STEELCASE, INC., PETITIONER, VS. DESIGN INTERNATIONAL SELECTIONS, INC., RESPONDENT.

Steelcase versus Design International Selections

The Case

This is a petition for review on certiorari brought by Steelcase, a foreign corporation organized under the laws of Michigan in the United States of America and engaged in the manufacture of office furniture, against Design International Selections, a Philippine corporation engaged in the furniture business. Steelcase sued Design International Selections for a sum of money, and Design International Selections answered by asserting that Steelcase had no legal capacity to sue because it was allegedly doing business in the Philippines without the required license. The case matters because it draws the precise boundary between a foreign corporation that is "doing business" and one that merely appoints an independent local distributor, and because it confirms that a party who has contracted with and benefited from a foreign corporation may be estopped from later raising that corporation's lack of license.

Procedural History

Steelcase filed a complaint for sum of money before the Regional Trial Court of Makati City, Branch 60. Design International Selections filed its answer with compulsory counterclaims, seeking a temporary restraining order and a writ of preliminary injunction, the dismissal of the complaint, and damages, on the ground that Steelcase was doing business in the Philippines without a license and therefore lacked capacity to sue. The trial court, through its acting presiding judge, initially admitted an amended complaint. Later, in an order dated November 15, 1999, the trial court dismissed the complaint, granted the temporary restraining order prayed for by Design International Selections, set aside the earlier order admitting the amended complaint, and denied Steelcase's motion to admit a second amended complaint. Steelcase moved for reconsideration, but the trial court denied the motion in its order dated May 29, 2000.

Steelcase appealed to the Court of Appeals, which affirmed the trial court in its decision dated March 31, 2005, holding that Steelcase was a foreign corporation doing business in the Philippines without a license and was thus barred from access to Philippine courts. Steelcase's motion for reconsideration was denied in a resolution dated March 23, 2006. Steelcase then elevated the matter to the Supreme Court by petition for review on certiorari under Rule 45.

Facts

Sometime in 1986 or 1987, Steelcase and Design International Selections orally entered into a dealership agreement under which Steelcase granted Design International Selections the right to market, sell, distribute, install, and service its products to end-user customers within the Philippines. The business relationship continued smoothly until it was terminated sometime in January 1999 after the agreement was breached, with neither party admitting any fault.

On January 18, 1999, Steelcase filed a complaint for sum of money against Design International Selections, alleging an unpaid account of 600,000 dollars and praying for actual or compensatory damages, exemplary damages, attorney's fees, and costs of suit. In its answer, Design International Selections alleged that the complaint failed to state a cause of action and to contain the required allegations on Steelcase's capacity to sue, since Steelcase was doing business in the Philippines without the required license.

The trial court agreed with Design International Selections. It reasoned that in requiring Design International Selections to meet the Dealer Performance Expectation and in terminating the dealership based on its failure to improve performance in business planning, organizational structure, operational effectiveness, and efficiency, Steelcase unwittingly revealed that it participated in the operations of Design International Selections. The Court of Appeals affirmed, citing a letter to Phinma, the cancellation of orders from customers such as Visteon, the shipment of products through Modernform, and the impositions on the management and operations of Design International Selections.

Issues

• Whether or not Steelcase is doing business in the Philippines without a license.
• Whether or not Design International Selections is estopped from challenging Steelcase's legal capacity to sue.

Applicable Provisions

Section 133 of the Corporation Code of the Philippines provides:

Section 133. Doing business without a license. 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; but such corporation may be sued or proceeded against before Philippine courts or administrative tribunals on any valid cause of action recognized under Philippine laws.

This is the provision that bars an unlicensed foreign corporation doing business in the Philippines from maintaining an action, and it frames the entire dispute.

Section 3(d) of Republic Act Number 7042, the Foreign Investments Act of 1991, defines the phrase "doing business":

The phrase "doing business" shall include soliciting orders, service contracts, opening offices, whether called "liaison" 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 totalling one hundred eighty (180) days or more; participating in the management, supervision or control of any domestic business, firm, entity or corporation in the Philippines; and any other act or acts that imply a continuity of commercial dealings or arrangements, and contemplate to that extent the performance of acts or works, or the exercise of some of the functions normally incident to, and in progressive prosecution of, commercial gain or of the purpose and object of the business organization: Provided, however, That the phrase "doing business" shall not be deemed to 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 interests in such corporation; nor appointing a representative or distributor domiciled in the Philippines which transacts business in its own name and for its own account.

