ASBESTOS INTEGRATED MANUFACTURING, INC., (AIMI) PETITIONER, VS. HON. ELVIRO L. PERALTA PRESIDING JUDGE, BRANCH XVII, MANILA COURT OF FIRST INSTANCE, METROPOLITAN WATERWORKS AND …

Asbestos Integrated Manufacturing versus Peralta

The Case

This is a petition for certiorari with a prayer for preliminary prohibitory and mandatory injunction, brought by Asbestos Integrated Manufacturing, a wholly Filipino-owned corporation, against the presiding judge of a Manila trial court and against the Metropolitan Waterworks and Sewerage System, Eternit Corporation, and Sanvar Development Corporation. The petitioner asks the Supreme Court to annul the trial court's orders dissolving a restraining order and dismissing its complaint, which had sought to nullify the award of a government supply contract to Sanvar. The case matters because it is the classic ruling on when a Filipino-owned distributor is a mere alter ego or dummy of an alien manufacturer, and on how the Flag Law's preferences actually operate in public biddings.

Procedural History

Asbestos Integrated Manufacturing filed a petition before the Court of First Instance of Manila against the Metropolitan Waterworks and Sewerage System, Eternit, and Sanvar, to nullify the award and to restrain its enforcement. The trial court found the petition sufficient in form and substance and issued a restraining order on 12 November 1976, setting the hearing on the writ of preliminary injunction. After the respondents moved to dismiss and to lift the restraining order, the trial court lifted the restraining order and denied the writ. The petitioner moved for reconsideration; the trial court denied it and dismissed the complaint. The petitioner then came to the Supreme Court on certiorari, and the Court issued its own temporary restraining order on 7 February 1977 while it studied the case.

Facts

Asbestos Integrated Manufacturing is a wholly Filipino-owned corporation engaged in marketing asbestos cement pressure pipes manufactured by Asbestos Cement Products Philippines, itself wholly Filipino-owned. Eternit is a domestic corporation, but ninety percent of its capital stock is owned and controlled by aliens. Sanvar is a wholly Filipino-owned corporation whose purposes include general contracting and trading, buying and selling, and acting as wholesaler, retailer, and importer. The Metropolitan Waterworks and Sewerage System is a government-owned and controlled corporation.

On 18 May 1976, the waterworks system conducted a public bidding for its asbestos cement pipe requirements. Sanvar bid 373,122 pesos and 30 centavos; Asbestos Integrated Manufacturing bid 423,913 pesos and 96 centavos, about 13.6 percent higher. No award was made, because the pipes needed would come from a later bidding. In the public bidding of 27 September 1976, Sanvar bid 2,653,360 pesos while Asbestos Integrated Manufacturing bid 3,259,492 pesos, about 22.84 percent higher. The contract was awarded to Sanvar.

Asbestos Integrated Manufacturing then sued, claiming that Sanvar was a mere dealer, distributor, or marketing arm of the alien-owned Eternit, and invoking the Retail Trade Nationalization Act, the Flag Law, the Anti-Dummy Act, and the law reserving to Filipinos the exclusive right to contract with government-owned or controlled corporations for the supply of materials, equipment, goods, and commodities. The trial court restrained the award, but later lifted the restraint and dismissed the complaint, and the case reached the Supreme Court.

Issues

• Whether or not Sanvar is a mere alter ego, agent, or dummy of the alien-owned Eternit, such that the Anti-Dummy Act, the Retail Trade Nationalization Act, and the law reserving government supply contracts to Filipinos may be invoked against it.
• Whether or not the Flag Law entitles the petitioner to the award despite its higher bid.
• Whether or not the petitioner's handwritten offer of an additional ten percent discount may be considered in its favor.

