PRE-BAR REVIEW DIVISION

2007 PRE-WEEK REVIEW NOTES

DOMONDONs CUT AND PASTE The BAR STAR NOTES

selective in the use of review materials. Domondons Cut and Paste, The Bar Star Notes were specially prepared to help you focus on the areas that are probable sources of questions to be given during the 2007 Bar Examination in Mercantile Law. The areas were identified by the author through statistical analysis using data from Bar Examination questions in Mercantile Law given during the period 1913 up to 2006. The essence of selected Supreme Court decisions up to February 2007 are also included. In order to have a most effective Pre-Week Review, you should read Domondons Cut and Paste, The Bar Star Notes in the following sequence: 1. You should first read and master the areas marked and because of the high statistical probability that 70% to 90% of the 2007 Bar Examination in Mercantile Law may be sourced from these areas. You should note that, except in very instances (usually enumerations and distinctions), the suggested answers rarely exceed three sentences. This is so, because you could CUT the suggested answers and PASTE them as your answers to the Bar Questions. Of course, there may be a need to adjust the concept that is PASTED in order to be appropriate to the requirements and factual circumstances of the actual Bar Examination Questions you would be answering. To optimize use of the read Domondons Cut and Paste, The Bar Star Notes, it is suggested that you cover the SUGGESTED ANSWER and then read the question. Try answering the question mentally before you check whether your answer is correct or not. This would train you in analyzing questions and formulating answers quickly. You would not miss any area because you are forced to read the notes with an interactive mind. If you could recollect a great number of the answers to the areas marked and , then you are ready for the Bar. You should adopt this method of reading, whether it is your first or nth reading. To facilitate your understanding of the areas marked and , it is suggested that you should write the notes you take during the Pre-Week Reviews you attend directly opposite

MERCANTILE LAW
VER. 2007.08.13 copyrighted 2007

Prepared by Prof. Abelardo T. Domondon

form of textual materials and representative review questions were specially prepared by Prof. Domondon for the exclusive use of Bar Candidates who attended his 2007 lectures in Mercantile Law , conducted by Primus Information, Center, Inc,, and others he has personally authorized.
During the Pre-Week from September 10 15, 2007, you do not anymore have the luxury of time to do a leisurely reading of your books and notes. Thus, you should be very

How to use the Notes: These Notes in the

the concept you find difficulty understanding. If you intend to do a self-review during the Pre-Week then you could annotate the Domondons Cut and Paste, The Bar Star Notes by writing your own comments and notes. Sometimes, it is easier to understand the concept if it is in your own handwriting. There may be no need to highlight the areas marked and , because all the areas in this section are equally dangerous. 2. After you have mastered the areas marked and , you should next do a selective reading of the areas marked and those that are not so marked. It is statistically probable that 10% to 20% of the questions may be sourced from these areas, especially more so, the so-called crazy questions. You could if you so desire, highlight certain of these areas, although it is not advisable to spend a lot of time here, if you have not yet mastered the areas marked and . DO NOT MEMORIZE the suggested answers. Some of the answers were purposely made to be lengthy in order to serve as explanatory devices. This is so because you do not have time anymore to refer back to your review materials. If you still could not understand the concepts after reading these Notes, then refer to the Doctrines and Illustrative cases as well as to your other review materials. The materials are arranged in accordance with the bar examination coverage. The actual bar questions may not be so arranged. Likewise, these Notes are only indicative of the areas from where Bar questions may be sourced. The questions shown in these Notes may or may not be exactly worded in the actual Bar questions. Finally, the purpose of Domondons Cut and Paste, The Bar Star Notes is not to teach you Mercantile Law but to provide a scientifically prepared guide on the areas where you should focus during the Pre-Week, not only to enable you pass the Bar, but also to place among the TOP TEN.

These materials are copyrighted and/or based on the writers book on Guide to Mercantile Law and future revisions. It is prohibited to reproduce any part of these Notes in any form or any means, electronic or mechanical, including photocopying without the written permission of the author. These materials are authorized for the use only of Bar reviewees the author has personally authorized. Unauthorized users shall not be prosecuted but SHALL BE SUBJECT TO THE LAW OF KARMA SUCH THAT THEY WILL NEVER PASS THE BAR OR WOULD BE UNHAPPY IN LIFE for stealing the intellectual property of the author. Only copies with the signature of Prof. Domondon, or his authorized representative and the corresponding number on this page are considered authorized copies. Holders of authorized copies are requested not to lend their copies for reproduction through Xerox or otherwise.

AUTHORIZED SIGNATURE:

PRIMUS CONTROL NO. __________

MERCANTILE LAW
(1) CODE OF COMMERCE

WARNING:

(a) Merchants and Transactions . Articles 1 to 63.

Commercial

(b) Letters of Credit under the Code of Commerce (Articles 567 to 572, inclusive) 1. What is a letter of credit ?
SUGGESTED ANSWER: A letter of credit is one whereby one person requests some other person to advance money or give credit to a third person, and promises that he will repay these to the person making the advancement, or accept the bills drawn upon himself for the like amount. (Bank of
Philippine Islands v. Commissioner of Internal Revenue, G. R. No. 137002, July 27, 2006)

1. What is meant by the theory of manifestation in the perfection of contracts as adopted in the Code of Commerce ? SUGGESTED ANSWER: A theory in the perfection of contracts which recognizes that the contract is perfected at the time when the acceptance is made by the offeree. 2. What is the theory of cognition in the perfection of contracts recognized under the Civil Code ? SUGGESTED ANSWER: The contract is perfected at the time the acceptance came to the knowledge of the offeror. 3. What is a joint account ? SUGGESTED ANSWER: A joint account is a transaction of merchants where other merchants agree to contribute the amount of capital agreed upon, and participating in the favorable or unfavorable results thereof in the proportion they may determine. 4. Distinguish joint account from partnership. SUGGESTED ANSWER: The following are the distinctions: a. A partnership has a firm name WHILE a joint account has none and is conducted in the name of the ostensible partner. b. A partnership has a juridical personality and may sue and be sued under its firm name WHILE a joint account has no juridical personality and can sue and be sued only in the name of the ostensible partner. c. A partnership has a common fund WHILE a joint account has none. d. In a partnership, all general partners have the right of management WHILE in a joint account the ostensible partner manages its business operations. e. Liquidation of a partnership may, by agreement, be entrusted to a partner or partners WHILE in a joint account liquidation thereof can only be done by the ostensible partner.

NOTES AND COMMENTS: a. UCP rules govern letters of credit. Since letters of
credit have gained general acceptability in international trade transactions, the International Chamber of Commerce (ICC) has published from time to time updates on the Uniform Customs and Practice (UCP) for Documentary Credits to standardize practices in the l/c area, the latest of the revisions being that in 1993. There being no specific provisions which govern the legal complexities arising from transactions involving letters of credit, not only between or among banks themselves but also between banks and the seller or the buyer, as the case may be, the applicability of UCP is undeniable. (Ibid., Bank of America, NT & SA v. Court of Appeals, et al., G. R. No. 105395, 10 December 1993, 228 SCRA 357) Thus, the observance of the UCP is justified by Article 2 of the Code of Commerce which provides that in the absence of any particular provision in the Code, commercial transactions shall be governed by usages and customs generally observed. (Ibid., citing Bank of Philippine Islands v, De Reny Fabric Industries, Inc., 146 Phil. 269; 35 SCRA 256 (1970) b. Draft, defined. A draft is a form of bill of exchange used mainly in transactions between persons physically remote from each other. it is an order made by one person, say the buyer of goods, addressed to a person having in his possession funds of such buyer ordering the addressee to pay the purchase price to the seller of the goods. Where the order is made by one bank to another, it is referred to as a bank draft. (Bank of Philippine Islands v. Commissioner of Internal Revenue, G. R. No. 137002, July 27, 2006) c. Foreign bill of exchange, defined. An inland bill of exchange is a bill which is, or on its face purports to be, both drawn and payable within the Philippines. Any other bill is a foreign bill. (Sec. 129, N.I.L.)

