Determining When a Foreign Corporation is “Doing Business” in the Philippines for Jurisdictional Purposes

G.R. No. 94980, May 15, 1996

Imagine a foreign company selling products in the Philippines. If a dispute arises, can Philippine courts hear the case? The key lies in whether the foreign company is considered to be “doing business” within the Philippines. This case clarifies the factors considered and the importance of proper allegations in the complaint.

Introduction

In today’s globalized world, businesses often operate across borders. This raises important questions about jurisdiction: When can a Philippine court exercise authority over a foreign corporation? The Supreme Court case of Litton Mills, Inc. v. Court of Appeals and Gelhaar Uniform Company, Inc. provides valuable guidance on this issue, specifically focusing on what constitutes “doing business” in the Philippines and how it impacts the ability to serve summons on a foreign entity.

This case involved a dispute between Litton Mills, Inc., a Philippine company, and Gelhaar Uniform Company, Inc., a U.S. corporation, over a contract for the supply of soccer jerseys. The central legal question was whether Gelhaar was “doing business” in the Philippines, thus making it subject to the jurisdiction of Philippine courts. The resolution of this question hinged on the interpretation of Rule 14, Section 14 of the Rules of Court and the application of relevant jurisprudence.

Legal Context: “Doing Business” and Jurisdiction

The concept of “doing business” is crucial in determining whether a foreign corporation can be sued in the Philippines. Section 14, Rule 14 of the Rules of Court governs how summons can be served on foreign private corporations. However, it only applies if the foreign corporation is “doing business” in the Philippines.

The Supreme Court has defined “doing business” as performing acts that imply a continuity of commercial dealings or the prosecution of the purpose and object of the organization. It does not necessarily require a physical presence. Isolated transactions are generally not considered “doing business”, but a single transaction can be sufficient if it demonstrates an intent to engage in further business activities in the Philippines.

Here’s the exact text of Rule 14, Section 14 of the Rules of Court (now Rule 14, Section 12 of the 2019 Amendments to the Rules of Civil Procedure), which is at the heart of this legal issue:

“Sec. 14. Service upon private foreign corporations. – If the defendant is a foreign corporation doing business in the Philippines, service may be made on its resident agent designated in accordance with law for that purpose, or, if there is no such agent, on the government official designated by law to that effect, or on any of its officers or agents within the Philippines.”

For instance, consider a hypothetical U.S.-based software company that licenses its software to Philippine businesses, provides technical support from overseas, and actively markets its products in the Philippines. This company would likely be considered to be “doing business” in the Philippines, even without a physical office, because these activities show a clear intention to engage in ongoing commercial activity in the country.

Case Breakdown: Litton Mills vs. Gelhaar Uniform

The story begins when Litton Mills, Inc. agreed to supply Gelhaar Uniform Company, Inc. with soccer jerseys. Gelhaar, through its local agent, Empire Sales Philippines Corporation, required an inspection certificate before Litton could be paid via a letter of credit.

When Empire refused to issue the certificate for one shipment, Litton filed a complaint for specific performance with the Regional Trial Court (RTC) of Pasig. Litton sought a mandatory injunction to compel Empire to issue the certificate.

Here’s a breakdown of the key events:

• Initial Complaint: Litton filed a complaint against Empire and Gelhaar.
• Temporary Injunction: The RTC issued a writ of preliminary mandatory injunction, compelling Empire to issue the certificate.
• Answer Filed: An attorney, Atty. Remie Noval, filed an answer on behalf of both Empire and Gelhaar.
• Challenge to Jurisdiction: Later, the law firm of Sycip, Salazar, Feliciano and Hernandez entered a special appearance for Gelhaar, challenging the court’s jurisdiction, arguing that Gelhaar was a foreign corporation not doing business in the Philippines.

The trial court initially denied Gelhaar’s motion to dismiss. However, the Court of Appeals (CA) reversed this decision, stating that Litton needed to first establish that Gelhaar was doing business in the Philippines before summons could be validly served.

The Supreme Court, however, disagreed with the Court of Appeals. The Supreme Court cited the Signetics Corporation v. Court of Appeals case, clarifying that the fact of doing business must, in the first place, be established by appropriate allegations in the complaint.

As stated by the Supreme Court:

“Hence, a court need not go beyond the allegations in the complaint to determine whether or not a defendant foreign corporation is doing business for the purpose of Rule 14, § 14. In the case at bar, the allegation that Empire, for and in behalf of Gelhaar, ordered 7,770 dozens of soccer jerseys from Litton and for this purpose Gelhaar caused the opening of an irrevocable letter of credit in favor of Litton is a sufficient allegation that Gelhaar was doing business in the Philippines.”

The Court also emphasized that the purchase of soccer jerseys was within the ordinary course of business for Gelhaar, which was engaged in the manufacture of uniforms. The acts indicated a purpose to do business in the Philippines.

Practical Implications: What Does This Mean for Businesses?

This case has significant practical implications for foreign corporations operating in the Philippines. It underscores the importance of carefully assessing whether their activities constitute “doing business” in the country. If so, they become subject to Philippine jurisdiction.

The ruling in Litton Mills also provides guidance for Philippine companies dealing with foreign entities. It clarifies the requirements for establishing jurisdiction over foreign corporations in legal disputes.

Key Lessons:

• Allegations Matter: The complaint must contain sufficient allegations to establish that the foreign corporation is doing business in the Philippines.
• Ordinary Course of Business: If the foreign corporation’s activities in the Philippines are part of its regular business operations, it is more likely to be considered “doing business.”
• Seek Legal Advice: Foreign corporations should seek legal advice to determine whether their activities in the Philippines subject them to local jurisdiction.

Frequently Asked Questions (FAQs)

Q: What constitutes “doing business” in the Philippines?

A: “Doing business” generally involves performing acts that imply a continuity of commercial dealings or the prosecution of the purpose and object of the organization. It doesn’t always require a physical presence.

Q: Is a single transaction enough to constitute “doing business”?

A: Generally, no. However, a single transaction can be sufficient if it demonstrates an intent to engage in further business activities in the Philippines.

Q: How can I determine if a foreign corporation is “doing business” in the Philippines?

A: Consider the nature and extent of the foreign corporation’s activities in the Philippines. Are they engaged in ongoing commercial activities? Do they have a resident agent or representative? Are their activities part of their regular business operations?

Q: What happens if a foreign corporation is found to be “doing business” in the Philippines without proper registration?

A: The foreign corporation may face penalties and may be barred from enforcing contracts in Philippine courts.

Q: What should I do if I’m unsure whether a foreign corporation is “doing business” in the Philippines?

A: Consult with a qualified attorney who can assess the specific facts and provide legal advice.

Q: What is the significance of Rule 14, Section 14 of the Rules of Court?

A: This rule outlines how summons can be served on foreign private corporations that are “doing business” in the Philippines. Proper service of summons is essential for establishing jurisdiction over the foreign corporation.

Q: Does having a local agent automatically mean a foreign company is doing business?

A: Having a local agent is a strong indicator, but the overall activities and intentions of the foreign company must be considered.

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