and thus$ in effect$ to permit persons to avoid their contractsmade 0ith such foreign corporations.&)2

)1#) 8hi. *< !1:2#".)2&,id , at p. *'. "mphasis supplied.


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6ubseuently, the +ourt rendered a decision in estern "4uipment and upply Co. v. )eyes,)3 where fro the stipulation of facts of the parties they hadagreed that the foreign corporation, &had ne%er engaged in business in the8hilippine Islands.& >nder such an aditted fact it was easy for the +ourt to holdthat a foreign corporation which has ne%er done any business in the 8hilippines

and which is unlicensed and unregistered to do business here, but is widely andfa%orably known in the 8hilippines through the use therein of its products bearingits corporate and trade nae, has a legal right to aintain an action in the8hilippines to restrain the residents and inhabitants fro organiFing a corporationbearing the sae nae as the foreign corporation.

estern "4uipment did not define what constitutes &doing business& sinceit was stipulated by the parties that the foreign corporation has done no businessin the 8hilippines. It supported the doctrine that foreign corporation can bring anaction in the 8hilippines to protect its reputation, corporate nae and goodwillwhich ha%e been established through the natural de%elopent of its trade o%er along period of years, in the doing of which it does not seek to enforce any legal or

contract rights arising fro, or growing out of, any business which it hastransacted in the 8hilippines.)#

. T'in C(a#ate#i:ation Test

In 1:#1, the 6upree +ourt in Mentholatum Co.$ &nc. v. Mangaliman,)'

began to fashion a jurisprudential test of what constitutes &doing business& in the8hilippines for foreign corporations. In that case, Jentholatu +opany, an

Aerican corporation, and its exclusi%e 8hilippine distributing agent, 8hilippine0 Aerican =rug +opany, instituted an action for infringeent of tradeark andunfair copetition against defendants Jangalian. Jentholatu had in pre%ious

years registered the tradeark &Jentholatu& for its products consisting of edicaent and sal%e. (he defendants Jangalian had prepared aedicaent and sal%e naed &Jentholian& which they sold to the publicpacked in containers of the sae siFe, color and shape as &Jentholatu&.

Although the trial court found for the plaintiffs, on appeal the +ourt of Appealsre%ersed the decision, holding that the acti%ities of Jentholatu were businesstransactions in the 8hilippines, and that, by 6ection ): of the +orporation aw, itcould not aintain any action.

In a petition for certiorari filed with the 6upree +ourt, the plaintiffs0petitioners claied that although Jentholatu ay be co%ered by the pro%isionof then 6ection ): of the +orporation aw on the effects of doing business

without a license, the coplaint was also filed by 8hilippine0Aerican =rug+opany, a doestic corporation, which had sufficient interest and standing toaintain the coplaint. In addition, it was shown that Jentholatu itself had notsold any of its products in the 8hilippines, and it was 8hilippine0Aerican =rug

)3'1 8hil. 11' !1:2*".)#&,id , at p. 12-.)'*2 8hil. '2# !1:#1".


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+o., Inc. and fifteen other local entities which iported the products and soldthe locally.

It deterining whether Jentholatu fell under the category of doingbusiness in the 8hilippines, which thereby reuired it to obtain a license to dobusiness, the +ourt heldH

9o general rule or go%erning principle can be laid downas to what constitutes Ldoing/ or Lengaging in/ or Ltransacting/business. Indeed, each case ust be judged in the light of itspeculiar en%ironental circustances. (he true test$ ho0ever$seems to ,e 0hether the foreign corporation is continuing a,ody or su,stance of the ,usiness or enterprise for 0hich it 0as organi+ed or 0hether it has su,stantially retired from it and turned it over to another. . . (he term implies a continuity of commercial dealings and arrangements$ and contemplates$to that e/tent$ the performance of acts or 0or*s or thee/ercise of some of the functions normally incident to$ and in

progressive prosecution of$ the purpose and o,7ect of itsorgani+ation.))