are the three distinct and independent contracts in a letter of credit? SUGGESTED ANSWER: The three distinct and independent contracts are: a. The contract of sale between the buyer and the seller; b. The contract of the buyer with the issuing bank, and c. The letter of credit proper in which the bank promises to pay the seller pursuant to the terms and conditions stated therein. (Keng Hua Paper Products Co., Inc. v. Court of Appeals, et al.,
286 SCRA 257)

2. What

3. In letters of credit in banking transactions, distinguish the liability of a confirming bank from a notifying bank. SUGGESTED ANSWER: A confirming bank adds its credit to the letter of credit and therefore is liable if the opening importer fails to pay the exporter while a notifying bank being merely one who gives advice as to the existence does not incur any such liability.
4. BV agreed to sell to AC, a Ship and Merchandise Broker, 2,500 cubic meters of logs at $27 per cubic meter FOB. After inspecting the logs, CD issued a purchase order. On the arrangements made upon instruction of the consignee, H & T Corporation of Los Angeles, California, the SP Bank of Los Angeles issued an irrevocable letter of credit available at sight in favor of BV for the total purchase price of the logs, The letter of credit was mailed to FE Bank with the instruction to forward it to the beneficiary. The letter of credit provided that the draft to be drawn is on SP Bank and that it be accompanied by, among other things, a certification from AC, stating that the logs have been approved prior to shipment in accordance with the terms and conditions of the purchase order. Before loading on the vessel chartered by AC, the logs were inspected by customs inspectors and representatives of the Bureau of Forestry, who certified to the good condition and exportability of the logs. After the loading was completed, the Chief Mate of the vessel issued a mates receipt of the cargo which stated that the logs are

in good condition. However, AC refused to issue the required certification in the letter of credit. Because of the absence of the certification, FE Bank refused to advance payment on the letter of credit. a. May FE Bank be held liable under the letter of credit? Explain. b. Under the facts stated above, the seller, BV, argued that FE Bank, by accepting the obligation to notify him that the irrevocable letter of credit has been transmitted to it on his behalf, has confirmed the letter of credit. Consequently, FE Bank is liable under the letter of credit. is the argument tenable ? Explain. SUGGESTED ANSWER: a. No. Without the certification from AC, which is a condition in the letter of credit, FE has no obligation to advance payment of the letter of credit. (Feati Bank v. Court of Appeals, et
al., 196 SCRA 576)

b. No. FE Bank is merely a notifying bank because there is no showing that it has added its credit to the letter of credit.

5. On 26 March 1997 Transfield and Luzon Hydro (LHC) entered into a Turnkey Contract whereby Transfield, as Turnkey Contractor, undertook to construct, on a turnkey basis, a 70 Megawatt power station (PROJECT). To ensure Transfields compliance with the contracted target completion date it opened, with ANZ Bank, in favor of LHC two standby letters of credit (SECURITIES) on 20 March 2000. As a result of some problems that beset the PROJECT completion arbitration was resorted to. Foreseeing that LHC would call on the SECURITIES Transfield advised ANZ Bank of the arbitration proceedings with the warning that until resolution of the arbitration no payment on the SECURITIES should be made to LHC or its representatives otherwise it would be subject to damages. LHC then demanded from ANZ Bank payment of the SECURITIES by surrendering the required drafts and documents required under the L/C and was in fact paid. Did ANZ act correctly under the premises ? Is it liable for damages to Transfield ? Reason out your answer.

SUGGESTED ANSWER: Yes, ANZ acted correctly under the premises. The engagement of ANZ Bank as the issuance bank is to pay LHC, the beneficiary of the credit once the draft and required documents are presented to it. The so-called :independence principle assures LHC, the beneficiary, of prompt payment independent of any breach in the main contract and precludes ANZ, the issuing bank from determining whether the main contract is actually accomplished or not. Under this principles issuing banks, such as ANZ, assume no liability or responsibility for the form, sufficiency, accuracy, genuineness, falsification or legal effect of any documents, or for the general and/or particular conditions stipulated in the documents superimposed thereon, nor do they assume any liability or responsibility for the description, quantity, weight, quality, condition, packing, delivery, value or existence of the goods represented by any documents, or for the good faith or acts and/or omissions, solvency, performance, or standing of the consignor, the carriers, or the insurers of the goods, or any other person whomsoever. (Transfield Philippines, Inc. v. Luzon
Hydro Corporation, et al., G. R. No. 146717, November 22, 2004 citing various authorities)

(i) Bulk Sales Law (Act 3952) 1. X is the sole proprietor of a store engaged in the business of trading auto spare parts, both wholesale and retail. Scared by what he perceived as the political and economic instability besetting country, he decided to emigrate to Canada with his entire family. He liquidated all his assets including his auto spare parts business lock, stock and barrel to his compadre for US$1,500,000.00 which he planned to reinvest in Canada. a. Is he covered by the provisions of the Bulk Sales Law ? b. In the affirmative, what must be done by the parties so as to comply with the law ? c. Suppose X submitted a false statement on the schedule of his creditors. What is the effect of such false statement to his compadre ?

d. What is the right of his creditors, if X failed to comply with the procedure steps required by law under question letter (b) hereof ? SUGGESTED ANSWER: a. Yes. X is covered by the Bulk Sales Law. The sale of his business lock, stock and barrel to his compadre is considered as a sales in bulk under the Bulk Sales Act because it is a: 1) Sale, transfer, or disposition is other than in the ordinary course of business; 2) Sale of all or substantially all of the business; and 3) Sale of all or substantially all of the fixtures and equipments. b. Since the sale is covered by the Bulk Sales Law, X must comply with the following requirements in order to make the sale valid: 1) Xs affidavit listing all the names of all his creditors, the nature and amount of credits due them; 2) X, as the seller, should prepare an inventory of the stocks to be sold and informs all the creditors ten (10) days before the sale or the projected sale in bulk; and 3) Nos. 1) & 2) are registered with the Bureau of Domestic Trade. c. If Xs compadre does not have knowledge of the falsity of the schedule, the sale is valid. However, if the vendee has knowledge of such falsity, the sale is void because he is in bad faith. d. The recourse of the creditors is to question the validity of the sale from X to his compadre, so as to recover what were sold to his compadre. NOTES AND COMMENTS: a. Purpose of Bulk Sales Law. To prevent secret or
fraudulent sale of the business, which could lead to its closure, to the detriment of the creditors.

2. What are the effects of failure to observe the requirements under the Bulk Sales Act ? SUGGESTED ANSWER:

a. The sale is null and void; b. The purchaser holds the property he bought in trust for the seller; c. The purchaser is liable to the sellers creditors for properties he bought and already disposed of by him; and d. The purchaser has the right to demand from the seller the return of the purchase price plus damages.

3. What are the instances when the sale, transfer, mortgage or assignment of stock of goods, wares, merchandise, provision, or materials otherwise than in the ordinary course of trade and the regular prosecution of the business of the vendor are not deemed to be a sale or transfer in bulk ? SUGGESTED ANSWER: a. When the sale, transfer or disposition is in the ordinary course of business; b. When there is a waiver of the provisions of the Bulk Sales Law of all the creditors; c. When the sale, transfer or disposition is by virtue of a judicial order.
BAR: 4. Excel Corporation sold its assets to Microsoft, Inc., after complying with the requirements of the Bulk Sales Law. Subsequently, one of the creditors of Excel Corporation tried to collect the amount due it, but found out that Excel Corporation had no more assets left. The creditor then sued Microsoft, Inc., on the theory that Microsoft, Inc., is a mere alter ego of Excel Corporation. Will the suit prosper ? Explain. SUGGESTED ANSWER: The suit will not prosper. The sale by Excel Corporation of its assets to Microsoft, Inc. did not result in the transfer of its liabilities to Microsoft, Inc., nor in the assumption of such liabilities by Microsoft, Inc. Furthermore, there is nothing in the problem which shows that there was a merger of consolidation, nor an agreement on the part of Microsoft, Inc., to assume Excel Corporations liabilities. 5. The shares of stock of Aldrin, Inc., engaged in the wholesale of paper products, is owned 100% by Justin. He decided to sell all of his shares of stock to James and

Jerome. Is this a sale in bulk subject to the Bulk Sales Act ? Explain briefly. SUGGESTED ANSWER: No. The transaction is a sale of the shares of stock and not of the business which would result to detriment of the creditors. The business still continues and the creditors may proceed against the same corporation which owed them. There was merely a change in ownership of the business.

