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COMPILATION OF DOCTRINES IN COMMERCIAL LAW


CODE OF COMMERCE

LETTERS OF CREDIT
In commercial transactions involving letters of credit, the functions assumed by a correspondent
bank are classified according to the obligations taken up by it. The correspondent bank may be
called a notifying bank, a negotiating bank, or a confirming bank.
In case of a notifying bank, the correspondent bank assumes no liability except to notify and/or
transmit to the beneficiary the existence of the letter of credit. The notifying bank may suggest to
the seller its willingness to negotiate, but this fact alone does not imply that the notifying bank
promises to accept the draft drawn under the documentary credit.
A notifying bank is not a privy to the contract of sale between the buyer and the seller, its
relationship is only with that of the issuing bank and not with the beneficiary to whom he assumes
no liability. It follows therefore that when the petitioner refused to negotiate with the private
respondent, the latter has no cause of action against the petitioner for the enforcement of his
rights under the letter.
A negotiating bank, on the other hand, is a correspondent bank which buys or discounts a draft
under the letter of credit. Its liability is dependent upon the stage of the negotiation. If before
negotiation, it has no liability with respect to the seller but after negotiation, a contractual
relationship will then prevail between the negotiating bank and the seller.
In the case of a confirming bank, the correspondent bank assumes a direct obligation to the seller
and its liability is a primary one as if the correspondent bank itself had issued the letter of credit.
(FEATI BANK VS. CA)

What characterizes letters of credit, as distinguished from other accessory contracts, is the
engagement of the issuing bank to pay the seller once the draft and the required shipping
documents are presented to it. In turn, this arrangement assures the seller of prompt payment
independent of any breach of the main sales contract. By this so-called "independence principle,"
the bank determines compliance with the letter of credit only by examining the shipping
documents presented; it is precluded from determining whether the main contract is actually
accomplished or not. (BANK OF AMERICA VS. CA)

NEGOTIABLE INSTRUMENTS LAW


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NEGOTIABILITY
The weight of authority in the United States is that postal money orders are not negotiable
instruments, the reason behind this rule being that, in establishing and operating a postal money
order system, the government is not engaging in commercial transactions but merely exercises a
governmental power for the public benefit. It is to be noted in this connection that some of the
restrictions imposed upon money orders by postal laws and regulations are inconsistent with the
character of negotiable instruments. For instance, such laws and regulations usually provide for not
more than one endorsement; payment of money orders may be withheld under a variety of
circumstances. (PHIL. EDUC. CO. VS. SORIANO)
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On this score, the accepted rule is that the negotiability or non-negotiability of an instrument is
determined from the writing, that is, from the face of the instrument itself. (CALTEX PHIL. VS. CA)

The indication of Fund 501 as the source of the payment to be made on the treasury warrants
makes the order or promise to pay "not unconditional and the warrants themselves non-negotiable.
There should be no question that the exception on Section 3 of the Negotiable Instruments Law is
applicable in the case at bar. (METROBANK VS. CA)

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A negotiable instrument may, however, instead of being negotiated, also be assigned or


transferred. The legal consequences of negotiation as distinguished from assignment of a
negotiable instrument are, of course, different. A nonnegotiable instrument may, obviously, not be
negotiated; but it may be assigned or transferred, absent an express prohibition against assignment
or transfer written in the face of the instrument:
The words 'not negotiable,' stamped on the face of the bill of lading, did not destroy its
assignability, but the sole effect was to exempt the bill from the statutory provisions relative
thereto, and a bill, though not negotiable, may be transferred by assignment; the assignee taking
subject to the equities between the original parties. (SESBREO VS. CA)

The essence of negotiability which characterizes a negotiable paper as a credit instrument lies in
its freedom to circulate freely as a substitute for money. (FIRESTONE TIRE & RUBBER VS. CA)

PAYABLE TO BEARER
Where a check is made payable to the order of 'cash', the word cash 'does not purport to be the
name of any person', and hence the instrument is payable to bearer. The drawee bank need not
obtain any indorsement of the check, but may pay it to the person presenting it without any
indorsement. (ANG TEK LIAN VS. CA)

COMPLETE BUT UNDELIVERED INSTRUMENT


A negotiable instrument, of which a check is, is not only a written evidence of a contract right
but is also a species of property. Just as a deed to a piece of land must be delivered in order to
convey title to the grantee, so must a negotiable instrument be delivered to the payee in order to
evidence its existence as a binding contract.
Thus, the payee of a negotiable instrument acquires no interest with respect thereto until its
delivery to him. Delivery of an instrument means transfer of possession, actual or constructive,
from one person to another. Without the initial delivery of the instrument from the drawer to the
payee, there can be no liability on the instrument. Moreover, such delivery must be intended to
give effect to the instrument. (DEVELOPMENT BANK VS. SIMA WEI)

FORGERY
A forged signature in a negotiable instrument is wholly inoperative and no right to discharge it or
enforce its payment can be acquired through or under the forged signature except against a party
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who cannot invoke the forgery, it stands to reason, upon the facts of record, that the respondent,
as a collecting bank which endorsed the checks to the drawee-banks for clearing, should be liable
to the latter for reimbursement, for, as found by the court a quo and by the appellate court, the
endorsements on the checks had been forged prior to their delivery to the petitioner. In legal
contemplation, therefore, the payments made by the drawee-banks to the respondent on account
of the said checks were ineffective; and, such being the case, the relationship of creditor and
debtor between the petitioner and the respondent had not been validly effected, the checks not
having been properly and legitimately converted into cash. (JAI-ALAI VS. BPI)

Where a check is drawn payable to the order of one person and is presented to a bank by
another and purports upon its face to have been duly indorsed by the payee of the check, it is the
duty of the bank to know that the check was duly indorsed by the original payee, and where the
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Bank pays the amount of the check to a third person, who has forged the signature of the payee,
the loss falls upon the bank who cashed the check, and its only remedy is against the person to
whom it paid the money. (REPUBLIC BANK VS. EBRADA)

The records show that at the time the twenty-three (23) checks were prepared, negotiated, and
encashed, the petitioner was using its own personalized checks, instead of the official PNB
Commercial blank checks. In the exercise of this special privilege, however, the petitioner failed to
provide the needed security measures. Hence, the petitioner is barred from setting up the defense
of forgery under Section 23 of the Negotiable Instruments Law because it was guilty of negligence

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not only before the questioned checks were negotiated but even after the same had already been
negotiated. (MWSS vs. CA)

While the drawer generally owes no duty of diligence to the collecting bank, the law imposes a
duty of diligence on the collecting bank to scrutinize checks deposited with it for the purpose of
determining their genuineness and regularity. The collecting bank being primarily engaged in
banking holds itself out to the public as the expert and the law holds it to a high standard of
conduct. (BANCO DE ORO VS. EQUITABLE BANK)

The negligence of a depositor which will prevent recovery of an unauthorized payment is based
on failure of the depositor to act as a prudent businessman would under the circumstances.
(GEMPESAW VS. CA)

The bank on which a check is drawn, known as the drawee bank, is under strict liability to pay
the check to the order of the payee. The drawer's instructions are reflected on the face and by the
terms of the check. Payment under a forged indorsement is not to the drawer's order. When the
drawee bank pays a person other than the payee, it does not comply with the terms of the check
and violates its duty to charge its customer's (the drawer) account only for properly payable items.
Since the drawee bank did not pay a holder or other person entitled to receive payment, it has no
right to reimbursement from the drawer. The general rule then is that the drawee bank may not
debit the drawer's account and is not entitled to indemnification from the drawer. The risk of loss
must perforce fall on the drawee bank.
However, if the drawee bank can prove a failure by the customer/drawer to exercise ordinary care
that substantially contributed to the making of the forged signature, the drawer is precluded from
asserting the forgery.
If at the same time the drawee bank was also negligent to the point of substantially contributing to
the loss, then such loss from the forgery can be apportioned between the negligent drawer and the
negligent bank. (ASSOCIATED BANK VS. CA)

The mere fact that the forgery was committed by the drawer-payors confidential employee or
agent, who by virtue of his position had unusual facilities for perpetrating the fraud and imposing
the forged paper upon the bank, does not entitle the bank to shift the loss to the drawer-payor in
the absence of some circumstances raising estoppel against the drawer. (PCIB vs. CA)

The petitioner is precluded from setting up the forgery, assuming there is a forgery, due to his
own negligence in entrusting to his secretary his credit cards and checkbook including the
verification of his statements of accounts. (ILUSORIO VS. CA)

MATERIAL ALTERATION
An alteration is said to be material if it alters the effect of the instrument. It means an
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unauthorized change in an instrument that purports to modify in any respect the obligation of a
party or an unauthorized addition of words or numbers or other change to an incomplete
instrument relating to the obligation of a party. In other words, a material alteration is one which
changes the items which are required to be stated under Section 1 of the Negotiable Instrument
Law.
A serial number is an item which is not an essential requisite for negotiability under Section 1 of
the NIL. (PNB vs. CA)

The insertion of the words "Agent, Phil. National Bank," which converts the bank from a mere
drawee to a drawer and therefore changes its liability, constitutes a material alteration of the
instrument without the consent of the parties liable thereon, and so discharges the instrument.
(MONTINOLA VS. PNB)

ACCOMMODATION PARTY 117


On principle, a solidary accommodation maker who made payment-has the right to contribution,
from his co-accommodation maker, in the absence of agreement to the contrary between them,
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and subject to conditions imposed by law. This right springs from an implied promise between the
accommodation makers to share equally the burdens that may ensue from their having consented
to stamp their signatures on the promissory note. For having lent their signatures to the principal
debtor, they clearly placed themselves-in so far as payment made by one may create liability on
the other in the category of mere joint guarantors of the former. (SADAYA VS. SEVILLA)
The aforequoted provision of the Negotiable Instruments Law which holds an accommodation
party liable on the instrument to a holder for value, although such holder at the time of taking the
instrument knew him to be only an accommodation party, does not include nor apply to
corporations which are accommodation parties. This is because the issue or indorsement of
negotiable paper by a corporation without consideration and for the accommodation of another is
ultra vires. Hence, one who has taken the instrument with knowledge of the accommodation nature
thereof cannot recover against a corporation where it is only an accommodation party. If the form
of the instrument, or the nature of the transaction, is such as to charge the indorsee with
knowledge that the issue or indorsement of the instrument by the corporation is for the
accommodation of another, he cannot recover against the corporation thereon.
By way of exception, an officer or agent of a corporation shall have the power to execute or
indorse a negotiable paper in the name of the corporation for the accommodation of a third person
only if specifically authorized to do so (CRISOLOGO-JOSE VS. CA)

To be sure, as regards an accommodation party (such as STEELWELD), the fourth condition, i.e.,
lack of notice of any infirmity in the instrument or defect in title of the persons negotiating it, has
no application. This is because Section 29 of the law above quoted preserves the right of recourse
of a "holder for value" against the accommodation party notwithstanding that "such holder, at the
time of taking the instrument, knew him to be only an accommodation party." (STELCO vs. CA)

In accommodation transactions recognized by the Negotiable Instruments Law, an


accommodating party lends his credit to the accommodated party, by issuing or indorsing a check
which is held by a payee or indorsee as a holder in due course, who gave full value therefor to the
accommodated party. The latter, in other words, receives or realizes full value which the
accommodated party then must repay to the accommodating party, unless of course the
accommodating party intended to make a donation to the accommodated party. But the
accommodating party is bound on the check to the holder in due course who is necessarily a third
party and is not the accommodated party. Having issued or indorsed the check, the accommodating
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party has warranted to the holder in due course that he will pay the same according to its tenor.
(TRAVEL-ON VS. CA)

HOLDER IN DUE COURSE


As the holder's title was defective or suspicious, it cannot be stated that the payee acquired the
check without knowledge of said defect in holder's title, and for this reason the presumption that it
is a holder in due course or that it acquired the instrument in good faith does not exist. And having
presented no evidence that it acquired the check in good faith, it (payee) cannot be considered as
a holder in due course. In other words, under the circumstances of the case, instead of the
presumption that payee was a holder in good faith, the fact is that it acquired possession of the
instrument under circumstances that should have put it to inquiry as to the title of the holder who
negotiated the check to it. The burden was, therefore, placed upon it to show that notwithstanding
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the suspicious circumstances, it acquired the check in actual good faith. (DE OCAMPO VS.
GATCHALIAN)

Admittedly, petitioner became the holder of the cashier's check as endorsed by Alexander Lim
who stole the check. He refused to say how and why it was passed to him. He had therefore notice
of the defect of his title over the check from the start. The holder of a cashier's check who is not a
holder in due course cannot enforce such check against the issuing bank which dishonors the same.
If a payee of a cashier's check obtained it from the issuing bank by fraud, or if there is some other

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reason why the payee is not entitled to collect the check, the respondent bank would, of course,
have the right to refuse payment of the check when presented by the payee, since respondent bank
was aware of the facts surrounding the loss of the check in question. (MESINA VS. IAC)

LIABILITY OF GENERAL INDORSER


"Recourse" means resort to a person who is secondarily liable after the default of the person who
is primarily liable. Appellant, by indorsing the note "with recourse" does not make itself a qualified
indorser; but a general indorser who is secondarily liable, because by such indorsement, it agreed
that if Dr. Villaruel fails to pay the note, plaintiff-appellee can go after said appellant. The effect
of such indorsement is that the note was indorsed Without qualification. A person who indorses
without qualification engages that on due presentment, the note shall be accepted or paid, or both
as the case may be, and that if it be dishonored, he will pay the amount thereof to the holder.
Appellant Sambok's intention of indorsing the note without qualification is made even more
apparent by the fact that the notice of demand, dishonor, protest and presentment were all
waived. The words added by said appellant do not limit his liability, but rather, confirm his
obligation as a general indorser. (METROPOL VS. SAMBOK)

The collecting bank or last endorser generally suffers the loss because it has the duty to
ascertain the genuineness of all prior endorsements considering that the act of presenting the
check for payment to the drawee is an assertion that the party making the presentment has done
its duty to ascertain the genuineness of the endorsements." The rule finds more meaning in this
case where the check involved is drawn on a foreign bank and therefore collection is more difficult
than when the drawee bank is a local one even though the check in question is a manager's check.
(BPI VS. CA AND NAPIZA)

