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University of Santo Tomas

Faculty of Civil Law

MERCANTILE
LAW
Questions Asked More
Than Once
(QuAMTO 2017)

*QUAMTO is a compilation of past bar questions with answers as suggested by


UPLC and other distinct luminaries in the academe, and updated by the UST
Academics Committee to fit for the 2017 Bar Exams.

*Bar questions are arranged per topic in accordance with the bar syllabus
released by the Supreme Court and were selected based on their occurrence
on past bar examinations from 1987 to 2016.
ACADEMICS COMMITTEE
CAMILLE ANGELICA B. GONZALES SECRETARY GENERAL

EMNIE VALERIE B. DURAN


IRVIN L. PALANCA
EXECUTIVE COMMITTEE
LARA NICOLE T. GONZALES
MARIELLA A. MARASIGAN

CAMILLE ANGELICA B. GONZALES LAYOUT AND DESIGN

QUAMTO COMMITTEE MEMBERS

JACKIELYN KRYSTYL NIHAMA BANA


KARL ANTHONY BULAONG
MERVIN MARCOS
KELLY ANN RUBIN
NESTOR FERNANDO SIAZON

ATTY. AL CONRAD B. ESPALDON


ADVISER
QUAMTO (1987-2016)

agreement for the issuance of letter of credit by the


MERCANTILE LAW QUAMTO
bank.
2. Issuing Bank and the Beneficiary/Seller/Exporter –
The issuing bank is the one who undertakes to pay the
LETTERS OF CREDIT beneficiary upon strict compliance of the latter to the
requirements set forth in the letter of credit.
3. Applicant and Beneficiary – The applicant is the one
DEFINITION AND NATURE OF LETTER OF CREDIT who procures the letter of credit and obliges himself to
reimburse the issuing bank upon receipt of the
Q: Explain the nature of Letters of Credit as a financial documents of title while the beneficiary is the one who,
devise. (2012 Bar) in compliance with the contract of sale, ships the goods
to the buyer and delivers the documents of title and
A: A letter of credit is a financial device developed by draft to the issuing bank to recover payment for the
goods. The relationship between them is governed by
merchants
dealing with as sales
a convenient
of goods andto relatively safeseemingly
satisfy the mode of the law on sales if it is a commercial letter of credit but
irreconcilable interests of a seller, who refuses to part with if it is a stand-by letter of credit it is governed by the law
his goods before he is paid, and a buyer, who wants to have on obligations and contract.
control of the goods before paying. The use of credits in
commercial transactions serves to reduce the risk of RIGHTS AND OBLIGATIONS OF PARTIES
nonpayment of the purchase price under the contract for
the sale of goods and to reduce the risk of nonperformance Q: Ricardo mortgaged his fishpond to AC Bank to secure
of an obligation in a non-sale setting. (Transfield Philippines a P1M loan. In a separate transaction, he opened a letter
Inc. vs. Luzon Hydro Corp., November 22, 2004) of credit with the same bank for $500,000 in his favor
of HS Bank, a foreign bank, to purchase outboard
Q: Is the Uniform Customs and Practice for motors. Likewise, Ricardo executed a Surety
Documentary Credits of the International Chamber of Agreement in favor of AC Bank.
Commerce applicable to commercial letters of credit
issued by a domestic bank even if not expressly The outboard motors arrived and were delivered to
mentioned in such letters of credit? What is the basis Ricardo, but he was not able to pay the purchase price
for your answer? (2015 Bar) thereof.

A: Yes , the Supreme Court held that the observance of the a. Can AC Bank take possession of the outboard
motors? Why?
Uniform
by ArticleCustoms and Practice
2 of the Code of Comm inerce
the Philippines is justified
which enunciates that b. Can AC Bank also foreclose the mortgage over the
in the absence of any particular provision in the Code of fishpond? Explain. (2005 Bank)
Commerce, commercial transaction shall be governed by
usage and customs generally observed. (Bank of the A:
Philippine Islands v. De Reny Fabric Industries, Inc. 35 SCRA a. If what Ricardo executed is a trust receipt, AC Bank can
253) take possession of the outboard motors so that it can
exercise its lien and sell them. If what Ricardo executed
Q: Explain what is a “Letter of Credit” as a fi nancial is a Surety Agreement, AC Bank cannot take possession
device and a “Trust Receipt” as a security to the Letter of the outboard motors, because it has no lien on them.
of Credit. (2016 Bar) b. AC Bank can also foreclose the mortgage over the
fishpond if Ricardo fails to pay the loan of P1M.
A: A letter of credit is any arrangement however named or
described whereby a bank acting upon the request of its Q: In letters of credit in banking transactions,
client or on its behalf agrees to pay another against distinguish the liability of a confirming bank from a
stipulated documents provided that the terms of the credit notifying bank. (1994 Bar)
are complied with (Section 2 of the Uniform Customs and
Practices for Documentary Credit). A trust receipt is an A: In case anything wrong happens to the letter of credit, a
arrangement whereby the issuing bank (referred to as the confirming bank incurs liability for the amount of the letter
of credit, while a notifying bank does not incur any liability.
entruster under the trust receipt) releases the imported
goods to the importer (referred to as the entru stee) but that
the latter in case of sale must deliver the proceeds thereof BASIC PRINCIPLES OF LETTER OF CREDIT
to the entruster up to the extent of the amount owing to the
entruster or to return the goods in case of non-sale. Doctrine of Independence

PARTIES TO A LETTER OF CREDIT Q: X Corporation entered into a contract with PT


Construction Corporation for the latter to construct and
Q: Explain the three (3) distinct but intertwined build a sugar mill within six (6) months. They agreed
contract relationships that are indispensable in a letter that in case of delay, PT Construction Corporation will
of credit transaction. (2002 Bar) pay X Corporation P100,000 for every day of the delay.
To ensure payment of the agreed amount of damages,
A: The following are the three (3) distinct relationships PT Construction Corp. secured from Atlantic Bank a
arising from a letter of credit: confirmed and irrevocable letter of credit which was
accepted by X Corporation in due time. One week
1. Issuing Bank and the Applicant/Buyer/Importer– before the expiration of the six (6) month period, PT
The applicant has the obligation to pay what the issuing Construction Corp. requested for an extension of time
bank has paid to the beneficiary with the cost and to deliver claiming that the delay was due to the fault of
interest on the letter of credit. Their relationship is X Corporation. A controversy as to the cause of delay

governed by the terms of the application and which involved the workmanship of the building

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Mercantile Law

ensued. The controversy remained unsolved. Despite obligation to pay does not depend on the fulfillment or non-
the controversy, X Corporation presented a claim fulfillment of the srcinating contract. It arises upon tender
against Atlantic Bank by executing a draft against the of the stipulated documents under the letter of credit. In the
letter of credit. present case, the tender of the certificate of default entitles
Y to payment under the standby letter of credit
a. Can Atlantic Bank refuse payment due to the notwithstanding the fact that X Company was not in default.
unresolved controversy? Explain. This is without prejudice to the right of X Company to
b. Can X Corporation claim directly from PT proceed against Y Company under the law on contracts and
Construction Corp.? Explain. (2008 Bar) damages. (Insular Bank of Asia and America v. IAC, 167 SCRA
450)
A:
ALTERNATIVE ANSWER:
a. Atlantic Bank cannot refuse to pay X Corporation. This
is because of the Doctrine of Independence which Under the fraud exception principle, the beneficiary may be
provides that the obligation of the issuing bank to pay enjoined from collecting on the letter of credit in case of
the beneficiary does not depend on the fulfillment or fraudulent abuse of credit. The issuance of a certificate of
non-fulfillment of the contract supporting the letter of default despite the fact that X Company is not in default
credit. The only instance where Atlantic Bank can constitutes fraudulent abuse of credit. (Transfield
refuse payment is when X Corporation wasn’t able to Philippines v. Luzon Hydro Corporation, 443 SCRA 307)
strictly comply with the conditions set forth in the
letter of credit. FRAUD EXCEPTION PRINCIPLE
b. X Corporation may directly claim from PT
Construction Corporation. A letter of credit by itself Q: The Supreme Court has held that fraud is an
does not come into operation without a contract exception to the “independence principle” governing
supporting it. It is not a contract that can stand on its letters of credit. Explain this principle and give an
own, it needs a supporting contract. It is merely an example of how fraud can be an exception. (2010 Bar)
alternative recourse and does not in any way prevent
the beneficiary from directly claiming from the A: The “independence principle” posits that the obligations
applicant. (Transfield Phils. Inc. v. Luzon Hydro of the parties to a letter of credit are independent of the
Corporation, G.R. No. 146717, Nov 22, 2004). obligations of the parties to the underlying transaction.
Thus, the beneficiary of the letter of credit, which is able to
Q: ABC Company filed a Petition for Rehabilitation with comply with the documentary requirements under the
the Court. An Order was issued by the Court, (1) staying letter of credit, must be paid by the issuing or confirming
enforcement of all claims, whether money or otherwise bank, notwithstanding the existence of a dispute between
against ABC Company, its guarantors and sureties not the parties to the underlying transaction, say a contract of
solidarily liable with the company; and (2) prohibiting sale of goods where the buyer is not satisfied with the
ABC Company from making payments of its liabilities, quality of the goods delivered by the seller. The Supreme
outstanding as of the date of the filing of the Petition. Court in Transfield Philippines, Inc. v. Luzon Hydro
XYC Company is a holder of an irrevocable Standby Corporation, 443 SCRA 307 (2004) for the first time declared
Letter of Credit which was previously procured by ABC that fraud is an exception to the independence principle.
Company in favor of XYC Company to secure For instance, if the beneficiary fraudulently presents to the
performance of certain obligations. In the light of the issuing or confirming bank documents that contain material
Order issued by the Court, can XYC Company still be facts that, to his knowledge, are untrue, then payment under
able to draw on their irrevocable Standby Letter of the letter of credit may be prevented through court
Credit when due? Explain your answer. (2012 Bar) injunction.

A: XYC Company, the beneficiary of the standby letter of DOCTRINE OF STRICT COMPLIANCE
credit, can draw on the letter of credit despite filing of
petition for corporate rehabilitation. The liability of the Q: BV agreed to sell to AC, a Ship and Merchandise
bank that issued the letter of credit is primary and solidary. Broker, 2500 cubic meters of logs at $27 per cubic
Being solidary, the claims against them can be pursued meter FOB. After inspecting the logs, CD issued a
separately from and independently of the rehabilitation purchase order.
case. (MWSS v. Daway G.R. No. 142381. October 15, 2003)
On the arrangements made upon instruction of the
Q: A standby letter of credit was issued by ABC Bank to consignee, H &T Corporation of LA, California, the SP
secure the obligation of X Company to Y Company. Bank of LA issued an irrevocable letter of credit
Under the standby letter of credit, if there is failure on available at sight in favor for the total purchase price of
the part of X Company to perform its obligation, then Y the logs. The letter of credit was mailed to FE Bank with
Company will submit to ABC Bank a certificate of the instruction “to forward it to the beneficiary”. The
default (in the form prescribed under the standby letter letter of credit provided that the draft to be drawn is on
of credit) and ABC Bank will have to pay Y Company the SP Bank and that it be accompanied by, among other
defaulted amount. Subsequently, Y Company submitted things, a certification from AC, stating that the logs have
to ABC Bank a certificate of default notwithstanding the been approved prior shipment in accordance with the
fact that X Company was not in default. Can ABC Bank terms and conditions of the purchase order.
refuse to honor the certificate of default? Explain.
(2015 Bar) Before loading on the vessel chartered by AC, the logs
were inspected by custom inspectors and
A: No. Under the doctrine of independence in a letter of representatives of the Bureau of Forestry, who certified
credit, the obligation of the issuing bank to pay the to the good condition and exportability of the logs. After
beneficiary is distinct and independent from the main and loading was completed, the Chief Mate of the vessel
srcinating contract underlying the letter of credit. Such issued a mate receipt of the cargo which stated that the

2
UST BAR OPERATIONS
QUAMTO (1987-2016)

logs are in good condition. However, AC refused to issue the borrower, lends his money to the borrower on
the required certification in the letter of credit. Because security of the goods, which the borrower is privileged
of the absence of certification, FE Bank refused to to sell clear of lien on agreement to pay all or part of the
advance payment on the letter of credit. proceeds of sale to the lender. The term is specifically
applied to a written instrument whereby a banker
a. May FE Bank be held liable under the letter of having advanced money for purchase of imported
credit? Explain. merchandise and having taken title in his own name,
b. Under the facts above, the seller, BV, argued that FE delivers possession to an importer on agreement in
Bank, by accepting the obligation to notify him that writing to hold the merchandise in trust for the banker
the irrevocable letter of credit has been until he is paid. Finally, a document executed between
transmitted to it on his behalf, has confirmed the an entrustor and an entrustee, under which the goods
letter of credit. Consequently, FE Bank is liable are released to the latter who binds himself to hold the
under the letter of credit. Is the argument tenable? goods in trust, or to sell or dispose of the goods with the
Explain. (1993 Bar) obligation to turn over the proceeds to the entrustor to
the extent of the entrustee’s obligation to him, or if
A: unsold, to return the same.
b. The case of estafa against C will not prosper. PD 115
a. FE Bank cannot be held liable under the letter of credit does not apply in this case because the proceeds of the
since the certificate is not issued by BV. It is a settled loan are used to renovate C’s commercial building.
rule in commercial transactions involving letters of Trust receipts transactions are intended to aid in
credit that the documents tendered must strictly financing importers and retail dealers who do not have
conform to the terms of the letter of credit. The tender sufficient funds or resources to finance the importation
of documents by the beneficiary (seller) must include or purchase of merchandise, and who may not be able
all documents required by the letter. A correspondent to acquire credit except through utilization, as
bank which departs from what has been stipulated collateral, of the merchandise imported or purchased.
under the letter of credit, as when it accepts a faulty The transactions contemplated under the Trust
tender, acts on its own risks and it may not thereafter Receipts Law mainly involved acquisition of goods for
be able to recover from the buyer or the issuing bank, the sale thereof. The transaction is properly called a
as the case may be, the money thus paid to the simple loan with the trust receipt merely as a collateral
beneficiary. Thus the rule of strict compliance. (Feati or security for the loan. ( Ng v. People G.R. No. 173905,
Bank and Trust Company v. Court of Appeals, G.R. No. April 23, 2010 citing Samo v. People, G.R. No. L-17603-04,
94209, April 30, 1991) May 31, 1962; Consolidated Bank and Trust Corporation
b. The argument made by BV is untenable. The FE Bank in
this case is only a notifying bank and not a confirming v. Court of Appeals, 356 SCRA 671)
bank. It is tasked only to notify and/or transmit the
Q: A buys goods from a foreign supplier using his credit
required documents and its obligation ends there. It is
line with a bank to pay for the goods. Upon arrival of the
not privy to the contract between the parties, its
goods at the pier, the bank requires A to sign a trust
relationship is only with that of the issuing bank and
receipt before A is allowed to take delivery of the goods.
not with the beneficiary to whom he assumes no
The trust receipt contains the usual language. A
liability.
disposes of the goods and receives payment but does
not pay the bank. The bank files a criminal action
against A for violation of the Trust Receipts Law. A
TRUST RECEIPTS asserts that the trust receipt is only to secure his debt
and that a criminal action cannot lie against him
because that would be violative of his constitutional
Q: C contracted D to renovate his commercial building. right against “imprisonment for non -payment of a
D ordered construction materials from E and received debt.” Is he correct? (1997 Bar)
delivery thereof. The following day, C went to F Bank to
apply for a loan to pay the construction materials. As A: No. Violation of a trust receipt is criminal as it is punished
security for the loan, C was made to execute a trust as estafa under Art. 315 of the RPC. There is a public policy
receipt. One year later, after C failed to pay the balance involved which is to assure the entruster with the
on the loan, F Bank charged with violation of the Trust reimbursement of the amount advanced or the balance
Receipts Law. thereof for the goods subject of the trust receipt. The
execution of the trust receipt or the use thereof promotes
a. What is a Trust Receipt? the smooth flow of commerce as it helps the importer or
b. Will the case against C prosper? Reason briefly buyer of the goods covered thereby.
(2007 Bar)
Q:
A:
a. A trust receipt is a written or printed document signed a. Maine Den, Inc. opened an irrevocable letter of
by the entrustee in favor of the entruster containing credit with Fair Bank, in connection with Maine Den
terms and conditions substantially complying with the Inc.’s importation of spare parts for its textile mills.
provision of PD 115 whereby the bank as entruster The imported parts were released to Maine Den,
releases the goods to the possession of the entrustee Inc. after it executed a trust receipt in favor of Fair
but retain ownership thereof while the entrustee may Bank. When Maine Den, Inc. was unable to pay its
sell the goods and apply the proceeds for the full obligation under the trust receipt, Fair Bank sued
payment of his liability to the bank. [ Sec. 3 (j), Trust Maine Den, Inc. for estafa under the Trust Receipts
Receipts Law] It is also defined as a document in which Law. The court, however, dismissed the suit. Was
is expressed a security transaction, where the lender, the dismissal justified? Why or why not?
having no prior title in the goods on which the lien is to b. Does the rule “res perit domino” apply in trust
be given, and not having possession which remains in receipt transactions? Explain. (2015 Bar)

3
Mercantile Law

Q: What acts or omissions are penalized under the


A: Trust Receipts Law? (2006 Bar)
a. The dismissal of the complaint for estafa is justified.
Under recent jurisprudence, the Supreme Court held A: Sec. 13 of P.D. 115, Trust Receipts Law, provides that the
that transactions referred to in relation to trust failure of an entrustee to turn over the proceeds of the sale
receipts, mainly involved sales, and if the entruster of the goods, documents or instruments covered by a trust
knew even before the execution of the alleged trust receipt to the extent of the amount owing to the entruster
receipt agreement that the goods subject of the trust or as appears in the trust receipt or to return said goods,
receipt were never intended by the entrustee for resale documents or instruments if they were not sold or disposed
or for the manufacture of items to be sold, the of in accordance with the terms of the trust receipt shall
agreement is not a trust receipt transaction but a constitute the crime of estafa.
simple loan, notwithstanding the label. In this case, the
object of the trust receipt, spare parts for textile mills, Q: Is lack of intent to defraud a bar to the prosecution of
were for the use of the entrustee and never intended for these acts or omissions? (2006 Bar)
sale. As such, the transaction is a simple loan. (Ng v.
People of the Philippines, G.R. No. 173905, April 23, 2010; A: No. Lack of intent to defraud is immaterial to the
Land Bank V. Perez, G.R. No. 166884, June 13, 2012 ; and prosecution for estafa under Trust Receipts Law. The mere
Hur Ting Yang v. People of the Philippines, G.R. No. failure to account or to return gives rise the crime which is
195117, August 14, 2013) a malum prohibitum.
b. No. This is because the loss of the goods, documents or
instruments which are the subject of a trust receipt RIGHTS OF THE ENTRUSTER
pending their disposition, irrespective of whether or
not it was due to the fault or negligence of the entrustee, Q: Mars Trading, Inc. (MT) imported various
shall not extinguish the entrustee’s obligation to the construction materials from Japan, under a letter of
entruster for the value thereof. credit-trust receipt (LC/TR) line provided by Filipinas
Bank. When the goods arrived in Manila, the same were
Also, while the entruster is made to appear as owner of released to MTI upon the latter’s execution of a trust
the goods covered by the trust receipt, such ownership receipt whereby MTI undertook to hold the goods in
is only a legal fiction to enhance the entruster’s security trust for the bank. The trust receipt further provided
interest over the goods. ( Section 10 of Pres. Decree No. that upon sale of the goods, the entrustee (MTI) will
115; Rosario Textile Mills Corp. v. Home Bankers Savings turn over the proceeds of the sale to the entrusting
and Trust Company, G.R. No. 1372323, June 29, 2005, 462 bank to the extent of the amount of U.S. $100, 000 owed
SCRA 88) by MTI to the bank on account of its importation, which
amount shall be paid in Philippine currency based on
LOAN/SECURITY FEATURE the rate of exchange prevailing at the time of payment.
MTI sold the goods 6 months later, during which the
Q: Delano Cruz is in default in the payment of his time the peso-dollar rate of exchange deteriorated
existing loan from BDP Bank. To extend and restructure substantially. MTI refused to pay Filipinas Bank
this loan, Delano agreed to execute a trust receipt in the contending that:
bank’s favor covering the iron pellets Delano imported
from China one year earlier. Delano subsequently a. The trust receipt stipulation to pay the peso
succeeded in selling the iron pellets to a smelting plant, equivalent of $100, 000 violated the Uniform
but the proceeds went to the payment of the separation Currency Act, rendering the trust receipt void, and
benefits of his employees who were laid off as he b. Assuming arguendo that such stipulations were
reduced his operations. enforceable, MIT should pay only on the basis of the
rate of exchange prevailing on the date when the
When the extended loan period expired without any goods were released.
significant payment from Delano (not even to the extent
of the proceeds of the sale of the iron pellets), BDP Bank Decide with reasons. (1987 Bar)
consulted you to on how to pr oceed against Delano. The
bank is contemplating the filing of estafa pursuant to A:
the provisions of PD 115 (Trust Receipts Law) to force
Delano to turn in at least the proceeds of the sale of the a. MIT is liable since only the stipulation requiring
iron pellets. payment on foreign currency is violative of the Uniform
Currency Act. The obligation itself under the law
Would you, as bank counsel and as officer of the court, subsists, which can be discharged by a payment in
advise the bank to proceed with its contemplated Philippine currency.
action? (2013 Bar) b. The basis of payment would be the rate of exchange
prevailing at the time of payment since the obligation
A: I will not advise BDP Bank to file a criminal case for estafa was incurred in foreign currency. Had the obligation
against Delano. Delano received the iron pellets he been incurred in Philippine currency then the rate of
imported one year before the trust receipt was executed. As exchange at the time the obligation was incurred would
held by the Supreme Court, where the execution of a trust have been the basis of payment.
receipt agreement was made after the goods covered by it
had been purchased by and delivered to the entrustee and OBLIGATION AND LIABILITY OF THE ENTRUSTEE
the latter as a consequence acquired ownership to the
goods, the transaction does not involve a trust receipt but a Q: CCC Car, Inc. obtained a loan from BBB Bank, which
simple loan even though the parties denominated the fund was used to import ten (10) units of Mercedes
transaction as one of trust receipt. (Colinares v. Court of Benz S class vehicles. Upon arrival of the vehicles and
Appeals, 339 SCRA 609, 2000; Consolidated Bank and Trust before release of said vehicles to CCC Car, Inc., X and Y,
Corporation v. CA, 356 SCRA 671, 2001 ) the President and Treasurer, respectively, of CCC Car,

4
UST BAR OPERATIONS
QUAMTO (1987-2016)

Inc. signed the Trust Receipt to cover the value of the employee of a corporation responsible for the violation of a
ten (10) units of Mercedes Benz S class vehicles after trust receipt is subject to the personal liability thereunder.
which, the vehicles were all delivered to the Car display
room of CCC Car, Inc. Sale of the vehicles were slow, and WAREHOUSEMAN’S LIEN
it took a month to dispose of the ten (10) units. CCC Car,
Inc. wanted to be in business and to save on various Q: Alex deposited goods for which Billy,
documentations required by the bank, decided that warehouseman, issued a negotiable warehouse receipt
instead of turning over the proceeds of the sales, CCC wherein the goods were deliverable to Alex or order.
Car, Inc. used the proceeds to buy another ten (10) units Alex negotiated the receipt to Caloy. Thereafter, Dario,
of BMW 3 series. a creditor secured judgment against Alex and served
notice of levy over the goods on the warehouseman.
Is the action of CCC Car, Inc. legally justified? Explain
your answer. (2012 Bar) a. To whom should the warehouseman deliver goods
upon demand?
A: No . It is the obligation of the entrustee, CCC Car, Inc. to b. Would your answer be the same if the
receive the proceeds of the sale of the goods covered by the warehouseman issued a non-negotiable warehouse
trust receipts in trust for the entruster and to turn over the receipt? (2007 Bar)
same to him to the extent of the obligation. (Sec. 4, Trust
Receipts Law) A:

Q: Will the corporate officers of CCC Car, Inc. be held a. Billy should deliver the goods to Caloy. Under the
liable under the circumstances? Explain your answer. Warehouse Receipts Act, the goods covered by the
(2012 Bar) negotiable receipt cannot be attached or levied upon
directly by the creditor. The creditor must resort to
A: Yes. Failure of the entrustee to turn over the proceeds of attaching or levying the receipt itself, not the goods,
the sale of the goods shall constitute the crime of estafa. If while in the possession of the debtor, Alex. Since Alex
the violation is committed by a juridical entity, the penalty has already negotiated it to Caloy, Dario cannot
shall be imposed upon the directors, officers, employees or anymore attach or levy the goods under the warehouse
other officials or persons therein responsible for the receipt.
offense, without prejudice to the civil liabilities arising from
b. A non-negotiable warehouse receipt is transferred thru
the criminal offense. Hence, the corporate officers are
simple assignment. Since Alex negotiated it instead of
criminally liable for the violation of the law being the
having it assigned, the conveyance of the warehouse
human agent responsible for the same. (Sec. 13, Trust
Receipts Law) receipt to Caloy is not valid; hence, Alex is still the
owner of the said goods. Dario could now attach or levy
the goods.
Q: Tom Cruz obtained a loan of P1M from XYZ Bank to
finance his purchase of 5,000 bags of fertilizer. He
executed a trust receipt in favor of XYZ Bank over the Q: Jojo deposited several cartons of goods with SN
5,000 bags of fertilizer. Tom Cruz withdrew the 5,000 Warehouse Corporation. The corresponding
bags from the warehouse to be transported to Lucena warehouse receipt was issued to the order of Jojo. He
City where his store is located. On the way, armed endorsed the warehouse receipt to EJ who paid the
robbers took from Tom Cruz the 5,000 bags of fertilizer. value of goods deposited. Before EJ could withdraw the
Tom Cruz now claims that his obligation to pay the loan goods, Melchor informed SN Warehouse Corporation
to XYZ Bank is extinguished because the loss was not that the goods belonged to him and were taken by Jojo
due to his fault. Is Tom Cruz correct? Explain. (2008 without his consent. Melchor wants to get the goods, but
Bar) EJ also wants to withdraw the same.

A: Tom Cruz is not correct in contending that his obligation a. Who has a better right to the goods? Why?
to pay the loan to XYZ Bank is extinguished. Sec. 10 of P.D. b. If SN Warehouse Corporation is uncertain as to who
115, Trust Receipts Law, provides that the loss of goods, is entitled to the property, what is the proper
documents or instruments which are the subject of a trust recourse of the corporation? Explain. (2005 Bar)

receipt,
or not it pending
was due their
to thedisposition, irrespective
fault or negligence of theofentrustee,
whether A:
shall not extinguish his obligation to the entruster for the
value thereof. Therefore, the entrustee cannot be relieved a. EJ has better right to the goods. The goods are covered
of their obligation to pay the loan in favor the bank. by a negotiable warehouse receipt which was indorsed
to EJ for value. The negotiation to EJ was not impaired
REMEDIES AVAILABLE by the fact that Jojo took the goods without the consent
of Melchor, as EJ had no notice of such fact. Moreover,
Q: Mr. Noble, as the President of ABC Trading, Inc., EJ is in possession of the warehouse receipt and only he
executed a trust receipt in favor of BPI Bank to secure can surrender it to the warehouseman. ( Sec. 8,
the importation by his company of certain goods. After Warehouse Receipts Law)
release and sale of the imported goods, the proceeds b. Under the Sec. 17 of Act 2137, Warehouse Receipt Law,
from the sale were not turned over to BPI. Would BPI be SN Warehouse Corporation may file an action for
justified in filing a case for estafa against Noble? (1991) interpleader and implead EJ and Melchor to determine
who is entitled to the said goods.
A: BPI would be justified in filing a case for estafa under PD
115 against Noble. The fact that the trust receipt issued in
Q: S stored hardware materials in the bonded
favor of a bank, instead of a seller, to secure the importation
warehouse of W, a licensed warehouseman under the
of the goods did not preclude the application of the Trust
General Bonded Warehouse Law (Act 3893 as
Receipts Law (PD 115). Under the law, any officer or

5
Mercantile Law

amended). W issued the corresponding warehouse recovery of a sum of money. The sheriff proceeded to
receipt in the form he ordinarily uses for such purpose levy upon the goods on a writ o f execution and directed
in the course of his business. All the essential terms the warehouseman to deliver the goods. Is the
required under Section 2 of the Warehouse Receipts warehouseman under obligation to comply with the
Law (Act 2137 as amended) are embodied in the form. sheriff’s order? (1998 Bar)
In addition, the receipt issued to S contains a
stipulation that W would not be responsible for the loss A: No. There was a valid negotiable receipt as there was a
of all or any portion of the hardware materials covered valid delivery of 200 cavans of rice for deposit. In such case,
by the receipt even if such loss is caused by the the warehouseman (LWC) is not obliged to deliver the 200
negligence of W or his representatives or employees. S cavans of rice deposited to any person, except to one who
endorsed and negotiated the warehouse receipt to B, can comply with Section 8 of the Warehouse Receipts law,
who demanded delivery of the goods. W could not namely: (1) surrender the receipt of which he is a holder;
deliver because the goods were nowhere to be found in (2) willing to sign a receipt for the delivery of the goods; and
his warehouse. He claims he is not liable because of the (3) pays the warehouseman’s liens, that is, his fees and
free-from-liability clause stipulated in the receipt. Do advances, if any.
you agree with W’s contention? Explain. (2000 Bar)
The sheriff cannot comply with these requisites, especially
A: No. I do not agree with the contention of W. the the first, as he is not the holder of the receipt.
stipulation that W would not be responsible for the loss of
all or any portion of the hardware materials covered by the Q: A purchased from S 150 cavans of palay on credit. A
receipt even if such loss is caused by the negligence of W or deposited the palay in W’s warehouse. W issued to A a
his representative or employees is void. The law requires negotiable warehouse receipt in the name of A.
that a warehouseman should exercise due diligence in the thereafter, A negotiated the receipt to B who purchased
care and custody of the things deposited in his warehouse. the said receipt for value and in good faith.

Q: A Warehouse Company received for safekeeping 1. Who has a better right to the deposit, S, the unpaid
1000 bags of rice from a merchant. To evidence the vendor, or B, the purchaser of the receipt for value
transaction, the Warehouse Company issued a receipt and in good faith? Why?
expressly providing that the goods be delivered to the 2. When can the warehouseman be obliged to deliver
order of said merchant. the palay to A? (1993 Bar)

A month after, a creditor obtained judgment against the A:


said merchant for a sum of money. The sheriff
proceeded to levy on the rice and directed the 1. B has a better right than S. The right of the unpaid seller,
Warehouse Company to deliver to him the deposited S, to the goods was defeated by the act of A in endorsing
rice. the receipt to B.
2. The warehouseman can be obliged to deliver the palay
a. What advice will you give the Warehouse Company? to A if B negotiates back the receipt to A. In that case, A
Explain your answer. becomes a holder again of the receipt, and A can comply
b. Assuming that a week prior to the levy, the receipt with Sec. 8 of the Warehouse Receipts Law.
was sold to a rice mill on the basis of which it filed a
claim with the sheriff. Would the rice mill have Q: To guarantee the payment of a loan obtained from a
better rights to the rice than the creditor? Explain bank, Raoul pledged 500 bales of tobacco deposited in
your answer. (1999 Bar) a warehouse to said bank and endorsed in blank the
warehouse receipt. Before Raoul could pay for the loan,
A: the tobacco disappeared from the warehouse.

a. The 1000 bags of rice were delivered to the Warehouse Who should bear the loss—the pledgor or the bank?
Company by a merchant, and a negotiable receipt was Why? (1992 Bar)
issued therefore. The rice cannot thereafter, while in
possession of the Warehouse Company, be attached by A: The pledgor should bear the loss. In the pledge of a
garnishment or otherwise, or be levied upon under an warehouse receipt the ownership of the goods remain with
execution unless the receipt be first surrendered to the depositor or his transferee. Any contract of real security,
warehouseman, or its negotiation enjoined. The among them a pledge, does not amount to or result in an
Warehouse Company cannot be compelled to deliver assumption of risk of loss by the creditor. The Warehouse
the actual possession of the rice until the receipt is Receipts Law did not deviate from this rule.
surrendered to it or impounded by the court.
b. Yes. The rice mill, as a holder for value of the receipt, Q: When is a warehouseman bound to deliver the goods
has a better right to the rice than the creditor. It is rice upon a demand made either by the holder of a receipt
mill that can surrender the receipt which is in its for the goods or by the depositor? (1991 Bar)
possession and can comply with the other
requirements which will oblige the warehouseman to A: The warehouseman is bound to deliver the goods upon
deliver the rice, namely, to sign a receipt for the demand made either by the holder of the receipt for the
delivery of the rice, and to pay the warehouseman’s lien goods or by the depositor if the demand is accompanied by
and fees and other charges. (a) an offer to satisfy the warehouseman’s lien, (b) an offer
to surrender the receipt, if negotiable, with such
Q: Luzon Warehouse Corporation received from Pedro indorsements as would be necessary for the negotiation
200 cavans of rice for deposit in its warehouse for thereof, and (c) readiness and willingness to sign when the
which a negotiable warehouse receipt was issued. goods are delivered if so requested by the warehouseman.
While the goods were stored in the said warehouse,
Cicero obtained a judgment against Pedro for the Q: Mr. Bakal deposited with a warehouseman 2 crates

6
UST BAR OPERATIONS
QUAMTO (1987-2016)

of goods for whi ch he received two warehouse receipts 2. The promissory note is not negotiable since the same is
(one for each crate) – one being a negotiable warehouse payable to Reliable Motors merely and not “to order or
receipt and the other a non-negotiable warehouse to bearer” or words of similar import.
receipt. Title to both warehouse receipts were Q: Discuss the negotiability or non-negotiability of the
transferred on December 1, 1985 to Mr. Tigas. The following notes:
warehouseman was not notified of the transfer of the
receipts. Meanwhile, Mr. Tapang, a judgment creditor 1. Manila, September 1, 1993
of Mr. Bakal, served a notice of levy over the goods on
the warehouseman. P2, 500.00

a. Between Mr. Tigas and Mr. Bakal, who would have I promise to pay Pedro San Juan or order the
preference over the goods covered by the sum of P2, 500.00
negotiable warehouse receipt? Reasons.
b. Who would have preference over the goods covered (Sgd.) NOEL CASTRO
by the non-negotiable receipt? Reasons. (1988 Bar)
2. Manila, June 3, 1993
A:
P10, 000.00
a. Mr. Tigas would have preference over the goods
covered by the negotiable warehouse receipt
For value received, I promise to pay Sergio Dee
(assuming that there was proper negotiation to him). In
or order the sum of P10, 000.00 in five (5)
negotiation, the transferee’s rights over the goods vests
installments, with the first installment payable
from the very moment of transfer and the transferee on October 5, 1993 and the other installments
thereupon acquires the direct obligation of the
on or before the fifth day of the succeeding
warehouseman to hold the goods for him.
month thereafter.
b. Mr. Tapang, in this case, would have preference over
the goods since the transferee of a non-negotiable
(Sgd.) LITO VILLA
warehouse receipt merely acquires (1) rights no better (1993 Bar)
than those of the transferor and (2) the direct
obligation of the warehouseman only upon notice to A:
him of the transfer.
1. The promissory note is negotiable as it complies with
Sec. 1, NIL.

NEGOTIABLE INSTRUMENTS LAW Firstly, it is in writing and signed by the maker, Noel
Castro.

REQUISITES OF NEGOTIABILITY Secondly, the promise is unconditional to pay a sum


certain in money, that is, P2, 500.00
Q:
1. What is the test to determine whether an Thirdly, it is payable on demand as no date of maturity
instrument is negotiable or not? is specified.
2. X bought a jeep from Reliable Motors Company for
a consideration of P50, 000. He paid P25, 000 in Fourth, it is payable to order.
cash and executed the following promissory note
on the balance: 2. The promissory note is negotiable. All the requirements
of Sec. 1, NIL, are complied with. The sum to be paid is
still certain despite that the sum is to be paid by
“September 1, 1989 installments.

I promise to pay the sum of P25, 000 to Reliable Q: What is a negotiable instrument? Give the
Motors Company on or before December 31, characteristics of a negotiable instrument (2005 Bar)
1989.
A: It is a written contract for the payment of money which
Sgd. X” is intended as a substitute for money and passes from one
person to another as money, in such a manner as to give a
At the bottom of the note, X wrote in his own holder in due course the right to hold the instrument free
handwriting the following: “I will not sell the jeep until from defenses available to prior parties. ( Sundiang, Aquino,
I shall have paid it in full.” Is the note negotiable? th
Reviewer in Commercial Law, p.5, 5 edition) For an
Reasons. (1989 Bar) instrument to be considered as a negotiable one, it must
comply with Section 1 of the Negotiable Instruments Law,
A: to wit:
1. In determining whether an instrument is negotiable or
not, the sole test is whether or not the requisites of
a. It must be in writing and signed by the maker or
negotiability expressed in Sec. 1 of the NIL are met on
drawer;
the face of the instrument itself. The intrinsic validity of
b. Must contain an unconditional promise or order to pay
the instrument is of no m oment. Even the acceptance or
a sum certain in money;
non-acceptance by the drawee of the instrument would
c. Must be payable on demand, or at a fixed or
be irrelevant.
determinable future time;
d. Must be payable to order or to bearer; and
e. Where the instrument is addressed to a drawee, he

7
Mercantile Law

must be named or otherwise indicated therein with


reasonable certainty. 2. Check:

A negotiable instrument is characterized by negotiability “September 15, 2002


(capability of being transferred from one person to another
so as to make him a holder who is entitled to the payment “Pay to the order of Juan Santos the sum of TEN
thereof) and its accumulation of secondary contracts THOUSAND PESOS (P10,000.00), Philippine
resulting from indorsements at the back thereof. currency.

Q: Distinguish a negotiable document from a negotiable


instrument (2005 Bar) (Signed) Pedro Cruz

A: A negotiable instrument is a written contract which is To: Philippine National Bank, Escolta, Manila
intended as a substitute for money like promissory notes Branch”
and bill of exchange while a negotiable document is a
commercial instrument with limited negotiability but they
have been held to be non-negotiable in the technical sense Q: Can a bill of exchange or a promissory note qualify as
because they do not have the requisites under the a negotiable instrument if —
Negotiable Instruments Law. (De Leon, The Philippine
Negotiable Instruments Law, p.8, 2010 edition ) Furthermore, a. It is not dated; or
a negotiable document actually stands for the goods it b. The day and month, but not the year of its maturity,
covers while in a negotiable instrument, the subject matter is given; or
is a sum certain in money. Moreover, a negotiable c. It is payable to “cash”; or
instrument is capable of accumulating secondary contracts d. It names two alternatives drawee (1997 Bar)
resulting from indorsements at the back thereof while a
negotiable document is not, especially considering that A:
indorsement of the latter does not result in liability of the a. Yes. Date is not a material particular required by Sec. 1,
endorser when the depositary, like the warehouseman, fails NIL, for the negotiability of an instrument.
to comply with his duty to deliver the things or goods b. No. The time for payment is not determinable in this
deposited and covered by the warehouse receipt by the case. The year is not stated
depositary. Also, a negotiable instrument is either a bill of c. Yes. Sec. 9(d), NIL, makes the instrument payable to
exchange or promissory note while a negotiable document bearer because the name of the payee does not purport
has various forms such as but not limited to bill of lading, to be the name of any person.
stock certificates, warehouse receipts and pawn tickets. d. A bill may not be addressed to two or more drawees in
the alternative or in succession, to be negotiable. To do
Q: so makes the order conditional.

a. Define the following: (1) a negotiable promissory


note, (2) a bill of exchange and (3) a check. Q: What are the requisites of a negotiable instrument?
b. You are Pedro Cruz. Draft the appropriate contract (1996 Bar)
language for (1) your negotiable promissory note
and (2) your check, each containing the essential A: The requisites of a negotiable instrument are as follows:
elements of a negotiable instrument. (2002 Bar)
1. It must be in writing and signed by the maker or
A: drawer;
2. It must contain an unconditional promise or order to
a. pay a sum certain in money;
1. A negotiable promissory note is an unconditional 3. It must be payable to order or to bearer; and
promise in writing made by one person to another, 4. Where the instrument is addressed to a drawee, he
signed by the maker, engaging to pay on demand or at must be named or otherwise indicated therein with
a fixed determinable future time, a sum certain in reasonable certainty.
money to order or bearer.
2. A bill of exchange is an unconditional order in writing Q: Which of the following stipulations or features of a
addressed by one person to another, signed by the promissory note (PN) affect or do not affect its
person giving it, requiring the person to whom it is negotiability, assuming that the PN is otherwise
addressed to pay on demand or at a fixed or negotiable? Indicate your answer by writing the
determinable future time a sum certain in money to paragraph number of the stipulation or feature of the
order or bearer. PN as shown below and your corresponding answer,
3. A check is a bill of exchange drawn on a bank payable either ―Affected or ―Not affected. Explain.
on demand.
a. The date of the PN is ―February 30, 2002.
b. b. The PN bears interest payable on the last day of
1. Negotiable promissory note: each calendar quarter at a rate equal to five percent
(5%) above the then prevailing 91-day Treasury
“September 15, 2002 Bill rate as published at the beginning of such
calendar quarter.
“For value received, I hereby p romise to pay Juan c. The PN gives the maker the option to make
Santos or order the sum of TEN THOUSAND PESOS payment either in money or in quantity of palay or
(P10,000.00) thirty (30) days from date hereof. equivalent value.
d. The PN gives the h older the option either to r equire
(Signed) Pedro Cruz” payment in money or to require the maker to serve

8
UST BAR OPERATIONS
QUAMTO (1987-2016)

as the bodyguard or escort of the holder for 30 days. is necessary say to determine when the note is due or
(2002 Bar) the interest is to run when the payment of interest has
been stipulated or whether the holder is barred by the
A: statute of limitations from enforcing the note. The fact
that there is no mention of consideration is not
a. NOT AFFECTED. Date is not one of the requirements for essential because it is presumed.
negotiability therefore it is not essential except when
the date is necessary to determine when the note is due. Q: State and explain whether the following are
b. NOT AFFECTED. An instrument payable with interest negotiable instruments under the Negotiable
determinable at a fixed time is negotiable. The law Instruments Law:
provides under section 2a of the NIL, a sum is still
considered as certain although it is to be paid with 1. Postal Money Order
interest. It does not make the promise unconditional. 2. A certificate of time deposit which states “ This is to
c. AFFECTED. An option given to the maker makes the certify that bearer has deposited in this bank the
promise conditional. sum of FOUR THOUSAND PESOS (P4, 000) only,
d. NOT AFFECTED. An option given to the holder does not repayable to the depositor 200 days after date.”
make the promise conditional. 3. Letters of Credit
4. Warehouse Receipts
Q: 5. Treasury warrants payable from a specific fund
(2005 Bar)
a. MP bought a used cell phone from JR. JR preferred
cash but MP is a friend so JR accepted MP‘s A:
promissory note for P10, 000. JR thought of
converting the note into cash by endorsing it to his 1. Postal Money Order is not a negotiable instrument
brother KR. The promissory note is a piece of paper because, as held in Phil. Education Co. v. Soriano , there
with the following hand-printed notation: ― MP are many restrictions which make them incompatible
WILL PAY JR TEN THOUSAND PESOS IN PAYMENT with concepts of negotiable instruments, thereby
FOR HIS CELLPHONE 1 WEEK FROM TODAY. Below making the order conditional, in contrast to Sec. 1 of the
this notation MP‘s signature with ― 8/1/00 next to NIL. Furthermore, such is governed by postal rules and
it, indicating the date of the promissory note. When regulation and it may only be negotiated once.
JR presented MP‘s note to KR, the latter said it w as 2. The certificate of time deposit is a negotiable
not a negotiable instrument under the law and so instrument because it is an acknowledgement in

could not be a valid substitute for cash. JR took the writing


promiseby to the bank
repay theof the to
same amount of deposit
the depositor or with
bearera
opposite view, insisting on the note‘s negotiability.
You are asked to referee. Which of the opposing thereof at a specific time. (Caltex v. CA, 212 SCRA 448)
views is correct? 3. A letter of credit is not negotiable because it is generally
b. TH is an indorsee of a promissory note that simply conditional and has limited negotiability because it is
states: ― PAY TO JUAN TAN OR ORDER 400 PESOS. issued in favor of a specific person. But the Supreme
The note has no date, no place of payment and no Court held, in the case of Lee v. Court of Appeals, that
consideration mentioned. It was signed by MK and the drafts issued in connection with the letters of credit
written under his letterhead specifying the are negotiable instruments.
address, which happens to be his residence. TH 4. A warehouse receipt is not a negotiable instrument
accepted the promissory note as payment for because the obligation of a warehouseman is not to pay
services rendered to SH, who in turn received the but to deliver the goods under the warehouse receipt
note from Juan Tan as payment for a prepaid cell which fails to comply with the requirements set forth
phone card worth 450 pesos. The payee under Sec. 1 of the Negotiable Instruments Law. It is
acknowledged having received the note on August merely considered as a negotiable document that does
1, 2000. A Bar reviewee had told TH, who happens not result in the accumulation of contracts.
to be your friend, that TH is not a holder in due 5. A treasury warrant require appropriations from the
course under Article 52 of the Negotiable national government which means that the particular
Instruments Law (Act 2031) and therefore does not fund may or may not exists which renders it

enjoy the rights and protection under the statute. conditional, thereby non-negotiable.
TH asks for our advice specifically in connection
with the note being undated and not mentioning a Q: Lorenzo drew a bill of exchange in the amount of
place of payment and any consideration. What P100, 000 payable to Barbara or order, with his wife,
would your advice be? (2000 Bar) Diana, as drawee. At the time the bill was drawn, Diana
was unaware that Barbara is Lorenzo’s paramour.
A: Barbara then negotiated the bill to her sister, Elena,
who paid for it for value, and who did not know who
a. The view of KR is correct. The note is payable to a Lorenzo was. On due date, Elena presented the bill to
specific person hence it is not negotiable. The law Diana for payment, but the latter promptly dishonored
provides that for an instrument to be negotiable, it m ust the instrument because, by then, Diana had already
comply with the requirements of section 1 of the NIL learned of her husband’s dalliance. Does the illicit
pertaining to the part that a note must be payable to cause or consideration adversely affect the
order or bearer. In the given case, there were no words negotiability of the bill? Explain. (2009 Bar)
of negotiability and it is silent as to whether it is payable
to order or bearer. Hence, the instrument is non- A: No. The illicit cause or consideration does not adversely
negotiable. affect the negotiability of the bill, especially in the hands of
b. The place and date are not essential to the negotiability a holder in due course. Under Sec. 1 of the NIL, the bill of
of the instrument except in certain cases when the date exchange is a negotiable instrument. Every negotiable
instrument is deemed prima facie to have been issued for

9
Mercantile Law

valuable consideration, and every person whose signature Q: Which of the following instruments is negotiable if all
appears thereon is deemed to have become a party thereto the other requirements of negotiability are met? (2014
for value. Bar)

Q: TRUE or FALSE. A document, dated July 15, 2009, that a. A promissory note with promise to pay out of the
reads: “Pay to X or order the sum of P5,000.00 five days U.S. Dollar account of the maker in XYZ Bank.
after his pet d og, Sparky, dies. Signed Y.” is a negotiable b. A promissory note which designates the U.S. Dollar
instrument. (2009 Bar) currency in which payment is to be made.
c. A promissory note which contains in addition a
A: True. The document is subject to a term and not a promise to paint the portrait of the bearer.
condition. The dying of the dog is a day which is certain to d. A promissory note made payable to the order of
com. Therefore, the order to pay is unconditional, in Jose Cruz or Josefa Cruz.
compliance with Section 1 of the NIL.
A: c. A promissory note which contains in addition a
Q: A writes a promissory note in favor of his creditor, B. promise to paint the portrait of the bearer.
it says: Subject to my option, I promise to pay B P1M or
his order or to give P1M worth of cement or to KINDS OF NEGOTIABLE INSTRUMENTS
authorize him to sell my house worth P1 M. signed, A.”
Is the note negotiable? Q: Can a bill of exchange or a promissory note qualify as
a negotiable instrument if –
a. No, because the exercise of the option to pay lies
with A, the maker and debtor. a. it is not dated;
b. No, because it authorizes the sale of collateral b. or the day and the month, but not the year of its
securities in case the note is not paid at maturity. maturity, is given; or
c. Yes, because the note is really payable to B or his c. it is payable to ― cash
order, the other provisions being merely optional. d. it names two alternative drawees (1997 Bar)
d. Yes, because an election to require something to be
done in lieu of payment of money does not affect
A:
negotiability. (2011 Bar)
a. Yes. Date is not an essential requirement for the
A: a. No, because the exercise of the option to pay lies with
negotiability of an instrument as provided for in Sec. 1
A, the maker and debtor.
of the NIL.

b. No. Sinceisthe
payment year is not determined, the time for
not determinable.
Q: Antonio issued the following instrument:
c. Yes. When the name of the payee does not purport to
be the name of any person, the law provides in Sec. 9(d)
August 10, 2013
of the NIL that the maker or drawer intends the same to
Makati City
be payable to bearer, hence the instrument qualifies as
P100,000.00
a negotiable instrument.
d. No. When the bill is addressed to two or more payees
Sixty days after date, I promise to pay Bobby or his
in the alternative, the law provides in Sec. 128 of the
designated representative the sum of ONE HUNDRED
NIL that it is conditional and therefore non-negotiable.
THOUSAND PESOS (P 100,000.00) from my BPI Acct. No.
The objection to the drawers being in the alternative or
1234 if, by this due date, the sun still sets in the west to
in succession is the difficulty in determining the exact
usher in the evening and rises in the east the following
date of dishonor of the bill inasmuch as it cannot be said
morning to welcome the day.
that the bill is dishonored until all of the drawers have
dishonored it and if the presentment takes place for a
(Sgd.) Antonio Reyes
period covering several days when the last dishonor is
made, the first drawee who dishonored it may have
Explain each requirement of negotiability present or
already been released from his secondary liability due
absent in the instrument. (2013 Bar)
to the lapse of time before notice of dishonor was made
A: The instrument contains a promise to pay and was signed by the holder. Notice of dishonor could not have been
made earlier by the holder since there is still a
by the maker, Antonio Reyes. [Sec. 1(a) of NIL] The promise
remaining drawee, who has not yet dishonored it.
to pay is unconditional insofar as the reference to the
setting of the sun in the west in the evening and its rising in
Q: How do you treat a negotiable instrument that is so
the east in the morning are concerned. These are certain to
ambiguous that there is doubt whether it is a bill or a
happen. [Sec. 4(c) of the NIL ] The promise to pay is
note? (1998 Bar)
conditional, because the money will be taken from a
particular fund, the BPI Account No. 1234. (Sec. 3 of NIL)
A: Sec. 17(e) of the NIL, where the instrument is so
ambiguous that there is doubt whether it is a bill or note,
The instrument contains a promise to pay a sum certain in
the holder may treat it as either at his election.
money, P100, 000.00. [Sec. 4(b) of NIL] The money is
payable at a determinable future time, sixty days after
Q: Richard Clinton makes a promissory note payable to
August 10, 2013. [ Sec. 4(a) of NIL]
bearer and delivers the same to Aurora Page. Aurora
Page, however, endorses it to X in this manner:
The instrument is not payable to order or to bearer. [ Sec.
"Payable to X. Signed: Aurora Page." Later, X, without
1(d) of the NIL]
endorsing the promissory note, transfers and delivers
the same to Napoleon. The note is subsequently
dishonored by Richard Clinton. May Napoleon proceed
against Richard Clinton for the note? (1998 Bar)
10
UST BAR OPERATIONS
QUAMTO (1987-2016)

A: Yes, Richard Clinton is liable for the promissory note. c. Non-negotiable. The instrument is not an unconditional
Under Sec. 60 of the NIL, the maker of a negotiable promise or order to pay a sum certain in money since
instrument, by making the same, engages that he will pay payment depends upon the happening of an event [ Sec.
according to its tenor, and admits the existence of the payee 1 (b) NIL].
and his then capacity to indorse. The liability of the maker d. Negotiable. There is certainty in payment since it is
is primary which means he is absolutely and payable on or before a fixed or determinable future
unconditionally required to pay. He engages to pay the time specified [Sec. 4(b) NIL].
instrument according to its terms without any condition. He e. Negotiable. It is a bearer instrument that is payable
is not only liable to the payee but also to the subsequent upon demand [Sec. 7 (b) and Sec. 9 (b) NIL ].
holder in due course. Since the instrument is a bearer
instrument (which nature was not changed even if it was Q: When can you treat a bill of exchange as a promissory
specially indorsed by Aurora), Napoleon became a legal note? (2015 Bar)
holder thereof by mere delivery from X to him. Thus, as a
legal holder of the promissory note, he is entitled to proceed
against the maker thereof, Richard Clinton. theAfollowing
A: bill of exchange may be treated as a promissory note in
instances:

Q: R issued a check for P1M which he used to pay S for a. The drawee is a fictitious person or a person not having
killing his political enemy. the capacity to contract;
b. The drawer and the drawee are one and the same
a. Can the check be considered a negotiable
person.
instrument?
c. Where the instrument is so ambiguous that there is a
b. Does S have a cause of action against R in case of
doubt as to whether the instrument is a bill or a note,
dishonor by the drawee bank?
the holder may treat it either as a bill or note,
c. If S negotiated the check to T, who accepted it in
good faith and for value, may R be held secondarily d. at the option of the holder (Secs. 130 and 17 of the NIL).
liable by T? (2007 Bar)
Q: A promissory note read as follows: “I promise to pay
Gabriela Silangan P100 three years after the
A: unconditional withdrawal of the U.S. of its military
bases in the Philippines.”
a. Yes. The check can be considered as a negotiable
instrument since it complied with the requirements of a. Discuss the negotiability or non-negotiability of the
negotiability under Sec. 1 of the NIL. The unlawful above note.
consideration for the issuance of the check is of no b. Discuss the effect of each of the following upon the
moment and will not affect the negotiability of the note’s negotiability:
check as it merely constitutes a defect of title under Sec. 1. No date is given
55 of the NIL. 2. The places where drawn and where payable are
b. No. S does not have a cause of action against R in case not stated. (1988 Bar)
of dishonor by the drawee bank. S is not a holder in due
course, thus, R can raise the defense that the check was A:
issued for an illegal consideration. a. The promissory note is not a negotiable instrument.
c. Yes. R may be held liable by T since T is a holder in due Section of the NIL requires, among other things, for an
course of the instrument. The unlawful consideration of instrument to be negotiable, that it must be payable to
the check is only a personal defense that cannot be order or to bearer. Without being so payable, the note
interposed to a holder in due course who receives the is not a negotiable instrument.
check free from the defect of title of S. b.
1. The negotiability of an instrument is not adversely
Q: Indicate and explain whether the promissory note is affected by its being undated. Even if it is needed to
negotiable or non-negotiable. determine the maturity of the instrument, the
holder is implicitly authorized to place the date
a. I promise to pay A or bearer Php100, 000.00 from thereof or to consider it dated as of its issue.
2. For the negotiability of a promissory note it is not
my father.
inheritance which I will get after the death of necessary that it must express the place where it is
my
made or where it is payable. All that is required
b. I promise to pay A or bearer Php100, 000 plus the
under the NIL is compliance with Section 1 thereof.
interest rate of ninety (90) – day treasury bills.
c. I promise to pay A or bearer the sum of Php100, COMPLETION AND DELIVERY
000 if A passes the 2012 bar exams.
d. I promise to pay A or bearer the sum of Q: AB Corporation drew a check for payment to XY
Php100.000 on or before December 30, 2012. Bank. The check was given to an officer of AB
e. I promise to pay A or bearer the sum of Php100, Corporation who was instructed to deliver it to XY
000. (2012 Bar) Bank. Instead, the officer, intending to defraud the
Corporation, filled up the check by making himself as
A: the payee and delivered it to XY Bank for deposit to his
personal account. XY Bank debited AB Corporation’s
account. AB Corporation came to know of the officer’s
a. Non-negotiable. It is based on a contingency and not an
unconditional promise or order to pay sum certain in
fraudulent act after he absconded. AB Corporation
asked XY Bank to recredit i ts amount. XY Bank refused.
money [Sec. 1 (b), NIL].
b. Negotiable. The instrument is negotiable despite the
a. If you were the judge, what issues would you
inclusion of interest since the sum to be paid with said
consider relevant to resolve the case? Explain.
interest is still certain [ Sec. 2(a) NIL].

11
Mercantile Law

b. How would you decide the case? Explain. (2008 it in good faith for payment of gems that KC sold to OB.
Bar) Later, OB told AX of what she did with regrets. AX timely
directed the bank to dishonor the check. Could AX be
A: held liable to KC? Answer and reason briefly. (2004
a. If I were the judge, I will consider the following issues: Bar)
(1) whether the check was a complete instrument; (2)
whether the check has been delivered; and (3) whether A: Yes. AX could be held liable to KC. This is a case of an
AB Corporation can be held liable for the amount of the incomplete check, which has been delivered. Under Section
check. 14 of the NIL, KC, as a holder in due course, can enforce
b. The check was an incomplete instrument in as much as payment of the check as if it had been filled up strictly in
the name of the payee was not written by the drawer, accordance with the authority given by AX to OB and within
AB Corporation. However, the said instrument has been a reasonable time.
delivered by AB Corporation to its officer. Thus, the
check became binding on AB Corporation as drawer Q: A, single proprietor of a b usiness concern, is about to
thereof. An incomplete instrument, if delivered, as in leave for a business trip and, as he so often does on
this case, creates liability on the part of the drawer. these occasions, signs several checks in blank. He
Therefore, AB Corporation cannot ask XY Bank to instructs B, his secretary, to safekeep the checks and fill
recredit the amount of the check to his account. them out when and as required to pay accounts during
his absence. B fills out one of the checks by placing her
Q: Jun was about to leave for a business trip. As his usual name as payee, fills in the amount, endorses and
practice, he signed several blank checks. He instructed delivers the check to C who accepts it in good faith as
Ruth, his secretary, to fill them as payment for his payment for goods sold to B. B regrets her action and
obligations. Ruth filled one check with her name as tells A what she did. A directs the Bank in time to
payee, placed P30, 000.00 thereon, endorsed and dishonor the check. When C encashes the check, it is
delivered it to Marie. She accepted the check in good dishonored.
faith as payment for goods she delivered to Ruth.
Eventually, Ruth regretted what she did and apologized Can A be held liable to C? (1997 Bar)
to Jun. Immediately he directed the drawee bank to
dishonor the check. When Marie encashed the check it A: Yes. A can be held liable to C, assuming that the latter
was dishonored. gave notice of dishonor to A. This is a case of an incom plete
instrument but delivered as it was entrusted to B, the
a. Is Jun liable to Marie? secretary of A. Moreover, under the doctrine of comparative
b. Supposing the check was stolen while in Ruth's negligence, as between A and C, both innocent parties, it
possession and a thief filled the blank check, was the negligence of A in entrusting the check to B which
endorsed and delivered it to Marie in payment for is the proximate cause of the loss.
the goods he purchased from her, is Jun liable to
Marie if the check is dishonored? (2006 Bar) INCOMPLETE AND UNDELIVERED INSTRUMENTS

A: Q:

a. Yes. When a delivered instrument is wanting in any a. PN makes a promissory note for P5, 000.00, but
material particular, the person in possession thereof leaves the name of the payee in blank because he
has prima facie authority to complete it by filling up the wanted to verify its correct spelling first. He
blanks. But if it was not filled up strictly in accordance mindlessly left the note on top of hi s desk at t he end
with the authority given, it cannot be enforced against of the workday. When he returned the following
any person who became party thereto prior to its morning, the note was missing. It turned up later
completion. However, if it is negotiated to a holder in when X presented it to PN for payment. Before X, T
due course, then it is valid and effective for all purpose who turned out to have filched the note from PN’s
in his hands because the defense of not filling it up in office, had endorsed the note after inserting his
accordance with the authority given is only a personal own name in the blank space as the payee. PN
defense that cannot be raised against a holder in due dishonored the note, contending that he did not
course. Based on the foregoing, Jun is liable to Marie, authorize its completion and delivery. But X said he
being a holder in due course, for the incomplete had no participation in, or knowledge about the
instrument which he delivered to Ruth. pilferage and alteration of the note and therefore
b. No. The check is an incomplete instrument not he enjoys the rights of a holder in due course under
delivered in contemplation of law. An incomplete the Negotiable Instruments Law. Who is correct and
instrument not delivered is not a valid contract in the why?
hands of any holder as against any person whose b. Can the payee in a promissory note be a “holder in
signature was placed thereon before delivery. As such, due course” within the meaning of the Negotiable
Jun is not liable to Marie since he does not assume any Instruments Law (Act 2031)? Explain your answer
responsibility whatsoever upon the said check ( Sec. 15, (2000 Bar)
Negotiable Instruments Law).
A:
Q: AX, a businessman, was preparing for a business trip
abroad. As he usually did i n the past, he signed several a. Since the negotiable instrument is still incomplete and
checks in blank and entrusted them to his secretary has not yet been delivered, PN is correct in dishonoring
with instruction to safeguard them and fill them out the said instrument. Sec. 15 of Act 2031 provides that
only when required to pay accounts during his absence. where an incomplete instrument has not been
OB, his secretary, filled out one of the checks by placing delivered, it will not, if completed and negotiated
her name as the payee. She filled out the amount, without authority, be a valid contract in the hands of
endorsed and delivered the check to KC, who accepted any holder, as against any person whose signature was

12
UST BAR OPERATIONS
QUAMTO (1987-2016)

placed thereon before delivery. Thus, under this the forgery.


section, it is a real defense that can even be interposed
against a holder in due course. a. Can “A” compel Citibank to re -credit to his account
b. The Supreme Court in the case of De Ocampo v. the amount of the forged check?
Gatchalian, G.R. No.L-15126, Nov. 30, 1961 , a payee may b. Does Citibank in turn have a recourse against the
be a holder in due course provided that he was able to collecting bank, Bank of P.I.? Explain.
establish the conditions entitling him to be a holder in c. Can Citibank or Bank of P.I., as the case may be,
due course. proceed against “C” as indorser? Explain. (1987
Bar)
INDORSEMENT BY MINOR OR CORPORATION
A:
Q: X makes a promissory note for P10, 000 payable to A,
a minor, to help him buy school books. A endorses the a. “A” can compel Citibank to re -credit to his account the
amount of the forged check, he being not a party to the
note to B A
C knows for
isvalue, whoIfin
a minor. C turn
sues endorses the note
X on the note, canto
X C.
set instrument. Forgery renders the forged signature
up the defenses of minority and lack of consideration? totally inoperative. Additionally, the drawee bank is
(1998, 1989) charged with knowledge of the drawer’s signature.
b. Citibank has no right of recourse against Bank of P.I.
A: Yes. C is not a holder in due course. The promissory note having gone through “the normal course of clearing”,
the latter can assume that the check was properly
is not a negotiable instrument, as it does not contain any
word of negotiability, that is, order or bearer, or words of drawn by the drawer. The drawee bank is charged with
similar meaning or import. Accordingly, the transferee knowledge of the drawer’s signature. The negligence, if
merely steps into the shoes of the transferor and, being at all, is attributed more to Citibank than with the bank
of P.I.
merely a successor-in- interest, has no right greater than
that of the transferor. Not being a holder in due course, C is
c. Recourse may be had by either against “C” as indorser
to subject such personal defenses of minority and lack of because of his warranty. In the case particularly of Bank
of P.I., its right of recourse may be based likewise on the
consideration.
agency rule that puts the risk of loss on the principal
(Bank of P.I.)
FORGERY
Q: Mario Guzman issued to Honesto Santos a check for
Q: Adam makes a note payable to Bert or order. Bert
P50, 000 as payment for a second-hand car. Without the
indorses the note to Cora. Douglas steals the note and
knowledge of Mario, Honesto changed the amount to
indorses it to Elvin by forging Cora’s signature. Elvin P150, 000 which alteration could not be detected by the
then indorses the note to Felix who is not aware of the
naked eye. Honesto deposited the altered check with
forgery. What is the right of Felix against Adam, Bert,
Shure Bank which forwarded the same to Progressive
Cora, Douglas and Elvin? (1989 Bar)
Bank for payment. Progressive Bank without noticing
the alteration paid the check, debiting P150, 000 from
A: On the assumption that Bert made a blank endorsement,
the account of Mario. Honesto withdrew the amount of
thereby rendering the instrument payable to bearer in the
P150, 000 from Shure Bank and disappeared. After
hands of Cora, the latter’s signature would be unnecessary
receiving his bank statement, Mario discovered the
so as to preserve the juridical relation between parties prior
alteration and demanded restitution from Progressive
to the forgery and parties after the forgery. On the further
Bank.
assumption that Felix had acquired the instrument for
value, thus making him holder in due course, he may
Discuss fully the rights and liabilities of the parties
accordingly hold Adam, Bert and Douglas liable. The
concerned. (1995 Bar)
liability of Adam, as maker, and Douglas, as forger, is
primary and that of Bert, as blank indorser, secondary. If,
A: The demand of Mario for restitution of the amount of
however, Felix did not acquire it for value and is not thus a
P150, 000 to his account is tenable. Progressive Bank has no
holder in due course, he then acquires no right greater than
right to deduct said amount from Mario’s ac count since the
that of the immediate transferor and Adam, Bert and Cora
order of Mario is different. Moreover, Progressive Bank is
would be without any liability in favor of Felix.
liable for the negligence of its employees in not noticing the
alteration which, though it cannot be detected by the naked
On the assumption that Bert made a special indorsement,
eye, could be detected by a magnifying instrument used by
the signature of Cora would be essential to pass title to the
tellers.
instrument. Her signature, forged by Douglas would be
inoperative, and Elvin, whether a holder in due course
As between Progressive Bank and Shure Bank, it is the
which is forged is required to pass title, all parties prior to
former that should bear the loss. Progressive Bank failed to
the forgery may raise the real defense of forgery against all
notify Shure Bank that there was something wrong with the
parties subsequent thereto.
check within the clearing hour rule of 24 hours.
Q: B forged A’s signature as drawer of the check drawn
Q: True or False: “A bank is bound to know its
on Citibank. The check was purportedly payable to the
depositor’s signature” is an inflexible rule in
order of B. B then indorsed the check to C, a holder in
determining the liability of a bank in forgery cases.
due course, who deposited the same to his account with
(2009 Bar)
Bank of P.I. The check was passed through the normal
course of clearing and accordingly the drawee,
A: False. In cases of forgery, the forger m ay not necessarily
Citibank, credited the collecting bank, Bank of P.I., with
be a depositor of the bank, especially in the case of a drawee
the amount of the check which Citibank in turn debited
bank. Yet in many cases of forgery, it is the drawee that is
from A’s deposit account. Upon receiving his monthly
held liable for the loss.
statement from Citibank, together with the cancelled
checks debited from his deposit account, A discovered