(ii) The Warehouse Receipts Law (Act 2137 in relation to the General Bonded Warehouse Act, Act 3893)
1. XYZ Warehouse, Inc. issued five (5) warehouse receipts (quedans) for sugar to Mia Therese Merchandising. which were substantially in the form and contains the terms prescribed for negotiable warehouse receipts by Section 2 of Act No. 2137. The five (5) quedans were subsequently negotiated and endorsed by Mia Therese to Ma. Regina who used these quedans as security for loans obtained from Joy Banking Corporation in the amount of P35 million. The quedans were endorsed by Ma. Regina to Joy Bank. Upon failure of Ma. Regina to pay Joy Bank the Bank now demanded from XYZ Warehouse, Inc. the release to it of the sugar covered by the five (5) quedans. XYZ refused claiming ownership because the check payment made by Mia Therese of the sugar covered by the five (5) quedans bounced. After XYZs claim of ownership was dismissed, it now refuses to release the sugar until Joy Bank pays storage fees. Is XYZ justified in refusing to release the sugar until the storage fees are paid ? SUGGESTED ANSWER: Yes. A warehouseman shall have a lien on goods deposited for all lawful charges for storage and preservation of the goods (Sec. 27, Warehouse Receipts Law). A warehouseman need not deliver until the lien is satisfied (Sec. 31, Warehouse Receipts Law) and in accordance with Sec. 29 of the Warehouse Receipts Law, the warehouseman loses his lien upon goods by surrendering possession thereof.

In this case, XYZs claim for storage fees was incompatible with its claim of ownership hence it could not have waived its right to storage fees. (Philippine National Bank, v. Judge
Se, Jr., et al., G.R. No. 119231, April 18, 1996)

NOTES AND COMMENTS: a. Warehouse receipt, defined. A warehouse receipt

is a written acknowledgment by the warehouseman that he has received goods from the depositor and holds the same in trust for him. b. Non-negotiable warehouse receipt. defined. A receipt in which it is stated that the goods received will be delivered to the depositor or to any other specified person. (Sec. 4, The Warehouse Receipts Law.) A non-negotiable receipt shall have plainly placed upon its face by the issuing warehouseman, non-negotiable or not negotiable. Upon failure to do so, a holder who purchased it for value supposing it to be negotiable, may, at his option treat such receipt as imposing upon the warehouseman the same liabilities he would have incurred had the receipt been negotiable. (Sec. 7, The Warehouse Receipts Law.) c. Negotiable warehouse receipt, defined. A receipt in which it is stated that the goods received will be delivered to the bearer or to the order of any person named in such receipt. (Sec. 5, The Warehouse Receipts Law)

a. I would advice the Warehouse Company not to deliver the goods to the sheriff, otherwise it may be held liable for conversion. It should deliver only to Patrick, the person who deposited the goods and upon presentation of the warehouse receipt. b. Yes, because Roberto would be a person who has stepped into the shoes of Patrick who made the deposit.

NOTES AND COMMENTS:

Instances where warehousemen bound or obligated to deliver. A warehouseman, in the absence of some
lawful excuse provided by Act No. 2137, The Warehouse Receipts Law, is bound to deliver the goods upon a demand made either by the holder of a receipt for the goods or by the depositor; if such demand is accompanied with: 1) An offer to satisfy warehousemans lien; 2) An offer to surrender the receipt, if negotiable, with such indorsements as would be necessary for the negotiation of the receipt; and 3) A readiness and willingness to sign, when the goods are delivered, an acknowledgment that they have been delivered, if such signature is requested by the warehouseman. In case the warehouseman refuses or fails to deliver the goods in compliance with a demand by the holder or depositor so accompanied, the burden shall be upon the warehouseman to establish the existence of a lawful excuse for such refusal. (Sec. 8, WRL) If the above are not present, then the warehouse could legally refuse to make delivery. These are the defenses a warehouseman could use to justify his REFUSAL to deliver.

a.

2. Patrick deposited with Warehouse Company for safekeeping 10,000 bags of cement. Warehouse Company issued a receipt expressly providing that the goods be delivered to the order of said Patrick. A month after, Paolo, one of Patricks creditors obtained judgment against Patrick for P50,000.00. Acting upon a writ of execution the sheriff proceeded to levy on the cement and directed Warehouse Company to deliver to him the deposited cement. a. What advice will you give Warehouse Company ? Explain your answer briefly. b. Assuming that a week prior to the levy, Patrick sold the receipt to Roberto on the basis of which, Roberto filed a claim with the sheriff. Would Roberto, the buyer of the receipt, have better rights to the cement than Paolo, the creditor? Explain your answers briefly. SUGGESTED ANSWERS:

b.

Justification of warehouseman in making

delivery. A warehouseman is justified in delivering the goods to one

who is: 1) The person lawfully entitled to the possession of the goods, or his agent; 2) A person who is either himself entitled to delivery by the terms of the non-negotiable receipt issued for the goods, or who has written authority from the person so entitled either indorsed upon the receipt or written upon another paper; or 3) A person in possession of a negotiable receipt by the terms of which the goods are deliverable to him or order, or to the bearer, or which has been indorsed to him or in blank by the person to whom delivery was promised by the terms of

the receipt or by his mediate or immediate indorser. (Sec. 9, WRL)

The above may be used by the warehouseman to defend himself WHY HE DELIVERED. c. Warehouse liable for conversion if he delivers
without a valid indorsement the goods covered by a negotiable warehouse receipt deliverable to the depositor or his order.

d. Instances where liable for conversion even with indorsement or authority: The warehouseman is also liable
even with indorsement or with authority , he is likewise liable, if prior to delivery he had either: 1) been requested, by or on behalf of the person lawfully entitled to a right of property or possession in the goods, not to make such delivery; or 2) Had information that the delivery about to be made was to one not lawfully entitled to the possession of the goods. (Sec. 10, WRL)

2) When can the warehouseman be obliged to deliver the palay to Albert ? SUGGESTED ANSWER: 1) Baldo, the purchaser of the receipt. As the person in possession of a negotiable receipt, by reason of Alberts negotiation, Baldos right is superior to that of Sammy who is not in a possession to present any negotiable receipt to enable the warehouseman to effect delivery. 2) The warehouseman can be obliged to deliver the palay to Albert, if Baldo indorses the receipt back to him. Since Albert is again the holder, he could upon surrender of the receipt, demand delivery of the palay. 5. A deposited goods with BC Warehouse Corporation which issued the corresponding warehouse receipt to the order of A. A endorsed the warehouse receipt to D who paid for the value of the goods deposited. Before D could withdraw the goods, E informed BC Warehouse Corporation that the goods belonged to him and were taken by A without his consent. E wants to get the goods but D also wants to withdraw the goods. Who has a better right to the goods ? Why ? SUGGESTED ANSWER: D has a better right to the goods because he is the holder of the negotiable warehouse receipt which was duly endorsed for value to him by A the person whose name appears on the receipt. 6. Samantha stored hardware materials in a bonded warehouse of Warren, a licensed warehouseman under the General Bonded Warehouse Law (Act 3893, as amended). Warren issued the corresponding warehouse receipt in the form he ordinarily uses for such purpose in the course of his business. All the essential terms required under Section 2 of the Warehouse Receipts Law (Act 2137, as amended) are embodied in the form. In addition, the receipt issued to Samantha contains a stipulation that Warren would not responsible for the loss of all or any portion of the hardware materials covered by the receipt even if such loss is caused by the negligence of Warren or his representatives or employees. Samantha endorsed and negotiated the warehouse receipt to Britney, who

3. To guarantee the payment of a loan obtained from a bank. Raoul pledged 500 bales of tobacco deposited in a warehouse to said bank and endorsed in blank the warehouse receipt. Before Raoul could pay for the loan, the tobacco disappeared from the warehouse. Who should bear the loss the pledgor or the bank ? Why ? SUGGESTED ANSWER: The pledgor should bear the loss. Where a warehouse receipt is pledged, the ownership of the goods remains with the depositor or his transferee. Any contract or real security, such as a pledge, does not result to an assumption of risk of loss by the creditor.. 4. Albert purchased from Sammy 150 cavans of palay on credit. Albert deposited the palay in Williams warehouse. William issued to Albert a negotiable warehouse receipt in the name of Albert. Thereafter, Albert negotiated the receipt to Baldo who purchased the said receipt for value and in good faith. 1) Who has a better right to the deposit, Sammy, the unpaid vendor, or Baldo, the purchaser of the receipt for value and in good faith ? Why ?

demanded delivery of the goods. Warren could not deliver because the goods were nowhere to be found in his warehouse. He claims that he is not liable because of the free-from-liability clause stipulated in the receipt. Do you agree with Warrens contention ? Explain. SUGGESTED ANSWER: No. The free-from-liability clause is void. The law requires the warehouseman to exercise due diligence in the care and custody of the things deposited in his warehouse.