PRESENTMENT FOR PAYMENT/ACCEPTANCE


A letter of credit is defined as an engagement by a bank or other person made at the request of
a customer that the issuer will honor drafts or other demands for payment upon compliance with
the conditions specified in the credit. Through a letter of credit, the bank merely substitutes its
own promise to pay for the promise to pay of one of its customers who in return promises to pay
the bank the amount of funds mentioned in the letter of credit plus credit or commitment fees
mutually agreed upon.
In the instant case then, the drawee was necessarily the herein petitioner. It was to the latter that
the drafts were presented for payment. In fact, there was no need for acceptance as the issued
drafts are sight drafts. Presentment for acceptance is necessary only in the cases expressly
provided for in Section 143 of the Negotiable Instruments Law (NIL). (PRUDENTIAL BANK VS. IAC)

Under Section 186 of the NIL, a check must be presented for payment within a reasonable time
after its issue or the drawer will be discharged from liability thereon to the extent of the loss
caused by the delay. By current banking practice, a check becomes stale after more than 6
months or 180 days.
A stale check is one which has not been presented for payment within a reasonable time after its
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issue. It is valueless and therefore should not be paid. This is because the nature and theory behind
the use of a check points to its immediate use and payability. (INTL CORP. BANK VS. SPOUSES
GUECO)

CHECKS
The drawing and negotiation of a check have certain effects aside from the transfer of title or
the incurring of liability in regard to the instrument by the transferor. The holder who takes the
negotiated paper makes a contract with the parties on the face of the instrument. There is an
implied representation that funds or credit are available for the payment of the instrument in the
bank upon which it is drawn. Consequently, the withdrawal of the money from the bank to avoid
liability on the checks cannot prejudice the rights of a holder in due course. (STATE INVESTMENT
HOUSE VS. CA)

In order to preserve the credit worthiness of chocks, jurisprudence has pronounced that crossing 117
of a check should have the following effects: (a) the check may not be encashed but only deposited
in the bank; (b) the check may be negotiated only once-to one who has an account with a bank; (c)
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and the act of crossing the check serves as warning to the holder that the check has been issued for
a definite purpose so that he must inquire if he has received the check pursuant to that purpose,
otherwise, he is not a holder in due course. (BATAAN CIGAR & CIGARETTE FACTORY VS. CA)

While it is true that the delivery of a check produces the effect of payment only when it is
cashed, pursuant to Art. 1249 of the Civil Code, the rule is otherwise if the debtor is prejudiced by
the creditor's unreasonable delay in presentment. The acceptance of a cheek implies an
undertaking of due diligence in presenting it for payment, and if he from whom it is received
sustains loss by want of such diligence, it will be held to operate as actual payment of the debt or
obligation for which it was given. It has, likewise, been held that if no presentment is made at all,
the drawer cannot be held liable irrespective of loss or injury unless presentment is otherwise
excused.
This is in harmony with Article 1249 of the Civil Code under which payment by way of check or
other negotiable instrument is conditioned on its being cashed, except when through the fault of
the creditor, the instrument is impaired. The payee of a check would be a creditor under this
provision and if its non-payment is caused by his negligence, payment will be deemed effected and
the obligation for which the check was given as conditional payment will be discharged. (PAPA VS.
A.U. VALENCIA & CO., INC.)

INSURANCE LAW

INSURABLE INTEREST
A person who is interested in the safety and preservation of materials in his possession belonging
to third parties because he stands either to benefit from their continued existence or to be
prejudiced by their destruction, has an insurable interest thereon which is not necessarily limited
to the extent of his liability to the owners thereof. A person having mere right of possession of
property may insure it to its full value and in his own name, even when he is not responsible for its
safekeeping. (ANG KA YU vs. PHOENIX ASSURANCE CO. LTD 1CAR 2)

The automatic assignment of the policy to CKS under the provision of the lease contract
previously quoted is void for being contrary to law and/or public policy. The proceeds of the fire
insurance policy thus rightfully belong to the spouses Nilo Cha and Stella Uy-Cha (herein
copetitioners), The insurer (United) cannot be compelled to pay the proceeds of the fire insurance
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policy to a person (CKS) who has no insurable interest in the property insured. (SPOUSES CHA vs.
CA, 277 SCRA 690)

The rationale of a group insurance policy of mortgagors, otherwise known as the "mortgage
redemption insurance," is a device for the protection of both the mortgagee and the mortgagor. On
the part of the mortgagee, it has to enter into such form of contract so that in the event of the
unexpected demise of the mortgagor during the subsistence of the mortgage contract, the proceeds
from such insurance will be applied to the payment of the mortgage debt, thereby relieving the
heirs of the mortgagor from paying the obligation. In a similar vein, ample protection is given to
the mortgagor under such a concept so that in the event of death; the mortgage obligation will be
extinguished by the application of the insurance proceeds to the mortgage indebtedness.
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(GREPALIFE VS. CA & LEUTERIO)

SUBROGATION
The insurer can only be subrogated to only such rights as the insured may have. However if the
insured, after receiving payment from the insurer, releases the wrongdoer who caused the loss, the
insurer loses his rights against the latter. In such a case, the insurer will be entitled to recover from
the insured whatever it has paid to the latter, unless the release was made with the consent of the
insurer. (MANILA MAHOGANY MANUFACTURING CORP. vs. CA, 154 SCRA 650)

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Subrogation is a normal incident of indemnity insurance Upon payment of the loss, the insurer is
entitled to be subrogated pro tanto to any right of action which the insured may have against the
third person whose negligence or wrongful act caused the loss.
The right of subrogation is of the highest equity. The loss in the first instance is that of the insured
but after reimbursement or compensation, it becomes the loss of the insurer.
When the insurance company pays for the loss, such payment operates as an equitable assignment
to the insurer of the property and all remedies which the insured may have for the recovery
thereof. That right is not dependent upon, nor does it grow out of, any privity of contract, or upon
written assignment of claim, and payment to the insured makes the insurer an assignee in equity.
(MALAYAN INSURANCE VS. CA)

There are a few recognized exceptions to this rule on subrogation. For instance, if the assured
by his own act releases the wrongdoer or third party liable for the loss or damage, from liability,
the insurer's right of subrogation is defeated. Similarly, where the insurer pays the assured the
value of the lost goods without notifying the carrier who has in good faith settled the assured's
claim for loss, the settlement is binding on both the assured and the insurer, and the latter cannot
bring an action against the carrier on his right of subrogation. And where the insurer pays the
assured for a loss which is not a risk covered by the policy, thereby effecting "voluntary payment",
the former has no right of subrogation against the third party liable for the loss. (PAN MALAYAN
INSURANCE CORP. VS. CA)
INCONTESTABILITY CLAUSE
Section 48 of the Insurance Code precludes the insurer from raising the defense of false
representations or concealment of material facts insofar as health and previous diseases are
concerned if the insurance has been in force for at least 2 years during the insureds lifetime. The
phrase during the lifetime in section 48 means that the policy is no longer considered in force
after the insured has died. The key phrase in section 48 is for a period of 2 years. The insurer has 2
years from the date of the issuance of the contract or its last reinstatement within which to contest
the policy whether or not the insured still lives within such period. (TAN vs. CA 174 SCRA 403)

MISCONDUCT OF INSURANCE AGENT


Where the applicant signs the application in blank and authorizes the agent of the insurance
company to fill up the blank spaces for him, he made them his own agent for that purpose and he is
responsible for their acts in that connection. If they falsified the answers for him, he could not
evade the responsibility for the application being falsified. (INSURANCE LIFE ASSURANCE CORP. vs.
FELICIANO, 74PHIL 468)

MARINE INSURANCE
The fact that the subject matter insured was loaded on two different barges did not make the
contract several and divisible as to the items insured, where it was shown that the items insured
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were not separately valued or separately insured and only one premium was paid for the entire
shipment. (ORIENTAL ASSURANCE CORP. vs. CA 200 SCRA459)

The fact that the unseaworthiness of the ship was unknown to the insured is immaterial in
ordinary marine insurance and may not be used as a defense to recover on the policy. The cargo
owner is required to look for a common carrier that keeps its vessels seaworthy. In the absence of
stipulation that the insurer answers for perils of the ship, insurance cannot be recovered on losses
from perils of the ship. (ROQUE vs. IAC, 139SCRA 597)

Under an all-risks policy, it is sufficient to show that there was damage occasioned by some
accidental cause of any kind, and there is no necessity to point to any particular cause. An all-risks
coverage extends all damages/ losses suffered by the insured cargo except a.) loss or damage or
expense proximately caused by delay; b) loss or damage or expense proximately caused by the 117
inherent vice or nature of the subject matter insured. Also it covers all losses except such as arising
from the fraud of the insured. (FILIPINO MERCHANTS INSURANCE CO. vs. CA, 179 SCRA 638)
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DOUBLE INSURANCE

The insurer may not recover under an insurance policy if he has violated the conditions of the
policy to the effect that he did not reveal the existence of other insurance policies over the same
properties as required by the warranty appearing on the face of the policy. (UNION
MANUFACTURING CO. INC. vs. PHILIPPINE GURANTY CO. INC., 47 SCRA 271)

REINSURANCE
In an action on a contract of reinsurance, as a general rule, the reinsurer is entitled to avail
itself of every defense which the reinsured might urge in an action by the person originally insured.
(GIBSON vs. REVILLA, 92 SCRA 219)

IMPLIED WARRANTY OF SEAWORTHINESS


In every voyage policy of marine insurance, there is an implied warranty that the vessel is in all
respect seaworthy, and such warranty can be excluded only by clear provisions of the policy.
(PHILIPPINE AMERICAN GENERAL INSURANCE CO. vs. CA 273 SCRA 262)

AUTHORIZED DRIVER CLAUSE


The main purpose of the authorized driver clause is that a person other than the insured owner
who drives the car with his person must be duly licensed and not disqualified to drive a car.
Where a car is admittedly unlawfully and wrongfully taken without the owners consent, such
taking constitutes or partakes the nature of theft for purposes of recovery under the insurance
policy. (VILLACORTA vs. INSURANCE COMMISSION, 100 SCRA 467)
The requirement in an authorized driver clause that the driver be permitted in accordance
with the licensing or other law or regulations to drive the motor vehicle and is not disqualified from
driving such motor vehicle by order of a court of law or by reason of an enactment or regulation in
that behalf applies only when the driver is driving under the insureds order or with his permission.
It does not apply when the person driving is the insured himself. (PALERMO vs. PYRAMID INSURANCE
CO. INC., 161 SCRA 677)

LIFE INSURANCE
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Where a life insurance policy is made payable to one of the heirs of the person whose life is
insured, the proceeds of the policy on the death of the insured belong exclusively to the
beneficiary and not to the estate of the person whose life was insured and such proceeds are his
individual property and not the property of the heirs of the person whose life was insured. (DEL
VAL vs. DEL VAL, 29 PHIL 534)

The proceeds of a life insurance policy payable to the insured persons estate, on which the
premiums were paid by the conjugal partnership, constitute community property and belong one-
half to the husband exclusively, and the other half to the wife. If the premiums were paid partly
with paraphernal and partly conjugal funds, the proceeds are in like proportion, paraphernal in
part and conjugal in part. (BPI vs. POSADAS, 56 PHIL 215)
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According to the Article 2012 of the New Civil Code that any person who is forbidden from
receiving any donation under Art. 739 cannot be named beneficiary of a life insurance policy by the
person who cannot make a donation to him. Both are founded upon the same consideration which is
liberality. (INSULAR LIFE vs. EBRADO 80 SCRA 181)

CASUALTY INSURANCE

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Where the contract provides for indemnity against liability to third persons, then third persons
to whom the insured is liable, can sue directly the insurer upon the occurrence of the injury or
event upon which the liability depends. The purpose is to protect the injured person against the
insolvency of the insured who causes such injury and to give him a certain beneficial interest in the
proceeds of the policy. It is as if such injured person were especially named in person. (SHAFER vs.
JUDGE, RTC, 167 SCRA 386)

COMPULSORY MOTOR VEHICLE LAW INSURANCE


Section 378 of the Insurance Code has established the following rules under the no fault
indemnity provision 1.) a claim maybe made against one motor vehicle only; 2) if the victim is an
occupant of a vehicle, the claim shall lie against the insurer of the motor vehicle in which he is
riding, mounting, dismounting from; 3) in any other case [i.e.] if the victim was not an occupant of
the vehicle, the claim shall lie against the insurer of the directly offending vehicle; 4) in all cases,
the right of the party paying the claim to recover the owner of the vehicle responsible for the
accident shall be maintained. (PERLA COMPANIA DE SEGURO INC. vs. ANCHETA 164 SCRA 144)

TRANSPORTATION LAWS

GENERAL CONCEPTS
There are two aspects of a contract of common carriage, namely: a.) the contract to carry, at
some future time, which contract is consensual and is necessarily perfected by mere consent and
b.) the contract of carriage itself which should be considered as a real contract for not until the
carrier is actually used can the carrier be said to have already assumed the obligation of a carrier.
(BRITISH AIRWAYS, INC. VS. CA)

Art. 1732 of the New Civil Code avoids any distinction between one whose principal business
activity is the carrying of persons or goods or both and one who does such carrying only as an
ancillary activity (sideline). It also avoids a distinction between a person or enterprise offering
transportation service on a regular or scheduled basis and one offering such service on an
occasional, episodic or unscheduled basis.
Neither does the law distinguish between a carrier offering its services to the general public that is
the general community or population and one who offers services or solicits business only from a
narrow segment of the general population.
A person or entity is a common carrier even if he did not secure a Certificate of Public
Convenience. (DE GUZMAN VS. CA)

One is a common carrier even if he has no fixed and publicly known route, maintains no
terminals, and issues no tickets. (ASIA LIGHTERAGE SHIPPING, INC. VS. CA)
Red Notes in Commercial Law

Art. 1732 makes no distinction as to the means of transporting, as long as it is by land, water or
air. It does not provide that the transportation should be by motor vehicle.
The test for determining whether a party is a common carrier is:
1. It must be engaged in the business of carrying goods for others as a public employment and
must hold itself out as ready to engage in the transportation of goods generally as a
business and not as a casual occupation;
2. It must undertake to carry goods of the kind to which its business in confined;
3. It must undertake to carry by the method by which his business is conducted and over its
established roads; and
4. The transportation must be for hire. (FIRST PHILIPPINE INDUSTRIAL CORPORATION VS. CA)

The true test of a common carrier is the carriage of goods or passengers provided it has space for
all who opt to avail themselves of its transportation for a fee. (NATIONAL STEEL CORP. VS. CA) 117
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The law of the country to which the goods are to be transported governs the liability of the
common carrier in case of their loss, destruction, or deterioration and it is immaterial that the
collision actually occurred in foreign waters. (NDC vs. CA)

REGISTERED OWNER AND KABIT SYSTEM


The registered owner of a certificate of public convenience is liable to the public for the injuries
or damages suffered by passengers or third persons caused by the operation of said vehicle, even
thought the same had been transferred to a third person. (EREZO VS. JEPTE)

The kabit system is an arrangement whereby a person who has been granted a certificate of
public convenience allows other persons who own motor vehicles to operate term under his license,
sometimes for a fee or percentage of the earnings. (LIM VS. CA)

Although not outrightly penalized as a criminal offense, the kabit system is invariably recognized
as being contrary to public policy and, therefore, void and inexistent under Art. 1409 of the Civil
Code. It is a fundamental principle that the court will not aid either party to enforce an illegal
contract, but will leave them both where it finds them. (LITA ENTERPRISES, INC. VS. IAC)
Where a jeepney is registered in the name of an authorized public operator but is actually
owned by another and the same bumped somebody thru the negligence of its driver, such a jeepney
can be sold at a public auction to satisfy the courts award. It cannot be considered a strangers
property. (SANTOS VS. SIBUG)

CARRIAGE OF GOODS

Duty to Accept goods


Common carriers cannot lawfully decline to accept a particular class of goods for carriage to the
prejudice of the traffic in those goods unless it appears that for some sufficient reason the
discrimination against the traffic in such goods is reasonable and necessary. Mere prejudice or
whim will not suffice. (FISHER VS. YANGCO STEAMSHIP CO.)