13
Mercantile Law

Q: Alex issued a negotiable promissory note (PN) a. May Camilo enforce the said promissory note
payable to Benito or order in payment of certain goods. against Mario and Jose?
Benito indorsed the PN to Celso in payment of an b. May Camilo go against Pablo?
existing obligation. Later Alex found the goods to be c. May Camilo enforce said note against J ulian?
defective. While in Celso’s possession the PN was stolen d. Against whom can Julian have the right of recourse?
by Dennis who forged Celso’s signature and discounted e. May Pablo recover from either Mario or Jose?
it with Edgar, a money lender who did not make
inquiries about the PN. Edgar indorsed the PN to Felix, Explain your answers. (1990 Bar)
a holder in due course. When Felix demanded payment
of the PN from Alex the latter refused to pay. Dennis A:
could no longer be located. a. Camilo may not enforce said promissory note against
Mario and Jose. The promissory note at the time of
1. What are the rights of Felix, if any, against Alex. forgery being payable to order, the signature of Pablo
Bento, Celso and Edgar? Explain. was essential for the instrument to pass title to
2. Does Celso have nay right against Alex, Benito and subsequent parties. A forged signature is inoperative.
Felix? Explain. (1995 Bar) Accordingly, the parties after the forgery are not
juridically related to parties after the forgery to allow
A: such enforcement.
1. Felix has no right to claim against Alex, Benito and Celso b. Camilo may not go against Pablo, the latter not having
who are parties prior to the forgery of Celso’s signature indorsed the instrument.
by Dennis. Parties to an instrument who are such prior c. Camilo may enforce the instrument against Julian
to the forgery cannot be held liable by any party who because of his special indorsement to Camilo, thereby
became such at or subsequent to the forgery. However, making him secondarily liable, both being parties after
Edgar, who became a party to the instrument the forgery.
subsequent to the forgery and who indorsed the same d. Julian, in turn, may enforce the instrument against Bert
to Felix, can be held liable by the latter. who, by his forgery, has rendered himself primarily
2. Celso has the right to collect from Alex and Benito. Celso liable.
is a party subsequent to the two. However, Celso has no e. Pablo preserves his right to recover from either Marion
right to claim against Felix who is a party subsequent to or Jose who remain parties juridically related to him.
Celso. Mario is still considered primarily liable to Pablo. Pablo
may, in case of dishonor, go after Jose who, by his
Q: Placido, a bank depositor, left his checkbook on his special indorsement, is secondarily liable.
desk at his house. Unknown to him, a visitor at the time,
noticing the same, took a check therefrom, filled it up in Q: A delivers a bearer instrument to B. B then specially
the amount of P3, 000 and succeeded in encashing the indorses it to C and C later indorses it in blank to D. E
check on the same day. Placido’s acco unt was thereby steals the instrument from D and, forging the
debited in the same amount. instrument of D, succeeds in "negotiating" it to F who
acquires the instrument in good faith and for value.
Discovering the erroneous debit, Placido demanded
that the bank credit him with a like amount. The bank a. If for any reason, the drawee bank refuses to honor
refused on the ground that Placido was negligent in the check, can F enforce the instrument against the
leaving his checkbook on his desk so that he could not drawer?
put up the defense of forgery or want of authority under b. In case of the dishonor of the check by both the
the NIL. drawee and the drawer, can F hold any of B, C and D
liable secondarily on the instrument? (1997 Bar)
The facts disclose that even to the naked eye, there
were marked differences between Placido’s signature A:
and the one in the check forged by the visitor.
a. Yes, F can proceed against the drawer, A, in case of
As between Placido and the bank, who should bear the dishonor by the drawee bank. Section 61 of the NIL
loss? Explain. (1992 Bar) provides that by drawing the instrument, the drawer

A: The bank should bear the loss. A drawee bank must engages
both that the to
according instrument
its tenor.will
Not beonly
accepted or drawer
is the paid or
exercise the highest diligence in safeguarding the accounts
obliged to pay the amount of the instrument to the
of its client-depositors. The bank is also charged with
holder, but he shall likewise be liable to the subsequent
genuineness of the signatures of its current account
indorser who was compelled to pay it. The forged
holders. But what can be more striking is that there were signature is unnecessary to presume the juridical
marked differences between Placido’s signature and the
relation between or among the parties prior to the
one in the check forged by the visitor. Certainly, Placido was
forgery and the parties after the forgery. Moreover, the
not negligent in leaving his checkbook on his desk.
only party who can raise the defense of forgery against
a holder in due course is the person whose signature is
Q: Jose loaned Mario some money and, to evidence his forged.
indebtedness, Mario executed and delivered to Jose a b. Only B and C can be held liable by F. According to
promissory note payable to his order. Section 67, when a person puts his signature on a
bearer instrument as a form of indorsement, he
Jose endorsed the note to Pablo. Bert fraudulently becomes subject to all liabilities of an indorser. D
obtained the note from Pablo and endorsed it to Julian cannot be held liable as an indorser because his
by forging Pablo’s signature. Julian then endorsed the signature is forged by E – hence, there was no consent
note to Camilo. from D. The forged signature is deemed inoperative and
no right can arise out of it. However, the effect of being

inoperative affects only the signature which is the


14
UST BAR OPERATIONS
QUAMTO (1987-2016)

product of forgery. It will not deem to affect other pays the same must be considered as paying out of its own
signatures subscribed with knowledge and funds since it is the primary duty of the bank to verify the
voluntariness. Therefore, B and C are liable as authenticity of the payee’s signature. (Traders Royal Bank v.
indorsers. RPN, G.R. No. 138510, Oct. 10, 2002)

Q: A issued a promissory note payable to B or bearer. A When the forged signature is that of an indorsement, the
delivered the note to B. B indorsed the note to C. C drawer’s account cannot be charged, and if charged, he can
placed the note in his drawer, which was stolen by the recover from the drawee-bank because the liability to pay
janitor X. X indorsed the note to D by forging C's still falls on the drawee bank for having guaranteed the
signature. D indorsed the note to E who in turn genuineness of all prior indorsements. However, a
delivered the note to F, a holder in due course, without collecting bank is not guilty of negligence over a forged
indorsement. Discuss the individual liabilities to F of A, indorsement on checks for it has no way of ascertaining the
B and C. (2001, 1997 Bar) authority of the indorsement unless it further indorses the
forged check wherein he becomes liable upon the same as a
A: A is primarily and unconditionally liable to F as the general indorser. (Ibid.)
maker of the promissory note. Section 60 provides that, by
making the instrument, the maker obliges himself to pay Q: Nadine has a checking account with Fair & Square
according to the tenor of the instrument. He is liable to both Bank. One day, she lost her checkbook and the finder
payee and subsequent holder in due course. Despite the was able to forge her signature and encash the forged
presence of the special indorsements on the note, these do check. Will Nadine be able to recover the amount
not detract from the fact that a bearer instrument, like the debited from her checking account from Fair & Square
promissory note in question, is always negotiable by mere Bank? Justify your answer. (2015 Bar)
delivery, until it is indorsed restrictively “For Deposit Only”
A: Yes, Nadine should be able to recover the amount
B as a general indorser is secondarily liable to F. By placing debited from her checking account from Fair and Square
his signature on the bearer instrument, he warrants that the Bank. The Bank is supposed to know the signature of its
instrument is genuine and in all respects what it purports clients. The Bank was thus negligent in not detecting the
to be; that he has good title to it; that all prior parties had forgery of Nadine’s signature and paying the check. Under
capacity to contract; that he has no knowledge of any fact the circumstances, there was no negligence on the part of
which would impair the validity of the instrument or render Nadine which would preclude her from invoking forgery.
it valueless; that at the time of indorsement, the instrument (Philippine National Bank v. Quimpo, 158 SCRA 582)
is valid and subsisting; and that on due presentment, it shall
be accepted or paid, or both, according to its tenor, and that CONSIDERATION
if it be dishonored and the necessary proceedings on
dishonor be duly taken, he will pay the amount thereof to Q: Paul George Pua (Pua) filed a complaint for a sum of
the holder, or to any subsequent indorser who may be money against the spouses Benito and Caroline James
compelled to pay. (Spouses James). In the complaint, Pua prayed that the
defendants pay Pua the amount of P8.5 M covered by a
C, however, cannot be held liable because the signature check. Pua asserts that defendants owed him a sum of
purporting to be his is a product of forgery. C can raise the money way back in 1988 for which the Spouses James
defense of forgery since it his signature that was forged. gave him several checks. The checks, however, had all
been dishonored and Pua has not been paid the amount
Q: CX maintained a checking account with UBANK, of the loan plus the agreed interest. In 1996, the
Makati Branch. One of his checks in a stub of 50 was Spouses James approached Pua to get the computation
missing. Later, he discovered that Ms. DY forged his of their liability including the 2% compounded interest.
signature and succeeded to encash P15,000 from After bargaining to lower the amount of the ir liability,
another branch of the bank. DY was able to encash the the Spouses James gave Pua a postdated check bearing
check when ET, a friend, guaranteed due execution, the discounted amount of P8.5 M. Like the 1988 checks,
saying that she was a holder in due course. Can CX the drawee bank likewise dishonored this check. To
recover the money from the bank? (2004 Bar) prove his allegations, Pua submitted the srcinal copies
of the 17 checks issued by Caroline in 1988 and the

A:
theYes , CX
NIL, can recover
forgery is a realfrom the The
defense. bank. Under
forged Section
check 23 of
is wholly check issued
Spouses James,in on
1996,
the Manilatrust
other hand,Check No. 750.
completely The
denied
inoperative in relation to CX. CX cannot be held liable the existence of the debt asserting that they had never
thereon by anyone, not even by a holder in due course. approached Pua to borrow money in 1988 or in 1996.
Under a forged signature of the drawer, there is no valid They assert, instead, that Pua is simply acting at the
instrument that would give rise to a contract which can be instance of his sister, Li lian, to file a false charge against
the basis or source of liability on the part of the drawer. The them using a check left to fund a gambling business
drawee bank has no right or authority to touch the drawer’s previously operated by Lilian and Caroline. Decide.
funds deposited with the drawee bank. (2014 Bar)

Q: Discuss the legal consequences when a bank honors A: The 17 srcinal checks, completed and delivered to Pua,
a forged check. (2006 Bar) are sufficient by themselves to prove the existence of the
loan obligation of Spouses James to Pua. In Pacheco v. Court
A: When drawer’s signature is forged, drawee -bank by of Appeals, the Court has expressly recognized that a check
accepting the check cannot set up the defense of forgery “constitutes an evidence of indebtedness” and is a veritable
because by accepting the instrument, the drawee bank “proof of an obligation.” Hence, it can be used “in lieu of and
admits the genuineness of the signature of the drawer. (BPI for the same purpose as a promissory note.” In fact, in the
Family Bank v. Buenaventura G.R. No. 148196, Sept. 30, 2005 ) seminal case of Lozano v. Martinez, the Court pointed out
that a check functions more than a promissory note since it

When the payee’s signature is forged, the drawee -bank who not only contains an undertaking to pay an amount of

15
Mercantile Law

money but is an “order addressed to a bank and partakes of his friend, C, President of Saad Banking Corporation
a representation that the drawer has funds on deposit (Saad) to accommodate him. C agreed, he signed a check
against which the check is drawn, sufficient to ensure for the aforesaid amount dated December 20, 1990,
payment upon its presentation to the bank.” The Court drawn against Saad’s account with the ABC Commercial
reiterated this rule in Lim v. Mindanao Wines and Liquour Banking Co. The By-laws of Saad requires that checks
Galleria stating that “a check, the entries of which are in issued by it must be signed by the President and the
writing, could prove a loan transaction.” This is the very Treasurer or the Vice-President. Since the Treasurer
same principle underpin Section 24 of the NIL which was absent, C requested the Vice-President to co-sign
provides that “every negotiable instrument is deemed the check, which the latter reluctantly did. The check
prima facie to have been issued for a valuable was delivered to B. The check was dishonored upon
consideration; and every person whose signature appears presentment on due date for insufficiency of funds.
thereon to have become a party for value.” Consequently,
the case should be decided in favor of Pua and against a. Is Saad liable on the check as an accommodation
Spouses James. party?
b. If it is not, who then, under the above facts, is/are
Q: Eva issued to Imelda a check in the amount of P50, liable? (1991 Bar)
000 postdated Sept. 30, 1995, as security for a diamond
ring to be sold on commission. On Sept. 15, 1995, A:
Imelda negotiated the check to MT investment which
paid the amount of P40, 000 to her. a. No, Saad is not liable as an accommodation party
because the issue or indorsement of negotiable paper
Eva failed to sell the ring, so she returned it to Imelda by a corporation without consideration and for the
on Sept. 19, 1995. Unable to retrieve her check, Eva accommodation of another is ultra vires. Hence, one
withdrew her funds from the drawee bank. Thus, when who has taken the instrument with knowledge of the
MT Investment presented the check for payment, the accommodation nature thereof cannot recover against
drawee bank dishonored it. Later on, when MT a corporation where it is only an accommodation party.
Investment sued her, Eva raised the defense of absence While it may be legally possible for a corporation whose
of consideration, the check having been issued merely business is to provide financial accommodations in the
as security for the ring that she could not sell. Does Eva ordinary course of business, such as one given by a
have a valid defense? Explain. (1996 Bar) financing company, to be an accommodation party, this
situation, however, is not the case at bar.
A: No. Eva does not have a valid defense. Her defense that
b. Considering that both the President and the Vice-
there was no consideration is not available to defeat the
claim of MT Investment since it is a holder in due course President
themselveswere
cansignatories to theto
be subject accommodation,
the liabilitiesthey
of
who holds the postdated check free from any defect of title
accommodation parties to the instrument in their
of prior parties and from defenses available to p rior parties
personal capacity. (Crisologo-Jose v. CA, 177 SCRA 594 )
among themselves. Eva can raise the defense of absence of
consideration against MT Investment only if the latter was
privy to the purpose for which the checks were issued, and
Q: Nora applied for a loan of Php100, 000 with BUR
Bank. By way of accommodation, Nora’s sister, Vilma,
therefore, not a holder in due course.
executed a promissory note in favour of BUR Bank.
When Nora defaulted, BUR bank sued Vilma, despite its
ACCOMMODATION PARTY
knowledge that Vilma received no part of the loan. May
Vilma be held liable? Explain. (1996 Bar)
Q: To accommodate Carmen, maker of a promissory
note, Jorge signed as indorser thereon, and the
instrument was negotiated to Raffy, a holder for value. A: Yes, Vilma may be held liable. A person who has signed
At the time Raffy took the instrument, he knew Jorge to the instrument as maker, drawer, acceptor, or indorser,
be an accommodation party only. When the promissory without receiving value therefor, and for the purpose of
note was not paid, and Raffy discovered that Carmen lending his name to some other person is liable on the
had no funds, he sued Jorge. Jorge pleads in defense the instrument to a holder for value, notwithstanding the fact
fact that he had endorsed the instrument without that such holder at the time of taking the instrument knew
receiving value therefor, and the further fact that Raffy him to be only an accommodation party. Thus, as an
knew that at the time he took the instrument Jorge had accommodation maker, Vilma is primarily and
not received any value or consideration of any kind for unconditionally liable on the promissory note to BUR Bank,
his indorsement. Is Jorge liable? Discuss. (1990, 1996 a holder for value.
Bar)
Q: For the purpose of lending his name without
A: Yes, Jorge is liable. By the clear mandate of Sec. 29 o f the receiving value therefor, Pedro makes a note for P20,
NIL, an accommodation party is "liable on the instrument to 000 payable to the order of X who in turn negotiates it
a holder for value, notwithstanding that such holder at the to Y, the latter knowing that Pedro is not a party for
time of taking the instrument knew him to be only an value.
accommodation party." It is not a valid defense that the
accommodation party did not receive any valuable a. May Y recover from Pedro if the latter interposes
consideration when he executed the instrument. (Ang Tiong the absence of consideration?
v. Ting, G.R. No. L-26767, February 22, 1968) b. Supposing under the same facts, Pedro pays the
said P20,000, may he recover the same amount
Q: On June 1, 1990, A obtained a loan of ₱100, 000 from from X? (1998 Bar)
B, payable not later than December 20, 1990. B
required A to issue him a check for that amount to be A:
dated December 20, 1990. Since he does not have any a. Yes. Y can recover from Pedro. Pedro is an
checking account, A, with the knowledge of B, requested accommodation party. Absence of consideration is in
the nature of an accommodation. Defense of absence of
16
UST BAR OPERATIONS
QUAMTO (1987-2016)

consideration cannot be validly interposed by a. Section 29 of the NIL provides that an accommodation
accommodation party against a holder in due course. party is liable on the instrument to a holder for value,
b. If Pedro pays the said P20 ,000 to Y, Pedro can recover notwithstanding that such holder at the time of taking
the amount from X. X is the accomm odated party or the the instrument knew him to be only an accommodation
party ultimately liable for the instrument. Pedro is only party. As an accommodation party, Ben Lopez is
an accommodation party. Otherwise, it would be unjust primarily and unconditionally liable on the promissory
enrichment on the part of X if he is not to pay Pedro. note to a holder for value as if the contract was not for
Q: Brad was in desperate need of money to pay his debt accommodation.
to Pete, a loan shark. Pete threatened to take Brad’s life b. Under Section 14 of the NIL, Juan Sy is primarily liable
if he failed to pay. Brad and Pete went to see Señorita to the extent of P5, 000 in the hands of a holder in due
Isobel, Brad’s rich cousin, and asked her if she could course. However, if Ben Lopez paid the note, Juan Sy has
sign a promissory note in his favor in the amount of the obligation to reimburse the former to the extent of
P10, 000.00 to pay Pete. Fearing that Pete would kill the amount paid.
Brad, Señorita Isobel acceded to the request. She
affixed her signature on a piece of paper with the Q: Dagul has a business arrangement with Facundo. The
assurance of Brad that he will just fill it up later. Brad latter would lend money to another, through Dagul,
then filled up the blank paper, making a promissory whose name would appear in the promissory note as
note for the amount of P100, 000.00. He then indorsed the lender. Dagul would then immediately indorse the
and delivered the same to Pete who accepted the note note to Facundo. Is Dagul an accommodation party?
as payment of the debt. What defense or defenses can Explain. (2005 Bar)
Señorita Isobel set up against Pete? Explain. (2005 bar)
A: An accommodation note is one to which the
A: Señorita Isobel can set-up both real and personal accommodation party has put his name, without
defenses against Pete, who cannot claim to be a holder in consideration, for the purpose of accommodating some
due course because he knew of the compulsion used upon other party who is to use it and is expected to pay it. The
Señorita Isobel, thus: accommodation is not one to the person who takes the note
— that is, the payee or indorsee, but one to the maker or
a. the real defenses available are incompleteness of the indorser of the note. In this case, the indorser, Dagul, in
instrument because Señorita Isobel only signed on a making the indorsement to the lender, Facundo, was merely
blank piece of paper, duress amounting to forgery, acting as agent for the latter or, as a mere vehicle for the
alteration of the holder by changing the amount to a transference of the naked title from the borrower or maker
higher figure; and of the note and was not acting as an accommodation party.
b. the personal defenses of fraud in inducement
incompleteness when the paper was delivered, and lack Q: As a rule under the Negotiable Instruments Law, a
of consideration. subsequent party may hold a prior party lia ble but not
vice-versa. Give two (2) instances where a prior party
Q: Susan Kawada borrowed P500, 000 from XYZ Bank may hold a subsequent party liable. (2008 Bar)
which required her, together with Rose Reyes who did
not receive any amount from the bank, to execute a A: In case of an accommodated party and in case of an
promissory note payable to the bank, or its order on acceptor for honor. An accommodation party may hold the
stated maturities. The note was executed as so agreed. party accommodated liable to him, even if the party
What kind of liability was incurred by Rose, that of an accommodated is a subsequent party. The relation between
accommodation party or that of a solidary debtor? them is that of a principal and a surety. (PNB v. Maza, 1925)
Explain. (2003 Bar) For the same reason, an acceptor for honor may hold the
party for whose honor he has accepted a bill of exchange
A: Rose incurs the liability of an accommodation party since liable to him. (Sec. 161, NIL) A payer for honor is subrogated
she executed the promissory without receiving value to the rights of the holder as regards the party for whose
therefor and for the purpose of lending his name to Susan honor he paid and all parties liable to the latter. (Sec. 175,
Kawada, the accommodated party. Nonetheless, as an NIL)
accommodation maker, Rose is primarily and
unconditionally liable on the promissory note to a holder NEGOTIATION
for value,co-debtor
solidary regardless of whether
since she stands
such distinction as abesurety
would or
entirely Modes of Negotiation
immaterial and inconsequential as far as a holder for value
is concerned.
Q: A delivers a bearer instrument to B. B then specially
indorses it to C and C later indorses it in blank to D. E
Q: Juan Sy purchased from “A” Appliance Center one steals the instrument from D and, forging the si gnature
generator set on installment with chattel mortgage in of D, succeeds in “negotiating” it to F who acquires the
favor of the vendor. After getting hold of the generator instrument in good faith and for value.
set, Juan Sy immediately sold it without consent of the
vendor. Juan Sy was criminally charged with estafa. To a. If, for any reason, the drawee bank refuses to
settle the case extra judicially, Juan Sy paid the sum of honor the check, can F enforce the instrument
P20, 000 and for the balance of P5, 000.00 he executed against the drawer?
a promissory note for said amount with Ben Lopez as an b. In case of the dishonor of the check by both the
accommodation party. Juan Sy failed to pay the balance. drawee and the drawer, can F hold any of B, C and
D liable secondarily on the instrument? (1997
a. What is the liability of Ben Lopez as an Bar)
accommodation party? Explain.
b. What is the liability of Juan S y? (1993, 2003 Bar) A:
a. Yes. The instrument was payable to bearer as it was a
A: bearer instrument. It could be negotiated by mere

17
Mercantile Law

delivery despite the presence of special indorsements. “For value received, I promise to pay
The forged signature is unnecessary to presume the Automotive Company or order at its office in
juridical relation between or among the parties prior to Legaspi City, the sum of P200, 000.00 with
the forgery and the parties after the forgery. The only interest at twelve (12%) per cent per annum,
party who can raise the defense of forgery against a payable in equal installments of P20, 000.00
holder in due course is the person whose signature is monthly for ten (10) months starting October
forged. 21, 1991.
b. Only B and C can be held liable by F. the instrument at
the time of the forgery was payable to bearer, being a Manila September 21, 1991.
bearer instrument. Moreover, the instrument was
indorsed in blank by C to D. D, whose signature was (Sgd.) Perla
forged by E cannot be held liable by F.
Pay to the order of Reliable Finance Corp.
Kinds of Indorsements
Automotive Company
Q: Anna makes a promissory note payable to bearer and By:
delivers it to Bing. In turn, Bing negotiates it by mere (Sgd.) Manager
delivery to Carmen, who endorses it especially to Dong.
Dong negotiates it by special indorsement to Emma, Because Perla defaulted in the payment of her
who negotiates it to Fe by mere delivery. Anna did not installments, Reliable Finance Corporation initiated a
pay. To whom are Bing, Carmen, Dong and Emma liable? case against her for a sum of money. Perla argued that
Explain your answer fully. (1988 Bar) the promissory note is merely open to all defenses
available to the assignor and, therefore, Reliable
A: Bing, not being an indorser, may only be held liable for Finance Corporation is not a holder in due course.
breach of warranty but the facts in the problem do not
disclose any such breach. a. Is the promissory note a mere assignment of credit
or a negotiable instrument? Why?
Carmen, under her special indorsement, may be held A: The promissory note in the problem is a negotiable
secondarily liable by Dong and Emma since the latter (Dong instrument, being in compliance with the provisions of
and Emma) derived title under Carmen’s special Section 1 of the NIL. Neither the fact that the payable sum is
indorsement. Carmen is not secondarily liable to Fe since to be paid with interest nor that the maturities are in stated
the latter obtained it by mere delivery from Emma and installments renders uncertain the amount payable.
therefore did not obtain title through Carmen’s special
indorsement. b. Is Reliable Finance Corporation a holder in due
course? Explain briefly. (1992 Bar)
Dong holds himself secondarily liable to Emma since the
latter derived title under Dong’s special indorsement but A: Yes, Reliable Finance Corporation is a holder in due
not to Fe who acquired the instrument only by delivery. course given the factual settings. Said corporation
apparently took the promissory note for value, and there
Emma, not being an indorser, is not secondarily liable to Fe. are no indications that it acquired it in bad faith.
Emma’s only possible source of liability to Fe would b e for
a breach of warranty but the facts in the problem do not Q: Larry issued a negotiable promissory note to Evelyn
disclose any such breach. and authorized the latter to fill up the amount in blank
with his loan account in the sum of P1, 000. However,
Secondary liability requires due notice of dishonor, unless Evelyn inserted P5, 000 in violation of the instruction.
excused, which we assume had properly been observed. She negotiated the note to Julie who had no knowledge
of the infirmity. Julie in turn negotiated said note to
HOLDER IN DUE COURSE Devi for value and who had no knowledge of the
infirmity.
Q: What constitutes a holder in course? (1996 Bar)
a. Can Devi enforce the note against Larry and if she
A: A holder in due course is one who has taken the can, for how much? Explain.
instrument under the following conditions: b. Supposing Devi endorses the note to Baby for value
but who has knowledge of the infirmity, can the
1. That it is complete and regular upon its face; latter enforce the note against Larry? (1993 Bar)
2. That he became a holder of it before it was overdue and
without notice that it had been previously dishonored, A:
if such was the fact;
3. That he took it in good faith and for value; a. Devi can enforce the note against Larry since she is a
4. That at the time it was negotiated to him, he had no holder in due course. Since the document delivered to
notice of any infirmity in the instrument or defect in the Evelyn is in blank and she was authorized to fill up the
title of the person negotiating it. amount in the promissory note, Devi can enforce
against Larry the amount of P5, 000.00 as this case falls
Q: Perla brought a motor car payable in installments squarely under Sec 14 of the Negotiable Instruments
from Automotive Company for P250, 000. She made a Law. As against a holder in due course, the instrument
down payment of P50, 000 and executed a promissory is always valid and enforceable to the full extent. The
note for the balance. The company subsequently defense of filing- up contrary to authorization is a mere
indorsed the note to Reliable Finance Corporation personal or equitable defense. (Villanueva, Commercial
which financed the purchase. The promissory note Law Review, 2009 edition )
read: b. Baby cannot enforce the note against Larry since she is
not a holder in due course because Larry could

18
UST BAR OPERATIONS
QUAMTO (1987-2016)

interpose the real and personal defenses to defeat the defect in the title of the person negotiating it. All of the
claim of Baby. However, because of the shelter principle four conditions must concur in order for a holder to
in Negotiable Instruments Law, Baby could be elevated qualify as a holder in due course. In the case at hand, Z
to a status of a holder in due course since a person not did not acquire the instrument for value. As such she
holder in due course steps in the shoes of the prior cannot be considered as a holder in due course.
party. Therefore, Baby could enforce the note against b. The drawer. The instrument was validly negotiated to
Larry the same way as Devi could enforce it. Z by virtue of the endorsement made by Y despite lack
of any consideration. The drawer cannot evade liability
Q: PN makes a promissory note for P5, 000, but leaves since Z, as a holder of the instrument, has the right to
the name of the payee in blank because he wanted to collect upon the same. Likewise, the drawer may not
verify its correct spelling first. He mindlessly left the raise as a defense the fact of lack of consideration since
note on top of his desk at the end of the workday. When it is a personal defense that may only be raised by Y
he returned the following morning, the note was since the drawer is not privy to said transaction.
missing. It turned up later when X presented it to PN for
payment. Before X, T, who turned out to have filched the DEFENSES AGAINST THE HOLDER
note from PN’s office, had endorsed the note after
inserting his own name in the blank space as the payee. Q: Po Press issued in favor of Jose a postdated crossed
PN dishonored the note, contending that he did not check, in payment of newsprint which Jose promised to
authorize its completion and delivery. Xxx Can the deliver. Jose sold and negotiated the check to Excel Inc.
payee in a promissory note be a “holder in due course” at a discount. Excel did not ask Jose the purpose of
within the NIL? Explain your answer. (2000 Bar) crossing the check. Since Jose failed to deliver the
newsprint, Po ordered the drawee bank to stop
A: No, a payee in a promissory note cannot be a “holder in payment on the check. Efforts of Excel to collect from Po
due course” within the meaning of the NIL, because a payee failed. Excel wants to know from you as counsel:
is an immediate party in relation to the m aker. The payee is
subject to whatever defenses, real or personal, available to a. Whether as second indorser and holder of the
the maker of the promissory note. crossed check, is it a holder in due course?
b. Whether Po’s defense of lack of consideration as
Q: How does the “shelter principle” embodied in the against Jose is also available as against Excel?
Negotiable Instruments Law operate to give rights of a (1994, 1995 Bar)
holder-in-due course to a holder who does n ot have the
status of a holder-in-due course? Briefly explain. (2008 A:
Bar)
a. Excel Inc. is not a holder in due course. The act of
A: The shelter principle provides that a person, to whom a crossing the check imposes upon the holder thereof the
holder in due course has transferred the negotiable duty to ascertain the indorser’s title to the check or the
instrument, as well as any later transferee, will succeed to nature of his possession or the purpose for which it was
the rights of the holder in due course. As a result, issued. Excel is guilty of gross negligence amounting to
transferees of holders in due course are generally not legal absence of good faith for its failure to inquire from
subject to defenses against the payment of an instrument. Jose the purpose for which the three checks were
This doctrine ensures the free transferability of the crossed despite the warning of the crossing, hence, it is
negotiable instrument. Its name derives from the idea that not deemed a holder in due course.
the transferees “take shelter” in the rights of the holder in b. Yes, the defense of lack of consideration as against Jose
due course. However, this principle presupposes that the is also available as against Excel. For not being a holder
holder for value is not a party to the fraud. in due course, Excel is subject to personal defenses as if
the check were non-negotiable, such as lack of
Since a holder for value merely steps into the shoes of the consideration between Po Press and Jose. In this case,
indorser, the holder for value will be able to acquire the Jose’s failure to deliver the newsprint resulted in the
rights of a holder in due course if the indorser is a holder in absence of consideration for the issuance of the check.
due course. Consequently, Po Press cannot be made liable to pay the
face value of the check.

Q: X borrowed
Php1Million and money from issued
as payment, Y in athe amount
check. of
Y then Q: On Oct 12, 1993, Chelsea Straights, a corporation
indorsed the check to his sister Z for no consideration. engaged in the manufacture of cigarettes, ordered from
When Z deposited the check to her account, the check Moises 2,000 bales of tobacco. Chelsea issued to Moises
was dishonored for insufficiency of funds. two crossed checks postdated 15 Mar 94 and 15 Apr 94
in full payment therefor. On 19 Jan 94 Moises sold to
a. Is Z a holder in due course? Explain your answer. Dragon Investment House at a discount the two checks
b. Who is liable on the check, the drawer or the drawn by Chelsea in his favor. Moises failed to deliver
indorser? Explain your answer. (2012 Bar) the bales of tobacco as agreed despite Chelsea’s
demand. Consequently, on 1 Mar 94 Chelsea issued a
A: “stop payment” order on the 2 checks issued to Moises.
Dragon, claiming to be a holder in due course, filed a
a. No. A holder in due course is a holder who has taken the complaint for collection against Chelsea for the value of
instrument under the following conditions: (a)That it is the checks. Rule on the complaint of Dragon. Give your
complete and regular upon its face; (b) That he became legal basis. (1995 Bar)
the holder of it before it was overdue, and without
notice that it had been previously dishonored, if such A: The complaint should be dismissed. The act of crossing
was the fact; (c) That he took it in good faith and for the check imposes upon the holder thereof the duty to
value; (d) That at the time it was negotiated to him he ascertain the indorser’s, in this case Moises’ title to the
had no notice of any infirmity in the instrument or check or the nature of his possession. Failing in this respect,

19
Mercantile Law

Dragon cannot be deemed a holder in due course and as purpose, otherwise he is not a holder in due course. The act
such, Moises is subject to personal defenses as if the check of crossing a check serves as a warning to the drawee bank
were non-negotiable, such as lack of consideration between that payment must be made to the right party; otherwise
Chelsea and Moises for Moises’ failure to deliver the bales the bank has no authority to use the drawer's funds
of tobacco. There being no consideration for the issuance of deposited with the bank. To be assured that it will avoid any
the check, Chelsea cannot thus be made liable to pay the face mistake in paying to the wrong party, banks adopted the
value of the check and this constitutes a defense not only policy that crossed checks must be deposited in the payee's
against Moises but even against Dragon who is not a holder account. When withdrawal is made, the banks can be sure
in due course. that they are paying to the right party.

Q: What are the effects of crossing a check? (1996 Bar) LIABILITIES OF PARTIES

A: The effects of crossing a check are as follows: Q: X, Y and Z signed a promissory note in favor of A
stating: “We promise to pay A on December 31, 2001
1. The check may not be encashed but only deposited in a the sum of P5, 000. “When the note fell due, A sued X
banks; and Y who put up the defense that A should have
2. The check may be negotiated only once to one who has impleaded Z. Is the defense valid? Why? (2001 Bar)
an account with a bank;
3. The act of crossing a check serves as a warning to the A: The defense is not valid. The liability of X, Y and Z under
holder thereof that the check has been issued for a the promissory note is joint. Such being the case, Z is not an
definite purpose so that the holder must inquire if he indispensable party. The fact that A did not implead Z will
has received the check pursuant to that purpose, not prevent A from collecting the proportionate share of X
otherwise he is not a holder in due course. and Y in the payment of the loan.

Q: On March 1, 1996, Pentium Company ordered a Q: A check for P50, 000 was drawn against drawee bank
computer from CD Bytes, and issued a crossed check in and made payable to XYZ Marketing or order. The
the amount of P30, 000 post-dated Mar 31, 1996. Upon check was deposited with payee’s account at ABC Bank
receipt of the check, CD Bytes discounted the check with which then sent the check for clearing to drawee bank.
Fund House. On April 1, 1996, Pentium stopped Drawee bank refused to honor the check on ground that
payment of the check for failure of CD Bytes to deliver the serial number thereof had been altered. XYZ
the computer. Thus, when Fund House deposited the Marketing sued drawee bank. In instant suit, drawee
check, the drawee bank dishonored it. If Fund House bank contended that XYZ Marketing as payee could not
files a complaint against Pentium and CD Bytes for the sue the drawee bank as there was no privity between
payment of the dishonored check, will the complaint them. Drawee theorized that there was no basis to
prosper? Explain (1996 Bar) make it liable for the check. (1999 Bar)

A: The case will prosper as against the CD Bytes, the a. Is this contention correct?
immediate indorser but not as against Pentium Company. b. Is it proper for the drawee bank to dishonor the
The effect of crossing a check relates to the mode of its check for the reason that it h ad been altered?
presentment for payment which must be made by the
holder, or by some person authorized to receive payment A:
on his behalf. Thus, in the absence of due presentment, as in
this case where the check was not presented by the payee a. Yes. As a general rule, the drawee is not liable under the
(CD Bytes) or the proper party authorized to make check because there is no privity of contract between
presentment of the checks, the drawer (Pentium Company) XYZ Marketing, as payee, and ABC Bank as the drawee
cannot be held liable. However, Fund House may recover bank. However, if the action taken by the bank is an
from the immediate indorser, if the latter has no valid abuse of right which caused damage not only to the
excuse for refusing payment. issuer of the check but also to the payee, the payee has
a cause of action under quasi-delict.
b. The serial number is not a material particular of the
check. Its alteration does not constitute material
Q: Distinguish clearly (1) crossed checks fro m cancelled alteration of the instrument. The serial number is not
checks (2004 Bar) material to the negotiability of the instrument.

A: A crossed check is one with two parallel lines drawn Q: Marlon deposited with LYRIC bank a money market
diagonally on the left portion of the check. On the other placement of P1M for a term of 31 days. On maturity
hand, a cancelled check is one marked or stamped "paid" date, one claiming to be Marlon called up the LYRIC
and/or "cancelled" by or on behalf of a drawee bank to Bank account officer and instructed him to give the
indicate payment thereof. manager’s check representing the proceeds of the
money market placement to Marlon’s girlfriend, Ingrid.
Q: What is a crossed check? What are the effects of The check, which bore the forged signature of Marlon,
crossing a check? Explain. (2005 Bar) was deposited in Ingrid’s account with YAMAHA Bank.
YAMAHA Bank stamped a guaranty on the check
A: A crossed check is a check with two parallel lines written reading: “All prior endorsements and/or lack of
diagonally on the left top portion of the check. The effects of endorsement guaranteed.” Upon presentment of the
crossing a check are: the check may not be encashed but check, LYRIC Bank funds the check. Days later, Marlon
only deposited in the bank; the check may be negotiated goes to LYRIC Bank to collect his money market
only once to one who has an account with a bank; and the placement and discovers the foregoing transactions.
act of crossing the check serves as a warning to the holder
that the check has been issued for a definite purpose so that Marlon thereupon sues LYRIC Bank which in turn files
he must inquire if he has received the check pursuant to that a third-party complaint against YAMAHA Bank. Discuss

20
UST BAR OPERATIONS
QUAMTO (1987-2016)

the respective rights and liabilities of the two banks. A:


(2010 Bar)
a. Since the instrument became a bearer instrument, EF
A: Since the money market placement of Marlon is in the could no longer claim payment from AB. EF is not a
nature of a loan to Lyric Bank, and since he did not authorize holder of the promissory note. To make the
the release of the money market placement to Ingrid, the presentment for payment, it is necessary to exhibit the
obligation of Lyric Bank to him has not been paid. Lyric instrument, which EF cannot do because he is not in
Bank still has the obligation to pay him . possession thereof.
b. No, because CD negotiated the instrument by delivery.
Since Yamaha Bank indorsed the check bearing the forged
endorsement of Marlon and guaranteed all endorsements, Q: Gemma drew a check on September 13, 1990. The
including the forged endorsement, when it presented the holder presented the check to the drawee bank only on
check to Lyric Bank, it should be held liable to it. However, March 5, 1994. The bank dishonored the check on the
since the issuance of the check was attended with the
negligence of Lyric Bank, it should share the loss with same
holderdate.
gaveAfter dishonor
a formal byofthe
notice drawee to
dishonor bank, the
Gemma
Yamaha Bank on a 50% basis. through a letter dated April 27, 1994.

Q: Distinguish an irregular indorser from a general 1. What is meant by “unreasonable time” as applied to
indorser. (2005) presentment?
2. Is Gemma liable to the holder? (1994 Bar)
A: An irregular indorser, not otherwise a party to the
instrument, places his signature thereon in blank before A:
delivery to add credit thereto. A general indorser is a
regular party to the instrument like a maker, drawer or 1. As applied to presentment for payment, “reasonable
acceptor and he signs upon delivery of the instrument while time” is meant not more than 6 months from the date of
an irregular indorser signs for valuable consideration. issue. Beyond said period, it is “unreasonable time” and
the check becomes stale.
Q: Pancho drew a check to Bong and Gerard jointly. 2. No. Aside from the check being already stale, Gemma is
Bong indorsed the check and also forged Gerard’s also discharged from liability under the check, being a
indorsement. The payor bank paid the check and drawer and a person whose liability is secondary, this
charged Pancho’s account f or the amount of the check. is due to the giving of the notice of dishonor beyond the
Gerard received nothing from the payment. Pancho period allowed by law. The giving of notice of dishonor
asked the payor bank to recredit his account. Should
the bank comply? Explain fully. (2008 Bar) on April
1994 27, the
when 1994 is more
check wasthan 1 month from
dishonored. Since March 5,
it is not
shown that Gemma and the holder resided in the same
A: Yes, the bank should recredit the full amount of the check place, the period within which to give notice of
to the account of Pancho, considering that the check was dishonor must be the same time that the notice would
payable to the account of Pancho. Considering that the reach Gemma if sent by mail.
check was payable to Bong and Gerard jointly, the
indorsement of Gerard was necessary to negotiate the NOTICE OF DISHONOR
check pursuant to Sec. 41 of the NIL, to wit: Where an
instrument is payable to the order of 2 or more payees or Q: When is notice of dishonor not required to be given
indorsees who are not partners, all must indorse unless the to the drawer? (1996 Bar)
one indorsing has authority to indorse for the others. Since
Bong forged the signature of Gerard without authority, the A: Notice of dishonor not required to be given to the drawer
indorsement was wholly inoperative. in any of the following cases:

1. Where the drawer and the drawee are the same person;
2. When the drawee is a fictitious person or a person not
PRESENTMENT FOR PAYMENT having capacity to contract;
3. When the drawer is the person to whom the instrument

Q: is presented for payment;


4. Where the drawer has no right to expect or require that
a. AB issued a promissory note for P1, 000 payable to the drawee or acceptor will honor the instrument;
CD or his order on September 15, 2002. CD indorsed 5. Where the drawer has countermanded payment
the note in blank and delivered the same to EF. GH
stole the note from EF and on September 14, 2002 DISCHARGE OF NEGOTIABLE INSTRUMENT
presented it to AB for payment. When asked by AB,
GH said CD gave him the note in payment for two Q: Bong bought 300 bags of rice from Ben for P300, 000.
cavans of rice. AB therefore paid GH P1, 000 on the As payment, Bong indorsed to Ben a BPI check issued
same date. On September 15, 2002, EF discovered by Baby in the amount of P300, 000. Upon presentment
that the note of AB was not in his possession and he for payment, the BPI check was dishonored because
went to AB. It was then that EF found out that AB Baby’s account from which it was drawn has been
had already made payment made payment on the closed. To replace the dishonored check, Bong indorsed
note. Can EF still claim payment from AB? Why? a crossed DBP check issued also by Baby for P300, 000.
b. As a sequel to the same facts narrated above, EF, out Again, the check was dishonored because of insufficient
of pity for AB who had already paid P1, 000 to GH, funds. Ben sued Bong and Baby on the dishonored BPI
decided to forgive AB and instead go after CD who check. Bong interposed the defense that the BPI check
indorsed the note in blank to him. Is CD still liable was discharged by novation when Ben accepted the
to EF by virtue of the indorsement in blank? Why? crossed DBP check as replacement for the BPI check.
(2002 Bar) Bong cited Section 119 of the NIL whi ch provides that a

21
Mercantile Law

negotiable instrument is discharged “by any other act immediately advised XM Bank of such fact and that William
which will discharge a simple contract for the payment immediately advised XM Bank of such fact and that the
of money.” Is Bong correct? (2014 Bar) latter promptly notified ND Bank thereafter. CB Circular No.
9, as amended, on which the decisions of the Suprem e Court,
A: No. Bong is not correct. While Section 119 of the NIL in in the Hongkong & Shanghai Banking Corporation v. People’s
relation to Article 1231 of the Civil Code provides that one Bank & Trust Co. and Republic Bank v. CA, et al. were based
of the modes of discharging a negotiable instrument is by was expressly cancelled and superseded by the CB Circular
any other act which will discharge a simple contract for the No. 317, dated December 23, 1970. The latter was in turn
payment of money, such as novation, the acceptance by the amended by CB Circular No. 580, dated September 19, 1977.
holder of another check which replaced the dishonored As to the altered checks, the new rules provide that the
bank check did not result to novation. drawee bank can still return them even after 4:00pm of the
next day provided it does so within 24 hours from discovery
There are only 2 ways which indicate the presence of of the alteration but in no event beyond the period fixed or
novation and thereby produce the effect of extinguishing an provided by law for filing of a legal action by the returning
obligation by another which substitutes the same. First, bank against the bank sending the same. Assuming that the
novation must be explicitly stated and declared in relationship between the drawee bank and the collecting
unequivocal terms as novation is never presumed. bank is evidenced by some written document, the
Secondly, the old and the new obligation must be prescriptive period would be 10 years.
incompatible on every point. In the instant case, there was
no express agreement that the holder’s acceptance of the CHECKS
replacement check will discharge the drawer and endorser
from liability. Neither is there incompatibility because both Q: Mr. Pablo sought to borrow P200, 000 from Mr.
checks were given precisely to terminate a single obligation Carlos. The latter agreed to loan the amount in the form
arising from the same transaction. of a post-dated check which was crossed (i.e., two
parallel lines diagonally drawn on the top left portion
Q: PN is the holder of a negotiable promissory note of the check). Before the due date of the check, Mr.
within the meaning of the NIL. The note was srcinally Pablo discounted it with Mr. Noble. On due date, Mr.
issued by RP to XL as payee. XL indorsed the note to PN Noble deposited the check with his bank. The check was
for goods bought by XL. The note mentions the place of dishonored. Mr. Noble sued Mr. Pablo. The court
payment on the specified maturity date as the office of dismissed Mr. Noble’s complaint. Was the court’s
the corporate secretary of PX bank during banking decision correct? (1991 Bar)
hours. On maturity date, RP was at the aforesaid office
ready to pay the note but PN did not show up. What PN A: The court’s decision was incorrect. Mr. Pablo and Mr.
later did was to sue XL for the face value of the note, Carlos, being immediate parties to the instrument, are
plus interest and costs. Will the suit prosper? Explain. governed by the rules of privity. Given the factual
(2000 Bar) circumstances of the problem, Mr. Pablo has no valid excuse
from denying liability. Mr. Pablo undoubtedly had benefited
A: Yes . The suit will prosper as far as the face value of the in the transaction. To hold otherwise would also contravene
note is concerned, but not with respect to the interest due the basic rules of unjust enrichment. Even in negotiable
subsequent to the maturity of the note and the costs of instruments, the Civil Code and other laws of general
collection. RP was ready and willing to pay the note at the application can still apply suppletorily.
specified place of payment on the specified maturity date,
but PN did not show up. PN lost his right to recover the Q: Mr. Lim issued a check drawn against BPI Bank in
interest due subsequent to the maturity of the note and the favor of Mr. Yu as payment for certain shares of stock
cost of collection. which he purchased. On the same day that he issued the
check to Mr. Yu, Mr. Lim ordered BPI to stop payment.
MATERIAL ALTERATION Per standard banking practice, Mr. Lim was made to
sign a waiver of BPI’s liability in the event that it should
Q: William issued to Albert a check for P100, 000 drawn pay Mr. Yu through oversight or inadvertence. Despite
on XM Bank. Albert alerted the amount of the check to the stop order by Mr. Lim, BPI nevertheless paid Mr. Yu
P210, 000, and deposited the check to his account with upon presentation of the check. Mr. Lim sued BPI for
ND Bank. When ND Bank presented the check for paying his order. Decide the case. (1991 Bar)
payment through the Clearing House, XM Bank honored
it. Thereafter, Albert withdrew the P210, 000 and A: In the event that Mr. Lim, in fact, had sufficient legal
closed his account. reasons to issue the stop payment order, he m ay sue BPI for
paying against his order. The waiver executed by Mr. Lim
When the check was returned to him after a month, did not mean that it need not exercise due diligence to
William discovered the alteration. XM Bank recredited protect the interest of its account holder. It is not amiss to
P210, 000 to William’s current account, and sought state that the drawee, unless the instrument had earlier
reimbursement from ND Bank. ND Bank refused, been accepted by it, is not bound to honor payment to the
claiming that XM Bank failed to return the altered check holder of the check that thereby excludes it from any
to it within the 24-hour clearing period. liability if it were to comply with the stop payment order.

Who, as between, XM Bank and ND Bank, should bear Q: X draws a check against his current account with the
the loss? Explain. (1996 Bar) Ortigas branch of Bonifacio Bank in favor of B. Although
X does not have sufficient fund, the bank honors the
A: ND Bank should bear the loss if XM Bank returned the check when it is presented to payment. Apparently, X
altered check to ND Bank within 24 hours after its discovery has conspired with the bank’s bookkeeper so that his
of the alteration. Under the given facts, William discovered ledger card would show that he still has sufficient
the alteration when the altered check was returned to him funds.
after a month. It may safely be assumed that William

22
UST BAR OPERATIONS
QUAMTO (1987-2016)

The bank files an action for recovery of the amount paid vehicle. Pura was eventually acquitted of the charge of
to B because the check presented has no sufficient violating BP 22 but was found civilly liable for the
funds. Decide the case. (1998 Bar) amount of the check plus legal interest. Pura appealed
the decision as regards the civil liability, claiming that
A: The bank cannot recover the amount paid to B for the there was no privity of contract between Foton and
check. When the bank honored the check, it became an Pura. No civil liability could be adjudged against her
acceptor. As acceptor, the bank became primarily and because of her acquittal from the criminal charge. It
directly liable to the payee/holder B. was Freddie who was civilly liable to Foton, Pura
claimed. Pura added that she could not be an
The recourse of the bank should be against X and its accommodation party either because she only came in
bookkeeper who conspired to make X’s ledger show that he after Freddie failed to pay the purchase price, or 6
has sufficient funds. months after the execution of the contract between
Foton and Freddie. Her liability was limited to her act
Q: Gaudencio, a store owner, obtained a P1 M loan from of issuing a worthless check, but by her acquittal in the
Bathala Financing Corporation (BFC). As security, criminal charge, there was no more basis for her to be
Gaudencio executed a “Dee d of Assignment of held civilly liable to Foton. Pura’s act of issuing the
Receivables,” assigning 15 checks received from subject check did not, by itself, assume the obligation of
various customers who bought merchandise from his Freddie to Foton or automatically make her a party to
store. The checks were duly indorsed by Gaudencio’s the contract. Is Pura liable? (2014 Bar)
customers.
A: Yes. Pura is liable. The rule is that every act or omission
The Deed of Assignment contains the following punishable by law has its accompanying civil liability. The
stipulation: civil aspect of every criminal case is based on the principle
that every person criminally liable is also civilly liable. If the
“If, for any re ason, the receivables or any part accused however, is not found to be criminally liable, it does
thereof cannot be paid by the obligors, the not necessarily mean that she will not likewise be held
ASSIGNOR unconditionally and irrevocably civilly liable because extinction of the penal action does not
agrees to pay the same, assuming the liability to carry with it extinction of civil action. Although Pura was
pay, by way of a penalty, 3% of the total amount not an accommodation party, she cannot escape civil
unpaid, for the period of delay until the same is liability. In cases of violation of BP 22, a special law, the
fully paid.” intent in issuing a check is immaterial. Pura issued the
bouncing check. Thus, regardless of her intent, she remains
When the checks became due, BFC deposited them for civilly liable because the act or omission, the making and
collection, but the drawee banks dishonored all the issuing of the subject check, from which her civil liability
checks for one of the following reasons: “account arises.
closed,” “payment stopped,” “account under
garnishment,” or “insufficiency of funds”. BFC wrote Q: Is a manager’s check as good as cash? Why or why
Gaudencio notifying him of the dishonored checks, and not? (2015 Bar)
demanding payment of the loan. Because Gaudencio did
not pay, BFC filed a collection suit. A: Yes , the Supreme Court held in various decisions that a
manager’s check is good as cash. A manager’s check is a
In his defense, Gaudencio contended that: (a) BFC did check drawn by the bank against itself. It is deemed pre-
not give timely notice of dishonor of the checks; and (b) accepted by the bank from the moment of issuance. The
considering that the checks were duly indorsed, BFC check becomes the primary obligation of the bank which
should proceed against the drawers and the indorsers issues it and constitutes its written promise to pay. By
of the checks. issuing it, the bank in effect commits its total resources,
integrity and honor behind the check. ( Tan v. CA, 239 SCRA
Are Gaudencio’s defenses tenable? Explain. (2009 Bar) 310; International Corporate Bank v. Gueco, 351 SCRA 516;
Metrobank v. Chiok, GR No. 172652, Nov. 26, 2014 )
A: No. Gaudencio’s defenses are untenable. The cause of
action of BFC was really on the contract of loan, with the ALTERNATIVE ANSWER: Manager’s check is not legal
checks merely serving as collateral to secure the payment tender because under Article 1249 of the Civil Code, checks
of the loan. By virtue of the Deed of Assignment which he do not produce the effect of payment until encashed or
signed, Gaudencio undertook to pay for the receivables if for through the fault of the creditor; their value has been
any reason they cannot be paid by the obligors. impaired. Moreover, under the Central Bank Act, the debtor
cannot compel the creditor to accept checks in payment of
Q: A criminal complaint for violation of BP22 was filed a debt whether public or private. ( Article 60 of RA 7653) I
by Foton Motors, an entity engaged in the business of
car dealership, against Pura Felipe with the office of the
City Prosecutor of Quezon City. The office found INSURANCE
probable cause to indict Pura and filed an information
before the MeTC of Quezon City, for her issuance of a
postdated check in the amount of P1, 020, 000.00 which Q: May a member of the MILF or its breakaway group,
was subsequently dishonored upon presentment due the Abu Sayyaf, be insured with a company licensed to
to “Stop Payment”. Pura issued the check because her do business under the Insurance Code of the
son, Freddie, attracted by a huge discount of P220, 000, Philippines? Explain. (2000 Bar)
purchased a Foton Blizzard 4x2 from Foton. The term
of the transaction was Cash-on-Delivery and no down A: A member of the MILF or the Abu Sayyaf may be insured
payment was required. The car was delivered on May with a company licensed to do business under the Insurance
14, 1997, but Freddie failed to pay upon delivery. Code of the Philippines. What is prohibited to be insured is
Despite non- payment, Freddie took possession of the a public enemy. A public enemy is a citizen or national of a

23
Mercantile Law

country with which the Philippines is at war. Such member calamities. Moreover, a common carrier is bound to
of the MILF or the Abu Sayyaf is not a citizen or national of transport cargo and passengers with extraordinary
another country, but of the Philippines. diligence. Such deviation is just proper in its exercise of
extraordinary diligence.
MARINE INSURANCE b. Sec. 124 of the Insurance Code provides that a deviation
is proper when:
Q: A marine insurance policy on a cargo states that “the
insurer shall be liable for losses incident to perils of the i. When caused by the circumstances over which
sea”. During the voyage, seawater entered the neither the master nor the owner of the ship has
compartment where the cargo was stored due to the any control;
defective drainpipe of the ship. The insured filed an ii. When necessary to comply with a warranty, or to
action on the policy for recovery of the damages caused avoid a peril, whether or not the peril is insured
to the cargo. May the insured recover damages? (1998 against;
Bar) iii. When made in good faith, and upon reasonable
grounds of belief in its necessity to avoid a peril; or
A: No. the proximate cause of the damage to the cargo iv. When made in good faith, for the purpose of saving
insured was the defective drainpipe of the ship. This is peril
human life or relieving another vessel in distress.
of the ship, and not peril of the sea. The defect in the
drainpipe was the result of the ordinary use of the ship. To
Q: On October 30, 2007, M/V Pacific, a Philippine
recover under a marine insurance policy, the proximate
registered vessel owned by Cebu Shipping Company
cause of the loss or damage must be peril of the sea.
(CSC), sank on her voyage from Hongkong to Manila.
Empire Assurance Company (Empire) is the insurer of
Q: An insurance company issued a marine insurance
the lost cargoes loaded on board the vessel which were
policy covering a shipment by sea from Mindoro to
consigned to Debenhams company. After it indemnified
Batangas of 1, 000 pieces of Mindoro garden stones
Debenhams, Empire as subrogee filed an action for
against “total loss only”. The stones were loaded in two
damages against CSC.
lighters, the first with 600 pieces and the second with
400 pieces. Because of rough seas, damage was caused
a. Assume that the vessel was seaworthy. Before
the second lighter resulting in the loss of 325 out of the
departing, the vessel was advised by the Japanese
400 pieces. The owner of the shipment filed claims
Meteorological Center that it was safe to travel to its
against the insurance company on the ground of
destination. But while at sea, the vessel received a
constructive total loss inasmuch as more than ¾ of the
report of a typhoon moving within its general path.
value of the stones had been lost in one of the lighter.
To avoid the
However, it typhoon,
was still the vessel
at the changed
fringe of theitstyphoon
course.
Is the insurance company liable under its policy? Why?
when it was repeatedly hit by huge waves,
(1992 Bar)
foundered and eventually sank. The captain and the
A: The insurance company is not liable under its policy
crew were saved except three (3) who perished. Is
covering against “total loss only” the shipment of 1,000
CSC liable to empire? What principle of maritime
pieces of Mindoro garden stones. There is no constructive
law is applicable? Explain.
total loss that can be claimed since the ¾ rule is to be
computed on the total 1, 000 pieces of Mindoro garden
b. Assume the vessel was not seaworthy as in fact its
stones covered by the single policy coverage.
hull had leaked, causing flooding in the vessel, will
your answer be the same? Explain.
Q: On a clear weather, M/V Sundo, carrying insured c. Assume the facts in question (b). Can the heirs of
cargo, left the port of Manila bound for Cebu. While at the three (3) crew members who perished recover
sea, the vessel encountered a strong typhoon forcing from CSC? Explain fully. (2008)
the captain to steer the vessel to the nearest island
where it stayed for seven days. The vessel ran out of A:
provisions for its passengers. Consequently, the vessel
proceeded to Leyte to replenish its supplies. a. The principle of limited liability will apply because the
exclusively real and hypothecary nature of maritime
a. Assuming that the cargo was damaged because of law operates to limit the liability of the ship owner to
such deviation, who between the insurance the value of the vessel, earned freightage and proceeds
company and the owner of the cargo bears the loss? of the insurance, if any “No vessel, No liability,”
Explain. expresses in a nutshell the limited liability rule.
b. Under what circumstances can a vessel properly (Monarch Ins. Co v. CA, June 2008) The total destruction
proceed to a port other than its port of destination? of the vessel extinguishes maritime lien as there is no
Explain. (2005 Bar) longer any res to which it can attach. In this case, the
ship was seaworthy. It exercised extraordinary
A: diligence when it changed its course to avoid the
typhoon but unfortunately, it was hit by huge waves
a. The insurance company is liable. It is an instance of a and sank. Since the vessel sank at no fault by CSC, it
valid deviation because the strong typhoon is a cannot be held liable by virtue of “No vessel, no liability
fortuitous event over which neither the master nor the rule.”
owner has any control. Deviation is likewise proper in b. No. The insurance company is not liable for loss if the
order to avoid a peril. [ Sec. 124 (b)] Art. 1734 of the New vessel is not seaworthy [ Madrigal, Tiangco Company v.
Civil Code further provides that common carriers are Hanson, Orth, and Stevenson, Inc. (1958) 103 Phil.345, at
responsible for the loss, destruction, deterioration of p. 350] A ship is seaworthy if it is reasonably fit to
the goods unless the same is due to any of the following perform the service and to encounter the ordinary
causes only, among others is when there is flood, storm, perils of the voyage contemplated by the parties to the
earthquake, lightning or other natural disaster or policy (Sec. 114, ICP). In this case, there was a leak in the

24
UST BAR OPERATIONS
QUAMTO (1987-2016)

hull of the ship making it unseaworthy; thereby, a fire in the furnace using material that was highly
insurance company is exempt from liability. flammable. The furnace fire caused intense heat and
c. Yes. Although the proximate cause of death o f the crew great volumes of smoke and soot that damaged the
members is their negligence in not attending to the furnishings in the rooms of X. when X tried to collect on
ship’s seaworthiness which is their duty to do so and the policy, Queens Insurance refused to pay contending
the company cannot be blamed for the acts imputable that the damage is not covered by the policy, where the
to its employees’ negligence; however, they can claim fire is confined within the furnace. Decide. (1989 Bar)
against the employee’s compensation because the
accident causing their death occurred during the course A: The refusal of Queens to pay is justified. The damage is
of employment and there was no notorious negligence not covered by the policy which only insures “against all
on the part of the crew members as to exempt the heirs direct loss and damage by fire.” The damage being claimed
from claiming under the employee’s com pensation. The by X was caused by intense heat and great volumes of
fund used for payment of claims is derived from the smoke and soot and not directly by fire. The stipulation in
State Insurance Fund, which, upon payment, will be the policy is paramount, not being contrary to law.
reimbursed by the employer.
Q: Robin insured his building against fire with EFG
Q: Paolo, the owner of an ocean-going vessel, offered to Assurance. The insurance policy contained the usual
transport the logs of Constantino from Manila to stipulation that any action or suit must be filed within 1
Nagoya. Constantino accepted the offer, not knowing year after the rejection of the claim.
that the vessel was manned by an irresponsible crew
with deep-seated resentments against Paolo, their After his building burned down, Robin filed his claim
employer. Constantino insured the cargo of logs against for fire loss with EFG. On February 28, 1994, EFG denied
both perils of the sea and barratry. The logs were Robin’s claim. On April 3, 1994, Robin sought
improperly loaded on one side, thereby causing the reconsideration of the denial, but EFG reiterated its
vessel to tilt on one side. On the way to Nagoya, the crew position. On March 20,1995, Robin commenced judicial
unbolted the sea valve of the vessel causing water to action against EFG.
flood the ship hold. The vessel sank. Constantino tried
to collect from the insurance company which denied Should Robin’s action be given due course? Explain.
liability, given the unworthiness of both the vessel and (1996 Bar)
its crew. Constantino countered that he was not the
owner of the vessel and he could therefore not be A: No, Robin’s action should not be given due course. His
responsible for conditions about which he was filing of the request for reconsideration did not suspend the
innocent. Is the insurance company liable? (2010 Bar) running of the prescriptive period of 1 year stipulated in the
insurance policy. Thus, when Robin commenced judicial
A: No, the insurance company is not liable because there is action against EFG on March 20, 1995, his ability to do so
an implied warranty in every marine insurance that the ship had already prescribed. The 1-year period is counted from
is seaworthy whoever is insuring the cargo, whether it be February 28, 1994 when EFG denied Robin’s claim, not from
the shipowner or not. There was a breach of warranty, the date (presumably after April 3, 1994) when EFG
because the logs were improperly loaded and the crew was reiterated its position denying Robin’s claim. The reason for
irresponsible. It is the obligation of the owner of the cargo this rule is to insure that claims against insurance
to look for a reliable comm on carrier which keeps its vessel companies are promptly settled and that insurance suits are
in seaworthy condition. brought by the insured while the evidence as to the srcin
and cause of the destruction has not yet disappeared.
Q: What is “barratry” in marine insurance? (2010 Bar)
LIFE INSURANCE
A: Barratry is any willful misconduct on the part of the
master or the crew in pursuance of some unlawful or Q: Manpower Company obtained a group life insurance
fraudulent purpose without the consent of the owner and to policy for its employees from Phoenix Insurance
the prejudice of the interest of the owner. Company. The master policy issued by Phoenix on June
1, 1986 contained a provision that eligible employees
Q: What warranties are implied in marine insurance? for insurance coverage were all full time employees of
Manpower regularly working at least 30 hours per
(2000 Bar) week. The policy had also an incontestable clause.
A: The following warranties are implied in marine Beforehand, Phoenix sent enrollment cards to
insurance: Manpower for distribution to its eligible employees. X
filled out the card which contained a printed clause: “I
1. That the ship is seaworthy to make the voyage and/or request the insurance for which I may become eligible
to take in certain cargoes; under said Group Policy.” The cards were then sent to
2. That the ship shall not deviate from the voyage insured; Phoenix and X was among the employees of Manpower
3. That the ship shall carry the necessary documents to who was issued a certificate of coverage by Phoenix
show nationality or neutrality and that it will not carry
document which will cast reasonable suspicion On July 3, 1988, X was killed on the occasion of a
thereon; robbery in their house. While processing the claim of
4. That the ship shall not carry contraband, especially if it X’s beneficiary, Phoenix found out that X was not an
is making voyage through belligerent waters. eligible employee as defined in the group policy since
he has not been employed 30 hours a week by
FIRE INSURANCE Manpower. Phoenix refused to pay. May X’s beneficiary
invoke the incontestability clause against Phoenix?
Q: Queens Insurance Company insured X, a resident of Reasons. (1989 Bar)
Baguio City, “against all direct loss and damage by fire.”

X lived in a house heated by a furnace. His servant built

25
Mercantile Law

A: The beneficiary of X may validly invoke the insurer of liability for the death of the insured since the
incontestability clause. If the incontestability clause can death was an accident.
apply even to cases of intentional concealment and
misrepresentation, there would be no cogent reason for Q: S Insurance Company issued a Personal Accident
denying such application where the insured had not been Policy to Bob Tan with a face value of P500, 000.
guilty thereof. When X filled out the card containing the
printed clause “I request the insurance for which I may In the evening of September 5, 1992, after his birthday
become eligible under said Group Policy”, it behooved the party, Tan was in a happy mood but not drunk. He was
insurer to look into the qualifications of X whether he can playing with his handgun, from which he previously
thus be covered or not by the group life insurance policy. In removed the magazine. As his secretary was watching
issuing the certificate of coverage to X, Phoenix may, in fact, television, he stood in front of her and pointed the gun
be said to have waived the 30-hour per week requirement. at her. She pushed it aside and said that it may be
loaded. He assured her that it was not and then pointed
Q: The policy of insurance upon his life, with a face it at his temple. The next moment, there was an
value of P100, 000, was assigned by Jose, a married man explosion and Tan slumped to the floor lifeless.
with 2 legitimate children, to his nephew, Y as security
for a loan of P50, 000. He did not give the insurer any The wife of the deceased sought payment on the policy
written notice of such assignment despite the explicit but her claim was rejected. The insurance company
provision to that effect in the policy. Jose died. Upon the agreed that there was no suicide. However, it was the
claim on the policy by the assignee, the insurer refused submission of the insurance company that there was no
to pay on the ground that it was not notified of the accident. In support thereof, it contended (a) that there
assignment. Upon the other hand, the heirs of Jose was no accident when a deliberated act was performed
contended that Y is not entitled to any amount under unless some additional, unexpected, independent and
the policy because the assignment without due notice unforeseen happening occur which produces or brings
to the insurer was void. Resolve the issues. (1991 Bar) about the injury or death; and (b) that the insured
willfully exposed himself to needless peril and thus
A: A life insurance is assignable. A provision, however, in removed himself from the coverage of the insurance
the policy stating that written notice of such an assignment policy. Are the two contentions of the insurance
should be given to the insurer is valid. The failure of the company tenable? Explain. (1993)
notice of assignment would thus preclude the assignee from
claiming rights under the policy. The failure of notice did A: No. these 2 contentions of the insurance company are not
not, however, avoid the policy; hence, upon the death of tenable. The insurer is liable for injury or death even due to
Jose, the proceeds would, in the absence of a designated the insured’s gross negligence. The fact that the insured
beneficiary, go to the estate of the insured. The estate, in removed the magazine from the handgun means that the
turn, would be liable for the loan of P50, 000 owing in favor insured did not willfully expose himself to needless peril. At
of Y. most, the insured is only guilty of negligence.

