Problem 13 - shan

I. Statement of the Problem

Whether or not MLFI, a foreign corporation is prohibited from suing in Philippine Courts
local investor because it is doing business in the country without the proper license, and that
the local investor is not a real party in interest?

II. Facts and Issues

MLFI, a foreign corporation, through MLFPH, a local company, sold commodity futures to the
public without the proper license to do business. MLFI filed a case in court against a local
investor. The local investor, aware that MLFI had no license, argues that it has no legal
standing in Philippine courts.

III. Discussion Of The Issues, Jurisprudence, Provision Of Law

Jurisprudential Rules:
a. Doctrine of Isolated Transactions
Foreign corporations, even unlicensed ones, can sue or be sued on a transaction or
series of transactions set apart from their common business in the sense that there is no
intention to engage in a progressive pursuit of the purpose and object of business
transaction (Eriks Pte. Ltd vs. CA, GR No. 118843, Feb. 6, 1997).

b. In Pari Delicto Rule

The Court denied the relief prayed for by petitioner when it ruled that the very purpose
of the law was circumvented and evaded when petitioner entered into the agreement
despite the prohibition in the law (Top-Weld Manufacturing vs. ECED, GR L-44944, Aug 9,
1985).

c. Estoppel Rule
A party is estopped from questioning the capacity of a foreign corporation to institute an
action in our courts where it had obtained benefits from its dealings with such foreign
corporations (Merrill Lynch vs. CA, GR No. 978160, July 24, 1992).

Section 133 of the Corporations Code of the Philippines clearly states that foreign
corporations transacting without a license, or its successors or assigns shall not be permitted
to maintain or intervene in any action, suit or proceeding in any court or administrative
agency of the Philippines; but said corporation may be sued or proceeded against before
Philippine courts or administrative tribunals on any valid cause of action recognized under
Philippine laws.

In the case of Home Insurance Co. vs. Eastern Shipping Lines, (G.R. No. L-34382, 20 July
1983) it was declared that, "the prohibition against doing business without first securing a
license is now given penal sanction which is also applicable to other violations of the
Corporation Code under the general provisions of Section 144 of the Code."

The Corporation Code provides no definition for the phrase doing business. Nevertheless,
Section 1 of Republic Act No. 5455 (RA 5455), provides that in determining a corporations
capacity to sue and be sued, it is very important to know whether or not such corporation is
transacting business. To clearly understand what it really means, the Omnibus Investments
Code of 1987 and the Foreign Investments Act of 1991 (RA7042) give a definition which may
be adopted for purposes of the corporation code: Soliciting orders, service contracts,
opening offices whether called liaisons offices or branches; appointing representatives or
distributors domiciled in the Philippines or who in any calendar year stay in the country for a
period or periods totaling one hundred eighty (180) days or more; participating in the
management, supervision or the control of any domestic business, firm, entity or
corporations in the Philippines; and any other act that imply a continuity of commercial
dealings or arrangement, and contemplate to that extent the performance of acts or works,
or the exercise of the functions normally incidents to, and in progressive prosecution of,
commercial gain or of the purposes and object of the business organization.

However, the Implementing Rules of the Foreign Investments Act provides that, transacting
business does not include: 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; nor having a nominee director or officer to represent its interest in such
corporations; nor appointing a representative or distributor domiciled in the Philippines
which transacts business in its own name and for its own account.

To be doing or "transacting business in the Philippines" for purposes of Section 133 of the
Corporation Code, the foreign corporation must actually transact business in the Philippines,
that is, perform specific business transactions within the Philippine territory on a continuing
basis in its own name and for its own account. Actual transaction of business within the
Philippine territory is an essential requisite for the Philippines to acquire jurisdiction over a
foreign corporation and thus require the foreign corporation to secure a Philippine business
license. If a foreign corporation does not transact such kind of business in the Philippines,
even if it exports its products to the Philippines, the Philippines have no jurisdiction to
require such foreign corporation to secure a Philippine business license. (B. Van Zuiden Bros.,
Ltd. vs. GTVL Marketing Industries, Inc., G.R. No. 147905, 28 May 2007)

In general, unlicensed foreign corporations transacting business in the Philippines cannot file
any action in local courts for them to be compelled to comply with the licensing
requirements. However, they can still file a case to protect their image as governed by
statue, Republic Act No. 8293 or the Intellectual Property code. It is settled that a
corporation which is unlicensed and never transacted business in the Philippines may sue in
the Philippines courts for the reason of protecting its good name, reputation and goodwill.
Moreover, the use of that corporations name or trademark within the country, gives them
the property right which they can assert and protect in any courts in the world.