Duty to exercise extraordinary diligence


San Beda College of

Common carriers, from the nature of their business and for reasons of public policy, are bound
to observe extraordinary diligence in the vigilance over the goods transported by them, and this
liability lasts from the time the goods are unconditionally placed in the possession of, and received
by the carrier for transportation until the same are delivered actually or constructively, by the
carrier to the person who has a right to receive them. (SARKIES TOURS PHILIPPINES, INV. VS. CA)

When goods placed in its care are lost or damaged, the carrier is presumed to have been at fault
or to have acted negligently. The carrier therefore has the burden of proving that it observed
extraordinary diligence in order to avoid responsibility for the lost cargo. (TABACALERA INSURANCE
CO. VS. NORTH FRONT SHIPPING SERVICES, INC.)
Law

The extraordinary responsibility of the common carrier lasts until the actual or constructive
delivery of the cargoes to the consignee or to the person who has a right to receive them. (MACAM
VS. CA)

After a common carriers status has passed from that of carrier to that of agent of consignee,
loss of goods in its hands for cause beyond its control and without its negligence being proved
relieves the carrier of civil liability for such loss or damage. (SAMAR MINING CO. INC. VS.
NORDEUTSHER LLOYD)

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Owing to the high degree of diligence required of them, common carriers as a general rule are
presumed to have been at fault or negligent if the goods they transported deteriorated or got lost
or destroyed. Mere proof of delivery of the goods in good order to a common carrier and of their
arrival in bad order at their destination constitutes a prima facie case of fault or negligence against
the carrier. (BELGIAN OVERSEAS CHARTERING AND SHIPPING N.V. VS. PHILIPPINE FIRST INSURANCE
CO., INC.)

Mere proof of delivery of goods to a carrier in good order and the subsequent arrival of the same
goods at the place of destination in bad order makes for a prima facie case against the carrier.
(COASTWISE LIGHTERAGE CORP. V. CA)

Delivery of goods to the custom authorities is not delivery to the consignee. (LU DO V.
BINAMIRA)

DEFENSES
Where fortuitous event or force majeure is the immediate and proximate cause of the loss, the
obligor is exempt from liability for non-performance.
No extraordinary diligence by the carrier could have prevented the loss of the goods after they had
been deposited in the warehouse of the Bureau of Customs. (SERVANDO VS. PHILIPPINE STEAM
NAVIGATION CO.)
Where loss of cargo results from the failure of the officers of a vessel to inspect their ship
frequently, that loss cannot be attributed to force majeure, but to the negligence of the officials.
(EDGAR COKALIONG SHIPPING LINES, INC. VS. UCPB GENERAL INSURANCE COMPANY INC.)

Fire may not be considered as a natural disaster or calamity as it arises almost invariably from
some act of man or by human means. (EASTERN SHIPPING LINES INC. VS. IAC)

To exculpate the carrier from liability arising from hijacking, he must prove that the robbers or
the hijackers acted with grave or irresistible threat, violence, or force in accordance with Art.1745
of the Civil Code. (BASCOS VS. CA)

In order that a common carrier may be absolved from liability where the loss, destruction or
deterioration of the goods is due to a natural disaster or calamity, it must further be shown that
such natural disaster or calamity was the proximate and only cause of the loss and that the
common carrier exercised due diligence to prevent or minimize the loss before, during, and after
the occurrence of the natural disaster. (PHILIPPINE AMERICAN GENERAL INSURANCE CO., INC. VS.
MGG MARINE SERVICES, INC.)

To absolve the common carrier from liability the public authority must be shown to have the
Red Notes in Commercial Law

power to issue the order or that it was lawful, or that it was issued under legal process of
authority. (GANZON VS. CA)

If the improper packing or the defects in the container are known to the carrier or his employees
or apparent upon ordinary observation, but he nevertheless accepts the same without protest or
exception notwithstanding such condition, he is not relieved of liability for damage resulting
therefrom. (CALVO VS. UCPB GENERAL INSURANCE CO., INC.)

CARRIAGE OF PASSENGERS
A passenger is defined as one who travels in a public conveyance by virtue of a contract, express
or implied, with the carrier as to the payment of fare, or that which is accepted as an equivalent
thereof. The relation of carrier and passenger commences when one puts himself in the care of
carrier, or directly under its control, with the bona fide intention of becoming a passenger and is
accepted by the carrier, as where he makes a contract for transportation and presents himself at 117
the proper place and in a proper manner to be transported. (JESUSA VDA DE NUECA, ET AL. VS.
MANILA RAILROAD COMPANY)
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The relation of carrier and passenger continues until the passenger has been landed at the port
of destination and has left the vessel owners dock or premises. Once created, the relationship will
not ordinarily terminate until the passenger has, after reaching his destination, safely alighted from
the carriers conveyance or had a reasonable opportunity to leave the carriers premises. All
persons who remain on the premises a reasonable time after leaving the conveyance are to be
deemed passengers, and what is a reasonable time or a reasonable delay within this rule is to be
determined from all the circumstances, and includes a reasonable time to see after his baggage and
prepare for his departure. (ABOITIZ SHIPPING CORPORATION VS. CA)

A public utility bus, once it stops, is in effect making a continuous offer to bus riders. Hence, it
becomes the duty of the driver and the conductor, every time the bus stops, to do no act that
would have the effect of increasing the peril to a passenger while he is attempting to board the
same. The victim herein, by stepping and standing on the platform of the bus, is already considered
a passenger and is entitled to all the rights and protection pertaining to such a contractual relation.
(DANGWA TRANSPORTATION CO. INC. VS. CA)

The duty of a common carrier to provide safety to its passengers so obligates it not only during
the course of the trip but for as long as the passengers are within its premises and where they
ought to be in pursuance of the contract of carriage. (LIGHT RAIL TRANSIT AUTHORITY VS.
NAVIDAD)

The relation of carrier and passenger does not cease at the moment the passenger alights from
the carriers vehicle at a place selected by the carrier at the point of destination, but continues
until the passenger has had a reasonable time or a reasonable opportunity to leave the carriers
premises. (LA MALLORCA VS. CA)

A contract to transport passengers is a relationship imbued with public interest. Failure on the
part of the common carrier to live up to the exacting standards of care and diligence renders it
liable for any damages that may be sustained by its passengers. However, this is not to say that
common carriers are absolutely responsible for all injuries even if the same were caused by a
fortuitous event. To rule otherwise would render the defense of force majeure, as an exception
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from any liability, illusory and ineffective. (JAPAN AIRLINES VS. CA)

A common carrier does not give its consent to become an insurer of any and all risks to
passengers and goods. It merely undertakes to perform certain duties to the public as the
law imposes, and holds itself liable for any breach thereof. (PILAPIL VS. CA)

While a passenger is entitled to protection from personal violence by the carrier or its agents or
employees, since the contract of transportation obligates the carrier to transport a passenger
safely to his destination, the responsibility of the carrier extends only to those acts that the carrier
could foresee or avoid through the exercise of the degree of care and diligence required of it.
(GILLACO, ET AL. VS. MRR CO.)
Law

OBLIGATIONS OF THE SHIPPER, CONSIGNEE AND PASSENGER


The act of the shipper in furnishing the carrier with an inaccurate weight of the payloader
constitutes a contributory circumstance to the damage caused on the payloader, which mitigates
the liability for damages of petitioner in accordance with Art. 1741 of the Civil Code.( COMPANIA
MARITIMA VS. CA)

A passenger is guilty of contributory negligence where he chose to ride on the open platform of
the train and failed to hold tightly on the vertical grab bar. (PNR vs. CA)

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EXTRAORDINARY DILIGENCE
While the breaking of the idler may be due to an accident, or to something unexpected, the
cause of the disaster which resulted in the loss of the gasoline can only be attributed to the
negligence and lack of precaution to avert it on the part of defendant. The ship was not seaworthy
and defendant did not have a competent tug to effectuate the rescue. (STANDARD VACUUM OIL
COMPANY VS. LUZON STEVEDORING CO., INC.)

The behavior of the captain of the Don Juan- playing mahjong before and up to the time of
the collision- constitutes behavior that is simply unacceptable on the part of the master of the
vessel upon whom the law imposes the duty of extraordinary diligence- the duty to carry the
passengers safely as far as human care and foresight can provide, using the utmost diligence of very
cautious persons, with due regard for all the circumstances. (MECENAS VS. CA)

The common carriers liability for the death or injuries to its passengers is based on its
contractual obligation to carry its passengers safely to their destination. They are presumed to
have been at fault or to have acted negligently unless they prove that they observed extraordinary
diligence. (BATANGAS LAGUNA TAYABAS BUS CO. VS. IAC)

In an action based on a contract of carriage, the court need not make an express finding of fault
or negligence on the part of the carrier in order to hold it responsible to pay the damages sought
for by the passenger. By the contract of carriage, the carrier assumes the express obligation to
transport the passenger to his destination safely and to observe extraordinary diligence with due
regard for all the circumstances, and any injury that might be suffered by the passenger is right
away attributable to the fault or negligence of the carrier. (BATANGAS TRANSPORTATION COMPANY
VS. CAGUIMBAL)

The rule is settled that a driver abandoning his proper lane for the purpose of overtaking another
vehicle in an ordinary situation has the duty to see to it that the road is clear and not to proceed if
he cannot do so in safety. (MALLARI, SR. VS. CA)

Fairness demands that in measuring a common carriers duty towards its passengers, allowance
must be given to the reliance that should be reposed on the sense of responsibility of all the
passengers in regard to their common safety. It is to be presumed that a passenger will not take
with him anything dangerous to the lives and limbs of his co-passengers, not to speak of his own.
Not to be considered lightly is the right to privacy of each passenger. He cannot be subjected to
any unusual search, when he protests the innocuousness of his baggage and nothing appears to
indicate the contrary. (NOCUM VS. LAGUNA TAYABAS BUS CO.)

A common carrier is presumed at fault in he absence of a satisfactory explanation on how the


Red Notes in Commercial Law

airplane crash occurred. (VDA. DE ABETO VS. PHIL. AIR LINES, INC.)

BILL OF LADING AND OTHER FORMALITIES


Three kinds of stipulation have often been made in a bill of lading. The first is one exempting
the carrier from any and all liability for loss or damage occasioned by its own negligence. The
second is one providing for an unqualified limitation of such liability to an agreed valuation. And
the third is one limiting the liability of the carrier to an agreed valuation unless the shipper
declares a higher value and pays a higher rate of freight. The first and second kinds of stipulations
are invalid as being contrary to public policy, but the third is valid and enforceable. (H.E. HEACOCK
CO. VS. MACONDRAY & CO.)

While it may be true that petitioner had not singed the plane ticket, he is nevertheless bound by 117
the provisions thereof. Such provisions have been held to be part of the contract of carriage, and
valid and binding upon the passenger regardless of the latters lack of knowledge or assent to the
regulation. It is what is known as a contract of adhesion, in regards which it has been said that
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contracts of adhesion wherein one party imposes a ready made form of contract on the other are
contracts not entirely prohibited. The one who adheres to the contract is in reality free to reject it
entirely; if he adheres, he gives his consent. (ONG YIU VS. CA )

The consignee by making claim for loss on the basis of the bill of lading, to all intents and
purposes accepted said bill. Having done so, he becomes bound by all stipulations contained
therein whether on the front or at the back thereof. (SEA-LAND SERVICE, INC. VS. IAC)

Basic is the rule that a stipulation limiting the liability of the carrier to the value of the goods
appearing in the bill of lading, unless the shipper or owner declares a greater value, is binding.
Further, a contract fixing the sum that may be recovered by the owner or shipper for the loss,
destruction or deterioration of the goods is valid, if it is reasonable and just under the
circumstances, and has been fairly and freely agreed upon. (CITADEL LINES, INC. VS. CA)

A stipulation in the bill of lading limiting the common carriers liability for loss or destruction of
a cargo to a certain sum, unless the shipper or owner declares a greater value, is sanctioned by
Articles 1749 and 1750 of the Civil Code. The just and reasonable character of a stipulation is
implicit in it giving the shipper or owner the option of avoiding accrual of liability limitation by the
simple expedient and far from onerous expedient of declaring the nature and value of the shipment
in the bill of lading. (EVERETT STEAMSHIP CORPORATION VS. CA)

The issuance of a bill of lading carries the presumption that the goods were delivered to the
carrier issuing the bill and it is prima facie evidence of the receipt of the goods by the carrier.
However as between the shipper and the carrier, when no goods have been delivered for shipment
no recitals in the bill of lading can estop the carrier from showing the true facts. (SALUDO, JR. VS.
CA)
ACTIONS IN CASE OF BREACH OF CONTRACT OF CARRIAGE
The owners and driver of the bus may be made jointly and severally liable to the victims where
their separate and distinct acts concurred to produce the same injury. (FABRE, JR. VS CA)

Where the contract of shipment contains a reasonable requirement of giving notice of loss or
injury to the goods, the giving of such notice is a condition precedent to the action for loss or
San Beda College of

injury or the right to enforce the carriers liability. The fundamental purpose is not to relieve the
carrier from just liability, but reasonably to inform it that the shipment has been damaged and that
it is charged with liability therefore, and to give it an opportunity to examine the nature and
extent of the injury. (PHILIPPINE AMERICAN GENERAL INSURANCE CO., INC. VS. SWEET LINES, INC.)

