Atty. Hubert B. Guevara

August 16, 2002 SEC OPINION Atty. Hubert B. Guevara Joaquin, Guevara Adarlo & Caoile Law Offices Unit 1008 The Atlanta Center, 31 Annapolis Street, Greenhills, 1502 San Juan, Metro Manila, Philippines S i r : This refers to your letter dated January 28, 2002 requesting for Opinion on whether or not the proposed activities of your client falls within the coverage of "retail trade". Based on the information contained in your letter, you disclosed that your client Adidas Philippines, Inc., a wholly-owned subsidiary of a German company, Adidas AG intends to distribute on consignment, its merchandise through its so called key accounts , who in turn, will sell the said products directly to the public. You are presenting this query in the light of questions raised by the decision of the Supreme Court in Ker & Co., Ltd., vs. Jose B. Lingad (G.R. No. L-20871, April 30, 1971), which ruled that Ker, the distributor of the products of United States Rubber International is merely an agent of the latter. Although the case primarily tackled the issue based on its tax angle, you express concern that said ruling may be used to consider the distribution contemplated by your client as falling within the category of a retail sale made by your client itself considering that its key accounts may be considered as mere agents of your client. Under Section 3(1) of RA 8762 the term "retail trade" is defined as follows: (1) "Retail Trade" shall mean any act, occupation or calling of habitually selling direct to the general public merchandise, commodities or goods for consumption. The Supreme Court has ruled, in the case of Marsman & Co., Inc. v. First Coconut Central Co., Inc. (162 SCRA 206) that for a sale to be considered as retail, the following three (3) elements must concur: (1) The seller should be habitually engaged in selling; (2) The sale must be direct to the general public; (3) The object of the sale is limited to merchandise, commodities or goods for consumption. In other words, the goods must be "consumption goods" or "consumer goods." There is, additionally, a fourth element, viz., that the target client/buyer and/or actual client/buyer should not be any of the following: a. Industrial and commercial users or consumers who will use the consumer goods bought by them to render service to the general public; and/or produce or manufacture goods which are in turn sold by them; and b. The national government, its bureaus, offices, agencies, instrumentalities, and local government units, and government owned or controlled corporations. The above-mentioned exceptions under RA 1180 and cited in Marsman have been incorporated to the new implementing rules (IRR) of RA 8762, An Act Liberalizing the Retail Trade Business. Under Section 2 of the implementing rules of RA 8762 The following sales are not considered as retail: "(e) Sales to industrial and commercial users or consumers who use the products bought by them to render service to the general public and/or manufacture of goods which are in turn sold by them." Black, in his definition of a "retailer", based his assertions from the point of view of the end-user. According to him: HIACEa "The essential distinction between a "wholesaler" and "retailer" as respects application of the Fair Labor Standards Act is that the person buying from the retailer is the ultimate user or consumer of the article or commodity or does not sell it again whereas the one buying from a wholesaler buys only for the purpose of selling the article again." Article 1458 of the Civil Code provides that: "By the contract of sale one of the contracting parties obligates himself to transfer the ownership of and to deliver a determinate thing, and the other to pay therefore a price certain in money or its equivalent. A contract of sale may be absolute or conditional." In the situation before us, the activities of Adidas Philippines, Inc. are outside of the scope of retail trade because of the basic nature of the business of the key account, which, as a retailer must source the goods sold by it in the ordinary course of business from manufacturers and distributors like your client, without whose products, the key account, as a commission merchant, cannot sell anything. In the normal course of commercial transactions, the distributors or manufacturers usually consign the goods in bulk to the key account (retailer), who will sell the products in its name and according to its own pricing system. The goods distributed by manufacturers or distributors are usually replenished and paid for on a monthly basis in accordance with the volume of sales made by the key account (retailer) to the public at large. The contract of consignment always involves a sale in bulk, to be paid on the occurrence of a suspensive condition that the same be sold by the key account (retailer), in its own name to the public. Webster has defined consignment as "a method of wholesale or jobber selling whereby the retailer pays for goods only after he has sold them." In the case before us, the distribution made by your client adidas is made in bulk or wholesale to its key accounts (shopping malls), who in turn, will pay the goods to your client only after it has resold them to a third person. Although an agency contract might have been created by such an agreement between your client and its key accounts (although that matter remains in dispute since the case of Ker does not apply squarely in this case), the fact