DISCLAIMER: This article does not create an attorney-client relationship between the author and the reader.  The answer of the author on the issue is just an expression of his general opinion based on Philippine law and hence does not constitute legal advice.

In most cases, entrepreneurs owning and running several corporations tend to forget that, by law and as a general rule, each of his corporation has a personality separate and distinct from each other and from him as owner and as such his act as owner or as an officer in one of his corporations has no effect in his other corporation.

Take this live case to discuss this separate personality of the corporation including the relativity of contract as these two find application in the situation.  

A distributorship agreement is being finalized by and between a Filipino-owned company and a multi-national company.  In the proposed distributorship agreement, one of the subsidiaries of the Filipino-owned company is prohibited to sell products that tend to compete with the products of the multi-national company. The Filipino-owned company, through its president, has agreed to the said prohibition.

Can the Filipino-owned company or the multi-national company compel the subsidiary company to comply with the prohibition?

If the subsidiary of the Filipino-owned company is not a party to the distributorship agreement and its Board has not subsequently ratified, either express or implied, the said distributorship agreement, neither the multi-national company nor the Filipino-owned company can compel the subsidiary company to comply with the prohibition.

Absence of ratification, the following are the principles or doctrines in law that supports on why the subsidiary company cannot be compelled to abide by the prohibition.

1) The principle of relativity of contract under Article 1311 of the Civil Code

2) The doctrine of separate juridical personality enunciated in Zambrano vs Philippine Carpet Manufacturing Co., G.R. No. 224099, June 21, 2017

As a general rule, only parties to a contract, their assigns and successors-in-interest are bound to comply.  This is embodied under Article 1311 of the Civil Code which reads “x x x Contracts take effect only between the parties, their assigns and heirs except in case where the rights and obligations arising from the contract is not transmissible x x x”.  Clearly, the subsidiary in the instant case cannot be compelled to comply with the prohibition because it is not a party to the distributorship agreement.  In the distributorship agreement, only the multi-national company and the Filipino-owned company (the parent company of the subsidiary) are parties to the distributorship agreement.

Likewise, in Zambrano vs Philippine Carpet Manufacturing Co., G.R. No. 224099, June 21, 2017, the Supreme Court held that a corporation is an artificial being created by operation of law has a personality separate and distinct from the persons composing it, as well as from any other legal entity to which may be related. Clearly, the subsidiary company being a juridical person created under the provisions of the Revised Corporation Code has a personality separate and distinct from the persons composing it and from its owners.  Having a separate personality, its right cannot be prejudiced by the act of its parent company (the Filipino-owned company).  As such, its right to sell any product (competing or not) is not prejudiced by the distributorship agreement entered by its parent company with the multi-national company.

In practice, although implied ratification of corporate act is allowed under the doctrine of estoppel, the distributorship agreement in the instant case is best ratified through a Board Resolution.

(March 30, 2024)