G.R. No. 159586 , July 26, 2004
European Resources and Technologies, Inc. and Delfin J. Wenceslao, petitioners, vs. Ingenieuburo Birkhahn + Nolte, Ingeniurgesellschaft mbh and Heers & Brockstedt GMBH & Co., respondents.

FACTS

Respondents, collectively the German Consortium, were awarded a contract by Clark Development Corporation (CDC) to construct, operate, and manage an Integrated Waste Management Center at the Clark Special Economic Zone (CSEZ) for 25 years. The Contract for Services required the German Consortium to organize a local corporation. Pursuant to this, the German Consortium entered into a Memorandum of Understanding (MOU) with D.M. Wenceslao and Associates, Inc. (DMWAI) and Ma. Elena B. Villarama to jointly form a local corporation, petitioner European Resources and Technologies, Inc. (ERTI). The MOU stipulated that a Shareholders’ Agreement was to be finalized within one month, failing which the MOU would be null and void. No Shareholders’ Agreement was executed. Nevertheless, on August 1, 2000, the German Consortium and ERTI entered into a Memorandum of Agreement (MOA) whereby the German Consortium ceded its rights under the CDC contract to ERTI. The MOA contained an arbitration clause for disputes. On December 11, 2000, the German Consortium, citing CDC’s disapproval of the assignment and the failure to finalize the Shareholders’ Agreement, terminated its agreements with ERTI. The German Consortium then filed a complaint for injunction before the Regional Trial Court (RTC) of Angeles City to stop ERTI from misrepresenting it had rights to the waste management project. Petitioners objected, arguing the RTC lacked jurisdiction because the German Consortium was an unlicensed foreign corporation doing business in the Philippines and that the dispute was governed by the MOA’s arbitration clause. The RTC overruled the objections and granted a writ of preliminary injunction. The Court of Appeals sustained the RTC.

ISSUE

1. Whether the German Consortium, as an unlicensed foreign corporation, had the capacity to sue in Philippine courts.
2. Whether the dispute between the parties was covered by the arbitration clause in the MOA.
3. Whether the issuance of the writ of preliminary injunction was proper.

RULING

1. On the capacity to sue: The Supreme Court ruled that the German Consortium was estopped from denying it was doing business in the Philippines. By participating in the public bidding, executing the Contract for Services with CDC for a 25-year term to operate a waste management center, and organizing a local corporation to implement the project, the German Consortium performed acts for which it was created, constituting “doing business.” However, petitioners were likewise estopped from assailing the German Consortium’s lack of capacity to sue. Petitioners had entered into the MOU and MOA with the Consortium, thereby recognizing its existence and capacity to contract. A party who has contracted with a foreign corporation cannot later repudiate the contract or challenge the corporation’s capacity to sue for its enforcement. The objection to the capacity to sue was deemed waived.
2. On the arbitration clause: The Supreme Court ruled that the dispute was not covered by the arbitration clause in the MOA. The arbitration clause referred to disagreements “relative to the interpretation or implementation of the MOA and the collateral documents including but not limited to the Contract for Services.” The German Consortium’s complaint for injunction was based on its rights under the original Contract for Services with CDC, from which it claimed ERTI was unlawfully interfering. The core issue was the protection of the German Consortium’s proprietary rights under its direct contract with CDC, not the interpretation or implementation of the MOA between the Consortium and ERTI. Since the MOA had been terminated by the Consortium, the arbitration clause therein could not be invoked to oust the RTC of its jurisdiction over an injunctive suit aimed at protecting a separate and distinct legal right.
3. On the propriety of the injunction: The Supreme Court ruled that the issuance of the writ of preliminary injunction was improper. A preliminary injunction is a preservative remedy to protect existing rights. The German Consortium sought to restrain ERTI from representing it had rights to the project. However, the factual and legal basis for the German Consortium’s exclusive right was seriously contested. CDC had disapproved the assignment to ERTI, and the underlying MOU was potentially null and void due to the non-execution of the Shareholders’ Agreement. These circumstances created a serious doubt regarding the German Consortium’s clear and unmistakable right that needed protection. The RTC should have first resolved these underlying issues on the validity of the termination and the parties’ respective rights before granting injunctive relief. The injunction effectively decided the main case without a full trial on the merits.
DISPOSITIVE:
The Petition was PARTLY MERITORIOUS. The Court of Appeals’ decision was AFFIRMED with respect to the ruling that petitioners were estopped from questioning the German Consortium’s capacity to sue and that the arbitration clause was inapplicable. However, the grant of the writ of preliminary injunction by the RTC was REVERSED and SET ASIDE.