TOP-WELD MANUFACTURING v ECED
August 9, 1985 | Gutierrez, J. | Foreign Corporation FACTS:
Digester: Angat, Christine Joy
SUMMARY: Top-weld Manufacturing, a Philippine corporation, entered into two
separate contracts with two foreign corporations: a License and Technical Assistance
Agreement with IRTI, a Swiss corporation, and a Distributorship Agreement with
ECED, a Panama corporation. Top-weld eventually learned that the two corporations
were searching for Top-weld’s replacement as their licensee and distributor. Top-weld
then filed an injunction suit, invoking RA 5455, Sec. 4(9) which prohibits foreign
corporations doing business in the Philippines from terminating existing contacts with
Philippine residents except for just cause. IRTI and ECED raised the defense that since
they were not required to apply for certification from the Board of Investments when
they entered into the contracts with Top-weld, the condition stated in Sec. 4(9) does not
apply to them. The Court held IRTI and ECED are foreign corporations doing business
in the Philippines, and pursuant to RA 5455, Sec. 4, they should have secured a
certification with the BOI before they commenced their business transactions in the
Philippines. However, given the circumstance that Top-weld knew of the requirements
of RA 5455 yet it failed to compel IRTI and ECED to comply with the same, and
following the doctrine of in pari delicto, Top-weld does not have a cause of action
against the two corporations and cannot therefore enjoin them from terminating the
said contracts pursuant to Sec. 4(9). To rule otherwise would be to use the law to
perpetuate an illegal situation. Moreover, based on their allegations that Top-weld
committed multifarious violations of the contract, IRTI and ECED is justified in
terminating the contracts.
DOCTRINE:
On doing business in the Philippines
There is no general rule or governing principle laid down as to what constitutes "doing"
or engaging in" or "transacting" business in the Philippines. Each case must be judged
in the light of its peculiar circumstances. The acts of foreign corporations engaged in
business in the Philippines should be distinguished from a single or isolated business
transaction or occasional, incidental and casual transactions which do not come within
the meaning of the law. Where a single act or transaction, however, is not merely
incidental or casual but indicates the foreign corporation's intention to do other
business in the Philippines, said single act or transaction constitutes "doing" or
"engaging in" or "transacting" business in the Philippines.
On RA 5455
Sec. 4(9) of RA 5455 states that an alien corporation must possess the required
certification from the Board of Investments before he can engage in business in the
Philippines. Once said certificate is granted, such alien corporation cannot terminate any
agreement it had with a Philippine resident upon showing of breach of contract or other
just cause.
However, 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.
 Top-weld Manufacturing Inc., a Philippine corporation engaged in the business of
manufacturing and selling welding supplies and equipment, entered into separate
contracts with two different foreign entities:
o With IRTI, S.A. (IRTI), a corporation organized and existing under the laws of
Switzerland with principal office in Fribourg, Switzerland: a “License and
Technical Assistance Agreement”
 Top-weld will be a licensee of IRTI, wherein the former will purchase raw
materials from the suppliers designated by the IRTI and will manufacture
in favor of the latter welding products under certain specifications
 The contract is for a period of three years, up to Jan. 1, 1975, but was later
extended up to Dec. 31, 1975.
o With ECED, S.A., (ECED), a company organized and existing under the laws
of Panama, with principal office at Apartado 1903, Panama I, City of Panama: a
“Distributor Agreement”
 Top-weld will the ECED’s distributor in the Philippines of certain
welding products and equipment.
 The contract was to remain effective until terminated by either party upon
giving 6 months written notice to the other.
 Top-weld learned that the two corporations were negotiating with another group to
replace it as their licensee and distributor.
 Top-weld then filed a case against the two corporations, EUTECTIC Corporation,
a corporation organized and existing under the laws of the State of the New York,
USA, and a certain Victor Gaerlan, a Filipino citizen alleged to the representative of
these three corporations. The petition for issuance of preliminary injunction seeks:
o to enjoin the two corporations from negotiating with third persons or from
actually transferring its distributorship and franchising rights
o to prohibit the corporations from terminating their contracts with Top-weld,
and in case the same was already terminated, to refrain from effecting the said
termination until after good faith negotiations between them have been carried
out and completed
 The trial court issued a TRO pending the hearing on the petition for injunction.
However, IRTI and ECED still wrote Top-weld separate notices about the
termination of their respective contracts.