In deciding that Jentholatu was indeed engaged in business in the8hilippines, the 6upree +ourt took cogniFance of the allegation in the coplaintthat clearly stated that the &8hilippine0Aerican =rug +o., Inc., is the exclusi%edistributing agent in the 8hilippine Islands of the Jentholatu +o., Inc., in thesale and distribution of its products known as the Jentholatu.& (he +ourttherefore concluded that whate%er transactions the 8hilippine0Aerican =rug+opany had executed in %iew of the law, the Jentholatu did itself. (he +ourtheld therefore that since Jentholatu is a foreign corporation doing business inthe 8hilippine without a license, it ay not prosecute the action for %iolation of tradeark and unfair copetition. In addition, neither ay the 8hilippine0

Aerican =rug +opany aintain the action for the reason that thedistinguishing features of the agent being its representati%e character andderi%ati%e authority, and could not, to the ad%antage of its principal, clai anindependent standing in court apart fro Jentholatu.

hat is significant in Mentholatum is its drawing of the two tests todeterine whether a foreign corporation is engaged in business in the8hilippinesH

First , it considered as the &true test& of doing business in the 8hilippines

as to whether a foreign corporation is aintaining or continuing in the 8hilippines&the body or substance of the business or enterprise for which it was organiFedor whether is has substantially retired fro it and turned it o%er to another.&

))&,id , at pp. '2-0'2:, citing (raction Cos. v. Collectors of &nt. )evenue 9C.C.%. :hio; 223 ?.:-#, :-*; 1riffin v. &mplement Dealer's Mut. Fire &ns. Co.$ 2#1 9.. *', **; Pauline :il # 1as Co.v. Mutual (an* ine Co.$ 2#) 8. -'1, -'2, 11- @kl. 111; %utomotive Material Co.$ v. %mericantandard Metal Products Corp., 1'- 9.. ):-, *


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econd , it defined &doing business& to necessarily iply &a continuity of coercial dealings and arrangeents, and conteplates, to that extent, theperforance of acts or works or the exercise of soe of the functions norallyincident to, and in progressi%e prosecution of, the purpose and object of itsorganiFation.&

(aken together, the characteriFation by Mentholatum of &doing business&in the 8hilippines co%ers transactions or series of transactions in pursuit of theain business goals of the corporation, and done with intent to continue thesae in the 8hilippines. It re0affired the early characteriFation of Marshall-ellsthat an &isolated transaction& by a foreign corporation cannot ualify as &doingbusiness& since it lacks the eleent of continuity. 9otice that the eleent of profitresults did not figure into the test.

Commissioner of &nternal )evenue v. British :verseas %ir0ays Corp. ,)*

held that when an international airline aintains a general sales agent in the8hilippines, which engaged in the selling and issuing of tickets, breaking downthe whole trip into series of tripKeach trip in the series corresponding to adifferent airline copany, recei%ing the fare fro the whole trip, and allocating tothe %arious airline copanies on the basis of their participation in the ser%icesrendered through the ode of interline settleent, then those acti%ities constitutedoing business in the 8hilippines for which it could be held liable for incoe taxliabilities as a resident foreign corporation under the 8hilippine (ax +ode.)-

(op-eld Manufacturing$ &nc. v. "C"D$ .%.,): suariFed it well when itheld thatH

(here is no general rule or go%erning principle laid downas to what constitutes &doing& or &engaging in& or &transacting&

business in the 8hilippines. ach case ust be judged in thelight of its peculiar circustances. !Jentholatu +o. %.Jangalian, *2 8hil. '2#". (hus, a foreign corporation with asettling agent in the 8hilippines which issues twel%e arinepolicies co%ering different shipents to the 8hilippines!eneral +orporation of the 8hilippines %. >nion Insurance6ociety of +anton, td. -* 8hil 313" and a foreign corporationwhich had been collecting preius on outstanding policies!Janufacturing ife Insurance +o., %. Jeer, -: 8hil. 3'1" wereregarded as doing business here. (he acts of thesecorporations should be distinguished fro a single or isolatedbusiness transaction or occasional, incidental and casual

transactions which do not coe within the eaning of the law.here a single act or transaction, howe%er, is not erelyincidental or casual but indicates the foreign corporationsintention to do other business in the 8hilippines, said single actor transaction constitutes &doing& or &engaging in& or

)*1#: 6+5A 3:' !1:-*".)-)eiterated in Commissioner of &nternal )evenue v.


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&transacting& business in the 8hilippines !?ar astInternational Iport and xport +orporation %. 9ankai Nogyo,+o., ) 6+5A *2'".

In (op-eld Manufacturing the +ourt considered the foreign corporation

as doing business in the 8hilippines when it entered into the disputed contractswhich were in accordance with the purpose for which it was created, naely, toanufacture and arket welding products and euipent. (he ters andconditions of the contracts, as well as the conduct thereof, indicate theestablishent within the country of a continuous business, and not erely one of a teporary character.