Q: Sun-Moon Insurance issued a Personal Accident Q: Juan de la Cruz was issued Policy No. 8888 of the
Policy to Henry Dy with a face value of P500, 000. A Midland Life Insurance Co. on a whole life plan for
provision in the policy states that “the company shall P20,000 on August 19, 1989. Juan is married to Cynthia
not be liable in respect of bodily injury consequent with whom he has three legitimate children. He,
upon the insured person attempting to commit suicide however, designated Purita, his common-law wife, as
or willfully exposing himself to needless peril except in the revocable beneficiary. Juan referred to Purita in his
an attempt to save human life.” 6 months later, Henry application and policy as the legal wife. Three (3) years
died of a bullet wound in his head. Investigation later, Juan died. Purita filed her claim for the proceeds
showed that one evening Henry was in a happy mood of the policy as the designated beneficiary therein. The
although he was not drunk. He was playing with his widow, Cynthia, also filed a claim as the legal wife. To
handgun from which he had previously removed its whom should the proceeds of the insurance policy be
magazine. He pointed the gun at his sister who got awarded? (1998 Bar)
scared. He assured her it was not loaded. He then
pointed the gun at his temple and pulled the trigger. A: The estate is entitled to claim for the proceeds of the
The gun fires and Henry slumped dead on the floor. insurance policy. As a general rule, the insured may
designate anyone he wishes to be his/her beneficiary.
Henry’s wife, Beverly, as the designated beneficiary, However, Art. 2012 of the Civil Code, which applies
sought to collect under the policy. Sun-Moon rejected suppletorily to the Insurance Code, provides that any
her claim on the ground that the death of Henry was not person who is forbidden from receiving any donation under
accidental. Beverly sued the insurer. Art. 739 cannot be named beneficiary of a life insurance
policy by the person who cannot make any donation to him,
Decide. Discuss fully. (1995 Bar) according to said article. Art. 739 specifically bars the
donations as between persons who were guilty of adultery
A: Beverly can recover the proceeds of the policy from the or concubinage. Since Purita is a common-law wife of Juan,
insurer. The death of the insured was not due to suicide or she falls squarely in to this category therefore she is
willful exposure to needless peril which are the excepted disqualified to receive insurance proceeds and when this
risks. The insured’s act was purely on act of negligence happens, the estate of the deceased is the one entitled to the
which is covered by the policy and for which the insured got proceeds (Insular Life Assurance Company, Ltd. v. Capronia
the insurance for his protection. In fact, he removed the Ebrado, G.R. No. L-44059, Oct. 28, 1977).
magazine from the gun and when he pointed the gun to his
temple he did so because he thought that it was safe for him Q: Jacob obtained a life insurance policy for P1M
to do so. He did so to assure his sister that the gun was designating irrevocably Diwata, a friend, as his
harmless. There is none in the policy that would relieve the beneficiary, Jacob, however, changed his mind and
wants Yob and Jojo, his other friends, to be included as

26
UST BAR OPERATIONS
QUAMTO (1987-2016)

beneficiaries considering that the proceeds of the a. Yes. The “incontestability clause” is a provision in law
policy are sufficient for the three friends. Can Jacob still that after a policy of life insurance made payable on
add Yob and Jojo as his beneficiaries? (2005 Bar) the death of the insured shall have been in force during
the lifetime of the insured for a period of 2 years from
A: No, Jacob cannot add other beneficiaries as this would the date of its issue or of its last reinstatement, the
diminish the interest of Diwata who is the irrevocably insurer cannot prove that the policy is void ab initio or
designated beneficiary. The insured can only do so with the is rescindable by reason of fraudulent concealment or
consent of Diwata. misrepresentation of the insured or his agent. In this
case, the policy was issued on August 30, 1993, and the
Q: What are the effects of an irrevocable designation of insured died on April 10, 1996. The insurance policy
a beneficiary under the Insurance Code? (2005 Bar) was thus in force for a period of 3 years, 7 months and
24 days. Considering that the insured died after the 2-
A: The irrevocable beneficiary has a vested interest in the year period, Ilocos is, therefore, barred from proving
policy, including its incident such as the policy loan and cash that the policy is void ab initio by reason of the
surrender value. insured’s fraudulent concealment or
misrepresentation or want of insurable interest on the
Q: On January 1, 2000, Antonio Rivera secured a life part of the beneficiary.
insurance from SOS Insurance Corp. for P1M with b. Yes, Aban is entitled to claim the proceeds. After the 2-
Gemma Rivera, his adopted daughter, as the year period lapse, or when the insured dies within the
beneficiary. Antonio Rivera died on March 4, 2005 and period, the insurer must make good on the policy, even
in the police investigation, it was ascertained that though the policy was obtained by fraud, concealment,
Gemma Rivera participated as an accessory in the or misrepresentation, as in this case, when the insured
killing of Antonio Rivera. Can SOS Insurance Corp. avoid did not personally apply for the policy as she was
liability by setting up as a defense the participation of illiterate and that it was the beneficiary who filled up
Gemma Rivera in the killing of Antonio Rivera? Discuss the insurance application designating herself as
with reasons. (2008 Bar) beneficiary.

A: SOS cannot avoid liability under the policy. While CASUALTY INSURANCE
Gemma’s interest as beneficiary in the policy is considered
forfeited since she is an accessory to the killing of Antonio, Q: HL insured his brand new car with P Insurance
the proceeds of the policy should be paid to the nearest Company for comprehensive coverage wherein the
relative of Antonio (if not otherwise disqualified). The insurance company undertook to indemnify him
Insurance Code provides that the interest of a beneficiary in against loss or damage to the car (a) by accidental
a life insurance policy shall be forfeited when the collision xxx (b) by fire, external explosion, burglary, or
beneficiary is the principal, accomplice, or accessory in theft, and (c) malicious act.
willfully bringing about the death of the insured; in which
event, the nearest relative of the insured shall receive the After a month, the car was carnapped while parked in
proceeds of said insurance if not otherwise disqualified. the parking space in front of the Intercontinental Hotel
in Makati. HL’s wife who was driving the said car when
Q: On July 3, 1993, Delia Sotero took out a life insurance it was carnapped was in possession of an expired
policy from Ilocos Life designating Aban, her niece, as driver’s license, a violation of the “authorized driver”
her beneficiary. Ilocos Life issued Policy No. 747, with a clause of the insurance company.
face value of P100, 000, in Sotero’s favor on August 30,
1993, after the requisite medical examination and 1. May the insurance company be held liable to
payment of the premium. On April 10, 1996, Sotero indemnify HL for the loss of the insured vehicle?
died. Aban filed a claim for the insurance proceeds on Explain.
July 9, 1996. Ilocos Life conducted an investigation into 2. Supposing that the car was brought by HL on
the claim and came out with the following findings: installment basis and there were installments due
and payable before the loss of the car, the vendor
1. Sotero did not personally apply for insurance demanded from HL the unpaid balance of the
coverage, as she was i lliterate. promissory note. HL resisted the demand and

2. Sotero was sickly since 1990. claimed


due andthat he was
payable only liable
before for of
the loss thethe
installments
car but no
3. Sotero did not have the financial capability to pay
longer liable for the other installments not yet due
the premium on the policy.
at the time of the loss of the car. Decide. (1993 Bar)
4. Sotero did not sign the application for insurance.
5. Aban was the one who filed the insurance A:
application and designated herself as the
beneficiary. 1. Yes. The car was lost due to theft. What applies in this
case is the “theft” clause, and not the “authorized
For the above reasons and claiming fraud, Ilocos Life driver” clause. It is immaterial that HL’s wife was
denied Aban’s claim on April 16, 1997, but refunded the driving the car with an expired driver’s license at the
premium paid on the policy. time it was carnapped.
2. The promissory note is not affected by whatever befalls
a. May the incontestability period set in even in cases the subject matter of the accessory contract. The
of fraud as alleged in this case? unpaid balance on the promissory note should be paid
b. Is Aban entitled to claim the proceeds under the and not only the installments due and payable before
policy? (2014 Bar) the loss of the car.

A: COMPULSORY MOTOR VEHICLE LIABILITY INSURANCE

27
Mercantile Law

Q: As a rule, an insurance contract is consensual and taken by one of the employees (of the machine shop) to
voluntary. The exception in the case of: show off to his girlfriend. While on the way to his
a. Inland Marine Insurance girlfriend’s house, the car smashed into a parked truck
b. Industrial Life Insurance and was extensively damaged. Mr. Gonzales filed a
c. Motor Vehicle Liability Life Insurance claim for recovery under the policy but was refused
d. Life Insurance (2014 Bar) payment. The insurance company averred that the car
was not stolen, and therefore was not covered by the
A: c. Motor Vehicle Liability Life Insurance “Theft Clause”.

Q: X was ri ding a suburban utility vehicle (SUV) covered Decide the merits of the insurer’s contention, with
by a comprehensive motor vehicle liability insurance reasons. (1988 Bar)
(CMVLI) underwritten by FastPay Insurance Company
when it collided with a speeding bus owned by RM A: I would decide in favor of the insured. The coverage of
Travel, Inc. the collision resulted in serious injuries to the policy was rather comprehensive in scope. The Theft
X; Y, a passenger of the bus; and Z, a pedestrian waiting Clause particularly, at least by intendment, should cover
for a ride at the scene of the collision. The police report situations of the loss of the property occasioned by the
established that the bus was the offending vehicle. The taking or use by another without the authority of the
bus had a CMVLI policy issued by Dragon Insurance insured. Furthermore, doubts on the insurance, being a
Corporation, X, Y and Z jointly sued RM Travel and “contract by adherence” must be construed against the
Dragon Insurance for indemnity under the Insurance insurer.
Code of the Philippines. The lower court applied the
“no-fault” indemnity policy of the statute, dismissed the Q: What is your understanding of a “no fault indemnity”
suit against RM Travel, and ordered Dragon insurance clause found in an insurance policy? (1994, 1989 Bar)
to pay indemnity to all three plaintiffs. Do you agree
with the court’s judgment? Explain. (2000 Bar) A: Under the “no fault indemnity” clause any claim for the
death or injury of any passenger or third party shall be paid
A: No. The cause of action of Y is based on the contract of without the necessity of proving fault or negligence of any
carriage, while that of X and Z is based on torts. The court kind. The indemnity in respect of any one person shall not
should not have dismissed the suit against RM Travel. The exceed P15, 000, provided they are under oath, the
court should have ordered Dragon Insurance to pay each of following proofs shall be sufficient:
X, Y, and Z to the extent of the insurance coverage, but
whatever amount is agreed upon in the policy should be a. Police report of the accident; and
answered first by RM Travel and the succeeding amount b. Death certificate and evidence sufficient to establish
should be paid by Dragon Insurance up to the amount of the the proper payee; or
insurance coverage. The excess of the claims of X, Y and Z, c. Medical report and evidence of medical or hospital
over and above such insurance coverage, if any, should be disbursement in respect of which refund is claimed.
answered or paid by RM Travel. d. Claim may be made against one motor vehicle only.

Q: Sheryl insured her newly acquired car, a NISSAN Q: While driving his car along EDSA, Cesar sideswiped
Maxima against any loss or damage for P50, 000 and Roberto, causing injuries to the latter. Roberto sued
against third party liability for P20, 000 with the XYZ Cesar and the third party liability insurer for damages
Insurance Corp. (XYZ). Under the policy, the car must be and/or insurance proceeds. The insurance company
driven only by an authorized driver who is either: (1) moved to dismiss the complaint, contending that the
the insured, or (2) any person driving on the insur ed’s liability of Cesar has not yet been determined with
order or with his permission: provided that the person finality.
driving is permitted in accordance with the licensing or
other laws or regulations to drive the motor vehicle and a. Is the contention of the insurer correct? Explain.
is not disqualified from driving such motor vehicle by b. May the insurer be held liable with Cesar? (1996)
order of a court.
A:
During the effectivity of the policy, the car, then driven
by Sheryl herself, who had no driver’s license, met an
accident and was extensively damaged. The estimated a. no , the
No contention
need to waitof for
the insurer is not correct.
the decision of theThere is
court
cost of the repair was P40, 000. Sheryl immediately
determining Cesar’s liability with finality before the
notified XYZ, but the latter refused to pay on the policy
third party liability insurer could be sued. The
alleging that Sheryl violated the terms thereof when
occurrence of the injury to Roberto immediately gave
she drove it without a driver’s license. Is the insurer
rise to the liability of the insurer under its policy. In
correct? (1991 Bar)
other words, where an insurance policy insures directly
against liability, the insurer’s liability accrues
A: No. the insurer is not correct in denying the claim since
immediately upon the occurrence of the injury or event
the proviso “that the person driving is permitted in
upon which the liability depends.
accordance with the licensing, etc.” qualifies only a person
b. The insurer cannot be held solidarily liable with Cesar.
driving the vehicle, other than the insured, at the tim e of the
The liability of the insurer is based on contract while
accident.
that of Cesar is based on tort. If the insurer were
solidarily liable with Cesar, it could be made to pay
Q: Mr. Gonzales was the owner of a car insured with
more than the amount stated in the policy. This would,
Masagana Insurance Company for “Own Damage”,
however, be contrary to the principles underlying
“Theft”, and “Third Party Liability” effective May 14,
insurance contracts. On the other hand, if the insurer
1986 to May 14, 1987. On May 2, 1987, the car was
were solidarily liable with Cesar and it is made to pay
brought to a machine ship for repairs. On May 11, 1987,
only up to the amount stated in the insurance policy, the
while in the custody of the machine shop, the car was
principles underlying solidary obligations would be
28
UST BAR OPERATIONS
QUAMTO (1987-2016)

violated. July 5, 2013. Matino denied the claim, reasoning as


stated in the contract that “the company shall not be
Q: X was riding a suburban utility vehicle (SUV) covered liable for any malicious damage caused by the i nsured,
by a comprehensive motor vehicle liability insurance any member of his family or by a person in the insured’s
(CMVLI) underwritten by FastPay Insurance Company service. Is Matino correct in denying the claim? (2014
when it collided with a speeding bus owned by RM Bar)
Travel, Inc. the collision resulted in serious injuries to
X; Y, a passenger of the bus; and Z, a pedestrian waiting A: No. Matino is not correct in denying the claim. An
for a ride at the scene of the collision. The police report insurance company cannot deny a claim by the owner of a
established that the bus was the offending vehicle. The motor vehicle who insured it against loss or damage
bus had a CMVLI policy issued by Dragon Insurance because the driver he employed stole it. Matino cannot
Corporation, X, Y and Z jointly sued RM Travel and invoke the provision excluding malicious damages caused
Dragon Insurance for indemnity under the Insurance by a person in the service of the insured. In common
Code of the Philippines. The lower court applied the ordinary usage, loss means failure to keep possession, while
“no-fault” indemnity policy of the statute, dismissed the malicious damage is damage resulting from the willful act
suit against RM Travel, and ordered Dragon insurance of the driver. Words which have different meanings shall be
to pay indemnity to all three plaintiffs. Do you agree understood in the sense which is most in keeping with the
with the court’s judgment? Explain. (2000 Bar) nature and object of the insurance contract. If a stipulation
admits several meanings, it should be understood as
A: No. The cause of action of Y is based on the contract of bearing the meaning which is most adequate to render it
carriage, while that of X and Z is based on torts. The court effectual. It may be shown that the words have a local,
should not have dismissed the suit against RM Travel. The technical or peculiar meaning and were so used and
court should have ordered Dragon Insurance to pay each of understood by the parties.
X, Y, and Z to the extent of the insurance coverage, but
whatever amount is agreed upon in the policy should be INSURABLE INTEREST
answered first by RM Travel and the succeeding amount
should be paid by Dragon Insurance up to the amount of the Q: A person is said to have an insurable interest in the
insurance coverage. The excess of the claims of X, Y and Z, subject matter insured where he has a relation or
over and above such insurance coverage, if any, should be connection with, or concern in it that he will derive
answered or paid by RM Travel. pecuniary benefit or advantage from its preservation.
Which among the following subject matters is not
Q: On May 26, 2001, Jess insured with Jack Insurance his considered insurable?
2014 Toyota Corolla sedan under a comprehensive
motor vehicle insurance policy for one year. On July 1, a. A partner in a firm on its future profits.
2014, Jess’ car was unlawfully taken. Hence, he b. A general creditor on the debtor’s property
immediately reported the theft to the Traffic c. A judgment creditor on debtor’s property
management Command (TMC) of the PNP, which made d. A mortgage creditor on debtor’s mortgaged
Jess accomplish a complaint sheet as part of its property. (2014 Bar)
procedure. In the complaint sheet, Jess alleged that a
certain Silat took possession of the subject vehicle to A: a. A partner in a firm on its future profits.
add accessories and improvements thereon. However,
Silat failed to return the subject vehicle within the Q: Distinguish insurable interest in property insurance
agreed 3-day period. As a result, Jess notified Jack of his from insurable interest in life insurance. (2002 Bar)
claim for reimbursement of the value of the vehicle
under the insurance policy. Jack refused to pay claiming A:
that there is no theft as Jess gave Silat lawfu l possession
of the car. Is Jack correct? (2014 Bar) 1. In property insurance, the expectation of benefit must
have a legal basis. In life insurance, the expectation of
A: No. Jack is not correct. The “theft clause” of a benefit to be derived from the continued existence of a
comprehensive motor vehicle insurance policy has been life need not have any legal basis.
interpreted by the Court in several cases to cover situations 2. In property insurance, the actual value of the interest

like (1) the


without when oneconsent
latter’s takes even
the motor vehicle
if the motor of another
vehicle is later thereinthereon.
placed is the limit of the
In life insurance
insurance, that
there is can validly
no limit be
to the
returned, there is theft —there being intent to gain as the amount of insurance that may be taken upon life.
use of the thing unlawfully taken constitutes gain, or (2) 3. In property insurance, an interest insured must exist
when there is taking of a vehicle by another person without when the insurance takes effect and when the loss
the permission or authority from the owner thereof. occurs but need not exist in the meantime. In life
insurance, it is enough that insurable interest exists at
Q: On February 21, 2013, Barrack entered into a the time when the contract is made but it need not exist
contract of insurance with Matino Insurance Company at the time of loss.
involving a motor vehicle. The policy obligates Matino
to pay Barrack the amount of P600, 000 in case of loss In life/health
or damage to said vehicle during the period covered,
which is from February 26, 2013 to February 26, 2014. Q: Blanco took out a P1M life insurance policy naming
On April 16, 2013, at about 9:00am, Barrack instructed his friend and creditor, Montenegro, as his beneficiary.
his driver, JJ, to bring the motor vehicle to a nearby auto When Blanco died, his outstanding loan obligation to
shop for tune-up. However, JJ no longer returned and Montenegro was only P50, 000. Blanco’s executor
despite diligent efforts to locate the said vehicle, the contended that only P50, 000 out of the insurance
efforts proved futile. Resultantly, Barrack promptly proceeds should be paid to Montenegro and the balance
notified Matino of the said loss and demanded payment of P950, 000 should be paid to Blanco’s estate.
of the insurance proceeds of P600,000. In a letter dated

29
Mercantile Law

Is the executor’s contention correct? Reason out your Carlo claim the i nsurance benefit? (2014 Bar)
answer. (1987 Bar) A: Yes. Carlo can claim the insurance benefit. If a person
insures the life or health of another person with himself as
A: The contention of the executor is incorrect. The beneficiary, all his rights, title and interests in the policy
beneficiary of a life insurance need not have any insurable shall automatically vest in the person insured. Carlo, as the
interest in the life of the insured. husband of Bianca, has an insurable interest in the life of the
latter. Also, every person has an insurable interest in the life
ALTERNATIVE ANSWER: The contention of the executor is and health of any person on whom he depends wholly or in
incorrect because it was Blanco himself who took out the part for support. The insurable interest in the life of the
life insurance policy on his own life, naming only person insured must exist when the insurance takes effect
Montenegro as the beneficiary. It would have been different but need not exist when the loss occurs. Thus, the
if it was Montenegro, as creditor, who took out a life subsequent knowledge of Carlo, upon the death of Bianca,
insurance policy on the life of Blanco, as a debtor. In that that the latter is a transgender does not destroy his
case, Montenegro’s insurable interest in the life of Blanco insurable interest on the life of the insured.
would be only to the extent of P50,000, which is the amount
of his credit. In Property

Q: On July 14, 19 85, X, a homosexual, took an insurance Q: In a civil suit, the Court ordered Benjie to pay Nat
policy on the life of his boyfriend, Y. In the insurance P500, 000. To execute the judgment, the sheriff levied
application, X misrepresented that Y was in perfect upon Benjie’s registered property (a parcel of land and
health although he knew all the time that Y was afflicted the building thereon), and sold the same at public
with AIDS. On October 18, 1987, Y died in a motor auction to Nat, the highest bidder. The latter, on March
accident. Shortly thereafter, X filed his i nsurance claim. 18, 1992, registered with the Register of Deeds the
certificate of sale issued to him by the sheriff.
Should the insurer pay? Reasons. (1987 Bar) Meanwhile, on January 27, 1993, Benjie insured with
Garapal Insurance for P1M the same building that was
A: The insurer is not obliged to pay. Friendship alone is not sold at public auction to Nat. Benjie failed to redeem the
the insurable interest contemplated in life insurance. property by March 18, 1993.
Insurable interest in the life of others (other than one’s own
life, spouses or children) is merely to the extent of the On March 19, 1993, a fire razed the building to the
pecuniary interest in that life. ground. Garapal Insurance refused to make good its
obligation to Benjie under the insurance contract.
Assuming that such pecuniary interest exist, an insurer
would be liable despite concealment or misrepresentation 1. Is Garapal Insurance legally justified in refusing
if the insurance had been in effect for more than 2 years payment to Benjie?
(incontestability clause). 2. Is Nat entitled to collect on the insurance policy?
(1994 Bar)
Q: Luis was the holder of an accident insurance policy
effective November 1, 1988 to October 31, 1989. At a A:
boxing contest held on January 1, 1989 and sponsored
by his employer, he slipped and was hit on the face by 1. Yes. At the time of the loss, Benjie was no longer the
his opponent so he fell and his head hit one of the posts owner of the property insured as he failed to redeem
of the boxing ring. He was rendered unconscious and the property. The law requires in property insurance
was dead on arrival at the hospital due to “intracranial that a person can recover the proceeds of the policy if
hemorrhage.” he has insurable interest at the time of the issuance of
the policy and also at the time when the loss occurs. At
Can his father who is a beneficiary under said insurance the time of fire, Benjie no longer had insurable interest
policy successfully claim indemnity from the insurance in the property insured.
company? Explain your answer. (1990 Bar) 2. No. While at the time of the loss he has insurable
interest in the building, as he was the owner thereof,
A: Yes, the father who is a beneficiary under the accident Nat did not have any interest in the policy. There was
insurance can successfully claim indemnity for the death of no automatic transfer clause in the policy that would
the insured. Clearly, the proximate cause of the death was give him such interest in the policy.
the boxing contest. Death is sustained in a boxing contest is
an accident. Q: A piece of machinery was shipped to Mr. Pablo on the
basis of C&F, Manila. Mr. Pablo insured said machinery
Q: Carlo and Bianca met in the La Boracay festivities. with the Talaga Merchants Insurance Corp. (TAMIC) for
Immediately, they fell in love with each other and got loss or damage during the voyage. The vessel sank en
married soon after. They have been cohabiting route to Manila. Mr. Pablo then filed a claim with TAMIC
blissfully as husband and wife, but they did not have which was denied for the reason that prior to delivery,
any offspring. As the years passed by, Carlo decided to Mr. Pablo had no insurable interest. Decide the case.
take out an insurance on Bianca’s life for P1M with him (1991 Bar)
(Carlo) as sole beneficiary, given that he did not have a
steady source of income and he always depended on A: Mr. Pablo had an existing insurable interest on the piece
Bianca both emotionally and financially. During the of machinery he bought. The purchase of goods under a
term of the i nsurance, Bianca died of what appeared to perfected contract of sale already vested equitable interest
be a mysterious cause so that Carlo immediately on the property in favor of the buyer even while it is
requested for an autopsy to be conducted. It was pending delivery.
established that Bianca died of a natural cause. More
than that, it was also established that Bianca was a Q: On February 3, 1987, while Jose Palacio was in the
transgender all along—a fact unknown to Carlo. Can hospital preparatory to a heart surgery, he called his

30
UST BAR OPERATIONS
QUAMTO (1987-2016)

only son, Boy Palacio, and showed the latter a will One of the provisions of the 1-year lease contract states:
naming the son as sole heir to all the father’s estate “18. x x x The LESSEE shall not insure against fire the
including the family mansion in Forbes Park. The chattels, merchandise, textiles, goods and eff ects placed
following day, Boy Palacio took out a fire insurance at any stall or store or space in the leased premises
policy on the Forbes Park mansion. One week later, the without first obtaining the written consent of the
father died. After his father’s death, Boy Palacio moved LESSOR. If the LESSEE obtains five insurance coverage
his wife and children to the family mansion which he without the consent of the LESSOR, the insurance policy
inherited. On March 30, 1987, a fire occurred razing the is deemed assigned and transferred to the LESSOR for
mansion to the ground. Boy Palacio then proceeded to the latter’s benefit.” Notwithstanding the stipulation in
collect on the fire insurance he took earlier on the the contract, without the consent of SBC, Ciriaco
house. insured the merchandise inside the premises against
loss by fire in the amount of P500, 000 with FUIC. A day
Should the insurance company pay? Reasons. (1987 before the lease contract expired, fire broke out inside
Bar) the leased premises, damaging Ciriaco’s merchandise.
Having learned of the insurance earlier procured by
A: In property insurance, insurable interest must exist both Ciriaco, SBC demanded from FUIC that the proceeds of
at the time of the taking of the insurance and at the time the the insurance policy be paid directly to it, as provided
risk insured against occurs. The insurable interest must be in the lease contract. Who is legally entitled to receive
an existing interest. The fact alone that Boy Palacio was the the insurance proceeds? Explain. (2009 Bar)
expected sole heir of his father’s estate does not give the
prospective heir any existing interest prior to the death of A: Ciriaco is entitled to receive the proceeds of the
the decedent. insurance policy. The stipulation that the policy is deemed
assigned and transferred to SBC is void, because SBC has no
Q: IS, is an elderly bachelor with no known relatives, insurable interest in the merchandise of Ciriaco.
obtained life insurance coverage for P250, 000 from
Starbrite Insurance Corporation, an entity licensed to Q: Novette entered into a contract for the purchase of
engage in the insurable business under the Insurance certain office supplies. The goods were shipped. While
Code of the Philippines. He also insured his residential in transit, the goods were insured by Novette. Does she
house for twice that amount with the same corporation. have an insurable interest over the goods even before
He immediately assigned all his rights to the insurance delivery of the same to her? Explain. (2015 Bar)
proceeds to BX, a friend-companion living with him. 3
years later, IS died in a fire that gutted his insured A: Yes, Novette has an insurable interest in the goods. The
house 2 days after he had sold it. There is no evidence contract of sale was already perfected and Novette acquired
of suicide or arson or involvement of BX in these events. interest thereon although the goods have yet to be
BX demanded payment of the insurance proceeds from delivered.
the 2 policies, the premiums for which IS had been
faithfully paying during all the time he was alive. DOUBLE INSURANCE AND OVER INSURANCE
Starbrite, refused payment, contending that BX had no
insurable interest and therefore was not entitled to Q: Distinguish co-insurance from re-insurance? (1994
receive the proceeds from IS’ insurance coverage on his Bar)
life and also on his property. Is Starbrite’s contention
valid? Explain. (2000 Bar) A: Co-insurance is the percentage in the value of the insured
property which the insured himself assumes or undertakes
A: Starbrite is correct with respect to the insurance to act as insurer to the extent of the deficiency in the
coverage on the property of IS. The beneficiary in the insurance of the insured property. Reinsurance is where the
property insurance policy or the assignee thereof must have insurer procures a third party, called the reinsurer, to
insurable interest in the property insured. BX, a mere insure him against liability by reason of such srcinal
friend-companion of IS, has no insurable interest in the insurance. Basically, a reinsurance is an insurance against
residential house of IS. BX is not entitled to receive the liability which the srcinal insurer may incur in favor of the
proceeds from IS’ insurance on his property. As to the srcinal insured
insurance coverage on the life of IS, BX is entitled to receive
the proceeds. There is no requirement that BX should have
insurable interest in the life of IS. It was IS himself who took Q: M/V Pearly
insured Shells,
for P40, passenger
000, 000.00 and“constructive
against cargo vessel,total
was
the insurance on his own life. loss.” Due to a typhoon, it sank near Palawan. Luckily,
there was no casualties, only injured passengers. The
Q: JQ, owner of a condominium unit, insured the same shipowner sent a notice of abandonment of his interest
against fire with XYZ Insurance Co., and made the loss over the vessel to the insurance company which then
payable to his brother, MLQ. In case of loss by fire of the hired professionals to afloat the vessel for P900,
said condominium unit, who may recover on the fire 000.00. When re-floated, the vessel needed repairs
insurance policy? (2001 Bar) estimated at P2, 000, 000.00. The insurance company
refused to pay the claim of the shipowner, stating that
A: JQ can recover on the fire insurance po licy for the loss of there was “no constructive total loss.”
the said condominium unit. He has the insurable interest as
owner-insured. As beneficiary in the fire insurance policy, a. Was there “constructive total loss” to entitle the
MLQ cannot recover on the fire insurance policy. For the shipowner to recover from the insurance company?
beneficiary to recover on the fire or property insurance Explain.
policy, it is required that he must have insurable interest in b. Was it proper for the shipowner to send a notice of
the property insured. In this case, MLQ does not have abandonment to the i nsurance company? Explain
insurable interest in the condominium unit. c. When does double insurance exist?
d. What is the nature of liability of the several
Q: Ciriaco leased a commercial apartment from SBC. insurers in double insurance? (2005 Bar)

31
Mercantile Law

A: Q: X borrowed from CCC Bank. She mortgaged her


house and lot in favor of the bank. X insured her house.
a. No. A constructive total loss is one which gives the The bank also got the house insured.
insured the right to abandon ( Sec. 131, ICP).
Abandonment of the thing insured may be availed of if a. Is this double insurance? Explain your answer.
the loss is more than three-fourths of its value or the b. Is this legally valid? Explain your answer.
expense to recover it from peril ( Sec 139, ICP). In this c. In case of damage, can X and CCC Bank separately
case, the constructive loss claimed by the shipowner claim for the insurance proceeds? (2012 Bar)
pertains to the vessel. The expenses for refloating and A:
estimated repairs did not amount to three-fourths of
the value of the vessel, hence, there is no constructive a. No. Double insurance exists where the same person is
total loss to speak of. insured by several insurers separately, in respect to the
b. No. The case did not qualify as one fo r total constructive same subject and interest. In the case at hand, the
loss. Deduced from the facts of the case, the loss insurance was acquired separately by X and CCC Bank.
incurred during the peril did not amount to three- There is therefore no double insurance as
fourths of its value. As provided in Sec. 139, contemplated upon by law (Sec. 93, Insurance Code ).
abandonment may be availed of if the loss is more than b. Yes. Double insurance is not prohibited unless there is
three-fourths of its value or the expense to recover it a stipulation to the contrary. A person may therefore
from peril. procure two or more insurances to cover his property.
c. Sec. 93 of the Insurance Code provides that double However, double insurance may lead to over insurance
insurance exists where the same person is insured by which is prohibited by law.
several insurers separately, in respect to the same c. Yes. The insurable interest of X, as a mortgagor, and
subject and interest. CCC Bank, as a mortgagee, is separate and distinct from
d. In double insurance, the insurers are considered as co- each other. Therefore they may insure the property to
insurers. Each one is bound to contribute ratably to the the extent that they may be damnified by a
loss in proportion to the amount for which he is liable contemplated peril. As such, X and CCC Bank may
under his contract. This is known as the “principle of separately claim for the insurance proceeds that they
contribution” or “contribution clause” [Sec. 94 (e)] . obtained from the property insured to the extent of
their insurable interest thereon.
Q: Terrazas de Patio Verde, a condominium building
has a value of P50 Million. The owner insured the MULTIPLE OR SEVERAL INTERESTS ON SAME
building against fire with three (3) insurance PROPERTY
companies for the following amounts:
Q: A businessman in the grocery business obtained
Northern Insurance Corp. – P20 Million from First Insurance an insurance policy for P5M to
Southern Insurance Corp. – P30 Million fully cover his stocks-in-trade from the risk of fire. 3
Eastern Insurance Corp. – P50 Million months later, a fire of accidental srcin broke out and
completely destroyed the grocery including his stocks-
a. Is the owner’s taking of insurance for the building in-trade. This prompted the businessman to file with
with three (3) insurers valid? Discuss. First Insurance a claim for P5M representing the full
b. The building as totally razed by fire. If the owner value of his goods. First Insurance denied the claim
decides to claim from the Eastern Insurance Corp. because it discovered that at the time of the loss, the
only P50 Million, will the claim prosper? (2008 Bar) stock-in-trade were mortgaged to a creditor who
likewise obtained from Second Insurance Company for
A: insurance coverage for the stocks at their full value of
P5M.
a. Yes. When there is double insurance and over
insurance results, the insured can claim in case of loss a. May the businessman and the creditor obtain
only up to the agreed valuation or up to the full separate insurance coverage over the same stocks-
insurable value from any, some or all insurers, without in-trade? Explain.
prejudice to the insurers ratably apportioning the b. Suppose you are the Judge, how much would you
allow the businessman and the creditor to recover
payments.
the Theboth
loss, from insured can also
insurers recoverpremium
the excess before orheafter
has from their respective insurers? Explain.
paid (Sec 94, ICP). What is prohibited is over insurance c. First Insurance refused to pay claiming that double
wherein there is only one insurer, where the insured insurance is contrary to law. Is this contention
takes insurance beyond the value of his insurable tenable? (1999 Bar)
interest. In this case, there is no over insurance because A:
the insurable interest in each insurance policy availed
of by the owner did not exceed the value of the a. Yes. The businessman, as owner, and the creditor, as
property. Double insurance resulting to over insurance mortgagee, have separate insurable interests in the
is allowed provided that the beneficiary can claim only same stocks-in-trade. Each may insure such interest to
up to the full insurable value from any, some or all protect his own separate interest.
insurers as in the case at bar. b. As judge, I would allow the businessman to recover his
b. Yes. The owner may demand indemnity from Eastern total loss of P5M pesos representing the full value of his
Insurance alone since the valued policy covers the total goods which were lost through fire. As to the creditor, I
amount of the loss incurred by the property insured. would allow him to recover the amount to the extent of
Sec. 94 clearly provides that in case of double or equivalent to the value of the credit he extended to
insurance, the owner may recover from any, two or all the businessman for the stocks-in-trade which were
of the insurers provided that the total amount that he mortgaged by the businessman.
will recover does not exceed his loss. c. The contention of First Insurance that double insurance
is contrary to law is untenable. There is no law
32
UST BAR OPERATIONS
QUAMTO (1987-2016)

providing that double insurance is illegal per se. Soon after the new policy was issued and before
Moreover, in the problem at hand, there is no double premium payments could be made, a fire gutted the
insurance because the insured with the First Insurance covered plant and facilities to the ground. The day after
is different from the insured with the Second Insurance the fire, SPMC issued a manager's check to SIC for the
Company. The same is true with respect to the interests fire insurance premium, for which it was issued a
insured in the two policies. receipt; a week later SPMC issued its notice of loss.

Q: To secure a loan of P10M, Mario mortgaged his SIC responded by issuing its own manager's check for
building to Armando. In accordance with the loan the amount of the premiums SPMC had paid, and denied
arrangements, Mario had the building insured with SPMC's claim on the ground that under the "cash and
First Insurance Company for P10M, designating carry" principle governing fire insurance, no coverage
Armando as the beneficiary. Armando also took existed at the time the fire occurred because the
insurance on the building upon his own interest with insurance premium had not been paid. Is SPMC entitled
Second Insurance Company for P5M. The building was to recover for the loss from SIC? (2003, 2013 Bar)
totally destroyed by fire, a peril insured against under
both insurance policies. It was subsequently A: St. Peter Manufacturing Company is entitled to recover
determined that the fire had b een intentionally started for the loss from Stable Insurance Company. Stable
by Mario and that in violation of the loan agreement, he Insurance Company granted a credit term to pay the
had been storing i nflammable materials in the building. premiums. This is not against the law, because the standing
business practice of allowing St. Peter Manufacturing
a. How much, if any, can Armando recover from ei ther Company to pay the premiums after 60 or 90 days, was
or both insurance companies? relied upon in good faith by SPMC. Stable Insurance
b. What happens to the P10M debt of Mario to Company is in estoppel ( UCPB General Insurance Company,
Armando? Explain. Inc. v. Masagana Telemart, Inc., 356 SCRA 307, 2001).

A: Q: Antarctica Life Assurance Corporation (ALAC)


publicly offered a specially designed insurance policy
a. Armando can receive P5M from Second Insurance covering persons between the ages of 50 to 75 who may
Company. As mortgagee, he had an insurable interest in be afflicted with serious and debilitating illnesses.
the building. Armando cannot collect anything from Quirco applied for insurance coverage, stating that he
First Insurance Company. First Insurance Company is was already 80 years old. Nonetheless, ALAC approved
not liable for the loss of the building. First, it was due to his application.

a willful actpolicies
insurance of Mario, who committed
contain arson.
a warranty Second,
that the fire
insured Quirco then requested ALAC for the issuance of a cover
will not store hazardous materials within the insured’s note while he was trying to raise funds to pay the
premises. Mario breached this warranty when he insurance premium. ALAC granted the request. 10 days
stored inflammable materials in the building. These after he received the cover note, Quirco had a heart
two factors exonerate First Insurance Company from seizure and had to be hospitalized. He then filed a claim
liability to Armando as mortgagee even though it was on the policy.
Mario who committed them.
b. Since Armando would have collected P5M from Second a. Can ALAC validly deny the claim on the ground that
Insurance Company, this amount should be considered the insurance coverage, as publicly offered was
as partial payment of the loan. Armando can only available only to persons 50 to 75 years of age? Why
collect the balance of P5M. Second Insurance Company or why not?
can recover from Mario the amount of P5 M it paid, A: No. By approving the application of Quirco who disclosed
because it became subrogated to the rights of Armando. that he was already 80 years old, ALAC waived the age
requirement. ALAC is now stopped from raising such
PREMIUM PAYMENT defense of age of the insured.

Q: Will an insurance policy be binding even if premium b. Did ALAC’s issuance of a cover note resu lt in the
is unpaid? What if partially paid? (2015 Bar) perfection of an insurance contract between Quirco

A: As a general rule, the insurance policy is not valid and and ALAC? Explain. (2009 Bar)
binding, unless the premium thereof has been paid. This is A: Yes. The issuance of a cover note resulted in the
the cash-and-carry rule under the Insurance Code. Premium perfection of the contract of insurance. In that case, it is only
is the consideration for the undertaking of the insurer to because there is delay in the issuance of the policy that the
indemnify the insured against a specified peril. There are cover note was issued.
exceptions, however, one of them is, when there is an
agreement allowing the insured to pay the premium in The cover note is a receipt whereby the company agrees to
installments and partial payment has been made at the time insure the insured for 60 days pending the issuance of a
of the loss ( Makati Tuscany Condominium Corporation v. regular policy. No separate premium is to be paid on a cover
Court of Appeals, G.R. No. 95546, November 6, 1992) note. It is not a separate policy but is integrated in the
regular policy to be subsequently issued.
Q: Stable Insurance Co. (SIC) and St. Peter
Manufacturing Co. (SPMC) have had a long-standing Q: The Peninsula Insurance Company offered to insure
insurance relationship with each other; SPMC secures Francis' brand new car against all risks in the sum of P1
the comprehensive fire insurance on its plant and Million for 1 year. The policy was issued with the
facilities from SIC. The standing business practice premium fixed at P60, 000.00 payable in 6 months.
between them has been to renewal of the policy is to Francis only paid the first two months installments.
allow SPMC a credit period of 90 days from the within Despite demands, he failed to pay the subsequent

which to pay the premium. installments. Five months after the issuance of the

33
Mercantile Law

policy, the vehicle was carnapped. Francis filed with the 2010. On April 5, 2010, the car was involved in an
insurance company a claim for its value. However, the accident that resulted in its total loss. On April 10, 2010,
company denied his claim on the ground that he failed the drawee bank returned Enrique’s check with the
to pay the premium resulting in the cancellation of the notation “Insufficient Funds.” Upon notification,
policy. Can Francis recover from the Peninsula Enrique immediately deposited additional funds with
Insurance Company? (2006 Bar) the bank and asked the insurer to redeposit the check.
Enrique thereupon claimed indemnity from the
A: Yes. As a general rule, no policy is binding unless the insurer. Is the insurer liable under the insurance
premiums thereof have been paid. However, one of the coverage? Why or why not? (2010 Bar)
exceptions is when there is an agreement allowing the
insured to pay the premium in installments and partial A: The insurer is not liable under the insurance policy.
payment has been made at the time of loss. In the case at Under Art 1249 of the Civil Code, the delivery of a check
hand Francis already paid two installments at the time of produces the effect of payment only when it is encashed.
the loss and as such may recover on the policy (Makati The loss occurred on April 5, 2010. When the check was
Tuscany Condominium Corp. v. CA, G.R. No. 95546, Nov. 6, deposited, it was returned on April 10, 2010, for
1992). Furthermore, the contention of the insurer that the insufficiency of funds. The check was honored only after
failure to pay premium resulted in the cancellation of the Enrique deposited additional funds with the bank. Hence, it
policy is not tenable since no policy of insurance shall be did not produce the effect of payment.
cancelled except upon notice thereof to the insured ( Sec. 64,
Insurance Code). Q: On September 25, 2013, Danny Marcial (Danny)
procured an insurance on his life with a face value of P5
Q: What is a mutual insurance company or association? M from RN Insurance Company (RN), with his wife Tina
(2006 Bar) Marcial (Tina) as sole beneficiary. On the same day,
Danny issued an undated check to RN for the full
A: A mutual insurance company is a cooperative enterprise amount of the premium. On October 1, 2013, RN issued
where the members are both the insurer and the insured. In the policy covering Danny’s life insurance. On October
it, the members all contribute, by a system of premiums or 5, 2013, Danny met a tragic accident and died. Tina
assessments, to the creation of a fund from which all losses claimed the insurance benefit, but RN was quick to deny
and liabilities are paid, and where the profits are divided the claim because at the time of Danny’s death, the
among themselves, in proportion of their interest. check was not yet encashed and therefore the premium
remained unpaid. Is RN correct? Will your answer be
Q: Alfredo took out a policy to insure his commercial the same if the check is dated October 15, 2013? (2014
building against fire. The broker for the insurance Bar)
company agreed to give a 15-day credit within which to
pay the insurance premium. Upon delivery of the policy A: No. RN is not correct. After the issuance of the check by
on May 15, 2006, Alfredo issued a postdated check Danny for the full amount of the premium, the
payable on May 30, 2006. On May 28, 2006, a fire broke unconditional delivery of an insurance policy of RN to
out and destroyed the building owned by Alfredo. Danny corresponding to the terms of the application
ordinarily consummates the contract, and the policy as
a. May Alfredo recover on the i nsurance policy? delivered becomes the final contract between the parties.
b. Would your answer in a) be the same if it as found Where the parties, so intend, the insurance becomes
that the proximate cause of the fire was an effective at the time of the delivery of the policy
explosion and that fire was but the immediate notwithstanding the fact that the check was not yet
cause of the loss and there is no excepted peril encashed. My answer will still be the same even if the check
under the policy? is dated October 15, 2013 since an acknowledgment in a
c. If the fire was found to have been caused by policy of the receipt of premium is conclusive evidence of
Alfredo’s own negligence, can he still recover on the its payment for the purpose of m aking the policy binding.
policy? (2007 Bar)
A: Q: Will an insurance policy be binding even if the
premium is unpaid? What if it were partially paid?
a. Yes, Alfredo may recover on the policy. It is valid to (2015 Bar)

stipulate
the thatof
payment the insured will
premium. be granted
Payment credit
by means ofterm for
a check A: As a general rule, the insurance policy is not valid and
which was accepted by the insurer, bearing a date prior binding unless the premium thereof has been paid. This is
to the loss, would be sufficient. The subsequent effects the cash and carry rule under the Insurance Code. Premium
of encashment retroact to the date of the check. is the consideration for the undertaking of the insurer to
indemnify the insured against a specified peril. There are
b. Yes, recovery under the insurance contract is allowed
exceptions, however, one of them is when there is an
if the cause of the loss was either the proximate or the
agreement allowing the insured to pay the premium in
immediate cause as long as an excepted peril, if any,
installments and partial payment has been made at the time
was not the proximate cause of the loss.
of the loss (Makati Tuscany Condominium Corporation v. CA,
c. Yes, mere negligence on the part of the insured will not
215 SCRA 463).
prevent recovery under the insurance policy. The law
merely prevents recovery when the cause of loss is the
Q: Name at least 3 instances when an insured is entitled
willful act of the insured, alone or in connivance with
to a return of the premium paid. (2000 Bar)
others.
A: Three instances when an insured is entitled to a return of
Q: Enrique obtained from Seguro Insurance Company a
premium paid are:
comprehensive motor vehicle insurance to cover his
top of the line Aston Martin. The policy was issued on
March 31, 2010 and, on even date, Enrique paid the
premium with a personal check postdated April 6,
34
UST BAR OPERATIONS
QUAMTO (1987-2016)

1. To the whole premium, if no part of his interest in the “during the lifetime” of the insured within 2 years and
thing insured be exposed to any of the perils insured prior to the commencement of the action.
against.
2. Where the insurance is made for a definite period of Is the contention of the beneficiaries tenable? (1994
time and the insured surrenders his policy, to such Bar)
portion of the premium as corresponds with the
unexpired time at a pro rata rate, unless a short period A: No. The incontestability clause does not apply. The
rate has been agreed upon and appears on the face of insured died within less than 2 years from the issuance of
the policy, after deducting from the whole premium any the policy on September 23, 1990. The insured died on April
claim for loss or damage under the policy which has 26, 1992, or less than 2 years from September 23, 1990.
previously accrued.
3. When the contract is voidable on account of the fraud The right of the insurer to rescind is only lost if the
or misrepresentation of the insurer or of his agent or on beneficiary has commenced an action on the policy. There
account of facts the existence of which the insured was is no such action in this case.
ignorant without his fault; or when, by any default of
the insured other than actual fraud, the insurer never Q: The assured answers “No” to the question in th e
incurred any liability under the policy. application for a life policy: “Are you suffering from any
form of heart illness?” In fact, th e assured has been a
RESCISSION OF INSURANCE CONTRACTS heart patient for many years. On September 7, 1991, the
assured is killed in a plane crash. The insurance
Concealment/Misrepresentation company denies the claim for insurance proceeds and
returns the premium paid.
Q: X applied for life insurance with Metropolitan Life
Insurance Company. The application contained this Is the decision of the insurance company justified?
question: “Have you ever had any ailment or disease of (1997 Bar)
x x x (b) the stomach or intestines, liver, kidney, or
genitourinary organ?” X, a laundrywoman who has no A: Assuming that the incontestability clause does not apply
medical knowledge answered “No”. the application was because the policy has not been in force for 2 years from
approved, premium was paid and 6 m onths later, X died date of issue, during the lifetime of the insured, the decision
from cancer of the stomach. The post medical of the insurance company not to pay is justified. There was
examination of X shows that she had the cancer at the fraudulent concealment. It is not material that the insured
time she applied for a policy. Can the beneficiary of X died of a different cause than the fact concealed. The fact
collect on the policy? Reasons. (1989 Bar) concealed, that is the heart ailment, is material to the
determination by the insurance company whether or not to
A: The beneficiary of X cannot collect on the policy. accept the application for insurance and to require the
Concealment, as a defense against liability by the insurer, medical examination of the insured.
may either be intentional or unintentional. Lack of
knowledge on the part of the insured about her ailment will However, if the incontestability clause applies to the
not preclude the insurer from raising the defense. The insurance policy covering the life of the insured had been in
insurer may be held in estoppel only if, having known of the force for 2 years from the issuance thereof, the insurance
concealed or misrepresented fact, still accepts the payment company would not be justified in denying the claim for the
of premium which is not the situation in th is case. proceeds of the insurance and in returning the premium
paid. In that case, the insurer cannot prove the policy void
Q: Atty. Roberto took out a life insurance policy from ab initio or rescindable by reason of fraudulent
Dana Insurance Corp. (DIC) on September 1, 1989. On concealment or misrepresentation of the insured.
August 31, 1990, Roberto died. DIC refused to pay his
beneficiaries because it discovered that Roberto had Q: Renato was issued a life insurance policy on January
misrepresented certain material facts in his 2, 1990. He concealed the fact that 3 years prior to the
application. The beneficiaries sued on the basis that issuance of his life insurance policy, he had been seeing
DIC can contest the validity of the insurance policy only a doctor about his heart ailment.
within 2 years from the date of issue and during the
lifetime of the insured. Decide the case. (1991 Bar) On March 1, 1992, Renato died of heart failure. May the
heirs file a claim on the proceeds of the life insurance
A: I would rule in favor of the insurance company. The policy of Renato? (1998 Bar)
incontestability clause, applies only if the policy had been in
effect for at least 2 years. The 2-year period is counted from A: Yes. The life insurance policy in question was issued on
the time the insurance becomes effective until the death of January 2, 1990. More than 2 years had elapsed when
the insured and not thereafter. Renato, the insured, died on March 1, 1992. The
incontestability clause applies.
Q: On September 23, 1990, Tan took a life insurance
policy from Philam. The policy was issued on November Q: Juan procured a “non -medical” life insurance from
6, 1990. He died on April 26, 1992 of hepatoma. The Good Life Insurance. He designated his wife, Petra, as
insurance company denied the beneficiaries’ claim and the beneficiary. Earlier, in his application in response
rescinded the policy by reason of alleged to the question as to whether or not he had ever been
misrepresentation and concealment of material facts hospitalized, he answered in the negative. He forgot to
made by Tan in his application. It returned the mention his confinement at the Kidney Hospital.
premiums paid.
After Juan died in a plane crash, Petra filed a claim with
The beneficiaries contend that the company had no Good Life. Discovering Juan’s previous hospitalization,
right to rescind the contract as rescission must b e done Good Life rejected Petra’s claim on the ground of

35
Mercantile Law

concealment and misrepresentation. Petra sued Good insurance policy from Ilocano Insurance covering its
Life, invoking good faith on the part of Juan. machineries and equipment effective for 1 year or until
May 14, 1997. The policy expressly stated that the
Will Petra’s suit prosper? Explain. (1996 Bar) insured properties were located at “Sanyo Precision
Phils. Building, Phase III, Lots 4 and 6, Block 15, PEZA,
A: No. Petra’s suit will not prosper (assuming that the policy Rosario Cavite.” Before its expiration, the policy was
of life insurance has been in force for a period of less than 2 renewed on “as is” basis for another year until May 13,
years from the date of its issue). The matters which Juan 1998. The subject properties were later transferred to
failed to disclose was material and relevant to the approval Pace Factory also in PEZA. On October 12, 1997, during
and issuance of the insurance policy. They would have the effectivity of the renewed policy, a fire broke out at
affected Good Life’s action on his application , either by the Pace Factory which totally burned the insured
approving it with the corresponding adjustment for a properties. The policy forbade the removal of the
higher premium or rejecting the same. Moreover, a insured properties unless sanctioned by Ilocano.
disclosure may have warranted a medical examination of Condition 9(c) of the policy provides that “the
Juan by Good Life in order for it to reasonably assess the risk insurance ceases to attach as regards the property
involved in accepting the application. In any case, good faith affected unless the insured, before the occurrence of
is no defense in concealment. The waiver of a medical any loss or damage, obtains the sanction of the
examination in the “non -medical” life insurance from Good company signified by endorsement upon the policy xxx
Life makes it even more necessary that Juan supply (c) if the property insured is removed to any building
complete information about his previous hospitalization for or place other than in that which is herein stated to be
such information constitutes an important factor which insured.” PAM claims that it has substantially complied
Good Life takes into consideration in deciding whether to with notifying Ilocano for the insurance coverage. Is
issue the policy or not. Ilocano liable under the policy? (2014 Bar)

If the policy of life insurance has been in force for a period A: Ilocano is not liable under the policy. With the transfer of
of 2 years or more from the date of its issue (on which point the location of the subject properties, without notice and
the given facts are vague) then Good Life can no longer without insurer’s consent, after the renewal of the policy,
prove that the policy is void ab initio or is rescindable by the insured clearly committed concealment,
reason of the fraudulent concealment or misrepresentation misrepresentation and a breach of material warranty. The
of Juan. Insurance Code provides that a neglect to communicate that
which a party knows and ought to communicate, is called
Q: “A” applied for a non -medical life insurance. The concealment. Concealment entitles the injured party to
insured did not inform the insurer that one week prior rescind a contract of insurance in case of an alteration in the
to his application for insurance, he was examined and use or condition of the thing insured. An alteration in the
confined at St. Luke’s Hospital where he was diagnosed use or condition of a thing insured from that to which it is
for lung cancer. The insured soon thereafter died in a limited by the policy made without the consent of the
plane crash. Is the insurer liable considering that the insurer, by means within the control of the insured, and
fact concealed had no bearing with the cause of death of increasing the risks, entitles the insurer to rescind the
the insured? Why? (2001 Bar) contract of fire insurance.

A: No. The concealed fact is material to the approval and Q: X insured his life for P20 million. X plays golf and
issuance of the insurance policy. It is well settled that the regularly exercises everyday, hence is considered in
insured need not die of the disease he failed to disclose to good health. He did not know, however, that his
the insurer. It is sufficient that his non- disclosure misled frequent headaches is really caused by his being
the insurer in forming his estimate of the risks of the hypertensive. In his application for a life insurance for
proposed insurance policy or in making inquiries. himself, he did not put a check to the question if he is
suffering from hypertension, believing that because of
Q: Benny applied for life insurance for Php 1.5 Million. his active lifestyle, being hypertensive is remote
The insurance company approved his application and possibility. While playing golf one day, X collapsed at
issued an insurance policy effective Nov. 6, 2008. Benny the fairway and was declared dead on arrival at the
named his children as his beneficiaries. On April 6, hospital. His death certificate stated that X suffered a
2010, Benny died of hepatoma, a liver ailment. The massive heart attack.
insurance company denied the children's claim for the
proceeds of the insurance policy on the ground that a. Will the beneficiary of X be entitled to the proceeds
Benny failed to disclose in his application two previous of the life insurance under the circumstances,
consultations with his doctors for diabetes and despite the non-disclosure that he is hypertensive
hypertension, and that he had been diagnosed to be at the time of application?
suffering from hepatoma. The insurance company also b. If X died in an accident instead of a heart attack,
rescinded the policy and refunded the premiums paid. would the fact of X’s failure to disclose that he is
Was the insurance company correct? (2013 Bar) hypertensive be considered as material
information? (2016 Bar)
A: The insurance company correctly rescinded the policy
because of concealment (Section 27 of Insurance Code ). A:
Benny did not disclose that he was suffering from diabetes,
hypertension, and hepatoma. The concealment is material, a. No, the beneficiary of X is not entitled to the proceeds
because these are serious ailments (Florendo v. Philam of the life insurance. The hypertension of X is a material
Plans, Inc., 666 SCRA 618, 2012 ). Benny died less than two fact that should have been disclosed to the insurer. The
years from the date of the issuance of the policy ( Section 48 concealment of such material fact entitles the insurer to
of Insurance Code). rescind the insurance policy.
b. It is still a material information. It is settled that the
Q: On May 13, 1996, PAM, Inc. obtained a P15M fire insured cannot recover even though the material fact

36
UST BAR OPERATIONS
QUAMTO (1987-2016)

not disclosed is not the cause of the loss. natural result of the insured’s voluntary act,
unaccompanied by anything unforeseen except the injury.
BREACH OF WARRANTIES There is no accident when a deliberate act is performed,
unless some additional and unforeseen happening occurs
Q: Julie and Alma formed a business partnership. Under that brings about the injury. This element of deliberateness
the business name Pino Shop, the partnership engaged is not clearly shown from the facts of the case, especially
in a sale of construction materials. Julie insured the considering the fact that BOY is a minor, and the injured
stocks in trade of Pino Shop with WGC Insurance parties are also children. Accordingly, it is possible that CNI
Company for P350,000. Subsequently, she again got an may not prosper. ATT’s report is not conclusive on POS or
insurance contract with RSI for P1M and then from EIC the court.
for P200,000. A fire of unknown srcin gutted the store
of the partnership. Julie filed her claims with the 3 Q: X Company procured a group accident insurance
insurance companies. However, her claims were denied policy for its construction employees variously
separately for breach of policy condition which assigned to its provincial infrastructure projects. Y
required the insured to give notice of any insurance Insurance Company underwrote the coverage, the
effected covering the stocks in trade. Julie went to court premiums of which were paid for entirely by X
and contended that she should not be blamed for the Company without any employee contributions. While
omission, alleging that the insurance agents for WGC, the policy was in effect, five of the covered employees
RSI and EIC knew of the existence of the additional perished at sea on their way to their provincial
insurance coverage and that she was not informed assignments. Their wives sued Y Insurance Company
about the requirement that such other or additional for payment of death benefits under the policy. While
insurance should be stated in the policy. the suit was pending, the wives signed a power of
attorney designating an X Company executive. PJ as
1. Is the contention of Julie tenable? Explain. their authorized representative to enter into a
2. May she recover on her fire insurance policies? settlement with the insurance company. When a
Explain. (1993 Bar) settlement was reached, PJ instructed the insurance
company to issue a settlement check to the order of the
A: X Company, which will undertake the payment to the
individual claimants of their respective shares. PJ
1. No. An insured is required to disclose the other misappropriated the settlement amount and the wives
insurances covering the subject matter of the insurance pursued their case against Y Insurance Company. Will
being applied for. the suit prosper? Explain. (2000 Bar)
2. No, because she is guilty of violation of a warranty/
condition. A: Yes. The suit will prosper. Y insurance Company is liable.
X Company, through its executive, PJ, acted as agent of Y
CLAIMS SETTLEMENT AND SUBROGATION Insurance Company. The latter is thus bound by the
misconduct of its agent. It is the usual practice in the group
Q: CNI insured SAM under a homeowner’s policy against insurance business that the employer-policy holder is the
claims for accidental injuries by neighbors. SAM’s agent of the issuer.
minor son, BOY, injured 3 children of POS, a neighbor,
who sued SAM for damages. Q:
a) Suppose that Fortune owns a house valued at
SAM’s lawyer was at ATT, who was paid for hi s services P600,000 and insured the same against fire with 3
by the insurer for reporting periodically on the case to insurance companies as follows:
CNI. In one report, ATT disclosed to CNI that after his
investigations, he found the injuries to the 3 children X ------------------- P400,000.00
not accidental but intentional. Y ------------------- P200,000.00
Z ------------------- P600,000.00
SAM lost the case in court, and POS was awarded P1M
in damages which he sought to collect from the insurer. In the absence of any stipulation in the policies
But CNI used ATT’s report to deny the claim on the from which insurance company or companies, may
Fortune recover in case of fire should destroy his
ground thathence
intentional, the excluded
injuries to POS’
from 3 children
the policy’s were
coverage. house completely?
POS countered that CNI was stopped from using ATT’s b) If each of the fire insurance policies obtained by
report because it was unethical for ATT to provide Fortune in problem (a) is a valued policy and the
prejudicial information against his client to the insurer, value of his house was fixed in each of the policies
CNI. at P1M, how much would Fortune recover from X i f
Who should prevail: the claimant, POS; or the insurer, he has already obtained full payment on the
CNI? Decide with reasons briefly. (2004 Bar) insurance policies issued by Y and Z?
c) If each of the policies obtained by Fortune in
A: CNI is not e stopped from using ATT’s report because CNI, problem (a) above is an open policy and it was
in the first place, commissioned it and paid ATT for it. On immediately determined after the fire that the
the other hand, ATT has no conflict of interest because SAM value of Fortune’s house was P2.4 M, how much may
and CNI are on the same side—their interests being he collect from X, Y and Z?
congruent with each other, namely, to oppose POS’ claim. It d) In problem (a), what is the extent of the liability of
cannot be said that ATT has used the information to the the insurance companies among themselves?
disadvantage or prejudice of SAM. e) Supposing in problem (a) above, Fortune was able
to collect from both Y and Z, may he k eep the entire
However, in Finman General Assurance Corp. v. Court of amount he was able to collect from the said 2
Appeals, 213 SCRA 493 (1992), it was explained that there is insurance companies?

no “accident” in the context of an accident policy, if it is the

37
Mercantile Law

Explain your answer. (1990 Bar) because the rice was no longer fit for human
consumption. Admittedly, the rice could still be used as
animal feed.
A:
Is RC’s claim for total loss justified? Explain. (1996 Bar)
a) Fortune may recover from the insurers in such order as
he may select up to their concurrent liability. A: Yes, RC’s claim for total loss is justified. The rice, which
b) One Answer (assuming that the real value is P1 M): was imported from Thailand for sale locally, is obviously
Fortune may still recover only the balance of P200,000 intended for consumption by the public. The complete
from X Insurance Company since the insured may only physical destruction of the rice is not essential to constitute
recover up to the extent of his loss. an actual loss. Such a loss exists in this case since the rice,
having been soaked in sea water and thereby rendered unfit
Another Answer (assuming that the real value is for human consumption, has become totally useless for the
P600,000): purpose for which it was imported.
Having obtained full payment on the insurance policies
issued by Y and Z, Fortune may no longer recover from SUBROGATION
X Insurance Company.
Q: ELP Insurance, Inc. issued a Marine Policy No. 888 in
c) In an open policy, the insured may recover his total loss favor of FCL Corp. to insure the shipment of 132 bundles
up to the amount of the insurance coverage. Thus, the of electric copper cathodes against all risks.
extent of recovery would be P400, 000 from X; P200, Subsequently, the cargoes were shipped on board the
000 from Y; and P600, 000 from Z. vessel “M/V Menchu” from Leyte to Pier 10, North
d) In the problem (a), the insurance companies among Harbor, Manila. Upon arrival, FCL Corp. engaged the
themselves would be liable, viz: services of CGM, Inc. for the release and withdrawal of
the cargoes from the pier and the subsequent delivery
X— 4/12 of P600,000 = P200,000 to its warehouses/plants in Valenzuela City. The goods
Y— 2/12 of P600,000 = P100,000 were loaded on board 12 trucks owned by CGM, Inc.,
Z— 6/12 of P600,000 = P300,000 driven by its employed drivers and accompanied by its
employed truck helpers. Of the 12 trucks en route to
e) No, he can only be indemnified for his loss, not profit Valenzuela City, only 11 reached the destination. One
thereby; hence, he must return P200, 000 of the P800, truck, loaded with 11 bundles of copper cathodes,
000 he was able to collect. failed to deliver its cargo. Because of this incident, FCL
Corp. filed with ELP Insurance, Inc. a claim for
Q: On October 18, 1980, P, took out a life insurance insurance indemnity in the amount of P1.5 M. After the
policy and named his only son Q as beneficiary. The requisite investigation and adjustment, ELP Insurance,
policy was silent with regard to any change of Inc. paid FCL Corp. the amount of P1, 350, 000.00 as
beneficiary. P later learned that Q was hooked on drugs insurance indemnity. ELP Insurance, Inc., thereafter,
and immediately notified the insurance company in filed a complaint for damages against CGM, Inc. before
writing that he is substituting his sister, R, as his the RTC, seeking reimbursement of the amount it had
beneficiary in place of Q. P later died of advanced paid to FCL Corp. for the loss of the subject cargo. CGM,
tuberculosis. In the application form filled up by the Inc. denied the claim on the basis that it is not privy to
agent of the insurance company prior to the issuance of the contract entered into by and between FCL Corp. and
the life insurance policy by the insurance company, the ELP Insurance, Inc., and hence, it is not liable therefor.
agent, without the knowledge of P, filled in a false If you are the judge, how will you decide the case? (2014
answer and made it appear that P was in good health. Bar)
Upon P’s death, Q claimed the proceeds of the insurance
policy contending that as designated beneficiary, he A: CGM, Inc. should be held liable for damages against ELP
cannot be changed without his consent, he having Insurance, Inc. The insurer, upon happening of the risk
acquired a vested right to the proceeds of the policy. insured against and after payment to the insured is
subrogated to the rights and cause of action of the latter. As
a) Is Q’s contention correct? Reasons. such, the insurer has the right to seek reimbursement for all
b) Can the insurance company refuse liability on the the expenses paid.
policy? Reasons. (1988 bar)
Q: Raul’s truck bumped the car owned by Luz. The car
A: was insured by Cala Insurance. For the damage caused,
a) No, the designation of the beneficiary is revocable Cala paid Luz P5,000 in amicable settlement. Luz
unless the right to revoke is waived. executed a release claim, subrogating Cala to all her
b) No, the insurer cannot escape liability. The insurance rights against Raul. When Cala demanded
agent is an agent not of the insured but of the insurer reimbursement from Raul, the latter refused saying
and the latter must thus suffer for the misconduct of the that he had already paid Luz P4, 500 for the damage to
agent. The result would have been different had the the car as evidenced by a release of claim executed by
false answer been made by the agent in connivance Luz discharging Raul.
with the insured.
So Cala demanded reimbursement from Luz, who
NOTICE AND PROOF OF LOSS refused to pay, saying that the total damage to the car
was P9, 500. Si nce Cala paid P5, 000 only, Luz contends
Q: RC Corporation purchased rice from Thailand, which that she was entitled to go after Raul to claim the
it intended to sell locally. Due to stormy weather, the additional P4, 500.
ship carrying the rice became submerged in sea water
and with it the rice cargo. When the cargo arrived in 1. Is Cala, as subrogee of Luz, entitled to
Manila, RC filed a claim for total loss with the insurer, reimbursement from Raul?

