TOP-WELD MANUFACTURING v ECED

August 9, 1985 | Gutierrez, J. | Foreign Corporation FACTS:

Digester: Angat, Christine Joy  Top-weld Manufacturing Inc., a Philippine corporation engaged in the business of
manufacturing and selling welding supplies and equipment, entered into separate
SUMMARY: Top-weld Manufacturing, a Philippine corporation, entered into two contracts with two different foreign entities:
separate contracts with two foreign corporations: a License and Technical Assistance o With IRTI, S.A. (IRTI), a corporation organized and existing under the laws of
Agreement with IRTI, a Swiss corporation, and a Distributorship Agreement with Switzerland with principal office in Fribourg, Switzerland: a “License and
ECED, a Panama corporation. Top-weld eventually learned that the two corporations Technical Assistance Agreement”
were searching for Top-weld’s replacement as their licensee and distributor. Top-weld  Top-weld will be a licensee of IRTI, wherein the former will purchase raw
then filed an injunction suit, invoking RA 5455, Sec. 4(9) which prohibits foreign materials from the suppliers designated by the IRTI and will manufacture
corporations doing business in the Philippines from terminating existing contacts with in favor of the latter welding products under certain specifications
Philippine residents except for just cause. IRTI and ECED raised the defense that since  The contract is for a period of three years, up to Jan. 1, 1975, but was later
they were not required to apply for certification from the Board of Investments when extended up to Dec. 31, 1975.
they entered into the contracts with Top-weld, the condition stated in Sec. 4(9) does not o With ECED, S.A., (ECED), a company organized and existing under the laws
apply to them. The Court held IRTI and ECED are foreign corporations doing business of Panama, with principal office at Apartado 1903, Panama I, City of Panama: a
in the Philippines, and pursuant to RA 5455, Sec. 4, they should have secured a “Distributor Agreement”
certification with the BOI before they commenced their business transactions in the  Top-weld will the ECED’s distributor in the Philippines of certain
Philippines. However, given the circumstance that Top-weld knew of the requirements welding products and equipment.
of RA 5455 yet it failed to compel IRTI and ECED to comply with the same, and  The contract was to remain effective until terminated by either party upon
following the doctrine of in pari delicto, Top-weld does not have a cause of action giving 6 months written notice to the other.
against the two corporations and cannot therefore enjoin them from terminating the  Top-weld learned that the two corporations were negotiating with another group to
said contracts pursuant to Sec. 4(9). To rule otherwise would be to use the law to replace it as their licensee and distributor.
perpetuate an illegal situation. Moreover, based on their allegations that Top-weld  Top-weld then filed a case against the two corporations, EUTECTIC Corporation,
committed multifarious violations of the contract, IRTI and ECED is justified in a corporation organized and existing under the laws of the State of the New York,
terminating the contracts. USA, and a certain Victor Gaerlan, a Filipino citizen alleged to the representative of
DOCTRINE: these three corporations. The petition for issuance of preliminary injunction seeks:
On doing business in the Philippines o to enjoin the two corporations from negotiating with third persons or from
There is no general rule or governing principle laid down as to what constitutes "doing" actually transferring its distributorship and franchising rights
or engaging in" or "transacting" business in the Philippines. Each case must be judged o to prohibit the corporations from terminating their contracts with Top-weld,
in the light of its peculiar circumstances. The acts of foreign corporations engaged in and in case the same was already terminated, to refrain from effecting the said
business in the Philippines should be distinguished from a single or isolated business termination until after good faith negotiations between them have been carried
transaction or occasional, incidental and casual transactions which do not come within out and completed
the meaning of the law. Where a single act or transaction, however, is not merely
 The trial court issued a TRO pending the hearing on the petition for injunction.
incidental or casual but indicates the foreign corporation's intention to do other
However, IRTI and ECED still wrote Top-weld separate notices about the
business in the Philippines, said single act or transaction constitutes "doing" or
termination of their respective contracts.
"engaging in" or "transacting" business in the Philippines.