There are instances when a foreign corporation may sue in the Philippines whether or not
they are licensed to do business: 1) to seek redress for an isolated business transaction; 2) to
protect its corporate reputation, name and goodwill; 3) to enforce a right not arising out of a
business transaction, e.g. tort that occurred in the Philippines; 4) when the parties have
contractually stipulated that Philippines is the venue of actions; 5) when the party sued is
barred by the principle of estoppels and/or principle of unjust enrichment from questioning
the capacity of the foreign corporation; and 6) recovery of misdelivered property.
If, on the other hand, the foreign corporation is not doing business in the Philippines, it does
not need a license to sue before Philippine courts. This is so because what the law prevents
is a foreign corporation doing business in the Philippines without a license from gaining
access to Philippine courts. It is not therefore the absence of the prescribed license, but
"doing business" in the Philippines without the proper license which bars the foreign
corporation from gaining access to Philippine courts. In other words, although a foreign
corporation has no license to do business in the Philippines, it does not necessarily follow
that it has no capacity to bring an action because a license is not necessary if the foreign
corporation is not doing business in the Philippines.
In Steelcase, Inc. vs. Design International Selections, Inc., G.R. No. 171995, 18 April 2012, the
Philippine Supreme Court declared that a foreign corporation doing business in the
Philippines without the requisite license may sue in Philippine Courts against a Philippine
citizen or entity that had contracted with and benefited by said corporation. In other words,
a party is estopped to challenge the personality of a corporation after having acknowledged
the same by entering into a contract with it.

Although the foreign corporation in this case was declared to be not doing business in the
Philippines, this case, nonetheless, explicitly declares another exception to the rule provided
in Section 133 of the Corporation Code of the Philippines that no foreign corporation
transacting business in the Philippines without a license, or its successors or assigns, shall be
permitted to maintain or intervene in any action, suit or proceeding in any court or
administrative agency of the Philippines Following the ruling in this case, a foreign
corporation doing business in the Philippines without a license may maintain suit in the
Philippines against a domestic corporation or person who is party to a contract as the
domestic corporation or person is deemed estopped from challenging the personality of the
foreign corporation. As a whole, a foreign corporations capacity to sue and be sued depends
on whether it is transacting business in the Philippines as defined in the Foreign Investment
Acts, the local corporation has acknowledged its personality and entered into a contract with
the latter.

In the case of Merrill Lynch Futures, Inc. vs. CA, G.R. No. 97816, July 24, 1992, which
squarely fits the facts and issues in this case, Merrill Lynch Futures, Inc (MLFI), a non-
resident foreign corporation, not doing business in the Philippines, duly organized and
existing under and by virtue of the laws of the state of Delaware, U.S.A., through MLFPh, a
local company, sold commodity futures to the public without the proper license to do
business. MLFI filed a case in court against local investor, Spouses Pedro M. Lara and Elisa G.
Lara for the recovery of a debt and interest thereon, damages, and attorney's fees because
of its refusal to pay the balance of US$84,836.27, "alleging that the transactions were null
and void because Merrill Lynch Philippines, Inc., the Philippine company servicing accounts
of plaintiff, had no license to operate as a 'commodity and/or financial futures broker. The
local investor, aware that MLFI had no license, argues that it has no legal standing in the
Philippine courts and its "complaint states no cause of action because it is not the real party
in interest, and moved for its Dismissal.

The Court decided this case applying the principle of quasi-estoppel by acceptance of
benefits, a foreign corporation doing business in the Philippines without a license may still
sue before the Philippine courts a Filipino or a Philippine entity that had derived some
benefit from their contractual arrangement because the latter is considered to be estopped
from challenging the personality of a corporation after it had acknowledged the said
corporation by entering into a contract with it.

In other words, considerations of equity dictate that, at the very least, a party is estopped to
challenge the juridical personality of a corporation after recognizing the same for having
entered into a contract with it. This doctrine applies to a foreign as well as to domestic
corporations to prevent a person contracting with a foreign corporation from later taking
advantage of its noncompliance with the statutes especially in cases where such person has
received the benefits of the contract. The Court was satisfied that the Laras did transact
business with ML FUTURES through its agent corporation organized in the Philippines, it
being unnecessary to determine whether this domestic firm was MLPI (Merrill Lynch
Philippines, Inc.) or Merrill Lynch Pierce Fenner & Smith (MLPI's alleged predecessor). The
fact is that ML FUTURES did deal with futures contracts in exchanges in the United States in
behalf and for the account of the Lara Spouses, and that on several occasions the latter
received account documents and money in connection with those transactions.

As between parties entering into this questionable agreements, without prejudiced to the
rights of innocent third parties, their agreements are binding as between themselves. It is
also submitted that relevant to the concept of Estoppel, the concept of In Pari Delicto
applies in the problem above where both parties should suffer the consequences of each
transaction and should not be allowed to "invoke the aid of the court with unclean hands.

Per Sir Montebon: There is a conflict in the ruling. It is submitted which jurisprudence takes
the latest and whether it is decided by a Division or by En Banc. On one case the SC decided
for Estoppel and the other case it was ruled that the parties are In Pari Delicto.
Merrill Lynch Futures vs CA is a 1992 case decided by the Second Division while Top-
Weld Manufacturing vs. ECED is a 1985 case decided by the First Division.