Jurisdiction Over Foreign Corporations Doing Business in the Philippines

The Supreme Court's ruling in Litton Mills, Inc. v. Court of Appeals and Gelhaar Uniform Company, Inc. (G.R. No. 94980, May 15, 1996) clarifies when Philippine courts may exercise jurisdiction over foreign corporations. The case addresses a recurring question in cross-border transactions: what does it take for a foreign company to be considered "doing business" in the Philippines, and how may summons be validly served on it? The ruling provides practical guidance for both local firms contracting with foreign entities and foreign companies seeking to understand their exposure to Philippine litigation.

The Dispute: A Contract for Soccer Jerseys

Litton Mills, Inc., a Philippine corporation, agreed to supply 7,770 dozens of soccer jerseys to Gelhaar Uniform Company, a US corporation. The transaction was arranged through Empire Sales Philippines Corporation, which acted as Gelhaar's local agent. Under the agreement, Litton could only collect payment from the letter of credit if Empire issued an inspection certificate confirming the goods were satisfactory.

Litton delivered four shipments, but when a fifth shipment was inspected in January 1984, Empire refused to issue the required certificate. Litton sued in the Regional Trial Court of Pasig, seeking to compel Empire to issue the certificate. The trial court granted a writ of preliminary mandatory injunction, and Empire issued the certificate the next day.

The Jurisdictional Challenge

Months after the case had proceeded — with a lawyer filing numerous motions for extension and an answer on Gelhaar's behalf — a new law firm entered a special appearance for Gelhaar. It moved to dismiss the case, arguing that Gelhaar was a foreign corporation not doing business in the Philippines and therefore beyond the reach of Philippine courts.

The trial court denied the motion, holding that Gelhaar was doing business in the Philippines and that service of summons was valid. The Court of Appeals reversed, ruling that proof of doing business should have been presented before summons could be served. It also held that the earlier lawyer's appearance did not bind Gelhaar because his authority had been questioned.

The Supreme Court's Ruling

The Supreme Court reversed the Court of Appeals and reinstated the trial court's order, with a modification allowing Gelhaar a new period to file its answer.

1. Allegations in the complaint suffice for jurisdiction

The Court clarified its earlier ruling in Pacific Micronisian Lines, Inc. v. Del Rosario (96 Phil. 23 [1954]), which the Court of Appeals had relied upon. Citing the later case of Signetics Corporation v. Court of Appeals (225 SCRA 737 [1993]), the Court explained that jurisdiction is initially determined by the allegations of the complaint, not by independent proof. A court need not go beyond the complaint's allegations to determine whether a foreign corporation is doing business for purposes of Rule 14, Section 14 of the Rules of Court.

In this case, the allegation that Empire, for and on behalf of Gelhaar, ordered 7,770 dozens of soccer jerseys and that Gelhaar caused the opening of an irrevocable letter of credit was a sufficient allegation of doing business.

2. A single transaction can constitute doing business

The Court rejected Gelhaar's argument that its contract with Litton was a single, isolated transaction. Citing Wang Laboratories, Inc. v. Mendoza (156 SCRA 44 [1987]), the Court held that a single act may constitute doing business if it is not merely incidental or casual but distinctly indicates a purpose to do other business in the country. Purchasing soccer jerseys was within the ordinary course of Gelhaar's business, since it manufactured uniforms. The act was therefore of such a character as to indicate a purpose to do business.

3. Service of summons was valid

Under Rule 14, Section 14, service on a foreign corporation doing business in the Philippines may be made in three ways: (1) upon the agent designated by law to accept service; (2) if there is no resident agent, upon the government official designated by law; or (3) upon any officer or agent of the corporation within the Philippines. Here, service was made through Gelhaar's agent, Empire Sales Philippines Corporation, which was valid service sufficient to confer jurisdiction.

4. The earlier lawyer's appearance did not bind Gelhaar

The Court agreed with the Court of Appeals that the lawyer who filed pleadings on Gelhaar's behalf was not authorized to do so. He admitted he was not appointed by Gelhaar and only claimed that Gelhaar knew of his representation but did not object. His information came through hearsay from Empire's president. There was no evidence he directly conferred with Gelhaar or furnished it copies of pleadings. No voluntary appearance by Gelhaar could be inferred from his acts.

Practical Takeaways

• Philippine courts determine jurisdiction over foreign corporations based on the allegations in the complaint, not on independent proof at the outset.
• A foreign corporation may be considered "doing business" in the Philippines even for a single transaction, if the transaction is in the ordinary course of its business and indicates a purpose to engage in business locally.
• Summons may be validly served on a foreign corporation through any officer or agent within the Philippines, including a local agent used for the transaction.
• Foreign corporations should be cautious: engaging a local agent for a commercial transaction may subject them to Philippine jurisdiction.
• A lawyer's appearance on behalf of a party must be authorized; unauthorized appearances will not constitute voluntary submission to jurisdiction.

This article is general information and not legal advice. For your specific situation, consult a lawyer or ask ASG Legal AI.