). Essene of Intent to Ps&e Contin&it- of T#ansations

(he lack of intent to pursue with continuity transactions in the 8hilippineshas been found crucial by the 6upree +ourt in deterining whether the foreigncorporation is engaged in business in the 8hilippines.

itton Mills$ &nc. v. Court of %ppeals ,*


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doing business.*2 (he +ourt heldH &e fail to see how exercising ones legal andproperty rights and taking steps for the %igilant protection of said rights,particularly the appointent of an attorney0in0fact, can be deeed by and of thesel%es to be doing business here.&*3

. Cont#at Test

In 1:'', in Pacific egeta,le :il Corp. v. ing+on ,*# the 6upree +ourtbegan fashion what seeed like a second branch of judicial characteriFation of what constitutes &doing business,& which essentially is a contract test.

In that case, a suit was filed by a foreign corporation against the defendantto reco%er daages suffered as a conseuence of the failure of the defendant todeli%er copra which was ordered through a contract negotiated and perfected inthe >nited 6tates, under &c.i.f. 8acific +oast& ters. (he lower court disissedthe coplaint holding that plaintiff had no personality to institute the casebecause at the tie the case was filed the plaintiff had no license to do business

in the 8hilippines, and e%en it afterwards obtained such license, the belated actdid not ha%e the effect of curing the defect that existed when the case wasinstituted. @n appeal, the 6upree +ourt held that the plaintiff was not doingbusiness in the 8hilippines under the contract, and there was no necessity for itto obtain a license before it can aintain the suit.

In holding that the plaintiff foreign corporation was not doing business inthe 8hilippines by %irtue of the contract co%ering copra to be processed anddeli%ered fro the 8hilippines, the 6upree +ourt took cogniFance of the factthat the subject contract was entered into in the >nited 6tates by the parties; thatpayent of the price was to be ade at 6an ?rancisco, +alifornia, through aletter of credit to be opened at a bank thereat; and with respect to the deli%ery of

the copra, it was stipulated to be at &c.i.f., 8acific +oast& which eant thatdeli%ery is to be ade only at the port of destination since the seller !defendant"obliged hiself to take care of the freight until the goods ha%e reacheddestination. (hus, although it was found by the 6upree +ourt that the plaintiff foreign corporation had also bought copra fro other exporters in the 8hilippines,it took note of the fact that those transactions were undertaken under siilar circustances.

(he Pacific egeta,le :il doctrine does not consider the twincharacteriFation tests of Mentholatum of substance of the transactions pertainingto the ain business of the corporation and the continuity or intent to continuesuch acti%ities. It would see that e%en if the twin characteriFation tests of Mentholatum obtained in a case, under the Pacific egeta,le :il doctrine, solong as the perfection and consuation of a series of transactions are doneoutside 8hilippine territorial jurisdiction, the sae would not constitute doing

*2Colum,ia Pictures$ &nc. v. Court of %ppeals$ 2)1 6+5A 1##, *3 6+A= )*# !1::)".*3&,id.*# Ad%anced =ecisions 6upree +ourt, April 1:'' 7ol., p. 1


26/62

business in the 8hilippines, e%en if the products thesel%es should beanufactured or processed in the 8hilippines by locals.

(he iplication of this doctrine is that if the salient points of a contract donot find thesel%es in the 8hilippines, 8hilippine authorities ha%e no businesssubjecting the parties to local registration and licensing reuireents.

(he doctrine had a follow0up in %etna Casualty # urety Company v.Pacific tar ine.*' In that case, a foreign insurance copany, as subrogee of theinsured, instituted ci%il actions in the then court of first instance of Janila toreco%er sus pertaining to daages on stolen cargo it insured, against localcopanies which handled the goods. In their aended answers, the defendantsalleged that plaintiff is a foreign corporation not duly licensed to do business inthe 8hilippines and, therefore, without capacity to sue.

>pon stipulation of facts showing that plaintiff was not licensed to engagein business in the 8hilippines, and that in fact it had filed thirteen !13" other ci%ilcases in the 8hilippines of siilar nature, the trial court disissed the coplaint

ruling that although a foreign corporation ay file a suit in the 8hilippines inisolated cases, but where the plaintiff has been filing actions in the 8hilippinesnot just in isolated instances, but in nuerous cases and therefore has beendoing business in the country without obtaining a license.

@n appeal, the 6upree +ourt held that the foreign insurance copanywas not doing business in the 8hilippines, and therefore was not prohibited froaintaining a suit in 8hilippine courts. (he +ourt found that the contract of insurance was entered into in 9ew 4ork; that payent was ade to theconsignee in its 9ew 4ork branch and that since the corporation &was erelycollecting a clai assigned to it by the consignee, it is not barred fro filing theinstant case although it has not secured a license to transact insurance business

in the 8hilippines.&*)

6ubseuently, in 2niversal hipping ines$ &nc. v. &ntermediate %ppellateCourt ,** it was held that a foreign insurance copany ay sue in 8hilippinecourts upon the arine insurance policies issued by it abroad to co%er international0bound cargoes shipped by a 8hilippine carrier, e%en if it has nolicense to do business in the 8hilippines, &for it is not the lack of the prescribedlicense !to do business in the 8hilippines" but doing business without suchlicense, which bars a foreign corporation fro access to our courts.&*- (he6upree +ourt considered the acti%ities as not doing business in the 8hilippines.