38
UST BAR OPERATIONS
QUAMTO (1987-2016)

2. May Cala recover what it has paid Luz? (1994 Bar) 1. May Reynaldo hold AM liable as a common carrier?
Explain.
A: 2. May AM set up the hijacking as a defense to defeat
Reynaldo’s claim? (1996 Bar)
1. No. Luz executed a release in favor of Raul.
2. Yes. Cala lost its right against Raul because of the A:
release executed by Luz. Since the release was made
without the consent of Cala, Cala may recover the 1. Reynaldo may hold AM liable as a common carrier. The
amount of P5, 000. facts that AM operates only 2 trucks for hire on a
selective basis, caters only to a few customers, does not
make regular or scheduled trips, and does not have a
certificate of public convenience are of no moment as
TRANSPORTATION LAWS the law (i) does not distinguish between one whose
principal business activity is the carrying of persons or
goods or both and one who does such carrying only as
COMMON CARRIERS an ancillary activity, (ii) avoids making any distinction
between a person or enterprise offering transportation
Q: service on a regular or scheduled basis and one offering
such service on an occasional, episodic or unscheduled
a. Name 2 characteristics which differentiate a basis, and (iii) refrains from the general public and one
common carrier from a private carrier. who offers services or solicits business only from a
b. Why is the defense of due diligence in the selection narrow segment of the general population.
and supervision of an employee not available to a 2. AM may not set up the hijacking as a defense to defeat
common carrier? (2002 Bar) Reynaldo’s claim as the facts given do not indicate that
the same was attended by the use of grave or
A: irresistible threat, violence or force. It would appear
that the truck was left unattended by its driver and was
a. Two characteristics that differentiate a common carrier taken while he was visiting his girlfriend.
from a private carrier are:
1. A common carrier offers its service to the public; a Q: Alejandro Camaling of Alegria, Cebu, is engaged in
private carrier does not. buying copra, charcoal, firewood, and used bottles and
2. A common carrier is required to observe in reselling them in Cebu City. He uses 2 big Isuzu trucks
for the purpose; however, he has no certificate of public
extraordinary diligence; a private carrier is not convenience or franchise to do business as a common
required.
carrier. On the return trips to Alegria, he loads his
b. The defense of due diligence in the selection and trucks with various merchandise of other merchants in
supervision of an employee is not available to a Alegria and the neighboring municipalities of Badian
common carrier because the degree of diligence and Ginatilan. He charges them freight rates much
required of a common carrier is not the diligence of a lower than the regular rates. In one of the return trips,
good father of a family but extraordinary diligence, i.e., which left Cebu City at 8:30 p.m. 1 cargo truck was
diligence of the greatest skill and utmost foresight loaded with several boxes of sardines, valued at P100,
000 belonging to one of his customers, Pedro Rabor.
Q: Define a common carrier. (1996 Bar) While passing the zigzag road between Carcar and
Barili, Cebu, which is midway between Cebu City and
A: A common carrier is a person, corporation, firm or Alegria, the truck was hijacked b y 3 armed men who
association engaged in the business of carrying or took all the boxes of sardines and kidnapped the driver
transporting passengers or goods or both, by land, water or and his helper, releasing them in Cebu City only 2 days
air for compensation, offering its services to the public. later.

Q: What is the test for determining whether or not one Pedro Rabor sought to recover from Alejandro the
is a common carrier? (1996 Bar) value of the sardines. The latter contends that he is not
liable therefore because he is not a common carrier
A: The test for determining whether or not one is a common under the Civil Code. If you were the judge, would you
carrier is whether the person or entity, for some business sustain the contention of Alejandro? (1991 Bar)
purpose and with general or limited clientele, offers the
service of carrying, transporting passengers or goods or A: If I were the Judge, I would hold Alejandro as having
both for compensation. engaged as a common carrier. A person who offers his
services to carry passengers or goods for a fee is a common
Q: AM Trucking, a small company, operates 2 trucks for carrier regardless of whether he has a certificate of public
hire on selective basis. It caters to only a few customers, convenience or not, whether it is his main business or
and its trucks do not make regular or scheduled trips. incidental to such business, whether it is scheduled or
It does not even have a certificate of public unscheduled service, and whether he offers his services to
convenience. the general public or to a limited few ( De Guzman v CA GR
47822, December 27, 1988 ).
On one occasion, Reynaldo contracted AM to transport,
for a fee, 100 sacks of rice from Manila to Tarlac. Q: What requirements must be met before a certificate
However, AM failed to deliver the cargo, because its of public convenience may be granted under the Public
truck was hijacked when the driver stopped in Bulacan Service Act? (1995 Bar)
to visit his girlfriend.
A: The following are the requirements for the granting of a

certificate of public convenience, to wit:

39
Mercantile Law

b. When can the Commission (Board) exercise its


a) The applicant must be a citizen of the Philippines, or a power to suspend or revoke certificate of public
corporation, co-partnership or association organized convenience?
under the laws of the Philippines and at least 60% of
the stock or paid-up capital of which must belong to 2. Pepay, a holder of a certificate of public
citizens of the Philippines. convenience, failed to register the complete
b) The applicant must prove public necessity. number of units required by her certificate.
c) The applicant must prove that the operation of the However, she tried to justify such failure by the
public service proposed and the authorization to do accidents that allegedly befell her, claiming that she
business will promote the public interest in a proper was so shocked and burdened by the successive
and suitable manner. accidents and misfortunes that she did not know
d) The applicant must be financially capable of what she was doing, she was confused and thrown
undertaking the proposed service and meeting the off tangent momentarily, although she always has
responsibilities incident to its operation. the money and financial ability to buy new trucks
or repair the destroyed one. Are the reasons given
Q: The City of Manila passed an ordinance banning by Pepay sufficient grounds to excuse her from
provincial buses from the city. The ordinance was completing her units? Explain. (1993 Bar)
challenged as invalid under the Public Service Act by X
who has a certificate of public convenience to operate A:
auto-trucks with fixed routes from certain towns in
Bulacan and Rizal to Manila and within Manila. Firstly, 1. a) No. A single hold-up incident which does not link
he claimed that the ordinance was null and void Robert’s taxicab cannot be construed that he rendered
because, among other things, it in effect amends his a service that is unsafe, inadequate and improper.
certificate of public convenience, a thing which only the b) Under Section 19(a) of the Public Service Act, the
Public Service Commission can do so under Section Commission (Board) can suspend or revoke a
16(m) of the Public S ervice Act. Under said section, the certificate of public convenience when the operator
Commission is empowered to amend, modify or revoke fails to provide a service that is safe, proper or
a certificate of public convenience after notice and adequate, and refuses to render any service which can
hearing. Secondly, he contended that even if the be reasonably demanded and furnished.
ordinance was valid, it is only the Commission which 2. No. The reasons given by Pepay are not sufficient
can require compliance with its provisions under grounds to excuse her from completing her units. The
Section 17(j) of said Act and since the implementation same could be undertaken by her children or by other
of the ordinance was without sanction or approval of authorized representatives.
the Commission, its enforcement was unauthorized and
illegal. Q: X has a Tamaraw FX among other cars. Every other
day during the workweek, he goes to his office in
1. May the reliance of X on Section 16(m) of the Public Quezon City using his Tamaraw FX and picks up friends
Service Act be sustained? Explain. as passengers at designated points along the way. His
2. Was X correct in his contention that under Section passengers pay him a flat fee for the ride, usually P20
17 (j) of the public Service Act it is only the per person, one way. Although a lawyer, he never
Commission which can require compliance with the bothered to obtain a license to engage in this type of
provision of the ordinance? Explain. (1993 Bar) income-generating activity. He believes that he i s not a
common carrier within the purview of the law. Do you
A: agree with him? Explain. (2000 Bar)

1. No. The power vested in the public Service Commission A: No. I do not agree with X. A common carrier holds himself
under Section 16(m) is subordinate to the authority of out to the public as engaged in the business of transporting
the City of Manila under Section 18(hh) of its revised persons or property from place to place, for compensation,
charter, to superintend, regulate or control the streets offering his services to the public generally. The fact that X
of the City of Manila. has a limited clientele does not exclude him from the
2. No. The powers conferred by law upon the Public definition of a common carrier. The law does not make any
Service Commission were not designed or supersede distinction between one whose principal business activity
the regulatory power of local governments over motor is the carrying of persons or goods or both, and the one who
traffic in the streets subject to their control. does such carrying only as an ancillary activity or in the
local idiom, as a “sideline”.
Q:
Q: Antonio was granted a Certificate of Public
1. Robert is a holder of a certificate of public Convenience (CPC) in 1986 to operate a ferry between
convenience to operate a taxicab service in Manila Mindoro and Batangas using the motor vessel “MV
and suburbs. One evening, one of his taxicab units Lotus”. He stopped operations in 1988 due to
was boarded by 3 robbers as they escaped after unserviceability of the vessel.
staging a hold-up. Because of said incident, the
LTFRB revoked the certificate of public In 1989, Basilio was granted a CPC for the same route.
convenience of Robert on the ground that said After a few months, he discovered that Carlos was
operator failed to render safe, proper and adequate operating on his route under Antonio’s CPC. Because
service as required under Section 19(a) of the Basilio filed a complaint for illegal operations with the
Public Service Act. Maritime Industry Authority, Antonio and Carlos
jointly filed an application for sale and transfer of
a. Was the revocation of the certificate of public Antonio’s CPC and substitution of the vessel “MV Lotus”
convenience of Robert justified? Explain. with another owned by Carlos.

40
UST BAR OPERATIONS
QUAMTO (1987-2016)

Should Antonio’s and Carlos’ joint application be


approved? Give your reasons. (1992 Bar) Q: Mr. Villa, a franchise holder and the regist ered owner
of a truck for hire, entered into a lease contract with
A: The joint application of Antonio and Carlos for the sale Mrs. Santos for the lease by the latter of said truck. The
and transfer of Antonio’s CPC and substitution of the vessel lease contract was not brought to the knowledge of the
MV Lotus with another vessel owned by the transferee Land Transportation, Franchising, and Regulatory
should not be approved. The CPC and “MV Lotus” are Board and was therefore not approved by the Land
inseparable. The unserviceability of the vessel covered by Transportation, Franchising, and Regulatory Board.
the certificate had likewise rendered ineffective the One stormy night, the said truck which was speeding
certificate itself, and the holder thereof may not legally along EDSA, skidded and ran over X who died on the
transfer the same to another. spot. The parents of X brought an action for damages
against Mr. Villa for the death of their son.
DILIGENCE REQUIRED OF COMMON CARRIERS
a) Will the action against Mr. Villa prosper? Reasons.
Q: Are common carriers liable for injuries to b) What recourse, if any, does X have? (1988 Bar)
passengers even if they have observed ordinary A:
diligence and care? Explain. (2015 Bar) a) Yes, the action will prosper. Both the registered owner
and the actual user or operator of a motor vehicle are
A: Yes, common carriers are liable to injuries to passengers liable for damages sustained in the operation thereof.
even if the carriers observed ordinary diligence and care Hence, the action against Villa can prosper.
because the obligation imposed upon them by law is to b) The heirs of X may likewise bring an action for tort
exercise extra-ordinary diligence. Common carriers are against Mrs. Santos and/or the driver of the vehicle.
bound to carry the passengers safely as far as human care The latter may also be charged criminally.
and foresight can provide, using the utmost diligence of
very cautious persons with a due regard for all the Q: Peter so hailed a taxicab owned and operated by
circumstances (Article 1755 of the Civil Code). Jimmy Cheng and driven by Hermie Cortez. Peter asked
Cortez to take him to his office in Malate. On the way to
Q: In a court case involving claims for damages arising Malate, the taxicab collided with a passenger jeepney,
from death and injury of bus passengers, counsel for as a result of which Peter was injured i.e. he fractured
the bus operator files a demurrer to evidence arguing his left leg. Peter sued Jimmy for damages, based upon
that the complaint should be dismisses because the a contract of carriage, and Peter won. Jimmy wanted to
plaintiffs did not submit any evidence that the operator challenge the decision before the SC on the ground that
or its employees were negligent. If you were the judge, the trial court erred in not making an express finding as
would you dismiss the complaint? (1997 Bar) to whether or not Jimmy was responsible for the
collision and, hence, civilly liable to Peter. He went to
A: No. in the carriage of passengers, the failure of the see you for advice. What will you tell him. Explain (1990
common carrier to bring the passengers safely to their Bar)
destination immediately raises the presumption that such
failure is attributable to the carrier’s fault or negligence. In A: I will advise Jimmy to desist from challenging the
the case at bar, the fact of death and injury of the bus decision. The action of Peter being based in culpa
passengers raises the presumption of fault or negligence on contractual, the carrier’s negligence is presumed upon the
the part of the carrier. The carrier must rebut such breach of contract. The burden of proof instead would lie in
presumption. Otherwise, the conclusion can be properly Jimmy to establish that despite an exercise of utmost
made that the carrier failed to exercise extraordinary diligence the collision could not have been avoided.
diligence as required by law.
Q: Marites, a paying bus passenger, was hit above her
LIABILITIES OF COMMON CARRIERS left eye by a stone hurled at the bus by an unidentified
bystander as the bus was speeding through the National
Q: Philip Mauricio shipped a box of cigarettes to a Highway. The bus owner’s personnel lost no time in
dealer in Naga City through Bicol Bus Company (BBC). bringing Marites to the provincial hospital where she
When the bus reached Lucena City, the bus developed was confined and treated. Marites wants to sue the bus
company for damages and seeks your advice whether
engine
shop in trouble. The driver
Lucena where he wasbrought theby
informed bus
theto a repair
mechanic she can legally hold the bus company liable. What will
that an extensive repair was necessary, which would you advise her? (1994 Bar)
take at least 2 days. While the bus was in the repair
shop, Typhoon Coring lashed Quezon Province. The A: As counsel, I will advise her that the company is not
cargoes inside the bus, including Mauricio’s cigarettes, liable. As a general rule, if the death or injury was due to a
got wet and were totally spoiled. Mauricio sued BBC for cause beyond the control of the carrier, it will not be liable
damage to his cargoes. Decide. (1987 Bar) to the passenger. However, it must do everything in its
power to try to prevent any passenger from getting hurt.
A: The BBC is liable for damages to the cargoes lost by Article 1763 provides that although a common carrier is
Mauricio. A natural disaster would relieve liability if it is the responsible for the death or injuries suffered by a passenger
proximate and only cause of the damage. The carrier itself, on account of the willful acts or negligence of other
in this case, had been negligent. The presumption of passengers, such is not applicable in this case. The driver
negligence in culpa contractual is not overcome by engine has no control over the situation. It happened while the bus
trouble which does not preclude its having been due to the was speeding through the national highway and such event
fault of the common carrier. The fact that an extensive occurred haphazardly, without any contributory negligence
repair work was necessary which, in fact, took 2 days to on the part of the carrier nor even if extraordinary diligence
complete somehow justifies an impression that the engine be exercised, the same would not prevent the event from
trouble could have been detected, if not already known, well happening because such is independent and out of control

before the actual breakdown. of the driver. More to the point, the carrier cannot be faulted

41
Mercantile Law

and be liable for damages because it immediately Q: Vivian Martin was booked by PAL, which acted as
responded to the injury suffered by the passenger. ticketing agent of Far East Airlines, for a round trip
Furthermore, as held in the case of Pilapil v. CA, there is no flight on the latter’s aircraft, from Manila -Hongkong-
showing that any such incident previously happened so as Manila. The ticket was cut by an employee of PAL. The
to impose an obligation on the part of the personnel of the ticket showed that Vivian was scheduled to leave
bus company to warn the passengers and to take the Manila at 5:30p.m. on 05 January 2002 aboard Far
necessary precaution. Such hurling of a stone constitutes East’s Flight F007. Vivian arrived at the NAIA an hour
fortuitous event in this case. The bus company is not an before the time scheduled in her ticket, but was told
insurer of the absolute safety of its passengers. that Far East’s Flight 007 had left at 12:10p.m. It turned
out that the ticket was inadvertently cut and wrongly
Q: M. Dizon Trucking entered into hauling contract with worded. PAL employees manning the airport’s ground
Fairgoods Co whereby the former bound itself to haul services nevertheless scheduled her to fly two hours
the latter’s 2000 sacks of soya bean meal from Manila later aboard their plane. She agreed and arrived in
Port Area to Calamba, Laguna. To carry out faithfully its Hongkong safely. The aircraft used by Far East Airlines
obligation Dizon subcontracted with Enrico Reyes the developed engine trouble, and did not make it to
delivery of 400 sacks of the Soya bean meal. Aside from Hongkong but returned to Manila. Vivian sued both
the driver, three make employees of Reyes rode on the airlines, PAL and Far East, for damages because of her
truck with the cargo. While the truck was on its way to having unable to take the Far East flight. Could either or
Laguna two strangers suddenly stopped the truck and both airlines be held liable to Vivian? Why? (2003 Bar)
hijacked the cargo. Investigation by the police disclosed
that one of the hijackers was armed with a bladed A: The instant petition was based on breach of contract of
weapon while the other was unarmed. For failure to carriage; therefore, Vivian can only sue Far East Airlines
deliver the 400 sacks, Fairgoods sued Dizon for alone, and not PAL, since the latter was not a party to the
damages. Dizon in turn set up a third party complaint contract. However, this is not to say that PAL is relieved
against Reyes which the latter registered on the ground from any liability due to any of its negligent acts. In China
that the loss was due to force majeure. Did the hijacking Air Lines v. CA, while not exactly in point; however,
constitute force majeure to exculpate Reyes from any illustrates the principle which governs this particular
liability? (1995 Bar) situation. In that case, the carrier (PAL), acting as an agent
of another carrier, is also liable for its own negligent acts or
A: No. The hijacking in this case cannot be considered as omission in the performance of its duties. Far East Airline
force majeure. Only one of the two hijackers was armed may also file a third-party complaint against PAL for the
with a bladed weapon. As against four male employees of purpose of determining who was primarily at fault between
Reyes, two hijackers, with only one of them being armed them. It is but logical, fair and equitable to allow Far East
with a bladed weapon, cannot be considered force majeure. Airlines to sue PAL for indemnification, if it is proven that
The hijackers did not act with grave or irresistible threat, the latter’s negligence was the proximate cause of Vivian’s
violence, or force. unfortunate experience, instead of totally absolving PAL
from any liability (British Airways v. CA, 1998).
Q: What are the defenses available to any common
carrier to limit or exempt it from liability? (2001 Bar) Q: One of the passenger buses owned by Continental
Transit Corporation (CTC), plying its usual route,
A: Article 1734 provides the following defenses available to figured in a collision with another bus owned by
limit or exempt carrier from liability: Universal Transport Inc. (UTI). Among those injured
inside the CTC bus were: Romeo, a stow away; Samuel,
1. Observance of extraordinary diligence is also a valid a pickpocket then in the act of robbing his seatmate
defense. when the collision occurred; Teresita, the bus driver’s
2. Flood, storm, earthquake, lightning or other natural mistress who usually accompanied the driver on his
disaster or calamity; trips for free; and Uriel, a holder of a free riding pass he
3. Act of public enemy during war, whether international won in a raffle held by CTC.
or civil
4. Act or omission of the shipper or owner of the goods; a. Do Romeo, Samuel, Teresita, and Uriel have a cause
5. The character of the goods or defects in the packing or of action for damages against UTI? Explain.
b. What, if any, are the valid defenses that CTC and UTI
in the containers; can raise in the respective actions against them?
6. Order or act of competent authority.
c. Will a suit for breach of contract of carriage filed by
Romeo, Samuel, Teresita, and Uriel against CTC
Q: Why is the defense of due diligence in the selection prosper? Explain. (2009 Bar)
and supervision of an employee not available to a
common carrier? (2002 Bar)
A:
A: Article 1733 provides that common carriers from the
a. Romeo, Samuel, Teresita, and Uriel may sue UTI on the
nature of their business and for reasons of public policy, are
basis of quasi-delict since they have no pre-existing
bound to observe extraordinary diligence in the vigilance
contractual relationship with UTI. They may allege that
over the goods and for the safety of the passengers
the collision was due to the negligence of driver of UTI
transported by them, according to all the circumstances of
and UTI was negligent in the selection and supervision
each case. It must be emphasized that extraordinary
of its driver.
diligence is required. The defense of due diligence in the
b. With respect to Romeo, Samuel and Teresita, since
selection and supervision of an employee cannot prevail
there was no pre-existing contractual relationship
over the clear intention of the law that extraordinary
between them and CTC, CTC can raise the defense that
diligence be exercised instead. Further, liability is based on
it exercised the due diligence of a good father of a family
contract, and diligence in the selection is a defense for
in the selection of its driver.
quasi-delict, not for breach of contract.

42
UST BAR OPERATIONS
QUAMTO (1987-2016)

It can raise the same defense against Uriel if there is a shield to perpetrate fraud, to defeat public convenience,
stipulation that exempts it from liability for simple or to avoid a clear legal obligation, this fiction shall be
negligence, but not for willful acts or gross negligence. disregarded and the individuals composing it will be
treated identically.
CTC can also raise against all the plaintiffs the defense
that the collision was due exclusively to the negligence In the case at bar, Sonnel was negligent in not installing
of the driver of UTI, and this constitutes a fortuitous a protective net atop the sidewalk before the beginning
event, because there was no concurrent negligence on of the construction work. Since the company had no
the part of its own driver. CTC can also raise against more account and property in its name, the heirs can
Samuel the defense that he was engaged in a seriously rightfully pursue the claim against the owner instead.
illegal act at the time of the collision, which can render The doctrine of separate personality cannot be invoked
him liable for damages on the basis of quasi-delict. to avoid liability, much more when it is used to
perpetuate an injustice.
Since UTI had no pre-existing contractual relationship b. I shall raise the affirmative defense of contributory
with any of the plaintiffs, it can raise the defense that it negligence. The proximate cause of death is the
exercised due diligence in the selection and supervision violation of the taxi driver of traffic rules and
of its driver, that the collision was due exclusively to the regulations when it drove offroad to avoid heavy traffic.
negligence of the driver of CTC, and that Samuel was The lumber that fell from the building was only the
committing a seriously illegal act at the time of the immediate cause of death of the victims. I will further
collision. substantiate my defense by invoking the principle that
my client, Sonnel Construction, had exercised due
c. Romeo cannot sue for breach of contract of carriage. A diligence in the selection and supervision of its
stowaway like Romeo, who secures passage by fraud, is employees.
not a passenger. c. Yes. Both taxicab owner and driver may be held liable
based on breach of contract of carriage and negligence
Samuel and Teresita cannot sue for breach of contract in the selection and supervision of employees for quasi-
of carriage. The elements in the definition of a delict. The driver can be held criminally liable for
passenger are: an undertaking of a person to travel in reckless imprudence resulting to homicide. He can also
the conveyance provided by the carrier and an be held liable for damages under quasi-delict as
acceptance by the carrier of the person as a passenger. provided in Article 2180 — an employer may be held
Samuel did not board the bus to be transported but to solidarily liable for the negligent act of his employee.
commit robbery. Teresita did not board the bus to be Hence, in this case, the taxicab owner is exempted from
transported but to accompany the driver while he was liability while the taxi cab driver is liable solely and
performing his work personally for criminal prosecution.

Uriel can sue for breach of contract of carriage. He was VOID STIPULATIONS
a passenger although he was being transported
gratuitously, because he won a free riding pass in a Q: Martin Nove shipped an expensive video equipment
raffle held by CTC. to a friend in Cebu. Martin had bought the equipment
from Hong Kong for U.S. $5, 000. The equipment was
VIGILANCE OVER GOODS shipped through M/S Lapu-Lapu under a bill of lading
which contained the following provision in big bold
Contributory Negligence letters:

Q: Nelson owned and controlled the Sonnel “The limit of the carrier’s liability for any loss or
Construction Company. Acting for the company, Nelson damage to cargo shall be P200 regardless of the
contracted the construction of a building. Without first actual value of such cargo, whether declared by
installing a protective net atop the sidewalks adjoining shipper or otherwise.”
the construction site, the company proceeded with the
construction work. One day, a heavy piece of lumber fell The cargo was totally damaged before reaching
from the building. It smashed a taxicab which at that Cebu. Martin Nove claimed for the value of his

time had
avoid thegone offroad
traffic. Theand onto the
taxicab sidewalk in
passengers order
died as to
a cargo as
P200 ($5, 000
per theor about P100,
limitation 000)
on the billinstead of just
of lading.
result.
Is there any legal basis for Nove’s claim? (1988
a. Assume that the company had no more account and Bar)
property in its name. As counsel for the heirs of the
victim, whom will you sue for damages, and what A: There is legal basis for the claim of Martin Nove. The
theory will you adopt? stipulation limiting the carrier’s liability up to a certain
b. If you were the counsel for Sonnel Construction, amount “regardless of the actual value of such cargo,
how would you defend you client? What would be whether declared by its shipper or otherwise,” is vi olative
your theory? of the requirement of the “Civil Code that such limiting
c. Could the heirs hold the taxicab owner and driver stipulations should be fairly and freely agreed upon ( Arts.
liable? Explain. (2008 Bar) 1749-1750 Civil Code). A stipulation that denies to the
A: shipper the right to declare the actual value of his cargoes
and to recover, in case of loss or damage, on the basis would
be invalid
a. I will sue Nelson as owner of Sonnel Corporation
invoking the Doctrine of piercing the veil of corporate
fiction. As a general rule, the liability of a corporation is Q: Discuss whether or not the following stipulations in
separate and distinct from the person composing it. a contract of carriage of a common carrier are valid:

However, when the veil of corporate fiction is used as a

43
Mercantile Law

1. A stipulation limiting the sum that may be sign the stipulation and in fact had not even read it. X
recovered by the shipper or owner to 90% of the did not declare a greater value despite the fact that the
value of the goods in case of loss due to theft. clerk had called the attention to the stipulation in the
2. A stipulation that in the event of loss, destruction or ticket. (1998 Bar)
deterioration of goods on account of the defective
condition of the vehicle used in the contract of A: X is bound by the stipulation written in the ticket because
carriage, the carrier’s liability is limited to the he consented to the terms and conditions thereof from the
value of the goods appearing in the bill of lading moment he availed the services of the carrier. The fact that
unless the shipper or owner declares a higher value he did not sign the ticket and he was not able to declare the
(2002 Bar) true value of his luggage is not a valid claim in order for the
carrier to pay for the value of the lost luggage. As a general
A: rule, the liability of the common carrier shall not exceed the
stipulation in a contract of carriage even if the loss or
1. Invalid. Article 1745 provides that the following or damage results from the carrier’s negligence ( Eastern and
similar stipulations shall be considered unreasonable, Australian Shipping Co. v. Great American Insurance Co., G.R.
unjust and contrary to public policy, among which is the No. L- 37604). However, it is subject to an exception as when
common carriers liability for acts committed by thieves the shipper or owner of the goods declares a greater value
or robbers who do not act with grave and irresistible and pays corresponding freight ( Art. 1749). X, therefore is
force, threat or violence is dispensed with or entitled to P500 for the two pieces of luggage lost.
diminished.
2. Valid. The stipulation limiting the carrier’s liab ility to LIABILITY FOR BAGGAGE OF PASSENGERS
the value of the goods appearing in the bill of lading
unless the shipper or owner declares a higher value, is Q: X boarded an airconditioned Pantranco Bus bound
expressly recognized in Article 1749 of the New Civil for Baguio. X was given notice that the carrier is not
Code. liable for baggage brought in by passengers. X kept in
his custody his attache case containing $10,000. In
Q: Suppose A was riding on an airplane of a common Tarlac, all the passengers, including X, were told to get
carrier when an accident happened and A suffered off and to take their lunch, the cost of which is included
injuries. In an action by A against the common carrier, in the ticket. X left his attaché case on his seat as the
the latter claimed that: door of the bus was locked. After lunch and when X
returned to the bus, he discovered that his attaché case
1. There was a stipulation in the ticket issued to A was missing. A vendor said that a man picked the lock
absolutely exempting the carrier from liability of the door, entered the bus and ran away with the
from the passenger’s death or injuries and notices attaché case. What, if any, is the liability of the carrier?
were posted by the common carrier dispensing (1989 Bar)
with the extraordinary diligence of the carrier, and
2. A was given a discount on his plane fare thereby A: Hand-carried pieces of luggage of passengers are
reducing the liability of the common carrier with governed by the rules on necessary deposit. Under Article
respect to A in particular. 2000 of the Civil Code the responsibility of the depository
shall, among other cases, include the loss of property of the
Are those valid defenses? (2001 Bar) guest caused by strangers but not that which may proceed
from force majeure. Article 2001 of the same Code
A: No, these are not valid defenses because they are considers an act of a thief as not one of force majeure unless
contrary to law as they are in violation of the extraordinary done with the use of arms or through an irresistible force.
diligence required of common carriers. Article 1757 Accordingly, the carrier may, given the factual setting in the
provides that responsibility of a common carrier for the problem, still be held liable.
safety of passengers as required in Articles 1733 and 1755
cannot be dispensed with or lessened by stipulation, by the Q: X took the Benguet Bus from Baguio going to Manila.
posting of notices, by statements on tickets, or otherwise. He deposited his maleta in the baggage compartment of
the bus common to all passengers. He did not declare
The defenses available to any common carrier to limit or his baggage nor pay its charges contrary to the
exempt it from liability are: observance of extraordinary regulations of the bus company. When X got off, he
diligence, or the proximate cause of the incident is a could not find his baggage which obviously was taken
fortuitous event or force majeure, act or omission of the by another passenger. Determine the liability of the bus
shipper or owner of the goods, the character of the goods or company. (1989 Bar)
defects in the packing or in the containers, and order or act
of competent public authority, without the common carrier A: The bus company is liable for the loss of the maleta. The
being guilty of even simple negligence. duty of extraordinary diligence in the vigilance over the
goods is due on such goods as are deposited or surrendered
LIMITATION OF LIABILITY TO FIXED AMOUNT to the common carrier for transportation. The fact that the
maleta was not declared nor the charges paid thereon,
Q: X took a plane from Manila bound for Davao via Cebu would not be consequential so long as it was received by the
where there was a change of planes. X arrived in Davao carrier for transportation.
safely but to his dismay, his two suitcases were left
behind in Cebu. The airline company assured X that the Q: A shipped 13 pieces of luggage through LG Airlines
suitcases would come in the next flight but they never from Tehran to Manila as evidences by LG Air Waybill
did. X claimed P2, 000.00 for the loss of both suitcases, which disclosed that the actual gross weight of the
but the airline was willing to pay only P500.00 because luggage was 180Kg. Z did not declare an inventory of
the airline ticket stipulated that unless a higher value the contents or the value of the 13 pieces of luggage.
was declared, any claim for loss cannot exceed P250 for After the said pieces of luggage arrived in Manila, the
each piece of luggage. X reasoned out that he did not consignee was able to claim from the cargo broker only

44
UST BAR OPERATIONS
QUAMTO (1987-2016)

12 pieces, with a total weight of 174Kg. X advised the A: No, X was not a “passenger”. A “stowaway”, being a
airlines of the loss of one of the 13 pieces of luggage and trespasser, has been held to assume the risk of damage.
of the contents thereof. Efforts of the airlines to trace
the missing luggage were fruitless. Since the airlines Q: During the elections last May, AB, a congressional
failed to comply with the demand of X to produce the candidate in Marinduque, chartered the helicopter
missing luggage, X filed an action for breach of contract owned by Lode Mining Corporation (LMC) for use in the
with damages against LG Airlines. In its answer, LG election campaign. AB paid LMC the same rate normally
Airlines of the carrier, if any, with respect to cargo to a charged by companies regularly engaged in the plane
sum of $20 per kilo or $9.07 per pound, unless a higher chartering business. In the charter agreement between
value is declared in advance and additional charges are LMC and AB, LMC expressly disclaimed any
paid by the passenger and the conditions of the contract responsibility for the acts or omissions of its pilot or f or
as set forth in the air waybill. Expressly subject the the defective condition of the plane’s engine. The
contract of the carriage of cargo to the Warsaw helicopter crashed killing AB. Investigations disclosed
Convention. May the allegation of LG Airlines be that pilot error was the cause of the accident. LMC now
sustained? Explain. (1993 Bar) consults you on its possible liability for AB’s death in
the light of the above findings. How would you reply to
A: Yes. Unless the contents of a cargo are declared or the LMC’s query? (1987 Bar)
contents of a lost luggage are proved by the satisfactory
evidence other than the self-serving declaration of one A: I would reply to LMC’s query as follows: LMC may not be
party, the contract should be enforced as it is the only held liable for the death of AB. A stipulation with a private
reasonable basis to arrive at a just award. The passenger or carrier that would disclaim responsibility for simple
shipper is bound by the terms of the passenger ticket or the negligence of the carrier’s employees is a valid stipulation.
waybill. Such a stipulation, however, will not hold in cases of liability
for gross negligence or bad faith.

BAGGAGE IN POSSESSION OF PASSENGERS Q: X, an 80-year old epileptic, boarded the S/S Tamaraw
in Manila going to Mindoro. To disembark, the
Q: Marino was passenger on a train. Another passenger, passengers have to walk thru a gang plant. While
Juancho, had taken a gallon of gasoline placed in a negotiating the gang plank, X slipped and fell into the
plastic bag into the same coach where Marino was waters. X was saved from drowning, brought to a
riding. The gasoline ignited and exploded causing hospital but after a month died from pneumonia.
injury to Marino who filed a civil suit for damages Except for X, all the passengers were able to walk thru
against the railway company claiming that Juancho the gang plank. What is the liability of the owner of S/S
should have been subjected to inspection by its Tamaraw? (1989 Bar)
conductor.
A: The owner of S/S Tamaraw is liable for the death of X in
The railway company disclaimed liability resulting failing to exercise utmost diligence in the safety of
from the explosion contending that it was unaware of passengers. Evidently, the carrier did not take the necessary
the contents of the plastic bag and invoking the ri ght of precautions in ensuring the safety of passengers in the
Juancho to privacy. boarding of and disembarking from the vessel. Unless
shown to the contrary, a common carrier is presumed to
a. Should the railway company be held liable for have been negligent in cases of death or injury to its
damages? passengers. Since X has not completely disembarked yet,
b. If it were an airline company involved, would your the obligation of the shipowner to exercise utmost diligence
answer be the same? Explain briefly. (1992 Bar) still then subsisted and he can still be held
A:
Q: Johnny owns a Sarao jeepney. He asked his neighbor
a. No. The railway company is not liable for damages. In Van if he could operate the said jeepney under Van’s
overland transportation, the common carrier is not certificate of public convenience. Van agreed and,
bound nor empowered to make an examination on the accordingly, Johnny registered his jeepn ey in Van’s
contents of packages or bags, particularly those name.

handcarried by passengers. On June 10, 1990, one of the passenger jeepneys


b. No. In case of air carriers, it is not lawful to carry
operated by Van bumped Tomas. Tomas was injured
flammable materials in passenger aircrafts, and airline
and in due time, he filed a complaint for damages
companies may open investigate suspicious packages
against Van and his driver for the injuries he suffered.
and cargoes (R.A. 6235).
The court rendered judgment in favor of Tomas and
ordered Van and his driver, jointly and severally, to pay
SAFETY OF PASSENGERS
Tomas actual and moral damages, attorney’s fees, and
cost.
Q: X brought 7 sacks of palay to the PNR. He paid his
freight charges and was issued Way Bill No. 1. The cargo
The Sheriff levied on the jeepney belonging to Johnny
was loaded on the freight wagon of the train. Without
but registered in the name of Van. Johnny filed a third-
any permission, X boarded the freight wagon and not
party claim with the Sheriff alleging ownership of the
the passenger coach. Shortly after the train started, it
jeepney levied upon and stating that the jeepney was
was derailed. The freight wagon fell on its side, killing
registered in the name of Van merely to enable Johnny
X. There is no evidence that X bought a ticket or paid his
to make use of Van’s certificate of public convenience.
fare at the same time that he paid the freight charges for
his cargo. Is X passenger of PNR? (1989 Bar)
May the Sheriff proceed with the public auction of
Johnny’s jeepney? Discuss the reasons. (1990 Bar)

45
Mercantile Law

A: Yes, the Sheriff may proceed with the auction sale of vehicle.
Johnny’s jeepney. In contemplation of law as regards the
public and third persons, the vehicle is considered the Q: Baldo is a driver of Yellow Cab Company under the
property of the registered operator. boundary system. While cruising along the South
Q: A bus of GL Transit on its way to Davao stopped to Expressway, Baldo’s cab figured in a collision, killing
enable a passenger to alight. At that moment, Santiago his passenger, Pietro. The heirs of Pietro sued Yellow
who had been waiting for a ride, boarded the bus. Cab Company for damages, but the latter refused to pay
However, the bus driver failed to notice Santiago who to the heirs, insisting that it is not liable because Baldo
was still standing on the bus platform, and stepped on is not an employee. Resolve with reasons. (2005 Bar)
the accelerator. Because of the sudden motion, Santiago
slipped and fell down suffering serious injuries. May A: Yellow Cab Company is liable because there exists an
Santiago hold GL Transit liable for breach of contract of employer-employee relationship between a jeepney owner
carriage? Explain (1996 Bar) and a driver under the boundary system arrangement in
accordance with Art. 103 of the RPC. Indeed to exempt from
A: Yes, Santiago may hold GL Transit liable for breach of liability the owner of a public vehicle who operates it under
contract of carriage. It was the duty of the driver, when he the “boundary system” on the ground that he is a mere
stopped the bus, to do no act that would have the effect of lessor would not only to abet a flagrant violations of the
increasing the peril to a passenger such as Santiago while Public Service Law but also to place the riding public at the
he attempting to board the same. When a bus is not in mercy of reckless and irresponsible drivers reckless
motion there is no necessity for a person who wants to ride because the measure of their earnings depends largely on
the same to signal his intention to board. A public utility bus, the number of trips they make and, hence, the speed at
once it stops, is in effect making continuous offer to bus which they drive; and irresponsible because most, if not all
riders. It is the duty of common carriers of passengers to of them, are in no position to pay the damages they might
stop their conveyances while they are doing so. Santiago, by cause.
stepping and standing on the platform of the bus is already
considered as a passenger and is entitled to all the rights Q: Procopio purchased an Isuzu passenger
and protection pertaining to a contract of carriage (Dangwa jeepney from Enteng, a holder of certificate of public
Trans. Co. v. CA, Oct. 7, 1991 ). convenience for the operation of public utility
plying the Calamba-Los Baños route. While Procopio
LIABILITY FOR ACTS OF OTHERS continued offering the jeepney for public transport
services, he did not have the registration of the vehicle
Other Passengers and Strangers transferred in his name. Neither did he secure for
himself a certificate of public convenience for its
Q: Antonio, a paying passenger, boarded a bus bound operation. Thus, per the records of the Land
for Batangas City. He chose a seat at the front row, near Transportation Franchising and Regulatory Board,
the bus driver, and told the bus driver that he had Enteng remained its registered owner and operator.
valuable items in his hand-carried bag which he then One day, while the jeepney was traveling southbound,
placed beside the driver’s seat. Not having slept for 24 it collided with a ten-wheeler truck owned by
hours, he requested the driver to keep an eye on the bag Emmanuel. The driver of the truck admitted
should he doze off during the trip. While Antonio was responsibility for the accident, explaining that the
asleep, another passenger took the bag away and truck lost its brakes.
alighted at Calamba, Laguna. Could the common carrier
be held liable by Antonio for the loss? (1997 Bar) Procopio sued Emmanuel for damages, but the latter
moved to dismiss the case on the ground that Procopio
A: Yes. Ordinarily, the common carrier is not liable for acts is not the real party in interest since he is not the
of other passengers. But the common carrier cannot relieve registered owner of the jeepney. Resolve the motion
itself from liability if the common carrier’s employees could with reasons (2005 Bar)
have prevented the act or omission by exercising due
diligence. In this case, the passenger asked the driver to A: The motion to dismiss should be denied. In the case of
keep an eye on the bag which was placed beside the driver’s Lim vs. Court of Appeals, G.R. No. 125817, January 16, 2002 ,
seat. the Supreme Court held that Procopio may sue for damages
against Emmanuel despite the existence of kabit system
If the driver exercised due diligence, he could have because, (a) neither parties to the kabit system is being held
prevented the loss of the bag. liable for damages; (b) the case arose from the negligence of
another vehicle using the public road to whom no
Q: Discuss the “kabit system” in land transportation and representation, or misrepresentation, as regards
its legal consequences (2005 Bar) ownership and operation of the passenger jeepney was
made to whom such representation, or misrepresentation
A: The “kabit system” is an agreement whereby a person was necessary (Villanueva, Commercial Law Reviewer, 2009
who has been granted a certificate of convenience allows ed.)
another person who owns motor vehicles to operate under
such franchise for a fee. It has been identified as one of the Q: Fil-Asia Air Flight 9I6 was on a scheduled passenger
root causes of the prevalence of graft and corruption in the flight from Manila when it crashed as it landed at the
government transportation offices. It is recognized as a Cagayan de Oro airport; the pilot miscalculated the
contract which is against public policy and therefore void plane's approach and undershot the runway. Of the I50
and inexistent under Art. 1409 ( Lita Enterprises, Inc. v. IAC, people on board, ten (10) passengers died at the crash
G.R. L-64693, April 27, 1984). As a consequence, both the scene.
owner of the certificate of public convenience and the actual
owner of the motor vehicle should be held jointly and Of the ten who died, one was a passenger who managed
severally liable for damages to third persons as a to leave the plane but was run over by an ambulance
consequence of the negligent operation of the motor
coming to the rescue. Another was an airline employee
46
UST BAR OPERATIONS
QUAMTO (1987-2016)

who hitched a free ride to Cagayan de Oro and who was just as a train was entering the station. Ricardo Santos
not in the passenger manifest. was run over by the train. He died. In action for
damages filed by the heirs of Ricardo Santos, CRI
It appears from the Civil Aeronautics Authority interposed lack of cause of action, contending that the
investigation that the co-pilot who had control of the mishap occurred before Ricardo Santos boarded the
plane's landing had less than the required flying and train and that it was not guilty of negligence. Decide.
landing time experience, and should not have been in (2008 Bar)
control of the plane at the time. He was allowed to fly as
a co-pilot because of the scarcity of pilots - Philippine A: The contention of CRI must fail. In the case of Light Rail
pilots have been recruited by foreign airlines under Transit Authority v. Navidad (G.R. No. 145804, 2003) , the
vastly improved flying terms and wages so that newer Supreme Court held that the duty of a common carrier to
and less trained pilots are being locally deployed. The provide safety to its passengers is not only during the
main pilot, on the other hand, had a very high level of course of the trip but for so long as the passenger are within
blood alcohol at the time of the crash. its premises and where they ought to be in pursuance to the
contract of carriage. Furthermore, the New Civil Code
You are part of the team that the victims hired to handle provision provides that the common carrier will still be
the case for them as a group. In your case conference, liable even though its employees acted beyond the scope of
the following questions came up: their work. Therefore, CRI is liable for the damages the heirs
of Ricardo Santos had suffered.
a. Explain the causes of action legally possible under
the given facts against the airline and the pilots; BILL OF LADING
whom will you specifically implead in these causes
of action? Q: Discuss the three-fold character of a bill of lading.
b. How will you handle the cases of the passenger run (2015 Bar)
over by the ambulance and the airline employee
allowed to hitch a free ride to Cagayan de Oro? A: A bill of lading is considered a receipt for the goods
(2013 Bar) shipped to the common carrier. It also serves as the contract
by which three parties, namely, the shipper, the carrier and
A: the consignee undertake specific responsibilities and
assumed stipulated obligations. Third, it is the evidence of
a. A complaint for breach of contract of carriage can be the existence of the contract of carriage providing for the
filed against Fil-Asia Air for failure to exercise terms and conditions thereof (Keng Hua Paper Products vs.
extraordinary diligence in transporting the passengers Court of Appeals, 286 SCRA 257).
safely from their point of embarkation to their
destination (Article 1755, Civil Code). Q:
a. What do you understand by a “bill of lading”?
A complaint based on a quasi-delict can be filed against b. Explain the two-fold character of a “bill of lading.”
the pilots because of their fault and negligence ( Article (1998 Bar)
2176, Civil Code). Fil-Asia Air can be included for
negligence in the selection and supervision of the pilots A:
(Article 2180, Civil Code). a. A bill of lading may be defined as written
acknowledgment of the receipt of goods and an
A third cause of action may be a criminal agreement to transport and to deliver them at a
prosecution for the reckless imprudence resulting specified place to a person named therein or on his
in homicide against two pilots. The airline will be order.
subsidiary liable for the civil liability only after the b. A bill of lading has two-fold character, namely, (a) it is
pilots are convicted and found to be insolvent. a receipt of goods to be transported; and (b) it
constitutes a contract of carriage of the goods.
b. It is the driver of the ambulance and his employer who
should be held liable for damages, because a passenger Q: JRT, Inc. entered into a contract with C. Co. of Japan
was run over. This is in accordance with Articles 2176 to export anahaw fans valued at $23,000. As payment

and 2180
criminal of the Civil
prosecution for Code. There
reckless could also
imprudence be a
r esulting thereof,The
buyer. a letter
letterofofcredit
creditwas issuedwas
required to JR, Inc. by
issued to the
JR,
in homicide against the ambulance driver and the Inc. by the buyer. The letter of credit required the
consequent civil liability. issuance of an on-board bill of lading and prohibited
the transshipment. The President of JRT, Inc. then
Since the airline employee was being transported contracted a shipping agent to ship the anahaw fans
gratuitously, Fil-Asia Air was not required to exercise through O Containers Lines, specifying the
extraordinary diligence for his safety and only ordinary requirements of the letter of credit. However, the bill of
care (Lara v. Valencia, 104 Phil. 65, 1958). lading issued by the shipping lines bore the notation
“received for shipment” and contained a n entry
WAITING FOR CARRIER OR BOARDING OF CARRIER indicating transshipment in Hongkong. The President
of JRT, Inc, personally received and signed the bill of
Q: City Railways, Inc. (CRI) provides train service, for a lading and despite the entries, he delivered the
fee, to commuters from Manila to Calamba, Laguna. corresponding check in payment of the freight.
Commuters are required to purchase tickets and then
proceed to designated loading and unloading facilities The shipment was delivered at the port of discharge but
to board the train. Ricardo Santos purchased the ticket the buyer refused to accept the anahaw fans because
for Calamba and entered the station. While waiting, he there was no on-board bill of lading, and there was
had an altercation with the security guard of CRI transshipment since the goods were transferred in

leading to a fistfight. Ricardo Santos fell on the railway Hongkong from MV Pacific, the feeder vessel, to MV

47
Mercantile Law

Oriental, a mother vessel. The same cannot be Central without surrender of the B/L on the basis of the
considered transshipment because both vessels belong latter’s undertaking to hold the carrier free and
to the same shipping company. harmless from any liability.

1. Was there transshipment? Explain. Subsequently, a Bank to whom the Central was
2. JRT, Inc. further argued that assuming there was indebted, claimed the cargo and presented the srcinal
transshipment, it cannot be deemed to have agreed of the B/L stating that the Central had failed to settle its
thereto even if it signed the bill of lading containing obligations with the Bank.
such entry because it has made known to the
shipping lines from the start that transshipment Was there misdelivery by the carrier to the sugar
was prohibited under the letter of credit and that, central considering the non-surrender of the B/L?
therefore, it had no intention to allow Why? (1992 Bar)
transshipment of the subject cargo. Is the argument
tenable? Reason. (1993 Bar) A: There was no misdelivery to the carrier since the cargo
was consigned to the sugar central per t he “Shipper’s
A: Order”.

1. Yes. Transshipment is the act of taking cargo out of one MARITIME COMMERCE
ship and loading it in another. It is immaterial whether
or not the same person, firm or entity owns the 2 Charter Parties
vessels.
2. No. JRT is bound by the terms of the bill of lading when Q: X owns the ship M/V Aguinaldo. He bareboat
it accepted the bill of lading with full knowledge of its chartered the ship to Y who appointed all its crew
contents which included transshipment in Hongkong members from the captain down to its last official. Y
Acceptance under such circumstances makes the bill of then transported a shipment of 10,000 bags of sugar
lading binding contract. belonging to Z. Thru the negligence of the ship captain,
half of the sugar was damaged due to sea water. Since Y
Q: X shipped thru M/V Kalayaan, spare parts worth is bankrupt, Z sued the captain and X. Will the suit
P500, 000. The bill of lading limits the liability of the prosper? (1989 Bar)
carrier to P50, 000 and contains a notation indicating
the amount of the letter of credit (i.e. P500, 000) which A: The action could pro sper against the ship captain whose
X obtained from a bank to import the spare parts. The negligence caused the damage but not against X who merely
spare parts were not delivered to X so X sued the carrier was a lessor of the vessel and who was neither a party to the
for P500, 000. Decide. (1989 Bar) contract for the shipment of the goods nor an employer of
the ship captain.
A: The limit of liability stipulated in the bill of lading is
subordinated to a declaration therein of the actual value of Q: The Saad Dev Co enters into a voyage charter with
the goods. Since the bill of lading itself contains a notation XYZ over the latter’s vessel, the MV LadyLove. Before
indicating the true value of the goods shipped (supported the Saad could load it, XYZ sold LadyLove to Oslob
by the letter of credit), X can sue the carrier on the basis of Maritime Co which decided to load it for its own
such true value. account.

DELIVERY WITHOUT SURRENDER OF BILL OF LADING a. May XYZ Shipping Co validly ask for the rescission
of the charter party? If so, can Saad recover
Q: Star Shipping Lines accepted 100 cartons of sardines damages? To what extent?
from Master to be delivered to 555 Company of Manila. b. If Oslob did not load it for its own account, is it
Only 88 cartons were delivered, however, these were in bound by the charter party?
bad condition. 555 Company claimed from Star c. Explain the meaning of “owner pro hac vice of the
Shipping Lines the value of the missing goods, as well as vessel.” In what kind of charter party does this
the damaged goods. Star Shipping Lines refused obtain? (1991 Bar)
because the former failed to present a bill of lading.
Resolve with reasons the claim of 555 Company. (2005 A:
Bar)
a. Yes. XYZ may ask for the rescission of the charter party
A: Star Shipping Lines should pay the claim of 555 Company. if, as in this case, it sold the vessel before the charterer
The mere fact that some cartons were lost and the 88 has begun to load the vessel and the purchaser loads it
cartons were damaged is sufficient proof of the fault of Star for his own account. Saad may recover damages to the
Shipping Lines. The fact that 555 Company failed to present extent of its losses (Art. 689 Code of Commerce).
a bill of lading makes no difference, because it was the b. If Oslob did not load Lady Love for its own account, it
actual consignee. Moreover, under Art. 353 of the Code of would be bound by the charter party, but XYZ would
Commerce, the surrender of the srcinal bill of lading is not have to indemnify Oslob if it was not informed of the
a condition precedent for a common carrier to be Charter Party at the time of sale ( Art. 689 Code of
discharged of its obligation. If surrender of the srcinal bill Commerce).
of lading is not possible, acknowledgment of delivery by c. The term “Owner Pro Hac Vice of the Vessel,” is
signing the delivery receipt suffices. generally understood to be the charterer of the vessel
in the case of bareboat or demise charter whereby the
Q: For a cargo of machinery shipped from abroad to a shipowner turns over possession of his vessel to the
sugar central in Dumaguete, Negros Oriental, the Bill of charterer, who then undertakes to provide a crew and
Lading (B/L) stipulated “To Shipper’s Order,” with victuals and supplies and fuel for her during the term of
notice of arrival to be addressed to the Central. The the charter (Litonjua Shipping Co v. National Seamen’s
cargo arrived at its destination and was released to the Board GR 51910, Aug 10, 1989).

48
UST BAR OPERATIONS
QUAMTO (1987-2016)

LIABILITY OF SHIP OWNERS AND SHIPPING AGENTS liability does not apply when the shipowner or captain
is guilty of negligence.
Q: Captain Hook, the ship captain of M.V. Peter Pan, b. Yes. In case of a lost vessel, the claimants may go after
overloaded the M.V. Peter Pan, as a consequence of the proceeds of the insurance covering the vessel.
which the vessel sank in the middle of the Sulu Sea, and
nothing whatsoever was recovered. The owners of the
cargo and the heirs of the three passengers of the vessel
filed an action for damages in the amount of P500, 000 Q: X Shipping Company spent almost a fortune in
against Mr. Wendy, the owner. Will the action prosper? refitting and repairing its luxury passenger vessel, the
Reasons. (1988 Bar) MV Marina, which plied the inter-island routes of the
company from La Union in the north to Davao City in the
A: The total loss or the lawful abandonment of the vessel south. The MV Marina met an untimely fate during its
precludes further liability on the part of the shipowner, post-repair voyage. It sank off the coast of Zambales
except to the extent of earned freightage or proceeds of while en route to La Union from Manila. The
insurance, if any, for the loss of cargo arising from the investigation showed that the captain alone was
“conduct of th e captain in the care of goods.” This right of negligent. There were no casualties in that disaster.
abandonment likewise applies to collisions and shipwreck Faced with a claim for the payment of the refitting and
but in the latter case only for unpaid wages. repair, X Shipping Company asserted exemption from
Accordingly, the action filed by the owners of the lost cargo, liability on the basis of the hypothecary or limited
absent any remaining value of the vessel, earned freightage liability rule under Article 587 of the Code of
or insurance proceeds, may not prosper. The action filed by Commerce. Is X Shipping Company’s assertion valid?
the heirs of the deceased passengers may, however, prosper Explain. (2000 Bar)
since, except in collisions, the shipowners are not granted
the right of abandonment. A: No, the assertion of X Shipping Company is not valid. The
total destruction of the vessel does not affect th e liability of
Q: X chartered the ship of Y to transport his logs from the shipowner for repairs on the vessel completed before its
Zamboanga to Manila. In the course of their voyage, the loss.
ship met a storm and had to dock in Cebu for 3 days. Z,
the captain of the ship, borrowed P20, 000 from X on Q: Under a charter party, XXO Trading Company
the pretext that he would need the money for the repair shipped sugar to Coca-Cola Company through SS Negros
of the ship. Z misappropriated the money and Shipping Corp., insured by Capitol Insurance Company.
converted it to his own benefit. What is the liability of Y, The cargo arrived but with shortages. Coca-Cola
if any? (1989 Bar) demanded from Capitol Insurance Co. P500, 000 in
settlement for XXO Trading. The MM Regional Trial
A: A shipowner would only be liable for contracts made by Court, where the civil suit was filed, "absolved the
the captain (a) when duly authorized or (b) even when insurance company, declaring that under the Code of
unauthorized, for ship repairs, or for equipping or Commerce, the shipping agent is civilly liable for
provisioning the vessel when the proceeds are invested damages in favor of third persons due to the conduct of
therein. Since the loan by the captain from X does not fall the carrier's captain, and the stipulation in the charter
under any of the foregoing cases, the amount borrowed party exempting the owner from liability is not against
shall be considered a personal liability of Z, the captain, and public policy. Coca-Cola appealed. Will its appeal
Y, the shipowner, cannot thus be held liable. prosper? Reason briefly. (2004 Bar)

Q: Thinking that the impending typhoon was still 24 A: No. The appeal of Coca-Cola will not prosper. Under
hours away, MV Pioneer left port to sail for Leyte. That Article 587 of the Code of Commerce, the shipping agent is
was a miscalculation of the typhoon signals by both the civilly liable for damages in favor of third persons due to the
shipowner and the captain as the typhoon came earlier conduct of the carrier's captain, and the shipping agent can
and overtook the vessel. The vessel sank and a number exempt himself therefrom only by abandoning the vessel
of passengers disappeared with it. Relatives of the with all his equipment and the freight he may have earned
missing passengers claimed damages against the during the voyage. On the other hand, assuming there is
shipowner. The shipowner set up the defense that bareboat charter, the stipulation in the charter party
under the doctrine of limited liability, his liability was
co-extensive with his interest in the vessel. As the exempting
policy the owner
because fromatliability
the public large isisnot
notinvolved
against (public
Home
vessel was totally lost, his liability had also been Insurance Co. v. American Steamship Agencies, Inc., 23
extinguished. (1999 Bar) SCRA25, 1968).

a. How will you advice the claimants? Discuss the LIABILITY FOR ACTS OF CAPTAIN
doctrine of limited liability in maritime law. (same
topic asked in 1982, 1985, 1988, 1989, 1991, 1994, Q: MV Mariposa, one of five passenger ships owned by
1997, 2008) the Marina Navigation Company, sank off the coast of
b. Assuming that the vessel was insured. May the Mindoro while en route to Iloilo City. More than 200
claimants go after the insurance proceeds? passengers perished in the disaster. Evidence showed
that the ship captain ignored typhoon bulletins issued
A: by PAGASA during the 24- hour period immediately
prior to the vessel’s departure from Manila. The
a. Under the doctrine of limited liability in maritime law, bulletins warned all types of sea crafts to avoid the
the liability of the shipowner arising from the operation typhoon’s expected path near Mindoro. To make
of a ship is confined to the vessel, equipment, and matters worse, he took more load than was allowed for
freight, or insurance, if any, so that if the shipowner the ship’s rated capacity. Sued for damages by the
abandoned the ship, equipment, and freight, his liability victim’s surviving relatives, Marina Navigation
is extinguished. However, the doctrine of limited Company contended: (1) that its liability, if any, had

49
Mercantile Law

been extinguished with the sinking of MV Mariposa; 2. Yes. When the ship owner of the vessel involved is
and (2) that assuming it had not been so extinguished, guilty of negligence, the “limited liability rule” does not
such liability should be limited to the loss of the cargo. apply. In such case, the ship owner is liable to the full
Are these contentions meritorious in the context of extent of the damages sustained by the aggrieved
applicable provisions of the Code of Commerce? (2000 parties.
Bar)
Q:
A: Yes. The contentions of Marina Navigation Company are
meritorious. The captain of MV Mariposa is guilty of 1. Two vessels coming from opposite directions
negligence in ignoring the typhoon bulletins issued by collided with each other due to fault imputable to
PAGASA and in overloading the vessel. But only the captain both. What are the liabilities of the two vessels with
of the vessel MV Mariposa is guilty of negligence. The respect to the damage caused to them and their
shipowner is not. Therefore, the shipowner can invoke the cargoes? Explain.
doctrine of limited liability. 2. If it cannot be determined which of the vessels was
at fault resulting in the collision, which party
My advice would be that RC should give notice of the should bear the damage caused to the vessels and
damage sustained by the cargo within 3 days and that he the cargoes? Explain.
has to file the suit to recover the damage sustained by the 3. Which party should bear the damage to the vessels
cargo within 1 year from the date of the delivery of the cargo and the cargoes if the cause of the collision was a
to him. fortuitous event? Explain. (1995 Bar)

LIMITED LIABILITY RULE A:


1. Each vessel must bear its own damage. Both of them are
Q: X, a rich trader, boarded the M/V Cebu, a small vessel at fault.
with a value of P3M and owned by Y, plying the route 2. Each of them should bear their respective damages.
Cotabato to Pagadian City. X had in his possession a Since it cannot be determined as to which vessel is at
diamond worth P5M. the vessel had a capacity of 40 fault. This is under the doctrine of “inscrutable fault”.
passengers. Near Pagadian, the vessel met squally 3. No party shall be held liable since the cause of the
weather and was hit by a six foot waves every three collision is fortuitous event. The carrier is not an
seconds. Soon, water entered the engine room and the insurer.
hull of the vessel. The patron of the vessel ordered the
distribution of life belts to the passengers. He told them Q: Explain these two doctrines in Maritime accidents—
the vessel was sinking and for them to take care of
themselves. The vessel turned out to be overloaded by a) The Doctrine of Inscrutable Fault; and
20 passengers and had no sufficient life belts. X failed b) The Doctrine of Limited Liability (1997 Bar)
to get a life belt and died when the vessel totally sunk.
The heirs of X sued Y for P10M damages. Y raised as a A:
defense of limited liability. (1989 Bar)
a) Under the “doctrine of inscrutable fault”, where fault is
A: The doctrine of limited liability does not apply when established but it cannot be determined which of the 2
death or injury or damage sustained is attributable to the vessels were at fault, both shall be deemed to have been
fault or negligence of the shipowner or shipagent or to at fault.
concurring fault or negligence of the shipowner or
shipagent or captain (or patron) of the vessel. Undoubtedly, b) Under the “doctrine of limited liability” the exclusively
the shipowner himself, was guilty of such fault or negligence real and hypothecary nature of maritime law operates
in not making certain that the passenger vessel is not to limit the liability of the shipowner to the value of the
overload, as well as and is having failed to provide sufficient vessel, earned freightage and proceeds of the
life belts on board the vessel. insurance. However, such doctrine does not apply if the
shipowner and the captain are guilty of negligence.
Q: Toni, a copra dealer, loaded 1, 000 sacks of copra on
board the vessel M/V Tonichi (a common carrier
engaged in coastwise trade owned by Ichi) for shipment ACCIDENTS AND DAMAGES IN MARITIME COMMERCE
from Puerto Galera to Manila.
General Average
The cargo did not reach Manila because the vessel
capsized and sank with all its cargo. Q: What is the “Jason Clause” in a charter party? (2015
Bar)
When Toni sued Ichi for damages based on breach of
contract, the latter invoked the “limited liability rule” A: The Jason Clause derives its name from the Jason case
[225 US 32 (1912)] decided by the US Supreme Court under
1. What do you understand of the “rule” invoked by the Harter Act. By the Jason Clause, a shipowner (provided
Ichi? he had exercised due diligence to make the ship seaworthy
2. Are there exceptions to the “limited liability rule” and properly manned, equipped and supplied) could claim
(1994 Bar) a general average contribution from the cargo, even when
the damage was caused by faulty navigation of the vessel,
A: provided that the bill of lading excluded liability for such
faults.
1. By “limited liability rule” is meant that the liability of a
ship owner for damages in case of loss is limited to the Q: Global Transport Services, Inc (GTSI) operates a fleet
value of the vessel involved. His other properties of cargo vessels plying interisland routes. One of its
cannot be reached by the parties entitled to damages. vessels, MV Donna Juana, left the port of Manila for

50
UST BAR OPERATIONS
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Cebu laden with, among other goods, 10,000 television Particular averages include all expenses and damages
sets consigned to Romualdo, a TV retailer in Cebu. caused to the vessel or to the cargo which did not inure to
the common benefit and profit of all the persons interested
When the vessel was about 10 nautical miles away from in the vessel and the cargo. General averages include all
Manila, the ship captain heard on the radio that a damages and expenses which are deliberately caused to
typhoon which, as announced by PAG-ASA, was on its save the vessel, its cargo, or both at the same time, from real
way out of the country, had suddenly veered back into and known risk.
Philippine territory. The captain realized that MV Dona
Juana would traverse the storm’s path, but decided to Q: An importer of Christmas toys loaded 100 boxes of
proceed with the voyage. True enough, the vessel sailed Santa Clause talking dolls aboard a ship in Korea bound
into the storm. The captain ordered the jettison of the for Manila. With the intention of smuggling 1⁄2 of his
10, 000 television sets, along with some other cargo, in cargo, he took a bill of lading for only 50 boxes to save
order to lighten the vessel and make it easier to steer the more precious cargo. Is the importer entitled to
the vessel out of the path of the typhoon. Eventually, the receive any indemnity for average? (2010 Bar)
vessel, with its crew intact, arrived safely in Cebu.
A: No. The importer is not entitled to receive any indemnity
a) Will you characterize the jettison of Romualdo’s TV for average. In order that the goods jettisoned may be
sets as an average? If so, what kind of an average, included in the general average and the owner be entitled
and why? If not, why not? to indemnity, it is necessary that their existence on board
be proven by means of the bill of lading.
A: The jettison of Romualdo’s TV sets resu lted in a general
average loss, which entitles him compensation or COLLISIONS
indemnification from the shipowner and the owners of the
cargoes saved by the jettison. Q: There was a severe typhoon when the vessel M/V
Fortuna collided with M/V Suerte. It is conceded that
b) Against whom does Romualdo have a cause of the typhoon was a major cause of the collision, although
action for indemnity of his lost TV sets? Explain. there was a strong possibility that it could have avoided
(2009 Bar) if the captain of M/V Fortuna was not asleep at the time
of the collision.
A: Romualdo has a cause of action for his lost TV sets against
the shipowner and the owners of the cargoes saved by the Who should bear the damages to the vessels and their
jettison. The jettison of the TV sets resulted in a general cargoes? (1987 Bar)
average loss, entitling Romualdo to indemnity for the lost
TV sets. A: Under the doctrine of inscrutable fault, neither of the
carriers may go after the other.
Q: MV SuperFast, a passenger-cargo vessel owned by SF
Shipping Company plying the inter-island routes, was The shippers may claim damages against the shipowners
on its way to Zamboanga City from the Manila port and the captains of both vessels, having been both negligent.
when it accidentally, and without fault or negligence of Their liability is solidary.
anyone on the ship, hit a huge floating object. The
accident caused damage to the vessel and loss of an The shipowners have the right to recover damages from the
accompanying crated cargo of passenger PR. In order to master of the vessels who were both guilty of negligence.
lighten the vessel and save it from sinking and in order The presence of a typhoon in the area had in fact warranted
to avoid risk of damage to or loss of the rest of the a greater degree of alertness on their part.
shipped items (none of which was located on the deck),
some had to be jettisoned. SF Shipping had the vessel Q: A severe typhoon was raging when the vessel SS
repaired at its port of destination. SF Shipping Masdaam collided with the M/V Princess. It is conceded
thereafter filed a complaint demanding all the other that the typhoon was the major cause of collision,
cargo owners to share in the total repair costs incurred although there was a very strong possibility that it
by the company and in the value jettisoned cargoes. In could have been avoided if the captain of the SS
answer to the complaint, the shippers’ sole contention Masdaam was not drunk and the captain of the M/V
was that, under the Code of Commerce, each damaged
party should bear its or his own damage and those that Princess was not asleep at the time of the collisions.
did not suffer any loss or damage were not obligated to Who should bear the damages to the vessels and their
make any contribution in favor of those who did. Is the cargoes? (1998 Bar)
shippers contention valid? Explain. (2000 Bar)
A: The shipowners of the SS Masdaam and M/V Princess
A: No, the shippers’ contention is not valid. The owners of shall each bear their respective loss of vessels.
the cargo jettisoned, to save the vessel from sinking and to
save the rest of the cargoes, are entitled to contribution. The For the losses and damages suffered by their cargoes, both
jettisoning of said cargoes constitute general average loss shipowner are solidarily liable.
which entitles the owners thereof to contribution from the
owner of the vessel and also from the owners of the cargoes Q: In a collision between M/T Manila, a tanker, and M/V
saved. SF Shipping is not entitled to Don Claro, an inter-island vessel, M/V Don Claro sank
contribution/reimbursement for the cost of repairs on the and many of its passengers drowned and died. All its
vessel from the shippers. cargoes were lost. The collision occurred at nighttime
but the sea was calm, the weather fair and visibility was
Q: What are the types of averages in marine commerce? good. Prior to the collision and while still 4 nautical
(2010 Bar) miles apart, M/V Don Claro already si ghted M/T Manila
on its radar screen. M/T Manila had no radar
A: The types of averages are particular and general average.