Applicable Provisions

Commonwealth Act Number 138, the Flag Law, as described in the decision, grants preference in favor of Philippine-made articles and of domestic entities. The decision explains its two preferences through the opinion of the Secretary of Justice:

The Flag Law (CA 138) establishes only two types of preference: (a) One in favor of unmanufactured articles, materials or supplies of the growth or production of the Philippines, and of manufactured articles, materials and supplies produced, made and manufactured in the Philippines substantially from articles, materials or supplies of the growth, production or manufacture of the Philippines; (b) The other, in favor of domestic entities, that is, citizens of the Philippines or corporate bodies or commercial companies, duly organized and registered under the laws of the Philippines, 75% of whose capital is owned by citizens of the Philippines, and who are habitually established in business engaged in the manufacture or sale of the merchandise covered by their bid.

This definition is decisive because Sanvar, being wholly Filipino-owned and habitually engaged in the sale of the pipes it bid, falls squarely within it.

The decision also invokes Article 1370 of the Civil Code on the interpretation of contracts:

In the interpretation of a contract the evident intention of the parties prevails over the words which appear contrary to it.

This governs whether the dealership agreement between Eternit and Sanvar created an agency or a genuine sale.

Ruling

On the first issue, the Court held that the evidence was not sufficient to show that Sanvar is an alter ego of Eternit. Adopting the trial court's disquisitions, the Court stressed that the essence of a contract, not the label the parties prefer, determines the legal relation. Reading the dealership agreement as a whole, the Court found it a contract of sale: the dealer resells products purchased from the company, pays in cash, bears loss after delivery, takes title upon delivery to the carrier, and the company reserves no control over the dealer's business, the entire control and direction remaining in the dealer. Sanvar bought from Eternit, received the goods, paid for them, and resold them for its own account. That Sanvar was called an exclusive distributor did not make it an agent, for a buyer engaged in selling what he buys must necessarily distribute what he buys. Since Sanvar is not an alter ego of Eternit, the Anti-Dummy Act, the Retail Trade Nationalization Act, and the law reserving government supply contracts to Filipinos cannot be invoked against it.

On the second issue, the Court held that the Flag Law finds no application where all the materials offered are produced and manufactured in the Philippines substantially from Philippine materials and the bidders are domestic entities, as here. The Flag Law may be invoked only against a bidder who is not a domestic entity, or against a domestic entity offering imported articles or articles made from imported materials. Even if the petitioner were preferred, it would still lose, because its bid was 22.84 percent higher than Sanvar's, still 7.84 percent above the fifteen percent margin the Flag Law gives a domestic entity over a non-domestic one.

On the third issue, the Court agreed with the waterworks system that the petitioner's handwritten offer of an additional ten percent discount was not called for in the bid and may not be considered in its favor.

Doctrine

A Filipino-owned distributor is not a dummy or alter ego of an alien manufacturer merely because it is the exclusive distributor of that manufacturer's products. The test is the essence of the contract, not its label: where the dealer purchases the goods, pays for them, takes title, bears the risk of loss, and resells for its own account without the manufacturer's control, the relation is one of sale, not agency. A domestic entity under the Flag Law must be organized under Philippine laws, at least seventy-five percent of its capital owned by Filipino citizens, and habitually established in business engaged in the manufacture or sale of the merchandise covered by its bid; such a bidder cannot be a dummy or front for a foreign manufacturer. The Flag Law's preferences apply only against non-domestic bidders or against domestic entities offering imported articles or articles made from imported materials; where all bidders are domestic entities offering Philippine-made goods, the law grants no preference. Finally, the fifteen percent margin in favor of a domestic entity cannot save a bid that remains higher even after the margin is applied.

Disposition

The Supreme Court dismissed the petition, lifted and set aside its temporary restraining order, and taxed the costs against Asbestos Integrated Manufacturing.

Remember This

Memorize this line: a distributor who buys, pays, takes title, bears the risk, and resells for its own account is a buyer, not an agent, so it is no dummy of the alien manufacturer. Examiners use this case to test the alter ego doctrine, the definition of a domestic entity under the Flag Law, and the fifteen percent bid margin in government supply contracts.