remains that said sale is not made directly by your client adidas to the public. Black's Law Dictionary defined the word "direct" as "without any intervening medium, agency or influence." Assuming arguendo that an agency contract might be construed to exist between adidas and the key account, the fact remains that the sale, based on the definition of Black, and for purposes of applying the retail trade law, was not made by Adidas directly to the public. On the issue of whether or not a sale has been perfected as between your client and its key accounts (department stores), it is important to note that the existence of some form of agency between them has no bearing on the fact that a contract of sale has been perfected as between them, albeit conditional. Under the law, a contract of sale may be absolute or conditional, and whether or not a sale is perfected for purposes of application of the retail trade is not dependent on the actual transfer of title of goods. The important condition, simply being, that there exists an obligation on the part of the seller to transfer title and to deliver a determinate thing; and on the buyer, the corollary obligation to pay the price in money or its equivalent. On the part of adidas , there is undeniably the obligation to transfer title to the goods. On the part of the key account, there is created, the obligation to pay a sum certain in money, to be paid in due time, upon the happening of the suspensive condition of the goods being resold by the key account to a third person. In a contract of sale, three elements must concur: a) There must be a meeting of the minds, b) as to the object of the sale c) and the price or consideration. In the instant case, there is a meeting of the minds as to the transfer of goods (shoes) in consideration of money. The object of the sale is determinate or capable of determination (the object being the shoes physically transferred into the possession of the key account), and there is a price certain in money (there is a fixed price) for the goods. The only unique feature of this contract is that the payment shall be made by the key account (the retailer) after the goods are in turn, resold by it to the public. In the subject case, the fact that the key account will have to pay your client for the goods sold means that the direct transaction is one between the key account and your client. It is a conditional sale whereby title to the goods is reserved to the seller until buyer pays for the goods. A sale therefore, is already perfected, consummated only upon payment of the goods by the key account, conditioned upon the goods being resold to the public by the latter. Consequently, no direct sale is made to the public. One element of retail is therefore, missing. On the issue of the nature of goods being distributed, said goods cannot qualify as "consumer goods" for the simple reason that they are intended for resale by retail establishments which can classify them as necessary factors in their business of selling goods. Therefore, the sale is not for final consumption nor is it made to the ultimate consumer, which is an essential ingredient in a retail sale. It would not be remiss to point out that in the situation presented, the key account (the department store) is the actual retailer, identified by the buying public as the seller of the said goods in the ordinary course of its business. Once a product is bought from the department store, a receipt is issued in the name of the department store. To classify all distributors of goods to department stores or drugstores, for that matter as retailers would create serious repercussions in the retail industry. It might discourage distributors or manufacturers with foreign equity from consigning their goods with department stores drugstores or retailers lest they be accused of violating the provisions of applicable retail laws. At any rate, let it be known that on May 21, 1984, the Supreme Court ruled, in the case of La Chemise Lacoste vs. Fernandez (G.R. No. 63796-97) that Rustan Commercial Corporation, an exclusive distributor of Lacoste Products, being an independent entity which buys and then markets not only products of the petitioner but also many other products bearing equally well-known and established trademarks and tradenames, " is not a mere agent or conduit of the petitioner . The Court ruled that Rustan is actually a middleman acting and transacting business in its own name and/or its own account and not in the name of or for the account of the petitioner. In fact the Court, citing PD No. 1789, otherwise known as the Omnibus Investments Code ruled that "(1) . . . A foreign firm which does business through middlemen acting on their own names, such as indentors, commercial brokers, or commission merchants shall not be deemed doing business in the Philippines. But such indentors, commercial brokers or commission merchants shall be the ones deemed to be doing business in the Philippines." Applying the aforementioned principle to the case at hand, it would be safe to assume that if a corporation doing business through a middleman acting on its own name shall not be deemed to be doing business in the Philippines, it is with more reason to state that a subsidiary distributing goods to a middleman acting on its own name is likewise not engaged in retail trade. We trust that the above explanation satisfies your query. aEACcS Very truly yours, (SGD.) JESUS ENRIQUE C. MARTINEZ Commissioner