51
Mercantile Law

equipment. As for speed, M/V Don Claro was twice as consul in a foreign country ( Art. 835, Code of
fast as M/T Manila. Commerce).
b. A, the passenger, is required to file a maritime protest
At the time of the collision, M/T Manila failed to follow since being a passenger of the vessel at the time of the
Rule 19 of the International Rules of the Road which collision, was expected to know the circumstances of
required 2 vessels meeting head on to change their the collision; thus, A cannot successfully maintain an
course by each vessel steering to starboard (right) so action to recover losses and damages. B, the shipper,
that each vessel may pass on the port side (left) of the can successfully maintain an action to recover since he
other. M/T Manila signaled that it would turn to port wasn’t there when the collision happened an d he is not
side and steered accordingly, thus resulting in the privy to the circumstances of the collision.
collision. M/T Don Claro’s captain was off -duty and was
having a drink at the ship’s bar at the time of the CARRIAGE OF GOODS BY SEA ACT
collision.
Period of Prescription
a) Who would you hold liable for the collision?
Q: A local consignee sought to enforce judicially a claim
A: I could hold the 2 vessels liable. In the problem given, against the carrier for loss of a shipment of drums of
whether on the basis of the factual settings or under the lubricating oil from Japan under the COGSA after the
doctrine of inscrutable fault, both vessels can be said to carrier had rejected its demand. The carrier pleaded in
have been guilty of negligence. The liability of the 2 carriers its Answer the affirmative defense of prescription
for the death or injury of passengers and for the loss of or under the provisions of the same Act inasmuch as the
damage to the goods arising from the collision is solidary. suit was brought by the consignee after 1 year from
Neither carrier may invoke the doctrine of last clear chance delivery of the goods. In turn, the consignee contended
which can only be relevant, if at all, between the 2 vessels that the period of prescription was suspended by the
but not on the claims m ade by passengers or shippers. written extrajudicial demand it had made against the
carrier within the 1-year period, pursuant to Article
b) If M/V Don Claro was at fault, may the heirs of the 1155 of the Civil Code providing that the prescription of
passengers who died and the owners of the cargoes actions is interrupted when there is a written
recover damages from the owner of said vessel? extrajudicial demand by the creditors.
(1991 Bar)
a) Has the action, in fact, prescribed? Why?
A: Yes, but subject to the doctrine of limited liability. The
doctrine is to the effect that the liability of the shipowners A: The action taken by the local consignee has, in fact,
would only be to the extent of any remaining value of the prescribed. The period of 1 year under the COGSA is not
vessel, proceeds of insurance, if any, and earned freightage. interrupted by a written extrajudicial demand. The
Given the factual settings, the shipowner himself was not provision of Article 1155 of the Civil Code merely apply to
guilty of negligence and, therefore, the doctrine can well the prescriptive periods provided for in said Code and not
apply. the special laws except when otherwise provided.

Q: Explain a maritime protest. When and where should b) If the consignee’s action were predicated on
it be filed? (1988 Bar) misdelivery or conversion of the goods, would your
answer be the same? Explain briefly. (1992 Bar)
A: A maritime protest is a sworn statement stating the
circumstances of collision which must be presented within A: If the consignee’s action were predicated on misdelivery
24 hours before the competent authority of the port nearest or conversion of the goods, the provisions of the COGSA
to where the collision had taken place or the first port of would be inapplicable. In these case, the Civil Code
arrival or, if it occurs in a foreign country, the Philippine prescriptive periods, including Art. 1155 of the Civil Code,
consular representative. An action to recover losses and will apply.
damages arising from collisions cannot be admitted if such
protest, however, will not prejudice such action by owners Q: What is the prescriptive period for actions involving
of cargo who were not on board the vessel or who were not lost or damaged cargo under the Carriage of Goods by
in a condition to make known their wishes. Sea Act? (1995 Bar)

Q: Two vessels figured in a collision along the Straits of A: One (1) year after delivery of the goods or the date when
Guimaras resulting in considerable loss of cargo. The the goods should have been delivered.
damaged vessels were safely conducted to the Port of Q: AA entered into a contract with BB thru CC to
Iloilo. Passenger A failed to file a maritime protest. B, a transport ladies’ wear from Manila to France with
non-passenger but a shipper who suffered damage to transshipment at Taiwan. Somehow the goods were not
his cargo, likewise did not file a maritime protest at all. loaded at Taiwan on time. Hence, when the goods
arrived in France, they arrived “off -season” and AA was
a. What is a maritime protest? paid only for 1⁄2 the value by the buyer. AA claimed
b. Can A and B successfully maintain an action to damages from the shipping company and its agent. The
recover losses and damages arising from the defense of the respondents was prescription.
collision? Reason Briefly. (2007 Bar) Considering that the ladies’ wear suffered “loss value”,
A: as claimed by AA, should the prescriptive period be one
year under the COGSA, or 1 0 years under the Civil Code?
a. Maritime protest is a sworn statement made within 24 Explain briefly. (2004, 2010 Bar)
hours after a collision in which the circumstances
thereof are declared or made known before a A: The applicable prescriptive period is 10 years under the
competent authority at the point of accident or the first Civil Code. The 1-year prescriptive period under the COGSA
port of arrival if in the Philippines or the Philippine applies in cases of loss or damage to the cargo. The term

52
UST BAR OPERATIONS
QUAMTO (1987-2016)

“loss” as interpreted by the Supreme Court in Mitsui O.S.K. whole interest in the corporation belongs to the State. A
Lines, contemplates a situation where no delivery at all was public corporation is created by special legislation or act of
made by the carrier of the goods because the same had Congress. A private corporation must be organized under
perished or gone out of commerce deteriorated or decayed the Corporation Code.
while in transit. In the present case, the shipment of ladies’
wear was actually delivered. The “loss of value” is not the A stock corporation is one that has capital stock divided into
total loss contemplated by the COGSA. shares and is authorized to distribute to the holders of such
shares dividends or allotment of the surplus profits on basis
Q: On December 1, 2010, Kore A Corporation shipped of the shares held. All other corporations are non-stock
from South Korea to LT Corporation in Manila some corporations.
300,000 sheets of high-grade special steel. The
shipment was insured against all risk by NA Insurance Q: Since February 8, 1935, the legislature has not
(NA). The carrying vessel arrived at the Port of Manila passed even a single law creating a private corporation.
on January 10, 2011. When the shipment was What provision of the constitution precludes the
discharged, it was noted that 25, 000 sheets were passage of such a law? (2008 Bar)
damaged and in bad order. The entire shipment was
turned over to the custody of ATI, the arrastre operator, A: Article XII, Sec 16 provides that Congress shall not,
on January 21, 2011 for storage and safekeeping, except by general law, provide for the formation,
pending its withdrawal by the consignee’s authorized organization, or regulation of private corporations.
customs broker, RVM. Government-owned and controlled corporations may be
created or established by special charters in the interest of
On January 26 and 29, 2011, the subject shipment was the common good and subject to the test of economic
withdrawn by RVM from the custody of ATI. On January viability.
29, 2011, prior to the withdrawal of the last batch of the
shipment, a joint inspection of the cargo was conducted Q: Your client Dianne approaches you for legal advice
per the Request for bad Order Survey (RBO) dated on putting up a medium-sized restaurant business that
January 28, 2011. The examination report showed that will specialize in a novel type of cuisine. As Dianne feels
30,000 sheets of steel were damaged and in bad order. that the business is a little risky, she wonders whether
she should use a corporation as the business vehicle, or
NA Insurance paid LT Corporation the amount of P30M just run it as a single proprietorship. She already has an
for the 30,000 sheets that were damaged, as shown in existing corporation that is producing meat products
the Subrogation Receipt dated January 13, 2013. profitably and is also considering the alternative of
Thereafter, NA Insurance demanded reparation against simply setting up the restaurant as a branch office of
ATI for the goods damaged in its custody, in the amount the existing corporation.
of P5M. ATI alleged that the COGSA applies in this case
since the goods were shipped from a foreign port to the Briefly explain to your client what you see as the legal
Philippines. NA Insurance claims that the COGSA does advantages and disadvantages of using a separate
not apply, since ATI is not a shipper or carrier. Who is corporation, a single proprietorship, or a branch of an
correct? (2014 Bar) existing corporation for the proposed restaurant
business. (2010 Bar)
A: NA Insurance is correct. ATI should be ordered to pay NA
Insurance notwithstanding the lapse of the one year A: If Dianne will set up a separate corporation, her liability
prescriptive period for filing a suit under the COGSA. The for its obligations and losses will be limited to the amount
term “carriage of goods” under Section 1 in COGSA, covers of her subscription in the absence of showing that there is a
the period from the time when the goods are loaded to the ground to disregard its separate juridical personality. If she
time when they are discharged from the ship infer that the were to operate a single proprietorship, her liability for its
period of time when the goods have been discharged from debts and losses will be unlimited.
the ship and given to the custody of the arrastre operator is
not covered by the COGSA. The COGSA does not mention The formation and the operation of a corporation require a
that an arrastre operator may invoke the prescriptive great deal of paper work and record-keeping. This is not the
period of one year; hence, it does not cover the arrastre situation in the case of a single proprietorship.

operator. If she were to set-up the restaurant as a branch office an


existing corporation, the corporation will have more funds
CORPORATION CODE as capital than if she were to form a separate corporation.
However, all the assets of the existing corporation will be
liable for the debts and losses of the restaurant business.
CORPORATION
CLASSES OF CORPORATIONS
Q: Distinguish clearly (1) a private corporation from a
public corporation; and (2) a stock corporation from a Q: What is a corporation sole? (2004 Bar)
non-stock corporation. (2004 Bar)
A: Section 10 of the Corporation Code defines a
A: A private corporation is one formed for some private “corporation sole” as one formed for the purpose of
purpose, benefit or end, while a public corporation is administering and managing, as trustee, the affairs,
formed for the government of a portion of the State for the property and temporalities of any religious denomination,
general good or welfare. The true test is the purpose of the sect or church. It is formed by the chief archbishop, bishop,
corporation. If the corporation is created for political or priest, minister, rabbi or other presiding elder of such
public purpose connected with the administration of religious denomination, sect or church.
government, then it is a public corporation. If not, it is a
private corporation although the whole or substantially the

53
Mercantile Law

Q: Is there a difference between a de facto corporation enunciated in Article XII, Sec.16: Congress shall not, except
and a corporation by estoppels? Explain briefly. (2004 by general law, provide for the formation, organization, or
Bar) regulation of private corporations. The general law creating
private corporations is governed by Batas Pambansa Blg.68
A: A de facto corporation is one which actually exists for all otherwise known as the Corporation Code of the
practical purposes as a corporation but which has no legal Philippines where the number of directors of trustees shall
right to corporate existence as against the State. It is not be less than five nor more than fifteen. Since NPC is not
essential to the existence of a de facto corporation that there governed by the Corporation Code, the standard number of
be: directors is not required.

1. A valid law under which a corporation might be Q: “XY” is a recreational club which was organized to
incorporated operate a golf course for its members with an srcinal
2. A bona fide attempt to organize as a corporation under authorized capital stock of P100M. The articles of
such law, and incorporation nor the by-laws did not provide for
3. Actual use or exercise in good faith of corporate powers distribution of dividends although there is a provision
conferred upon it by law that after its dissolution, the assets shall be given to a
charitable corporation. Is “XY” a stock corporation ?
A corporation by estoppels exists when person assume to Give reasons for you answer. (2001 Bar)
act as a corporation knowing it to be without authority to
do so. In this case, those persons will be liable as general A: “XY” is a stock corporation because it is organized as a
partners for all debts, liabilities and damages incurred or stock corporation and there is no prohibition in its Articles
arising as a result of their actions. of Incorporation or in its by-laws for it to declare dividends.
When a corporation is organized as a stock corporation and
Q: A corporation was created by a special law. Later, the its Articles of Incorporation or By-Laws are silent, the
law creating it was declared invalid. May such corporation is deemed to have the power to declare
corporation claim to be a de facto corporation? (1996 dividends under Section 43. Since it has the power to
Bar) declare dividends, “XY” is a stock corporation.

A: No. A private corporation may be created only under the The provision in its Articles of Incorporation that at
Corporation Code. Only public corporations may be created dissolution the assets of the corporation shall be given to a
under a special law. Where a private corporation is created charitable corporation does not prohibit the corporation
under a special law, there is no attempt at a valid from declaring dividends before dissolution.
incorporation and it cannot claim a de facto status.
NATIONALITY OF CORPORATIONS
Q: May a corporation enter into a joint venture? (1996
Bar) Q: ABC Corporation was organized in Malaysia but has
a branch in the Philippines. It is entirely owned by
A: Yes. A corporation may enter into a joint venture with Filipino citizens. Can you consider ABC Corporation a
another where the nature of that venture is in line with the Philippine national? (2015 Bar)
business authorized by its charter. (Tuason v. Bolanos, G.R.
No. L-4935, May 28, 1954 ) However, inasmuch as the term A: Yes, it is a considered a Philippine national as long as it
‘joint venture’ has no precise legal definition, it may take is registered as doing business in the Philippines under the
various forms. It could take the form of a simple pooling of Corporation Code. (Sec. 1 of RA 7042, as amended by Sec. 1
resources (not involving incorporation) between two or of RA 8179)
more corporations for a specific project, purpose or
undertaking, or for a limited time. It may involve the Control Test
creation of a more formal structure, and, hence, the
formation of a corporation. What is prohibited by law is the Q: What is the nationality of a corporation organized
creation of a partnership between corporations but not the and incorporated under the laws of a foreign country,
creation of a joint venture. but owned 100% by Filipinos? (1998 Bar)

Q: a) Since February 8, 1935, the legislature has not A: Under the control test of corporate nationality, this
passed even a single law creating a private corporation. foreign corporation is of Filipino Nationality. Where there
What provision of the Constitution precludes the are grounds for piercing the veil of corporate entity, that is,
passage of such law? (2008 Bar) disregarding the fiction, the corporation will follow the
nationality of the controlling members or stockholders,
A: Section 16, Article XII of the 1987 Constitution states since the corporation will then be considered as one and the
“The Congress shall not, except by general law, provide for same.
the formation, organization, or regulation of private
corporations.” The same provision is contained in Section 7, CORPORATE JURIDICAL PERSONALITY
Article XIV of the 1935 Constitution and Section 4, Article
XIV of the 1973 Constitution. Doctrine of Separate Juridical Personality

Q: May the composition of the board of directors of the Q: Richard owns 90% of the shares of the capital stock
National Power Corporation (NPC) be validly reduced of GOM Corporation. On one occasion, GOM
to three (3)? Explain your answer fully. (2008) Corporation, represented by Richard as President and
General Manager, executed a contract to sell a
A: Yes. NPC is a government owned and controlled subdivision lot in favor of Tomas. For failure of GOM
corporation created by a special charter. Its charter allows Corporation to develop the subdivision, Tomas filed an
the composition of its board of directors to be reduced. The action for rescission and damages against GOM
prohibition only applies to private corporations. As clearly
Corporation and Richard.
54
UST BAR OPERATIONS
QUAMTO (1987-2016)

as a stockholder with a substantial equity share, he


Will the action prosper? Explain. (1996 Bar) owns that portion of the corporate assets now in his
possession. Is the contention of S valid? Explain. (2000
A: The action may prosper against GOM Corporation but Bar)
definitely not against Richard. Richard has a legal
personality separate and distinct from that of GOM A: No. the contention of S is not valid. The Ford Expedition
Corporation. If he signed the contract to sell, he did so as the is owned by the corporation. The corporation has a legal
President and General Manager of GOM Corporation and personality separate and distinct from that of its
not in his personal capacity. Mere ownership by Richard of stockholder. What the corporation owns is its own property
90% of the capital stock of GOM Corporation is not of itself and not property of any stockholder even how substantial
sufficient ground to disregard his separate legal personality the equity share that stockholder owns.
absent a showing, for example, that he acted maliciously or
in bad faith. Q: Nelson owned and controlled Sonnel Construction
Company. Acting for the company, Nelson contracted
Q: As a result of perennial business losses, a the construction of a building. Without first installing a
corporation’s net worth has been wiped out. In fact, it is protective net atop the sidewalks adjoining the
now in negative territory. Nonetheless, the construction site, the company proceeded with the
stockholders did not like to give up. construction work. One day a heavy piece of lumber fell
from the building. It smashed a taxicab which at that
Creditor-banks, however, do not share the confidence time had gone offroad and onto the sidewalk in order to
of the stockholders and refuse to grant more loans. avoid the traffic. The taxicab passenger died as a result.

Assuming that the corporation continues to operate If you were the counsel for Sonnel Construction, how
even with depleted capital, would the stockholders or would you defend your client? What would be your
the managers be solidarily liable for the obligations theory? (2008 Bar)
incurred by the corporation? Explain. (1999 Bar)
A: If I were the counsel for Sonnel Construction Company, I
A: No. As a general rule, the stockholders or the managers will argue that the proximate cause of the death of the
cannot be held solidarily liable for the obligations incurred victim is the gross negligence of the taxicab driver. The
by the corporation. The corporation has a separate and latter drove the taxicab offroad and onto the sidewalk in
distinct personality from that of the stockholders and order to avoid the traffic. Furthermore, I will argue that
managers. The latter are presumed to be acting in good faith assuming that Nelson was negligent, he alone should be
in continuing the operation of the corporation. The sued as the Sonnel Coonstruction Company has a separate
obligations incurred by the corporation are those of the and distinct personality. Nelson’s controlling interest in
corporation which alone is liable therefor. However, when Sonnel Construction Company does not justify the piercing
the corporation is already insolvent, the directors and of the corporate veil.
officers become trustees of the business and assets of the
corporation for the benefit of the creditors and are liable for Q: In an action for collection of a sum of money, the RTC
negligence or mismanagement. of Makati City issued a decision finding D- Securities,
Inc. liable to Rehouse Corporation for P10M.
Q: Marulas Creative Technology Inc., an e-business Subsequently, the writ of execution was issued but
enterprise engaged in the manufacture of computer returned unsatisfied because D-Securities had no more
multimedia accessories, rents an office and store space assets to satisfy the judgment. Rehouse moved for an
at a commercial building owned by X. being a start-up Alias Writ of Execution against Fairfield Bank (FB), the
company, Marulas enjoyed some leniency in its rent parent company of D-Securities. FB opposed the motion
payment; but after 3 years, X put a stop to it and asked on the grounds that it is a separate entity and that it was
Marulas president and general manager, Y, who is a never made party to the case. The RTC granted the
stockholder, to pay back rentals amounting to a motion and issued the Alias Writ of Execution. In its
hundred thousand pesos or to vacate the premises at Resolution, the RTC relied on the following facts:
the end of the month. Marulas neither paid its debt nor 499,995 out of the 500,000 outstanding shares of stocks
vacated the premises. X sued Marulas and Y for of D-Securities are owned by FB; FB had actual

collection
of of Will
litigation. the unpaid
the suitrentals,
prosper plus interest
against and costs
X? Against Y? knowledge
lawyers of represented
who the subject matter of litigation
D-Securities as the
are also the
(2000 Bar) lawyers of FB. As an alter ego, there is no need for a
finding of fraud or illegality before the doctrine of
A: Yes, the suit will prosper against Marulas. It is the one piercing the veil of corporate fiction can be applied. The
renting the office and store space, as lessee, from the owner RTC ratiocinated that being one and the same entity in
of the building, X, as lessor. But the suit against Y will not the eyes of the law, the service of summons upon D-
prosper. Y, as president and general manager, and also Securities has bestowed jurisdiction over both the
stockholder of Marulas Creative Technology, Inc., has a legal parent and wholly-owned subsidiary. Is the RTC
personality separate and distinct from that of the correct? (2014 Bar)
corporation and not that of its officers and stockholders
who are not liable for corporate liabilities. A: No, the RTC is not correct. The court must have first
acquire jurisdiction over the corporation(s) involved before
Q: Nine individuals formed a private corporation its or their separate personalities are disregarded; and the
pursuant to the provisions of the Corporation Code of doctrine of piercing the veil of corporate entity can only be
the Philippines. Incorporator S was elected director raised during a full-blown trial over a cause of action duly
and president—general manager. Part of his commenced involving parties duly brought under the
emolument is a Ford Expedition, which the corporation authority of the court by way of service of summons or what
owns. After a few years. S lost his corporate positions passes as such service.

but he refused to return the motor vehicle claiming that

55
Mercantile Law

RECOVERY OF MORAL DAMAGES Q: Plaintiffs filed a collection action against “X”


Corporation. Upon execution of the court’s decision, “X”
Q: In a complaint filed against XYZ Corporation, Luzon Corporation was found to be without assets. Thereafter
Trading Corporation allege that its President & General plaintiffs filed an action against its present and past
Manager, who is also a stockholder, suffered mental stockholder “Y” Corporation which owned
anguish, fright, social humiliation and serious anxiety substantially all of the stocks of “X” Corporation. The
as a result of the tortuous acts of XYZ Corporation. two corporations have the same board of directors and
“Y” Corporation financed the operations of “X”
In its counterclaim, XYZ Corporation claimed to have Corporation. May “Y” Corporation be held liable for the
suffered moral damages due to besmirched reputation debts of “X” Corporation? Why? (2001 Bar)
or goodwill as a result of Luzon Trading Corporation’s
complaint. A: Yes, “Y” Corporation may be held liable for the debts of
“X” Corporation. The doctrine of piercing the veil of
a. May Luzon recover moral damages based on the corporate fiction applies to this case. The two corporations
allegations in the complaint? have the same board of directors and “Y” corporation
b. May XYZ Corporation recover moral damages? owned substantially all of the stocks of “X” Corporation,
(1998 Bar) which facts justify the conclusion that the latter is merely an
A: extension of the personality of the former, and that the
former controls the policies of the latter. Added to this is the
a. No. A corporation, being an artificial person which has fact that “Y” Corporation controls the finances of “X”
no feelings, emotions or senses, and which cannot Corporation which is merely an adjunct, business conduit or
experience physical suffering or mental anguish, is not alter-ego of “Y” Corporation.
entitled to moral damages.
b. Yes. When a juridical person has a good reputation that Q: Mr. Pablo, a rich merchant in his early forties, was a
is debased, resulting in social humiliation, moral defendant in a lawsuit which could subject him to
damages may be awarded. Moreover, goodwill can be substantial damages. A year before the court rendered
judgment, Mr. Pablo sought his lawyer’s advice on how
considered an asset of the corporation.
to plan his estate to avoid taxes. His lawyer suggested
that he should form a corporation with himself, his wife
DOCTRINE OF PIERCING THE CORPORATE VEIL
and his children (all students and still unemployed) as
stockholders and then transfer all his assets and
Q:
liabilities to this corporation. Mr. Pablo and the plaintiff
sought to enforce this judgment. The sheriff, however,
A. What is the
corporate doctrine
entity?” of “piercing the veil of
Explain. could not locate any property in the name of Mr. Pablo
and therefore returned the writ of execution
unsatisfied. What remedy, if any, is available to the
A: Under the doctrine of “piercing the veil of corporate
plaintiff? (1991 Bar)
entity,” the legal fiction that a corporation is an entity with
a juridical personality separate and distinct from its
A: The plaintiff can avail himself of the doctrine of piercing
members or stockholders may be disregarded and the
the veil of corporate fiction which can be invoked when a
corporation will be considered as a mere association of
corporation is formed or used in avoiding a just obligation.
persons, such that liability will attach directly to the officers
While it is true that a family corporation may be organized
and the stockholders. It is an equitable doctrine developed
to pursue an estate tax planning, which is not per se illegal
to address situations where the separate corporate
or unlawful, the factual settings, however, indicate the
personality of a corporation is abused or used for wrongful
existence of a lawsuit that could subject Mr. Pablo to a
purposes.
substantial amount of damages. It would thus be difficult for
Mr. Pablo to convincingly assert that the incorporation of
B. To what circumstances will the doctrine apply?
the family corporation was intended merely as a case of
(2006 Bar)
“estate tax planning”.
A: The doctrine of “piercing the veil of corporate entity” will
INCORPORATION AND ORGANIZATION
apply when the corporation’s separate juridical personality

is used: Q:
a) To defeat public convenience;
A. What is the minimum and maximum number of
b) To justify wrong, protect fraud, or defend crime;
incorporators required to incorporate a stock
c) As a shield to confuse the legitimate issues;
corporation? Is this also the same minimum and
d) Where a corporation is the mere alter ego or business
maximum number of directors in a stock
conduit of a person; or
corporation? (2006 Bar)
e) Where the corporation is so organized and controlled
and its affairs are so conducted as to m ake it merely an
A: To incorporate a stock corporation, a minimum of 5 and
instrumentality, agency, conduit or adjunct of another
a maximum of 15 incorporators are required.
corporation.
Yes, the same minimum and maximum number of directors
Q: How does one pierce the veil of corporate fiction?
is required in a stock corporation.
(2004 Bar)
B. Must all incorporators and directors be residents of
A: The veil of corporate fiction may be pierced by proving
the Philippines?
in court that the notion of legal entity is being used to defeat
public convenience, justify wrong, protect fraud, or defend
A: No. Only a majority of the incorporators and a majority
crime or the entity is just an instrument or alter ego or
of the directors must be residents of the Philippines.
adjunct of another entity or person.
56
UST BAR OPERATIONS
QUAMTO (1987-2016)

Q: X is a Filipino immigrant residing in Sacramento, A: Yes. The articles of incorporation defines the charter of
California. Y is a Filipino residing in Quezon City, the corporation and the contractual relationship between
Philippines. Z is a resident alien residing in Makati City. the State and the corporation, the State and the
GGG Corporation is a domestic corporation - 40% stockholders, and between the corporation and the
owned by foreigners and 60% owned by Filipinos, with stockholders. Its contents are thus binding upon both the
T as authorized representative. CCC Corporation is a corporation and the stockholders, conferring on Juancho a
foreign corporation registered with the Philippine clear right to have his stockholding recorded.
Securities and Exchange Commission. KKK Corporation
is a domestic corporation (100%) Filipino owned. S is a NUMBER AND QUALIFICATIONS OF INCORPORATORS
Filipino, 16 years of age, and the daughter of Y.
Q:
a. Who can be incorporators? Who can be
subscribers? A. What is the minimum and maximum number of
b. What are the differences between an incorporator incorporators required to incorporate a stock
and a subscriber, if there are any? corporation? Is this also the same minimum and
c. Who are qualified to become members of the board maximum number of directors required in a stock
of directors of the corporation? corporation?
d. Who are qualified to act as Treasurer of the B. Must all incorporators and directors be residents of
company? the Philippines? (2006 Bar)
e. Who can be appointed Corporate Secretary? (2012 A:
Bar) A. Any number of natural persons not less than five but
not more than fifteen may form a private corporation
A: (Sec. 10, Corporation Code). Likewise, the number of
directors must not be less than five nor more than
a. X, Y, Z, and T can be incorporators. The corporations fifteen as indicated in the AOI. (Sec. 14, Corporation
and S cannot be incorporators since the former are not Code)
natural persons and the latter is not of legal age. ( Sec. B. No. The Corporation Code only provides that majority
10, Corporation Code) All of the foregoing can become of incorporators and directors of a corporation must be
subscribers except S since she is not yet of legal age. residents of the Philippines. (Sec. 10 and Sec. 23,
b. The difference between the two is as follows: a) an Corporation Code)
incorporator is a signatory of the AOI while a
subscriber is not; b) there is a limit for the number of
incorporators while there is no limit in the number of CORPORATE NAME
subscribers; c) an incorporator must be a natural Amendment
person while a subscriber can be either natural or
juridical person and d) incorporators has a residence Q: Guetze and his wife have 3 chidren: Neymar, 25, who
requirement while there is no such requirement in case is now based in Rio de Janeiro, Brazil; Muelter, 23, who
of subscribers. has migrated to Munich, Germany; and James, 21, who
c. A natural person, of legal age, and who owns at least resides in Bogota, Colombia. Neymar and Muelter have
one share of stock registered in his name in the books since renounced their Philippine citizenship in favor of
of the corporation and must have all the qualifications their country of residence. Nearing 70 years old, Guetze
and none of the disqualifications provided for by the decided to incorporate his business in Bi nondo, Manila.
law and AOI or the by-laws of the corporation. ( Sec. 23, He asked his wife and 3 children to act as i ncorporators
Corporation Code) with 1 share of stock each, while he owned 999,996
d. A natural person, of legal age, whether or not a Filipino shares of the 1,000,000 shares of the capital stock.
citizen but under the SEC rules he must be a resident of
the Philippines and provided that he is not the Assuming the corporation has been properly
president of the same corporation at the same time. registered, may the Articles of Incorporation now be
(SEC Opinion No. 10-24 ) amended to reduce the number of directors to two —
e. A natural person, of legal age, and a Filipino resident Guetze and his wife—to reflect the real owners of the
citizen may
provided thatbecome a secretary
he is not of the ofcorporation
the president the same shares of stock? (2014 Bar)
corporation at the same time. A: No, the Articles of Incorporation may not be amended to
reduce the number of directors to two. Sec. 14 of the
Q: Triple A Corporation (Triple A) was incorporated in Corporation Code requires that the Articles of
1960, with 500 founder’s shares and 78 common shares Incorporation shall contain the number of directors, which
as its initial capital stock subscription. However, Triple shall not be less than 5 nor more than 15. Hence, the
A registered its stock subscription. However, Triple A reduction of the number of directors to two, to reflect the
registered its stock and transfer books only in 1978, real owners of the shares of stock, is not valid.
and recorded merely 33 common shares as the
corporation’s issued and outstanding shares.
ARTICLES OF INCORPORATION
In 1982, Juancho, the sole heir of one of the srcinal Contents
incorporators filed a petition with the SEC for the
registration of his property rights over 120 founder’s
Q: The articles of incorporation to be registered in the
shares and 12 common shares. The petition was
SEC contained the following provisions—
supported by a copy of the Articles of Incorporation
indicating the incorporators’ initial capital stock
a. “First Article. The name of the corporation shall be
subscription. Will the petition be granted? Why or why
Toho Marketing Company.”
not? (2009 Bar)

57
Mercantile Law

b. “Third Article. The principal office of the


corporation shall be located in Region III, in such Q: You are asked to incorporate a new company to be
municipality therein as its Board of Directors may called FSB Savings & Mortgage Bank, Inc. List the
designate.” documents that you must submit to the Securities and
c. “Seventh Article. The capital stock of the Exchange Commission (SEC) to obtain a certificate of
corporation is One Million Pesos (P1, 000, 000), incorporation for FSB Savings & Mortgage Bank, Inc.
Philippine Currency.” (2002 Bar)

What are your comments and suggested changes to the A: The documents to be submitted for the issuance of a
proposed articles? (1990 Bar) certificate of incorporation in favor of FSB Savings &
Mortgage Bank, Inc. are the following:
A:
a. On the First Article, I would suggest that the corporate 1. Articles of incorporation
name indicate the fact of incorporation by using either 2. Treasurer's affidavit
“Toho Marketing Corporation” or “Toho Marketing 3. Certificate of authority by the Monetary Board of BSP
Company, Incorporated”. 4. Verification slip from the records of the SEC whether or
b. The Third Article should indicate the City or the not the proposed name has already been registered
Municipality and the Province in the Philippines, and
under a different entity
not merely the region or as its Board of Directors may
5. An undertaking stating that the proposed name shall be
later designate, to be its place of principal office.
changed in case another entity has been registered
c. The Seventh Article must additionally point out the
under the proposed name
number of shares into which the capital stock is
6. Registration sheet
divided, as well as the par value thereof or a statement
that said stock or a portion thereof are without par 7. Bank certificate of deposit covering the paid-up
value. capital
8. Letter containing authorization to the SEC or Monetary
Certificate of Incorporation Board or any of its duly authorized representative to
inspect bank records concerning the paid-up capital
Q: A, B, C, D & E decided to form Alphabet, Inc., a
corporation dealing with the manufacture and sale of Q: Guetze and his wife have 3 chidren: Neymar, 25, who
school supplies, with an authorized capital stock of P1 is now based in Rio de Janeiro, Brazil; Muelter, 23, who
M. The five equally subscribed to 25% of the authorized has migrated to Munich, Germany; and James, 21, who
capital stock or P50,000 each. Even before they could resides in Bogota, Colombia. Neymar and Muelter have
pay the 25% of their total subscription, however, they since renounced their Philippine citizenship in favor of
entered into a contract with Manila College. Determine their country of residence. Nearing 70 years old, Guetze
the liability of A, B, C, D, and E and Alphabet, Inc. vis-à- decided to incorporate his business in Bi nondo, Manila.
vis Manila College. (1989 Bar) He asked his wife and 3 children to act as incorporators
with 1 share of stock each, while he owned 999,996
A: Alphabet not having been issued as yet a certificate of shares of the 1,000,000 shares of the capital stock.
registration of its articles of incorporation (for its failure to Assuming all other requirements are met, should the
meet the minimum paid-up requirement) is without any SEC accept or reject the Articles of Incorporation? Why?
legal personality, and it cannot thus itself be made liable for (2014 Bar)
the breach of contract. The rule, furthermore, is that
contracts for and in behalf of a corporation prior to its A: Yes, the SEC should accept the Articles of Incorporation.
incorporation are not binding on it unless and until they are If the Articles of Incorporation substantially comply with
approved, expressly or impliedly, by its board of directors the statute and all other requirements are met, the SEC has
after due incorporation. A, B, C, D and E themselves, as a no discretion, but may be compelled by mandamus to file
rule, would not themselves be liable for the breach of them. The discretion exercised by SEC does not extend to
contract subject however, to their respective the merits of an application for incorporation, although it
representations and extent thereof. Pre-incorporation may be exercised as to matters of form.
expenses, in general, are for the account of the corporation
and unless, in general, are for the account of the corporation ADOPTION OF BY-LAWS
and unless the corporation is fictitious, the incorporators or
stockholders are not personally liable therefore. Amendment or Revision

Q: A corporation organized under the Corporation Code Q: The proposed Amended By-laws of CXT Inc., a
commences to have corporate existence and juridical corporation listed in the Makati Stock Exchange,
personality and is deemed incorporated: contain the following provisions:

a. From the date the application for incorporation is 1. That the holders of a majority of the outstanding
filed with the SEC. capital stock may elect all the members of the
b. From the date the SEC issues a certificate of Board of Directors;
incorporation under its official seal. 2. That no officer of the corporation shall be required
c. 30 days after the date the application for to be a stockholder;
incorporation is filed with the SEC. 3. That the directors’ bonuses shall be equivalent to
d. 30 days after the date the SEC issues a 10% of gross revenues in any given year;
certificate of incorporation under its official 4. That a candidate for director must own at least
seal. (2010 Bar) 1,000 shares;
5. That meetings of the Board of Directors need not be
A: b. From the date the SEC issues a certificate of held in the principal office and may even be held
incorporation under its official seal.
outside the country.
58
UST BAR OPERATIONS
QUAMTO (1987-2016)

more of its directors or trustees or officers is voidable,


As Corporate Secretary of CXT, you are asked to at the option of such corporation ( Sec 32, Corporation
comment on the validity of the above proposed Code). Such contract can be ratified by the vote of the
amendments. (1987 Bar) stockholders representing at least two-thirds of the
outstanding capital stock in a meeting called for the
A: As Corporate Secretary of CXT, I would give the following purpose: Provided, that full disclosure of the adverse
comments on the question of validity of the various interest of the directors or trustees involved is made at
proposed amendments to the By-laws, as follows: such meeting: Provided, however, That the contract is
fair and reasonable under the circumstances.
1. The minority stockholders may not be deprived of their b. Valid – Approval of the stockholders is not required in
right to vote in electing the members of the board of declaring cash dividends
directors; hence, the proposed amendment would be c. Void – This is an ultra vires act on part of XL Foods
invalid. Corporation, and is not one of the powers provided for
2. The President should be a director who should thus in Sec. 36 of the Corporation Code. It can be ratified
own at least one share of stock. Therefore, the provided it is not illegal per se but merely beyond the
suggested amendment would be invalid unless the power of the corporation by the approval of the
President is excluded from the proposed amendment. majority of the board and vote of the stockholders
3. The director’s bonuses (total compensation) cannot representing at least two thirds of the outstanding
exceed 10% of net income; accordingly, the proposed capital stock. Where the contract or act is not illegal per
amendment fixing the directors’ bonuses to 10% of se but merely beyond the power of the corporation, the
gross venues in any given year would be invalid. same is merely voidable and may be enforced by
4. While the By-laws may provide additional performance, ratification, or estoppels, or on equitable
qualifications for directors such qualifications must not grounds (Republic v. Acoje Mining Co., Inc) especially if
be unreasonable. A qualification requiring a director to no creditors are prejudiced thereby and no rights of the
own at least 1,000 shares, in my view, would be state or the public are involved ( Fletcher, p.585).
unreasonable and a denial of the right of representation
by the minority shareholders in the Board of Directors.
5. The meetings of the Board of Directors, unlike those of
the stockholders, may be held outside the Philippines; Power to Extend or Shorten Corporate Term
accordingly, the proposed amendment to the by-laws
on the matter can be valid. Q: A group of stockholders of Sesame Corporation filed
a court suit against the members of the Board of
Directors to make good to the shareholders, in
CORPORATE POWERS proportion to their shareholdings, the losses incurred
Q: What vote is needed to consider every decision to be by the corporation because the of defendant Board of
valid corporate act? Directors’ management.

a. A majority of the directors present at the meeting While the case was pending, the corporation was
b. 2/3 of the directors present at the meeting dissolved. During the three-year period from its
c. A m ajority of the directors present at the meeting dissolution, the Board of Directors decided to extend
at which there is a quorum the corporate life by an amendment of its Articles of
d. 2/3 of the directors present at the meeting at which Incorporation. Can the Board of Directors do so?
there is a quorum (2014 Bar) Reasons. (1988 Bar)

A: c. A majority of the directors present at the meeting at A: No. The corporate life may be extended so long as the
which there is a quorum proper steps therefor (charter amendment) are done by the
corporation before its expiry date.
Q: Which of the following corporate acts are valid, void,
or voidable? Indicate your answer by writing the Power to Increase or Decrease Capital Stock or Incur,
paragraph number of the query, followed by your Create, Increase Bonded Indebtedness
corresponding answer as “Valid,” “Void,” or “Voidable,”
as the case may be. If your answer is “Void,” explain Q: Suppose
stock of P1M“X” Corporation
divided has anshares
into 100,000 authorized capital
of stock with
your answer. In case of a “Voidable” answer, specify
what conditions must be present or complied with to par value of P10 each.
make the corporate act valid.
a) Give two ways whereby said authorized capital
a. XL Foods Corporation, which is engaged in the fast- stock may be increased to about P1.5 M.
food business, entered into a contract with its b) Give three practical reasons for a corporation to
President Jose Cruz, whereby the latter would increase its capital stock. (2001 Bar)
supply the corporation with its meat and poultry
requirements. A:
a) Two ways of increasing the Authorized Capital Stock of
b. The Board of Directors of XL Foods Corporation
“X” Corporation to P1.5 M are:
declared and paid cash dividends without approval
of the stockholders. 1. Increase the number of shares from 100,000 to
150,000 shares with the same par value of P10
c. XL Foods Corporation guaranteed the loan of its
each.
sister company XL Meat Products, Inc. (2002 Bar)
2. Increase par value of the 1000,000 shares to P15
each.
A:
b) Three practical reasons for a corporation to increase its
a. Voidable – A contract of the corporation with one or
capital stock are:

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Mercantile Law

1. To generate more working capital; business of the company. Acme Bottlers, Inc., creditor-
2. To have more shares with which to pay for the supplier of the bottle requirements of Union
acquisition of more assets like acquisition of Corporation, now questions the sale as fraudulent and
company car, stocks, house, machinery or business; therefore null and void, contending that it learned of
and the sale only from the column of Leticia Locsin at the
3. To have extra share with which to cover or meet Daily Globe.
the requirement for declaration of stock dividend.

Power to Sell or Dispose of Corporate Assets a) Is Acme Bottlers, Inc. correct in alleging that the
said sale is null and void?
Q: Venezia is a famous international fashion chain b) What are the rights and liabilities of Victory
outlets in Makati, Ortigas, and Manila. It has complied Corporation? (1989 Bar)
with the minimum capitalization required under the
Retail Trade Nationalization Act and carries on retail A:
business worth more than $3M for each outlets. As its a) No, the allegation of Acme that the sale is null and void
Manila outlet is not doing very well, it decides to sell all cannot be sustained. The Corporation Code expressly
of its business there consisting of remaining inventory, authorizes corporations to sell all or substantially all of
furniture and fixtures and other assets to its its assets under the conditions therein expressed which
competitor. had been complied with according to the facts stated in
the problem. The Bulk Sales Law, upon the other hand,
1. Venezia’s Manila outlet constitutes 1/3 of its total cannot successfully be invoked as the legal basis for the
business. Should it comply with the requirements nullity of the sale as the Act applies only to the
of the Bulk Sales Law? Why or why not? conveyance in bulk of stocks in trade. Had the law been
applicable, notice to the creditors before the sale would
A: Venezia need not comply with the requirements of the have been required under the Bulk Sales Law for its
Bulk Sales Law as its Manila outlet constitutes only 1/3 of validity.
its total business and, therefore, it would not be a sale of all b) Victory has acquired rights as lawful buyer in the sale
or substantially all of the business conducted by Venezia. of Union’s corporate assets. If, as alleged by Acme, the
Moreover, the requirements of the Bulk Sales Law reflected sale is fraudulent and it is rescinded on that ground, the
in Sections 3, 4, 5, and 9, by the express language of said rescission would only be to the extent that there is
provisions, apply only to the first type of bulk sales, i.e., to prejudice to the creditors. Assuming further, that the
any sale, transfer, mortgage or assignment of a stock of rescission, in fact, takes place, Victory Corporation may
goods, wares, merchandise, provisions or materials go after the seller for breach of sale or warranty as the
otherwise than in the ordinary course of trade and the ultimate facts would warrant.
regular prosecution of business of the vendor, mortgagor,
transferor, or assignor, and not to the second type (as in the Q: In the annual meeting of the “XYZ” Corporation, the
sale described in the problem) or the third type (i.e., sale, stockholders unanimously adopted a resolution
etc. of all or substantially all of the fixtures and equipment proposed by the Board of Directors t o sell substantially
used in and about the business). As the Bulk Sales Law is all the fixtures and equipment used in and about its
penal in nature, it should be interpreted strictly against the business. The President of the Corporation approached
State. you and asked for legal assistance to effect the sale.

2. If instead of selling its Manila outlet, Venezia 1. What steps should you take so that the sale may be
merely mortgages its assets there, would it need to valid?
comply with the requirements of the Bulk Sales 2. What are two instances when the sale, transfer,
Law? mortgage or assignment of stock of goods, wares,
merchandise, provision, or materials otherwise
A: For the same reasons stated in the answer to (1) above, than in the ordinary course of trade and the regular
Venezia need not comply with the requirements of the Bulk prosecution of the business of the vendor are not
Sales Law. The second type of bulk sales also includes the deemed to be a sale or transfer in bulk? (1993 Bar)
mortgage of all or substantially all of the business of the
mortgagor. A:

3. What are the legal consequences of a failure to 1. The requirements of the Bulk Sales Law must be
comply with the requirements of a Bulk Sales Law? complied with. The seller delivers to the purchaser a list
(2010 Bar) of his creditors and the purchaser in turn notifies such
creditors of the proposed sale at a stipulated time in
A: Failure to comply with the requirements of a Bulk Sales advance.
Law renders the sale, transfer, mortgage, or assignment 2. If the sale and transfer is made (1) by vendor,
fraudulent and void, and makes any person found guilty of mortgagor, transferor or assignor who produces and
violating any provision of the Bulk Sales Law punishable by delivers a written waiver of the provisions of the Bulk
imprisonment for not less than 6 months nor more than 5 Sales Law from his creditors as shown by verified
years, or a fine in an amount not exceeding P5, 000, or both statement; and (2) by a vendor, mortgagor, receiver,
such imprisonment and fine in the discretion of the court. assignee in insolvency, or public officer acting under
judicial process, the sale or transfer is not covered by
Q: The Board of Directors of Union Corporation, with the Bulk Sales Law.
the unanimous authority of its stockholders in a
meeting duly called for the purpose, sold to Victory Q: E Corporation sold its assets to M, Inc. after
Corporation for P880 Million substantially all of the complying with the requirements of the Bulk Sales Law.
company’s assets consisting of pieces of machinery, Subsequently, one of the creditors of E Corporation
fixtures, and equipment used in the alcoholic beverage tried to collect the amount due it, but found out that E

60
UST BAR OPERATIONS
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Corporation had no more assets left. The creditor then Q: Seeking to streamline its operations and to bail out
sued M, Inc. on the theory that M, Inc. is a mere alter ego its losing ventures, the stockholders of X Corporation
of E Corporation. unanimously adopted a proposal to sell substantially
all of the machineries and equipment used in and about
Will the suit prosper? Explain. (1996 Bar) its manufacturing business and to sink the proceeds of
the sale for the expansion of its cargo transport
A: The suit will not prosper. The sale by E Corporation of its services.
assets to M, Inc. does not result in the transfer of the
liabilities of the latter to, nor in the assumption thereof by a) Would the transaction be covered by the provisions
the former. The facts given do not indicate that such of the Bulk Sales Law?
transfer or assumption took place or was stipulated upon b) How would X Corporation effect a valid sale? (2007
by the parties in their agreement. Furthermore, the sale by Bar)
E Corporation of its assets is a sale of its property. It does
not involve the sale of the shares of stock of the corporation A:
belonging to its stockholder. There is, therefore, no merger a) No, the transaction is not covered by the provisions of
or consolidation that took place. E Corporation continues to the Bulk Sales Law. Bulk Sales Law applies only to retail
exist and remains liable to the creditor. merchants, traders and dealers. It does not apply to
manufacturers. X Corporation is engaged in the
Q: House of Pizza (PIZZA) is the owner and operator of manufacturing business.
a nationwide chain of pizza outlets. House of Liquor b) To effect a valid sale, X Corporation must prepare an
(LIQUOR) is a retailer of all kinds of liquor. affidavit stating the names of all its creditors, their
addresses, the amount of their credits and their
House of Foods (FOODS) has offered to purchase all of maturities. X Corporation should give the affidavit to
the outlets, equipment, fixtures and furniture of PIZZA. the buyer who, in turn, should furnish a copy to each
FOODS also offered to purchase from LIQUOR all of its creditor and notify the creditors of the proposed bulk
moderately priced stock constituting 50% of its total sale to enable them to protect their interest.
inventory.
Q: Pursuant to a writ of execution issued by the RTC in
Both PIZZA and LIQUOR have creditors. What legal “Express Bank v. Don Rubio,” the sheriff levied and sold
requirements must PIZZA and LIQUOR comply with in at public auction 8 photocopying machines of Don
order for FOODS to consummate the transactions? Rubio. Is the sheriff’s sale covered by the Bulk Sales
Discuss fully. (1995 Bar) Law? (2006 Bar)

A: PIZZA and LIQUOR must prepare an affidavit stating the A: No. The sheriff’s sale is not covered by the Bulk Sales Law.
names of all their creditors, their addresses, the amounts of If the sale and transfer in bulk is made by a public officer,
their credits and their respective maturities. PIZZA and acting under judicial process, as is true in this case, said sale
LIQUOR must submit said affidavit to FOODS which, in turn, or transfer is not covered by the Bulk Sales Law.
should notify the creditors about the transaction which is
about to be concluded with PIZZA and LIQUOR. Q: Divine Corporation is engaged in the manufacture of
garments for export. In the course of its business, it was
Q: Company X, engaged in the business of able to obtain loans from individuals and financing
manufacturing car parts and accessories, operates a institutions. However, due to the drop in the demand
factory with equipment, machinery and tools for this for garments in the international market, Divine
purpose. The manufactured goods are sold wholesale Corporation could not meet its obligations. It decided to
to distributors and dealers throughout the P hilippines. sell all its equipment such as sewing machines, perma-
Company X was among the business entities adversely press machines, high speed sewers, cutting tables,
hit by the 1997 Asian business crisis. Its sales dropped ironing tables, etc., as well as its supplies and materials
with the decline in car sales and its operating costs to Top Grade Fashion Corporation, its competitor.
escalated, while its creditor banks and other financial
institutions tightened their loan portfolios. Company X a. How would you classify the transaction?
was faced with the dismal choice of either suspending b. Can Divine Corporation sell the aforesaid items to
its operations or selling its business. It chose the latter. its competitor, Top Grade Fashion Corporation?
Having struck a deal with Company Z, a more viable What are the requirements to validly sell the items?
entity engaged in the same business, Company X sold i ts Explain.
entire business to the former without much fanfare or c. How would you protect the interest of the creditors
any form of publicity. In fact, evidence exists that the of Divine Corporation?
transaction was furtively entered into to avoid the d. In case Divine Corporation violated the law, what
prying eyes of Company X’s creditors. The creditor remedies are available to Top Grade Fashion
banks and other financial institutions sued Company X Corporation? (2005 Bar)
for violation of the Bulk Sales Law. Decide. (2000 Bar)
A:
A: Company X violated the Bulk Sales Law when it sold its
entire business to Company Z furtively to avoid the prying a. The transaction is deemed classified as sale of all or
eyes of its creditors. Its manufactures goods are sold substantially all of the corporate assets because the
wholesale to distributors and dealers. The sale of all or corporation would be rendered incapable of continuing
substantially all of its stocks, not in the ordinary course of the business or accomplishing the purpose for which it
business, constitutes bulk sale. The transaction being a bulk was incorporated.
sale, entering into such transaction without complying with b. Yes, the law does not prohibit sale of all or substantially
the requirements of the Bulk Sales law, Company X violated all of corporate assets to competitor-company provided
said law. said sale is subject to laws against illegal combination,

monopoly or restraint of trade and Bulk Sales Law.

61
Mercantile Law

Nowhere in the facts states that the competitor


company lies within the restrictions provided for by A:
law. For the transaction to be valid, it needs a majority
vote of its board of directors and stockholder’s 1. Yes. The sale involves all fixtures and equipment, not in
approval representing at least 2/3 of outstanding the ordinary course of trade and the regular
capital stock. Further, since bulk sales apply to sale of prosecution of business of Stanrus, Inc.
all or substantially all of corporate assets, it also 2. Crossroads should require from Stanrus, Inc.
requires the following: submission of a written waiver of the Bulk Sales Law by
the creditors as shown by verified statements or to
I. list of creditors under oath must be given by the comply with the requirements of the Bulk Sales Law,
seller to the buyer 10 days before the sale that is, the seller must notify his creditors of the terms
containing the list of their respective names, and conditions of the sale, and also, before receiving
addresses, due dates and amount owing to each; from the vendee any part of the purchase price, deliver
to such vendee a written sworn statement of the names
II. inventory of goods or properties to be sold, cost and addresses of all his creditors together with the
price and the amount for which it has been sold, amount of indebtedness due to each.
and
III. the list of inventory is filed with the DTI, Power to Acquire Own Shares
otherwise, it will be null and void for being in
fraud of creditors. Q: Under what conditions may a stock corporation
acquire its own shares? (2005 Bar)
c. To protect the interest of the creditors, I will require the
seller to prepare an affidavit stating the names of all its A: The corporation may acquire its own shares when it has
creditors, their addresses, the amount of their credits unrestricted retained earnings in its books to cover the
and their respective maturities, and to submit the shares to be purchased/acquired and if it is for a legitimate
affidavit to the buyer who, in turn, should notify the corporate purpose/s.
creditors about the transaction he is about to conclude
with the seller. Q: A corporation executed a promissory note binding
itself to pay its President/ Director, who had tendered
If the transaction was made to defraud the creditors, the his resignation, a certain sum in payment of the latter’s
latter may have the contract rescinded. The creditors may shares and interests in the company. The corporation
also file a petition for involuntary insolvency and have the defaulted in paying the full amount so that the said
sale voided if it was made in fraud of creditors. former President filed suit for collection of the balance
before the SEC.
d. Top Grade Fashion Corporation may recover the
amount paid if the sale was made in fraud of creditors a) Under what condition is a stock corporation
and sue for damages. empowered to acquire its own shares?

Q: The sole proprietor of a medium-size grocery shop, A: A stock corporation may only acquire its own shares of
engaged in both wholesale and retail transactions, sells stock if the trust fund doctrine is not impaired. This is to say,
the entire business “lock, stock barrel” because of his for instance, that it may purchase its own shares of stock by
plan to emigrate abroad with his family. Is he covered utilizing merely its surplus profits over and above the
by the provisions of the Bulk Sales Law? In the subscribed capital of the corporation.
affirmative, what must be done by the parties so as to
comply with the law? (1997 Bar) b) Is the arrangement between the corporation and its
President covered by the trust fund doctrine?
A: Yes . This is a sale of all the stock of goods, fixtures and Explain your answers briefly. (1992 Bar)
entire business, not in the ordinary course of business or
trade of the vendor. Before receiving from the vendee any A: The arrangement between the corporation and its
part of the purchase price, the vendor must deliver to such President to the extent that it calls for the payment of the
vendee a written statement, duly sworn, of the names and latter’s shares is covered by the trust fund doctrine. The
addresses of all creditors to whom said vendor may be only exceptions from the trust fund doctrine are the
indebted, together with the amount of indebtedness due or redemption of redeemable shares and, in the case of close
owing, on the account of the goods, fixtures or business corporation, when there should be a deadlock and the SEC
subject matter of the bulk sale. orders the payment of the appraised value of a
stockholder’s share.
Q: Stanrus, Inc., a department store with outlets in
Makati, Mandaluyong and Quezon City, is Power to Invest Corporate Funds in Another
contemplating to refurbish and renovate its Makati Corporation or Business
store in order to introduce the most modern and state
of the art equipment in merchandise display. To carry Q: Stikki Cement Corporation (STIKKI) was organized
out its plan, it intends to sell ALL of the existing fixtures primarily for cement manufacturing. Anticipating
and equipment (display cases, wall decoration, substantial profits, its President proposed that STIKKI
furniture, counters, etc.) to Crossroads Department invest in (a) a power plant project, (b) a concrete road
Store. Thereafter, it will buy and install new fixtures project, and (c) quarry operations for limestone used in
and equipment and continue operations. the manufacture of cement.

Crossroads wants to know from you, as counsel: 1. What corporate approvals or votes are needed for
1. Whether the intended sale is “bulk sale”. the proposed investments? Explain.
2. How can it protect itself from future claims of 2. Describe the procedure in securing these
approvals. (1995 Bar)
creditors of Stanrus. (1994 Bar)
62
UST BAR OPERATIONS
QUAMTO (1987-2016)

b) Acme may invest in the realty corporation, on the


A: assumption that the balance of 60% of ownership of the
latter corporation, is Filipino-owned since the law
1. Unless the power plant and the concrete road project merely required 60% Filipino holding in land corporate
are reasonably necessary to the manufacture of cement ownership.
by STIKKI (and they do not appear to be so), then the c) The Anti-Dummy Law allows board representation to
approval of the said projects by a majority of the Board the extent of actual and permissible foreign
of Directors and the ratification of such approval by the investments in corporations. Accordingly, the
stockholders representing at least 2/3 of the President of Acme may not sit in the Board of Directors
outstanding capital stock would be necessary. of the department store corporation but can do so in the
realty corporation.
As for the quarry operations for limestone, the same is d) The Treasurer of Acme may not hold that position
an indispensable ingredient in the manufacture of either in the department store corporation or in the
cement and may, therefore, be considered reasonably realty corporation since the Anti-Dummy Law prohibits
necessary to accomplish the primary purpose of the employment of aliens in such nationalized areas of
STIKKI. In such case, only the approval of the Board of business except those that call for highly technical
Directors would be necessary. qualifications.

2. a) The procedure in securing the approval of the Board Power to Declare Dividends
of Directors is as follows:
i) A notice of meeting of the Board should be Q: Taurus Corporation (TC) commenced operation in
sent to all the directors. The notice should 1985. During that year TC’s loss from operations
state the purpose of the meeting. amounted to P500, 000. In 1986, TC recouped all its
ii) At the meeting, each of the project should losses in 1985, registering a net after tax profit of P500,
be approved by a majority of the Board 000. In the same year, the management of the company
(not merely a majority of those present at discovered that a parcel of land srcinally acquired in
the meeting). 1985 for P300, 000 had at least doubled in value and
accordingly the Board of Directors of TC, with the
b) The procedure in securing the approval of the conformity of the external auditors and backed up by a
stockholders is as follows: valuation report of a reputable appraiser, recognized a
i) Written notice of the proposed investment and revaluation or appraisal surplus of P300, 000.
the time and place of the stockholders’ meeting
should be sent to each stockholder at his place May the Board of Directors of TC declare a cash
of residence as shown on the books of the dividend out of this surplus? Explain. (1987 Bar)
corporation and deposited to the addressee in
the post office with postage prepaid, or served A: The Board of Directors cannot declare cash dividends out
personally. of the revaluation or appraisal surplus that may fluctuate
ii) At the meeting, each of the projects should be from time to time. Dividends can only be declared from
approved by the stockholders representing at surplus profits arising from its operations.
least 2/3 of the outstanding capital stock.
Q:
Q: Acme Trading Company, Inc. (Acme), a trading
company wholly owned by foreign stockholders, was a. Distinguish between cash dividend and stock
persuaded by Paulo Alva, a Filipino, to invest in 20% of dividend. When may the declarations of these
the outstanding shares of stock of a corporation he is dividends be revoked?
forming which will engage in the department store b. After 1 year of operation, Safe Realty, Inc., wanted
business (the “department store corporation”). Paulo to declare dividends to its stockholders. Ramos, its
also urged Acme to invest in 40% of the outstanding President, asked Santos, its Treasurer, whether this
shares of stock of the realty corporation he is putting up feasible, considering the financial standing of the
to own the land on which the department store will be corporation. Santos reported that the corporation
built (the “realty corporation”). posted a P1M profit and its real estate has
appreciated in value to the tune of P4M. The Board
a) May Acme invest in the said department store then declared dividends to its stockholders
corporation? Explain your answer. computed on the basis of P5M representing profits
b) May Acme invest in the realty corporation? Discuss and appreciation in value of its real estate. Is the
with reasons. dividend declaration proper? Reasons. (1989 Bar)
c) May the President of Acme, a foreigner, sit in the
Board of Directors of the said department store A:
corporation? Discuss with reasons.
d) May the Treasurer of Acme, another foreigner, a. Dividends may either be cash (property) or stock. Any
occupy the same position in the said department dividend other than from the unissued shares of the
store corporation? May he be the treasurer of the corporation is, in contemplation of law, a cash dividend.
said realty corporation? Explain your answers? A stock dividend is one that is declared and paid out
(1990 Bar) from the unissued shares of corporation. Declaration of
stock dividends, unlike cash dividends, need the
A: concurrence of the stockholders.
a) Acme may not invest in the department store
corporation since the Retail Trade Act allows, in the A declaration of dividends may be revoked if the same
case of corporations, only 100% Filipino-owned was irregularly declared, such as when the same is
companies to engage in retail trade. violative of the trust fund doctrine; otherwise, it can no

63
Mercantile Law

longer be revoked once the right thereto has already thereafter to be concurred in by a 2/3 vote of the
vested in the stockholders. stockholders. There is no prohibition, however, against the
b. The dividend declaration is improper. Dividends may stockholders’ resolving to recommend to the board of
be declared only out of unrestricted retained earnings directors that it consider a declaration of stock dividends
and, as understood in generally accepted accounting for concurrence thereafter by the stockholders.
principles, such declaration would preclude its being
sourced from mere increments in the value of Q: For the past three years of its commercial operation,
corporate assets which may fluctuate from time to time. X, an oil company, has been earning tremendously in
excess of 100% of the corporation’s paid -in capital. All
Q: At least 2/3 of the stockholders of Solar Corporation, of the stockholders have been claiming that they share
meeting upon the recommendation of the Board of in the profits of the corporation by way of dividends but
Directors, declared a 50% stock dividend during their the Board of Directors failed to lift its finger.
annual meeting. The notice of the annual stockholders’
meeting did not mention anything about a stock a. Is Corporation X guilty of violating a law? If in the
dividend declaration. The matter was taken up only affirmative, state the basis.
under the item “Other Business” in the agenda of the b. Are there instances when a corporation shall not be
meeting. C.K. Senwa, a stockholder, who received his held liable for not declaring dividends? (2001 Bar)
copy of the notice but did not attend the meeting,
subsequently learned about the 50% stock dividend A:
declaration. He desires to have the stock dividend
declaration cancelled and set aside, and wishes to a. Corporation X is guilty of violating Section 43 of the
retain your services as a lawyer for the purpose. Corp Code. This provision prohibits stock corporations
from retaining surplus profits in excess of 100% of their
Will you accept the case? Discuss with reasons. (1990 paid-in capital.
Bae) b. The instances when a corporation shall not be held
liable for not declaring dividends are: ( Sec. 43)
A: I will not accept the case. Section 43 of the Corporation 1. when justified by definite corporate expansion
Code states that no stock dividend shall be issued without
projects or programs approved by the BOD; or
the approval of the stockholders representing not less than
2. when the corporation is prohibited under any loan
2/3 of the outstanding capital stock at a regular or special
agreement with any financial institution or
meeting duly called for that purpose. Conformably with
creditor, whether local or foreign, from declaring
Section 50 of the Corporation Code, a written notice of the
dividends without its or his consent, and such
holding of the regular meeting sent to the shareholders will
suffice. The notice itself specifies the said subject matter. 3. consent has be
when it can notclearly
yet been secured;
shown or retention is
that such
necessary under special circumstances obtaining
Q: ABC Management Inc. presented to the DEF Mining
in the corporation, such as when there is need for
Co, the draft of its proposed Management Contract. As
special reserve for probable contingencies.
an incentive, ABC included in the terms of
compensation that ABC would be entitled to 10% of any
stock dividend which DEF may declare during the Q:
lifetime of the Management Contract. Would you
approve of such provision? If not, what would you A. Under what circumstances may a corporation
suggest as an alternative? (1991 Bar) declare dividends?
B. Distinguish dividend from profit; cash dividend
A: I would not approve a proposed stipulation in the from stock dividend.
management contract that the managing corporation, as an C. From what funds are cash and stock dividends
additional compensation to it, should be entitled to 10% of sourced? Explain why. (2005 Bar)
any stock dividend that may be declared. Stockholders are
the only ones entitled to receive stock dividends. (Nielsen & A:
Co v. Lepanto Mining 26 SCRA 569) I would add that the
unsubscribed capital stock of a corporation may only be A. A corporation may declare dividends if it has
issued for cash or property or for services already rendered unrestricted retained earnings.
constituting a demandable debt ( Sec 62 Corp Code ). As an B. Profits belong to the corporation, while dividends
alternative, I would suggest that the managing corporation belong to the stockholders when dividend is declared.
should instead be given a net profit participation and, if it
later so desires, to then convert the amount that may be due A cash dividend involves disbursement of earnings to
thereby to equity or shares of stock at no less than the par stockholders, while stock dividend does not involve any
value thereof. disbursement. A cash dividend affects the fractional
interest in property which each share represents, while
Q: During the annual stockholders meeting, Riza, a a stock dividend decreases the fractional interest in
stockholder proposed to the body that a part of the corporate property which each share represents. A
corporation’s undeserved earned surplus be cash dividend does not increase the legal capital, while
capitalized and stock dividends be distributed to the a stock dividend does, as there is no cash outlay
stockholders, arguing that as owners of the company, involved. Cash dividends are subject to income tax,
the stockholders, by majority vote, can do anything. As while stock dividends are not. Declaration of stock
chairman of the meeting, how would you rule on the dividend requires the approval of both the majority of
motion to declare stock dividends? (1991 Bar) the members of the board of directors and at least 2/3
of the stockholders. In the declaration of cash dividend,
A: As the chairman of the meeting, I would rule against the the approval by a majority of the members of the board
motion considering that a declaration of stock dividends of directors will suffice.
should initially be taken by the board of directors and C. Both cash dividend and stock dividend may be declared

64
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out of unrestricted retained earnings. Paid-in surplus is unable to declare dividends, because it had entered
can be declared stock dividend but not cash dividend, into a loan agreement with a certain creditor wherein
because a stock dividend merely transfers the paid-in the declaration of dividends is not allowed without the
surplus to capital. consent of such creditor. If DEF Corporation cannot
obtain this consent, will it be justified in not declaring
Q: Ace Cruz subscribed to 100, 000 shares of stock of JP dividends to its stockholders? Explain. (2015 Bar)
Development Corporation, which has a par value of P1
per share. He paid P25, 000.00 and promised to pay the A: Yes. Stock corporations are prohibited from retaining
balance before December 31, 2008. JP Development surplus profits in excess of 100% of their paid-in capital
Corporation declared cash dividends on October 15, stock except among others, when the corporation is
2008 payable on December 1, 2008. prohibited under any loan agreement with any financial
institution or creditor; whether local or foreign, from
a. For how many sh ares is Ace Cruz entitled to be paid declaring dividends without the consent of the creditor and
cash dividends? Explain. such consent has not been secured ( Section 43 of the
b. On December 1, 2008, can Ace Cruz compel JP Corporation Code).
Development Corporation to issue to him the stock
certificate corresponding to the P25, 000 paid by ULTRA VIRES ACTS
him? (2008 Bar)
Q: When is there an ultra vires act on the part of the:
A:
a. corporation
a. Ace is entitled to the whole amount of his shares which b. board of directors
is 100, 000. A contract of subscription is an indivisible c. corporate officers. (2009 Bar)
contract. If only partial payment for the subscription
was made, it cannot be the basis for the amount of cash A:
dividend in favor of the stockholder. Cash dividends
due on delinquent stocks shall first be applied to the a. Under Sec. 45 of the Corporation Code, no corporation
unpaid balance on the subscription plus cost and shall possess or exercise any corporate power except
expenses. (Sec 43) Stocks become delinquent 30 days those conferred by the Code or by its articles of
from the due date specified in the contract of incorporation and except such as are necessary or
subscription or in the date stated in the call made by the incidental to the exercise of the powers so conferred.
board (Sec 67). In this case, the cash dividend is not yet When the corporation does an act or engages in an
delinquent. Ace Cruz, therefore can claim the entire
cash dividend payable on December 1, 2008. activity
incidentalwhich is outside
powers set of
outits in
express, implied or
its articles of
b. No. No certificate of stock shall be issued to a incorporation, the act is deemed to be ultra vires.
subscriber until the full amount of subscription b. When the Board engages in an activity or enters into a
together with interest and expenses (in case of contract without the ratificatory vote of the
delinquent shares), if any is due, has been paid ( Sec 64). stockholders in those instances where the Corporation
Clearly, since Ace Cruz did not pay the full subscription Code so requires such ratificatory vote, such as when
yet, the certificate of stock shall not be issued to him . the corporation is made to invest in another
corporation or engage in a business which is not in
Q: On September 15, 2007, XYZ Corporation issued to pursuit of its primary purpose, the board resolution not
Paterno 800 preferred shares with the following terms: ratified by stockholders owning or representing at least
2/3 of the outstanding capital stock would make the
“The Preferred Shares shall have the following rights, transaction void, as being ultra vires.
preferences, qualifications, and limitations, to wit: c. When a corporate officer enters into a contract on
a. The right to receive a quarterly dividend of 1% behalf of the corporation without having been so
cumulative participating; expressly or impliedly authorized by the board of
b. These shares may be redeemed, by drawing of Directors, even when the act or contract falls within the
lots, at any time after 2 years from date of corporation’s express, implied or incidental power,
issue, at the option of the Corporation; x x x.” then the unauthorized act of the corporate officer is

deemed to be ultra vires.