On RA 5455  Top-weld then filed an amended complaint and a supplemental complaint for
Sec. 4(9) of RA 5455 states that an alien corporation must possess the required preliminary mandatory injunction invoking RA 5455, Sec. 4(9) [prohibiting alien
certification from the Board of Investments before he can engage in business in the firms doing business in the PH from terminating existing contracts except for just
Philippines. Once said certificate is granted, such alien corporation cannot terminate any cause] and seeking:
agreement it had with a Philippine resident upon showing of breach of contract or other o to compel ECED to ship and deliver various items covered by the
just cause. distributorship contract
However, as between the parties themselves, R.A. No. 5455 does not declare as void or o to prohibit the corporations from importing into the Philippines any
invalid the contracts entered into without first securing a license or certificate to do EUTECTIC materials, supplies or equipment except through Top-weld
business in the Philippines. Neither does it appear to intend to prevent the courts from  On the other hand, IRTI and ECED argue:
enforcing contracts made in contravention of its licensing provisions.
 o That they are justified in terminating the contract due to the several violations  Where a single act or transaction is not merely incidental or casual but
committed by Top-weld, i.e. failure to pay royalties, use of wrong materials in indicates the foreign corporation's intention to do other business in the
manufacture of products, use of obsolete and antiquated equipment, Philippines, said single act or transaction constitutes "doing" or "engaging
rebranding of non-Eutectic products using Eutectic label, falsification of in" or "transacting" business in the Philippines.
invoices, etc. o IN THIS CASE: When IRTI and ECED entered into the disputed contracts
o RA 5455, Sec. 4(9) does not apply in the instant case since they were not with Top-weld, they were carrying out the purpose for which they were
required to apply for a written certificate with the Board of Investments created, i.e. to manufacture and market welding products and equipment. The
 RTC ruled in favor of Top-weld (both on original complaint and supplemental contracts actually stipulate that they were carrying out in the Philippines a
complaint). On MR, RTC affirmed the grant of preliminary injunction (original continuous business, not a mere temporary transaction. Therefore, they can be
complaint) but lifted the preliminary mandatory injunction (supplemental considered as doing business in the Philippines.
complaint).  Having been engaged in business in the Philippines, IRTI and ECED
 On appeal, CA ruled in favor of the foreign corporations and set aside the RTC should be within the purview of RA 5455.
orders. o Contrary to IRTI and ECED’s contention that Top-weld is an independent
o While IRTI and ECED are foreign corporations contemplated by RA 5455 entity which does not conduct business exclusively with them, the foreign
and are therefore bound to secure a written certificate from the Board of principal, Top-weld’s contract is exclusive and IRTI and ECED are actually
Investments. However, the latter failed to enforce said requirements, therefore corporations dependent on Top-weld for their manufacturing and distribution
it cannot likewise require compliance with Sec. 4(9) on prohibition on activities in the Philippines.
termination of contracts  IRTI’s contract provides that IRTI or its employees cannot sell its welding
o Top-weld did not come to court with clean hands as it entered into business products in the Philippines except to Top-weld. Likewise, Top-weld
with the corporations knowing that the do not possess the requisite certificate. cannot sell in the Philippines any other welding products that is the same
Thus, it cannot invoke the equitable remedy of injunction as to do so would as that of IRTI’s without its written consent.
only perpetuate an illegal situation of holding business with foreign  Top-weld cannot distribute any product of other manufacturer or supplier
corporations who do not possess the requisite authorization. except that of ECED’s. Further, upon termination of the contract, Top-
 Hence, the instant petition. weld cannot engage in the commercialization, distribution and/or
manufacture of products competing with ECED’s products covered by
RULING: Petition granted. the agreement.
o Therefore, being engaged in business in the Philippines enabled IRTI and
Whether IRTI and ECED are foreign corporations “doing business in the ECED to enter into the mainstream of Philippine economic life in
Philippines” who should comply with the requirements of Sec. 4(9) RA 5455 – competition with Filipino business interests, necessarily bringing them under
YES, they are foreign corporations doing business in the Philippines, but given the provisions of RA 5455
the circumstances present in the instant case, they are NOT obligated to follow  HOWEVER, there are compelling reasons present in the instant case to
Sec. 4(9) of RA 5455. exempt them from the requirements of Sec. 4(9).
 IRTI and ECED are foreign corporations “doing business in the o RA 5455, Sec. 4(9) provides:
Philippines” Section 4. Licenses to do business.-No alien, and no firm, association, partnership,
o What constitutes “doing” or “engaging in” or “transacting” business in the corporation, or any other form of business organization formed, organized, chartered or
Philippines depends on the peculiar circumstances of each case. The true test, existing under any laws other than those of the Philippines, or which is not a Philippine
however, seems to be whether the foreign corporation is continuing the body National, or more than thirty per cent of the outstanding capital of which is owned or
or substance of the business or enterprise for which it was organized or controlled by aliens shall do business or engage in any economic activity in the Philippines, or
whether it has substantially retired from it and turned it over to another. be registered, licensed, or permitted by the Securities and Exchange Commission, or by any
 When the foreign corporation extends the business for which it is other bureau, office, agency, political subdivision, or instrumentality of the government, to do
organized here in the Philippines, then it can be considered as doing business, or engage in an economic activity in the Philippines without first securing a written
business in the Philippines. The term implies a continuity of commercial certificate from the Board of Investments to the effect …
dealings and arrangements, to that extent, the performance of acts or xxxx
works or the exercise of some of the functions normally incident to, and Upon granting said certificate, the Board shall impose the following requirements on the alien
in progressive prosecution of, the purpose and object of its organization. or the firm, association, partnership, corporation, or other form of business organization that
is not organized or existing under the laws of the Philippines.
