Court rules on good faith in distributorship agreements

Managing IP is part of Legal Benchmarking Limited, 1-2 Paris Gardens, London, SE1 8ND

Copyright © Legal Benchmarking Limited and its affiliated companies 2025

Accessibility | Terms of Use | Privacy Policy | Modern Slavery Statement

Court rules on good faith in distributorship agreements

Sponsored by

hechanova-400px.png
Female hand signing contract.

Entering a foreign market for one's products is usually made through direct investment or by way of licensing, such as forging a distributorship agreement. Such an agreement will be the law for the parties. For agreements involving the Philippines, other than the provisions stated in it, other laws relevant to said agreement are deemed included and must be complied with. An example is Article 19 of the Civil Code on the abuse of rights. Article 19 sets certain standards which must be observed not only in the exercise of one's rights but also in the performance of one's duties, i.e. to act with justice; to give everyone his due; and to observe honesty and good faith.

In the case of Tocoms Philippines v Philips Electronics and Lighting Inc (G.R. 214046, February 5 2020), the Supreme Court (SC) reversed the decision issued by the Court of Appeals (CA) granting Philips' motion to dismiss the complaint of Tocoms and ordered the Regional Trial Court of Pasig city to try the case with utmost dispatch. The facts of the case are as follows. Tocoms was appointed as Philippines distributor of Philips Domestic Appliance by respondent PELI and its principal Philips Singapore, which was renewed on a yearly basis from 2001 and 2008. In its complaint to which the distributorship agreement (agreement) was attached, Tocoms claimed that it had consistently delivered and even surpassed its targets before the end of 2012. Further, Tocoms stated that it has made disclosures of its plans for 2012 in preparation for the renewal of the agreement.

However, on January 2 2013, PELI called for a meeting and terminated the agreement, to the surprise of Tocoms. As a result of this sudden termination, Tocoms said that its strongest client Western Marketing was set to return its inventory worth PHP 5 million ($103 million), and that it was going to lose PHP 2 million from other dealers. Tocoms also alleged that PELI offered unreasonable terms to buy back its inventories where it stood to lose about PHP12 million and was pressuring Tocoms to accept the terms by recalling the Import Commodity Clearance (ICC) needed to sell said products in the Philippines. Moreover, Tocoms also alleged that the new distributor Fabriano had been selling the licensed products at a much lower price even before the termination of the agreement, and had prodded Western Marketing to return the products it purchased from Tocoms, to the injury of the latter.

PELI filed a motion to dismiss Tocoms complaint on the ground of lack of cause of action, which was denied by the Regional Trial Court, but granted on appeal by the CA because the agreement was non-exclusive, and had already expired when Tocoms filed its complaint. The Supreme Court, however, reversed the CA's decision and ruled that if the allegations made by Tocoms were hypothetically admitted, the acts constitute bad faith on the part of PELI and the court may validly award damages in favour of Tocoms. The SC further observed that PELI, not having filed its answer, has not yet been able to prove that its acts were done without malice and bad faith. The SC ruled that the concept of bad faith denotes a dishonest purpose, moral deviation, and a conscious commission of a wrong and that bad faith under the law cannot be presumed – it must be established by clear and convincing evidence. As such the case must be reinstated so that PELI may prove good faith in its dealings with Tocoms in the context of the expiration of its distributorship agreement.

more from across site and SHARED ros bottom lb

More from across our site

Managing IP’s parent company, LBG, will acquire The Lawyer, a leading news, intelligence, and data-driven insight provider for the legal industry, from Centaur Media
In major recent developments, a team of partners broke away from Taylor Wessing to form their own firm, while Kilburn & Strode made a strategic UPC hire
General Court backs Christian Archambeau in some of his challenges against his departure, but dismisses others
Morgan Lewis adds three partners with technical depth, reinforcing the firm’s strategy to bridge legal and tech expertise in patent litigation
The firm posted a 13% increase in profit as well as a rise in overall revenue
Catherine Lee, one of Managing IP’s Top 250 Women in IP 2025, discusses her ‘soft’ approach to leadership and why building a community at work is important
Transactions specialists at Paul Weiss are advising on the high-profile split of Kraft Heinz into two companies, while Skadden is also involved in the deal
Youngmin Park joins us for our ‘Five minutes with’ series to discuss learning languages, moonlighting as a drummer, and why late is better than never
The record-breaking $1.5 billion settlement between the AI company and book authors may not lead to rapid resolution of other cases, say copyright lawyers
Leaders at two Brazilian law firms outline strategies to adjust to trademark fee changes at Brazil's IP office while urging clients to apply before September 20
Gift this article