(he 5ules and 5egulations ipleenting the @nibus In%estents +ode

of 1:-*,*: expressly included in the definition of &doing business& the &soliciting of orders, purchases !sales" or ser%ice contracts.& In fact, it pro%ided that &+oncreteand specific solicitations by a foreign fir or by an agent of such foreign fir, not

*'-< 6+5A )3' !1:**".*)&,id , at p. )##.**1-- 6+5A 1*< !1::


27/62

acting independently of the foreign fir, aounting to negotiations or fixing of theters and conditions of sales or ser%ice contracts, regardless of 0here thecontracts are actually reduced to 0riting , shall constitute doing business e%en if the enterprise has no office or fixed place of business in the 8hilippines.& Inaddition, the 5ules and 5egulations expressly pro%ided that &(he arrangements

agreed upon as to manner$ time and terms of delivery of the goods or thetransfer of title thereto is immaterial.& ffecti%ely therefore, the oard of In%estents, by the ipleenting 5ules and 5egulations, had attepted too%erride the Pacific egeta,le doctrine.

(he Ipleenting 5ules and 5egulations to the ?oreign In%estent Act of 1::1, while retaining &soliciting orders& as doing business in the 8hilippines hasdropped entirely the explicit pro%isions seeking to o%erride the Pacific egeta,ledoctrine. $owe%er, its retaining &soliciting orders& as constituting doing businessin the 8hilippines indicates a bias against the Pacific egeta,le doctrine.

In addition, the 6upree +ourt in Communication Materials and Design$&nc. v. Court of %ppeals,-


28/62

peculiar en%ironental circustances. (he true test, howe%er,sees to be whether the foreign corporation is continuing thebody or substance of the business or enterprise for which itwas organiFed whether it has substantially retired fro it andturned it o%er to another.

As a general proposition upon which any authoritiesagree in principle, subject to such odifications as ay benecessary in %iew of the particular issue or of the ters of thestatute in%ol%ed, it is recogniFed that a foreign corporation is&doing,& &transacting,& &engaging in,& or &carrying on& businessin the 6tate when, and ordinarily only when, it has entered the6tate by its agents and is there engaged in carrying on andtransacting through the soe substantial part of its ordinaryor custoary business, usually continuous in the sense that itay be distinguished fro erely casual, sporadic, or occasional transitions and isolated acts.

(he +ourt held that although 6ection 1!g" of the Ipleenting 5ules and5egulations of the @nibus In%estents +ode lists aong others the &solicitingorders, purchases !sales" or ser%ice contracts, and the appointing of representati%e or distributor who is doiciled in the 8hilippines,& as constitutingdoing business, the ere fact that foreign o%ie copanies are copyright ownersor owners of exclusi%e distribution rights in the 8hilippines of otion pictures or fils did &not con%ert such ownership into an indiciu of doing business whichwould reuire the 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 intellectualproperties.&

(he +ourt stressed that as a general rule, a foreign corporation will not be

regarded as doing business in the 6tate siply because it enters into contractswith residents of the 6tate, where such contracts are consuated outside the6tate. In fact, a %iew is taken that a foreign corporation is not doing business inthe 6tate erely because sales of its products are ade there or other businessfurthering its interest is transacted there by an alleged agent, whether acorporation or a natural person, whether such acti%ities are not under thedirection and control of the foreign corporation but are engaged in by the allegedagent as an independent business.

It is generally held that sales ade to custoers in the 6tate by anindependent dealer who has purchased and obtained title fro the corporation of the products sold are not a doing of business by the corporation. ikewise, a

foreign corporation which sells its products to person styled &distributing agents&in the 6tate, for distribution by the, is not doing business in the 6tate so as torender it subject to ser%ice of process therein, where the contract with thesepurchasers is that they shall buy exclusi%ely fro the foreign corporation suchgoods as it anufactures and shall sell the 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


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the 8hilippines to the jurisdiction of local courts on isolated contracts that ha%ebeen entered into or perfored within 8hilippine territorial jurisdiction.-#


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ualify it to be considered as being engaged in business, although on a pre%iousoccasion its %essel was chartered by the 9ational 5ice and +orn +orporation tocarry rice cargo fro abroad to the 8hilippines, since the two transactions werenot related. It was held therefore, that such foreign corporation had capacity tosue in the 8hilippines e%en without a license.