 Top-weld then filed an amended complaint and a supplemental complaint for
preliminary mandatory injunction invoking RA 5455, Sec. 4(9) [prohibiting alien
firms doing business in the PH from terminating existing contracts except for just
cause] and seeking:
o to compel ECED to ship and deliver various items covered by the
distributorship contract
o to prohibit the corporations from importing into the Philippines any
EUTECTIC materials, supplies or equipment except through Top-weld
 On the other hand, IRTI and ECED argue:
 o That they are justified in terminating the contract due to the several violations
committed by Top-weld, i.e. failure to pay royalties, use of wrong materials in
manufacture of products, use of obsolete and antiquated equipment,
rebranding of non-Eutectic products using Eutectic label, falsification of
invoices, etc.
o RA 5455, Sec. 4(9) does not apply in the instant case since they were not
required to apply for a written certificate with the Board of Investments
 RTC ruled in favor of Top-weld (both on original complaint and supplemental
complaint). On MR, RTC affirmed the grant of preliminary injunction (original
complaint) but lifted the preliminary mandatory injunction (supplemental
complaint).
 On appeal, CA ruled in favor of the foreign corporations and set aside the RTC
orders.
o While IRTI and ECED are foreign corporations contemplated by RA 5455
and are therefore bound to secure a written certificate from the Board of
Investments. However, the latter failed to enforce said requirements, therefore
it cannot likewise require compliance with Sec. 4(9) on prohibition on
termination of contracts
o Top-weld did not come to court with clean hands as it entered into business
with the corporations knowing that the do not possess the requisite certificate.
Thus, it cannot invoke the equitable remedy of injunction as to do so would
only perpetuate an illegal situation of holding business with foreign
corporations who do not possess the requisite authorization.
 Hence, the instant petition.
RULING: Petition granted.
Whether IRTI and ECED are foreign corporations “doing business in the
Philippines” who should comply with the requirements of Sec. 4(9) RA 5455 –
YES, they are foreign corporations doing business in the Philippines, but given
the circumstances present in the instant case, they are NOT obligated to follow
Sec. 4(9) of RA 5455.
 IRTI and ECED are foreign corporations “doing business in the
Philippines”
o What constitutes “doing” or “engaging in” or “transacting” business in the
Philippines depends on the peculiar circumstances of each case. The true test,
however, seems to be whether the foreign corporation is continuing the body
or substance of the business or enterprise for which it was organized or
whether it has substantially retired from it and turned it over to another.
 When the foreign corporation extends the business for which it is
organized here in the Philippines, then it can be considered as doing
business in the Philippines. The term implies a continuity of commercial
dealings and arrangements, 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, the purpose and object of its organization.
 Where a single act or transaction is not merely incidental or casual but
indicates the foreign corporation's intention to do other business in the
Philippines, said single act or transaction constitutes "doing" or "engaging
in" or "transacting" business in the Philippines.
o IN THIS CASE: When IRTI and ECED entered into the disputed contracts
with Top-weld, they were carrying out the purpose for which they were
created, i.e. to manufacture and market welding products and equipment. The
contracts actually stipulate that they were carrying out in the Philippines a
continuous business, not a mere temporary transaction. Therefore, they can be
considered as doing business in the Philippines.
 Having been engaged in business in the Philippines, IRTI and ECED
should be within the purview of RA 5455.
o Contrary to IRTI and ECED’s contention that Top-weld is an independent
entity which does not conduct business exclusively with them, the foreign
principal, Top-weld’s contract is exclusive and IRTI and ECED are actually
corporations dependent on Top-weld for their manufacturing and distribution
activities in the Philippines.
 IRTI’s contract provides that IRTI or its employees cannot sell its welding
products in the Philippines except to Top-weld. Likewise, Top-weld
cannot sell in the Philippines any other welding products that is the same
as that of IRTI’s without its written consent.
 Top-weld cannot distribute any product of other manufacturer or supplier
except that of ECED’s. Further, upon termination of the contract, Top-
weld cannot engage in the commercialization, distribution and/or
manufacture of products competing with ECED’s products covered by
the agreement.
o Therefore, being engaged in business in the Philippines enabled IRTI and
ECED to enter into the mainstream of Philippine economic life in
competition with Filipino business interests, necessarily bringing them under
the provisions of RA 5455
 HOWEVER, there are compelling reasons present in the instant case to
exempt them from the requirements of Sec. 4(9).