Today, Paterno sues XYZ Corporation for specific
performance, for the payment of dividends on, and to Q: YKS Trading filed a complaint for specific
compel the redemption of, the preferred shares, under performance with damages against the PWC
the terms and conditions provided in the stock Corporation for failure to deliver cement ordered by
certificates. Will the suit prosper? Explain. (2009 Bar) plaintiff. In its answer, PWC denied liability on the
ground, inter alia, that YKS has no personality to sue,
A: No, the suit will not prosper. Paterno cannot compel XYZ not being incorporated, and that the President of PWC
Corporation to pay dividends, which have to be declared by was not authorized to enter into a contract with
the Board of Directors and the latter cannot do so, unless plaintiff by the PWC Board of Directors, hence the
there are sufficient unrestricted retained earnings. contract is ultra vires. YKS Trading replied that it is a
Otherwise, the corporation will be forced to use its capital sole proprietorship owned by YKS, and that the
to make said payments in violation of the trust fund President of PWC had made it appear in several letters
doctrine. Likewise, redemption of shares cannot be presented in evidence that he had authority to sign
compelled. While the certificate allows such redemption, contracts on behalf of the Board of Directors of PWC.
the option and discretion to do so are clearly vested in the Will the suit prosper or not? Reason briefly. (2014 Bar)
Corporation.
A: Yes, the suit will prosper. As the sole proprietorship, the
Q: DEF Corporation has retained surplus profits in proprietor of YKS Trading has the capacity to act and the

excess of 100% of its paid in capital stock. However, it personality to sue PWC. It is not necessary for YKS Trading

65
Mercantile Law

to be incorporated before it can sue. On the other hand, PWC except only in instances specifically allowed by the
is stopped from asserting that its President had no Corporation Code.
authority to enter into the contract, considering that, in
several of PWC’s letters, it had clothed its President with BOARD OF DIRECTORS AND TRUSTEES
apparent authority to deal with YKS Trading.
Q: To constitute a quorum for the transaction of
Q: Define: Doctrine of apparent authority. (2015 Bar) corporate business, only a majority of the number of
Board of Directors is required:
A: By the doctrine of apparent authority, the corporation
will be estopped from denying the agent’s authority if it a. As fixed by the corporate by-laws
knowingly permits one of its officers or any other agent to b. As fixed in the articles of incorporation
act within the scope of an apparent authority and it holds c. Actually serving in the board
him out to the public as possessing the power to do those d. Actually serving in the board but constituting a
acts (Advance Paper Corporation v. Arma Traders quorum (2014 Bar)
Corporation, GR No. 176897, Dec. 11, 2013)
A:
By the Officers b. As fixed in the articles of incorporation

Q: Rodman, the President of TF Corporation wrote a Q: The BOD of X Co, acting on a s tanding authority of the
letter to Gregorio, offering to sell to the latter 5, 000 stockholders to amend the by-laws, amended its by-
bags of fertilizer at P100 per bag. Gregorio signed his laws so as to disqualify any of its stockholders who is
conformity to the letter-offer, and paid a down payment also a stockholder and director of a competitor from
of P50, 000. A few days later, the Corporate Secretary of being elected to its BOD. Y, a stockholder holding
TF informed Gregorio of the decision of the Board of sufficient assets to assure him of a seat in the BOD, filed
Directors not to ratify the letter-offer. However, since a petition with the SEC for a declaration of nullity of the
Gregorio had already paid the down payment, TF amended by-laws. He alleged among other things that
delivered the 500 bags of fertilizer which Gregorio as a stockholder, he had acquired rights inherent in
accepted. TF made it clear that the delivery should be stock ownership such as the right to vote and be voted
considered an entirely new transaction. Thereafter, upon in the election of directors. Is the stockholder‘s
Gregorio sought enforcement of the letter-offer. petition tenable? (1998, 2000, 2001, 2003)

Is there a binding contract for the 5, 000 bags of A: No. In a similar case Gokongwei vs. SEC, it was held that a
fertilizer? Explain. (1996 Bar) corporation is authorized to prescribe the qualifications of
its directors. A provision in the by-laws of the corporation
A: No, there is no binding contract for the 5,000 bags of that no person shall qualify or be eligible for nomination for
fertilizers. First, the facts do not indicate that Rodman, the elections to the BOD if he is engaged in any business which
President of TF Corporation, was authorized by the Board competes with that of the Corporation is valid. A director
of Directors to enter into the said contract or that he was stands in a competition from being elected to the board of
empowered to do so under some provision of the by-laws of directors is a reasonable exercise of corporate authority.
TF. The facts do not also indicate that Rodman has been Sound principles of corporate management counsel against
clothed with the apparent power to execute the contract or sharing sensitive information with a director whose
agreements similar to it. Second, TF has specifically fiduciary duty to loyalty may well require that he discloses
informed Gregorio that it has not ratified the contract for this information to a competitive rival. In the case at bar, the
the sale of 5,000 bags of fertilizer and that the delivery to petition of Y is not tenable because he has no vested right to
Gregorio of 500 bags, which Gregorio accepted, is an be elected as a director. When a person buys stock in a
entirely new transaction. corporation he does so with the knowledge that its affairs
are dominated by a majority of the stockholders. Such
TRUST FUND DOCTRINE amendment made in the by-laws is valid.

Q: Define: Trust fund doctrine. (2015 Bar) Q: At the annual stockholders‘ meeting of MS
Corporation, the stockholders unanimously passed a
A: By the trust fund doctrine subscriptions to the capital resolution authorizing the Board of Directors to amend
stock of a corporation constitute a fund to which the the corporate by-laws so as to disqualify any
creditors have the right to look for satisfaction of their stockholder who is also a director or stockholder of a
claims. The scope of the doctrine encompasses not only the competing business from being elected to the Board of
capital stock but also other property and assets generally Directors of MS Corporation. The by-laws were
regarded in equity as a trust fund for the payment of accordingly amended. GK, a stockholder of MS
corporate debts (Halley v. Printwell, GR No. 157549, May 30, Corporation and a majority stockholder of a
2011; Ong v. Tiu, 401 SCRA 1). competitor, sought election to the Board of Directors of
MS Corporation. His nomination was denied on the
Q: Discuss the trust fund doctrine. (2007 Bar) ground that he was ineligible to run for the position.
Seeking a nullification of the offending disqualification
A: The trust fund doctrine means that the capital stock, provision, GK consults you about its validity under the
properties and other assets of a corporation are regarded as Corporation Code of the Phils. What would your legal
equity in trust for the payment of corporate creditors. advice be? (2000 Bar)
Stated simply, the trust fund doctrine states that all funds
received by the corporation in payment of the shares of A: The provision disqualifying any stockholder who is also
stock shall be held in trust for the corporate creditors and a director or stockholder of a competing business from
other stockholders of the corporation. Under such doctrine, being elected to the BOD is valid ( Gokongwei Jr v. SEC 89
no fund shall be used to buy back the issued shares of stock SCRA 336, 1979; 97 SCRA 78, 1980).

66
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Q: The Board of Directors of X Corporation, acting on a Q: After many difficult years, whi ch called for sacrifices
standing authority of the stockholders to amend the by- on the part of the company’s directors, ABC
laws, amended its by-laws so as to disqualify any of its Manufacturing Inc. was finally earning substantial
stockholders who is also a stockholder and director of profits. Thus, the President proposed to the Board of
a competitor from being elected to its Board of Directors that the directors be paid a bonus equivalent
Directors. to 15% of the company’s net income before tax during
the preceding year. The President’s proposal was
Y, a stockholder holding sufficient shares to assure him unanimously approved by the Board. A stockholder of
of a seat i n the Board, filed a petition with the SEC for a ABC questioned the bonus. Does he have grounds to
declaration of nullity of the amended by-laws. He object? (1991 Bar)
alleged among other things that as a stockholder, he
had acquired rights inherent in stock ownership such A: Yes, the stockholder has a valid and legal ground to
as the right to vote and be voted upon in the election of object to the payment to the directors of a bonus equivalent
directors. Is the stockholder’s petition tenable? (1998 to 15% of the company’s net income. The law provides that
Bar) the total annual compensation of directors, in the preceding
year, cannot exceed 10% of the company’s net income
A: No. There is no vested right of a stockholder to be elected before income tax.
as director. When a person buys stock in a corporation he
does so with the knowledge that its affairs are dominated Fiduciary Duties and Liability Rules
by a majority of the stockholders. To this extent, the
stockholder parted with his personal right to regulate the Q: X subscribed and aid for P10, 000 worth of shares of
disposition of his property which he invested in the capital stock of Rainbow Mines, Inc. as an incorporator and
stock of the corporation and surrendered it to the will of the srcinal subscriber. He was employed as the mine
majority of his fellow incorporators or stockholders. superintendent and as such, made the design of certain
equipment used in its mines. Due to some technical
Corporations have the power to make by-laws declaring a error in the design, the corporation suffered a loss of
person employed in the service of a rival company to be P1M. The Board accused X of infidelity and breach of
ineligible for the Corporation’s Board of Directors. An trust, and confiscated his shares. Is the action of the
amendment which renders a director ineligible, or if Board legal? (1989 Bar)
elected, subjects him to removal, if he is also a director in a
corporation whose business is in competition with or is A: The action of the Board is not legal. The rights and
antagonistic to the other corporation, is valid. liabilities of X as the Mine Superintendent (or as an Officer)
are apart from his rights and liabilities arising from being
Removal likewise a stockholder. In general, in order that directors
and officers may be held personally accountable they must
Q: Assuming that the minority block of the XYZ have voted or assented to a patently illegal act, or are guilty
Corporation is able to elect only 1 director and of bad faith or gross negligence, or are in conflict of interest
therefore, the majority stockholders can always muster with the corporation. A mere technical error committed by
a 2/3 vote, would you allow the majority stockholders X in the design of an equipment used by the company,
to remove the one director representing the minority? absent fault or negligence, would not warrant liability on his
(1991 Bar) part even as an employee.

A: No. I would not allow the majority stockholders to Q: ABC Piggery, Inc. is engaged in raising and selling
remove the director. While the stockholders may, by a 2/3 hogs in the local market. Mr. De Dios, one of its
vote, remove a director, the law also provides, however, directors, while travelling abroad, met a leather goods
that this right may not, without just cause, be exercised so manufacturer who was interested in buying pig skins
as to deprive the minority of representation in the board of from the Philippines. Mr. De Dios set up a separate
directors. company and started exporting pig skins to his foreign
contact but the pig skins exported were not sourced
Q: Henry is a board director in XYZ Corporation. For from ABC. His fellow directors in ABC complained that
being the “fiscalizer” in the Board, the majority of the he should have given his business to ABC. How would
board of directors want him removed and his shares you decide this matter? (1991 Bar)
sold at auction, so he can no longer participate even in
the stockholders’ meetings. Henry approaches you for A: I would decide in favor of Mr. De Dios. ABC, Inc., is
advice on whether he can be removed as board director engaged in raising and selling hogs in the local market. The
and stockholder even without cause. What is your company that Mr. De Dios had set up was to engage, as it did,
advice? Explain “amotion” and the procedure in in the export of pig skins. There is thus no conflict of interest
removing a director. (2016 Bar) situation under the law.

A: Henry cannot be removed by his fellow directors. The Q: Ronald Sham doing business under the name of
power to remove belongs to the stockholders. He can only SHAMRON Machineries (SHAMRON) sold to Turtle
be removed by the stockholders representing at least 2/3 of Mercantile (TURTLE) a diesel farm tractor. In payment,
the outstanding capital stock in a meeting called for that TURTLE’s President and Manager Dick Seldon issued a
purpose. The removal may be with or without cause except check for P50, 000 in favor of SHAMRON. A week after,
that in this case, the removal has to be with cause because TURTLE sold the tractor to Briccio Industries (BRICCIO)
it is intended to deprive minority stockholders of the right for P60, 000. BRICCIO discovered that the engine of the
of representation. Amotion is the premature ousting of a tractor was reconditioned so he refused to pay TURTLE.
director or officer from his post in the corporation. As a result, Dick S eldon ordered “stop payment” of the
check issued to SHAMRON.
Compensation

67
Mercantile Law

SHAMRON sued TURTLE and Dick Seldon. SHAMRON result of the non- delivery of the promised supplies, the
obtained a favorable judgment holding co-defendants American firm incurred damages. The American fi rm
TURTLE and Seldon jointly and severally liable. would like to file a suit for damages. Can the American
firm sue:
Comment on the decision of the trial court. Discuss
fully. (1995 Bar) a. The members of the Board of Directors
individually, because they approved the
A: The trial court erred in holding Dick, President and transaction?
General Manager of Turtle, jointly and severally liable with b. The corporation?
TURTLE. c. F, the general manager, personally, because the
non-delivery was with his knowledge and consent?
In issuing the check issued to SHAMRON and, thereafter, d. Explain the rules on liabilities of a corporation for
stopping payment thereof, Seldon was acting in his capacity the act of its corporation officers and the liabilities
as an officer of TURTLE. He was not acting in his personal of the corporate officers and Board of Directors of a
capacity. Furthermore, no facts have been provided which corporation acting in behalf of the corporation.
would indicate that the action of Seldon was dictated by an (2012 Bsr)
intent to defraud SHAMRON by himself or in collusion with
A:
TURTLE. Having acted in what he considered as his duty as
an officer of the corporation, Seldon should not be held
a. No, in approving the transaction, the directors were
personally liable.
not acting in their personal capacities but rather on
behalf of XYZ Corporation exercising the powers of the
Q: When may a corporate director, trustee or offi cer be
corporation and conducting its business. The problem
held personally liable with the corporation? (1996 Bar)
contains no facts that would indicate that the directors
acted otherwise.
A: A corporate director, trustee or officer be held personally
liable with the corporation under the following b. Yes. The Board approved the supply contract and the
circumstances: General Manager entered into the contract, both of
them acting on behalf of the XYZ Corporation.
1. When he assents to a patently unlawful act of the c. Yes, F could be sued in his personal capacity because he
corporation; knowingly consented to the non-delivery of the
2. When he acts in bad faith or with gross negligence in promised supplies contrary to the contract that was
directing the affairs of the corporation, or in conflict duly approved by the Board of Directors. The problem
with the interest of the corporation, its stockholders or does not indicate any circumstance that would excuse
other persons; or favorably explain the action of F.
3. When he consents to the issuance of watered stocks or d. A corporation would be liable for the acts of its Board
who, having knowledge thereof, does not forthwith file of Directors and officers if the said acts were perform ed
with the corporate secretary his written objection by them in accordance with the powers granted to them
thereto; under the Corporation Code, the articles of
4. When he agrees to hold himself personally and incorporation and by-laws of the corporation, the laws
solidarily liable with the corporation; or and regulations governing the business of, or otherwise
5. When he is made, by specific provision of law, to applicable to, the corporation, and, in the case of
personally answer for the corporate action. officers, the resolution approved by the Board of
Directors.
Q: A Korean national joined a corporation which is
engaged in the furniture manufacturing business. He As the directors have a personality separate from that
was elected to the Board of Directors. To complement of the corporation, they would be personally liable only
its furniture manufacturing business, the corporation if they acted willfully and knowingly vote for or assent
also engaged in the logging business. With the to a patently unlawful act of the corporation, or when
additional logging activity, can the Korean national still they are guilty of gross negligence or bad faith in
be a member of the Board of Directors? Explain (2005 directing the affairs of the corporation, or when they
Bar) acquire any personal or pecuniary interest in conflict
with their duty as directors, which acts result in
A: The Korean National can still be a member of the Board damages to the corporation, its stockholders or other
of Directors as long as sixty percent (60%) of the Board of persons, when they agree to hold themselves
Directors are Filipinos. Corporations that are sixty percent personally and solidarily liable with the corporation, or
(60%) owned by Filipinos can engaged in the business of when they are made, by a specific provision of law, to
exploration, development and utilization of natural personally answer for the corporate action.
resources (Art. XII, Sec. 2, 1987 Constitution). The election of
aliens as members of the Board of Directors engaging in Q: Bell Philippines, Inc. (BelPhil) is a public utility
partially-nationalized activities is allowed in proportion to company, duly incorporated and registered with the
their allowable participation or share in the capital of such Securities and Exchange Commission. Its authorized
entities (Sec. 2-A, Anti Dummy Law) Nothing in the facts capital stock consists of voting common shares and
shows that more than forty percent (40%) of the Board of non-voting preferred shares, with equal par values of
Directors are foreigners. P100.00/share. Currently, the issued and outstanding
capital stock of BelPhil consists only of common shares
Q: A, B, C, D, E, are all duly elected members of the Board shared between Bayani Cruz, a Filipino with 60% of the
of Directors of XYZ Corporation. F, the general manager, issued common shares, and Bernard Fleet, a Canadian,
entered into a supply contract with an American firm. with 40%.
The contract was duly approved by the Board of
Directors. However, with the knowledge and consent of To secure additional working fund, BelPhil issued
F, no deliveries were made to the American firm. As a preferred shares to Bernard Fleet equivalent to the

68
UST BAR OPERATIONS
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currently outstanding common shares. A suit was filed on putting up a medium-sized restaurant business that
questioning the corporate action on the ground that the will specialize in a novel type of cuisine. As Dianne feels
foreign equity holdings in the company would now that the business is a little risky, she wonders whether
exceed the 40% foreign equity limit allowed under the she should use a corporation as the business vehicle, or
Constitution for public utilities. Rule on the legality of just run it as a single proprietorship. She already has an
Bernard Fleet's current holdings. (2013 Bar) existing corporation that is producing meat products
profitably and is also considering the alternative of
A: The holding of Bernard Fleet equivalent to the simply setting up the restaurant as a branch office of
outstanding common shares is illegal. His holdings of the existing corporation. (2010 Bar)
preferred shares could not exceed 40%. Since the
constitutional requirement of 60% Filipino ownership of a. If you advise your client to use a corporation, what
the capital of public utilities applies not only to voting officer position must the corporation at least have?
control but also to beneficial ownership of the corporation, b. What particular qualifications, if any, are these
it should also apply to the preferred shares. Preferred officers legally required to possess under the
shares are also entitled to vote in certain corporate matters Corporation Code?
(Gamboa v. Teves, 682 SCRA 397, 2012 ). The state shall
develop a self-reliant and independent national economy A:
effectively controlled by Filipinos (Article II, Sec. 19, 1987
Constitution). The effective control here should be mirrored a. The corporation must have at least 4 directors. It must
across the board on all kinds of shares. also have a president, treasurer, and a secretary.
b. Every director must own at least 1 share of the capital
Q: Ten classmates, all graduates of Class ’78 of the Los stock of the corporation, which must be recorded in his
Banos School of Agriculture and Husbandry, decided to name on the books of the corporation, and a majority of
form “Gatas Atbp., Inc.”, the principal purpose of which the directors must be residents of the Philippines. The
is to produce, package, and sell carabao’s milk. The president must also be a director. The secretary must
Articles of Incorporation provided, among others, that be a resident and citizen of the Philippines.
the business of the corporation shall be managed by the
stockholders of the corporation rather than by a board CONTRACTS
of directors and restricts the transfer of shares to
outsiders. By Self-Dealing Directors with the Corporation

One of the ten classmates, Mr. Sakit-ulo, disgruntles at Q: Briefly discuss the doctrine of corporate opportunity
the way the affairs of the corporation was being
handled, demanded that all the ten stockholders meet (1985, 2005 Bar)
to elect directors, citing Section 50 of the Corporation A: It is where a director, by virtue of his office, acquires for
Code. Meanwhile, Sakit-tiyan, sued all the ten himself a business opportunity which should belong to the
classmates-stock-holders for damages for violation of corporation, thereby obtaining profits to the prejudice of
the Food, Drugs Cosmetics Act – a cockroach was found such corporation In such a case, a director shall refund to
in the milk she drank, the package bearing the the corporation all the profits he realizes on a business
inscription “produced, packaged and sold by Gatas opportunity which: 1. The corporation is financially able to
Atbp., Inc.” undertake; 2. From its nature, is in line with corporations
business and is of practical advantage to it; and 3. The
a) Can Mr. Sakit-ulo demand that a stockholders corporation has an interest or a reasonable expectancy,
meeting be called to elect directors of the unless the act has been ratified by a vote of the stockholders
corporation? owning or representing at least two-thirds of the
b) Does Ms. Sakit-tiyan have a cause of action against outstanding capital stock. This shall apply notwithstanding
all the ten classmates-stockholders, albeit no the fact that the director risked his own funds in the venture
negligence has been proven? (1989 Bar) (Sec 34, CCP).

A: Q: Pedro owns 70% of the subscribed capital stock of a


a) “Gatas Atbp., Inc.” is a close corporation, and its Articles company which owns an office building. Paolo and Juan
of Incorporation can, as it did, provide that the business
of the corporation be managed by the stockholders own owns
also the remaining
a securitystock equally
agency, between
a janitorial them. Paolo
company and a
rather than by a board of directors. The presence of this catering business. In behalf of the office building
provision in the Articles of Incorporation, precludes company, Paolo engaged his companies to render their
Sakit-ulo from demanding that the stockholders meet services to the office building. Are the service contracts
in order to elect directors of the company. valid? Explain. (2008 Bar)
b) Ms. Sakit-tiyan has a cause of action against the
stockholders who, under the law, are deemed to be A: No. This is a case of close corporation where the
directors and subject to liabilities as such. Said provision on interlocking directors in open corporations
stockholders are made personally liable for corporate also apply. As a general rule, the presence of interlocking
torts unless the corporation has obtained reasonably directors does not make the contract void or unenforceable.
adequate liability insurance. Negligence need not be It is further validated when there is no fraud; the contract is
proven to warrant liability by manufacturers of fair and reasonable under the circumstances; the interest of
foodstuffs for death or injury caused by any obnoxious the interlocking director in one corporation is substantial
or harmful substance used. and his interest on the other corporation or corporations is
merely nominal and compliance with the requirement
Tenure, Qualifications and Disqualifications of under Sec 32 in so far as the nominal corporation is
Directors or Trustees concerned. In this case, Pedro owns a substantial interest in
both business enterprise, parties to the contract in violation

Q: Your client Dianne approaches you for legal advice of the legal requirement that in order for a contract with

69
Mercantile Law

interlocking directors be valid, there must only be Q: Leonardo is the Chairman and President, while
substantial interests in one of the corporation he represents Raphael is a Director of NT Corporation. On one
and not in both. Pedro has substantial interest in both occasion, NT Co, represented by Leonardo and A
businesses. He owns a substantial portion of the company Enterprises, a single proprietorship owned by Raphael,
which Paolo and Juan are also stockholders while at the entered into a dealership agreement whereby NT Co
same time the owner of the security, janitorial and catering appointed A Enterprises as exclusive distributor of its
business. Directors/officers are discouraged by law to products in Northern Luzon. Is the dealership
personally contract with the corporation in which they are agreement valid? Explain. (1996 Bar)
directors, trustees and officers because they have fiduciary
relationship with the corporation and there can be no real A: The dealership agreement is valid PROVIDED the
bargaining where the same is acting on both sides of the following conditions under Section 32 of BP 68 are
trade. complied with. The law provides that a contract of the
corporation with one or more of its directors or trustees or
Q: Suppose that the by-laws of “X” Corporation, a mining officers is voidable, at the option of such corporation, unless
firm, provides that “The directors shall be relieved all the following conditions are present: 1) that the
from all liability for any contract entered into by the presence of such director or trustee in the board meeting in
corporation with any firm in which the directors may which the contract was approved was not necessary to
be interested.” Thus, director “A” acquired claims constitute a quorum for such meeting; 2) that the vote of
which overlapped with “X’s” claims and where such director or trustee was not necessary for the approval
necessary for the development and operation of “X’s” of the contract; 3) that the contract is fair and reasonable
mining properties. under the circumstances; and 4) that in case of an officer,
the contract has been previously authorized by the board of
What happens if director “A” is able to consummate his directors.
mining claims over and above that of the corporation’s
claims? (2001 Bar) EXECUTIVE COMMITTEE

A: “A” should account to the corporation for the profits Q: Pursuant to its By-Laws, Soei Corporation’s Board of
which he realized from the transaction. He grabbed the Directors created an Executive Committee to manage
business opportunity from the corporation. the affairs of the corporation in between board
meetings. The Board of Directors appointed the
Q: Chito Santos is a director of both Platinum following members of the Executive Committee: the
Corporation and Kwik Silver Corporation. He owns 1% President, Sarah L; the Vice-President, Jane L; and a
of the outstanding capital stock of Platinum and 40T of third member from the board, Juan Riles. On December
Kwik. Platinum plans to enter into a contract with Kwik 1, 2013, the Executive Committee, with Sarah L and Jane
that will make both companies earn very substantial L present, met and decided on the following matters:
profits. The contract is presented at the respective
board meetings of Platinum and Kwik. 1. Purchase of a delivery van for use in the
corporation’s retail business;
a. In order that the contract will not be voidable, what 2. Declaration and approval of the 13th month
conditions will have to be complied with? Explain. bonus;
b. If these conditions are not met, how may this 3. Purchase of an office condominium unit at the
contract be ratified? Explain (1995 Bar) Fort; and
4. Declaration of P10.00 per share cash dividend.
A:
Are the actions of the Executive Committee valid? (2014
a. Under Section 32 of BP 68, the law provides that: a) the Bar)
presence of such director or trustee in this case Chito in
the board meeting in which the contract was approved A: The action of the Executive Committee with regard to the
was not necessary to constitute a quorum for such purchase of a delivery van for use in the corporation’s retail
meeting; b) that the vote of such director or trustee was business, declaration and approval of the 13th month
not necessary for the approval of the contract; c) that
bonus, purchase of an office condominium unit at the Fort,
the contract is fair and reasonable under the
circumstances; and d) that in case of an officer, the and the
valid, as declaration
such mattersofwere
P10.00 perby
taken share cash dividend
a majority is
vote of all
contract has been previously authorized by the board its members, on such matters within the competence of the
of directors. In the case at bar, Chito must make sure board and as delegated to it in the by-laws.
that the following conditions be met for in order that
the contract will not be voidable. Q: Guetze and his wife have 3 chidren: Neymar, 25, who
b. Under Section 32 of BP 68, the law provides that where is now based in Rio de Janeiro, Brazil; Muelter, 23, who
any of the first two conditions set forth in the preceding
has migrated to Munich, Germany; and James, 21, who
paragraph is absent, in the case of a case of a contract resides in Bogota, Colombia. Neymar and Muelter have
with a director or trustee, such contract may be ratified
since renounced their Philippine citizenship in favor of
by the vote of the stockholders representing at least their country of residence. Nearing 70 years old, Guetze
2/3 of the outstanding capital stock or of at least 2/3 of decided to incorporate his business in Bi nondo, Manila.
the members in a meeting called for the purpose:
He asked his wife and 3 children to act as incorporators
Provided, that full disclosure of the adverse interest of
with 1 share of stock each, while he owned 999, 996
the directors or trustees involved is made at such shares of the 1, 000, 000 shares of the capital stock.
meeting: Provided, however, that the contract is fair
and reasonable under the circumstances. Being the control freak and micro-manager that he is,
Guetze asked you—his astute legal adviser—if he can
NOTE: SEE section 33 as well on interlocking directors. serve as Chairman of the Board of Directors, as
President, and as General Manager of the corporation,
70
UST BAR OPERATIONS
QUAMTO (1987-2016)

all at the same time. Please advise Guetze. (2014 Bar) (1996, 1995 Bar)

A: Yes, Guetze can serve as Chairman, as President, and as A: Under Section 42 of the Corporation Code, a corporation
General Manager of the corporation all at the same time. may invest its funds in another corporation or business or
Section 25 of the Corporation Code provides that “two or for any other purposes when approved by a majority of the
more positions may be held concurrently by the same board of directors or trustees and ratified by the
person, except that no one shall act as president and stockholders representing at least two- thirds (2/3) of the
secretary or as president and treasurer at the same time.” outstanding capital stock, or by at least two thirds (2/3) of
Such case does not fall within the exception under the the members in the case of non- stock corporations, at a
aforesaid Section. stockholder's or member's meeting duly called for the
purpose. There must be written notice of the proposed
STOCKHOLDERS AND MEMBERS investment and the time and place of the meeting shall be
addressed to each stockholder or member at his place of
Rights of a Stockholder and Members residence as shown on the books of the corporation and
deposited to the addressee in the post office with postage
Q: Mercy subscribed to 1, 000 shares of stock of Rosario prepaid, or served personally.
Corporation. She paid 25% of said subscription. During
the stockholders’ meeting, can Mercy vote all her Q: The stockholders of People Power, Inc. (PPI)
subscribed shares? Explain your answer. (1990 Bar) approved the following two resolutions in a special
stockholder’s meeting: (i) Resolution increasing the
A: Yes, Mercy can vote all her subscribed shares. Section 72 authorized capital stock of PPI, and (ii) Resolution
of the Corporation Code state that holders of subscribed authorizing the Board of Directors to issue for cash
shares not fully paid which are not delinquent shall have all payment the new shares from the proposed capital
the rights of a stockholder. stock increase in favor of outside investors who are
non-stockholders. The foregoing resolutions were
approved by stockholders representing 99% of the
Q: What are the rights of a stockholder? (1996 Bar) total outstanding capital stock. The sole dissenter was
Jose Estrada who owned the rest 1% of the stock.
A: The rights of a stockholder are as follows:
a) Are the resolutions binding on the corporations
1. The right to vote, including the right to appoint a and its stockholders, including Estrada, the
proxy; dissenting stockholder?
b) What remedies, if any, are available to Estrada?
2. The right to share in the profits of the corporation, (1987 Bar)
including the right to declare stock dividends;
3. The right to proportionate share of the assets of the
A:
corporation upon liquidation;
a. The board resolutions (i) increasing the authorized
4. The right of appraisal; capital stock of PPI, and (ii) authorizing the Board to
5. The preemptive right to shares; issue new shares from that increase of capital stock in
6. The right to inspect corporate books and records; favor of outside investors is binding on the
7. The right to elect directors; stockholders since the said resolutions were approved
8. Such other rights as may contractually be granted to the by the stockholders representing at least 2/3 of the
stockholders by the corporation or by special law. total outstanding capital stock.
b. Estrada, the dissenting stockholder, may avail himself
Q: PR Corporation owns a beach resort with several of the appraisal rights by claiming that since the
cottages. Jaime, the President of PR, occupied one of the resolutions appear to favor outside investors, as
cottages for residential purposes. After Jaime’s term against incumbent stockholders, on the increase in
expired, PR wanted to recover possession of the capital stock, he may demand the payment of the
cottage. Jaime refused to surrender the cottage, appraised value of his shares.
contending that as a stockholder and former President,
he has a right to possess and enjoy the properties of the Q: The stockholders of People Power Inc (PPI)

corporation. approved two resolutions in a special stockholders’


meeting:
Is Jaime’s contention correct? Explain. (1996 Bar) 1. Resolution increasing the authorized capital stock
of PPI; and
A: Jaime’s contention is not correct. Jaime may own shares 2. Resolution authorizing the BOD to issue, for cash
of stock in PR Corporation but such ownership does not payment, the new shares from the proposed capital
entitle him to the possession of any specific property of the stock increase in favor of outside i nvestors who are
corporation or a definite portion thereof. Neither is he a co- non-stockholders.
owner of a corporate property. Properties registered in the
name of the corporation are owned by it as an entity The foregoing resolutions were approved by
separate and distinct from its stockholders. stockholders representing 99% of the total outstanding
capital stock. The sole dissenter was Jimmy Morato who
Stockholders like Jaime only own shares of stock in the owned 1% of the stock.
corporation. Such shares of stock do not represent specific
corporate property. a. Are the resolutions binding on the corporation and
its stockholders including Jimmy Morato, the
Participation in Management dissenting stockholder?
b. What remedies, if any, are available to Morato?
Q: When may a corporation invest its funds in another (1998 Bar)
corporation or business or for any other purposes? A:

71
Mercantile Law

a. No. Sec. 38 of the Corporation Code provides that no


corporation shall increase or decrease capital stock or A: No. The demand of the Company does not tally with the
incur create or increase bonded indebtedness unless concept of a Voting Trust Agreement. The Voting Trust
approved by a majority of the board of directors and, at Agreement merely conveys to the trustee the right to vote
a stockholders’ meeting duly called for the purpose, the shares of grantor/s. the consequence of the foreclosure
two-thirds of the outstanding capital stock shall favor of the mortgaged properties would be alien to the Voting
the increase or diminution of the capital stock, or the Trust Agreement and its effects.
incurring, creating or increasing any bonded
indebtedness. Written notice of the proposed increase Right of Appraisal
or diminution of the capital stock or of the incurring,
creating, or increasing of any bonded indebtedness and Q: In a stockholder’s meeting, S dissented from the
of the time and place of the stockholder’s meeting at corporate act converting preferred voting shares to
which the proposed increase or diminution of the non-voting shares. Thereafter, S submitted his
capital stock or the incurring or increasing of any certificates of stock for notation that his shares are
bonded indebtedness us to be considered, must be dissenting. The next day, S transferred his shares to T
addressed to each stockholder at his place of residence to whom new certificates were issued. Now, T demands
as shown on the books of the corporation deposited to from the corporation the payment of the value of his
the addressee in the post office with postage prepaid, shares.
or served personally. In the present case, the
resolutions are not binding on the corporation and its a. What is the meaning of stockholder’s appraisal
stockholders including Jimmy Morato. While these right?
resolutions were approved by the stockholders, the b. Can T exercise the right of appraisal? Reason
directors’ approval, which is required by law in such briefly. (2007 Bar)
case, does not exist.
b. Jimmy Morato can petition the RTC to declare the 2 A:
resolutions, as well as any and all actions taken by the
BOD thereunder, null and void. a. Appraisal right is the right of a stockholder, who
dissents from a fundamental or extraordinary
corporate action, to demand payment of the fair value
Q: In 1999, Corporation “A” passed a board resolution of his shares. It is the right of a stockholder to withdraw
removing “X” from his position as manager of said from the corporation and demand payment of the fair
corporation. The by-laws of “A” corporation provides value of his shares after dissenting from certain
that the officers are the president, vice-president, corporate acts involving fundamental changes in the
treasurer and secretary. Upon complaint filed with the corporate structure.
SEC, it held that a manager could be removed by mere b. No, T cannot exercise the right of appraisal in this case.
resolution of the board of directors. On motion for When S transferred his shares to T and T was issued
reconsideration, “X” alleged that could only be removed new stock certificates, the appraisal right of S ceased,
by the affirmative vote of the stockholders and T acquired all the rights of a regular stockholder.
representing 2/3 of the outstanding capital stock. Is The transfer of shares from S to T constitutes an
“X’s” contention legally tenable. Why? (2001) abandonment of the appraisal right of S. All that T
acquired from the issuance of new stock certificates
A: No. Stockholders’ approval is necessary only for the was the rights of a regular stockholder.
removal of the members of the Board. For the removal of a
corporate officer or employee, the vote of the Board of Right to Inspect
Directors is sufficient for the purpose.
Q: Petitioner who is a stockholder of Bilmoko
Voting Trust Corporation wanted to examine the books and records
of a foreign subsidiary wholly owned by Bilmoko
Q: A distressed company executed a voting trust Corporation. The books and records of the foreign
agreement for a period of 3 years over 60% of its subsidiary were in the possession of Bilmoko
outstanding paid-up shares in favor of a bank to whom Corporation. The latter’s board of directors refused to
it was indebted, with the Bank named as trustee. allow the petitioner to examine said books and records,
Additionally, the Company mortgaged all its properties contending that the foreign subsidiary is a separate and
to the Bank. distinct corporation domiciled in another country;
hence, the petitioner was not within the class of
Because of the insolvency of the Company, the Bank persons having an interest in the operations of the
foreclosed the mortgaged properties, and as the highest foreign subsidiary.
bidder, acquired said properties and assets of the
Company. a) Decide the case.
b) What are the limitations on a stockholder’s rights
The 3-year period prescribed in the Voting Trust to inspect corporation books and records? (1989
Agreement having expired, the company demanded the Bar)
turnover and transfer of all its assets and properties,
including the management and operation of the A:
Company, claiming that under the Voting Trust a. The statutory right of a stockholder to inspect the
Agreement, the bank was constituted as trustee of the books and records of a corporation extends—in
management and operations of the Company. consonance with equity, good faith and fair dealing—to
a foreign subsidiary wholly owned by the corporation.
Does the demand of the Company tally with the concept b. The right of inspection does not allow the stockholder
of a Voting Trust Agreement? Explain briefly. (1992 to improperly use any information that is secured

Bar)
72
UST BAR OPERATIONS
QUAMTO (1987-2016)

thereby. The stockholder must exercise the right in in the corporation.


good faith and for a legitimate purpose only. b. Preemptive right must be exercised in accordance with
the Articles of Incorporation or the By-Law. When the
Pre-Emptive Right Articles of Incorporation and By-Laws are silent, the
Board may fix a reasonable time within which the
Q: ABC Corporation has an authorized capital stock of stockholders may exercise the right.
P1M divided into 50, 000 common shares and 50, 000
preferred shares. At its inception, the Corporation Q: The Board of Directors of ABC, Inc., a domestic
offered for subscription all the common shares. corporation, passed a resolution authorizing additional
However, only 40, 000 shares were subscribed. issuance of shares of stocks without notice nor
Recently, the directors thought of raising additional approval of the stockholders. DX, a stockholder,
capital and decided to offer to the public all the objected to the issuance, contending that it violated his
authorized shares of the Corporation at their market right of pre-emption to the unissued shares. Is his
value. contention tenable? Explain briefly. (2004 Bar)

a. Would Mr. X, a stockholder holding 4, 000 shares, A: Yes. DX/s contention is tenable. Under Section 39 of the
have pre-emptive rights to the remaining 10, 000 Corporation Code, all stockholders of ABC, Inc. enjoy
shares? preemptive right to subscribe to all issues of shares of any
b. Would Mr. X have pre-emptive rights to the 50 ,000 class, including the reissuance of treasury shares in
preferred shares? proportion to their respective shareholdings.
c. Assuming that the existing stockholders are
entitled to pre-emptive rights, at what price will the Right to Vote
shares be offered? Explain your answers. (1999
Bar) Q: The By-laws of the ABC Corporation is silent as to
A: when a stockholder can be qualified to attend the
meeting of the stockholders. The Corporate Secretary
a. Yes. Mr. X, a stockholder holding 4, 000 shares, has pre- sent out the notice of the stockholders meeting 2 days
emptive right to the remaining 10,000 shares. All before the meeting and at that time X was not yet a
stockholders of a stock corporation shall enjoy stockholder. On the day of the meeting, however, X
preemptive right to subscribe to all issues or became a shareholder which was duly recorded in the
disposition of shares of any class, in proportion to their stock and transfer book. Which statement is most
respective shareholdings. The ruling in Benito v. Datu accurate?

and Tan v. SEC to the effect that preemptive right a. X is a stockholder of ABC Corporation as o f the time
applies only to issuance of shares in connection with an
increase in capital is no longer a valid rule under the of meeting of the stockholders for the purpose of
Corporation Code. The facts in those cases happened electing the members of the board;
during the regime of the old Corporation Law. b. X is not qualified to elect members of the board
b. Yes. Mr. X would have pre-emptive rights to the 50, 000 because at the time the notice of the meeting was
preferred shares. All stockholders of a stock sent, she was not yet a stockholder;
corporation shall enjoy pre-emptive right to subscribe c. Qualifications as to who are considered as
to all issues or disposition of shares of any class, in stockholders on record for purposes of being able
proportion to their respective shareholdings. to elect members of the board are to be determined
c. The shares will be offered to existing stockholders, who by the By-laws alone;
are entitled to pre-emptive right, at a price fixed by the d. None of the above. (2012 Bar)
Board of Directors, which shall not be less than the par
value of such shares. A: a. X is a stockholder of ABC Corporation as of the time of
meeting of the stockholders for the purpose of electing the
members of the board.
Q: Suppose that “X” Corporation has already issued the
1000 srcinally authorized shares of the corporation so
Q: Dennis subscribed to 10, 000 shares of XYZ
that its Board of Directors and stockholders wish to
Corporation with a par value of 100 per share.
increase “X’s” authorized capital stock. After complying
with the requirements of the law on increase of capital However,
000. hehas
No call paid onlymade
been 25% on
of the
thesubscription or P250,
unpaid subscription.
stock, “X” issued an additional 1000 shares of the same
value.
How many shares is Dennis entitled to vote at the
annual meeting of the stockholders of XYZ?
a. Assume that the stockholder “A” presently holds
200 out of the 1000 srcinal shares. Would “A” have
a preemptive right to 200 of the new issue of 1000 a. 10,000 shares;
shares? Why? b. 2,500 shares;
b. When should stockholder “A” exercise the c. 100 shares;
preemptive right? (2001 Bar) d. 0 shares;
e. None of the above. (2013 Bar)
A:
A: a) 10,000 shares
a. Yes, “A” would have a preemptive right to 200 of the
new issue of 1000 shares. “A” is a stockholder of record REMEDIAL RIGHTS
holding 200 shares in “X” Corporation. According to the
Corporation Code, each stockholder has the preemptive Derivative Suit
right to all issues of shares made by the corporation in
proportion to the number of share he holds on record

73
Mercantile Law

Q: A became a stockholder of prime Real Estate majority stockholders adopted a resolution


Corporation (PREC) on July 10, 1991, when he was authorizing MOP Corporation to withdraw the suit.
given one share by another stockholder to qualify him Pursuant to said resolution, the corporate counsel filed
as a director. A was not re-elected director in the July 1, a Motion to Dismiss in the name of the MOP
1992 annual meeting but he continued to be a Corporation.
registered shareholder of PREC.
Should the motion be granted or denied? Reason
When he was still a director, A discovered that on briefly. (2004 Bar)
January 5, 1991, PREC issued free of charge 10, 000
shares to X, a lawyer who assisted in a court case A: No. All the requisites for a valid derivative suit exist in
involving PREC. this case. First, AA was exempt from exhausting his
remedies within the corporation, and did not have to make
1. Can A now bring an action in the name of the a demand on the Board of Directors for the latter to sue.
corporation to question the issuance of the shares Here, such a demand would be futile, since the directors
to X without receiving any payment? who comprise the majority (namely, BB, CC, DD and EE) are
2. Can X question the right of A to sue him in b ehalf of the ones guilty of the wrong complained of. Second, AA
the corporation on the ground that A has only one appears to be stockholder at the time the alleged
share in his name? (1993 Bar) misappropriation of corporate funds. Third, the suit is
brought on behalf and for the benefit of MOP Corporation.
A: In this connection, it was held in Conmart (Phils.) Inc. v. SEC,
198 SCRA 73 (1991) that to grant to the corporation
1. As a general rule, A cannot bring a derivative suit in the concerned the right of withdrawing or dismissing the suit,
name of the corporation concerning an act that took at the instance of the majority stockholders and directors
place before he became a stockholder. However, if the who themselves are the persons alleged to have comm itted
act complained of is a continuing one, A may do so. the breach of trust against the interest of the corporation
2. No. In a derivative suit, the action is instituted/ brought would be to emasculate the right of minority stockholders
in the name of a corporation and the reliefs are prayed to seek redress for the corporation. Filing such action as a
for therein for the corporation by a minority derivative suit even by a lone stockholder is one of the
stockholder. The law does not qualify the term protections extended by law to minority stockholders
“minority” in terms of the number of shares owned by against abuses of the majority.
a stockholder bringing the action in behalf of the
corporation. Q:

Q: In 1970, Magno joined AMD Co as a Junior A. What is an intra-corporate controversy?


Accountant. He steadily rose from the ranks until he B. Is the Securities and Exchange Commission the
became AMD‘s Executive VP. Subsequently, however venue for actions involving intra-corporate
because of his involvement in certain anomalies, the controversies? (2006 Bar)
AMD BOD considered him resigned from the company
due to loss of confidence. Aggrieved, Magno filed a A:
complaint in the SEC questioning the validity of his
termination, and seeking reinstatement to his former A. An intra-corporate controversy is one which arises
position, with backwages, vacation and sick leave between a stockholder and the corporation and
benefits, 13th month pay and Christmas bonus, plus pertains to the enforcement of the parties’ correlative
moral and exemplary damages, attorney‘s fees and rights and obligations under the Corporation Code and
costs. AMD filed a motion to dismiss, arguing that the the internal and intra-corporate regulatory rules of the
SEC has no jurisdiction over cases of illegal dismissal, corporation (Real v. Sangu Philippines Inc., G.R. No.
and has no power to award damages. Should the motion 168757 January 19, 2011 ).
to dismiss be granted? Explain. (1996, 1997 Bar) B. No. The venues for actions involving intra-corporate
controversies are now under the jurisdiction of the RTC
A: RTC has jurisdiction. Under section 5.2 of the SRC, the acting as a special commercial court (Sec. 5, A.M. NO. 01-
commission’s jurisdiction over all cases enumerated under 2-04-SC).
Sec. 5 of PD 902-A is hereby transferred to the Courts of
general jurisdiction or the appropriate Regional Trial Court: Q: DC is a unit owner of Medici Condominium located in
Provided, That the Supreme Court in the exercise of its Pasig City. On September 7, 2011, Medici Condominium
authority may designate the Regional Trial Court branches Corp. (Medici) demanded from DC payment for alleged
that shall exercise jurisdiction over these cases. The unpaid association dues and assessments amounting to
Commission shall retain jurisdiction over pending cases P195, 000. DC disputed the claim, saying that he paid all
involving intra-corporate disputes submitted for final dues as shown by the fact that he was previously elected
resolution which should be resolved within 1 year from the as Director and President of Medici. Medici, on the
enactment of this Code. The commission shall retain other hand, claimed that DC’s obligation was a
jurisdiction over pending suspension of Construction Corporation. Consequently, DC was
payments/rehabilitation cases filed as of 30 June 2000 until prevented from exercising his right to vote and be
finally disposed. voted for during the 2011 election of Medici’s Board of
Directors. This prompted DC to file a complaint for
Q: AA, a minority stockholder, filed a suit against BB, CC, damages before the Special Commercial Court of Pasig
CC, and EE, the holders of majority shares of MOP City. Medici filed a motion to dismiss on the ground that
Corporation, for alleged misappropriation of corporate the court has no jurisdiction over the intra-corporate
funds. The complaint averred, inter alia, that MOP dispute which the HLURB has exclusive jurisdiction
Corporation is the corporation in whose behalf and for over. Is Medici correct? (2010 Bar)
whose benefit the derivative suit is brought. In their
capacity as members of the Board of Director, the

74
UST BAR OPERATIONS
QUAMTO (1987-2016)

A: No, Medici is not correct. A controversy between the The derivative suit was improper. In a derivative suit, the
condominium corporation and its members-unit owners for corporation, not the individual stockholder, must be the
alleged unpaid association dues and assessments and the aggrieved party and that the stockholder is suing on behalf
prevention of DC from exercising his right to vote and be of the corporation. What stockholder X is asserting is his
voted for during the 2011 election of the Medici’s Board of individual right as a stockholder to elect the two directors.
Directors, partakes of the nature of an intra-corporate The case partake more of an election contest under the rules
dispute which does not fall within the jurisdiction of the on intra-corporate controversy (Legaspi Towers 300, Inc. v.
HLURB despite its expansive jurisdiction. It is considered as Muer, 673 SCRA 453, 2012).
an intra-corporate controversy falling within the
jurisdiction of the Regional Trial Court designated as special Q: A, B, C, D and E were members of the 2003-2004
commercial court. Board of Directors of FLP Corporation. At the election
for the 2004-2005 Board of Directors, not one of them
Q: Atlantis Realty Corporation (ARC), a local firm was elected. They filed in court a derivative suit on
engaged in real estate development, plans to sell one of behalf of FLP Corporation against the newly-elected
its prime assets—a 3-hectare land valued at about members of the Board of Directors. They questioned
P100M. For this purpose, the board of directors of ARC the validity of the election as it was allegedly marred by
unanimously passed a resolution approving the sale of lack of quorum, and prayed for the nullification of the
the property for P75M to Shangrila Real Estate said election. The 2004-2005 Board of Directors moved
Ventures (SREV), a rival realty firm. The resolution also to dismiss the complaint because the derivative suit is
called for a special stockholders meeting at which the not proper. Decide. (2014 Bar)
proposed sale would be up for ratification. Atty. Edric,
a stockholder who owns only 1 share in ARC, wants to A: The derivative suit is n ot proper. The parties-in- interest
stop the sale. He then commences a derivative suit for are not the petitioners as stockholders, who were members
and in behalf of the corporation from approving the of the 2003-2004 Board of Directors of FLP Corporation.
sale. The cause of action devolves on the petitioners, not on FLP
a. Can Atty. Edric, who owns only 1 share in the Corporation, which did not have the right to vote. Hence, the
company, initiate a derivative suit? Why or why complaint filed by A, B, C, D and E is a direct action by the
not? petitioners, who were the members of the Board of
b. Will the suit prosper? Why or why not? (2009 Bar) Directors of the corporation before the election, against
respondents, who are the newly-elected Board of Directors.
A: Under the circumstances, the derivative suit filed by
petitioners in behalf of FLP is improper.
a. Yes, Atty. Edric can initiate a derivative suit, otherwise
known as the minority stockholders’ suit. It is allowed MEETINGS
by law to enable the minority stockholder/s to protect
the interest of the corporation against illegal or Q: On May 6, 1992, a special stockholders’ meeting was
disadvantageous act/s of its officers or directors, the held. At this meeting, what would have constituted a
people who are supposed to the corporation. quorum? Explain. (2009 Bar)
b. No, the suit will not prosper. There is no requisite
demand on the officers and directors concerned. There A: A quorum consists of the majority of the totality of the
is, therefore, no exhaustion of adm inistrative remedies. shares which have been subscribed and issued. Thus the
quorum for such meeting would be 289 shares or a majority
Q: In June 2012, two (2) of Greenville Corporation's of the 576 shares issued and outstanding as indicated in the
directors- Director A and Director B -resigned from the articles of incorporation. This includes the 33 common
board. Relying on Section 29 of the Corporation Code, shares reflected in the stocks and transfer book, there being
the remaining six (6) directors elected two (2) new no mention or showing of any transaction effected from the
directors to fill in the vacancy caused by the resignation time of Triple A’s incorporation in 1960 up to the said
of Directors A and B. meeting.

Stockholder X questioned the election of the new Q: Under the articles of incorporation of Manila
directors, initially, through a letter-complaint Industrial Corp., its principal place of business shall be

addressed went
complaint to the board, and
unheeded), later when
through his letter-
a derivative suit in Pasig,
are at theMetro Manila.
Ortigas ThePasig,
Center, principal corporate
Metro Manila,offices
while
filed with the court. He claimed that the vacancy in the factory processing leather products is in Manila. The
board should be filled up by the vote of the corporation holds its annual stockholders' meeting at
stockholders of Greenville Corporation. Greenville the Manila Hotel in Manila and its BOD meeting at a
Corporation's directors defended the legality of their hotel in Makati, Metro Manila. The by-laws are silent as
action, claiming as well that Stockholder X's derivative to the place of meetings of the stockholders and
suit was improper. Rule on the issues raised. (2013 directors.
Bar)
a. Who shall preside at the meeting of the directors?
A: The remaining directors cannot elect new directors to fill b. Can Ting, a stockholder, who did not attend the
in the two vacancies. The board of directors may fill up stockholders' annual meeting in Manila, question
vacancy only if the ground is not due to expiration of term, the validity of the corporate resolutions passed at
removal or increase in the number of board seats. In this such meeting?
case, the term of the two directors expired after one year. c. Can the same stockholder question the validity of
They remained in office in a hold-over period is not part of the resolutions adopted by the BOD at the meeting
their term. The vacancies should be filled up by election by held in Makati? (1993 Bar)
the stockholders (Valle Verde Country Club, Inc. v. Africa, 598
SCRA 202, 2009). A:

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Mercantile Law

a. Section 54 of the Code provides that it is the President Q: The Board of Directors of a corporation, by a vote of
who shall preside over the directors' meeting, unless ten in favor and one against, declared due and payable
the by-laws provide otherwise. However, in practice it all unpaid subscription to the capital stock. The lone
is the Chairman who presides because the President dissenting director failed to pay on due date, i.e.,
only reports to the Chairman. Only in the absence of a September 19, 1997, his unpaid subscription. Other
Chairman can a President preside over directors than the shares wherein he was unable to complete
meetings. payment, he did not own any share in the corporation.
b. No. Sec. 51 provides that the annual stockholders’ On September 23, 1997, he was informed by the Board
meeting shall be held in the city or municipality where of Directors that, unless due payment is meanwhile
the principal office is located. For this purpose, the law received, he:
also provides that Metro Manila is considered a city or
municipality. Since the principal office or business of a) Could no longer serve as a director of the
MIC is Pasig, Metro Manila, the holding of the annual corporation forthwith;
stockholder’s meeting in Manila is proper. b) Would not be entitled to the cash and stock
c. No. Ting cannot question the validity of corporate dividends which were declared and payable on
resolutions passed in the BOD meeting because Section September 24, 1997; and
53 of the Code does not require that the meeting must c) Could not vote in the stockholders meeting
held within the city or municipality where the principal scheduled to take place on September 26, 1997.
office of the corporation is located. The directors'
meeting can be held anywhere in or outside the Was the action of the Board of Directors on each of the
Philippines. foregoing matters valid? (1997 Bar)

CAPITAL S TRUCTURE A:
a) No. The period 30 days within which the stockholder
Subscription Agreements can pay the unpaid subscription had not yet expired.
b) No. The delinquency did not deprive the stockholder of
Q: What tools are available to the stockholders to his right to receive dividends declared. However, the
replenish capital? (1999 Bar) cash dividend declared may be applied by the
corporation to the unpaid subscription.
A: In the face of the refusal of the creditor-banks to grant c) No. The period of 30 days within which the stockholder
more loans, the following are tools available to the can pay the unpaid subscription had not yet expired.
stockholders to replenish capital, to wit: (1) additional
subscription to shares of stock of the corporation by Consideration for Stocks
stockholders or by investors; (2) advances by the
stockholders to the corporation; (3) payment of unpaid Q: Janice rendered some consultancy work for XYZ
subscription by the stockholders. Corporation. Her compensation included shares of
stock therein.
Payment of balance of subscription
Can XYZ Corporation issue shares of stock to pay for the
Q: A, B and C are shareholders of XYZ Company. A has service of Janice as its consultant? Discuss your answer.
an unpaid subscription of P100, 000, B’s shares are fully (2005 Bar)
paid up, while C owns only nominal but fully paid up
shares and is a director and officer. XYZ Company A: The corporation can issue shares of stock to pay for
becomes insolvent, and it is established that the actually performed services to the corporation, but not for
insolvency is the result of fraudulent practices within future services or services yet to be performed.
the company. If you were counsel for a creditor of XYZ
Company, would you advice legal action against A, B Q: Victor was employed in MAIA Corporation. He
and C? (1997 Bar) subscribed to P1, 500 shares of the corporation at P100
per share or a total of P150, 000. He made an initial
A: down payment of P37, 500. He was appointed President
and General Manager. Because of his disagreement
a) An action can be brought against A for P100,000 which with the Board of Directors, he resigned and demanded
is the amount of his unpaid subscription. Since the payment of his unpaid salaries, his cost of living
corporation is insolvent, the limit of a stockholder’s allowance, his bonus, and reimbursement of his
liability to the creditor is only up to the extent of his gasoline and representation expenses.
unpaid subscription.
b) There is no cause of action against B because he has MAIA Corporation admits that it owed Victor P40, 000
already fully paid for his subscription. As stated earlier, but told him that this will be applied to the unpaid
the limit of the stockholder’s liability to the creditor of balance of his subscription in the amount of P100, 000.
the corporation, when the latter becomes insolvent, is There was no call or notice for the payment of the
the extent of his subscription. unpaid subscription. Victor questioned the set-off.
c) An action can be filed against C, not as a stockholder
because he has already paid up the shares, but in his 1. May MAIA set-off unpaid subscription with Victor’s
capacity as director and officer because of the claim for salaries?
corporation’s insolvency being the result of fraudulent 2. Would your answer be the same if indeed there had
practices within the company. Directors are liable been a call for the unpaid subscription? (1994 Bar)
jointly and severally for damages sustained by the
corporation, stockholders or other persons resulting A:
from gross negligence or bad faith in directing the
affairs of the corporation.

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UST BAR OPERATIONS
QUAMTO (1987-2016)

1. No. MAIA cannot set-off the unpaid subscription with formalities prescribed by law for the replacement of
Victor’s claim for salaries. The unpaid subscription is the “lost” certificate, Certificate of Stock No. 2002. Juan
not yet due as there is no call. forthwith transferred for valuable consideration the
2. Yes. The reason is that Victor is entitled to the payment new certificate to Jose who knew nothing of the
of his salaries which MAIA has no right to withhold in previous sale to Pedro. In time, the corporation was
payment of unpaid subscription. To do so would violate confronted with the conflicting claims of Pedro and
Labor Laws. Jose.

Watered Stock Between Pedro and Jose, whom should the corporation
so recognize as the rightful stockholder? (1997 Bar)
Liability of Directors for Watered Stocks
A: If there is no over-issuance of shares resulting from the
Q: What is “watered stock” and what is the legal two transactions of Juan, the corporation should recognize
consequence of the issuance of such stock? (2015 Bar) both Pedro and Jose as rightful stockholders. This is without
prejudice to the right of the corporation to claim against
A: Watered stocks are stocks issued for a consideration less Juan for the value of the shares which Juan sold to Jose.
than its par or issued value or for a consideration in any
form other than cash, valued in excess of its fair value. Any Q: Arnold has in his name 1, 000 shares of the capital
director or officer of a corporation consenting to the stock of ABC Corporation as evidenced by a stock
issuance of watered stocks or who, having knowledge certificate. Arnold delivered the stock certificate to
thereof, does not forthwith express his objection in writing Steven who now claims to be the real owner of the
and file the same with the corporate secretary shall be shares, having paid for Arnold’s subscription. ABC
solidarily liable with the stockholder concerned to the refused to recognize and register Steven’s ownership.
corporation and its creditors for the difference between the
fair value received at the time of issuance of the stock and Is the refusal justified? Explain. (1996 Bar)
the par or issued value of the same ( Section 65 of the
Corporation Code). A: ABC’s refusal to recognize and register Steven’s
ownership is justified. The facts indicate that the stock
CERTIFICATE OF STOCK certificate for the 1,000 shares in question is in the name of
Arnold. Although the certificate was delivered to Steven or
Q: Mr. Balimbing signed a written subscription for 100 that the procedure for the effective transfer of shares of
shares of stock of Laban and Co., paying 25% of the stock set out in the by-laws of ABC Corporation, if any, was
amount thereof. The corporation subsequently became observed. Since the certificate was not endorsed in favor of
insolvent due to a series of financial reverses. Mr. Steven (or anybody else for that matter), the only
Balimbing demanded from the Corporate S ecretary the conclusion could be no other than that the shares in
stock certificates corresponding to 25 shares which he question still belong to Arnold.
claimed was already paid. Since the corporation was .
insolvent, Mr. Balimbing refused to pay for his STOCK AND TRANSFER BOOK
remaining unpaid subscription.
Q: What is a stock and transfer book? (2009 Bar)
a) Can the Corporate Secretary validly refuse to issue
stock certificates in the name of Mr. Balimbing for A: A stock and transfer book is a book which records all
25 shares despite the payment of 25% of the stocks in the name of the stockholders alphabetically
subscription of 100 shares? Reasons. arranged; the installments paid or unpaid on all stocks for
b) Is Mr. Balimbing correct in refusing to pay for the which subscription has been made and the date of payment
remaining shares, the Company being already of any installment, a statement of every alienation, sale or
insolvent? Reasons. (1989 Bar) transfer of stock made, the date thereof, and by and to
whom made; and such other entries as the by-laws may
A: prescribe.
a) Yes, the Corporation Code expressly provides that no
certificate of stock shall be issued unless the full Transfer of stock

amountpayment
partial of the subscription is paid. amount
of the subscription This is toissay that a
allocated Q: “A” is the registered owner of Stock Certificate No.
or apportioned to the entire number of the subscribed 000011. He entrusted the possession of said certificate
shares and, therefore, each share subscribed by Mr. to his best friend “B” who borrowed the said endorsed
Balimbing would been paid only to the extent of 25% certificate to support B’s application for passport (or
thereof. for a purpose other than transfer). But “B” sold the
b) The refusal of Mr. Balimbing to pay is not correct. The certificate to “X”, a bona fide purchaser who relied on
obligation to pay for unpaid subscription is a liability of the endorsed certificates and believed him to be the
Mr. Balimbing that has not yet been discharged, but is owner thereof. Can “A” claim the shares of stocks from
instead entrenched under the trust fund doctrine upon “X”? Explain. (2001 Bar)
the insolvency of the corporation.
A: No. Assuming that the shares were already transferred to
Q: Juan was a stockholder of X Corporation. He owned a “B”, “A” cannot claim the shares of stock from “X” the
total of 500 shares evidenced by Certificate of Stock No. certificate of stock covering said shares have been duly
1001. He sold the shares to Pedro. After getting paid, endorsed by “A” and entrusted by him to “B”. B y his said acts
Juan indorsed and delivered said certificate of Stock No. “A” is now estopped from claiming said shares from “X”, a
1001 to Pedro. The following day, Juan went to the bona fide purchaser who relied on the endorsement by “A”
offices of the corporation and claimed that his of the certificate of stock.
Certificate of Stock No. 1001 was lost and that, despite

diligent efforts, the certificate could not be located. The Q: Four months before his death, PX assigned 100

77
Mercantile Law

shares of stock registered in his name in favor of his the Corporation. Until the corporation is dissolved and
wife and his children. They then brought the deed of liquidation of assets shall have been made, the shareholders
assignment to the proper corporate officers for have no right over any specific asset of the corporation ( Sec.
registration with the request for the transfer in the 122, Corporation Code ). The suit should have been filed
corporation’s stock and transfer books of the assigned instead by the and in the name of the corporation
shares, the cancellation of the stock certificates in PX’s (Evangelista v. Santos, 64 Phil. 697; see also Gamboa v.
name, and the issuance of new stock certificates in the Victoriano, 90 SCRA 40).
names of his wife and his children as the new owners.
The officers of the Corporation denied the request on Q: The corporation, once dissolved, thereafter
the ground that another heir is contesting the validity continues to be a body corporate for 3 years for
of the deed of assignment. May the Corporation be purposes of prosecuting and defending suits by and
compelled by mandamus to register the shares of stock against it and of enabling it to settle and close its affairs,
in the names of the assignees? Explain briefly. (2004 culminating in the final disposition and distribution of
Bar) its remaining assets. If the 3-year extended life expires
without a trustee or receiver being designated by the
A: Yes. The corporation may be compelled by mandamus to corporation within that period and by that time (expiry
register the shares of stock in the name of the assignee. The of the 3-year extended term), the corporate liquidation
only legal limitation imposed by Section 63 of the is not yet over, how, if at all, can a final settlement of the
Corporation Code is when the Corporation holds any unpaid corporate affairs be made? (1997 Bar)
claim against the shares intended to be transferred. The
alleged claim of another heir of PX is not sufficient to deny A: The liquidation can continue with the winding up. The
the issuance of new certificates of stock to his wife and members of the Board of Directors can continue with the
children. It would be otherwise if the transferee’s title to the winding of the corporate affairs until final liquidation. They
shares has no prima facie validity or is uncertain. can act as trustees or receivers for this purpose.

Q: Because of disagreement with the BOD and a threat Q: The SEC approved the amendment of the Articles of
by the BOD to expel her for mi sconduct and inefficiency, Incorporation of GHQ Corp shortening its corporate life
Carissa offered in writing to resign as President and to only 25 years i n accordance with Sec 120 of the Corp
member of the BOD, and to sell to the company all her Code. As shortened, the corporation continued its
shares therein for P300, 000.00 Her offer to resign was business operations until May 30, 1997, the last day of
―effective as soon as my shares are fully paid. At its its corporate existence. Prior to said date, there were a
meeting, the BOD accepted Carissa‘s resignation, number of pending civil actions, of varying nature but
approved her offer to sell back her shares of s tock to the mostly money claims filed by creditors, none of which
company, and promised to buy the stocks on a was expected to be completed or resolved within five
staggered basis. Carissa was informed of the BOD years from May 30, 1997. If the creditors had sought
Resolution in a letter-agreement to which she affixed your professional help at that time about whether or
her consent. The Company‘s new President signed the not their cases could be pursued beyond May 30, 1997,
promissory note. After payment P100, 000 the what would have been your advice? (2000 Bar)
company defaulted in paying the balance of P200, 000.
Carissa wants to sue the Company to collect the balance. A: The cases can be pursued even beyond May 30, 1997, the
If you were retained by Carissa as her lawyer, where last day of the corporate existence of GHQ Corp. The
will you file the suit? A) Labor Arbiter; b) RTC; or c) SEC? Corporation is not actually dissolved upon the expiration of
(2014 Bar) its corporate term. There is still the period for liquidation
or winding up.
A: RTC has jurisdiction. Under Section 5.2 of the SRC, the
commission’s jurisdiction over all cases enumerated under Q: AAA Corporation is a bank. The operations of AAA
Section 5 of PD 902-A is hereby transferred to the Courts of Corporation as a bank was not doing well. So, to avert
general jurisdiction or the appropriate Regional Trial Court: any bank run, AAA Corporation, with the approval of
Provided, That the Supreme Court in the exercise of its the Monetary Board, sold all its assets and liabilities to
authority may designate the Regional Trial Court branches BBB Banking Corporation which includes all deposit
that shall exercise jurisdiction over these cases. The accounts. In effect then, BBB Corporation will service all
Commission shall retain jurisdiction over pending cases deposits of all depositors of AAA Corporation.
involving intra- corporate disputes submitted for final
resolution which should be resolved within 1 year from the a. Will the sale of all assets and liabilities of AAA
enactment of this Code. The commission shall retain Corporation to BBB Banking Corporation
jurisdiction over pending suspension of automatically dissolve or terminate the corporate
payments/rehabilitation cases filed as of 30 June 2000 until existence of AAA Corporation? Explain your
finally disposed. answer.
b. What are the legal requirements in order that a
DISSOLUTION AND LIQUIDATION corporation may be dissolved? (2012 Bar)

Q: A group of stockholders of Sesame Corporation filed A:


a court suit against the members of the Board of
Directors to make good to the shareholders, in a. No. AAA Corporation is an artificial being created by
proportion to their shareholdings, the losses incurred law and has a legal personality of its own. A corporation
by the corporation because the of defendant Board of does not owe its existence upon the presence of assets
Directors’ management. and properties. It can only be dissolved in cases
provided for by law. As such, AAA Corporation will
Will the action prosper? (1988 Bar) subsist regardless of the sale of all of its assets and
liabilities to another corporation.
A: The action will not prosper because the right belongs to b. A corporation may be dissolved voluntarily, by

78
UST BAR OPERATIONS
QUAMTO (1987-2016)

shortening of the corporate term and through 3. After the determination of the value of the property, by
involuntary dissolution. In voluntary dissolution, the assigning or transferring the property to one
action for dissolution must be approved by majority of stockholder with the obligation on the part of said
the directors or trustees and 2/3 of the stockholders stockholder to pay the other four stockholders the
representing the outstanding capital stock or members, amount/s in proportion to the value of the stockholding
publication requirement and filed with SEC which will of each.
issue certificate of dissolution. If there are creditors
affected, there must be a hearing to hear the objections Q: Name 3 methods by which a stock corporation may
and claims of the creditors. In case of shortening of be voluntarily dissolved. Explain each method. (2002
corporate term, through amendment of the AOI. In Bar)
involuntary dissolution, through filing of a verified
complaint with the SEC based on any ground provided A: The 3 methods by which a stock corporation may be
by law or rules. voluntarily dissolved are:

INVOLUNTARY DISSOLUTION 1. Voluntary dissolution where no creditors are affected.