In %ntam Consolidated$ &nc. v. Court of %ppeals,:


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shipped to the 8hilippines in Bula*hidas v. Navarr o;:) !e" the sale to thego%ernent of road construction euipent and spare parts with no intent of continuity of transaction in 1on+ales v. )a4ui+a;:* and !f" the reco%ery on a$ongkong judgent against a resident in Janila in !ang ung Ban*$ td. v.aulog .:-

In !ang ung Ban*$ td. v. aulog :: the 6upree +ourt added a particular point in the rationale for the allowing foreign corporations not doing business inthe 8hilippines to sue in our courtsH &@therwise we will be hapering the growthand de%elopent of business relations between ?ilipino citiFens and foreignnationals. orse, we will be allowing the law to ser%e as a protecti%e shield for unscrupulous ?ilipino citiFens who ha%e business relationships abroad.& 1S

ustice Joran rendered a dissenting opinion in Mentholatum that thepro%isions of 6ection ): of the +orporation aw do not apply to suits brought byforeign corporations for infringeent of tradearks and unfair copetition, thetheory being that &the right to the use of the corporate nae and trade nae of aforeign corporation is a property right, a right in rem, which it ay assert andprotect in any of the courts of the world e%en in countries where it does notpersonally transact any business,& and that &trade ark does not acknowledgeany territorial boundaries but extends to e%ery ark where the traders goodsha%e becoe known and identified by the use of the ark.& 1


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rights within the local courts. $owe%er, the rearks forget that the purpose of then 6ection ): of the +orporation aw was that when a foreign corporationindeed does business in the 8hilippines without obtaining a license, there is apublic policy of prohibiting it fro seeking any reedy fro 8hilippine courts andadinistrati%e bodies.

$owe%er, the atter as to tradearks and tradenaes had becoe ootwith the adoption of 6ection 210A1


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protection against unfair copetition in the sae way that they are obliged tosiilarly protect ?ilipino citiFens and firs.

(he current legislation is reflected in Converse )u,,er Corporation v.2niversal )u,,er Products$ &nc.,1


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does not engage in ,usiness in the Philippines ay bring a ci%il or adinistrati%eaction hereunder for opposition, cancellation, infringeent, unfair copetition, or false designation of origin and false description, 0hether or not it is licensed todo ,usiness in the Philippine under existing laws./

(he wordings of 6ection 1)< do not see to coprehend the thrust of

6ection 210A of (he (radeark aw, and the new ualification that such foreigncorporation ust not be engaged in business in the 8hilippines contradicts thepro%ision that dispenses with the need to obtain a license to do business in the8hilippines to ualify a foreign corporation to seek reedy under the +ode. It cantherefore be reasonably anticipated that the courts will e%entually interpret6ection 1)< of the +ode to ha%e the sae eaning and application as 6ection210A of (he (radeark aw, which would ualify any foreign corporation, e%enwhen doing business in the 8hilippines without appropriate license, to be able toobtain reedies and reliefs under the +ode.

TRANSACTIONS AND CONTRACTS6ITH AGENTS= BRO>ERS ANDINDENTORS

In Mentholatum$ it was held that the sale of the products of a foreigncorporation through a local copany was eui%alent to the foreign corporationdoing business in the 8hilippines, because the actions of the agent in the8hilippines pertain to its foreign principal, and thereby without obtaining a licensein the 8hilippines, both the foreign corporation and the agent ha%e no capacity tosue in 8hilippine courts.

a Chemise acoste$ .%. v. Fernande+ ,111 clarified that not e%ery sale toan exclusi%e agent in the 8hilippines by a foreign corporation would constitutethe latter as doing business in the 8hilippines. It held that the principle inMentholatum is applicable only when it is found that the local copany or representati%e is selling the foreign copanys products in the latters nae or for the latters account. In that case, the arketing of the products of the ?renchcopany in the 8hilippines &is done through an exclusi%e distributor, 5ustan+oercial +orporation. (he latter is an independent entity which buys and thenarkets not only products of the petitioner but also any other products bearingeually well0known and established tradearks and tradenaes. In other words,5ustan is not a ere agent or conduit of the petitioner.&112

In addition, the +ourt in a Chemise acoste took cogniFance of &the rulesand regulations proulgated by the oard of In%estents pursuant to its rule0aking power under 8residential =ecree 9o. 1*-:, otherwise known as the@nibus In%estent +ode,& which define &doing business& as one whiche/cludes &a foreign fir which does business through iddleen acting on their own naes, such as indentors, coercial brokers or coission

11112: 6+5A 3*3 !1:-#".112&,id , at p. 3-3.