For suits not predicated upon loss or damage but on alleged misdelivery or conversion of the
goods, the applicable rule on prescription is that found in the New Civil Code; either ten years for
breach of a written contract or four years for quasi-delict, and not the rule on prescription in the
COGSA. (ANG VS. AMERICAN STEAMSHIP AGENCIES INC.)

Loss refers to the deterioration or disappearance of goods. Damages arising from delay or late
Law

delivery are not the damage or loss contemplated under the COGSA. (MITSUI O.S.K. LINES LTD. VS.
CA)

The coverage of the one-year prescriptive period under the COGSA includes the insurer of the
goods. Otherwise, what the Act intends to prohibit after the lapse of the one-year prescriptive
period can be done indirectly by the shipper or owner of the goods by simply filing a claim against
the insurer even after the lapse of one year. (FILIPINO MERCHANTS INSURANCE CO., INC. VS.
ALEJANDRO)

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Under Sec. 3 (6) of the COGSA, only the carriers liability is extinguished if no suit is brought
within one year. But the liability of the insurer is not extinguished because the insurers liability is
based not on the contract of carriage but on the contract of insurance. (MAYER STEEL PIPE CORP.
VS. CA)

A written extrajudicial demand by the creditor does not toll the running of the one-year
prescriptive period under the Act. (DOLE PHILIPPINES, INC. VS MARITIME CO. OF THE PHILS.)

MARITIME LAW
The real and hypothecary nature of maritime law simply means that the liability of the carrier in
connection with losses related to maritime contracts is confined to the vessel, which is
hypothecated for such obligations or which stands as the guaranty for their settlement. (ABOITIZ
SHIPPING CORP. VS. GENERAL ACCIDENT FIRE AND LIFE ASSURANCE CORP., LTD.)

No vessel, no liability, expresses in a nutshell the limited liability rule. The shipowners or
agents liability is merely co-extensive with his interest in the vessel such that a total loss thereof
results in its extinction. The total destruction of the vessel extinguishes maritime liens because
there is no longer any res to which it can attach. (MONARCH INSURANCE CO., INC. VS. CA)

Art. 587 of the Code of Commerce speaks only of situations where the fault or negligence is
committed solely by the captain. Where the shipowner is likewise to be blamed, Art. 587 will
not apply, and such situation will be covered by the provision of the Civil Code on common
carriers. (PHILIPPINE AMERICAN GENERAL INSURANCE CO., INC. VS. CA)

The liability of a shipowner is limited to the value of the vessel or to the insurance thereon.
Despite the total loss of the vessel therefore, its insurance answers for the damages that a
shipowner or agent may be held liable for by reason of the death of its passenger. (VASQUEZ VS.
CA)

The provisions of the Code of Commerce regarding maritime commerce have no room in the
application of the Workmens Compensation Act. Said Act creates a liability to compensate
employees or laborers in cases of injury received by or inflicted upon them, while engaged in the
performance of their work or employment, or the heirs and dependents of such laborers and
employees in the event of death caused by their employment. (ABUEG VS. SAN DIEGO)

While the total destruction of the vessel extinguishes a maritime lien, as there is no longer any
risk to which it can attach, but the total destruction of the vessel does not affect the liability of
the owner for repairs of the vessel completed before its loss. (GOVERNMENT OF THE PHILIPPINES
Red Notes in Commercial Law

VS. MARITIME)

The owners and agents of a vessel causing the loss of another vessel by collision are not liable
beyond the vessel itself causing the collision and other things appertaining thereto.(PHILIPPINE
SHIPPING CO. VS. GARCIA)

In case of collision, abandonment of the vessel is necessary in order to limit the liability of the
shipowner or the agent to the value of the vessel, its appurtenances and freightage earned in the
voyage in accordance with Art.837 of the Code of Commerce. The only instance where such
abandonment is dispensed with is when the vessel was entirely lost. LUZON STEVEDORING CORP.
VS. CA

If the shipowner or agent may in any way be held civilly liable at all for injury to or death of
passengers arising form the negligence of the captain in cases of collisions or shipwrecks, his 117
liability is merely co-extensive with his interest in the vessel such that a total loss thereof results in
its extinction. (YANGCO VS. LASERNA)
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The requisite of registration on the registry, of the purchase of a vessel, is necessary and
indispensable in order that the purchasers rights may be maintained against a claim filed by a third
person. (RUBISO AND GELITO VS. RIVERA)

A ships captain must be accorded a reasonable measure of discretionary authority to decide


what the safety of the ship and of its crew and cargo specifically requires on a stipulated ocean
voyage. (INTER-ORIENT MARITIME ENTERPRISES INC. VS. CA)

While in exercising his functions a pilot is in sole command of the ship and supersedes the master
for the time being in the command and navigation of the ship, the master does not surrender his
vessel to the pilot and the pilot is not the master. There are occasions when the master may and
should interfere and even displace the pilot, as when the pilot is obviously incompetent or
intoxicated. (FAR EASTERN SHIPPING COMPANY VS. CA)

It is imperative that a public carrier shall remain as such, notwithstanding the charter of the
whole or portion of a vessel by one or more persons, provided the charter is limited to the ship
only, as in the case of a time-charter or voyage-charter. It is only when the charter includes both
the vessel and crew, as in demise or bareboat that a common carrier becomes private, at least
insofar as the particular voyage covering the charter-party is concerned. (PLANTERS PRODUCTS,
INC. VS. CA)

If the charter is a contract of affreightment which leaves the general owner in possession of the
ship as owner for the voyage, the rights and the responsibilities of ownership rest on the owner.
The charterer is free from liability to third persons in respect of the ship. (CALTEX (PHILIPPINES),
INC. VS. SULPICIO LINES, INC.)

Expenses incurred to refloat a vessel, which accidentally ran aground, in order to continue its
voyage, do not constitute general average. Not only is there absence of a marine peril, common
safety factor, and deliberateness. It is the safety of the property, and not the voyage, which
constitutes the true foundation of general average. (A. MAGSAYSAY, INC. VS. AGAN)
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Common carriers cannot limit their liability for injury or loss of goods where such injury or loss
was caused by its own negligence. Otherwise stated, the law on averages under the Code of
Commerce cannot be applied in determining liability where there is negligence. (AMERICAN HOME
ASSURANCE, COMPANY VS. CA)

A derelict is defined as a ship or her cargo which is abandoned and deserted at sea by those who
are in charge of it, without any hope of recovering it, or without any intention of returning to it. If
those in charge left with the intention of returning, or of procuring assistance, the property is not
derelict, but if they quitted the property with the intention of finally leaving it, it is derelict and a
change of their intention and an attempt to return will not change its nature. (ERLANGER &
GALINGER VS. SWEDISH EAST ASIATIC CO. LTD)
Law

WARSAW CONVENTION
The Warsaw convention does not operate as an exclusive enumeration of the instances for
declaring a carrier liable for breach of contract of carriage or as an absolute limit of the extent of
that liability. It must not be construed to preclude the operation of the Civil Code and other
pertinent laws. (CATHAY PACIFIC AIRWAYS, LTD. VS. CA)

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The articles in the Warsaw Convention merely declare the carrier liable for damages in the
enumerated cases, if the conditions specified therein are present. Neither said provisions nor
others regulate or exclude liability for other breaches of contract by the carrier. (NOTHWEST
AIRLINES, INC. VS CUENCA)

The Warsaw Convention does not operate as an absolute limit of the extent of an airlines
liability, it does not regulate or exclude liability for other breaches of contract by the carrier,
or misconduct of its employees, or of some particular or exceptional type of damage.
(ALITALIA VS IAC)

There is international transportation: 1.) where the place of departure and the place of
destination are situated within the territories of two high contracting parties regardless of
whether or not there be a break of transportation or a transshipment; and 2.) where the place
of departure and the place of destination are within the territory of a single high contracting
party if there is an agreed stopping place within a territory subject to the sovereignty,
mandate or authority of another power, even though the power is not a party to the
convention. (MAPA VS. CA)

Under a general pool partnership agreement, the ticket-issuing airline is the principal in a
contract of carriage while the endorsee-airline is the agent. The obligation of the former remained
and did not cease even when the breach occurred not on its own flight but on that of another
airline which had undertaken to carry the passengers to one of their destinations. (CHINA AIRLINES
VS. CHIOK0 )

The forum of action provided in Art. 28(1) is a matter of jurisdiction rather than of venue.
It is the passengers ultimate destination not an agreed stopping place that determines the
country where suit is to be filed. (SANTOS III V. NORTHWEST)

A cause of action arising from the slashing and loss of personal effects by an airline passenger is
well within the bounds of the Warsaw Convention while a cause of action arising from the shabby
and humiliating treatment received from the airline employees is not. (UNITED AIRLINES VS. UY)

PUBLIC UTILITIES
A certification of public convenience is included in the term "property" in the broad sense of the
term. Under the Public Service Law, a certificate of public convenience can be sold by the holder
thereof because it has considerable material value and is considered as valuable asset. Although
there is no doubt that it is private property, it is affected with a public interest and must be
submitted to the control of the government for the common good. Hence, insofar as the interest of
the State is involved, a certificate of public convenience does not confer upon the holder any
proprietary right or interest or franchise in the route covered thereby and in the public highways.
However, with respect to other persons and other public utilities, a certificate of public
Red Notes in Commercial Law

convenience as property, which represents the right and authority to operate its facilities for public
service, cannot be taken or interfered with without due process of law. Appropriate actions may be
maintained in courts by the holder of the certificate against those who have not been authorized to
operate in competition with the former and those who invade the rights which the former has
pursuant to the authority granted by the Public Service Commission. (COGEO-CUBAO OPERATORS &
DRIVERS ASSOC. VS. CA)

Nobody has the exclusive right to secure a franchise or a Certificate of Public Convenience. The
paramount consideration should always be the public interest and public convenience. (VDA. DE
LAT VS. PSC)

Considering the environmental circumstances of the case, the conveyance of passengers, trucks
and cargo from Matnog to Allen is certainly not a ferry boat service but a coastwise or interisland
shipping service. Under no circumstance can the sea between Matnog and Allen be considered a 117
continuation of the highway. While a ferry boat service has been considered as a continuation of
the highway when crossing rivers or even lakes, which are small body of waters - separating the
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land, however, when as in this case the two terminals, Matnog and Allen are separated by an open
sea it can not be considered as a continuation of the highway. Respondent PANTRANCO should
secure a separate CPC for the operation of an interisland or coastwise shipping service in
accordance with the provisions of law. Its CPC as a bus transportation cannot be merely amended
to include this water service under the guise that it is a mere private ferry service. (SAN PABLO VS.
PANTRANCO SOUTH EXPRESS, INC.)

Section 19 (a) of the Public Service Act contemplates of failure to provide a service that is safe,
proper or adequate and refusal to render any service which can reasonably be demanded and
furnished. It refers specifically to the operator's inability to provide reliable vehicles to transport
the riding public to their places of destination and to the failure to provide an adequate number of
units authorized under his franchise at all times to secure the public of sustained service. While the
words "unsafe, inadequate and improper" may be broad enough to cover a lot of things, they must
be interpreted in consonance with the purpose of the Public Service Law, which was specifically
enacted, among other things, to protect the public against unreasonable charges and poor
inefficient service and to secure adequate sustained service for the public at the least possible
costs. (MANZANAL VS. AUSEJO)

CORPORATION LAW

ATTRIBUTES OF A CORPORATION
A corporation as known to Philippine jurisprudence is a creature without any existence until it
has received the imprimatur of the state acting according to law. It is logically inconceivable
therefore that it will have rights and privileges of a higher priority than that of its creator. More
than that, it cannot legitimately refuse to yield obedience to acts of its state organs, Certainly not
excluding the judiciary, whenever called upon to do so. (TAYAG VS. BENGUET CONSOLIDATED,
INC.)

For practical purposes, franchises, so far as relating to corporations, are divisible into (1)
corporate or general franchises; and (2) special or secondary franchises. The former is the franchise
to exist as a corporation, while the latter are certain rights and privileges conferred upon existing
corporations such as the right to use the streets of a municipality to lay pipes of tracks, erect poles
or string wires.
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The primary franchise of a corporation, that is, the right to exist as such, is vested 'in the
individuals who compose the corporation and not in the corporation itself and cannot be conveyed
in the absence of legislative authority so to do but the special or secondary franchises of a
corporation are vested in the corporation and may ordinarily be conveyed or mortgaged under a
general power granted to a corporation to dispose of its property except such special or secondary
franchises as are charged with a public use. (JRS BUSINESS CORP. VS. IMPERIAL INSURANCE, INC.)

The guaranties of the Fourteenth Amendment and so of the first paragraph of the Philippine Bill
of Rights, are universal in their application to all persons within the territorial jurisdiction, without
regard to any differences of race, color, or nationality. The word "person" includes aliens. Private
corporations, likewise, are "persons" within the scope of the guaranties in so far as their property is
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concerned. (SMITH, BELL & CO. VS. NATIVIDAD)

A corporation is, after all, but an association of individuals under an assumed name and with a
distinct legal entity. In organizing itself as a collective body it waives no constitutional immunities
appropriate to such body. Its property cannot be taken without compensation. It can only be
proceeded against by due process of law, and is protected, under the 14th Amendment, against
unlawful discrimination.
In Stonehill, et al. vs. Diokno, et al., supra, this Court impliedly recognized the right of a
corporation to object against unreasonable searches and seizures. (BACHE & CO. VS. RUIZ)

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It is elementary that the right against self-incrimination has no application to juridical persons.
While an individual may lawfully refuse to answer incriminating questions unless protected by an
immunity statute, it does not follow that a corporation, vested with special privileges and
franchises, may refuse to show its hand when charged with an abuse of such privileges. (BASECO vs.
PCGG)

It is a doctrine well-established and obtains both at law and in equity that a corporation is a
distinct legal entity to be considered as separate and apart from the individual stockholders or
members who compose it, and is not affected by the personal rights, obligations and transactions of
its stockholders or members. The property of the corporation is its property and not that of the
stockholders, as owners, although they have equities in it. Properties registered in the name of the
corporation are owned by it as an entity separate and distinct from its members. Conversely, a
corporation ordinarily has no interest in the individual property of its stockholders unless
transferred to the corporation, "even in the case of a one-man corporation". (SULO NG BAYAN, INC.
VS. GREGORIO ARANETA, INC.)