The final clause is decisive, because it excludes from "doing business" the appointment of a distributor who transacts business in its own name and for its own account.

Rule I, Section 1(f) of the Implementing Rules and Regulations of Republic Act Number 7042 elaborates on the same phrase:

"Doing business" shall include soliciting orders, service contracts, opening offices, whether liaison offices or branches; appointing representatives or distributors, operating under full control of the foreign corporation, domiciled in the Philippines or who in any calendar year stay in the country for a period totalling one hundred eighty [180] days or more; participating in the management, supervision or control of any domestic business, firm, entity or corporation in the Philippines; and any other act or acts that imply a continuity of commercial dealings or arrangements, and contemplate to that extent the performance of acts or works, or the exercise of some of the functions normally incident to and in progressive prosecution of commercial gain or of the purpose and object of the business organization.

This rule clarifies that appointing a distributor counts as doing business only when the distributor operates under the full control of the foreign corporation.

Ruling

On the first issue, the Court ruled in favor of Steelcase and held that it was an unlicensed foreign corporation not doing business in the Philippines. The Court stressed that the appointment of a distributor in the Philippines is not sufficient to constitute doing business unless it is under the full control of the foreign corporation; if the distributor is an independent entity that buys and distributes products, including those of other companies, in its own name and for its own account, the foreign corporation cannot be considered to be doing business. The Court found that Design International Selections was founded in 1979, was independently owned and managed, and distributed products of other companies in addition to Steelcase products. The owner himself described the arrangement as basically a buy and sell arrangement in which Design International Selections placed orders, added its profit margin over Steelcase's prices, and shouldered freight charges and taxes. This, the Court held, belied the assertion that Design International Selections was a mere conduit.

The Court also rejected the grounds relied upon by the Court of Appeals. The letter to Phinma and the cancellation of orders from Visteon did not show doing business, because no sale was concluded as a result of those communications; had Steelcase been doing business, it would have readily accepted and serviced the orders. As to Modernform, the Court held that Steelcase's twenty-five percent ownership was grossly insufficient to justify piercing the veil of corporate fiction, there being no evidence that Modernform acted as Steelcase's alter ego. Finally, the Dealer Performance Expectation was nothing more than an exercise of sound business practice, for as long as the requirements did not impinge on the distributor's independence.

On the second issue, the Court held that even assuming Steelcase had been doing business without a license, Design International Selections would nonetheless be estopped from challenging its legal capacity to sue. Design International Selections had entered into the dealership agreement and profited from it for twelve years, and it never raised the absence of a license until after it was informed that it owed Steelcase 600,000 dollars. By acknowledging the corporate entity of Steelcase and entering into a dealership agreement with it and benefiting from it, Design International Selections was estopped from questioning Steelcase's existence and capacity to sue. The Court grounded this on the axiom that no person ought to derive any advantage of his own wrong, and on the rule that a party is estopped to challenge the personality of a corporation after having acknowledged the same by entering into a contract with it.

Doctrine

A foreign corporation transacting business in the Philippines without a license cannot maintain or intervene in any action before Philippine courts, under Section 133 of the Corporation Code. But the appointment of a local distributor is not doing business under Section 3(d) of Republic Act Number 7042 where the distributor transacts business in its own name and for its own account; the appointment counts as doing business only when the distributor operates under the full control of the foreign corporation. Whether a foreign corporation is doing business must be judged in light of the attendant circumstances. And even where a foreign corporation is doing business without a license, a party who contracted with it and benefited from the contract is estopped from challenging its capacity to sue, for no person ought to derive any advantage of his own wrong.

Disposition

The Court granted the petition, reversed and set aside the decision of the Court of Appeals and the orders of the trial court, and remanded the case for further proceedings, with Steelcase prevailing on both issues.

Remember This

The one line to memorize: appointing a distributor who transacts business in its own name and for its own account is not doing business, and one who has dealt with and benefited from a foreign corporation is estopped from later denying its capacity to sue. Examiners use this case to test the statutory definition of doing business under the Foreign Investments Act and the doctrine of estoppel against a party who raises lack of license only after being sued for an unpaid account.