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erchants . . . Appointing BofC a representati%e or distributor who is doiciled inthe 8hilippines BwhoC has an independent status, i.e., it transacts business in itsnae and for its account, and not in the nae or for the account of a principal.& 113

In chmid # :,erly$ &nc. v. )


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case an iportant part of the contract !deli%ery of the subject atter" takes partwithin 8hilippine territory under the contract theory of Pacific egeta,le. ikewise,such transactions confor to the twin characteriFation enunciated inMentholatum.

In fact, the 6upree +ourt turned down the contention in chmid #

:,erly to hold the local indentor liable for the penal pro%isions of the then 6ection): of the +orporation awH

?inally, the afore0uoted penal pro%ision in the+orporation aw finds no application to 6+$JI= and itsofficers and eployees relati%e to the transactions in theinstant case. hat the law seeks to pre%ent, through saidpro%ision, is the circu%ention by foreign corporations of licensing reuireents through the de%ice of eploying localrepresentati%es. An indentor, acting in his own nae, is not,howe%er, co%ered by the abo%e0uoted pro%ision. In fact, thepro%ision of the 5ules and 5egulations ipleenting the

@nibus In%estent +ode uoted abo%e, which was copiedfro the 5ules ipleenting 5epublic Act 9o. '#'',recogniFes the distinct role of an indentor, such that when aforeign corporation does business through such indentor, theforeign corporation is not deeed doing business in the8hilippines.11)

In other words, had it not been for the ipleenting rule pro%ision, aforeign corporation selling its products in the 8hilippines would be doing businesshere for indeed the contract is strictly between the foreign exporter and the localbuyer, with the indentor erely acting as agent for both. (he ipleenting ruleshas therefore afforded foreign corporations the route of &circu%ention by foreigncorporations of licensing reuireents through the de%ice of eploying localBindentorsC.& Indeed, this is the logic of chmid # :,erly since it expressly foundthe indentor not to be liable on the warranty on hidden defects since it was not considered the seller of the products. hat is not explained in chmid # :,erly ,though, is how the 6upree +ourt could accept that an adinistrati%e rule andregulation pro%ision can o%erride clear statutory reuireents for foreigncorporations engaging in business in the 8hilippines fro obtaining a license. It isa settled principle in our jurisdiction, that rules and regulations issued byadinistrati%e agencies cannot aend the law or go beyond the liits of the lawwhich they seek to ipleent.11*

?urther, it is to be noted that the present applicable Ipleenting 5ulesand 5egulations of the ?oreign In%estent Act of 1::1 ha%e totally dropped thepro%isions exepting fro the definition of doing business transactions byforeign corporations done through indentors, coercial brokers or coissionerchants. $owe%er, the rules and regulations ha%e retained the pro%ision

11)&,id , at p. '


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excluding fro &doing business& the appointing of a representati%e or distributor doiciled in the 8hilippines which transact business in the representati%es or distributors own nae and account.

oth the a Chemise acoste and the chmid # :,erly rulings o%erlookedthe fact that although the sales ade by iddleen, distributors or

representati%es &in their own nae or for their own accounts& in the 8hilippinesdo not pertain to the foreign principals abroad, ne%ertheless the purchase andiportation by such iddleen, distributors or representati%es of such productsfro abroad undeniably constitute a body of transactions in the 8hilippines of which their foreign principals are direct parties.

And yet in ang a,oratories$ &nc. v. Mendo+a,11- the 6upree +ourttreated differently a foreign corporation being represented in the 8hilippines by aindependent distributor. In that case, although the foreign corporation angaboratories, Inc. had an exclusi%e distributor in the 8hilippines, and a local firhad entered into direct contract with the local distributor, the 6upree +ourtrefused allow the otion to disiss filed by the foreign corporation on the groundthat not doing business in the 8hilippines, the court below had not obtained

jurisdiction o%er the person of the foreign corporation, by ser%ing suons on itslocal exclusi%e distributor. In finding that ang aboratories, Inc. was doingbusiness in the 8hilippines, the court took into consideration the appointent of the local distributor as indicated of doing business, and %arious ad%ertiseentsshowing the local copany to be the representati%e of the foreign corporationand that adission in the reply to the opposition to the otion to disiss by theforeign corporation that &it deals exclusi%ely with Bthe local copanyC in the saleof its products in the 8hilippines,&11: clearly indicating that the sales and deli%eriesby foreign corporation to its distributor in the 8hilippines constitutes doingbusiness, regardless of whether the distributor sells the sae products to thepublic for its own account.