(iii) Receipts 1.

Presidential Decree 115 on Trust

Herminio opened a letter of credit with the Bank of Philippine Islands for the importation of certain equipment. He failed to pay and also failed to deliver the equipment despite demand. He now assails the constitutionality of P.D. No. 115, the Trust Receipts Law on the ground that it constitutions imprisonment for nonpayment of a debt. Rule on his contention. SUGGESTED ANSWER: Contention is bereft of merit. P.D. No. 115, is a declaration by the legislative authority to make the act punishable under its authority to prescribe certain acts as pernicious and inimical to public welfare under the exercise of police power. (Tiomico v. Court of Appeals, et al., G.R. No. 122539,
March 4, 1999)

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. (Ching v. Court of Appeals, et al., G.R. No. 110844, April 27, 2000) b. Nature of a trust receipt. A trust receipt partakes of the nature of a security transaction. It could never be a mere additional or side document. Otherwise, a party to a trust receipt agreement could easily renege on its obligation thereunder, undermining the importance and defeating with impunity the purpose of such an indispensable tool in commercial transactions. (Ching v. Court of Appeals, et al., G.R. No. 110844, April 27, 2000) c. Purpose of Trust Receipts Law. It punishes dishonesty and abuse of confidence in the handling of money or goods to the prejudice of public order. (Ong v. Court of Appeals, et al., G. R. No. 119858, April 29, 2003) d. Acts and omissions penalized. The Trust Receipts Law is violated whenever the entrustee fails to: 1) turn over the proceeds of the sale, or 2) return the goods covered by the trust receipt if the goods are not sold. (Ong v. Court of Appeals, et al., G. R. No. 119858, April 29, 2003) Returning the goods results to absence of criminal liability but the entrustee is still liable for the balance of what he owes the entruster.

e. Violation of Trust Receipts Law is criminal in character. Return of the goods if unsold merely extinguishes the
entrustees criminal liability. He is still civilly liable for the unpaid loan. (Vintola v. IBAA, 159 SCRA 140) The mere failure to account or return gives rise to the crime which is malum prohibitum. There is no requirement to prove intent to defraud. (Ong v. Court of Appeals, et al., G. R. No. 119858, April 29, 2003)

NOTES AND COMMENTS: a. Trust receipt, defined. A trust receipt is considered

as a security transaction intended to aid in financing importers and retail dealers who do not have sufficient funds or resources to finance the importation or purchase of merchandise who may not be able to acquire credit except through utilization, as collateral, of the merchandise imported or purchased. The goods are held as security by the lending institution for the loan obligation. (Nacu vs. Court of Appeals, et al., G.R. 108638, March 11, 1994) Alternative definition: A trust receipt is a document in which is expressed a security transaction whereunder the lender, having no prior title to the goods on which the loan is to be given and not having possession which remains in the borrower, lends his money to the borrower on security of the goods which the borrower is privileged to sell clear of the lien with an agreement to pay all or part of the proceeds of the sale to the lender. It is a security agreement

f. Trusts receipts and domestic letters of credit are contracts of adhesion and any ambiguities must be held strictly against the bank. (Security Bank & Trust Company v.
Court of Appeals, et al., G.R. No. 115997, November 27, 2000)

g. Persons criminally liable for violation in case of corporations, are the officers or employers or other persons
responsible for the offense are liable to suffer the penalty of imprisonment.

2. Who is an entrustee for purposes of the Trust Receipts Law ? SUGGESTED ANSWER: An entrustee is one having or taking possession of goods, documents or instruments under a

10

trust receipt transaction, and any successor in interest of such person for the purpose of payment specified in the trust receipt agreement. [Ching v. Secretary of Justice, et al., G. R. No. 164317,
February 6, 2006 citing Sec. 3 (b) of P.D. No. 115]

What are the obligations of an entrustee ? SUGGESTED ANSWER: The entrustee is obliged to: a. hold the goods, documents or instruments in trust for the entruster and shall dispose of them strictly in accordance with the terms and conditions of the trust receipt; b. receive the proceeds in trust for the entruster and turn over the same to rthe entruster or as appears trust receipt; c. insure the goods the goods for their total value against loss from fire, theft, pilferage or other casualties; d. keep said goods or proceeds thereof whether in money or whatever form, separate and capable of identification as property of the entruster; e. return the goods, documents or instruments in the event of non-sale or upon demand of the entruster; and f. observe all other terms and conditions of the trust receipt not contrary to the Trust Receipts Law. (Ching v. Secretary of Justice, et al., G. R. No. 164317, February 6, 2006 citing Sec. 9 of P.D. No. 115)

3.

a. Negotiability. The ability of the instrument to be transferred from one hand to another, and for the holder to have the right to hold the instrument and to collect the sum certain in money. b. Accumulation of secondary contracts. As the instrument is transferred from one hand to another, contracts are entered into between those who are parties to each transfer independently of the contract between the previous and subsequent parties. NOTES AND COMMENTS: a. Characteristics of negotiable paper. The language of
negotiability which characterizes negotiable paper as a credit instrument is its freedom to circulate as a substitute for money. (Traders Royal Bank v. Court of Appeals, 269 SCRA 15)

(2) Negotiable 2031) 1.

Instruments

Law (Act No.

3. Distinguish a negotiable document from a negotiable instrument. SUGGESTED ANSWER: a. Subject matter of a negotiable document is goods while that of a negotiable instrument is money. b. Parties prior to the holder of a negotiable document may not beheld liable while the essence of a negotiable in that liability attaches to prior parties. c. There is need for notices of dishonor in negotiable instrument to hold prior parties liable while there is no concept of notices of dishonor in negotiable documents. 4. What are the requisites of a negotiable instrument ? SUGGESTED ANSWER: An instrument to be negotiable must conform to the following requirements: a. It must be in writing and signed by the maker or drawer; b. It must contain an unconditional promise or order to pay a sum certain in money; c. It must be payable to order to bearer; d. Where the instrument is addressed to a drawee, he must be named or otherwise indicated therein with reasonable certainty. (Sec. 1, N.I.L.)

What is a negotiable instrument ? SUGGESTED ANSWER: A negotiable instrument is a written contract signed by the maker or drawer which contains an unconditional promise or order to pay a sum certain in money to order or to bearer which by its form and face is intended as a substitute for money and passes from one hand to another as money, so as to give a holder in due course the right to hold the instrument and collect the sum for himself. 2. Give the characteristics of a negotiable instrument. SUGGESTED ANSWER: The characteristics of a negotiable instrument are:

ANALYTICAL STEPS FOR SOLVING PROBLEMS INVOLVING NEGOTIABILITY OF INSTRUMENTS. NOTE: This area is one of the most popular areas under Negotiable Instruments Law. The bar candidate should master the analytical steps: a. Look for the DATE: 1) If dated. The date is prima facie the true date of the instrument. Negotiability is not affected. 2) If ante-dated or post-dated. Negotiability not affected UNLESS ante-dated or post-dated for fraudulent purpose. 3) No date. Negotiable character not affected. 4) If no date, true date may be inserted. a) If instrument payable at fixed period after date (1) Wrong date is inserted (a) No effect on instrument, if holder in due course (b) Instrument invalid, if not holder in due course b. Look for SIGNATURE of maker (PN) or drawer (BE). 1) If no signature, not negotiable. 2) If signed, negotiable. c. Look for UNCONDITIONAL PROMISE (PN) or UNCONDITIONAL ORDER (BE). If present, negotiable 1) Conditional and not negotiable, if promise or order depends upon: a) A future event which may or may not happen b) A past event unknown to the parties 2) Conditional and not negotiable if promise or order to pay out of a particular fund. Example: "Pay B or order P10,000.00 out of my money in your hands." Not negotiable because it is conditional being payable out of a particular fund and no other. 3) Unconditional and negotiable even if indicates a particular fund out of which reimbursement is to be made or particular account to be debited. Example: "Pay B or order P10,000.00 and reimburse yourself out of my money in your hands." Negotiable because there is no

