Licensing and the Capacity to Sue and be Sued

Doing Business and the Capacity to Sue and be Sued

On the first part of the article, we have learned the definition of “doing business” and how the concept evolved as ways of conducting businesses progress. Again, under the law, a foreign corporation shall have the right to transact business in the Philippines after obtaining a license and a certificate of authority for that purpose from the appropriate government agency.[1] There is one important reason as to why the acquisition of a license is very essential in conducting business in the country. According to Philippine jurisprudence,

A corporation has legal status only within the state or territory in which it was organized. For this reason, a corporation organized in another country has no personality to file suits in the Philippines. In order to subject a foreign corporation doing business in the country to the jurisdiction of our courts, it must acquire a license from the Securities and Exchange Commission (SEC) and appoint an agent for service of process. Without such license, it cannot institute a suit in the Philippines[2]

Codifying the said principle, the Corporation Code provides that “no foreign corporation shall be permitted to maintain or intervene in any action, suit or proceeding in any court or administrative agency of the Philippines; but such corporation may be sued or proceeded against before Philippine courts or administrative tribunals”.[3] While failure to obtain license does not affect the validity of the contracts entered into by the foreign corporation, it removes from such foreign corporation the legal standing to sue on tribunals.[4] Hence, the foreign corporation undertakes a very huge risk whenever it enters into local contracts with the intention to do business without securing a license.

In Pari Delicto and Estoppel Doctrine

While the general rule is that a foreign corporation doing business in the country without a license may not sue in local courts, jurisprudence holds that where the individual it entered a contract with in the Philippines knew that such foreign corporation has no license to do business in the country, it is “in pari delicto” with such foreign corporation such that it cannot question the irregularity anymore.[5] The “in pari delicto” doctrine is based on the principle that one seeks relief in the courts must “come to court in clean hands”, otherwise the court will leave the parties as they are. Thus, if a contracting party knows of the irregular situation where the foreign party it is contracting with has no license to do business in the country, yet it still entered into the contract with it, he has already stained his hands of illegality such that the court will refuse to accord him protection. Thus, the court held

As between the parties themselves, R.A. No. 5455 does not declare as void or invalid the contracts entered into without first securing a license or certificate to do business in the Philippines. Neither does it appear to intend to prevent the courts from enforcing contracts made in contravention of its licensing provisions. There is no denying, though, that an "illegal situation," as the appellate court has put it, was created when the parties voluntarily contracted without such license. The parties are charged with knowledge of the existing law at the time they enter into the contract and at the time it is to become operative… The parties in this case being equally guilty of violating R.A, No. 5455, they are in pari delicto, in which case it follows as a consequence that petitioner is not entitled to the relief prayed for in this case

Similar to the “in pari delicto” doctrine is the “doctrine of estoppel” used in later jurisprudence. Accordingly, local parties who made an agreement with a foreign corporation not licensed to do business in the country is “estopped” from questioning the capacity to sue of the said corporation. This is to avoid an unjust situation where, after getting all the benefits of a contract, a local business partner prevents their foreign counterparts in suing them. Thus, the court held,

One who has dealt with a corporation of foreign origin as a corporate entity is estopped to deny its corporate existence and capacity: The principle will be applied to prevent a person contracting with a foreign corporation from later taking advantage of its noncompliance with the statutes chiefly in cases where such person has received the benefits of the contract[6]

It is clear therefore that the law protects as well foreign corporations especially when they invest resources in our country that strengthen our economy. The Court, in one case, in fact said that while it is essential to uphold the sound public policy behind the rule that denies unlicensed foreign corporations doing business in the Philippines access to our courts, it must not however “seriously jeopardize the desirability of the Philippines as an investment site that would have the deleterious effect of hindering trade between Philippine companies and international corporations”.[7]

Requirements for Issuance of a License

Now that it is established how essential a license is to do business in the country, we then go to the requirements for the issuance of a license. Aside from depositing a copy of the articles of incorporation and by-laws, as well as a certificate under oath duly executed by the authorized official its home country attesting to the fact that the laws of its country allow Filipino citizens and corporations to do business therein, to the Securities and Exchange Commission, an application under oath must state, among others, the place in the country where it intends to operate as well as its business purpose or transactions in the country.[8] It must be noted however that, as a prerequisite for the issuance of a license, a foreign corporation must appoint a resident agent.[9] A resident agent is a natural or juridical person on whom summons and other legal processes may be served in all actions or other legal proceedings against such foreign corporation.[10] Consequently, such resident agent must be in possession of a written power of attorney stating that service upon such resident agent shall be admitted and held as valid as if served upon the duly authorized officers of the foreign corporation at its home office.[11]