The tenor of the NLRC judgment and the implementing writ is clear enough. It directed
Qualitrans Limousine Service, Inc. to reinstate the discharged employees and pay them full
backwages. Respondent, however, chose to "pierce the veil of corporate entity" usurping a power
belonging to the court and assumed improvidently that since the complainant is the
owner/president of Qualitrans Limousine Service, Inc., they are one and the same. It is a well-
settled doctrine both in law and in equity that as a legal entity, a corporation has a personality
distinct and separate from its individual stockholders or members. The mere fact that one is
president of a corporation does not render the property he owns or possesses the property of the
corporation, since the president, as individual, and the corporation are separate entities. (CRUZ
VS. DALISAY)

Inasmuch as the real properties included in the inventory of the estate of the late Pastor Y. Lim
are in the possession of and are registered in the name of private respondent corporations, which
under the law possess a personality separate and distinct from their stockholders, and in the
absence of any cogency to shred the veil of corporate fiction, the presumption of conclusiveness of
said titles in favor of private respondents should stand undisturbed. (LIM VS. CA)

The test in determining the applicability of the doctrine of piercing the veil of corporate fiction
is as follows:
1. Control, not mere majority or complete stock control, but complete domination, not only of
finances but of policy and business practice in respect to the transaction attacked so that the
corporate entity as to this transaction had at the time no separate mind, will or existence of its
own;
2. Such control must have been used by the defendant to commit fraud or wrong, to perpetuate the
Red Notes in Commercial Law

violation of a statutory or other positive legal duty, or dishonest and unjust act in contravention of
plaintiff's legal rights; and
3.The aforesaid control and breach of duty must proximately cause the injury or unjust loss
complained of.
The absence of any one of these elements prevents 'piercing the corporate veil.' In applying the
'instrumentality' or 'alter ego' doctrine, the courts are concerned with reality and not form, with
how the corporation operated and the individual defendant's relationship to that operation."
(CONCEPT BUILDERS, INC. VS. NLRC)

Furthermore, considering the nature of the legal services involved, whatever obligation said
incorporators, directors and officers of the corporation had incurred, it was incurred in their
personal capacity. When directors and officers of a corporation are unable to compensate a party
for a personal obligation, it is far-fetched to allege that the corporation is perpetuating fraud or
promoting injustice, and be thereby held liable therefor by piercing its corporate veil. (FRANCISCO 117
MOTORS CORP. VS. CA)
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The award of moral damages cannot be granted in favor of a corporation because, being an
artificial person and having existence only in legal contemplation, it has no feelings, no emotions,
no senses. It cannot, therefore, experience physical suffering and mental anguish, which can be
experienced only by one having a nervous system. The statement in People v. Maneroand Mambulao
Lumber Co. v. PNB that a corporation may recover moral damages if it "has a good reputation that
is debased, resulting in social humiliation" is an obiter dictum. On this score alone the award for
damages must be set aside, since RBS is a corporation. (ABS-CBN vs. CA)

Nevertheless, AMECs claim for moral damages falls under item 7 of Article 2219 of the Civil
Code. This provision expressly authorizes the recovery of moral damages in cases of libel, slander
or any other form of defamation. Article 2219(7) does not qualify whether the plaintiff is a natural
or juridical person. Therefore, a juridical person such as a corporation can validly complain for libel
or any other form of defamation and claim for moral damages.
Moreover, where the broadcast is libelous per se, the law implies damages.In such a case,
evidence of an honest mistake or the want of character or reputation of the party libeled goes only
in mitigation of damages. Neither in such a case is the plaintiff required to introduce evidence of
actual damages as a condition precedent to the recovery of some damages. In this case, the
broadcasts are libelous per se. Thus, AMEC is entitled to moral damages. (FILIPINAS
BROADCASTING NETWORK, INC. VS. AMEC-BCCM, JANUARY 21, 2005)

Note: The bar exams covers only decisions promulgated by the SC up to June 2004. However, for
purposes of clarifying the conflicting decisions as to the entitlement of a corporation to moral
damages, we hereby make reference to the case of Filipinas Broadcasting Network, Inc., vs. Ago
Medical and Educational Center-Bicol Christian College of Medicine, G.R. No. 141994. January 17,
2005.

An employee of a company or corporation engaged in illegal recruitment may be held liable as


principal, together with his employer, if it is shown that he actively and consciously participated in
illegal recruitment. It has been held that the existence of the corporate entity does not shield from
prosecution the corporate agent who knowingly and intentionally causes the corporation to commit
a crime. The corporation obviously acts, and can act, only by and through its human agents, and it
is their conduct which the law must deter. The employee or agent of a corporation engaged in
unlawful business naturally aids and abets in the carrying on of such business and will be
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prosecuted as principal if, with knowledge of the business, its purpose and effect, he consciously
contributes his efforts to its conduct and promotion, however slight his contribution may be.
(PEOPLE VS. CHOWDURY)

In the absence of an express provision of law making the petitioner liable for the criminal
offense committed by the corporation of which lit is a president as in fact them is no such
provisions in the Revised Penal Code under which petitioner is being prosecuted, the existence of a
criminal liability on his part may not be said to be beyond any doubt. In all criminal prosecutions,
the existence of a criminal liability for which the accused is made answerable must be clear and
certain. (SIA VS. PEOPLE)
Note: This case was decided at the time when P.D. 115 or the Trust Receipts Law was not yet in
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effect)

KINDS OF CORPORATIONS
It is conceded that the Club derived profit from the operation of its bar and restaurant, but such
fact does not necessarily convert it into a profit-making enterprise. The bar and restaurant are
necessary adjuncts of the Club to foster its purposes and the profits derived therefrom are
necessarily incidental to the primary object of developing and cultivating sports for the healthful
recreation and entertainment of the stockholders and members. That a Club makes some profit

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does not make it a profit making club. As has been remarked, a club should always strive, whenever
possible, to have a surplus (CIR VS. CLUB FILIPINO)

The application of the doctrine of estoppel applies to a third party only when he tries to escape
liability on a contract from which it had benefited on the irrelevant ground of defective
incorporation. In the case at bar, the petitioner is not trying to escape liability from the contract
but rather is the one claiming from the contract. (INTL EXPRESS TRAVEL VS. CA)

The doctrine of corporation by estoppel may apply to the alleged corporation and to a third
party. In the first instance, an unincorporated association, which represented itself to be a
corporation, will be estopped from denying its corporate capacity in a suit against it by a third
person who relied in good faith on such representation. It cannot allege lack of personality to be
sued to evade its responsibility for a contract it entered into and by virtue of which it received
advantages and benefits.
On the other hand, a third party who, knowing an association to be unincorporated, nonetheless
treated it as a corporation and received benefits from it, may be barred from denying its corporate
existence in a suit brought against the alleged corporation. In such case, all those who benefited
from the transaction made by the ostensible corporation, despite knowledge of its legal defects,
may be held liable for contracts they impliedly assented to or took advantage of.
Technically, it is true that petitioner did not directly act on behalf of the corporation. However,
having reaped the benefits of the contract entered into by persons with whom he previously had an
existing relationship, he is deemed to be part of said association and is covered by the scope of the
doctrine of corporation by estoppel. (LIM TONG LIM VS. PHILIPPINE FISHING GEAR INDUSTRIES)

The doctrine of corporation by estoppel advanced by private respondent cannot override


jurisdictional requirements. Jurisdiction is fixed by law and is not subject to the agreement of the
parties. It cannot be acquired through or waived, enlarged or diminished by, any act or omission of
the parties, neither can it be conferred by the acquiescence of the court.
Corporation by estoppel is founded on principles of equity and is designed to prevent injustice and
unfairness. It applies when persons assume to form a corporation and exercise corporate functions
and enter into business relations with third persons. Where there is no third person involved and
the conflict arises only among those assuming the form of a corporation, who therefore know that
it has not been registered there is no corporation by estoppel. (LOZANO VS. DE LOS SANTOS)

Under our statute it is to be noted that it is the issuance of a certificate of incorporation by the
SEC which calls a corporation into being. The immunity of collateral attack is granted to
corporations 'claiming in good faith to be a corporation under this act.' Such a claim is compatible
with the existence of errors and irregularities; but not with a total or substantial disregard of the
law. Unless there has been an evident attempt to comply with the law the claim to be a
corporation 'under this act' could not be made in good faith. (HALL VS. PICCIO)
Red Notes in Commercial Law

COMPONENTS OF A CORPORATION
A corporation, until organized, has no life and, therefore, no faculties. It is, as it were, a child in
ventre sa mere. This is not saying that under no circumstances may the acts of promoters of
corporation be ratified by the corporation if and when subsequently organized. (CAGAYAN FISHING
VS. SANDIKO)

Where similar acts have been approved by the directors as a matter of general practice, custom,
and policy, the general manager may bind the company without formal authorization of the board
of directors. In varying language, existence of such authority is established, by proof of the course
of business, the usages and practices of the company and by the knowledge which the board of
directors has, or must be presumed to have, of acts and doings of its subordinates in and about the
affairs of the corporation. (BOARD OF LIQUIDATORS VS. HEIRS OF MAXIMO KALAW)
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Even under the foregoing express grant of power and authority, there can be no automatic
corporate dissolution simply because the incorporators failed to abide by the required filing of
bylaws embodied in Section 46 of the Corporation Code, There is no outright "demise" of corporate
existence. Proper notice and hearing are cardinal components of due process in any democratic
institution, agency or society. In other words, the incorporators must be given the chance to
explain their neglect or omission and remedy the same. (LOYOLA GRAND VILLAS HOMEOWNERS
ASSOC. VS. CA)

Nor can petitioner claim a vested right to sit in the board on the basis of "practice." Practice, no
matter how long continued, cannot give rise to any vested right if it is contrary to law. Even less
tenable is petitioner's claim that its right is "coterminous with the existence of the association."
(GRACE CHRISTIAN HIGH SCHOOL VS. CA)

Admittedly, the right to amend the by-laws lies solely in the discretion of the employer, this
being in the exercise of management prerogative or business judgment. However this right,
extensive as it may be, cannot impair the obligation of existing contracts or rights.
Prescinding from these premises, private respondent's insistence that it can legally dismiss
petitioner on the ground that his tenure has expired is untenable. To reiterate, petitioner, being a
regular employee, is entitled to security of tenure; hence, his services may only be terminated for
causes provided by law. A contrary interpretation would not find justification in the laws or the
Constitution. If we were to rule otherwise, it would enable an employer to remove any employee
from his employment by the simple expediency of amending its by-laws and providing that his/her
position shall cease to exist upon the occurrence of a specified event. (SALAFRANCA VS.
PHILAMLIFE)

POWERS OF THE CORPORATION


While as a rule an ultra vires act is one committed outside the object for which a corporation is
created as defined by the law of its organization and therefore beyond the powers conferred upon
it by law, there are however certain corporate acts that may be performed outside of the scope of
the powers expressly conferred if they are necessary to promote the interest or welfare of the
corporation. Thus, it has been held that "although not expressly authorized to do so a corporation
may become a surety where the particular transaction is reasonably necessary or proper to the
conduct of its business, and here it is undisputed that the establishment of the local post office is a
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reasonable and proper adjunct to the conduct of the business of appellant company. Indeed, such
post office is a vital improvement in the living condition of its employees and laborers who came to
settle in its mining camp which is far removed from the postal facilities or means of communication
accorded to people living in a city or municipality. (REPUBLIC VS. ACOJE MINING)

Inasmuch as a corporate president is often given general supervision and control over corporate
operations, the strict rule that said officer has no inherent power to act for the corporation is
slowly giving way to the realization that such officer has certain limited powers in the transaction
of the usual and ordinary business of the corporation. In the absence of a charter or bylaw provision
to the contrary, the president is presumed to have the authority to act within the domain of the
general objectives of its business and within the scope of his or her usual duties. (PEOPLES
Law

AIRCARGO VS. CA)

Since a corporation, such as the private respondent, can act only through its officers and agents,
all acts within the powers of said corporation may be performed by agents of its selection; and,
except so far as limitations or restrictions may be imposed by special charter, by-law or statutory
provisions, the same general principles of law which govern the relation of agency for a natural
person govern the officer or agent of a corporation, of whatever status or rank, in respect to his
power to act for the corporation; and agents when once appointed, or members acting in their

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stead, are subject to the same rules, liabilities, and incapacities as are agents of individuals and
private persons. (AF REALTY VS. DIESELMAN)

For the principle of apparent authority to apply, the petitioner was burdened to prove the
following: (a) the acts of the respondent justifying belief in the agency by the petitioner; (b)
knowledge thereof by the respondent which is sought to be held; and (c) reliance thereon by the
petitioner consistent with ordinary care and prudence. In this case, there is no evidence on record
of specific acts made by the respondent showing or indicating that it had full knowledge of any
representations made by Roxas to the petitioner that the respondent had authorized him to grant
to the respondent an option to buy a portion of Lot No. 491-A-3-B-1 covered by TCT No. 78085, or
to create a lien or burden thereon, or that the respondent allowed him to do so. (WOODCHILD
HOLDINGS VS. ROXAS ELECTRIC)

LIABILITY OF DIRECTORS AND OFFICERS


In Tramat Mercantile, Inc., vs. Court of Appeals, the Court has collated the settled instances
when, without necessarily piercing the veil of corporate fiction, personal civil liability can also be
said to lawfully attach to a corporate director, trustee or officer; to wit:
When (1) He assents (a) to a patently unlawful act of the corporation, or (b) for bad faith or gross
negligence in directing its affairs, or (c) for conflict of interest, resulting in damages to the
corporation, its stockholders or other persons;
(2) He consents to the issuance of watered stocks or who, having knowledge thereof, does not
forthwith file with the corporate secretary his written objection thereto;
(3) He agrees to hold himself personally and solidarity liable with the corporation; or
(4) He is made, by a specific provision of law, to personally answer for his corporate action.
(SANTOS VS. NLRC)

RIGHTS OF SHAREHOLDERS
One of the rights of a stockholder is the right to participate in the control and management of
the corporation that is exercised through his vote. The right to vote inherent in and incidental to
the ownership of corporate stock, and as such is a property right. The stockholder cannot be
deprived of the to vote his stock nor may the right be essentially impaired, either by the legislature
or by the corporation without his consent, through amending the charter, or the by-laws.
(CASTILLO VS. BALINGHASAY)

While it may be true that the right of inspection granted by Sec. 74 of the Corporation Code is
not absolute, as when the stockholder is not acting in good faith and for a legitimate purpose; or
when the demand is purely speculative or merely to satisfy curiosity, the same may not be said in
the case of private respondent. This is because the impropriety of purpose such as will defeat
enforcement must be set up (by) the corporation defensively if the Court is to take cognizance of it
as a qualification. In other words, the specific provisions take from the stockholder the burden of
Red Notes in Commercial Law

showing impropriety of purpose or motive.