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condition as to source of funds only with respect to reimbursement which occurs after the instrument is paid. 4) Unconditional and negotiable if dependent upon a future event which is certain to happen even if time of happening is not known. 5) Unconditional and negotiable even if statement of the transaction is given. Example: "I promise to pay B or order P1,000,000.00 in payment of the house I bought from him on March 17, 2005." 6) Conditional and not negotiable because qualified. Example: "I promise to pay B or order P1,000, 000.00 subject to the terms and conditions of the March 17, 2005 Deed of Sale for the sale of his house." d. Is the sum CERTAIN IN MONEY ? If so, negotiable 1) Not negotiable, if not in money. Example: "I promise to pay B or order the equivalent of P50,000.00 in carabaos." 2) Negotiable even if holder has election require something to be done in lieu of money. Example: "To C: Pay to B or order P50,000.00 or 50 cavans of rice at the option of the holder." 3) If at the option of the drawer, not negotiable because it is conditional. e. Is the instrument payable ON DEMAND or AT A FIXED OR DETERMINABLE FUTURE TIME ? If so, negotiable. 1) If not, not negotiable. 2) Not negotiable, if payable on contingency. Happening of the event does not cure the defect. Example: "Pay to B or order P100,000.00, two (2) days after he passes the Bar." Negotiable: 3) Payable on demand and negotiable when expressed to be payable on demand, at sight or presentation, no time for payment is expressed on the instrument, or when the instrument is overdue. 4) Payable at a determinable future time and negotiable if payable at a fixed period after date

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or sight, on or before a fixed or determinable future time specified therein, or on or before a fixed period after occurrence of a certain event though happening be uncertain. f. Is the instrument payable TO ORDER or BEARER ? If so, then negotiable. If not, not negotiable. g. If the instrument is addressed to a drawee, is he named or otherwise indicated on the instrument with reasonable certainty ? If so negotiable. If not, not negotiable.

5. Miky brought a motor car payable in installments from Autocars, Inc. for P550,000.00. He made a down payment of P50,000.00 and executed a promissory note for the balance. The company subsequently indorsed the note to California Finance Corporation which financed the purchase. The promissory note reads:
For value received, I promise to pay Autocars, Inc. or order at its office in Makati City, the sum of P500,000.00 with interest at twelve percent (12%) per annum, payable in equal installments of P50,000.00 monthly for ten (10) months starting October 21, 2005. Manila, September 21, 2005. (Sgd.) Miky Pay to the order of California Finance Corp. Autocars, Inc. By: (Sgd.) Manager Because Miky defaulted in the payment of his installments, California Finance Corporation initiated a case against her for sum of money. Miky argued that the

promissory note is merely an assignment of credit, a nonnegotiable instrument open to all defenses available to the assignor and, therefore, California Finance Corporation is not a holder in due course. a) Is the promissory note a mere assignment of credit or a negotiable instrument ? Why ? b) Is the California Finance Corporation a holder in due course ? Explain briefly. SUGGESTED ANSWER: a) The promissory note is a negotiable instrument because it conforms to the requirements of a negotiable instrument. It is in writing signed by the maker Miky, it contains an unconditional promise to pay a sum certain in money at a fixed or determinable future time. The sum is a sum certain although it is payable in installments with interest. b) California Finance Corporation is a holder in due course because it took the instrument complete and regular upon its face, that it is not overdue and without notice that it had been previously dishonored, that it took the instrument in good faith and for value, and that it had no notice of any infirmity in the instrument or defect in Autocars, Inc.s title.

6. Discuss the negotiability or non-negotiability of the following notes:

Manila, September 1, 2005 P2,500.00 I promise to pay Pedro San Juan or order the sum of P2,500.00. (Sgd.) NOEL CASTRO SUGGESTED ANSWER: It is negotiable because it is in writing signed by the maker, Noel Castro, it contains an unconditional promise to pay a sum P2,500.00 which is a sum certain in money, it is payable on demand as no date of maturity is shown, and it is payable to order.

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Manila, June 3, 2005 P10,000.00 For value received, I promise to pay Sergio Dee or order the sum of P10,000.00 in five (5) installments, with the first installment payable on October 5, 2005 and the other installments on or before the fifth day of the succeeding month thereafter. (Sgd.) LITO VILLA SUGGESTED ANSWER: The promissory note is negotiable. It is in writing and signed by the maker Lito Villa. It contains an unconditional promise to pay Sergio Dee or order, a sum certain in money (although to be paid in installments), at a fixed and determinable future time within five (5) months from October 5, 2003.

instruments because they are conditional in character, being payable out of a specific fund.

8. Can a bill of exchange or a promissory note qualify as a negotiable instrument if: (a) it is not dated; or (b) the day and the month, but not the year of its maturity, is given; or (c) it is not payable to cash; or (d) it names two alternative drawees ? SUGGESTED ANSWER: (a) Yes. The lack of a date does not impair the negotiability of a instrument. If there is no date, the true date may be inserted. (b) No. The instrument is not payable at a fixed or determinable future time. (c) Yes. The instrument is payable to bearer because the name of the payee does not purport to be the name of any person. (d) No. The order is conditional if addressed to two or more drawees in the alternative or in succession. SUMMARY OF VARIOUS SITUATIONS INVOLVING NEGOTIABLE INSTRUMENTS. Another area
that the reader should master: If the reviewee would be able to solve all of the following problems, he would be able to answer any question given with respect to irregular instruments. SUMMARY OF SITUATIONS a. Incomplete instrument 1) Delivered a) With forgery and alteration b) Without forgery and alteration 2) Not delivered a) With forgery and alteration b) Without forgery and alteration b. Complete instrument 1) Delivered a) With forgery and alteration b) Without forgery and alteration 2) Not delivered a) With forgery and alteration

7. State and explain whether the following are negotiable instruments under the Negotiable Instruments Law: (i) Postal Money Order; (ii) A certificate of time deposit which states This is to certify that bearer has deposited in this bank the sum of FOUR THOUSAND PESOS (P4,000.00) only, repayable to the depositor 200 days after date. (iii) Letters of credit; (iv) Warehouse receipts; (v) Treasury warrants payable from a specific fund. SUGGESTED ANSWER: The subject of postal money order, a certificate of time deposit and letters of credit is money but they are not negotiable instruments because they do not bear the words of negotiability to order, or to bearer. While it is true, that warehouse receipts may be negotiable but their subject is goods and not money. Thus, they are not negotiable instruments. Finally, treasury warrants are not negotiable

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b) Without forgery and alteration

INCOMPLETE INSTRUMENT BUT DELIVERED.

Holder has prima facie authority to fill up blanks 1) Signature on blank paper delivered by signatory with intention of making it a negotiable instrument, prima facie authority to fill it up for any amount. 2) Party prior to completion bound if filled up a) In accordance with authority b) Within reasonable time b. Irrespective of compliance with no. 2) above prior parties still bound but only to holder in due course. c. The rules apply whether the instrument is a promissory note or bill of exchange, whether payable to bearer or order.
a.

given and within a reasonable time. There is likewise conclusive presumption of delivery. Ana a very busy businessperson does not have time to sign checks one by one. So, she signs several checks in blank and instructs Beth, her personal assistant, to safekeep the checks and fill them out when and as required to pay her accounts as they fall due. Beth fills out one of the checks by placing her name as payee, fills in the amount of P50,000.00, endorses and delivers the check to Carlos who accepts it in good faith as payment for goods sold to Beth. Ana learns of the dishonesty foisted upon her by Beth. Ana was able to instruct the Bank in time to dishonor the check. When Carlos encashes the check, it is dishonored. Can Carlos hold Ana liable for the P50,000.00 value of the check ? Explain briefly. SUGGESTED ANSWER: Yes, assuming that the Carlos gave notice of dishonor to Ana. This is a case of an incomplete instrument but delivered as it was entrusted to Beth, Anas personal assistant. This is so because Carlos is a holder in due course who does not have any knowledge of the extent of authority given to Beth, that the check is for the payments of Anas account only. Moreover under the doctrine of comparative negligence, as between Ana and Carlos, both innocent parties, it was the negligence of Ana in entrusting the check to Beth which is the proximate cause of the loss.

