Court rules on good faith in distributorship agreements

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.