This is done by a majority vote of the directors, and
By Expiration of Corporate Term resolution of at least 2/3 vote of stockholders,
submitted to the SEC.
Q: XYZ Corporation entered into a contract of lease with 2. Voluntary dissolution where creditors are affected.
ABC, Inc., over a piece of real estate for a term of 20 This is done by a petition for dissolution which must be
years, renewable for another 20 years, provided that filed with the SEC, signed by a majority of the members
XYZ’s corporate term is extended in accordance with of the board of directors, verified by the president or
law. Four years after the term of XYZ Corporation secretary, and upon affirmative vote of stockholders
expired, but still within the period allowed by the lease representing at least 2/3 of the outstanding capital
contract for the extension of the lease period, XYZ Corp. stock.
notified ABC Inc., that it is exercising the option to 3. Dissolution by shortening of the corporate term. This is
extend the lease. ABC Inc. objected to the proposed done by amendment of the articles of incorporation.
extension, arguing that since the corporate life of XYZ
Corp. had expired, it could no longer opt to renew the Conveyance to a Trustee within a Three-Year Period
lease. XYZ Corp. countered that withstanding the lapse
of its corporate term it still has the right to renew the Q: The corporation, once dissolved, thereafter
lease because no quo warranto proceedings for continues to be a body corporate for three years for
involuntary dissolution of XYZ Corp. has been
instituted by the Office of the Solicitor General. purposes of prosecuting
against it and of enabling itand defending
to settle suits
and close itsby and
affairs,
culminating in the final disposition and distribution of
Is the contention of XYZ Corp. meritorious? Explain its remaining assets. If the 3 year extended life expires
briefly. (2004 Bar) without a trustee or receiver being designated by the
corporation within that period and by that time (expiry
A: XYZ Corporation’s contention is not meritorious. Based of the 3 year extended term), the corporate liquidation
on the ruling of the Supreme Court in Philippine National is not yet over, how, if at all, can a final settlement of the
Bank v. CFI of Rizal, 209 SCRA (1992). XYZ Corp. was corporate affairs be made? (199 Bar)
dissolved ipso facto upon the expiration of its srcinal term.
It ceased to be a body corporate for the purpose of A: The liquidation can continue with the winding up. The
continuing the business for which it was organized, except members of the BOD can continue with the winding of the
only for purposes connected with its winding up or corporate affairs until final liquidation. They can act as
liquidation. Extending the lease is not an act to wind up or trustees or receivers for this purpose.
liquidate XYZ Corp.’s affairs. It is contrary to the idea of
winding up the affairs of the corporation. Liquidation after Three Years

METHODS OF LIQUIDATION Q: Bam filed an action to enjoin SN Company’s Board of


Directors from selling a parcel of land registered in the
By the Corporation Itself corporation’s name, to compel the corporation to
recognize Bam as a stockholder with 50 shares, to allow
Q: “X” Corporation shortened its corporate life by him to inspect the corporate books, and to claim
amending its articles of incorporation. It has no debts damages against the corporation and its officers.
but owns a prime property located in Quezon City. How Subsequently, the corporation and the individual
would the said property be liquidated among the five defendants moved to dismiss the complaint since the
stockholders of said corporation? Discuss two methods corporation’s certificate of registration was revoked by
of liquidation. (2001 Bar) the SEC during the pendency of Bam’s case on the
ground of non-compliance with reportorial
A: The prime property of “X” Corporation can be liquidated requirements. The special commercial court granted
among the five stockholders after the property has been the motion and reasoned that only an action for
conveyed by the corporation to the five stockholders, by liquidation of assets can be maintained when a
dividing or partitioning it among themselves in any two of corporation has been dissolved and Bam cannot seek
the following ways: reliefs which in effect lead to the continuation of the
corporation’s business. The court also ruled that it lost
1. By physical division or partition based on the jurisdiction over the intra-corporate controversy upon
proportion of the values of their stockholdings; or the dissolution of the corporation.
2. Selling the property to a third person and dividing the
proceeds among the five stockholders in proportion to a. Was the court correct?
their stockholdings; or b. Four years later, SN Company files an action

79
Mercantile Law

against Bam to recover corporate assets allegedly Sometime in April 2004, Malyn learned about Fort Patio
held by the latter for liquidation. Will this action Café located in Taguig City and that its development
prosper? (2015 Bar) was undertaken by a new corporation known as Fort
Patio, Inc., where both Schiera and Jazz are directors.
Malyn also found that Schiera and Jaz, on behalf of Patio
A: Investments, had obtained a loan of P500, 000.00 from
PBCom Bank, for the purpose of opening Fort Patio
a. The court is not correct. An action to be recognized as a Café. This loan was secured by the assets of Patio
stockholder and to inspect corporate documents is an Investments and personally guaranteed by Schiera and
intra-corporate dispute which does not constitute a Jaz.
continuation of business. The dissolution of the
corporation simply prohibits it from continuing its Malyn then filed a corporate derivative action before
business. Moreover, under Section 145 of the the Regional Trial Court of Makati City against Schiera
Corporation Code, no right or remedy in favor of or and Jaz, alleging that the two directors had breached
against any corporation, its stockholders, members, their fiduciary duties by misappropriating money and
directors and officers shall be removed or impaired by assets of Patio investments in the operation of Fort
the subsequent dissolution of the corporation. The Patio Café.
dissolution does not automatically convert the parties
into strangers or change their intra-corporate a. Did Schiera and Jaz violate the principle of
relationship. Neither does it terminate existing causes corporate opportunity? Explain.
of action which arose because of the corporate ties of b. Was it proper for Malyn to file a derivative suit with
the parties. The cause of action involving an intra- prayer for injunctive relief? Explain.
corporate controversy remains and must be filed as an c. Assuming that a derivative suit is proper, may the
intra-corporate dispute despite the subsequent action continue if the corporation is dissolved
dissolution of the corporation ( Aguirre v. FQB +7, Inc. during the pendency of the suit? Explain. (2005
GR no. 170770, Jan. 9, 2013). Bar)
b. The action cannot prosper because the corporation has
no more legal capacity to sue after three years from its A:
dissolution (Alabang Development Corporation v.
Alabang Hills Village Association, GR no. 187456, June 2, a. Yes, although Malyn refused the business before,
2014). nevertheless, using the resources and credit standing of
the company, Schiera and Jaz clearly demonstrated that
Q: The SEC approved the amendment of the articles of the business could have been successfully pursued in
incorporation of GHQ Corporation shortening its the name of the close corporation. More importantly,
corporate life to only 25 years in accordance with Schiera and Jaz are guilty of diverting the resources of
Section 120 of the Corporation Code. As shortened, the the close corporation to another entity, equivalent to
corporation continued its business operations until fraud and bad faith.
May 30, 1997, the last day of its corporate existence. b. Yes. Where corporate directors are guilty of breach of
Prior to said date, there were a number of pending civil trust, a stockholder may institute a suit in behalf of
actions, of varying nature but mostly money claims himself and other stockholders for the benefit of the
filed by creditors, none of which was expected to be corporation, to bring about a redress of a wrong
completed or resolved within 5 years from May 30, inflicted directly upon the corporation and indirectly
1997. upon the stockholders ( Reyes vs. Tan, 3 SCRA 198). In
this case, Schiera and Jaz breached a fiduciary duty
If the creditors had sought your professional help at when they used the property of Patio investments in
that time about whether or not their cases could be the operation of Fort Patio café despite the latter’s
pursued beyond May 30, 1997, what would have been financial condition to the prejudice of the corporation.
your advice? (2000 Bar) Further, an individual stockholder may institute a suit
in behalf of a corporation, wherein he holds stocks, in
A: The cases can be pursued even beyon d May 30, 1997, the order to protect corporate rights whenever the officials
last day of the corporate existence of GHQ Corporation. The of the corporation refuse to sue, or are the ones to be
Corporation is not actually dissolved upon the expiration of sued or hold the control of the corporation ( Republic
its corporate term. There is still the period for liquidation Bank v. Cuaderno). Furthermore, the demand on the
or winding up. Board of Directors to file a derivative suit would be a
futile formality since majority of the Board is the
OTHER CORPORATIONS precursor of the wrongful act. Injunction is likewise
proper to prevent foreclosure of the assets of the
Close Corporations corporation used as security of the loan availed by the
two erring Board of Directors.
Q: Malyn, Schiera and Jaz are the directors of Patio c. Yes, under Section 145 of the Corporation Code, no
Investments, a close corporation formed to run the right or remedy in favor of or against any corporation
Patio Café, an al fresco coffee shop in Makati City. In shall be removed or impaired either by the subsequent
2000, Patio café began experiencing financial reverses, dissolution of said corporation. No reason can be
consequently, some of the checks it issued to its conceived why a suit already commenced by the
beverage distributors and employees bounced. corporation during its existence to proceed to final
judgment and execution thereof because even a mere
In October 2003, Schiera informed Malyn that she trustee (of a dissolved corporation), who, by fiction,
found a location for a second café in Taguig City. Malyn merely continues the legal personality may commence
objected because of the dire financial condition of the a suit which can proceed to final judgment even beyond
corporation. the 3-year period of liquidation ( Knecht v. United
Cigarette Corporation, 348 SCRA 48 ).

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QUAMTO (1987-2016)

composed of the 5 incorporators, which is authorized


Q: Rafael inherited from his uncle 10, 000 shares of Sta. to admit new members. The Articles of Incorporation
Ana Corporation, a close corporation. The shares have also allow the Foundation to receive donations from
a par value of P10.00 per share. Rafael notified Sta. Ana members. As of January 30, 1993, 60 members had
that he was selling his shares at P70 per share. There been admitted by the board of trustees.
being no takers among the stockholders, Rafael sold the
same to his cousin Vicente (who is not a stockholder) 1. Can the Foundation use the funds donated to it by
for P700, 000. its members for the purchase of food and medicine
for distribution to the victims of the Pinatubo
The Corporate Secretary refused to transfer the shares eruption?
in Vicente’s name in the corporate books because 2. Can the Foundation operate a specialty restaurant
Alberto, one of the stockholders, opposed the transfer that caters to the general public in order to
on the ground that the same violated the by-laws. augment its funds? (1993 Bar)
Alberto offered to buy the shares at P12.50 per share,
as fixed by the by-laws or a total price of P125,000 only. A:

While the by-laws of Sta. Ana provides that the right of 1. Yes, Sec. 36 (9) of the Corporation Code provides that
first refusal can be exercised “at a price not exceeding as long as the amount of donation is reasonable.
25% more than the par value of such shares, the 2. If the purposes of the corporation are limited to the
Articles of Incorporation simply provides that the establishment and maintenance of the library and
stockholders of record” shall have preferential right to museum as stated in the problem, the foundation
purchase the said shares.” It is silent as to pricing. cannot operate a specialty restaurant that caters to the
(1994 Bar) general public. In such case, the action of the foundation
will be ultra vires.
A: Yes. In a close corporation, the restriction as to the
transfer of shares has to be stated/ annotated in the Articles Foreign Corporations
of Incorporation, the By-Laws and the certificate of stock.
This serves as notice to the person dealing with such shares Doctrine of “Doing Business” (related to definition under
like Rafael in this case. With such notice, he is bound by the the Foreign Investments Act, R.A. No. 7042)
pricing in the By-Laws.
Q: Phil-Hong, Inc. (PHI) is a joint venture corporation
Non-Stock Corporations organized in the Philippines, 60% of which is owned by
Filipino citizens and 40% by Hong Kong residents who
Q: “X” company is a stock corporation composed of the are british nationals. PHI owns and operates the
Reyes family engaged in real estate business. Because Lancelot Hotel in Makati. PHI decides to expand into the
of the regional crisis, the stockholders decided to restaurant business and so, with t he requisite approval
convert their stock corporation into a charitable non- of its Board of Directors and stockholders, PHI sets up a
stock and non-profit association by amending the wholly-owned subsidiary, Guinevere Bistro, Inc. (GBI)
articles of incorporation. and proceeds to set up an adjunct restaurant in the
Lancelot Hotel and another one in a rented space in SM
a. Could this be legally done? Why? City along EDSA, Quezon City.
b. Would your answer be the same if at the inception,
“X” company is a non-stock corporation? Why? PHI consults you for legal advice on whether or not it is
(2001 Bar) legal for GBI to operate the Guinevere Bistro:
A:
a) In the Lancelot Hotel and
a. Yes, it can be legally done. In converting the stock b) In SM City
corporation to a non-stock corporation by a mere
amendment of the Articles of Incorporation, the stock How would you answer the query? Explain. (1987 Bar)
corporation is not distributing any of its assets to the
stockholders. On the contrary, the stockholders are A:
a) GBI may operate the Guinevere Bistro in the Lancelot
deemed to have waived their right to share in the Hotel. The Retail Trade Act, nationalizing retail trade,
profits of the corporation which is a gain not a loss to
the corporation. exempts keepers of restaurants included in, or
b. No, my answer will not be the same. In a non-stock incidental to, the hotel business.
corporation, the members are not entitled to share in b) It is not legal for GBI to operate the restaurant business
the profits of the corporation because all present and in SM City since the latter is not a hotel; hence, the
future profits belong to the corporation. In converting restaurant operation will not fall under the exemption
the non-stock corporation to a stock corporation by a clause of the Retail Trade Law.
mere amendment of the Articles of Incorporation, the
non-stock corporation is deemed to have distributed an Q: Global KL Malaysia (GLOBAL), a 100% Malaysian-
asset of the corporation —i.e. its profits, among its owned corporation, desires to build a hotel beach
members, without a prior dissolution of the resort in Samal Island, Davao City, to take advantage of
corporation. Under Section 122, the non-stock the increased traffic of tourists and boost the tourism
corporation must be dissolved first. industry of the Philippines.

Q: The AB Memorial Foundation, Inc. was incorporated 1. Assuming that GLOBAL has US$100 Million to invest
as a non-profit, non-stock corporation in order to in a hotel beach resort i n the Philippines, may it be
establish and maintain a library and museum in honor allowed to acquire the land on which to build the
of the deceased parents of the incorporators. Its resort? If so, under what terms and conditions may

Articles of Incorporation provide for a board of trustees GLOBAL acquire the land? Discuss fully.

81
Mercantile Law

2. May GLOBAL be allowed to manage the hotel beach been purchasing and selling securities through EOL
resort? Explain. with the use of her American Express credit card. Grace
3. May GLOBAL be allowed to operate restaurants has never traveled outside the Philippines. After a
within the hotel beach resort? Explain. (1995 Bar) series of erroneous stock picks, she had incurred a net
indebtedness of US$30, 000 with EOL, at which time she
A: cancelled her American Express credit card. After a
1. GLOBAL can secure a lease on the land. As a corporation number of demand letters sent to Grace, all of them
with a Malaysian nationality, GLOBAL cannot own the unanswered, EOL, through a Makati law firm, filed a
land. complaint for collection against Grace with the RTC of
2. Yes, GLOBAL can manage the hotel beach resort. There Makati. Grace, through her lawyer, filed a motion to
is no law prohibiting it from managing a resort. dismiss on the ground that EOL (a) was doing business
3. GLOBAL may be allowed to operate restaurants within in the Philippines without a license and was therefore
the beach resort. This is part of the operation of the barred from bringing suit and (b) violated the SRC by
resort. selling or offering to sell securities within the
Philippine SEC and thus came to court “with unclean
Q: ABC Manufacturing, Inc., a company wholly owned by hands”. EOL opposed the motion to dismiss, contending
foreign nationals, manufactures typewriters which ABC that it had never established a physical presence in the
distributes to the general public in 2 ways: Philippines, and that all of the activities related to
plaintiffs trading in U.S. securities all transpired
a) ABC consigns its typewriters to independent outside the Philippines. If you are the judge, decide the
dealers who in turn sell them to the public; and, motion to dismiss by ruling on the respective
b) Through individuals, who are not employees of contentions of the parties on the basis of the facts
ABC, and who are paid strictly on a commission presented above. (2002 Bar)
basis for each sale.
A: The grounds of the motion to dismiss are both untenable.
Do these arrangements violate the Retail Trade Law? EOL is not doing business in the Philippines, and it did not
(1991 Bar) violate the Securities Act, because it was not selling
securities in the country.
A:
a) The first arrangement would not be in violation of the The contention of EOL is correct, because it never did any
Retail Trade Law. The law applies only when the sale is business in the Philippines. All its transactions in question
direct to the general public. A dealer buys and sells for were consummated outside the Philippines
and in his own behalf and, therefore, the sale to the
general public is made by the dealer and not by the Q: What is the legal test f or determining if an unlicensed
manufacturer. foreign corporation is doing business in the
b) The second arrangement would be violative of the Philippines? (2002 Bar)
Retail Trade Law, since the sale is done through
individuals being paid strictly on a commission basis. A: The test is whether or not the unlicensed foreign
The said individuals would then be acting merely as corporation has performed an act or acts that imply a
agents of the manufacturer. Sales, therefore, made by continuity of commercial dealings or arrangements, and
such agents are deemed direct sales by the contemplate to that extent the performance of acts or
manufacturer itself. works, or the exercise of some of the functions normally
incident to, and in progressive prosecution of, commercial
Q: When is a foreign corporation deemed to be “doing gain or of the purpose and object of the business
business in the Phi lippines?” (1998 Bar) corporation.

A: A foreign corporation is deemed to “deemed business in Q: Give at least three (3) examples of the acts or
the Philippines” if it is continuing the body or substance of activities that are specifically identified under our
the business or enterprise for which it was organized. It is foreign investment laws as constituting “doing
the intention of an entity to continue the body of its business” in the Philippines (2002 Bar)
business in the country. The grant and extension of 90-day
credit terms of a foreign corporation to a domestic A: Any three (3) of the following acts or activities constitute
corporation for every purchase shows an intention to “doing business” in the Philippines under our foreign
continue transacting with the latter. investment laws:

Q: Equity Online Corporation (EOL), a New York 1. Soliciting orders;


corporation, has a securities brokerage service on the 2. Opening offices by whatever name;
Internet after obtaining all requisite U.S. licenses and 3. Participating in the management, supervision or
permits to do so. EOL’s website (www.eonline.com), control of any domestic entity;
which is hosted by a server in Florida, enables Internet
4. Entering into service contracts;
users to trade on-line in securities listed in the various
5. Appointing representative or distributors, operating
stock exchanges in the U.S. EOL buys and sells U.S.-listed
under the control of the foreign entity, who is domiciled
securities for the accounts of its clients all over the
in the Philippines or who stays in the country for a
world, who convey their buy and sell instructions to
period or periods totaling at least 180 days in any
EOL through the Internet. EOL has no offices, employees
calendar year.
or representatives outside the U.S. The website has
icons for many countries, including an icon “For
Q: Celeste, a domestic corporation wholly owned by
Filipino Traders” containing the day’s prices of U.S.—
Filipino citizens, is engaged in trading and operates as
listed securities expressed in U.S. dollars and in their
general contractor. It buys and resells the products of
Philippine peso equivalent. Grace Gonzales, a resident
Matilde, a domestic corporation, 90% of whose capital
of Makati, is a regular customer of the website and has
stock is owned by aliens. All of Matilde’s goods are
82
UST BAR OPERATIONS
QUAMTO (1987-2016)

made in the Philippines from materials found or


produced in the Philippines. Q: A foreign firm is engaged in the business of
manufacturing and selling rubber products to dealers
On the other hand, ECQ Integrated is a 100% Filipino- who in turn sell them to others. It also sells directly to
owned corporation and manufacturer of asbestos agricultural enterprises, automotive assembly plants,
products. public utilities which buy them in large bulk, and to its
officers and employees.
Celeste and ECQ took part in a public bidding conducted
by MWSS for its asbestos pipe requirements. Celeste 1. Is there a violation of the Retail Trade Law? Explain.
won the bid, having offered 13% lower than that 2. May said firm operate a canteen inside the
offered by ECQ; and MWSS awarded the contract to premises of its plant exclusive for its officials and
supply its asbestos pipes to Celeste. ECQ sought to employees without violating the Retail Trade Act?
nullify the award in favor of Celeste. Explain. (1993 Bar)

1. Is Celeste barred under the Flag Law from taking A:


part in bidding to supply the government?
2. Did Celeste and Matilde violate the Anti-Dummy 1. On the assumption that the foreign firm is doing
Law? business in the Philippines, the sale to the dealers of
3. Did Celeste and Matilde violate the Retail Trade agricultural enterprises, automotive assembly plants,
Nationalization Law? Explain. (1994 Bar) and public utilities is wholesale and, therefore, not in
violation of the Retail Trade Act.
A: 2. Yes. The operation of the canteen inside the premises
exclusively for its officers and employees, would
1. No. The materials offered in the bids submitted are amount to an input in the manufacturing process and,
made in the Philippines from articles produced or therefore, does not violate the Retail Trade Act.
grown in the Philippines, and the bidder, Celeste, is a
domestic entity. The Flag Law does not apply. It can be Q: A Cooperative purchased from “Y” Corporation on
invoked only against a bidder who is not a domestic installments a rice mill and made a down payment
entity, or against a domestic entity who offers imported therefor. As security for the payment of the balance, the
materials. Cooperative executed a chattel mortgage in favor of Y
2. No, since Celeste is merely a dealer of Matilde and not Corporation. Y Corporation, in turn, assigned its rights
an alter ego of the latter. Celeste buys and sells on its to the chattel mortgage to Z, Inc., a 5% foreign-owned
own account the products of Matilde. company doing business in the Philippines. The
3. Matilde did not violate the Retail Trade Law since it cooperative thereafter made installment payment to Z,
does not sell its products to consumers, but to dealers Inc.
who resell them. Neither did Celeste violate the Retail
Trade Law since, in the first place, it is not prohibited to Because the Cooperative was unable to meet its
engage in retail trade. Besides, Matilde’s sale of the obligations in full, Z, Inc. filed against it a court suit for
asbestos products to Celeste, being wholesale, the collection. The Cooperative resisted contending that Z,
transaction is not covered by the Retail Trade Law. Inc. was illegally engaged in the retail trade business
for having sold a consumer good as opposed to a
Q: producer item. The Cooperative also alleged that Z, Inc
had violated the Anti-Dummy Law.
1. “A” invested P500, 000 in a security agency on
October 30, 1990. He was charged with being a Is Z, Inc. guilty of violating the Retail Trade Law and the
dummy of his friend, a foreigner. If you were the Anti-Dummy Law? Why? (1992 Bar)
prosecutor, what evidence can you present to prove
violation of the Anti-Dummy Law? A: Z, Inc. is not guilty of violating the Retail Trade Law and
2. Juana de la Cruz, a common-law wife of a foreigner the Anti-Dummy Law. The term “retail” under the Retail
wrested the control of a television firm. At the Trade Act requires that the seller must be habitually
instance of the minority group of the firm, she was engaged in selling to the general public consumption goods.
charged with violation of the Anti-Dummy Law. May By consumption goods are meant “personal, family and
she be convicted by the mere fact that she is a household” purposes. A Rice Mill does not fall under that
common-law wife of a foreigner? Explain. (1993 category. Neither does it appear that Z, Inc, is habitually
Bar) engaged in selling to the general public that commodity.
Since there is no violation of the Retail Trade Law, there
A: would likewise be no violation of the Anti-Dummy Law.

1. “A” allows or permits the use or exploitation or Q: A softdrinks company uses bi g quantities of gasoline
enjoyment of a right, privilege or business, the exercise and diesel fuel, buying the same from an American oil
of enjoyment of which is expressly reserved by the company in big container or drums.
Constitution or the laws to citizens of the Philippines,
by the foreigner not possessing the requisites a) May the American company sell the gasoline and
prescribed by the Constitution or the laws of the diesel fuel directly to the softdrinks company for
Philippines. The prosecutor should prove the above the latter’s use in its delivery trucks?
elements of the crime and also the facts that “A” does b) May the American company sell the gasoline and
not have the means and resources to invest P500,000 diesel fuel directly to the softdrinks company for
in the security agency. use by the latter in the manufacture of softdrinks
2. No. The mere fact of being a common-law wife of a which are sold by the softdrinks company to the
foreigner does not bring her within the ambit of the public? (1989 Bar)

Anti-Dummy law.

83
Mercantile Law

A: The law excludes from the coverage of the “Retail Trade stockholders conformably with the dissolution and
Act” the sale to manufacturers or processors selling to liquidation procedures under the New Corporation
industrial and commercial user or consumers who use the Code? Discuss the merits of this argument. (1999
product to render service to the general public and/or to Bar)
produce or manufacture goods which are, in turn, sold by
them. Accordingly: A:
a) No. There is no need for the absorbed corporation to
a) The American company cannot directly sell gasoline undertake dissolution and winding up procedure. As a
and fuel oil to the softdrinks company for the latter’s result of the merger, the absorbed corporation is
use in its delivery trucks since this service is to serve automatically dissolved and its assets and liabilities are
the requirements of the user (softdrinks company) acquired and assumed by the surviving corporation.
itself and not to serve the general public (such as that b) No. The merger does not become effective until and
rendered by common carriers). unless approved by the SEC. before the approval by the
b) The answer is also in the negative under the end-user SEC of the merger, the surviving corporation has no
test. The fuel is consumed by the softdrinks company. legal personality with respect to receivables due to the
Hence, the sale of the fuel by the American company to absorbed corporation.
the softdrinks company is retail business. The fact that c) Whether the receivable was incurred by the absorbed
the softdrinks company uses or consumes the fuel in corporation before or after the merger agreement, or
the manufacturer of softdrinks which are sold by the before or after the approval thereof by the SEC, the said
softdrinks company to the public is of no moment. What receivable would still belong to the surviving
is prohibited is the sale of the fuel by the American corporation under Section 80 of the Corporation Code
company to the softdrinks company. which does not make any distinction as to the assets
and liabilities of the absorbed corporation that the
Isolated Transactions surviving corporation would inherit.

Q: A foreign company has been exporting goods to a


Philippine company for several years now. When the SECURITIES REGULATION CODE
Philippine company failed to pay the latest exportation,
the foreign company sued to collect in the Philippines.
The Philippine company interposed the defense that Q: Define securities (1996 Bar)
the foreign company was doing business in the
Philippines without a license; hence, could not sue A: Stocks, bonds, notes, convertible debentures, warrants or
before a Philippine court. Is this defense tenable? other documents that represent a share in a company or
Explain your answer. (2015 Bar) debt owed by a company or government entity. Evidences
of obligations to pay money or rights to participate in
A: The defense is not tenable. The mere act of exporting earnings and distribution of corporate assets. Instruments
from one’s own country, without doing any specific giving to their legal holders rights to money or other
commercial act within the territory of the importing property; they are therefore instruments which have
country cannot be deemed as doing business in the intrinsic value and are recognized and used as such in the
importing country. Thus, the foreign company may sue in regular channels of commerce.
the Philippines despite lack of license to do business in the
Philippines (Van Zuiden Bros Ltd. v. GTVL Manufacturing Q: Why is the Securities Regulation Code called a “truth
Industries 523 SCRA 233). in securities law”? (2015 Bar)

MERGERS AND CONSOLIDATIONS A: The Securities Regulation Code is called a “ truth in


securities law “ because it requires the issuer to make full
Q: Two corporations agreed to merge. They then and fair disclosure of information about securities being
executed an agreement specifying the surviving sold or offered to be sold within the Philippines and
corporation and the absorbed corporation. Under the penalizes manipulative and fraudulent acts, devices and
agreement of merger dated November 5, 1998, the schemes.
surviving corporation acquired all the rights,
properties and liabilities of the absorbed corporation. EXEMPT TRANSACTIONS

a) What would happen to the absorbed corporation? Q: Assume that Greater Manila Telephone and
Must the absorbed corporation undertake Telegraph Company, Incorporated has 10, 000
dissolution and the winding up procedures? employees. It has a policy of encouraging stock
Explain your answer. ownership among its employees. Its Board of Directors,
b) Pending the approval of the merger by the SEC, may intends to sell P2M worth of common stocks to either
the surviving corporation already institute suits to (a) it managerial employees only numbering about 1,
collect all receivables due to the absorbed 000 or (b) indiscriminately to all its 10, 000 employees.
corporation from its customers? Explain your In case it decides to sell to its managerial employees
answer. only, does it have to register its securities? How about
c) A case was filed against a customer to collect on the if the intended sale is to all emp loyees? (1989 Bar)
promissory note issued by him after the date of the
merger agreement. The customer raised the A: Exempt transactions are those that do not require
defense that while the receivables as of the date of registration either because the law itself exempts them
the merger agreement were transferred to the therefrom or the SEC finds that the enforcement of the
surviving corporation, those receivables which registration requirement is not necessary in the public
were created after the merger agreement remained interest and for the protection of investors by reason of the
to be owned by the absorbed corporation. These amount involved or the limited character of the public
receivables would be distributed to the
offering. The proposed sales stated in the problem do not
84
UST BAR OPERATIONS
QUAMTO (1987-2016)

strictly fall under any of the exempt transactions in the law a) No, the arrangement is not lawful. It is an artificial
itself. Accordingly, if the corporation would want to exempt manipulation of the price of securities. This is
the sale from registration, it must file an application with prohibited by the Securities Regulation Code.
the SEC for such exemption which may then act in b) If the sale materializes, it is called a wash sale or
accordance with the rule above-stated. simulated sale.

Q: INSIDER TRADING

A. Able Corporation sold securities to 21 non- Q: Under the SRC, what is the Margin Trading Rule?
qualified buyers during a 15-month period, without (2009 Bar)
registering the securities with the Securities and
Exchange Commission. Did Able Corporation A: Under the Margin Trading Rule, no registered broker or
violate the Securities Regulation Code? Explain. dealer, or member of an exchange shall extend credit on any
B. Securities issued by the Philippine government are security an amount greater than whichever is higher of:
“exempt securities” and, therefore, need not be
registered with the Securities and Exchange a) 65% of the current market price of the security;
Commission prior to their sale or offering to the b) 100% of the lowest market price of the security during
public in the Philippines. What is the rationale the preceding 36 calendar months, but not more than
behind this exemption? (2015 Bar) 75% of the current market price.

A: The purpose of the Margin Trading Rule is to prevent


excessive use of credit for the purchase of securities it is a
A. Yes because under the SRC securities shall not be sold counter to broker’s desire to generate more sales by
or offered to be sold to the public within the Philippines encouraging clients to buy securities on credit.
unless the securities are registered with and approved
by the Securities and Exchange Commission. Public Q: Ms. OB was employed in MAS Investment Bank. WIC,
means 20 or more inventors. The fact that the securities a medical drug company, retained the Bank to assess
were sold during a 15 month period is immaterial. whether it is desirable to make a tender offer for DOP
However, the sale of securities to less than 20 investors company, a drug manufacturer. OB overheard in the
if done during a 12-month period is an exempt course of her work the plans of WIC. By herself and thru
transaction under the Securities Regulation Code. associates, she purchased DOP stocks available at the
B. The rationale for the exemption is that the public is stock exchange price at P20 per share. When WIC’s
amply protected even without the registration of the tender offer was announced, DOP stocks jumped to P30
securities to be issued by the government since the per share. Thus OB earned a sizable profit.
government is presumed to be always solvent.
Is OB liable for breach and misuse of confidential or
Q: What are the so-called exempt securities under the insider information gained from her employment? Is
SRC? (2009 Bar) she also liable for damages to sellers or buyers with
whom she traded? If so, what is the measure of such
A: Under Sec. 9 of the SRC, the so-called exempt securities damages? Explain briefly. (2004 Bar)
are:
A: OB is an insider (as defined in Subsection 3.8(3) of the
a. Those issued or guaranteed by the government of the SRC) since she is an employee of the Bank, the financial
Philippines or any of its political subdivisions or adviser of DOP, and this relationship gives her access to
agencies; material information about the issuer (DOP) and the latter’s
b. Those issued or guaranteed by the government of any securities (shares), which information is not generally
foreign country with which the Philippines has available to the public. Accordingly, OB is guilty of insider
diplomatic relations, or any other state on the basis of trading under Section 27 of the SRC, which requires
reciprocity, although the SEC may require compliance disclosure when trading in securities.
with the form and content of disclosures;
c. Those issued by the receiver or by the trustee in a OB is also liable for damages to sellers or buyers with whom
she traded. Under Subsection 63.1 of the SRC, the damages
bankruptcy duly approved by the proper adjudicatory
board; awarded could be an amount not exceeding triple the
d. Those involving the sale or transfer which is by law, amount of the transaction plus actual damages. Exemplary
under the regulation of the OIC, HLURB, BIR; and damages may also be awarded in case of bad faith, fraud,
e. Those issued by banks, except its own shares. malevolence or wantonness in the violation of the SRC or its
implementing rules. The court is also authorized to award
MANIPULATION OF SECURITY PRICES attorney’s fees not exceeding 30% of the award.

Q: Suppose “A” is the owner of several inactive Q: Under the Revised Securities Act, it is unlawful for an
securities. To create an appearance of active trading for insider to sell or buy a security of the issuer if he knows
such securities, “A” connives with “B” by which “A” will a fact or special significance with respect to the issuer
offer for sale some of his securities and “B” will buy or the security that is not generally available, without
them at certain fixed price, with the understanding that disclosing such fact to the other party.
although there would be an apparent sale, “A” will
retain the beneficial ownership thereof. a. What does the term “insider” mean as used in the
Revised Securities Act?
a) Is the arrangement lawful? b. When is a fact considered to be “of special
b) If the sale materializes, what is it called? (2001 Bar) significance” under the same Act?
c. What are the liabilities of a person who violates the

A: pertinent provisions of the Revised Securities Act

85
Mercantile Law

regarding the unfair use of inside information? handling the printing work of Grand Gas
(1995 Bar) Corporation saw the exploration reports which
were mistakenly sent to their establishment
A: together with other materials to be printed. They
a. “Insider” means (1) the issuer, (2) a director or officer too bought shares in the company at low prices and
of or a person controlling, controlled by, or under later sold them at huge profits. Will they be liable
common control with, the issuer, (3) a person whose for violation of the SRC? Why? (2008 Bar)
relationship or former relationship to the issuer gives A:
or gave him access to a fact of special significance about
the issuer or the security that is not generally available, a. The directors and officers of the corporation violated
or (4) a person who learns such a fact from any of the Sec. 27 of the SRC on the prohibition on insider’s
foregoing insiders with knowledge that the person trading. Sec. 27.1 of the SRC provides that it shall be
from whom he learns the facts is such an insider. unlawful for an insider to sell or buy a security of the
b. It is one which, in addition to being material, would be issuer, while in possession of material information with
likely to affect the market price of a security to a respect to the issuer or the security that is not generally
significant extent on being made generally available, or available to the public. In this case, the directors and
one which a reasonable person would consider officers falls squarely into the definition of an insider
especially important under the circumstances in under Sec. 3.8 of the SRC. Thus, the directors and
determining his course of action in the light of such officers are liable for violating the prohibition on
factors as the degree of its specificity, the extent of its Insider trading.
difference from information generally available b. The said employees will be also liable for engaging in
previously, and its nature and reliability. insider trading. Sec. 3.8 of the SRC, an insider is also a
c. The person may be liable to (1) a fine of not less than person whose relationship or former relationship to
P5,000 nor more than P500,000, or (2) imprisonment the issuer gives or gave him access to material
of not less than 7 years nor more than 21 years, (3) or information about the issuer or security that is not
both such fine and imprisonment in the discretion of generally available to the public. The said employees
the court. because of their relationship with the issuer, Grand Gas
Corporation as their printer, where able to obtain
If the offender is a corporation, partnership, association material information. They too became liable for
or other juridical entity, the penalty shall be imposed insider trading when they bought the shares in the
upon the officers of the corporation, etc. responsible for company and at the same time possessing undisclosed
the violation. And if such an officer is an alien, he shall, material information.
in addition to the penalties prescribed, be deported
without further proceedings after service of sentence. Q: You are a member of the legal staff of a law firm doing
corporate and securities work for Coco Products Inc., a
Q: In insider trading, what is a fact of special company with unique products derived from coconuts
significance? (1991 Bar) and whose shares are traded in the Philippine Stock
Exchange. A partner in the law firm, Atty. Buenexito, to
A: It is in addition to being material, such fact as would whom you report, is the Corporate Secretary of Coco
likely, on being made generally available, to affect the Products. You have long been investing in Coco
market price of a security to a significant extent, or which a Products stocks even before you became a lawyer.
reasonable person would consider as especially important
under the circumstances in determining his course of action While working with Atty. Buenexito on another file, he
in the light of such factors as the degree of its specificity, the accidentally gave you the Coco Products file containing
extent of its difference from information generally available the company's planned corporate financial
previously, and its nature and reliability [ Sec. 30 (c), Revised rehabilitation. While you knew you had the wrong file,
Securities Act]. your curiosity prevailed and you browsed through the
file before returning it. Thus, you learned that a petition
Q: In Securities Law, what is a shortswing transaction? for financial rehabilitation is imminent, as the company
(1994 Bar) could no longer meet its obligations as they fell due.

A: A shortswing is a transaction where a person buys Soon after, your mother is rushed to the hospital for an
securities and sells or disposes of the same within a period emergency operation, and you have to raise money for
of six (6) months her hospital bills. An immediate option for you is to sell
your Coco Products shares. The sale would be very
Q: Grand Gas Corporation, a publicly listed company, timely because the price of the company's stocks are
discovered after extensive drilling a rich deposit of still high.
natural gas along the coast of Antique. For five (5)
months, the company did not disclose the discovery so Would you sell the shares to raise the needed funds for
that it could quietly and cheaply acquire neighboring your mother's hospitalization? Take into account legal
land and secure mining rights to the land. Between the and ethical considerations. (2013 Bar)
discovery and its disclosure of the information to the
Securities and Exchange Commission, all the directors A: The sale of th e shares does not constitute insider trading.
and key officers of the company bought shares in the Although Atty. Buenexito, as corporate secretary of Coco
company at very low prices. After disclosure, the price Products, Inc., was an insider, it did not obtain the
of the shares went up. The directors and officers sold information regarding the planned corporate rehabilitation
their shares at huge profits. by communication from him. He just accidentally gave the
wrong file (Section 3.8 of SRC ). It would be unethical to sell
a. What provision of the Securities Regulation Code the shares. Rule 1.01 of the Code of Professional
(SRC) did they violate, if any? Explain. Responsibility provides, “A lawyer shall not engage in
b. Assuming that the employees of the establishment unlawful, dishonest, immoral or deceitful conduct.”

86
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QUAMTO (1987-2016)

A lawyer should not only refrain from performing unlawful purchaser no longer owns such securities. Furthermore, the
acts. He should also desist from engaging in unfair deceitful SEC may issue a cease and desist order.
conduct to conceal form the buyer of the shares of the
planned corporate rehabilitation. Q: ABC Corp. is engaged in the pawnshop business
involving cellphones, laptops and other gadgets of
Q: What is insider trading? (2015 Bar) value. In order to expand its business and attract
investors, it offered to any person who invests at least
A: Insider trading is the buying or selling by securities by an P100, 000.00 a “promissory note” where it obliged itself
insider while in the possession of a material non-public to pay the holder to pay a 50% return on investment
information. within one month. Due to the attractive offer, many
individuals invested in the company but not one of
Q: Give a case where a person who is not an issuing them was able to realize any profit after one month. Has
corporation, director or officer thereof, or a person ABC Corp. violated any law with its scheme? Explain.
controlling, controlled by or under common control (2016 Bar)
with the issuing corporation, is also considered an
“insider”. (1994 Bar) A: Yes. ABC Corporation violated the provisions of the
Securities Regulation Code that prohibits sale of securities
A: It may be a case where a person, whose relationship or to the public, like promissory notes, without a registration
former relationship to the issuer gives or gave him access to statement filed with and approved by the Securities and
a fact of special significance about the issuer or the security Exchange Commission.
that is not generally available, or a person, who learns such
a fact from any of the insiders, with knowledge that the TENDER OFFER RULE
person from whom he learns the fact, is such an insider.
Q: What is tender offer? (2016, 2002 Bar)
PROTECTION OF INVESTORS
A: Tender offer means a publicly announced intention by a
Q: Andante Realty, a marketing company that promotes person acting alone or in concert with other persons to
and facilitates sales of real property through leverage acquire equity securities of a public company. It is also an
marketing, solicits investors who are required to be a offer by the acquiring person to stockholders of a public
Business Center Owner (BCO) by paying an enrollment company for them to tender their shares therein on the
fee of $250. The BCO is then entitled to recruit two terms specified in the offer. Tender offer is in place to
other investors who pay $250 each. The BCO receives protect their minority shareholders against any scheme
$90 from the $250 paid by each of his recruits and is that dilutes the share value of any investments. It gives the
credited a certain amount for payments made by minority shareholders the chance to exit the company
investors through the initial efforts of his Business under reasonable terms, giving them opportunity to sell
Center. Once the accumulated amount reaches $5, 000, their shares at the same price as those of the majority
the same is used as down payment for the real property shareholders (CEMCO HOLDINGS, INC. v. National Life
chosen by BCO. Insurance Company, Inc. G.R. No. 171815, August 7, 2007).

Does the multi-level marketing scheme constitute an Q: In what instances is a tender offer required to be
“investment contract” under the SRC? Define an made? (2002 Bar)
“investment contract”. (2010 Bar)
A: It is required when:
A: Yes. The multi-level marketing scheme constitutes an
“investment contract” under the SRC. An “investment 1. Any person or group of persons acting in concert, who
contract” is a contract, transaction or scheme: intends to acquire thirty-five percent (35%) or more of
equity shares in a public company. They m ust however,
a. Involving an investment of money, disclose the intention to acquire the shares
b. In a common enterprise, contemporaneously with the tender offer.
c. With expectation of profits, 2. Any person or group of persons acting in concert, who
d. Primarily from the efforts of others. intends to acquire thirty-five percent (35%) or more of

Q: What procedure must be followed under the SRC to equity shares in a public company in one or more
transactions within a period of twelve (12) months,
authorize the sale or offer for sale or distribution of an shall be required to make a tender offer to all holders of
investment contract? (2010 Bar) such class for the number of shares so acquired within
the said period.
A: Before the investment contract is sold or offered for sale 3. If any acquisition of even less than thirty-five percent
or distribution to the public in the Philippines, it should be (35%) would result in ownership of over fifty-one
registered with the SEC in accordance with Section 8 of the percent (51%) of the total outstanding equity securities
SRC. of a public company, the acquirer shall be required to
make tender offer for all the outstanding equity
Q: What are the legal consequences of failure to follow securities to all remaining stockholders of the said
this procedure? (2010 Bar) company at a price supported by a fairness opinion
provided by an independent financial advisor or
A: The failure to follow this procedure has criminal equivalent third party. The acquirer in such a tender
consequences (i.e., upon conviction, a fine P50,000 to P5 M offer shall be required to accept any and all securities
and/or imprisonment of 7-12 years). It carries also civil thereof.
liabilities in that the purchaser can recover from the seller
(i) the consideration paid with interest thereon, less the
Q: Union Mines, Inc. has a total asset of P60M with 210
amount of any income received on the purchased securities,
stockholders holding at least 100 shares each. The
upon the tender of such securities, or (ii) damages if the

87
Mercantile Law

company has two principal stockholders, ABC which 2013).


owns 60% of the shares of stock, and XYZ which owns
17%. ABC in turn is owned to the extent of 21.31% by Q: Philippine Chromite, Inc., after registration of its
Acme, Inc.; 29.69% by Golden Boy, Inc; 9% by XYZ; and securities, sold P10M worth of common stocks to the
the rest by individual stockholders. None of the parties public at P.01 per share. In its registration statement, it
is a publicly-listed company. alleged that it holds a perfected mining claim on 100
hectares of chromite land in Botolan, Zamabales. X, a
XYZ now proposes to buy Acm e’s and Golden Boy’s Botolan resident, bought P50, 000 worth of stocks of
shares in ABC, which would give it direct control of ABC the corporation from the stock exchange. After its
and indirect control of Union Mines. Is the proposed public offering, the value of the stock dropped to half its
acquisition by XYZ subject to the mandatory tender price. X made some investigations and discovered that
offer and when is it mandatory? (2010 Bar) the mining claims of the corporation had not been
perfected at the time of the issuance of its securities.
A: Yes, the proposed acquisition is subject to mandatory The stock, however, rallied and after 2 years,
tender offer rule. A tender offer is a publicly announced commanded a price of 1 ½ centavo per share. On its
intention by a person (acting alone or in concert with other third year, the company collapsed and its stocks
persons) to acquire shares of a public company. A tender became totally valueless. What is the remedy of X?
offer is meant to protect minor stockholders against any (1989 Bar)
scheme that dilutes the share value of their investments. It
gives them the chance to exit the company under the same A: The remedy of X for damages is lost by prescription. Any
terms offered to the majority stockholders. suit therefore must be filed within 2 years after the
discovery of the facts constituting the cause of action (but
Under the SRC and its implementing rules, a mandatory not beyond 5 years after such cause of action accrued). 2
tender offer is required: years having already elapsed since the time that X had
discovered the misrepresentation in the registration
a. When at least 35% of the outstanding shares of a public statement of the corporation , the latter’s civil liability has
company is to be acquired in one transaction or a series prescribed. X, however, is not prevented from invoking
of transaction during a 12-month period, or SEC’s regulatory powers against the corporation.
b. Even if any acquisition is less than 35% threshold but
the result thereof is the ownership of more than 51% of
the total outstanding shares of a public company. The BANKING LAWS
mandatory offer rule also applies to share acquisition
meeting the threshold, which is done at the level of the
holding or parent corporation controlling a public THE NEW CENTRAL BANK ACT (R.A. NO. 7653)
company
Q: Why is the Bangko Sentral ng Pilipinas considered a
In this case, Union Mines is clearly a public company, since lender of last resort? (2015 Bar)
it has a total asset of P60M with 210 stockholders holding
at least 100 shares each. A public company is defined as a A: It is considered the lender of last resort because it lends
corporation listed on the stock exchange, or a corporation to banks and similar institutions under financial distress
with assets exceeding P50M and with 200 or more when they have no other means to raise funds.
stockholders at least 200 of them holding not less than 100
share of such corporation. Q:

XYZ’s acquisition of shares of Acme, Inc. and Golden Boy, a. What are the responsibilities and primary
Inc., taken separately, does not reach 35% threshold. If objectives of the Bangko Sentral ng Pilipinas?
taken collectively, the two acquisitions total only 50%. b. What is the principal purpose of laws and
However, when the acquisitions are added to XYZ’s existing regulations governing securities in the Philippines?
shares in Union Mines, they meet the more- than-51% (1998 Bar)
threshold for mandatory tender offer.
A:
CIVIL LIABILITY
a. The Bangko Sentral ng Pilipinas shall provide policy
Q: Mr. and Mrs. Reyes invested their hard-earned directions in the areas of money, banking and credit. It
savings in securities issued by LEAD Bank. After shall have supervision over the operations of banks and
discovering that the securities sold to them were not exercise such regulatory powers as provided in the
registered with the SEC in violation of the Securities Central Bank Act and other pertinent laws over the
Regulation Code, the spouses Reyes filed a complaint operations of finance companies and non-bank
for nullity of contract and for recovery of a sum of financial institutions performing quasi-banking
money with the RTC. LEAD Bank moved to dismiss the functions, such as quasi-banks and institutions
case on the ground that it is the SEC that has primary performing similar functions. The primary objective of
jurisdiction over actions involving violations of the the BSP is to maintain price stability conducive to a
Securities Regulation Code. If you were the judge, how balanced and sustainable growth of the economy. It
would you rule on the motion to dismiss? (2015 Bar) shall also promote and maintain monetary stability and
convertibility of the Peso.
A: The motion should be denied. Civil suits falling under the b. The principal purpose of laws and regulations
SRC (like liability for selling unregistered securities) are governing securities in the Philippines is to protect the
under the exclusive srcinal jurisdiction of the RTC and public against nefarious practices of unscrupulous
hence, need not be first filed before the SEC unlike criminal brokers and salesmen in selling securities.
cases, wherein the latter body exercises primary

jurisdiction (Pua v. Citibank, GR no. 180064, September 16, How the BSP handles banks in distress
88
UST BAR OPERATIONS
QUAMTO (1987-2016)

Q: Under the Financial Rehabilitation and Insolvency


Q: Distinguish between the role of a conservator and Act (FRIA), the filing of a petition for voluntary
that of a receiver of a bank. (2006 Bar) rehabilitation must be approved by:

A: The role of a conservator is to restore the viability of the a. A majority vote of the Board of Directors and
bank. The role of a receiver is to determine whether or not authorized by the vote of the stockholders
a bank can be rehabilitated. representing at least a majority of the
outstanding capital stock.
Q: Give the basic requirements to be complied with by b. A majority vote of the Board of Directors and
the Central Bank before the Monetary Board can authorized by the vote of the stockholders
declare a bank insolvent, order it closed and forbid it representing at least 2/3 of the outstanding
from doing further business in the Philippines. (1997 capital stock.
Bar) c. 2/3 vote of the Board of Directors and
authorized by the vote of the stockholders
A: Before the Monetary Board can declare a bank insolvent, representing at least a majority of the
order it closed and forbid it from doing further business in outstanding capital stock.
the Philippines, the following basic requirements must be d. 2/3 vote of the Board of Directors and
complied with by the Central Bank, to wit: authorized by the vote of the stockholders
representing at least 2/3 of the outstanding
a) There must be an examination by the head of the capital stock. (2010 Bar)
Department of Supervision or his examiners or agents
into the condition of the bank. A:
b) The examination discloses that the condition of the c. A majority vote of the Board of Directors and
bank is one of insolvency, or that its continuance in authorized by the vote of the stockholders
business would involve probable loss to creditors or representing at least 2/3 of the outstanding capital
depositors. stock.
c) The head of said Department shall inform in writing the
Monetary Board of such facts. Q:
d) Upon finding said information or statement to be true, a. Can a distressed corporation file a petition for
the Monetary Board shall appoint a receiver to take corporate rehabilitation after the dismissal of its
charge of the assets and liabilities of the bank. earlier petition for insolvency? Why?
e) Within 60 days, the Monetary Board shall determine b. Can the corporation file a petition for rehabilitation
and confirm if the bank is insolvent, and public interest first, and after it is dismissed file a petition for
requires, to order the liquidation of the bank. insolvency? Why?
c. Explain the key phrase “equality is equity” in
Q: Manosa, a newspaper columnist, while making a corporate rehabilitation proceedings. (2009 Bar)
deposit in a bank, overheard a pretty bank teller
informing a co-employee that Gigi, a well-known public A:
official, has just a few hundred pesos in her bank
account and that her next check will in all probability a) Yes, the dismissal of a petition for insolvency does not
bounce. Manosa wrote this information in his preclude the distressed corporation from filing a
newspaper column. Thus, Gigi filed a complaint with petition for corporate rehabilitation. The dismissal of
the City Fiscal of Manila for unlawfully disclosing the petition for insolvency only means that the
information about her bank account. corporation may still be restored to solvency.
b) Yes, the dismissal of a petition for rehabilitation means
a. Will the said suit prosper? Explain your answer. that the corporation can no longer be restored to
b. Supposing that Gigi is charged with unlawfully solvency. Hence, it can file a petition for insolvency.
acquiring wealth under RA 1379 and that the fiscal c) All assets of a corporation under rehabilitation
issued a subpoena duces tecum for the records of receivership are held in trust for the equal benefit of all
the bank account of Gigi. May Gigi validly oppose creditors, precluding one from obtaining an advantage
the said issuance on the ground that the same or preference over another by the expediency of
attachment, execution or otherwise. Once the
violatesyour
Explain the answer.
law on (1990
secrecy of bank
Bar) deposits? corporation is taken over by a receiver, all the creditors
A: stand on equal footing and no one may be paid ahead of
the others. This is precisely the reason for suspending
a. The suit will not prosper. It is clear as provided in all pending claims against the corporation under
Section 3 of R.A. 1405 that it shall be unlawful for any receivership. This is called the “pari passu principle”.
official or employee of a banking institution to disclose
to any person other than those mentioned in section Q: The Blue Star Corporation filed with the Regional
two of the said law any information concerning said Trial Court a petition for rehabilitation on the ground
deposits. Manosa as a columnist is not one of those that it foresaw the impossibility of paying its
persons contemplated under the law. Furthermore, he obligations as they fall due. Finding the petition
merely overheard what appeared to be a vague remark sufficient in form and substance, the court issued an
of the bank teller therefore is not in a sense an inquiry Order appointing a rehabilitation receiver and staying
or a disclosure. the enforcement of all claims against the corporation.
b. No, Gigi cannot oppose the said issuance because the What is the rationale for the Stay Order? (2006 Bar)
law provides as an exception from the coverage of RA
1405 that upon order of a competent court in cases of A: The reason behind the indiscriminate suspension or stay
anti-graft and corruption cases, the examination of the order in relation to the creditors’ claims is to expedite the
deposits may be allowed. rehabilitation of the distressed corporation by enabling the

management committee or the rehabilitation receiver to

89
Mercantile Law

effectively exercise its/his powers free from any judicial or The receiver seeks your advice on whether the Bulk
extrajudicial interference that might unduly hinder or Sales Law will apply to either, or both, options. What
prevent the rescue of the debtor company. It also recognizes will your advice be? (2009 Bar)
the assets of a corporation under rehabilitation held under
trust for the equal benefit of all creditors under the doctrine A: I will advice the receiver that the Bulk Sales Law does not
equality is equity, whereby all the creditors ought to stand apply to both options. Section 8 of the Bulk Sales Law
on equal footing, and not one of them should be paid ahead expressly provides that it will not apply to executors,
of others. administrators, receivers, and assignees in insolvency, or
public officers, acting under judicial process. In this case,
Closure the receiver is acting under judicial process.

Q: Maharlikang Pilipino Banking Corporation (MPBC) Q: Due to growing financial difficulties, Z Bank was
operates several branches of Maharlikang Pilipino unable to finish construction of its 21-storey building
Rural Bank in Eastern Visayas. Almost all the branch on a prime lot located in Makati City. Inevitably, the
managers are close relatives of the members of the Bangko Sentral ordered the closure of Z Bank and
Board of Directors of the corporation. Many consequently placed it under receivership. In a bid to
undeserving relatives of the branch managers were save the bank’s property investment, the President of Z
granted loans. In time, the branches could not settle Bank entered into a financing agreement with a group
their obligations to depositors and creditors. of investors for the completion of the construction of
the 21-storey building in exchange for a 10-year lease
Receiving reports of these irregularities, the and the exclusive option to purchase the building.
Supervising and Examining Department (SED) of the
Monetary Board prepared a detailed report (SED a. Is the act of the President valid? Why or why not?
Report) specifying the facts and the chronology of b. Will a suit to enforce the exclusive right of the
events relative to the problems that beset MPBC rural investors to purchase the property prosper?
bank branches. The report concluded that the bank Reason briefly. (2007 Bar)
branches were unable to pay their liabilities as they fell
due, and could not possibly continue in business
without incurring substantial losses to its depositors A:
and creditors.
a. No, the bank president’s act is not valid. He had no
May the Monetary Board order the closure of the MPBC authority to enter into the financing agreement. Z Bank
rural banks relying only on the SED Repost, without was ordered closed and placed under receivership.
need of an examination? Explain. (2009 Bar) Control over the properties of Z Bank passed to the
receiver. The appointment of a receiver operates to
A: Yes. Upon receipt of the report of the SED, the Monetary suspend the authority of the bank and its officers over
Board is authorized to take any of the actions enumerated the bank’s assets and properties, such authority being
under Sec. 30, RA No. 7653, otherwise known as the New reposed in the receiver.
Central Bank Act, leading to the receivership and b. No, the exclusive option granted to the investors,
liquidation of a bank or quasi-bank. There is no having been entered into by one without authority to
requirement that an examination be first conducted before do so, is unenforceable. The bank, therefore, cannot be
a banking institution may be placed under receivership. compelled to sell the property. Under Section 30 of the
R.A. No. 7653, New Central Bank Act, the properties of
Receivership Z Bank should be administered for the benefit of its
creditors. The property in question can be disposed of
Q: Distinguish a conservator from a receiver of a bank. only for the purpose of paying the debts of Z Bank.
(2006, 2015 Bar)
Legal Tender Power
A: A conservator is appointed if a bank or quasi-bank is in a
state of continuing inability or unwillingness to maintain a Q: After many years of shopping in the Metro Manila
condition of liquidity deemed adequate to protect the area, housewife HW has developed the sound habit of
interest of creditors and depositors. The conservator shall
take charge of the assets and liabilities of the bank and making cash
shopping trippurchases only,she
to Mega Mall, none
got on
thecredit.
shock In
of one
her
exercise management and exercise other powers to restore shopping life for the first time, a store’s smart salesgirl
the bank’s viability. The conservatorship shall not exceed refused to accept her coins in payment for a purchase
one year. A receiver is appointed generally if the realizable worth not more than P100. HW was paying P70 in 25-
value of the bank’s assets as determined by BSP is less than centavo coins and P25 in 10-centavo coins. Strange as it
its liabilities. The receiver shall take charge of the assets and may seem, the salesgirl told HW that her coins were not
liabilities of the institution and administer the same for the “legal tender”. Do you agree with the salesgirl in respect
benefit of its creditors. The receiver shall determine within of her understanding of “legal tender”? Explain. (2000
90 days whether the bank can be rehabilitated, otherwise, Bar)
he shall recommend the closure of the institution.
A: No. The salesgirl’s understanding that coins are not legal
Q: XXX Corporation (XXX) and its sister company, YYY tender is not correct. Coins are legal tender in amounts not
Corporation (YYY), are both under judicial exceeding P50 for denominations from 25- centavos and
receivership. The receiver has the option to sell all or above, and in amounts not exceeding P20 for
substantially all of the properties of YYY to XXX, or denominations 10-centavos and less.
simply merge the two corporations. Under either
option, the requirements under the Corporation Code LAW ON SECRECY OF BANK DEPOSITS (R.A. NO. 1405,
have to be complied with. AS AMENDED)

90
UST BAR OPERATIONS
QUAMTO (1987-2016)

Purpose b. No. Sec. 2 of the Law on Secrecy of Bank Deposits


provides that all deposits of whatever nature with
Q: The law (RA No. 6832) creating a Commission to banks or banking institutions in the Philippines
Conduct a Thorough Fact-Finding Investigation of the including investments in bonds issued by the
Failed Coup D’Etat of December 1989, Recommended Government of the Philippines, its political
Measures to Prevent The Occurrence of Similar subdivisions and instrumentalities, are hereby
Attempts at a Violent Seizure of Power and for Other considered as an absolutely confidential in nature and
Purposes, provides that the Commission may ask the may not be examined, inquired or looked into by any
Monetary Board to disclose information on and/or person, government official, bureau or office. It must be
grant authority to examine any bank deposits, trust or noted that Bank Secrecy Deposits Law only applies to
investment funds, or banking transactions in the name deposits with banks in the Philippines and not when
of and/or to grant authority to examine any bank deposited abroad as in the instant case.
deposits, trust or investment funds, or banking
transactions in the name of and/or utilized by a person, Q: X, a government official, has a number of bank
natural or juridical, under investigation by the accounts in T Bank containing millions of pesos. He also
Commission, in any bank or banking institution in the opened several trust accounts in the same bank which
Philippines, when the Commission has reasonable specifically covered the placement and/or investment
ground to believe that said deposits, trust or of funds. X was later charged with graft and corruption
investment funds, or banking transactions have been before the Sandiganbayan (SB) by the Ombudsman. The
used in support or in furtherance of the objectives of Special Prosecutor filed a motion praying for a court
the said coup d’etat. order authorizing it to look into the savings and trust
accounts of X in T Bank. X opposed the motion arguing
Does not the above provision violate the Law on Secrecy that the trust accounts are not “deposits” under the Law
of Bank Deposits (RA No. 1405)? (1991 Bar) on Secrecy of Bank Deposits (Rep. Act. No. 1405). Is the
contention of X correct? Explain. (2016 Bar)
A: The law on Secrecy of Bank Deposits is itself merely a
statutory enactment, and it may, therefore, be modified, or A: The contention of X is not correct. Deposits in the context
amended (such as by providing further exceptions of the Secrecy of Philippine currency deposits include
therefrom), or even repealed, expressly or impliedly, by a deposits of whatever nature and kind. They include funds
subsequent law. The Secrecy of Bank Deposits Act did not deposited in the bank giving rise to creditor-debtor
amount to a contract between the depositors and relationship, as well as funds invested in the bank like trust
depositary banks within the meaning of the non- accounts (Ejercito v. Sandiganbayan, G.R. Nos. 157294-95,
impairment clause of the Constitution. Even if it did, the Nov. 30, 2006)
police power of the State is superior to the non-
impairment clause. RA No, 6832, creating a commission to Exceptions
conduct an investigation of the failed 1989 coup d’etat and
to recommend measures to prevent similar attempts to Q: A secured a judgment by default against B for a sum
seize power is a valid exercise of police power. of money. To satisfy judgment, A sought the
garnishment of the bank deposit of B with China Bank.
Q: Hi Yielding Corporation filed a complaint against five The Bank refused.
of its officers for violation of Section 31 of the
Corporation Code. The corporation claimed that the a. May a writ of garnishment be issued against the
said officers were guilty of advancing their personal bank deposit of B? Reasons.
interests to the prejudice of the corporation, and that b. What are the exceptions to the prohibition against
they were grossly negligent in handling its affairs. Aside disclosure of bank deposits? (1988 Bar)
from documents and contracts, the corporation also
submitted in evidence records of the officers’ U.S. A:
Dollar deposits in several banks overseas – Boston
Bank, Bank of Switzerland, and Bank of New York. a. Yes. A writ of garnishment may be issued against the
bank deposit of B with China Bank. The Law on Secrecy
For their part, the officers filed a criminal complaint of Bank Deposits is merely against inquiry or disclosure

against the
violation directorsAct
of Republic ofNo.
Hi 6426,
Yielding Corporation
otherwise knownforas of information
custody relative to the funds or property in the
of the bank.
the Foreign Currency Deposit Act of the Philippines. b. The exceptions to the prohibitions against disclosure of
The officers alleged that their bank deposits were bank deposits include:
illegally disclosed for want of court order, and that such 1. Upon the written permission of the depositor;
deposits were not even the subject of the case against 2. in cases of impeachment;
them. 3. upon order of a competent court in cases of bribery
or dereliction of duty or where money deposited or
a. Will the complaint filed against the directors of Hi invested is the subject matter of litigation;
Yielding Corporation prosper? Explain. 4. in anti-graft and corruption cases; and
b. Was there a violation of Bank Secrecy Deposits Law 5. when authorized by the Monetary Board if it has
(Republic Act No.1405)? Explain. (2014 Bar) reasonable ground to believe that such account is
being used or was used to com mit a bank fraud.
A:
Q: Socorro received $10, 000 from a foreign bank
a. No. Foreign Currency Deposits law applies to foreign although she was entitled only to $1, 000. In an
currency deposit accounts constituted in the apparent plan to conceal the erroneously sent amount,
Philippines and not when constituted abroad. In this she opened a dollar account with her local bank,
instance, the foreign currency deposit was made deposited the $10, 000 and issued 4 checks in the
abroad. amount of $2, 000 and 1 check for $1, 000 each payable

91
Mercantile Law

to different individuals who deposited the same i n their At the initial hearing of the case the court ordered
respective dollar accounts with different local banks. Prosperity Bank to produce the records of Michaels’s
peso current account, and Eastern Bank t o produce the
The sender bank then brought a civil suit before the records of his foreign currency savings account.
RTC for the recovery of the erroneously sent amount. In
the course of the trial, the sender presented Can the court compel Prosperity Bank and Eastern
testimonies of the bank officials to show that the funds Bank to disclose the bank deposits of Michael? Discuss
were, in fact, deposited in a bank by Socorro and paid fully. (1995 Bar)
out to several persons, who participated in the
concealment and dissipation of the amount that A: Yes, as far as the peso account is concerned. Section 2 of
Socorro had erroneously received. RA No. 1405 allows the disclosure of bank deposits in case
where the money deposited is the subject matter of the
Socorro moved to strike out said testimonies from the litigation. Since the case filed against Michael is aimed at
record invoking the law on secrecy of bank deposits. recovering the amount he withdrew from the funds of the
If you were the Judge, would you issue an order to strike partnership, which amount he allegedly deposited in his
them out? Why? (1992 Bar) account, a disclosure of his bank deposits would be proper.