 xxxx which case Top-weld is not entitled to any relief against IRTI and
(9) Not to terminate any franchise, licensing or other agreement that applicant may have ECED.
with a resident of the Philippines, authorizing the latter to assemble, manufacture or sell o Even assuming Sec. 4(9) of RA 5455 applies in the instant case, there is just
within the Philippines the products of the applicant, except for violation thereof or other just cause for IRTI and ECED to terminate the contract.
cause and upon payment of compensation and reimbursement and other expenses incurred by  The burden of overcoming the responsive effect of the answer is upon
the licensee in developing a market for the said products; Provided. however, That in case of the petitioner. He who alleges a fact has the burden of proving it and a
disagreement, the amount of compensation or reimbursement shall be determined by the court mere allegation is not evidence.
where the licensee is domiciled or has its principal office who shall require the applicant to file  In the case at bar, Top-weld failed to refute the charges made by IRTI and
a bond in such amount as, in its opinion, is sufficient for this purpose. ECED in their opposition wherein they stated that Top-weld violated
o Sec. 4(9) of RA 5455 states that an alien corporation must possess the required their contracts in several instances. IRTI and ECED presented
certification from the Board of Investments before he can engage in business overwhelming evidence of the supposed breaches of the contract.
in the Philippines. Once said certificate is granted, such alien corporation  Top-weld, instead of rebutting the charges, filed a “Reply to Opposition”
cannot terminate any agreement it had with a Philippine resident upon which was neither verified nor supported by counter-affidavits to show its
showing of breach of contract or other just cause. innocence. It failed to substantiate its allegation that it did not violate the
o IN THIS CASE: It is admitted that IRTI and ECED did not possess the contracts, leaving IRTI and ECED’s affidavits uncontroverted and
required certification from the BOI when it entered into the contracts with sufficient enough for the court to rule that there is just cause for the
Top-weld, thereby violating RA 5455. However, while non-compliance with contract’s termination.
the law created an illegal situation as between the parties, it did not void or  In any case, the dispute had been rendered moot and academic as the contract had
invalidate the contracts they entered into. already expired.
 It is important to note that the CA erred in finding that because IRTI and o As between Top-weld and IRTI, the contract was extended only until
ECED failed to secure the certification, then there is no occasion for the December 31, 1975. The original injunction suit to stop the contract’s
BOI to impose the requirements stated in Sec. 4. To rule otherwise would termination was filed in June 1975, but the appeal was filed past December
open the way for an interpretation that by doing business in the country 1975. Therefore, the dispute had already been moot and academic as the
without first securing the required written certificate from the Board of contract had already expired.
Investments, a foreign corporation may violate or disregard the safeguards o The courts have no power to make contracts for the parties. Parties cannot be
which the law, by its provisions, seeks to establish. coerced to enter into a contract where no agreement is had between them as to
o Nonetheless, termination of the contract (and noncompliance with Sec. the principal terms and conditions of the contract.
4(9)) can be justified under the rule of in pari delicto. Apart from IRTI
and ECED, Top-weld also violated RA 5455. NOTES:
 The parties in a contract are charged with knowledge of the existing law at  For those details which are not important but seems important.
the time they enter into the agreement and at the time it is to become
operative. Between a Philippine national and an alien, there is a
presumption that the former is more knowledgeable about his own state
law than his alien or foreign contemporary.
 In this case, Top-weld is presumed to be more knowledgeable of
Philippine law and the requirements of RA 5455. It was incumbent
upon Top-weld to know whether IRTI and ECED were properly
authorized to engage in business in the Philippines under RA
5455—a duty it failed to dispose when it entered into the licensing
and distributorship agreements with the two corporations
 In fact, it is shown that Top-weld knew of RA 5455 at the time when they
entered into the contracts. Still, it entered into the said contracts despite
knowledge that the two corporations were violating RA 5455.
 Thus, by overlooking the required certification, Top-weld is equally
guilty of violating RA 5455. They are, therefore, in pari delicto, in