In the case at bar, petitioner failed to discharge the burden of proof to show that private
respondent's action in seeking examination of the corporate records was moved by unlawful or ill
motivated designs which could appropriately call for a judicial protection against the exercise of
such right. Save for its unsubstantiated allegations, petitioner could offer no proof, nay, not even a
scintilla of evidence that respondent Cojuangco, Jr., was motivated by bad faith; that the demand
was for an illegitimate purpose or that the demand was impelled by speculation or idle curiosity.
Surely, respondent's substantial shareholdings in the SMC and UCPB cannot be an object of mere
curiosity. (REPUBLIC VS. SANDIGANBAYAN)

The power to issue shares of stocks in a corporation is lodged in the board of directors and no
stockholders' meeting is necessary to consider it because additional issuance of shares of stocks
does not need approval of the stockholders. The by-laws of the corporation itself states that 'the
Board of Trustees shall, in accordance with law, provide for the issue and transfer of shares of
117
stock of the Institute and shall prescribe the form of the certificate of stock of the Institute'.
Petitioner bewails the fact that in view of the lack of notice to him of such subsequent issuance, he
was not able to exercise his right of pre-emption over the unissued shares. However, the general
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rule is that pre-emptive right is recognized only with respect to new issue of shares, and not with
respect to additional issues of originally authorized shares. This is on the theory that when a
corporation at its inception offers its first shares, it is presumed to have offered all of those which
it is authorized to issue. An original subscriber is deemed to have taken his shares knowing that
they form a definite proportionate part of the whole number of authorized shares. When the shares
left unsubscribed are later reoffered, he cannot therefore claim a dilution of interest. (BENITO VS.
SEC)

SHARES AND SUBSCRIPTIONS


A subscription contract necessarily involves the corporation as one of the contracting parties
since the subject matter of the transaction is property owned by the corporation its shares of
stock.
The real contracting parties to a subscription agreement are the corporation and the subscriber
alone. Thus, a civil case for rescission on the ground of breach of contract filed by a third party in
their personal capacities will not prosper. Only the corporation has the legal personality to file suit
rescinding the subscription agreement with the subscriber inasmuch as it was the real party in
interest therein. (ONG YONG VS. TIU)

The usual practice is for the stockholder to sign the form on the back of the stock certificate.
The certificate may thereafter be transferred from one person to another. If the holder of the
certificate desires to assume the legal rights of a shareholder to enable him to vote at corporate
elections and to receive dividends, he fills up the blanks in the form by inserting his own name as
transferee. Then he delivers the certificate to the secretary of the corporation so that the transfer
may be entered in the corporation's books. The certificate is then surrendered and a new one
issued to the transferee.
That procedure cannot be followed in the instant case because, as already noted, the twenty
shares in question we Dot covered by any certificate of stork in Po's name. Moreover, the
corporation has a claim on the said shares for the unpaid balance of Po's subscription. A stock
subscription in a subsisting liability from the time the subscription is made. The subscriber is as
much bound to pay his subscription, as he would be to pay any other debt. The right of the
corporation to demand payment is no less incontestable. (NAVA VS. PEERS)

It may be argued that despite non-compliance with the requisite endorsement and delivery, the
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assignment was valid between the parties, meaning the private respondents as assignors and the
petitioners as assignees. While the assignment may be valid and binding on the petitioners and
private respondents, it does not necessarily make the transfer effective. Consequently, the
petitioners as mere assignees, cannot enjoy the status of a stockholder, cannot vote nor be voted
for, and will not be entitled to dividends, insofar as the assigned shares are concerned.
Parenthetically, the private respondents cannot, as yet, be deprived of their rights as stockholders,
until and unless the issue of ownership and transfer of the shares in question is resolved with
finality. (RURAL BANK OF LIPA CITY VS. CA)

Before a transferee may ask for the issuance of stock certificates, he must first cause the
registration of the transfer and thereby enjoy the status of a stockholder insofar as the corporation
is concerned. A corporate secretary may not be compelled to register transfers of shares on the
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basis merely of an indorsement of stock certificates. With more reason, a corporate secretary may
not be compelled to issue stock certificates without such registration. (PONCE VS. ALSONS CEMENT
CORP)

Are attachments of shares of stock included in the term "transfer" as provided in Sec. 63 of the
Corporation Code? We rule in the negative. As succinctly declared in the case of Monserrat v.
Ceron, chattel mortgage over shares of stock need not be registered in the corporation's stock and
transfer book inasmuch as chattel mortgage over shares of stock does not involve a "transfer of

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shares," and that only absolute transfers of shares of stock are required to be recorded in the
corporation's stock and transfer book in order to have "force and effect as against third persons."
(CHEMPHIL EXPORT VS. CA)

DISSOLUTION AND LIQUIDATION


The word "trustee" as used in the corporation statute must be understood in its general concept
which could include the counsel to whom was entrusted in the instant case, the prosecution of the
suit filed by the corporation. The purpose in the transfer of the assets of the corporation to a
trustee upon its dissolution is more for the protection of its creditor and stockholders. Debtors like
the petitioners herein may not take advantage of the failure of the corporation to transfer its
assets to a trustee, assuming it has any to transfer which petitioner has failed to show, in the first
place. To sustain petitioners' contention would be to allow them to enrich themselves at the
expense of another, which all enlightened legal systems condemn. (GELANO VS. CA)

FOREIGN CORPORATIONS
As between the parties themselves, R.A. No. 5455 does not declare as void or invalid the
contracts entered into without at securing a license or certificate to do business in the Philippines.
Neither does it appear to intend to prevent the courts from enforcing contracts made in
contravention of its licensing provisions, There is no denying, though, that an "illegal situation," as
the appellate court has put it, was created when the parties voluntarily contracted without such
license.
The parties are charged with knowledge of the existing law at the time they enter into the contract
and at the time it is to become operative. Moreover, a person is presumed to be more
knowledgeable about his own state law than his alien or foreign contemporary. In this case, the
record shows that, at least, petitioner had actual knowledge of the applicability of R.A. No. 5455 at
the time the contract was executed and at all times thereafter. This conclusion is compelled by the
fact that the same statute is now being propounded by the petitioner to bolster its claim. We,
therefore, sustain the appellate court's view that "it was incumbent upon TOP-WELD to know
whether or not IRTI and ECED were properly authorized to engage in business in the Philippines
when they entered into the licensing and distributorship agreements." The very purpose of the law
was circumvented and evaded when the petitioner entered into said agreements despite the
prohibition of R.A. No. 5455. The parties in this case being equally guilty of violating R.A. No. 5455,
they are in pari delicto, in which case it follows as a consequence that petitioner is not entitled to
the relief prayed for in this case. (TOP-WELD MFG. VS. ECED)

The prohibition against doing business without first securing a license is now given penal sanction
which is also applicable to other violations of the Corporation Code under the general provisions of
Section 144 of the Code.
It is, therefore, not necessary to declare the contract null and void even as against the erring
foreign corporation. The penal sanction for the violation and the denial of access to our courts and
administrative bodies are sufficient from the viewpoint of legislative policy.
Red Notes in Commercial Law

Our ruling that the lack of capacity at the time of the execution of the contracts was cured by the
subsequent registration is also strengthened by the procedural aspects of these cases. (HOME
INSURANCE CO. VS. EASTERN SHIPPING)

The obtainment of a license prescribed by Section 125 of the Corporation Code is not a condition
precedent to the maintenance of any kind of action in Philippine courts by a foreign corporation.
However, under the aforequoted provision, no foreign corporation shall be permitted to transact
business in the Philippines, as this phrase is understood under the Corporation Code, unless it shall
have the license required by law, and until it complies with the law in transacting business here, it
shall not be permitted to maintain any suit in local courts.
As thus interpreted, any foreign corporation not doing business in the Philippines may maintain an
action in our courts upon any cause of action, provided that the subject matter and the defendant
are within the jurisdiction of the court. It is not the absence of the prescribed license but "doing
business" in the Philippines without such license which debars the foreign corporation from access 117
to our courts. In other words, although a foreign corporation is without license to transact business
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in the Philippines, it does not follow that it has no capacity to bring an action. Such license is not
necessary if it is not engaged in business in the Philippines. (COLUMBIA PICTURES VS. CA)

More than the sheer number of transactions entered into, a clear and unmistakable intention on
the part of petitioner to continue the body of its business in the Philippines is more than apparent.
As alleged in its complaint, it is engaged in the manufacture and sale of elements used in sealing
pumps, valves, and pipes for industrial purposes, valves and control equipment used for industrial
fluid control and PVC pipes and fittings for industrial use. Thus, the sale by petitioner of the items
covered by the receipts, which are part and parcel of its main product line, was actually carried
out in the progressive prosecution of commercial gain and the pursuit of the purpose and object of
its business, pure and simple. Further, its grant and extension of 90-day credit terms to private
respondent for every purchase made, unarguably shows an intention to continue transacting with
private respondent, since in the usual course of commercial transactions, credit is extended only to
customers in good standing or to those on whom there is an intention to maintain long-term
relationship. (ERIKS PTE. LTD. VS. CA)

We agree with the finding of the respondent court that petitioner is not suing on an isolated
transaction as it claims to be, as it is very obvious from the deed of assignment and its relationships
with Marcopper and Placer Dome, Inc. that its unmistakable intention is to continue the operations
of Marcopper and shield its properties/assets from the reach of legitimate creditors, even those
holding valid and executory court judgments against it. There is no other way for petitioner to
recover its huge financial investments which it poured into Marcoppers rehabilitation and the local
situs where the Deeds of Assignment were executed, without petitioner continuing to do business in
the country.
While petitioner may just be an assignee to the Deeds of Assignment, it may still fall within the
meaning of doing business based on the ruling of the Supreme Court that Where a single act or
transaction however is not merely incidental or casual but indicates the foreign corporations
intention to do other business in the Philippines, said single act or transaction constitutes doing or
engaging in or transacting business in the Philippines. (MR HOLDINGS, INC. VS. BAJAR)

The true test (for doing business), however, seems tot be whether the foreign corporation is
continuing the body of the business or enterprise for which it was organized or whether it has
substantially retired from it and turned it over to another. (Substance test)
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The second test is the continuity test, expressed thus:


The term (doing business) implies a continuity of commercial dealings and arrangements, and
contemplates, to that extent, the performance of acts or works or the exercise of some of the
functions normally incident to, and in the progressive prosecution of, the purpose and objects of its
organization. (AGILENT TECHNOLOGIES VS. INTEGRATED SILICON)

The party is estopped from questioning the capacity of a foreign corporation to institute an
action in our courts where it had obtained benefits from its dealings with such foreign corporations
and thereafter committed a breach of or sought to renege on its obligations. The rule relating to
estoppel is deeply rooted in the axiom of commodum ex injuria sua non habere debet no person
ought to derive any advantage from his own wrong. (EUROPEAN RESOURCES VS. IGNIEBURO)
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CORPORATE REHABILITATION
The issue of whether or not preferred creditors of distressed corporations stand on equal footing
with all other creditors gains relevance and materiality only upon the appointment of a
management committee, rehabilitation receiver, board or body. (RCBC VS. IAC)

The reason for suspending actions for claims against the corporation should not be difficult to
discover. It is not really to enable the management committee or the rehabilitation receiver to

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substitute the defendant in any pending action against it before any court, tribunal, board or body.
Obviously, the real justification is to enable the management committee or rehabilitation receiver
to effectively exercise its/his powers free from any judicial or extra-judicial interference that
might duly hinder or prevent the rescue of the debtor company. (B.F. HOMES, INC. VS. CA cited
in PAL VS. SPOUSES SADIC)

BANKING LAWS

NEW CENTRAL BANK ACT


It must be remembered that the Central Bank of the. Philippines (now Bangko Sentral ng
Pilipinas), through the Monetary Board, is the government agency charged with the responsibility of
administering the monetary, banking and credit system of the country and is granted, the power of
supervision and examination over banks and non-bank financial institutions performing quasi-
banking functions, of which savings and loan associations, such as PESALA, form part of. (BUSUEGO
VS. CA)

While admittedly the Central Bank Act gives vast and far-reaching powers to the conservator of a
bank, it must be pointed out that such powers must be related to the preservation of the assets of
the bank (the reorganization thereof) and the restoration of its viability. Such powers, enormous
and extensive as they are, cannot extend to ex post facto repudiation of perfected transactions,
otherwise they would infringe against the non-impairment clause of the Constitution. (FIRST PHIL.
INTL BANK VS. CA)

There is no requirement whether express or implied, that a hearing be first conducted before a
banking institution may be placed under receivership. On the contrary, the law is explicit as to the
conditions prerequisite to the action of the Monetary Board to forbid the institution to do business
in the Philippines and to appoint a receiver to immediately take charge of the bank's assets and
liabilities. They are: (a) an examination made by the examining department of the Central Bank;
(b) report by said department to the Monetary Board; and (c) prima facie showing that the bank is
in a condition of insolvency or so situated that its continuance in business would involve probable
loss to its depositors or creditors.
The evident implication of the law, therefore, is that the appointment of a receiver may be made
by the Monetary Board without notice and hearing but its action is subject to judicial inquiry to
insure the protection of the banking institution. Stated otherwise, due process does not necessarily
require a prior hearing; a hearing or an opportunity to be heard may be subsequent to the closure.
One can just imagine the dire consequences of a prior hearing: bank runs would be the order of the
day, resulting in panic and hysteria. In the process, fortunes may be wiped out, and disillusionment
will ran the gamut of the entire banking community. (RURAL BANK OF BUHI VS. CA)

The purpose of the law in requiring that only the stockholders of record representing the
Red Notes in Commercial Law

majority of the capital stock may bring the action to set aside a resolution to place a bank under
conservatorship is to ensure that it be not frustrated or defeated by the incumbent Board of
Directors or officers who may immediately resort to court action to prevent its implementation or
enforcement. It is presumed that such a resolution is directed principally against acts of said
Directors and officers which place the bank in a state of continuing inability to maintain a condition
of liquidity adequate to protect the interest of depositors and creditors. Indirectly, it is likewise
intended to protect and safeguard the rights and interests of the stockholders. Common sense and
public policy dictate then that the authority to decide on whether to contest the resolution should
he lodged with the stockholders owning a majority of the shares for they are expected to be more
objective in determining whether the resolution is plainly arbitrary and issued in bad faith.
(CENTRAL BANK VS. CA)