Within 60 days after the issuance of the license to transact business in the Philippines, the licensee, except foreign banking or insurance corporations, shall deposit with the Securities and Exchange Commission bonds or other evidence of indebtedness of the Government, securities or shares of stock, or any combination thereof, with an actual value of at least P 500,000.00 or such other amount that may be set by the Commission.[12] This bond shall be adjusted annually especially when the gross income for the year exceeds P 10,000,000.00.[13]

Isolated Transactions

Nonetheless, securing a license is mandatory only for corporations “doing business” in the country. It is not essential, even for suing before Philippine courts, for foreign corporations conducting isolated transactions in the country. These “isolated transactions” are those that are not done on a continuing basis, or which is merely incidental to its business such as advertising without soliciting orders. The Implementing Rules and Regulations of the Foreign Investments Act thus enumerate specific business acts that are “isolated” in nature, to wit:

(1) Mere investment as a shareholder by a foreign entity in domestic corporations duly registered to do business, and/or the exercise of rights as such investor;

(2) Having a nominee director or officer to represent its interests in such corporation;

(3) Appointing a representative or distributor domiciled in the Philippines which transacts business in the representative’s or distributor’s own name and account;

(4) The publication of a general advertisement through any print or broadcast media;

(5) Maintaining a stock of goods in the Philippines solely for the purpose of having the same processed by another entity in the Philippines;

(6) Consignment by a foreign entity of equipment with a local company to be used in the processing of products for export;

(7) Collecting information in the Philippines; and

(8) Performing services auxiliary to an existing isolated contract of sale which are not on a continuing basis, such as installing in the Philippines machinery it has manufactured or exported to the Philippines, servicing the same, training domestic workers to operate it, and similar incidental services.[14]

Again, on these isolated transactions, foreign corporations may sue even if they are unlicensed in the country. This is so because securing a license is mandatory only in foreign corporations “doing business” in the country.

Summary: Agilent Technologies Case

One significant decision of the Supreme Court summarized the prevailing doctrines in terms of the capacity to sue in local tribunals of foreign corporations. In Agilent Technoligies Singapore (PTE) ltd v Integrated Silicon Technology Phil. Corp.[15], the court outlined the guiding principles in the capacity to sue of foreign corporations.

(1) if a foreign corporation does business in the Philippines without a license, it cannot sue before the Philippine courts;

(2) if a foreign corporation is not doing business in the Philippines, it needs no license to sue before Philippine courts on an isolated transaction or on a cause of action entirely independent of any business transaction;

(3) if a foreign corporation does business in the Philippines without a license, a Philippine citizen or entity which has contracted with said corporation may be estopped from challenging the foreign corporations corporate personality in a suit brought before Philippine courts; and

(4) if a foreign corporation does business in the Philippines with the required license, it can sue before Philippine courts on any transaction.

Conclusion

With the rapid digitalization of business, cross-border transactions can be made without a the physical movement of assets from one country. While it can be made in a manner without an iota of trace, securing a license is still needed should there be any mishaps in transactions that requires court intervention. We, the Sangalang and Gaerlan, Business Lawyers, offer business registration services for both domestic and foreign companies seeking to do business in the country.

Christian Andrew Labitoria Gallardo recently graduated with a degree of Juris Doctor at the Ateneo School of Law and is currently an associate of the Sangalang & Gaerlan, Business Lawyers. You may reach him at andrew.gallardo@paladinslaw.org

[1] § 140, RA11232, Revised Corporation Code of the Philippines.

[2] European Resources and Technologies v Ingenieuburo Birkanh + Nolte, 435 SCRA 246 (2004).

[3] § 150, RA 11232.

[4] Home Insurance Eastern Shipping Lines, 123 SCRA 424 (1983).

[5] Top-Weld Manufacturing Co. v ECED, SA, 138 SCRA 118.

[6] Communications Materials and Design, Inc. v Court of Appeals, 260 SCRA 673 (1996).

[7] Steelcase, Inc. v Design International Selections, Inc 670 SCRA 64, 82 (2012).

[8] § 142, RA 11232.

[9] Id.

[10] § 145, RA 11232.

[11] Id.

[12] § 143, RA 11232.