A: No. I will not strike out the testimonies from the record. No, with respect to the foreign currency account. Under the
The testimonies of bank officials indicating where the Foreign Currency Law, the exemption to the prohibition
questioned dollar accounts were opened in depositing against disclosure of information concerning bank deposits
misappropriated sums must be considered as likewise is the written consent of the depositor.
involved in litigation —one which is among the excepted
cases under the Secrecy of Bank Deposits Act. Q: An employee of a large manufacturing firm earns a
salary which is just a bit more than what he need for a
Q: Miguel, a special customs agent is charged before the comfortable living. He is thus able to still maintain a
Ombudsman with having acquired property out of P10, 000 savings account, a P20, 000 checking account,
proportion to his salary, in violation of the Anti-Graft a P30, 000 money market placement and a P40, 000
and Corrupt Practices Act. The Ombudsman issued a trust fund in a medium-size commercial bank.
subpoena duces tecum to the Banco de Cinco
commanding its representative to furnish the State which of the above accounts are covered by the
Ombudsman records of transactions by or in the name Law on Secrecy of Bank Deposits. (1997 Bar)
of Miguel, his wife and children. A second subpoena was
issued expanding the first by including the production A: The P10, 000 savings account and the P20, 000 checking
of records of friends of Miguel in said bank and in all its account are covered by the Law on Secrecy of Bank
branches and extension offices, specifically naming Deposits.
them.
Q: An insurance company is deluded into releasing a
Miguel moved to quash the subpoenas arguing that they check to A for P35M to pay for T-bills which A claims to
violate the Law on Secrecy of Bank Deposits. In be en route on board an armoured truck from a
addition, he contends that the subpoenas are in the government bank. The check is delivered to A who
nature of “fishing expedition” or “general warrants” deposits it to his account with XYZ Bank before the
and are constitutionally impermissible with respect to insurance company realized it is a scam. Upon such
private individuals who are not under investigation. realization, the insurance company files an action
against A for recovery of the amount defrauded and
Is Miguel’s contention tenable? (1994 Bar) obtains a writ of preliminary attachment. In addition to
the writ, the bank i s also served a subpoena to examine
A: No. Miguel’s contention is not tenable. The inquiry into the account records of A. The bank declines to provide
illegally acquired property extends to cases where such any information in response to the writ and moves to
property is concealed by being held by or recorded in the quash the subpoenas invoking secrecy of bank deposits
name of other persons. To sustain Miguel’s theory and under RA 1405, as amended. Can the Bank justifiably
restrict the inquiry only to property held by or in the name invoke RA 1405 and (a) not respond to the writ and (b)
of the government who illegally acquire property an easy quash for examination? (1998 Bar)
means of evading prosecution. All they have to do would be
to simply place the property in the name of persons other A: Yes. Whether the transaction is considered a sale or
than their spouses and children. money placement does not make the money subject matter
of litigation within the meaning of Sec. 2 of RA 1405 which
Q: Michael withdrew authority funds of the partnership prohibits the disclosure or inquiry into bank deposits
in the amounts of P500, 000 and used US$50, 000 for except “in cases where the money deposited or invested is
services he claims he rendered for the benefit of the the subject matter of litigation” nor will it matter wh ether
partnership. He deposited the P500, 000 in his personal the money was “swindled”.
peso current account with Prosperity Bank and the
US$50, 000 in his personal foreign currency savings Q: GP is a suspected jueteng lord who is rumored to be
account with Eastern Bank. enjoying police and military protection. The envy of
many drug lords who had not escaped the dragnet of
The partnership instituted an action in court against the law, GP was summoned to a hearing of the
Michael, Prosperity Bank and Eastern Bank to compel Committee on Racketeering and Other Syndicated
Michael to return the subject funds to the partnership Crimes of the House of Representatives, which was
and pending litigation to order both banks to disallow conducting a congressional investigation ― in aid of
any withdrawal from his accounts. legislation on the involvement of police and military
personnel, and possibly even of local government
officials, in the illegal activities of suspected gambling

92
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and drug lords. Subpoenaed to attend the investigation 3. In cases involving BIR inquiry.
were officers of certain identified banks with a 4. In cases of anti-graft and corrupt practices.
directive to them to bring the records and documents of 5. In cases where the money involved is the subject of
bank deposits of individuals mentioned in the litigation.
subpoenas, among them GP. GP and the banks opposed
the production of the bank records of deposits on the Explain your answer or choice briefly. (2004)
ground that no such inquiry is allowed under the Law
on Secrecy of Bank Deposits (RA 1405 as amended). Is A: Under Section 6(F) of the National Internal Revenue
the opposition of GP and the banks valid? Explain. Code, the Commissioner of Internal Revenue can inquire
(2000 Bar) into the deposits of a decedent for the purpose of
determining the gross estate of such decedent. Apart from
A: Yes. The opposition is valid. GP is not a public official. The this case, a BIR inquiry into bank deposits cannot be made.
investigation does not involve one of the exceptions to the Thus, exception 3 may not always be applicable. Turning to
prohibition against disclosure of any information
concerning bank deposits under the Law on Secrecy of Bank exception 4, an inquiry
in prosecutions into bank deposits
for unexplained is possible
wealth under only
the Anti-
Deposits. The Committee conducting the investigation is Graft and Corrupt Practices Act, according to the Supreme
not a competent court or the Ombudsman authorized under Court in the cases of Philippine National Bank v. Gancayco,
the law involving such disclosure. 15 SCRA 91 and Banco Filipino Savings and Mortgage Bank
v. Purisima, 161 SCRA 576. However, all other cases of anti-
Q: The Law on Secrecy of Bank Deposits, otherwise graft and corrupt practices will not warrant an inquiry into
known as RA 1405, is intended to encourage people to bank deposits. Thus, exception 4 may not always be
deposit their money in banking institutions and also to applicable. Like any other exception, it must be interpreted
discourage private hoarding so that the same may be strictly. Exceptions 1, 2 and 5, on the other hand, are
properly utilized by banks to assist in the economic provided expressly in the Law on Secrecy of Bank
development of the country. Is a notice of garnishment Depositors. They are available to depositors at all times.
served on a bank at the instance of a creditor of a
depositor covered by the said law? State the reason(s) Q: Under Republic Act No.1405 (The Bank Secrecy Law),
for your answer (2001 Bar) bank deposits are considered absolutely confidential
and may not be examined, inquired or looked into by
A: No. The notice of garnishment served on a bank at the any person, government official, bureau or office. What
instance of a creditor is not covered by the Law on Secrecy are the exceptions? (2006 Bar)
of Bank Deposits. Garnishment is just a part of the process
of execution. The moment a notice of garnishment is served
on a bank and there exists a deposit by the judgment debtor, A: The exceptions are as follows:
the bank is directly accountable to the sheriff, for the benefit
1. Upon written consent of the depositor. ( Sec. 2)
of the judgment creditor, for the whole amount of the
2. In cases of impeachment. (Sec. 2)
deposit. In such event, the amount of the deposit becomes,
3. Upon order of competent court in cases of bribery or
in effect, a subject of the litigation.
dereliction of duty of public officials. ( Sec. 2)
Q: CDC maintained a savings account with CBank. On 4. In cases where the money deposited or invested is the
orders of the MM RTC, the Sheriff garnished P50, 000 of subject matter of the litigation. (Sec. 2)
his account, to satisfy the judgment in favor of his 5. Upon order of the Commissioner of Internal Revenue in
creditor, MO. CDC complained that the garnishment respect of the bank deposits of a decedent for the
violated the Law on the Secrecy of Bank Deposits purpose of determining such decedent’s gross estate.
because the existence of his saving account was (Sec. 6[F][1], NIRC)
disclosed to the public. 6. Upon the order of the Commissioner of Internal
Revenue in respect of bank deposits of a taxpayer who
Is CDC’s complaint meritorious or not? Reason briefly. has filed an application for compromise of his tax
(2004 Bar) liability by reason of financial incapacity to pay is
nothing in RA 1405 that places bank deposits beyond
A: No. CDC’s complaint is not meritorious. It was held in the reach of judgment creditor. And the disclosure of
information on bank deposits pursuant to the writ of
China Banking
that peso Corporation
deposits may be v. Ortega, 49
garnished SCRA
and the 355 (1973)
depositary garnishment is only incidental to the execution process
bank can comply with the order of garnishment without (PCIB v. CA, 193 SCRA 452). The dollar deposits,
violating the Law on the Secrecy of Bank Deposits. however, are exempt from garnishment or court order
Execution is the goal of litigation as it is its fruit. under the Foreign Currency Act (RA 6426). Thus, the
Garnishment is part of the execution process. Upon service bank should not comply with this part of the
of the notice of garnishment on the bank where the garnishment.
defendant deposited funds, such funds become part of the 7. In case of dormant accounts/deposits for at least 10
subject matter of litigation. years under the Unclaimed Balances Act. ( Sec. 2, Act No.
3936).
Q: The Law on Secrecy of Bank Deposits provides that 8. When the examination is made by the BSP to insure
all deposits of whatever nature with banks or banking compliance with the Anti-Money Laundering Law in the
institutions are absolutely confidential in nature and course of a periodic or special examination
may not be examined, inquired or looked into by any 9. With court order: a. In cases of unexplained wealth
person, government official, bureau or office. However, under Sec. 8 of the Anti-Graft and Corrupt Practices Act
the law provides exceptions in certain instances. Which (PNB v. Gancayco, L-18343, Sept. 30, 1965); b. In cases
of the following may not be among the exceptions: filed by the Ombudsman and upon the latter’s authority
to examine and have access to bank accounts and
1. In cases of impeachment. records (Marquez v. Desierto, GR 138569, Sept. 11, 2003 )

2. In cases involving bribery 10. Without court order: If the AMLC determines that a

93
Mercantile Law

particular deposit or investment with any banking A: Yes. There being no freeze order over the subject houses
institution is related to the following: a. Hijacking, b. and lots, Luansing Realty, Inc., is obliged to deliver the titles
Kidnapping, c. Murder, d. Destructive, Arson, and e. 4. to Rudy who is the owner thereof.
Violation of the Dangerous Drugs Act.
Q:
Q: Rudy is jobless but is reputed to be a jueteng
operator. He has never been charged or convicted of A. Raymond invested his money in securities issued
any crime. He maintains several banks accounts and by the Philippine government, through his bank.
has purchased 5 houses and lots for his children from Subsequently, the Bureau of Internal
the Luansing Realty, Inc. since he does not have any Revenue asked his bank to disclose his
visible job, the company reported his purchases to the investments. His bank refused the request for
AMLC. Thereafter, AMLC charged him with violation of disclosure on the ground that the investments are
the Anti-Money Laundering Law. Upon request of the confidential under the Secrecy of Bank Deposits
AMLC, the bank disclosed to it Rudy’s bank deposits Law (Republic Act No. 1405, as amended). Is the
amounting to P100M. Subsequently, he was charged in bank’s refusal justified? Defend your answer.
court for violation of the Anti-Money Laundering Law. B. First Bank received an order of garnishment over a
client’s peso and dollar deposits in First Bank.
1. Can Rudy move to dismiss the case on the ground Should First Bank comply with that order? Explain.
that he has no criminal record? (2015 Bar)

A: No. As with any crime, the absence of a criminal record is A:


not a defense against a charge for violation of the Anti-
Money Laundering Law. Moreover, having a criminal record
A. It is justified. Under RA 1405, investment in bonds
is not an element of Money Laundering Offense defined issued by the Philippine government are also
under Section 4 of the Anti-Money Laundering Law. absolutely confidential and may not be examined,
inquired or looked into by any person, government
2. To raise funds for his defense, Rudy sold the houses official, bureau or office save for the exceptions
and lots to a friend. Can Luansing Realty, Inc. be provided by law. None of the exceptions apply in the
compelled to transfer to the buyer ownership of the present case.
houses and lots? B. First Bank should comply with the order of
garnishment over a client’s peso deposits because there
A: Yes. In the absence of a freeze order on the subject is nothing in RA 1405 that places bank deposits beyond
houses and lots pending criminal proceedings against Rudy,
the reach of judgment creditor. And the disclosure of
the ownership thereof may be validly transferred to information on bank deposits pursuant to the writ of
another, and Luansing Realty, Inc. can be compelled to garnishment is only incidental to the execution process
recognize the rights of the buyer as the new owner. Section (PCIB v. CA, 193 SCRA 452). The dollar deposits,
7(6) in relation to Section 10 of the Anti-Money Laundering
however, are exempt from garnishment or court order
Law required an Order from the Court of Appeals for the
under the Foreign Currency Act (RA 6426). Thus, the
freezing of any money or property believed to be the
bank should not comply with this part of the
proceeds of any unlawful activity. garnishment.

3. In disclosing Rudy’s bank accounts to the AMLC, did GENERAL BANKING LAW OF 2000 (R.A. NO. 8791)
the bank violate any law?
Q: Fatima Investment Corporation is engaged in the
A: Yes. The bank violated RA No. 1405 (Secrecy of Bank
purchase of accounts receivables or specifically,
Deposits Act), which considers all deposits of whatever
installment papers of purchasers of cars and trucks. As
nature with banks or banking institutions as absolutely
a source of its funding, it sells bonds from time to time
confidential and may not be examined, inquired or looked
to the public. The proceeds of the sale of its bonds are
into by any person, government officials, bureau or office
utilized by Fatima Investment Corporation in its
except upon depositor’s written permission; in cases of
financing operations.
impeachment; upon order of a competent court in cases of
bribery of, or dereliction of duty by public official; and in
cases where the money deposited or invested is the subject a. Is Fatima within
institution Investment Corporation
the purview a banking
of the General
matter of the litigation. The disclosure was made before
Banking Act?
Rudy was charged in court for violation of the Anti-Money
b. What is the effect if a corporation engages in illegal
Laundering Law. Hence, his deposits were technically not
banking? (1988 Bar)
yet the subject matter of litigation.
A:
Moreover, under RA No. 9160, the AMLC may inquire into
or examine any particular deposit or investment with any
a. Fatima Investment Corporation in a strict sense is not
banking institution upon order of any competent court for
banking institution, but a financial intermediary. Under
violation of the said Act. In the case at bar, the AMLC m erely
the General Banking Act, banking institutions, and
requested the disclosure; it did not secure the requisite
financial intermediaries are considered financial
court order. The bank, therefore, was under no obligation to
institutions subject to and governed by that law.
disclose Rudy’s deposits.
b. The General Banking Act, as well as the Central Bank
Act, provides for civil and criminal liabilities, not only
4. Supposing the titles of the houses and lots are in
on the corporation, but likewise on the officers and
possession of the Luansing Realty, Inc., is it under
directors thereof in proper cases, when a corporation
obligation to deliver the titles to Rudy? (2006 Bar)
engages in illegal banking

ALTERNATIVE ANSWER TO B:
94
UST BAR OPERATIONS
QUAMTO (1987-2016)

The government can ask in a petition for the dissolution of exchange, and other evidence of debt;
the corporation (Republic v. Security Credit and Acceptance d. Accept or create demand deposits;
Corp., 19 SCRA 58). e. Receive other types of deposits, as well as deposit
substitutes;
Q: There are 6 classes of banks identified in the General f. Buy and sell foreign exchange, as well as gold or
Banking Law of 2000. Name at least 4 of them and silver bullion;
explain the distinguishing characteristic or function of g. Acquire marketable bonds and other debts
each one. (2002 Bar) securities; and
h. Extend credit, subject to such rules promulgated by
A: Any 4 of the following 6 classes of banks identified in the the Monetary Board.
GBL of 2002, to wit: 3. Thrift bank - A thrift bank is one established as a
savings and mortgage bank, a stock savings and loan
1. Universal Banks — these are those which used to be association, or a private development bank, for the
called expanded commercial banks and the operations purpose of:
of which are now primarily governed by the GBL of a. Accumulating the savings of depositors and
2000. They can exercise the powers of an investment investing them in outlets determined by the
house and invest in non-allied enterprises. They have Monetary Board as necessary in the furtherance of
the highest capitalization requirement. national economic objectives;
2. Commercial Banks — these are ordinary or regular b. Providing short-term working capital, medium and
commercial banks, as distinguished from a universal long-term financing, to business engaged in
bank. They have a lower capitalization requirement agriculture, services, industry and housing; and
than universal banks and cannot exercise the powers of c. Providing diversified financial and allied services
an investment house and invest in non- allied for its chosen market and constituencies especially
enterprises. for small and medium enterprises and individuals.
3. Thrift bank s— these banks (such as savings and 4. Rural bank - A rural bank is one established to provide
mortgage banks, stock savings and loan associations, credit facilities to farmers and merchants or their
and private development banks) may exercise most of cooperatives and, in general, to the people of the rural
the powers and functions of a commercial bank except communities.
that they cannot, among others, open current or check 5. Cooperative bank - A cooperative bank is organized
accounts without prior Monetary Board approval, and under the Cooperative Code to provide financial and
they cannot issue letter of credit. Their operations are credit services to cooperatives. It may perform any or
governed primarily by the Thrift Banks Act of 1995 (RA all the services offered by a rural bank, including the
No, 7906)
4. Rural Banks — these are those which are organized operation of a Foreign Currency Deposit Unit subject to
certain conditions.
primarily to extend loans and other credit facilities to
farmers, fishermen or farm families, as well as Bank Powers and Liabilities
cooperatives, merchants, and private and public
employees and whose operations are primarily Q: The Monetary Board of the Bangko Sentral closed
governed by the Rural Banks Act of 1992 (RA No. 7353) Urban Bank after it encountered crippling financial
5. Cooperative Banks — these are those which are difficulties that resulted in a bank run. X, one of the
organized primarily to provide financial and credit members of the Board of Directors of the bank,
services to cooperatives and whose operations are attended and stayed throughout the entire meeting of
primarily governed by the Cooperative Code of the the Board that was held well in advance of the bank run
Philippines (RA No. 6938) and before news had begun to trickle to the business
6. Islamic Banks — these are those which are organized community about the dire financial pit the bank had
primarily to provide financial and credit services in a fallen into. Immediately after the meeting, X caused the
manner or transaction consistent with the Islamic preparation and issuance of a manager’s check paya ble
Shari’a. At present, only the Al Amana Islamic to himself in the sum of P5M equivalent to the amount
Investment Bank of the Philippines has been organized placed or invested in the bank by a business
as an Islamic bank. acquaintance. He now claims that he is keeping the
funds in trust for the owner and that h e had committed
Q: Briefly describe the following types of banks: no violation
should of the General
be punished. Do you Banking Act
agree that for which
there he
has been
1. Universal bank no violation of the statute? (2000 Bar)
2. Commercial Bank
3. Thrift Bank A: No. I do not agree that there is no violation of the statute.
4. Rural bank X violated Section 85 when he caused the preparation and
5. Cooperative Bank (2010 Bar) issuance of a manager’s check paya ble to himself in the sum
of P5M. This is paying out or permitting to be paid out funds
A: of the bank after the latter became insolvent. This act is
penalize by fine of not less than P1, 000 nor more than P10,
1. Universal bank - A universal bank is a commercial bank 000 and by imprisonment for not less than 2 nor more than
with 2 additional powers, namely: 10 years.
a. The power of an investment house; and
b. The power to invest in non-allied enterprises. Banking and Incidental Powers
2. Commercial bank - A commercial bank is a bank that
can: Q: How do you characterize the legal relationship
between a commercial bank and its safety deposit box
a. Accept drafts;
client? (2010 Bar)
b. Issue letters of credit;
c. Discount and negotiate promissory note, bills of
A: The relationship between a commercial bank and its

95
Mercantile Law

safety deposit box client is that of a bailee and bailor, the A: Under the single borrower’s limit, the total amount of
bailment being for hire and mutual benefit. loans, credit accommodations and guarantee that the bank
may extend to any person shall not exceed 25% of the
ALTERNATIVE ANSWER: The legal relationship of the bank’s net worth. While the law sets the ceiling at 20% of
bank and its safety deposit box client is that of a lessor and the bank’s networth, it also empowers the BSP to modify the
lessee. ceiling. The current SBL as set by BSP is 25% of the Bank’s
net worth.
Q: Is a stipulation in the contract for the use of a safety
deposit box relieving the bank of liability in connection Restrictions on Bank Exposure to DOSRI (Directors,
with the use thereof valid? (2010 Bar) Officers, Stockholders and their Related Interests)

A: The stipulation relieving the bank of liability in Q: As part of the safeguards against imprudent banking,
connection with the use of the safety deposit box is void as the General Banking Law imposes limits or restrictions
it is against law and public policy. on loans and credit accommodations which may be
extended by banks. Identify at least 2 of these limits or
Q: A commercial bank wants to acquire shares in a restrictions and explain the rationale of each of them.
cement manufacturing company. Do you think it can do (2002 Bar)
that? Why or why not? (2015 Bar)
A: Any 2 of the following limits or restrictions on loan and
A: A commercial bank cannot acquire shares in a cement credit transaction which may be extended by banks, as part
manufacturing company because a commercial bank can of the safeguard against imprudent banking, to wit:
only invest in the equity of allied undertakings, meaning,
undertakings related to banking (Section 30 of RA 8791). 1. SBL Rules—SBL (i.e., single borrower’s limit) rules are
those promulgated by the BSP, upon the authority of
Nature of Bank Funds and Bank Deposits Section 35 of the General Banking Law of 2000, which
regulate the total amount of loans, credit
Q: Differentiate “bank deposits” from bank substitutes”. accommodations and guarantees that may be extended
(2010 Bar) by a bank to any person, partnership, association, or
corporation or other entity. The rules seek to protect a
A: Bank deposits are funds obtained by a bank from the bank from making excessive loans to a single borrower
public which are relent by such bank to its own borrowers. by prohibiting it from lending beyond a specified
Deposit substitutes are alternative forms of obtaining funds ceiling.
from the public, other than deposits, through the issuance, 2. DOSRI Rules—These are rules promulgated by the BSP,
endorsement, or acceptance of debt instruments for the upon authority of Section 5 of the GBL of 2000, which
own account of the borrower, for the purpose of relending regulate the amount of credit accommodations that a
or purchasing of receivables and other obligations. These bank may extend to its directors, officers, stockholders
instruments may include, but need not be limited to, and their related interests. Generally, a bank’s credit
bankers acceptances, promissory notes, participations, accommodations to its DOSRI must be in the regular
certificates of assignment and similar instruments with course of business and on terms not less favorable to
recourse, and repurchase agreements. the bank than those offered to non-DOSRI borrowers.
3. No commercial bank shall make any loan or discount on
Q: Why are banks required to maintain reserves against the security of shares of its own capital stock.
their deposits and deposit substitutes? State one of
three purposes for these reserves. (2010 Bar) Q: Pio is the president of Western Bank. His wife
applied for a loan with the said bank to finance an
A: Any one of the following 4 purposes for requiring banks internet cafe. The loan officer told her that her
to maintain reserves against their deposits and deposit application will not be approved because the grant of
substitutes will suffice: loans to related interests of bank directors, officers,
and stockholders is prohibited by the General Banking
1. One of the purposes of the requirement to maintain Law. Explain whether the loan officer is correct. (2006
bank reserves is to control the volume of money Bar)
created by the credit operations of the banking system;
2. It is to enable the banks to answer any withdrawal; A: No. The loan officer should have advised the wife to ask
3. To help Government to finance its operation; her husband to secure the approval of the bank’s Board of
4. To help Government control money supply. Directors for the intended loan and to limit the same in an
amount not to exceed its unencumbered deposits and book
Stipulation on Interests value of its paid in capital contribution in the bank; if the
intended loan should exceed the foregoing limit, the
Q: A court found the interest charged by a bank as borrower should have the same secured by a non-risk
excessive and unconscionable and struck down the assets as determined by the Monetary Board, unless the
contractual stipulation on interest. If you were the loan shall be in the form of a fringe benefit (Sec. 36, General
judge, what would you impose as the applicable Banking Law of 2000).
interest rate? State your legal basis. (2015 Bar)

A: I will impose legal rate of interest which is currently set INTELLECTUAL PROPERTY LAW
at 6% per annum.

Single Borrower’s Limit Differences between Copyrights, Trademarks and


Patent
Q: What is the single borrower’s limit? (2015 Bar)
Q: Differentiate trademark, copyright and patent from
96
UST BAR OPERATIONS
QUAMTO (1987-2016)

each other. (2015 Bar) Cezar created the device and likewise, came up with a
similar gadget, also using scrap materials and spare
A: parts of the company. Thereafter, Francis filed an
application for registration of his device with the
1. As to definition: Bureau of Patent.
a. Trademark is any visible sign capable of
distinguishing goods a. Is the gas-saving device patentable? Explain.
b. Copyright is an incorporeal right granted by statute b. Assuming that it is patentable, who is entitled to the
to the author or creator of srcinal literary and patent? What, if any, is the remedy of the losing
artistic works whereby he is invested for a limited party?
period of time with the right carry out, authorize c. Supposing Joab got wind of the inventions of his
and prevent the reproduction, distribution, employees and also laid claim to the patents,
transformation, rental, public performance and asserting that Cezar and Francis were using his

other
public.forms of communication of his work to the materials and prevail
will his claim company time
over in making
those of his the devices
employees
c. Patent is any technical solution of any problem in (2005 Bar)
any field of human activity which is new, requires A:
an inventive step and industrially applicable.
2. As to object a. Yes, the gas-saving device is patentable. Sec. 21 of IPL
a. The object of trademark are goods provides that in order that a machine, product, process
b. The object of copyright are srcinal literary and or improvement of them may be patented it must be
artistic works new, it must involve an inventive step and it must be
c. The object of patent is invention industrially applicable. The invention is new because it
3. As to term does not form part of prior art; involves an inventive
a. The term of trademark is ten years step and unquestionably industrially applicable for it
b. The term of copyright is generally 50 years can be produced as what Francis did though he used
scrap materials instead.
c. The term of patent is 20 years from application
4. As to how acquired b. Cezar is entitled to the patent. Sec 28 of IPL provides
a. Trademark is acquired through registration and that the right to a patent belongs to the inventor, his
use heirs, or assigns. Further, in case the employee made
the invention in the course of his employment contract,
b. Copyright is acquired from the moment of
the patent belongs to the employee, if the inventive
creation
c. Patent is acquired through application with the activity is not a part of his regular duties even if he uses
the time, facilities and materials of the employer [Sec 30
IPO
(1)]. In this case, Cezar is the inventor. The inventive
activity was not part of Cezar’s regular duties despite
Q: Can an article of commerce serve as a trademark and the fact that he uses the time, facilities and materials of
at the same time enjoy patent and copyright the employer. Francis application, however, should be
protection? Explain and give an example. (2010 Bar) given priority under the “first to file” rule, subject to the
right of Cezar to have the application canceled within
A: A stamped or marked container of goods can be three months from the decision as the rightful inventor
registered as a trademark. An srcinal ornamental design or or to file an action to prove his priority to the invention
model for articles of manufacturer can be copyrighted. An within one year from publication.
ornamental design cannot be patented, because aesthetic
c. No. Sec. 30(1) explicitly provides that in case the
creations cannot be patented. However, it can be registered
employee made the invention in the course of
as an industrial design. Thus, a container of goods which has
employment, the patent belongs to the employee, if the
an srcinal ornamental design can be registered as a
inventive activity is not part of his regular duties even
trademark, can be copyrighted, and can be registered as an
if he uses the time, facilities and materials of the
industrial design.
employer. Joab’s assertion that Cezar and Francis used
his materials and company’s time to lay claim for patent
PATENTS
cannot prevail over the clear provision of the law.
Patentable Inventions
Q: Dr. Nobel discovered a new method of treating
Alzheimer’s involving a special method of diagnosing
Q: X invented a method of improving the tenderness of
the disease, treating it with a new medicine that has
meat by injecting an enzyme solution into the live
been discovered after long experimentation and field
animal shortly before a slaughter. Is the invention
testing, and novel mental isometric exercises. He comes
patentable? (1989 Bar)
to you for advice on how he can have his discoveries
protected. Can he legally protect his new method of
A: To be patentable, the invention must be new and should
diagnosis, the new medicine, and the new method of
consist in a useful machine, manufactured product or
treatment? If no, why? If yes, how? (2010 Bar)
process. Among those that cannot be patented are
processes which are not directed to making or improving a
A: Dr. Nobel can be protected by a patent for the new
commercial product. Viewed from the above light, X may
medicine as it falls within the scope of Sec. 21 of the
lawfully patent his invention.
Intellectual Property Code. But no protection can be legally
extended to him for the method of diagnosis and method of
Q: Cezar works in a car manufacturing company owned
treatment which are expressly non-patentable.
by Joab. Cezar is quite innovative and loves to tinker
with things. With the materials and part of the car, he
Non-Patentable Inventions
was able to invent a gas-saving device that will enable
cars to consume less gas. Francis, a co-worker, saw how

97
Mercantile Law

Q: X invented a bogus coin detector which can be used A: I would not exempt the alleged violator from liability for
exclusively on self-operating gambling devices the following reasons:
otherwise known as one-armed bandits. Can X apply or
a patent? (1989 Bar) 1. A patent once issued by the Patent Office raises a
presumption that the article is patentable; it can,
A: X may not apply for the patent since the gambling device however be shown otherwise. A mere statement or
mentioned in the problem itself is prohibited and against allegation is not enough to destroy that presumption.
public order. But if the machine is used in legalized 2. An intention to infringe is not necessary nor an element
gambling such as in cases of exclusive use of casinos in a case for infringement of a patent.
established by the government, such device can be 3. There is no need of exact duplication of the patentee’s
patented. existing patent such as when the improvement made by
another is merely minor. To be independently
Q: Supposing Albert Einstein were alive today and he patentable, an improvement of an existing patented
filed with the Intellectual Property Office (IPO) an invention must be a major improvement.
application for patent for his theory of relativity
expressed in the formula E=mc 2. The IPO disapproved Q: Che-che invented a device that can convert rainwater
Einstein's application on the ground that his theory of to automobile fuel. She asked Macon, a lawyer, to assist
relativity is not patentable. Is the IPO's action correct? in getting her invention patented. Macon suggested that
(2006 Bar) they form a corporation with other friends and have the
corporation apply for a patent, 80% of the shares of
A: Yes. Under the Intellectual Property Code, discoveries, stock thereof to be subscribed by Che-che and 5% by
scientific theories and mathematical methods, are classified Macon. The corporation was formed and the patent
to be as "non-patentable inventions." Einstein's theory of application was filed. However, Che-che died 3 months
relativity falls within the category of being a non-patentable later of a heart attack.
"scientific theory"(Sec. 22, IPC as amended by R.A. 9502).
Franco, the estranged husband of Che-che, contested
Rights Conferred by a Patent the application of the corporation and filed his own
patent application as the sole surviving heir of Che-che.
Q: For years, Y has been engaged in the parallel Decide the issue with reasons. (1990 Bar)
importation of famous brands, including shoes carrying
the foreign brand MAGIC. Exclusive distributor X A: The estranged husband of Che-che cannot successfully
demands that Y cease importation because of his contest the application. The right over inventions accrue
appointment as exclusive distributor of MAGIC shoes in from the moment of creation and as a right it can lawfully
the Philippines. Y countered that the trademark MAGIC be assigned. Once the title thereto is vested in the
is not registered with the Intellectual Property Office as transferee, the latter has the right to apply for its
a trademark and therefore no one has the right to registration. The estranged husband of Che-che, if not
prevent its parallel importation. Suppose the shoes are disqualified to inherit, merely would succeed to the interest
covered by a Philippine patent issued to the brand of Che-che.
owner, what would your answer be? Explain. (2010 Q: Ferdie is a patent owner of a certain invention. He
Bar) discovered that his invention is being infringed by
Johann.
A: A patent for a product confers upon its owner the
exclusive right of importing the product. The importation of 1. What are the remedies available to Ferdie against
a patented product without authorization of the owner of a Johann?
patent constitutes infringement of the patent. X can prevent 2. If you were the lawyer of Johann in the
the parallel importation of such shoes by Y without its infringement suit, what are the defenses that your
authorization. client can assert? (1993 Bar)

Patent Infringement A:

Q: What is the doctrine of equivalents? (2015 Bar) 1. The following are the remedies available to Ferdie
against Johann:
A: Under the doctrine of equivalents, infringement of patent
occurs when a device appropriates a prior invention by a. Seize and destroy
incorporating its innovative concept and albeit with some b. Injunction
modifications and change performs the same function in c. Damages in such amount may have been obtained
substantially the same way to achieve the same result from the use of the invention if properly transacted
which can be more than what the infringer
(Godines v. CA, 226 SCRA 338).
(Johann) received.
Q: In an action for infringement of patent, the alleged d. Attorney’s fees and costs.
infringer defended himself by stating (1) that the
2. These are the defenses that can be asserted in an
patent issued by the Patent Office was not really an
infringement suit:
invention which was patentable; (2) that he had no
intent to infringe so that there was no actionable case
a. Patent is invalid
for infringement; and (3) that there was no exact
b. Patent is not new or patentable
duplication of the patentee’s existing patent but only a
c. Specification of the invention does not comply with
minor improvement.
Sec.14
d. Patent was issued not to the true and actual
With those defenses, would you exempt the alleged
inventor, designer or author of the utility model or
violator from liability? Why? (1992 Bar)
the plaintiff did not derive his rights from the true

98
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and actual inventor, designer or author of the Clark from applying for the registration of the same
utility model. trademark. Also, a mere distributor does not own the
trademark to the goods he distributes and his right over the
TRADEMARKS trademark cannot prevail over the owner (E.Y Industrial
Sales v. Shien Dar Electricity and Machinery, GR no. 184850,
Q: Jinggy went to Kluwer University (KU) in Germany Oct. 20, 2010; Ecole de Cuisine Manille v. Renaud Cointreau,
for his doctorate degree (Ph.D.). He completed his GR 185830, June 5, 2013).
degree with the highest honors in the shortest time.
When he came back, he decided to set-up his own Non-Registrable Marks
graduate school in his hometown in Zamboanga. After
seeking free legal advice from his high-flying lawyer- Q: In 1988, the FDA approved the labels submitted by
friends, he learned that the Philippines follows the Turbo Corporation for its new drug brand name,
territoriality principle in trademark law, i.e., “Axilon”. Turbo is now applying with the Bureau of
trademark rights are acquired through valid Patents, Trademarks and Technology Transfer for the
registration in accordance with the law. Forthwith, registration of said brand name. It was subsequently
Jinggy named his school the Kluwer Graduate School of confirmed that “Accilonne” is a generic term for a class
Business of Mindanao and immediately secured of anti-fungal drugs and is used as such by the medical
registration with the Bureau of Trademarks. KU did not professional and the pharmaceutical industry, and that
like the unauthorized use of its name by its top alumnus it is used as generic chemical name in various scientific
no less. KU sought your help. What advice can you give and professional publications. A competing drug
KU? (2014 Bar) manufacturer asks you to contest the registration of the
brand name “Axilon” by Turbo.
A: I will advice KU to seek for the cancellation of the Kluwer
Graduate School of Business of Mindanao with the Bureau What will be your advice? (1990 Bar)
of Trademarks. Jinggy’s registration of the mark “Kluwer”
should not have been allowed because the law prohibits the A: The application for registration by Turbo Corporation
registration of the mark “which may disparage or falsely may be contested. The Trademark Law would not allow the
suggests a connection with persons, living or dead, registration of a trademark which, when applied to or used
institutions, beliefs”. Moreover, the Philippines is a in connection with his products, is merely descriptive or
signatory to the Paris Convention for the Protection of deceptively misdescriptive of them. Confusion can result
Intellectual Property (Paris Convention), it is obligated to from the result from the use of “Axilon” as the generic
assure nationals of countries of the Paris Convention that product itself.
they are afforded an effective protection against violation of
their intellectual property rights in the Philippines. Thus, Tests to Determine Confusing Similarity between
under the Philippine law, a trade name of a national of a Marks
State that is a party to the Paris Convention, whether or not
the trade name forms part of a trademark, is protected Q: What is the “test of dominancy”? (1996 Bar)
“without the obligation of filing or registration”.
A: The test of dominancy requires that if the competing
Prior Use of Mark as a Requirement trademark contains the main or essential features of
another and confusion and deception is likely to result,
Q: CHEN, Inc., a Taiwanese company, is a manufacturer infringement takes place. Duplication or imitation is not
of tires with the mark Light Year. From 2009 to 2014, necessary; nor is it necessary that the infringing label
Clark Enterprises, a Philippine-registered corporation, should suggest an effort to imitate. Similarity in size, form
imported tires from CHEN, Inc. under several sales and color, while relevant, is not conclusive.
contracts and sold them herein the Philippines. In
2015, CHEN, Inc. filed a trademark application with the Q: Skechers Corporation sued Inter-Pacific for
Intellectual Property Office (IPO) for the mark Light trademark infringement claiming that Inter-Pacific
Year to be used for tires. The IPO issued CHEN, Inc. a used Skechers’ registered “S” logo mark on Inter -
certificate of registration (COR) for said mark. Clark Pacific’s shoe products without its consent. Skechers
Enterprises sought the cancellation of the COR and has registered the trademark “SKECHERS” and the

claimed
Year. it had
CHEN, a better
Inc. right
asserted to it
that register the
was the markof
owner Light
the trademark
Intellectu “S” (with
al Property an (IPO).
Office ova l design) with the
mark and Clark Enterprises was a mere distributor.
Clark Enterprises argued that there was no evidence on In its complaint, Skechers points out the following
record that the tires it imported from CHEN, Inc. bore similarities: the color scheme of the blue, white and
the mark Light Year and Clark Enterprises was able to gray utilized by Skechers. Even the design and “wave -
prove that it was the first to use the mark here in the like” pattern of the mid -sole and outer sole of Inter-
Philippines. Decide the case. (2015 Bar) Pacific’s shoes are very similar to Skechers’ shoes, i f not
exact patterns thereof. On the side of Inter- Pacific’s
A: While RA 8293 removed the previous requirement of shoes, near the upper part, appears the stylized “S”
proof of actual use prior to the filing of an application for placed in the exact location as that of the stylized “S” the
registration of a mark, proof of prior and continuous use is Skechers shoes. On top of the “tongue” of both shoes,
necessary to establish ownership of trademark. Such appears the stylized “S” i n practically the same location
ownership of the trademark confers the right to register the and size.
trademark. Since Chen owns the trademark as evidenced by
its actual and continuous use prior to the Clark Enterprises, In its defense, Inter-Pacific claims that under the
then it is the one entitled to the registration of the Holistic Test, the following dissimilarities are present:
trademark. The fact that Clark was the first one to use the the mark “S” found in Strong shoes is not enclosed in an
mark here in the Philippines will not matter. Chen’s prior “oval design”; the word “Strong” is conspicuously

actual use of the trademark even in another country bars placed at the backside and insoles; the hang tags labels

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Mercantile Law

attached to the shoes bear the word “Strong” for Inter -


Pacific and Skeckers U.S.A.” for Skechers; and, Strong Q: For years, Y has been engaged in the parallel
shoes modestly priced compared to the cost of Skechers importation of famous brands, including shoes carrying
shoes. the foreign brand MAGIC. Exclusive distributor X
demands that Y cease importation because of his
Under the foregoing circumstances, which is the proper appointment as exclusive distributor of MAGIC shoes in
test to be applied—Holistic or Dominancy Test? Decide. the Philippines. Y countered that the trademark MAGIC
(2014 Bar) is not registered with the Intellectual Property Office as
a trademark and therefore no one has the right to
A: The proper test to be applied is the dominancy test. prevent its parallel importation. Who is correct? Why?
Applying the dominancy test, there is a confusing similarity (2010 Bar)
“Skechers” rubber shoes and “Strong” rubber shoes. The use
of the stylized “S” by Inter -Pacific in its Strong Shoes A: X is correct. His rights under his exclusive distributorship
infringes on the trademark “Skechers” already registered by agreement are property rights entitled to protection. The
Skechers U.S.A. with the IPO. While it is undisputed that importation and sale by Y of MAGIC shoes constitutes unfair
Skechers U.S.A. stylized “S” is within an oval design, the competition. Registration of the trademark is not necessary
dominant feature of the trademark is stylized “S” as it is in case of an action for unfair competition.
precisely the stylized “S” which catches the eye of the
purchaser (Skechers, USA, Inc. v. Inter-Pacific Industrial Q: Laberge, Inc. manufactures and markets after-shave
Trading, Nov. 30, 2006 ). lotion, shaving cream, deodorant, talcum powder and
toilet soap, using the trademark “PRUT”, which is
Well-Known Marks registered with the Philippine Patent Office. Laberge
does not manufacture briefs and underwear and these
Q: S Development Corporation sued Shangrila items are not specified in the certificate of registration.
Corporation for using the “S” logo and the tradename
“Shangrila.” The former claims that it was the first to JG, who manufactures briefs and underwear, wants to
register the logo and the tradename in the Philippines know whether, under our laws, he can use and register
and that it had been using the same in its restaurant the trademark “PRUTE” for his merchandise. What is
business. your advice? (1994 Bar)

Shangrila Corporation counters that it is an affiliate of A: Yes. The trademark registered in the name of Laberge,
an international organization which has been using Inc. covers only after-shave lotion, shaving cream,
such logo and tradename “Shangrila” for over 20 years. deodorant, talcum powder and toilet soap. It does not cover
briefs and underwear.
However, Shangrila Corporation registered the
tradename and logo in the Philippines only after the The limit of the trademark is stated in the certificate issued
suit was filed. to Laberge, Inc. It does include briefs and underwear which
are different products protected by Laberge’s trademark.
a. Which of the two corporations has a better right to
use the logo and the tradename? Explain. JG can register the trademark “PRUTE” to cover its briefs
b. How does the international affiliation of Shangrila and underwear.
Corporation affect the outcome of the dispute?
Explain. (2005 Baar) Infringement and Remedies
A:
Q: SONY is a registered trademark for TV, stereo, radio,
a. S Corporation. Sec. 122 of the IPC provides that the cameras, betamax and other electronic products. A
rights in a trademark are acquired through valid local company, Best Manufacturing, Inc., produced
registration. Actual prior use in commerce in the electric fans which it sold under the trademark’s SONY
Philippines has been abolished as a condition for the without the consent of SONY. SONY sued Best
registration of a trademark (Record of the Senate, Vol. II, Manufacturing for infringement. Decide the case. (1991
No. 29, 8 Oct.1996; Journal of the House of Bar)

b. Representatives, No. 35. 12 Nov.


Shangrila’s international 1996, 34
affiliation ). result in a
shall A: In order that a case for infringement of trademark can
decision favorable to it. The Paris Convention mandates prosper, the products on which the trademark is used must
that protection should be afforded to internationally be of the same kind. The electric fans produced by Best
known marks as signatory to the Paris Convention, Manufacturing cannot be said to be similar to such products
without regard as to whether the foreign corporation is as TV, stereo and radio sets or cameras or betamax products
registered, licensed or doing business in the of SONY.
Philippines. Shangrila’s separate personalities from
their mother corporation cannot be an obstacle in the Q: While vacationing in Boracay, Valentino
enforcement of their rights as part of the Kuok Group of surreptitiously took photographs of his girlfriend
Companies and as official repository, manager and Monaliza in her skimpy bikini. 2 weeks later, her
operator of the subject mark and logo. Besides, R.A. No. photograph appeared in the Internet and in a national
166 did not require the party seeking relief to be the celebrity magazine.
owner of the mark but "any person who believes that
he is or will be damaged by the registration of a mark Monaliza found out that Valentino had sold the
or trade name." (Shangri-la International Hotel photograph to the magazine and, adding insult to
Management v. Developers Group of Companies, Inc. G.R. injury, uploaded them to his personal blog on the
No. 159938). Internet.

Rights Conferred by Registration


100
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1. Monaliza filed a complaint against Valentino for same mark. On the other hand, the earlier filing of petition
damages based on, among other grounds, violation to cancel the mark with the Bureau of Legal Affairs shall not
of her intellectual property rights. Does she have constitute a prejudicial question that must be resolved
any cause of action? Explain. before an action to enforce the rights to same registered
mark may be decided. The issues raised before the different
A: No. Monaliza cannot sue Valentino for violation of her the IPO and the RTC are different. The issue raised before
intellectual property rights, because she was not the one the IPO is whether or not the cancellation of the subsequent
who took the pictures. She may sue Valentino instead for trademark is proper because of the prior ownership of the
violation of her right to privacy. He surreptitiously took disputed mark by K-9. While the issue raised before the RTC
photographs of her and then sold the photographs to a pertains to infringement. Furthermore, an action for
magazine and uploaded them to his personal blog in the infringement or unfair competition, as well as the remedy
Internet. of injunction and relief for damages, is explicitly and
unquestionably within the competence and jurisdiction of
2. Valentino’s friend Francesco stole the photographs ordinary courts (Shangri-la International Hotel
and duplicated them and sold them to a magazine Management v. Makati Shangri-la Hotel and Resort Inc., G.R.
publication. Valentino sued Francesco for No. 111580. June 21, 2001).
infringement and damages. Does Valentino have
any cause of action? Explain. Q: After disposing of his last opponent in only two
rounds in Las Vegas, the renowned boxer Sonny Bachao
A: No. Valentino cannot sue Francesco for infringement, arrived at the NAIA met by thousands of hero-
because he has already sold the photographs to a magazine. worshipping fans and hundreds of media
photographers. The following day, a colored
3. Does Monaliza have any cause of action against photograph of Sonny wearing a black polo short
Franceso? Explain. (2010 Bar) embroidered with the 2-inch Lacoste crocodile logo
appeared on the front page of every Philippine
A: Yes. Monaliza can also sue Francesco for violation of her newspaper.
right to privacy.
Lacoste International, the French firm that
Q: In intellectual property cases, fraudulent intent is manufactures Lacoste apparel and owns the Lacoste
not an element of the cause of action except in cases trademark, decided to cash in on the universal
involving: popularity of the boxing icon. It reprinted the
photographs, with the permission of the newspaper
a. Trademark infringement publishers, and went on a world-wide blitz of print
b. Copyright infringement commercials in which Sonny is shown wearing a
c. Patent infringement Lacoste shirt alongside the phrase “ Sonny Bachao just
d. Unfair competition (201 4 Bar) loves Lacoste”.

A: a. Trademark infringement When Sonny sees the Lacoste advertisements, he hires


you as a lawyer and asks you to sue Lacoste
Q: What is the distinction between trademark International before a Philippine court:
infringement and unfair competition? (1996, 2015 Bar)
a) For trademark infringement in the Philippines
A: The distinctions between infringement and unfair because Lacoste International used his image
competition are the following: without his permission.

1. Infringement of trademark is the unauthorized use of a A: Sonny Bachao cannot sue for infringement of trademark.
trademark, whereas unfair competition is the passing The photographs showing him wearing a Lacoste shirt were
off of one's goods as those of another. not registered as a trademark.
2. In infringement of trademark fraudulent intent is
unnecessary whereas in unfair competition fraudulent b) For copyright infringement because of the
intent is essential. unauthorized use of the published photographs.

3. In infringement
the trademark isofa trademark
prerequisitethe
toprior registration
the action, whereasof A: Sonny Bachao cannot sue for infringement of copyright
in unfair competition registration is not necessary (Del for the unauthorized use of the photographs showing him
Monte Corp. vs. CA, G.R. No. L-78325, January 25, 1990). wearing a Lacoste shirt. The copyright to the photographs
belong to the newspaper which published them inasmuch
Q: K-9 Corporation, a f oreign corporation alleging itself as the photographs were the result of the performance of
to be the registered owner of trademark “K -9” and logo the regular duties of the photographers. Moreover, the
“K”, filed an Inter Partes case with the Intellectual newspaper publishers authorized the reproduction of the
Property Office against Kanin Corporation for the photographs.
cancellation of the latter’s mark “K -9” and logo “K.”
During the pendency of the case before the IPO, Kanin c) For injunction in order to stop Lacoste
Corporation brought suit against K-9 Corporation International from featuring him in their
before the RTC for infringement and damages. Could commercials.
the action before the RTC prosper? Why? (2003 Bar) Will these actions prosper?

A: Yes, the action before the RTC can prosper. According to A: The complaint for injunction to stop Lacoste
Sec. 151.2 of the IPC, the filing of a suit to enforce the International from featuring him in its advertisements will
registered mark with the proper court or agency shall prosper. This is a violation of subsection 123.4(c) of the IPC
exclude any other court or agency from assuming and Art. 169 in relation to Article 170 of the RPC.

jurisdiction over a subsequently filed petition to cancel the

101
Mercantile Law

d) Can Lacoste International validly invoke the Q: X, a dealer of low grade oil, to save on expenses, uses
defense that it is not a Philippine company and, the containers of different companies. Before
therefore, Philippine courts have no jurisdiction? marketing to the public his low grade oil, X totally
Explain. (2009 Bar) obliterates and erases the brands or marks stenciled on
the containers. Y brings an action against X for unfair
A: No. Philippine courts have jurisdiction over it, if it is competition upon its discovery that its containers have
doing business in the Philippines. Moreover, under Section been used by X for his low grade oil.
133 of the Corporation Code, while a foreign corporation
doing business in the Philippines without license to do Is there unfair competition? State briefly your reasons.
business, cannot sue or intervene in any action, it may be (1988 Bar)
sued or proceeded against before our courts or
administrative tribunal. A: There is no unfair competition, unfair competition is
passing off of one’s goods as those of another and requires
Unfair Competition fraudulent intent on the part of the user. These elements are
not present in the problem.
Q: In what ways would a case for infringement of
trademark be different from a case for unfair COPYRIGHTS
competition? (2015 Bar)
Copyrightable Works
A:
Q: What intellectual property rights are protected by
1. In infringement of trademark, prior registration of the the copyright? (1995 Bar)
trademark is a prerequisite to the action, whereas in
unfair competition, trademark registration is not A: Copyright protects copyright or economic rights which
necessary. consist of the exclusive right to carry out, authorize, or
2. Trademark infringement is the unauthorized use of the prevent the following:
registered trademark, while unfair competition is the
passing off of one’s goods as those of another. a. reproduction of the work or substantial portion of the
3. In infringement of trademark, fraudulent intent is work;
unnecessary, whereas in unfair competition, fraudulent b. dramatization, translation, adaptation, abridgment,
intent is essential. arrangement or other transformation of the work;
c. the first public distribution of the srcinal and each
Q: In what way is an infringement of a trademark copy of the work by sale or other forms of transfer of
similar to that which pertains to unfair competition? ownership;
(2003 Bar) d. rental of the srcinal or a copy of an audiovisual or
cinematographic work, a work embodied in a sound
A: The similarity lies in both their ability to disrupt fair recording, a computer program, a compilation of data
competition amongst business enterprises and other and other materials or a musical work in graphic form,
businesses. They can also create confusion, mistake, and irrespective of the ownership of the srcinal or the copy
deception as to the minds of the consumers with regard to which is the subject of the rental;
the source or identity of their products or services due to its e. public display of the srcinal or a copy of the work;
similarity in appearance or packaging. f. public performance of the work; and
g. other communication to the public of the work. (Sec.
Q: N Corporation manufactures rubber shoes under the 177, Intellectual Property Code )
trademark “Jordann” which hit the Philippine Market
in 1985, and registered its trademark with the Bureau Rights of Copyright Owner
of Patents, Trademarks and Technology Transfer
(BPTTT) in 1990. PK Company also manufactures Q: Diana and Piolo are famous personalities in
rubber shoes with the trademark “Javorski” which it showbusiness who kept their love affair secret. They
registered with the BPTTT in 1978. use a special instant messaging service which allows
them to see one another’s typing on their own screen as
In 1992, PK Company adopted and copied the design of
N Corporation’s “Jordann” rubber shoes, both as to eachservice
the letter key is pressed.
facility, When
found out Greg,
their the controller
identities, he keptof
a
shape and color, but retained the trademark “Javorski” copy of all the messages Diana and Piolo sent each other
on its products. and published them. Is Greg liable for copyright
infringement? Reason briefly. (2007 Bar)
May PK Company be held liable to N Corporation?
Explain. (1996 Bar) A: Yes. The messages which Diana and Pablo sent each
other fall under the category of letters as provided in Sec.
A: PK may be held liable for unfairly competing against N 172.1.d which provides that literary and artistic works,
Corporation. By copying the design, shape and color of N’s hereinafter referred to as “works,” are srcinal intellectual
“Jordann” rubber shoes and using the same in its rubber creations in the literary and artistic domain protected from
shoes trademarked “Javorski”, PK is obviously trying to pass the moment of their creation and shall include in particular,
off its shoes for those of N. It is of no moment that the among others , letters. Infringement of such consist in the
trademark “Javorski” was registered ahead of the doing by any person, without the consent of the owner of
trademark “Jordann”. Priority in registration is not material the copyright, of anything the sole right to do which is
in an action for infringement of trademark. The basis of an conferred by statute on the owner of the copyright.
action for unfair competition is confusing and misleading Reproduction and first public distribution of the work are
similarly in general appearance, not similarity of economic rights of the authors of the work. Such cannot be
trademarks. done by the person not the author of the work. In this

instance, Greg is not the owner of the messages. He merely


102
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QUAMTO (1987-2016)

copied it without the consent of the authors thereof and which, after some slight editing, were printed in the
subsequently published the same in violation of the latter’s newspaper. However, Diario de Manila proved
economic rights. unprofitable and closed only after two months. Due to
the minimal amounts involved, Eloise chose not to
Rules on Ownership of Copyright pursue any claim for payment from the newspaper,
which was owned by New Media Enterprises,
Q: Felix copyrighted the oil painting showing the oath
taking of Pres. C. Aquino and Vice-President S. Laurel Three years later, Eloise was planning to publish an
after the EDSA revolution. Val engaged an artist to paint anthology of her works, and wanted to include the three
the same scene for use as picture postcards. Val then columns that appeared in the Diario de Manila in her
started sending the picture postcards to his friends anthology. She asks for your legal advice:
abroad. Is there a violation of Felix’s copyright?
Reasons. (1989 Bar) a. Does Eloise have to secure authorization from New
Media Enterprises to be able to publish Diario de
A: While Felix can have a copyright on his own painting Manila columns in her own anthology? Explain
which is expressive of his own artistic interpretation of the fully.
event he has portrayed, the scene or the event itself b. Assume that New Media Enterprises plans to
however, is not susceptible to exclusive ownership. publish Eloise’s columns in its own anthology
Accordingly, there would be no violation of Felix’s copyright entitled, “The best of Diario de Manila.” Eloise
if another painter were to do the similar work. wants to prevent the publication of her columns in
that anthology since she was never paid by the
Q: Solid Investment House commissioned Mon Blanco newspaper. Name one irrefutable legal argument
and his son Steve, both noted artists, to paint a mural Eloise could cite to enjoin New Media Enterprises
for the Main Lobby of the new building of Solid for a from including her columns in its anthology. (2008
contract price of P2M. Bar)

a. Who owns the mural? Explain. A:


b. Who owns the copyright of the mural? Explain.
(1995 Bar) a. No. In the case of a work commissioned by a person
other than an employer of the author and who pays for
A: it and the work is made in pursuance of the
a. The mural is owned by Solid. It commissioned the work commission, the person who so commissioned the
work shall have ownership of work, but the copyright
and paid Mon and Steve Blanco P2M for the mural. thereto shall remain with the creator, unless there is a
b. Even though Solid owns the mural, the copyright of the
mural is jointly owned by Mon and Steve, unless there written statement to the contrary. (Sec 178.4, IPL) Thus,
is a written stipulation to the contrary ( Sec. 178.4, IPC). though Diario de Manila commissioned the work, it
cannot be considered as its owner because it did not
pay Eloise. Ownership and copyright still belong to
Q: BR and CT are noted artists whose paintings are
Eloise. Authorization is no longer needed to publish
highly prized by collectors. Dr. DL commissioned them
Diario de Manila in her anthology because Eloise has
to paint a mural at the main lobby of his new hospital
moral and economic rights over her works.
for children. Both agreed to collaborate on the project
b. The fact that Eloise was not paid, ownership over her
for a total fee of 2 million Pesos to be equally divided
work, published in the newspaper, did not vest upon
between them. It was also agreed that Dr. DL had to
the latter. She retains full moral and economic rights
provide all the materials for the painting and pay for
over it.
the wages of technicians and laborers needed for the
work on the project.
Q: In 1999, Mocha Warm, an American musician, had a
hit rap single called Warm Warm Honey which he
Assume that the project is completed and both BR and
CT are fully paid the amount of P2M as artists' fee by DL. himself composed and performed. The single was
produced by a California record company, Galactic
Under the law on intellectual property, who will own
Records. Many noticed that some passages from Warm
the mural? Who will own the copyright in the mural?
Why? Explain. (2004 Bar) Warm Honey
Hassle, a 1978sounded eerily
hit song by similar to parts
the British rockof band
Under
Majesty. A copyright infringement suit was filed in the
A: According to Sec. 178.4 of the IPC, when the work is
United States against Mocha Warm by Majesty. It was
commissioned by a person other than an employer of the
later settled out of court, with Majesty receiving
author, the owner of the work shall be the one who
attribution as co-author of Warm Warm Honey as well
commissioned the work, but the copyright of the work shall
as share in the royalties.
be owned by the person who is responsible for its creation,
unless there is a written stipulation to the contrary. Hence,
DL owns the mural while both BR and CT jointly own the
By 2002, Mocha Warm was nearing bankruptcy and he
copyright thereto. This is so because the mural was
sold his economic rights over Warm Warm Honey to
commissioned by DL and a consideration was paid to BR
Galactic Records for $10, 000.
and CT in exchange thereof.
In 2008, Planet Films, a Filipino movie producing
Q: Eloise, an accomplished writer, was hired by Petong company, commissioned DJ Chef Jean, a Filipino
to write a bimonthly newspaper column for Diario de musician, to produce an srcinal re-mix of Warm Warm
Honey for use in one of its latest films, Astig!. DJ Chef
Manila, a newly-established newspaper of which
Jean remixed Warm Warm Honey with a salsa beat, and
Petong was the Editor-in-chief. Eloise was to be paid P1,
interspersed as well a recital of a poetic stanza by John
000.00 for each column that was published. In the
course of two months, Eloise submitted three columns Blake, a 17th century Scottish poet. DJ Chef Jean died
shortly after submitting the remixed Warm Warm

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Mercantile Law

Honey to Planet Films. make quotations or excerpts from a work already made
accessible to the public. Such quotations may be utilized in
Prior to the release of Astig!, Mocha Warm learns of the their srcinal form or in translation. Viewed from the
remixed Warm Warm Honey and demands that he be foregoing, a review by another that “literally reproduced
publicly identified as the author of the remixed song in 90%” of the research work done by X may no longer be
all the CD covers and publicity releases of Planet Films. considered as fair play, and X can sue Y for the violation of
the copyright.
a. Who are the parties or entities entitled to be
credited as author of the remixed Warm Warm Q: May a person have photocopies of some pages of the
Honey? Reason out your answers. book of Professor Rosario made without violating the
b. Who are the particular parties or entities who copyright law? (1998 Bar)
exercise copyright over the remixed Warm Warm
Honey? Explain. (2008 Bar) A: Yes, a person may photocopy some of pages of Professor
A: Rosario’s book for as long as it is not for public use or
distribution and it does not copy the substantial text or
a. Mocha Warm, Majesty and Chef Jean are entitled to be “heart” of the book. It i s considered as fair use of the
credited as authors of the remixed Warm Warm Honey, copyrighted work.
because it is their joint work. Mocha Warm retained his
moral right to be credited as an author of the remixed Q: In a written legal opinion for a client on the
Warm Warm Honey despite the sale of his economic difference between apprenticeship and learnership,
rights to Galactic Records, because his moral rights Liza quoted without permission a labor law expert's
exist independently of his economic rights. John Blake comment appearing in his book entitled "Annotations
cannot be credited for the use of his work because on the Labor Code." Can the labor law expert hold Liza
copyright extends only during the lifetime of the author liable for infringement of copyright for quoting a
and 50 years after his death. portion of his book without his permission? (2006 Bar)
b. The copyright over the remixed Warm Warm Honey
belongs to Galactic records, Majesty, and Chef Jean. The A: No. One of the limitations on copyright is the making of
copyright of Mocha Warm belongs to Galactic Records, quotations from a published work if they are compatible
because he assigned it to Galactic Records. Majesty also with fair use, provided that the source and the name of the
has a copyright, because it is a co- author. The copyright author, if appearing on the work, are mentioned. The legal
of Chef Jean belongs to him even if his work was opinion made by Liza is consistent with fair use since the
commissioned by Planet Firm, because the copyright quoted part is merely used to explain a concept of law for
remained with him. the benefit of the client and not to defeat the rights of the
author over his copyright [ Sec. 184.1 (b), IPC].
Q: Rudy is a fine arts student in a university. He stays in
a boarding house with Bernie as his roommate. During Copyright Infringement
his free time, Rudy would paint and leave his finished
works lying around the boarding house. One day, Rudy Q: Miss Solis wrote a script for Regal Films for the movie
saw one of his works - an abstract painting entitled “One Day—Isang Araw”. Ms. Badiday, while watching
Manila Traffic Jam - on display at the university the movie in Ermita Theatre, discovered that the story
cafeteria. The cafeteria operator said he purchased the of the movie is exactly similar to an unpublished
painting from Bernie who represented himself as its copyrighted autobiography which she wrote. Ms.
painter and owner. Rudy and the cafeteria operator Badiday sued Miss Solis for infringement of copyright.
immediately confronted Bernie. While admitting that It was however, conclusively proven that Miss Solis was
he did not do the painting, Bernie claimed ownership of not aware that the autobiography of Ms. Badiday was
its copyright since he had already registered it in his protected by a copyright.
name with the National Library as provided in the
Intellectual Property Code. Who owns the copyright to Is Miss Solis liable? State briefly your reasons. (1988
the painting? Explain. (2013 Bar) Bar)

A: Rudy owns the copyright to the painting because he was A: Yes, Miss Solis may be held liable. Animus furandi or
intention to pirate is not an element of infringement; hence,
one whofrom
existed actually created itof( Sec.
the moment 178.1 of the
its creation IPC
(Sec. ). His
172; rights
Unilever an honest intention is no defense to an action for
Philippines (PRC) v. CA, 498 SCRA 334, 2006). The infringement.
registration of the painting by Bernie with the National
Library did not confer copyright upon him. The registration Q: The Victoria Hotel chain reproduces videotapes,
is merely for the purpose of completing the records of the distributes the copies thereof to its hotels and makes
National Library (Section 191). them available to hotel guests for viewing in the hotel
guest rooms. It charges a separate nominal fee for the
Doctrine of Fair Use use of the videotape player.

Q: X copyrighted a scientific research paper consisting a. Can the Victoria Hotel be enjoined for infringing
of 50 pages dealing with the Tasadays. Y wrote a 100- copyrights and held liable for damages?
page review of X’s paper criticizing X’s findings and b. Would it make any difference if Victoria Hotel does
dismissing X’s story as a hoax. Y’s review literally not charge any fee for the use of the videotape?
reproduced 90% of X’s paper. Can X sue Y for (1994 Bar)
infringement of his copyright? (1989 Bar)
A:
A: The Copyright Law provides that to an extent compatible
with fair practice and justified by scientific, critical, a. Yes. Victoria Hotel may be held liable for infringing
copyrights of the said videotapes because the
informatory or educational purpose, it is permissible to
104
UST BAR OPERATIONS
QUAMTO (1987-2016)

reproduction and distribution thereof are not merely any crime. He maintains several bank accounts and has
for private viewing. Instead, it was used as a means to purchased 5 houses and lots for his children from the
gain extra profit by making it as an extra amenity for its Luansing Realty Inc. Since he does not have any visible
hotel services. However, if such performances job, the company reported his purchases to the Anti-
contained in the videotapes became available to the Money Laundering Council (AMLC). Thereafter, AMLC
public even prior to its registration, then there is no charged him with violation of the Anti-Money
copyright infringement because the videotapes are Laundering Law. Upon request of the AMLC, the bank
already considered as public property. disclosed to it Rudy's bank deposits amounting to P100
b. No. Notwithstanding the non-charging of fee for the use Million. Subsequently, he was charged in court for
of the videotapes, Victoria Hotel still uses the violation of the Anti-Money Laundering Law.
videotapes for business purposes, serving as an
attraction to prospective and current guests, unless the a. Can Rudy move to dismiss the case on the ground
performances in the videotapes had been long before that he has no criminal record?
available to the public prior to registration; hence, it is b. To raise funds for his defense, Rudy sold the houses
already public property (Filipino Society of Composers, and lots to a friend. Can Luansing Realty, Inc. be
Authors, Publishers, Inc. v. Benjamin Tan, G.R. No. L- compelled to transfer to the buyer ownership of the
36402, March 16, 1987). houses and lots?
c. In disclosing Rudy's bank accounts to the AMLC, did
Q: In an action for damages on account of an the bank violate any law?
infringement of a copyright, the defendant (the alleged d. Supposing the titles of the houses and lots are in
pirate) raised the defense that he was unaware that possession of the Luansing Realty Inc., is it under
what he had copied was a copyright material. Would obligation to deliver the titles to Rudy? (2006 Bar)
this defense be valid? (1997 Bar)
A:
A: No. In copyright infringement, intent is irrelevant. A
person may consciously or unconsciously copy or infringe a a. No. The contention of Rudy is not tenable because
copyrighted material and still be held liable for such act. under AMLA, "money laundering crime" committed
when the proceeds of an "unlawful activity," like
Q: Juan Xavier wrote and published a story similar to an jueteng operations, are made to appear as having
unpublished copyrighted story of Manoling Santiago. It srcinated from legitimate sources. Money laundering
was, however, conclusively proven that Juan Xavier was crime is separate from the unlawful activity of being a
not aware that the story of Manoling Santiago was jueteng operator, and requires no previous conviction
protected by copyright. Manoling Santiago sued Juan for the unlawful activity. ( Sec. 3, AMLA)
Xavier for infringement of copyright. Is Juan Xavier b. Yes. Rudy is still the owner of the house and lot in
liable? (1998 Bar) question and as such he may dispose the same as he
pleases. Absent any freeze order filed by the OSG on
A: No. Although intent is irrelevant in cases of copyright behalf of the AMLC, Rudy may dispose said properties
infringement, Juan had no access to Manoling’s copyrighted and compel Luansing Realty to transfer to the buyer
story because it is unpublished. Hence, he can put up ownership of the properties sold.
independent creation as a defense being that he has no c. Yes. Under the Anti-money Laundering Law, as
reasonable access to the unpublished copyrighted story of amended, the AMLC may look into bank accounts upon
Manoling. order of any competent court based in ex parte
application when it has been established that said
Q: KK is from Bangkok, Thailand. She studies medicine accounts are related to an unlawful activity. In the case
in the Pontifical University of Santo Tomas (UST). She at hand, the AMLC merely requested the disclosure of
learned that the same foreign books prescribed in UST said accounts without court order. The bank therefore
are 40-50% cheaper in Bangkok. So she ordered 50 violated the secrecy of bank account of Rudy when it
copies of each book for herself and her classmates and allowed the AMLC to look into said accounts without
sold the books at 20% less than the price in the court order. (Sec. 11, Anti-money Laundering Law as
Philippines. XX, the exclusive licensed publisher of the amended)
books in the Philippines, sued KK for copyright d. Yes. The properties are validly sold in favor of Rudy and

infringement. Decide. (2014 Bar) as suchthe


deliver Luansing Realty
titles to the is under
buyer. the obligation
This is without to
prejudice
A: KK did not commit copyright infringement. Under the to the application of freeze order by the OSG on behalf
“first sale” doctrine, the owner of a particular copy or of the AMLC.
phonorecord lawfully made is entitled, without the
authority of the copyright owner, to sell or otherwise Unlawful Activities and Predicate Crimes
dispose of the possession of that copy or phonorecord.
Hence, there is no infringement by KK since the said Q: Name at least 5 predicate crimes to money
doctrine permitted importation and resale without the laundering. (2007 Bar)
publisher’s further permission.
A:
a. Kidnapping for ransom under Article 267 of Act no.
SPECIAL LAWS 3815, otherwise known as the RPC, as amended;
b. Sections 3,4,5,7,8, and 9 of Article Two of R.A. No. 6425,
as amended, otherwise known as the Dangerous Drugs
ANTI-MONEY LAUNDERING ACT(R.A. NO. 9160, AS Act of 1972;
AMENDED BY R.A. NO. 9194) c. Section 3 paragraphs B,C,E,G,H, and I of R.A. No. 3019,
as amended, otherwise known as the Anti-Graft and
Q: Rudy is jobless but is reputed to be a jueteng Corrupt Practices Act;

operator. He has never been charged or convicted of d. Plunder under R.A. No. 7080, as amended;

105
Mercantile Law

e. Robbery and extortion under Articles 294, 295, 296, report”? (2015 Bar)
300, 301, and 302 of the RPC, as amended;
f. Jueteng and Masiao punished as illegal gambling under A: A covered transaction report involves transaction/s in
PD No. 1602; cash or other equivalent monetary instrument involving a
g. Piracy on the high seas under the RPC, as amended and total amount in excess of 500k within one banking day
PD No. 532; while suspicious transaction report involves transactions
h. Qualified theft under Article 310 of the RPC, as with covered institutions regardless of the amounts
amended; involved made under any of the suspicious circumstances
i. Swindling under Article 315 of the RPC, as amended; enumerated by law.
j. Smuggling under R.A. Nos. 455 and 1937;
k. Violations under RA No. 8792, otherwise known as the Q: Does the Anti-Money Laundering Council have the
Electronic Commerce Act of 2000; authority to freeze deposits? Explain. (2015 Bar)
l. H