o RA 5455, Sec. 4(9) provides:
Section 4. Licenses to do business.-No alien, and no firm, association, partnership,
corporation, or any other form of business organization formed, organized, chartered or
existing under any laws other than those of the Philippines, or which is not a Philippine
National, or more than thirty per cent of the outstanding capital of which is owned or
controlled by aliens shall do business or engage in any economic activity in the Philippines, or
be registered, licensed, or permitted by the Securities and Exchange Commission, or by any
other bureau, office, agency, political subdivision, or instrumentality of the government, to do
business, or engage in an economic activity in the Philippines without first securing a written
certificate from the Board of Investments to the effect …
xxxx
Upon granting said certificate, the Board shall impose the following requirements on the alien
or the firm, association, partnership, corporation, or other form of business organization that
is not organized or existing under the laws of the Philippines.
 xxxx
(9) Not to terminate any franchise, licensing or other agreement that applicant may have
with a resident of the Philippines, authorizing the latter to assemble, manufacture or sell
within the Philippines the products of the applicant, except for violation thereof or other just
cause and upon payment of compensation and reimbursement and other expenses incurred by
the licensee in developing a market for the said products; Provided. however, That in case of
disagreement, the amount of compensation or reimbursement shall be determined by the court
where the licensee is domiciled or has its principal office who shall require the applicant to file
a bond in such amount as, in its opinion, is sufficient for this purpose.
o Sec. 4(9) of RA 5455 states that an alien corporation must possess the required
certification from the Board of Investments before he can engage in business
in the Philippines. Once said certificate is granted, such alien corporation
cannot terminate any agreement it had with a Philippine resident upon
showing of breach of contract or other just cause.
o IN THIS CASE: It is admitted that IRTI and ECED did not possess the
required certification from the BOI when it entered into the contracts with
Top-weld, thereby violating RA 5455. However, while non-compliance with
the law created an illegal situation as between the parties, it did not void or
invalidate the contracts they entered into.
 It is important to note that the CA erred in finding that because IRTI and
ECED failed to secure the certification, then there is no occasion for the
BOI to impose the requirements stated in Sec. 4. To rule otherwise would
open the way for an interpretation that by doing business in the country
without first securing the required written certificate from the Board of
Investments, a foreign corporation may violate or disregard the safeguards
which the law, by its provisions, seeks to establish.
o Nonetheless, termination of the contract (and noncompliance with Sec.
4(9)) can be justified under the rule of in pari delicto. Apart from IRTI
and ECED, Top-weld also violated RA 5455.
 The parties in a contract are charged with knowledge of the existing law at
the time they enter into the agreement and at the time it is to become
operative. Between a Philippine national and an alien, there is a
presumption that the former is more knowledgeable about his own state
law than his alien or foreign contemporary.
 In this case, Top-weld is presumed to be more knowledgeable of
Philippine law and the requirements of RA 5455. It was incumbent
upon Top-weld to know whether IRTI and ECED were properly
authorized to engage in business in the Philippines under RA
5455—a duty it failed to dispose when it entered into the licensing
and distributorship agreements with the two corporations
 In fact, it is shown that Top-weld knew of RA 5455 at the time when they
entered into the contracts. Still, it entered into the said contracts despite
knowledge that the two corporations were violating RA 5455.
 Thus, by overlooking the required certification, Top-weld is equally
guilty of violating RA 5455. They are, therefore, in pari delicto, in
which case Top-weld is not entitled to any relief against IRTI and
ECED.
o Even assuming Sec. 4(9) of RA 5455 applies in the instant case, there is just
cause for IRTI and ECED to terminate the contract.
 The burden of overcoming the responsive effect of the answer is upon
the petitioner. He who alleges a fact has the burden of proving it and a
mere allegation is not evidence.
 In the case at bar, Top-weld failed to refute the charges made by IRTI and
ECED in their opposition wherein they stated that Top-weld violated
their contracts in several instances. IRTI and ECED presented
overwhelming evidence of the supposed breaches of the contract.
 Top-weld, instead of rebutting the charges, filed a “Reply to Opposition”
which was neither verified nor supported by counter-affidavits to show its
innocence. It failed to substantiate its allegation that it did not violate the
contracts, leaving IRTI and ECED’s affidavits uncontroverted and
sufficient enough for the court to rule that there is just cause for the
contract’s termination.
 In any case, the dispute had been rendered moot and academic as the contract had
already expired.
o As between Top-weld and IRTI, the contract was extended only until
December 31, 1975. The original injunction suit to stop the contract’s
termination was filed in June 1975, but the appeal was filed past December
1975. Therefore, the dispute had already been moot and academic as the
contract had already expired.
o The courts have no power to make contracts for the parties. Parties cannot be
coerced to enter into a contract where no agreement is had between them as to
the principal terms and conditions of the contract.
NOTES:
 For those details which are not important but seems important.