10.

ILLUSTRATIVE PROBLEMS: BUT DELIVERED INSTRUMENTS.

INCOMPLETE

Meg issued a negotiable promissory note to Leon authorizing Leon to fill up the amount in blank up to P10,000.00. Leon however, filled it up to P25,000.00. Could Leon collect P25,000.00 from Meg ? SUGGESTED ANSWER: No, because the instrument was not strictly filled up in accordance with the authority given. Supposing in the above problem, Leon negotiated the instrument to Mara who knows that Meg's instructions was for Leon to fill it up to P10,000.00 only. Could Mara collect P25,000.00 from Meg ? SUGGESTED ANSWER: No, because Mara is not a holder in due course. She knew of the instrument's infirmity when the instrument was negotiated to her. Meg could interpose the personal defense of want of authority. Supposing further, in the above problem, that Mara did not know of the lack of authority, may Mara collect the P25,000.00 from Meg ? SUGGESTED ANSWER: Yes, because Mara is a holder in due course, she not being aware of any infirmity in the instrument at the time she took it. She may thus enforce it as if it had been filled up strictly in accordance with the authority

9.

INCOMPLETE INSTRUMENT NOT DELIVERED.

a. Completed and delivered with authority, valid. b. Completed and delivered without authority 1) Valid against party whose signature was placed after delivery like indorser. Reason: Indorser warrants the instrument is in all respect what it purports to be. 2) Not valid against party whose signature was placed before delivery, if not a holder in due course. Reason: Delivery is essential to validity. However, with respect to a holder in

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due course, there is prima facie presumption of delivery which may be rebutted. c. Rules apply whether 1) Promissory note or bill of exchange 2) Payable to bearer or order 3) With or without forgery and material alteration.

ILLUSTRATIVE PROBLEMS: NOT DELIVERED INSTRUMENT.

INCOMPLETE

11. Pocholo signed a blank check and kept it in his safe. This was stolen by Edwin who filled in the amount and placed a fictitious person as payee signed the name of the payee and indorsed the same to Paolo, Paolo to Patrick, Patrick to Sally, Sally to Jeddah, Jeddah to Rhia. All of the subsequent indorsers as well as the holder were all holders in due course. May Rhia proceed against Pocholo in case of dishonor by the drawee bank ? SUGGESTED ANSWER: No, because there was no valid delivery which is essential to the validity of the instrument. Under the same set of facts, if Pocholo as well as the drawee bank dishonors the check, may Rhia proceed against Jeddah ? SUGGESTED ANSWER: Yes, because Jeddah as an indorser warrants that the instrument is what it purports to be and if it is dishonored and necessary proceedings for dishonor taken, she shall pay the holder, Rhia. Under the same set of facts, in case of dishonor by the drawee bank and/or Pocholo and the other indorsers, is Edwin liable ? SUGGESTED ANSWER: Yes, because he was responsible for the theft, the filling up and subsequent negotiation of the instrument. Supposing under the same set of facts, that the drawee bank upon presentation by Rhia encashed the check and Pocholo now sues the bank, what defenses may the drawee bank raise against Pocholo ? SUGGESTED ANSWER:

a. Rhia is a holder in due course, therefore there is a prima facie showing of delivery which Pocholo must now rebut with proof of non-delivery. b. Negligence on Pocholo's part which resulted in the loss of the check. c. Good faith on the part of the bank. It's obligation is to deliver on a genuine signature of Pocholo. It is not obligated to know the signature of the payee as in this case, the payee did not encash the check, hence no way of identifying. d. As between two innocent parties, the one who made possible the loss should be liable. Here Pocholo made possible the loss as he signed the blank check knowing fully well that if stolen, it could be negotiated. Furthermore, Pocholo should have immediately advised the bank to stop payment. e. Under the above problem, if the incomplete check was delivered by Pocholo to Edwin for safekeeping, there is valid delivery. NOTE: The reader should solve the problem as if there is an incomplete but delivered instrument, 12. Rochelle left her friend and classmate Lora inside her car. Lora stole a blank check which she found in Rochelle's car, forged Rochelle's signature and encashed the same with the Union Bank (the drawee-depository). Is the bank liable despite allegations that Rochelle was negligent ? SUGGESTEDANSWER: Yes. Reasons: a. Under the circumstances, Rochelle could not be considered negligent as she could not have expected that Lora would remove a check from her checkbook. He had no reason to suspect that a classmate and friend would breach her trust. b. A bank is bound to know the signatures of its clients and if it pays on a forged check, it is considered as having paid out of its own funds.

COMPLETE AND DELIVERED INSTRUMENT.

a. Without forgery and alteration, all parties bound. b. With forged indorsement and/or alteration 1) Order instruments a) Order promissory note

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Prior parties not bound. Reason: Forged signature wholly inoperative unless estoppel sets in, then prior parties bound. (2) Subsequent parties bound. Reason: Bound on warranties of indorsers unless otherwise specified (a) Whether or not holder in due course (b) Only forged signature is inoperative b) Order bill of exchange (1) Drawee cannot charge drawer's account (a) If charged drawer has right to recover (2) Drawer has no right against collecting bank (3) Drawee can recover from collecting bank (4) Collecting bank bears loss (a) Can recover from person it paid (5) Payee can recover from (a) Drawer (b) Collecting bank (c) Payee cannot recover from drawee (6) Drawer not liable to the collecting bank 2) Bearer instruments a) Bearer promissory note (1) Prior parties liable (2) Forged signatory not liable to party not holder in due course b) Bearer bill of exchange (1) Drawee bank liable
(1)

Dennis makes a promissory note payable to the order of Kay, who indorses it to Micky. Somehow, Freddie obtains possession of the note and forging the signature of Micky endorses it to Angelo who then indorses it to Bea. State the rights and liabilities of the parties. SUGGESTED ANSWER: Micky whose indorsement is forged and the parties prior to him including the maker, Dennis and the payee, Kay cannot be held liable to the holder Bea, whether or not she is a holder in due course. Reasons: a. An order note can be negotiated only by indorsement completed by delivery. A forged indorsement is wholly inoperative and does not transfer any rights. b. No right to retain the note, give discharge therefore, or enforce payment could be acquired under a forged indorsement. c. Since the predecessor of the holder obtained the note by fraudulent and unlawful means, then there are no rights that are transferred. d. Angelo is liable to Bea because of Angelo's warranties as a general indorser that the instrument is what it purports to be and that he shall pay in case of dishonor.

13.

ILLUSTRATIVE PROBLEM: RIGHTS OF PARTIES IN FORGED INDORSEMENT OF BILL OF EXCHANGE PAYABLE TO ORDER.

ILLUSTRATIVE PROBLEM: RIGHTS PARTIES IN FORGED INDORSEMENT PROMISSORY NOTE PAYABLE TO ORDER.

OF OF

14. Tina issued a check to Nellie or order as the payee with Eastern Bank as the drawee. Fidel fraudulently obtains the check and forges Nellie's signature. Fidel then deposits it in Daya Bank (Collecting Bank). Western Bank indorses the check to Eastern Bank through the clearing house. Fidel then withdraws from Daya Bank, the proceeds of the check. What are the rights of the parties ? SUGGESTED ANSWER: a. Drawer's account (Tina''s) cannot be charged (debited, deducted, subtracted or reduced) by the drawee (Eastern Bank), for the amount paid, and if her account is charged, Tina can recover from Eastern Bank.