(he subseuent case of 1ranger %ssociates v. Micro0ave ystems$&nc.,12


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licensing J6I to anufacture and sell rangers products in the 8hilippines BandCBaCll subseuent agreeents were erely auxiliary to the first contract and shouldnot be considered separate transactions coing within the concept of Pdoingbusiness in the 8hilippines.&121

Although the +ourt found that any agreeents entered into dealt on

other atters as to constitute doing business, the +ourt went on to hold that&%en if it be assued for the sake of arguent that the subject atter of the firstcontract is of the sae kind as that of the subseuent agreeents, that factalone would not necessarily signify that all such agreeents are erely auxiliaryto the first. %s long as it can ,e sho0n that the parties entered into a series of agreements$ as in successive sales of the foreign company's regular products$that company shall ,e deemed as doing ,usiness in the Philippines .&122

(he +ourt also found that ranger Associates saw to it that it was assuredof at least one seat in the board of directors of the local copany, &withoutprejudice to the right of ranger to reuest additional seats as its interest ayreuire.& (he fact that it was directly in%ol%ed in the business of the localcopany was also anifested in another stipulation where ranger Associates&acknowledged and confired& the transfer of a block of stocks fro oneshareholder to another group of in%estors. 6uch appro%al was considered by the+ourt as not norally gi%en except by a stockholder enjoying substantialparticipation in the anageent of the business of the copany.123

Although the rules and regulations of the oard of In%estents pro%idethat ere in%estent in a local copany by a foreign corporation should not beconstrued as doing business in the 8hilippines, howe%er the +ourt in 1ranger

%ssociates found that the in%estent of the foreign copany was uitesubstantial, &enabling it to participate in the actual anageent and control of

J6I BandC it appointed a representati%e in the board of directors to protect itsinterest, and this director was so influential that, at his reuest, the regular boardeeting was con%erted into an annual stockholders eeting to take ad%antageof his presence.&12#

9oteworthy are the stateents of the +ourt that & %t any rate$ theadministrative regulation$ 0hich is intended only to supplement the la0$ cannot

prevail against the la0 itself as the court has interpreted it. &t is a/iomatic that the delegate$ in e/ercising the po0er to promulgate implementing regulations$cannot contradict the la0 from 0hich the regulations derive their very e/istence.(he courts, for their part, interpret the adinistrati%e regulations in harony withthe law that authoriFed the in the first place and a%oid as uch as possible any

construction that would annul the as an in%alid exercise of legislati%e power.& 12'

@n the arguent that a foreign corporation ust be shown to ha%e dealtwith the public in general to be considered as transacting business in the

121&,id , at p. )3'.122&,id , at p. )3*. "mphasis supplied.123&,id , at p. )3-.12#&,id , at p. )3:.12'&,id , at pp. )3:0)#


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8hilippines, the +ourt held that &it is the perforance by a foreign corporation of the acts for which it was created, regardless of volume of ,usiness, thatdeterines whether a foreign corporation needs a license or not.&12)

?inally, 1ranger %ssociates reiterated the rationale of the doctrineH

(he purpose of the rule reuiring foreign corporations tosecure a license to do business in the 8hilippines is to enableus to exercise jurisdiction o%er the for the regulation of their acti%ities in this country. If a foreign corporation operates in the8hilippines without subitting to our laws, it is only just that itno be allowed to in%oke the in our courts when it shouldneed the later for its own protection. hile foreign in%estorsare always welcoe in this land to collaborate with use for our utual benefit, they ust be prepared as an indispensablecondition to respect and be bound by 8hilippine law in proper cases, as in the one at bar .12*

1ranger %ssociates therefore does not consider it crucial that a foreigncorporation does not deal with, or sell directly to, the public by using aiddlean, a coercial broker, an indentor, or a distributor; rather, it considerscrucial &the perforance by a foreign corporation of the acts for which it wascreated, regardless of volume of ,usiness.& y dealing with its products with localbrokers, indentors, or distributors, regardless of what the latter do with theproducts subseuently, a foreign corporation is perforing acts integral to itspurpose.

$owe%er, under the ?oreign In%estent Act of 1::1, the policy of the 6tate!not by adinistrati%e fiat" has been declared on the atter when the law itself pro%ided that not included in the definition of &doing business& is the act of

&appointing a representati%e or distributor doiciled in the 8hilippines whichtransacts business in its own nae and for its own account.& 12-

(aking the rationale of the ruling in 1ranger %ssociates$ the followingexceptions to &doing business& pro%ided for in the Ipleenting 5ules and5egulations to the Act are of doubtful %alidity and are beyond the language of the

Act itselfH

!a" Jaintaining stock of goods in the 8hilippines solely for thepurpose of ha%ing the sae processed by another entity inthe 8hilippines; and

!b" +onsignent by a foreign entity of euipent with a localcopany to be used in the processing of products for export.