It has been said that where upon the insolvency of a bank a receiver therefor is appointed, the
assets of the bank pass beyond its control into the possession and control of the receiver whose 117
duty it is to administer the assets for the benefit of the creditors of the bank. Thus, the
appointment of a receiver operates to suspend the authority of the bank and of its directors and
officers over its property and effects, such authority being reposed in the receiver, and in this
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respect, the receivership is equivalent to an injunction to restrain the bank officers from
intermeddling with the property of the bank in any way. (VILLANUEVA VS. CA)

The fact that the insolvent bank is forbidden to do business, that its assets are turned over to
the Superintendent of Banks, as a receiver, for conversion into cash, and that its liquidation is
undertaken with judicial intervention means that, as far as lawful and practicable, all claims
against the insolvent bank should be filed in the liquidation proceeding.
We explained therein the rationale behind the provision, i.e., the judicial liquidation is intended to
prevent multiplicity of actions against the insolvent bank. It is a pragmatic arrangement designed
to establish due process and orderliness in the liquidation of the bank, to obviate the proliferation
of litigations and to avoid injustice and arbitrariness. The lawmaking body contemplated that for
convenience only one court, if possible, should pass upon the claims against the insolvent bank and
that the liquidation court should assist the Superintendent of Banks and regulate his operations.
(ONG VS. CA)

SECRECY OF BANK DEPOSITS ACT


The lower court did not order an examination of or inquiry into the deposit of B & B Forest
Development Corporation, as contemplated in the law. It merely required Tan Kim Liong to inform
the court whether or not the defendant B & B Forest Development Corporation had a deposit in the
China Banking Corporation only for purposes of the garnishment issued by it, so that the bank would
hold the same intact and not allow any withdrawal until further order.
It is clear that the prohibition against examination of or inquiry into a bank deposit under Republic
Act 1405 does not preclude its being garnished to insure satisfaction of a judgment. Indeed there is
no real inquiry in such a case, and if the existence of the deposit is disclosed the disclosure is
purely incidental to the execution process. It is hard to conceive that it was ever within the
intention of Congress to enable debtors to evade payment of their just debts, even if ordered by
the Court, through the expedient of converting their assets into cash and depositing the same in a
bank. (CHINA BANKING CORP. VS. ORTEGA)

Before an in-camera inspection may be allowed of bank deposits, there must be a pending cases
before a court of competent jurisdiction. Further, the account must be clearly identified, the
inspection limited to the subject matter of the pending case before the court of competent
jurisdiction. The bank personnel and the account holder must be notified to be present during the
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inspection, and such inspection may cover only the account identified in the pending case.
An examination by the Office of the Ombudsman is not a pending litigation to allow examination of
the respondents bank account. (MARQUEZ VS. DESIERTO)

Thus, while Republic Act No. 1405 provides that bank deposits are "absolutely confidential . . .
and [therefore] may not be examined, inquired or looked into," except in those cases enumerated
therein, the Anti-Graft Law directs in mandatory terms that bank deposits "shall be taken into
consideration in the enforcement of this section, notwithstanding any provision of law to the
contrary." The only conclusion possible is that section 8 of the Anti-Graft Law is intended to amend
section 2 of Republic Act No. 1405 by providing an additional exception to the rule against the
disclosure of bank deposits.
With regard to the claim that disclosure would be contrary to the policy making bank deposits
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confidential, it is enough to point out that while section 2 of Republic Act No. 1405 declares bank
deposits to be "absolutely confidential" it nevertheless allows such disclosure in the following
instances: (1) Upon written permission of the depositor; (2) In cases of impeachment; (2) Upon
order of a competent court in cases of bribery or dereliction of duty of public officials; (4) In cases
where the money deposited is the subject of the litigation. Cases of unexplained wealth are similar
to cases of bribery or dereliction of duty and no reason is seen why these two classes of cases
cannot be excepted from the rule making bank deposits confidential. The policy as to one cannot
be different from the policy as to the other. This policy expresses the notion that a public office is

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a public trust and any person who enters upon its discharge does so with the full knowledge that his
life, so far as relevant to his duty, is open to public scrutiny. (PNB VS.GANCAYCO)

The inquiry into illegally acquired property-or property NOT "legitimately acquired"-extends to
cases where such property is concealed by being held by or recorded in the name of other persons.
This proposition is made clear by R.A. No. 3019 which quite categorically states that the term,
"legitimately acquired property of a public officer or employee shall not include property
unlawfully acquired by the respondent, but its ownership is concealed by its being recorded in the
name of, or held by, respondent's spouse, ascendants, descendants, relatives or any other persons."
To sustain the petitioner's theory, and restrict the inquiry only to property held by or in the name
of the government official or employee, or his spouse and unmarried children is unwarranted in the
light of the provisions of the statutes in question, and would make available to persons in
government who illegally acquire property an easy and foolproof means of evading investigation
and prosecution; all they would have to do would be to simply place the property in the possession
or name of persons other than their spouse and unmarried children. This is an absurdity that we
will not ascribe to the lawmakers. (BANCO FILIPINO VS. PURISIMA)

SPECIAL LAWS

CHATTEL MORTGAGE
While a pledge, real estate mortgage, or antichresis may exceptionally secure after-incurred
obligations so long as these future debts are accurately described, a chattel mortgage, however,
can only cover obligations existing at the time the mortgage is constituted. Although a promise
expressed in a chattel mortgage to include debts that are yet to be contracted can be a binding
commitment that can be compelled upon, the security itself, however, does not come into
existence or arise until after a chattel mortgage agreement covering the newly contracted debt is
executed either by concluding a fresh chattel mortgage or by amending the old contract
conformably with the form prescribed by the Chattel Mortgage Law. Refusal on the part of the
borrower to execute the agreement so as to cover the after-incurred obligation can constitute an
act of default on the part of the borrower of the financing agreement whereon the promise is
written but, of course, the remedy of foreclosure can only cover the debts extant at the time of
constitution and during the life of the chattel mortgage sought to be foreclosed. (ACME SHOE,
RUBBER & PLASTIC VS. CA)

A stipulation in the chattel mortgage, extending its scope and effect to after-acquired property,
is valid and binding where the after-acquired property is in renewal of, or in substitution for, goods
on hand when the mortgage was executed, or is purchased with the proceeds of the sale of such
goods. A mortgage may, by express stipulations, be drawn to cover goods put in stock in place of
others sold out from time to time. A mortgage may be made to include future acquisitions of goods
to be added to the original stock mortgaged, but the mortgage must expressly provide that future
acquisitions shall be held as included in the mortgage. Where a mortgage covering the stock in
Red Notes in Commercial Law

trade, furniture, and fixtures in the mortgagor's store provides that "all goods, stock in trade,
furniture, and fixtures hereafter purchased by the mortgagor shall be included in and covered by
the mortgage," the mortgage covers all after-acquired property of the classes mentioned, and,
upon foreclosure, such property may be taken and sold by the mortgagee the same as the property
in possession of the mortgagor at the time the mortgage was executed. (TORRES VS. LIMJAP)

In the instant case, defendant corporation elected to foreclose its mortgage upon default by the
plaintiffs in the payment of the agreed installments, Having chosen to foreclose the chattel
mortgage, and bought the purchased vehicles at the public auction as the highest bidder, it
submitted itself to the consequences of the law as specifically mentioned, by which it is deemed to
have renounced any and all rights which it might otherwise have under the promissory note and the
chattel mortgage as well as the payment of the unpaid balance. (RIDAD VS. FILIPINAS INVESTMENT)
There is also no legal provision nor jurisprudence in our jurisdiction which makes a third person
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who secures the fulfillment of another's obligation by mortgaging his own property to be solidarily
bound with the principal obligor. A chattel mortgage may be "an accessory contract" to a contract
of loan, but that fact alone does not make a third-party mortgagor solidarily bound with the
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principal debtor in fulfilling the principal obligation that is, to pay the loan. The signatory to the
principal contract-loan-remains to be primarily bound. It is only upon the default of the latter that
the creditor may have recourse on the mortgagors by foreclosing the mortgaged properties in lieu
of an action for the recovery of the amount of the loan. And the liability of the third-party
mortgagors extends only to the property mortgaged. Should there be any deficiency, the creditor
has recourse on the principal debtor. (CERNA VS. CA)

WAREHOUSE RECEIPTS LAW


Any deposit made with a bonded warehouseman must necessarily be governed by the provisions
of Act No. 3893. The kind or nature of the receipts issued by him for the deposits is not very
material, much less decisive. Though it is desirable that receipts issued by a bonded warehouseman
should conform to the provisions of the Warehouseman Receipts Law, said provisions are not
mandatory, and indispensable in the sense that if they fell short of the requirement of the
Warehouse Receipts Act, then the commodities delivered for storage become ordinary deposits and
will not be governed by the provisions of the Bonded Warehouse Act. Under Section 1 of the
Warehouse Receipts Act, the issuance of a warehouse receipt in the form provided by it is merely
permissive and directory and not obligatory. (GONZALES VS. GO TIONG)

In conclusion, we hold that where a warehouse receipt or quedan is transferred or endorsed to a


creditor only to secure the payment of a loan or debt, the transferee or endorsee does not
automatically become the owner of the goods covered by the warehouse receipt or quedan but he
merely retains the right to keep and with the consent of the owner to sell them so as to satisfy the
obligation from the proceeds of the sale, this for the simple reason that the transaction involved is
not a sale but only a mortgage or pledge, and that if the property covered by the quedans or
warehouse receipts is lost without the fault or negligence of the mortgagee or pledgee or the
transferee or endorsee of the warehouse receipt or quedan, then said goods are to be regarded as
lost on account of the real owner, mortgagor or pledgor.
The indorsement and delivery of the warehouse receipts (quedans) by Ramos and Zoleta to
petitioner was not to convey "title" to or ownership of the goods but to secure (by way of pledge)
the loans granted to Ramos and Zoleta by petitioner. The indorsement of the warehouse receipts
(quedans), to perfect the pledge, merely constituted a symbolical or constructive delivery of the
possession of the thing thus encumbered. (PNB VS. SAYO, JR.)
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Regrettably, the factual settings do not sufficiently indicate whether the demand to obtain
possession of the goods complied with Section 8 of the law. The presumption, nevertheless, would
be that the law was complied with, rather than breached, by petitioner. Upon the other hand, it
would appear that the refusal of private respondents to deliver the goods was not anchored on a
valid excuse, i.e., non-satisfaction of the warehouseman's lien over the goods, but on an adverse
claim of ownership. Private respondents justified their refusal to deliver the goods, as stated in
their Answer with Counterclaim and Third-Party Complaint in Civil Case No. 90-53023, by claiming
that they "are still the legal owners of the subject quedans and the quantity of sugar represented
therein." Under the circumstances, this hardly qualified as a valid, legal excuse. The loss of the
warehouseman's lien, however, does not necessarily mean the extinguishment of the obligation to
pay the warehousing fees and charges which continues to be a personal liability of the owners, i.e.,
the pledgors, not the pledgee, in this case. But even as to the owners-pledgors, the warehouseman
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fees and charges have ceased to accrue from the date of the rejection by Noah's Ark to heed the
lawful demand by petitioner for the release of the goods. (PNB VS. SAYO, JR.)
Imperative is the right of the warehouseman to demand payment of his lien at this juncture,
because, in accordance with Section 29 of the Warehouse Receipts Law, the warehouseman loses
his lien upon goods by surrendering possession thereof. In other words, the lien may be lost where
the warehouseman surrenders the possession of the goods without requiring payment of his lien,
because a warehouseman's lien is possessory in nature. (PNB vs. Se, Jr.)
Where a warehouse receipt or quedan is transferred or endorsed to a creditor only to secure the
payment of a loan or debt, the transferee or endorsee does not automatically become the owner of

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the goods covered by the warehouse receipt or quedan but he merely retains the right to keep, and
with the consent of the owner to sell, them so as to satisfy the obligation from the proceeds of the
sale, this for the simple reason that the transaction involved is not a sale but only a mortgage or
pledge, and if the property covered by the quedans or warehouse receipts is lost later without the
fault or negligence of the mortgagee or pledgee or the transferee or endorsee of the warehouse
receipt or quedan, then said goods are to be regarded as lost on account of the real owner,
mortgagor or pledgor. (MARTINEZ VS. PNB)

TRUST RECEIPTS LAW


As regards the first issue, the Court has repeatedly upheld the validity of the Trust Receipts Law
and consistently declared that the said law does not violate the constitutional proscription against
imprisonment for non-payment of debts.
Verily, PD 115 is a declaration by the legislative authority that, as a matter of public policy, the
failure of a person to turn over the proceeds of the sale of goods covered by a trust receipt or to
return said goods if not sold is a public nuisance to be abated by the imposition of penal sanctions.
In fine, PD 115 is a valid exercise of police power and is not repugnant to the constitutional
provision of non-imprisonment for non-payment of debt.
In a similar vein, the case of People vs. Nitafan (supra) held: "The Trust Receipts Law punishes the
dishonesty and abuse of confidence in the handling of money or goods to the prejudice of another
regardless of whether the latter is the owner or not. The law does not seek to enforce payment of a
loan. Thus, there can be no violation of the right against imprisonment for non-payment of a debt."
(TIOMICO VS. CA)

A letter of credit-trust receipt arrangement is endowed with its own distinctive features and
characteristics. Under that set-up, a bank extends a loan covered by the letter of Credit, with the
trust receipt as a security for the loan. In other words, the transaction involves a loan feature
represented by the letter of credit, and a security feature which is in the covering trust receipt.
A trust receipt, therefore, is a security agreement, pursuant to which a bank acquires a "security
interest in the goods. It secures an indebtedness and there can be no such thing as security
interest that secures no obligation.
Contrary to the allegation of the VINTOLAS, IBAA did not become the real owner of the goods. It
was merely the holder of a security title for the advances it had made to the VINTOLAS. The goods
the VINTOLAS had purchased through IBAA financing remain their own property and they hold it at
their own risk. The trust receipt arrangement did not convert the IBAA into an investor; the latter
remained a lender and creditor."
For the bank has previously extended a loan which the L/C represents to the importer, and by that
loan, the importer should be the real owner of the goods. If under the trust receipt, the bank is
made to appear as the owner, it was but an artificial expedient, more of a legal fiction than fact,
for if it were go, it could dispose of the goods in any manner it wants, which it cannot do, just to
give consistency with the purpose of the trust receipt of giving a stronger security for the loan
obtained by the importer. To consider the bank as the true owner from the inception of the
transaction would be to disregard the loan feature thereof.
Red Notes in Commercial Law