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Reason: The depository (drawee Eastern Bank) owes to the depositor (drawer Tina), an absolute and contractual duty to pay the check only to the person to whom made payable or upon his genuine indorsement. The drawer authorizes and directs the drawee to pay only to the payee or to the order of the payee not to another. b. Drawee (Eastern Bank's) defenses: Drawer, Tina is precluded from raising the defense of forgery due to estoppel on account of negligence, for example, if the payee Nellie advised Tina of the loss, but she (Tina) did not inform Eastern Bank. c. Drawer (Tina) has no right to recover from the collecting bank (Daya Bank). Reasons: 1) Duty of collecting bank to exercise care in collecting is true only to the purported payee. 2) The drawer does not suffer any damage caused by the collecting bank as he can recover from the drawee bank which has no right to charge the drawer's account. d. Drawee bank (Eastern Bank) can recover from the collecting bank (Daya Bank). Reason: Since the check passed through the clearing house, the collecting bank (Daya Bank) must have indorsed the check to the drawee bank (Eastern Bank), therefore it is liable on an indorser's warranty of genuineness and liability to pay in case of dishonor. e. Collecting bank (Daya Bank) bears the loss but it can recover from the person to whom it paid the check, Fidel. f. The payee (Nellie) can still recover from the drawer (Tina). Reason: She still retained her claim as it was not extinguished. Exception: The payee (Nellie) cannot recover if the check was impaired through her fault. g. The payee (Nellie) can recover from the collecting bank (Daya Bank). Reason: Possession of the forged instrument is unlawful and money collected is held in trust for rightful owners. (Note: This is on the assumption that, the drawer's account was charged by the drawee bank, otherwise the drawer would be unjustly enriched) h. The payee (Nellie) cannot recover from the drawee bank (Eastern Bank). Reason: There is no privity of contract.

i. Drawer (Tina) is not liable to the collecting bank (Daya Bank). Reason: There is no privity of contract between Tina and Daya Bank. 15. On June 19, 2003, Triumph Lumber Corporation opened a current account deposit with Security Bank and authorized withdrawals on the basis of any of three signatures of Triumphs president, treasurer and general manager appearing on the specimen signature cards. On March 23, 2005, Triumph discovered that the door of its office was forced open, including that of the filing cabinet where its savings account passbook, check booklets and other bank documents were kept. This was not reported to the police, neither was Solid Bank advised. On the same day of the burglary, Triumph made three separate deposits totaling P374,554.10, and immediately after said deposits, three (3) Triumph checks totaling P300,000.00 were successively presented to Solid Bank for encashment. These were given due course following the standard bank procedure for verification of the check signatures and regularity of other particulars of the said check. Triumph now claims that due to Solid Banks gross and inexcusable negligence in determining the forgery of the drawers signatures, the three checks which were all drawn against its current account were encashed by unauthorized persons. It then demanded that Solid Bank credits back its account the value of the checks it claimed were wrongfully encashed. Rebuffed in its demand, Triumph sues Solid Bank. Will the suit prosper ? SUGGESTED ANSWER: No. The loss resulted from Triumphs negligence. Under the above circumstances a prudent and reasonable man would have gone over the check booklets after the burglary and have discovered that three checks were missing. The bank would have been then immediately advised. (Security Bank & Trust Company v. Triumph
Lumber and Construction Corporation, G.R. No. 126696, January 21, 1999) NOTES AND COMMENTS: The above cited case was decided as shown above because of Triumphs failure to prove forgery. It is the authors view that had Triumph been able to prove forgery, the

bank would NOT have been liable as shown by the following discussion.

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a. Checks with forged indorsements should be differentiated from checks bearing forged signatures of the drawer. (Associated Bank v. Court of Appeals, et al., and its
companion case Philippine National Bank v. Court of Appeals, et al., 252 SCRA 620) b. Effect of forged signature. When a signature is forged or made without authority of the person whose signature it purports to be, it is wholly inoperative, and no right to retain the instrument, or to give a discharge therefor, or to enforce payment against any party thereto, can be acquired through or under such signature unless the party against whom it is sought to enforce such right is precluded from setting up the forgery or want of authority. (Sec. 23, Negotiable Instruments Law) Sec. 23 does not avoid the instrument but only the forged signature. Thus, a forged indorsement does not operate as the payees indorsement.

c. A person may be bound under a forged signature.

if he is precluded from setting up the forgery or want of authority. Parties who warrant or admit the genuineness of the signature in question and those who, by their acts, silence or negligence are estopped from setting up the defense of forgery are precluded from using this defense. Indorsers, persons negotiating by deliver and acceptors are warrantors of the genuineness of the signatures on the instrument. In bearer instruments, the signature of the payee or holder is not necessary to pass title to the instrument. Hence, when the indorsement is a forgery, only the person whose signature is forged can raised the defense of forgery even against a holder in due course. (Associated Bank v. Court of Appeals, et al., supra)

d. Effects of a forged indorsement on an instrument payable to order.

1) Where the instrument is payable to order at the time of the forgery, the signature of the rightful holder is essential to transfer title to the same instrument. When the holders indorsement is forged all parties prior to the forgery may raise the real defense of forgery against all parties subsequent thereto. 2) An indorser of an order instrument warrants that the instrument is genuine and in all respects what it purports to be; that he has good title to it; that all prior parties had capacity to contract; and that the instrument is at the time of his indorsement valid and subsisting. He cannot interpose the defense that signatures prior to him are forged.

3) A collecting bank where a check is deposited and which indorses the check upon presentment with the drawee bank is a general indorser which warrants the genuineness of the instrument. So, even if the indorsement on the check deposited by the banks client is forged, the collecting bank is bound by its warranties as an indorser and cannot set up the defense of forgery as against the drawee bank. Since a forged indorsement is inoperative, the collecting bank had no right to be paid by the drawee bank. The collecting bank must necessarily return the money to the drawee bank because it was paid wrongfully. This liability scheme operates without regard to fault on the part of the collecting/presenting bank. Even if it was not negligent, it would still be liable to the drawee bank because of his indorsement. 4) 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 had done its duty to ascertain the genuineness of the endorsements. 5) Moreover, the collecting bank is made liable because it is privy to the depositor who negotiated the check. The bank knows him, his address and history because he is a client. It has taken a risk on the deposit. The bank is also in a better position to detect forgery, fraud or irregularity in the endorsement. 6) The drawee bank is not similarly situated as the collecting bank because the drawee bank makes no warranty as to the genuineness of the endorsements. The drawee banks duty is but to verify the genuineness of the drawers signature and not of the endorsement because the drawer is its client. The drawee bank is under strict liability to pay the check to the order of the payee. The drawers instructions are reflected on the face and by the terms of the check. Payment under a forged endorsement is not to the drawers 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 customers (the drawers) account only for properly payable items. Where 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 drawers account and is not entitled to

indemnification from the drawer. The risk of loss must perforce fall on the drawee bank. 7) The chain of liability does not end with the drawee bank. While the drawee bank may not debit the drawers account, it may generally pass liability back through the collection chain to the party who took from the forger and. of course, to the forger himself, if available. The drawee bank can seek reimbursement or a return of the amount it paid from the presentor/collecting bank or person. Eventually, the loss falls on the party who took the check from the forger (the collecting bank), or on the forger himself. Hence, the drawee bank can recover the amount paid on the check bearing the forged endorsement from the collecting bank. 8) A drawee bank has the duty to promptly inform the presentor/collecting bank of the forgery upon discovery. If the drawee bank delays in informing the presentor/collecting bank of the forgery, thereby depriving said presentor/collecting bank of the right to recover from the forger, the drawee bank is deemed negligent and can no longer recover from the presentor/collecting bank. 9) 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 as a defense. 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, supra)

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insure and to distribute the cost among its customers who use checks makes the drawee an ideal party to spread the risk to insurance. (Samsung Construction Company Philippines, Inc., v. Far East Bank and Trust Company, et al., G. R. No. 129015, August 13, 2004) g. Bank liability attaches even if not negligent. The banks liability attaches even if it exerts due diligence and care in preventing such faulty discharge. Forgeries often deceive the eye of the most cautious experts, and when a bank has been so deceived, it is a harsh rule which compels it to suffer although no one has suffered by its being deceived. The forgery may be so bear like the genuine as to defy detection by the depositor himself, and yet the bank is liable to the depositor if it pays the check. .(Samsung Construction Company Philippines, Inc., v. Far East Bank and Trust Company, et al., G. R. No. 129015, August 13, 2004 citing various authorities) If a loss, which must be borne be by one or two innocent persons, can be traced to the neglect or fault of either, such loss would be borne by the negligent party, even if innocent of intentional fraud. (PNB v. National City Bank of New York, 63 Phil. 711 (1936) The bank is so situated that it would have been the last bulwark in the detection of the forgery.