12)&,id , at p. )#


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y way of o,iter in Phil. Products Co. v. Primateria ociete %nonyme Pour e Commerce "/terieur@ Primnaterial APhil.$ &nc. 12: since the foreign corporationtherein was held liable for the judgent, it was held by the 6upree +ourt that&BiCn the absence of express legislation,& agents or representati%es of foreigncorporations ay be held personally liable for acts and contracts entered into in

behalf of such corporations only when &preised on the inability to sue theprincipal or non0liability of such principal.&13<

ately, !anh v. Court of %ppeals,131 held that when a foreign car copanyhas an agent or distributor in the 8hilippines, it will be considered doing businessin the country, and the trial court acuired jurisdiction o%er the foreign corporationby %irtue of the ser%ice of suons on the =epartent of (rade and Industry.@therwise, if the representati%e is not the agent of the foreign copany but anindependent dealer, the foreign corporation is not considered doing business inthe 8hilippines within the eaning of the ?oreign In%estents Act of 1::1 an the5ules and 5egulations ipleenting the @nibus In%estent +ode of 1:-*, 132

and the trial court did not acuire jurisdiction o%er the foreign corporation.

(he +ourt found the following allegations in the coplaint to be sufficientto show that the foreign corporation was doing business in the 8hilippinesthrough its local representati%eH the local representati%e took orders for the carsand transitted the to the foreign copany; that the foreign copany uponreceipt of the orders, fixed the downpayent and pricing charges, notified thelocal representati%e of the scheduled production onth for the orders, andreconfired the orders by signing and returning to hi the acceptance sheets; alldocuents and in%oice being in the fors of the foreign copany; payent wasade by the buyer directly to the foreign copany; title to the cars purchasedpassed directly to the buyer and the local representati%e ne%er paid for thepurchase price of the cars sold in the 8hilippines, and erely recei%edcoissions.

FOREIGN CORPORATIONS AS PARTIES DEFENDANTS

6ection 12, 5ule 1# of the 1::* 5ules of +i%il 8rocedure133 pro%ides for the anner of ser%ice upon foreign corporations by allowing ser%ice of suonsto be ade on Lits resident agent designated in accordance with law for thatpurpose, or, if there be no such agent, on the go%ernent official designated bylaw to that effect, or on any of its officers or agents within the 8hilippines.&

$owe%er, in order to obtain jurisdiction o%er a foreign corporation under the section, it specifically pro%ides that such foreign corporation ust ha%e&transacted business in the 8hilippines.& (he phrase would only ephasiFe thefact that as a atter of principle our laws take effect, and courts ha%e jurisdiction

12:1' 6+5A 3


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o%er, foreign corporations, in the absence of consent, on the nexus of their doingbusiness in the 8hilippines. enerally, our laws would ha%e no binding effect onforeign corporations who do not ha%e &presence& in the 8hilippines, otherwiseany judgent rendered would be a %iolation of due process.

!anh v. Court of %ppeals,13# reiterated the rule that for purposes of ha%ing

suons ser%ed on a foreign corporation in accordance with 5ule 1#, 6ection1# of the 5ules of +ourt, it is sufficient that it be alleged in the coplaint that theforeign corporation is doing business in the 8hilippines. (he court need not gobeyond the allegations of the coplaint in order to deterine whether it has

jurisdiction. A deterination that the foreign corporation is doing business is onlytentati%e and is ade only for the purpose of enabling the local court to acuire

jurisdiction o%er the foreign corporation through ser%ice of suons. 6uchdeterination does not foreclose a contrary finding should e%idence later showthat it is not transacting business in the country.

1. Ne;&s of "Doing B&siness in t(e P(i!i**ines"

Per*ins v. Di+on,13' had clearly discussed the general principle when it heldthat &when the defendant is a non0resident and refuses to appear %oluntarily, thecourt cannot acuire jurisdiction o%er his person e%en if the suons be ser%edby publication, for he is beyond the reach of judicial process. 9o tribunalestablished in one 6tate can extend its process beyond its territory so as tosubject to its decisions either persons or property located in another 6tate . . .and a personal judgent upon constructi%e or substituted ser%ice against a non0resident who does not appear is wholly in%alid.& 13)

(he basic preise as i

Documents

Ima's Foreign Corporations