Since the IBAA is not the factual owner of the goods, the VINTOLAS cannot justifiably claim that
because they have surrendered the goods to IBAA and subsequently deposited them in the custody
of the court, they are absolutely relieved of their obligation to pay their loan because of their
inability to dispose of the goods. The fact that they were unable to sell the seashells in question
does not affect IBAA's right to recover the advances it had made under the Letter of Credit.
(VINTOLA VS. INSULAR BANK)

The penal provisions of P.D. No. 115 apply even when the trust receipt issued covers goods or
items not destined for sale or for use in manufacture, and would include items obtained under a
trust receipt used to repair and maintain equipment used in business. If the beneficiary is not paid
under such trust receipt, the trustee is liable under the law. (ALLIED BANKING CORP. VS.
ORDOEZ)
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From the legal and jurisprudential standpoint it is clear that the security interest of the
entruster is not merely an empty or idle title. To a certain extent, such interest becomes a "lien" on
the goods because the entruster's advances will have to be settled first before the entrustee can
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consolidate his ownership over the goods. A contrary view would be disastrous. For to refuse to
recognize the title of the banker under the trust receipt as security for the advance of the purchase
price would be to strike down a bonafide and honest transaction of great commercial benefit and
advantage founded upon a well-recognized custom by which banking credit is officially mobilized
for manufacturers and importers of small means.
Besides, as earlier stated, the law warrants the validity of petitioner's security interest in the goods
pursuant to the written terms of the trust receipt as against all creditors of the trust receipt
agreement. The only exception to the rule is when the properties are in the hands of an innocent
purchaser for value and in good faith. The records however do not show that the winning bidder is
such purchaser. Neither can private respondents plead preferential claims to the properties as
petitioner has the primary right to them until its advances are fully paid. (PRUDENTIAL BANK VS.
NLRC)

INSOLVENCY LAW
The provision of the above-quoted Section 32, of the Insolvency Law is very clear-that
attachments dissolved are those levied within one (1) month next preceding the commencement of
the insolvency proceedings and judgments vacated and set aside are judgments entered in any
action, including judgment entered by default or consent of the debtor, where the action was filed
within thirty (30) days immediately prior to the commencement of the insolvency proceedings. In
short, there is cut off period--one (1) month in attachment cases and thirty (30) days, in judgments
entered in actions commenced prior to the insolvency proceedings. Section 79, on the other hand,
relied upon by private respondents, provides for the right of the plaintiff if the attachment is not
dissolved before the commencement of proceedings in insolvency, or is dissolved by an undertaking
given by the defendant, if the claim upon which the attachment suit was commenced is proved
against the estate of the debtor. Therefore, there is no conflict between the two provisions.
(RADIOLA-TOSHIBA VS. IAC)

INTELLECTUAL PROPERTY LAW

TRADEMARK
A word or a combination of words which is merely descriptive of an article of trade, or of its
composition, characteristics, or qualities, cannot be appropriated and protected as a trademark to
the exclusion of others. (ONG OI GUI VS. DIRECTOR, PHILIPPINE PATENTS OFFICE, 96 PHIL. 673)
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Common geometric shapes, such as diamonds, are ordinarily not regarded as indicia of the origin
of goods, unless they have acquired a secondary meaning. (VICTORIAS MILLING CO. INC. VS. ONG
SU, 79 SCRA 207)

One who has adopted and used a trademark on his goods does not prevent the adoption and use
on the same trademark by others for products which and of a different description. (FABERGE INC.
VS. INTERMEDIATE APPELLATE COURT, 215 SCRA 3160

A word or phrase originally incapable of exclusive appropriation with reference to an article on


the market, because it is geographically or otherwise descriptive, might nevertheless have been
Law

used so long and so exclusively by one producer with reference to its article that, in that trade and
to that branch of the purchasing public, the word or phrase has come to mean that the article was
his product. (LYCEUM OF THE PHILIPPINES INC. VS. COURT OF APPEALS, 219 SCRA 610)

Although the word Selecta may be an ordinary or common word in the sense that it may be
used or employed by any one in promoting his business or enterprise, once adopted or coined in
connection with ones business as an emblem, sign or device to characterize its products, or as a
badge of authenticity, it may acquire a secondary meaning as to be exclusively associated with its

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products and business. In this sense, its use by another may lead to confusion in trade and cause
damage to its business. (ARCE SONS AND CO. VS. SELECTA BISCUIT CO. INC., ET. AL, 110 PHIL. 858)
The trademark Lionpas for medicated plaster cannot be registered because it is confusingly
similar to Salonpas, a registered trademark also for medicated plaster. When the two words are
pronounced, the sound effects are confusingly similar. (MARVEX COMMERCIAL CO. INC. VS. PETRA
HAWPIA AND CO., 18 SCRA 1178)

The function of a trademark is to point distinctively, either by its own meaning or by association,
to the origin or ownership of the wares to which it is applied. Ang Tibay as used by the
respondent to designate his wares, had exactly performed that function for twenty-two years
before the petitioner adopted it as a trademark in her own business. Even if Ang Tibay therefore,
were not capable of exclusive appropriation as a trademark, the application of the doctrine of
secondary meaning could be sustained because, in any event, by respondents long and exclusive
use of said phrase with reference to his products and his business, it has acquired a proprietary
connotation. (ANG VS. TEODORO, 74 PHIL. 50)

Infringement of trademark is a form of unfair competition. The universal test question for
infringement is whether the public is likely to be deceived. Actual probable deception and
confusion on the part of the customers by reason of defendants practices must always appear.
(ASIA BREWERY INC. VS. COURT OF APPEALS, 224 SCRA 437)

The validity of a cause for infringement is predicated upon colorable imitation. The phrase
colorable imitation denotes such a close or ingenious imitation as to be calculated to deceive
ordinary persons, or such resemblance to the original as to deceive an ordinary purchaser giving
such attention as a purchaser usually gives, and to cause him to purchase the one supposing it to be
the other. (ETEPHA VS. DIRECTOR OF PATENTS ET. AL, 16 SCRA 495)

If the competing trademark contains the main or essential or dominant features of another by
reason of which, confusion and deception are likely to result, then infringement takes place; the
duplication or imitation is not necessary, a similarity in the dominant features of the trademarks
would be sufficient. (PHILIPPINE NUT INDUSTRY INC. VS. STANDARD BRANDS INC., 65 SCRA 575)

In infringement or trademark cases in the Philippines, particularly in ascertaining whether one


trademark is confusingly similar to or is a colorable imitation of another, no set rules can be
deduced each case must be decided on its own merits. (SOCIETE DES PRODUITS NESTLE S.A. VS.
COURT OF APPEALS, 356 SCRA 207)

Infringement of trademark depends on whether the goods of the two contending parties using
the same trademark, such as ESSO, are so related as to lead the public to be deceived. The
trademark ESSO which the petitioner uses for its various petroleum products can be used by
Red Notes in Commercial Law

another as trademark for cigarettes as the two classes of products flow through different trade
channels. (ESSO STANDARD Eastern Inc. vs. Court of Appeals, 116 SCRA 336)

In determining whether the trademarks are confusingly similar, a comparison of the words is not
the only determining factor. The trademark in their entirety as they appear in their respective
labels or hang tags must also be considered in relation to the goods to which they are attached.
(FRUIT OF THE LOOM INC. VS. COURT OF APPEALS, 133 SCRA 405)

It has been held that if a mark is so commonplace that it cannot be readily distinguished from
others, then it is apparent that it cannot identify a particular business; and he who first adopted it
cannot be injured by any subsequent appropriation or imitation by others, and the public will not
be deceived. (PHILIPPINE REFINING CO. INC. VS. NG SAM, 115 SCRA 472)

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The Convention of Paris for the Protection of Industrial Property, otherwise known as the Paris
Convention, is a multilateral treaty that seeks to protect industrial property consisting of patents,
utility models, industrial designs, trademarks, service marks, trade names and indications of source
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or appellations of origin and at the same time aims to repress unfair competition. The convention is
essentially a compact among various countries which as members, have pledged to accord to
citizens of the other member countries, trademark and other rights comparable to those accorded
their own citizens by their domestic laws for an effective protection against unfair competition.
(MIRPURI VS. COURT OF APPEALS, 318 SCRA 516)

A foreign corporation not doing business in the Philippines needs no license to sue in the
Philippines for trademark violations. The Philippine being a party to the Paris Convention for the
Protection of Industrial Property, the right of a foreign corporation to file suit in the Philippine
courts to protect its trademark is to be enforced. (LA CHEMISE LACOSTE VS. FERNANDEZ, 129 SCRA
373)

A foreign corporation not doing business in the Philippines may have the right to sue before the
Philippine courts but it may not necessarily be entitled to protection due to absence of actual use
of the emblem in the Philippine market. (PHILIP MORRIS INC. VS. COURT OF APPEALS, 224 SCRA
576)

An unlicensed, unregistered foreign corporation which has never done any business in the
Philippines, but is widely and favorably known in the Philippines through the use of its products
bearing its corporate and trade name, has a legal right to maintain an action in the Philippines to
restrict the organization of a corporation whose sole purpose is to deal and trade in the same goods
as those of the foreign corporation. (CONVERSE RUBBER CORP. VS. UNIVERSAL RUBBER PRODUCTS
INC., 147 SCRA 154)

Agreement giving distributor ownership of packages does not necessarily get her exclusive use of
the trademark. The fact that distributor spent substantial sums to promote product covered by
trademark is not sufficient to vest ownership of the trademark. (GABRIEL VS. PEREZ, 55 SCRA 406)

A certificate of registration of a mark or trade name is prima facie evidence of the validity of
the registration, the registrants ownership of the mark or trade name, and of the registrants
exclusive right to use the same in connection with the goods, business or services specified in the
certificate, subject to any conditions and limitations stated therein. (AMIGO MANUFACTURING INC.
San Beda College of

VS. CLUETT PEABODY CO. INC., 354 SCRA 434)

In cases of confusion of business or origin, the question that usually arises is whether the
respective goods or services of the senior user are so related as to likely cause confusion of business
or origin, and thereby render the trademark or trade name confusingly similar. Goods are related
when they belong to the same class or have the same descriptive properties, when they possess the
same physical attributes or essential characteristics with reference to their form, composition,
texture or quality. They may also be related because they serve the same purpose. (CANON
KABUSHIKI KAISHA VS. COURT OF APPEALS, 336 SCRA 266)

The reckoning point for the filing of a petition for cancellation of certificate of registration of
trademark is not from the alleged date of use but from the date the certificate of registration was
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published in the Official Gazette and issued to the registrant. (EMERALD GARMENT
MANUFACTURING CORP. VS. COURT OF APPEALS, 251 SCRA 600)

The right to the exclusive use of a corporate name with freedom from infringement is
determined by priority of adoption.
In determining the existence of confusing similarity in corporate name, the test is whether the
similarity is such as to mislead a person using ordinary care and discretion. (PHILIPS EXPORT B.V.
VS. COURT OF APPEALS, 206 SCRA 457)

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Where an unreasonable period of time had elapsed prior to the filing of a petition for revival of
the patent application due to the negligence of the applicants counsel, such inaction would result
in the forfeiture of the right to revive the patent application. (SCHWARTZ VS. COURT OF APPEALS,
335 SCRA 493)

PATENTS
A person or entity who has not been granted letters patent over an invention and has not
acquired any right of title thereto either as assignee or as licensee, has no cause of action for
infringement because the right to maintain an infringement suit depends on the existence of the
patent. (CRESSER PRECISSION SYSTENS INC. VS. COURT OF APPEALS, 286 SCRA 13)

The doctrine of equivalents provides that an infringement also takes place when a device
appropriates a prior invention by incorporating its innovative concept and, although with some
modification and change, performs substantially the same function in substantially the same way to
achieve substantially the same result. The doctrine of equivalents thus requires satisfaction of the
function-means-and-result test, the patentee having the burden to show that all three components
of such equivalency test are met. (SMITH KLINE BECKMAN CORPORATION vs. COURT OF APPEALS ET
AL.)

To be able to effectively and legally preclude others from copying and profiting from the
invention, a patent is a primordial requirement. No patent, no protection. The ultimate goal of a
patent system is to bring new designs and technologies into the public domain through disclosure.
Ideas, once disclosed to the public without the protection of a valid patent, are subject to
appropriation without significant restraint. (PEARL & DEAN (PHIL.), INCORPORATED vs. SHOEMART,
INCORPORATED, and NORTH EDSA MARKETING, INCORPORATED)

Under the aforequoted law, only the patentee or his successors-in-interest may file an action for
infringement. The phrase "anyone possessing any right, title or interest in and to the patented
invention" upon which petitioner maintains its present suit, refers only to the patentee's successors-
in-interest, assignees or grantees since actions for infringement of patent may be brought in the
name of the person or persons interested, whether as patentee, assignees, or as grantees, of the
exclusive right.
Moreover, there can be no infringement of a patent until a patent has been issued, since whatever
right one has to the invention covered by the patent arises alone from the grant of patent. In short,
a person or entity who has not been granted letters patent over an invention and has not acquired
any right or title thereto either as assignee or as licensee, has no cause of action for infringement
because the right to maintain an infringement suit depends on the existence of the patent.
Petitioner admits it has no patent over its aerial fuze. Therefore, it has no legal basis or cause of
action to institute the petition for injunction and damages arising from the alleged infringement by
Red Notes in Commercial Law

private respondent. While petitioner claims to be the first inventor of the aerial fuze, still it has no
right of property over the same upon which it can maintain a suit unless it obtains a patent
therefor. (CRESER PRECISON SYTEMS VS. CA)

COPYRIGHT
Copyright, in the strict sense of the term, is purely a statutory right. Being a mere statutory
grant, the rights are limited to what the statute confers. It may be obtained and enjoyed only with
respect to the subjects and by the persons, and on terms and conditions specified in the statute.
Accordingly, it can cover only the works falling within the statutory enumeration or description.
(PEARL & DEAN (PHIL.), INCORPORATED vs. SHOEMART, INCORPORATED, and NORTH EDSA
MARKETING, INCORPORATED)

The copyright does not extend to the general concept or format of its dating game show.
(JOAQUIN VS. DRILON)
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In determining the question of infringement, the amount of matter copied from the copyrighted
work is an important consideration. To constitute infringement, it is not necessary that the whole
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or even a large portion of the work shall have been copied. If so much is taken that the value of the
original is sensibly diminished, or the labors of the original author are substantially and to an
injurious extent appropriated by another, that is sufficient in point of law to constitute piracy.
(HABANA VS. ROBLES)
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