ILLUSTRATIVE PROBLEM: RIGHTS OF PARTIES IN FORGED INDORSEMENT OF PROMISSORY NOTE PAYABLE TO BEARER. OR OF BEARER BILL OF EXCHANGE.

e. Effects where the drawers signature was forged.

The drawer can recover from the drawee bank. No drawee bank has the right to pay a forged check. If it does, it shall have to recredit the amount of the check to the amount of the drawer. The liability chain ends with the drawee bank whose responsibility it is to know the drawers signature since the latter is its customer. (Associated Bank, supra)

f. Rationale for banks liability if it pays on a forged signature. If payment is made the drawee cannot charge the
drawers account. The traditional justification for the result is that the drawee is in a superior position to detect forgery because he has the makers signature and is expected to know and compare it. The rule has a healthy cautionary effect on banks by encouraging care in the comparison of the signatures against those on the signature cards they have on file. Moreover, the very opportunity of the drawee to

16. Nini makes a promissory note payable to bearer. The bearer negotiates the note to Amboy by mere delivery thence to Raymond, thence to Bunny, thence to Katrina. The instrument was lost and George who found the note placed a signature purporting that of Kaktrina and negotiates the note to Lina by mere delivery such that Lina is a holder in due course. May Lina proceed against Nini, Raymond, Bunny and Katrina ? SUGGESTED ANSWER: Yes. Reason: Forged indorsement is not necessary to the title of the holder, Lina, because the instrument is a bearer instrument that passes title by mere delivery. Supposing Lina is not a holder in due course may prior parties be held liable ? SUGGESTED ANSWER: Yes, but not against Nellie whose signature was forged. Reason: Estoppel.

20

ILLUSTRATIVE PROBLEM: RIGHTS OF PARTIES IN COMPLETE AND DELIVERED INSTRUMENT BUT MATERIALLY ALTERED.

17. On 12 November 1994, Cabilzo issued a postdated 24 November 1994 Metrobank Check, payable to CASH in the amount of P1,000.00 and paid to Marquez as his sales commission. On due date the check, which was now altered to P91,000.00 was presented to Westbank for payment, which in turn indorsed the check to Metrobank for appropriate clearing. Metrobank cleared the check for encashment in accordance with the Philippine Clearing House Corporation (PCHC) Rules. Westbank then paid the same, obtained reimbursement from Metrobank which proceeded to debit Cabilzos account. When he discovered this, Cabilzo sued Metrobank claiming that it was negligent in debiting his account on the basis of encashment of the altered check. Is Metrobank liable ? SUGGESTED ANSWER: Yes. It is clear that it was through Metrobanks negligence that the encashment of the altered check took place, and that Cabilzo was entirely innocent in the proceedings. Under the doctrine of equitable estoppel when one of two innocent persons, each guiltless of any intentional or moral wrong, must suffer a loss, it must be borne by the one whose erroneous conduct, either by omission or commission was the cause of injury. Metrobank could not rely on Westbanks indorsement to exculpate itself. That is a matter between the two banks, which does not concern the highest degree of fidelity it owes to its clients. Metrobank should not rely on the judgment of other banks on occasions where its clients money were involved, no matter how small or substantial the amount at stake.
(Metropolitan Bank and Trust Company v. Cabilzo, G. R. No. 154469, December 6, 2006)

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 Instruments Law. (Philippine National Bank v. Court of Appeals, et al., 256 SCRA 491) b. Examples of material alteration: Any of the following alteration which changes: 1) The date; 2) The sum payable, either for principal or interest; 3) The time or place of payment; 4) The number or relations of the parties; 5) The medium or currency in which payment is to be made; 6) Or which adds a place of payment where no place of payment is specified, or any other change or addition which alters the effect of the instrument in any respect is a material alteration. (Sec. 125, N.I.L.) c. Effect of alteration of instrument. Where a negotiable instrument is materially altered without the assent of all parties liable thereon, it is avoided, except as against a party who has himself made, authorized, and assented to the alteration and subsequent indorsers. But when the instrument has been materially altered and is in the hands of a holder in due course not a party to the alteration, he may enforce the payment thereof according to its original tenor. (N.I.L., Sec.124) d. 24-hour rule deleted since 1980. Under Section 4 (c) of C.B. Circular No. 580, items bearing a forged endorsement shall be returned within twenty-four (24) hours after discovery of the forgery but in no event beyond the period fixed or provided by law for filing of a legal action by the returning bank. The Central Bank Circular was in force for all banks until June 1980 when the Philippine Clearing House Corporation (PCHC) was set up and commenced operations. Section 23 of the PCHC Rules deleted the requirement that items bearing a forged endorsement should be returned within twenty-four (24) hours. (Associated Bank v. Court of Appeals, et al., and its companion case Philippine National Bank v. Court of Appeals, et al., 252 SCRA 620)

NOTES AND COMMENTS: a. Material alteration. An alteration is said to be material

if it alters the effect of the instrument. It means an 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 he obligation

18. On August 31, 2006, Julio demanded from BPI the payment of P267,692.50 representing the aggregate value of three checks payable to him or his order but which were credited to Annabelles account with BPI, without his knowledge and endorsement. Consequently, BPI froze another account of Annabelle, not the account in which Julios checks were erroneously credited, since this

21

account was already closed or had insufficient balances. It is from Annabelles account that Julio was paid. Thus, Annabelle sued BPI demanding for the return of the P267,692.50 and damages. Is the court correct in awarding the return to Annabelle of the amount debited, and in awarding damages in her favor ? SUGGESTED ANSWER: The court erred in ordering the return but was correct in awarding damages. It is clear that there was no transfer of ownership of the check to Annabelle because of the lack of indorsement. Order instruments are to be transferred only by endorsement coupled with delivery. Thus, Annabelle was not entitled to the check as ownership did not flow to her because of the lack of indorsement. While it is true that BPI made a mistake in crediting Annabelles account, and it warranted All prior endorsements and/or lack of endorsements guaranteed, as the collecting bank it had the right to debit Annabelles other account because it had the right of set-off. Annabelle has a right to damages because had BPI adhered to the diligence expected of one engaged in the banking business it would have avoided the incident and the damages suffered by Annabelle. This is so even if BPIs negligence was not attended with malice and bad faith. (Bank of
Philippine Islands, v. Court of Appeals, et al., G.R. No. 136202, January 25, 2007)

19. Ford Philippines, Inc. issued various crosschecks drawn against CITIBANK, N.A., with the Commissioner of Internal Revenue. It appears that Rivera Fords General Ledger Accountant, prepared checks for payment to the BIR. Instead, however, of delivering the same to the payee, Rivera passed on the checks to Castro who was a pro-manager of the San Andres Branch of PCIB. In connivance with Dulay, PCIBs Asst. Manager at its Meralco Branch, Castro himself subsequently opened a Checking Account in a name of a fictitious person denominated as Reynaldo Reyes in the Meralco Branch of PCIBank where Dulay works as Asst. Manager. Thus, the syndicate succeeded in encashing the checks and appropriating the value.

As a result of the BIR did not receive the tax payment, and Ford was forced to pay the tax anew. Ford filed suit to recover from the drawee CITIBANK, N.A. and the collecting bank PCIBank the value of the checks. Has Ford the right to recover from the collecting bank and the drawee bank the value of the checks intended as payment to the Commissioner of Internal Revenue. SUGGESTED ANSWER: Yes. Ford could recover against CITIBANK, N.A., the drawee bank, and PCIBank, the collecting bank. However, Ford is guilty of contributory negligence which could serve to limit the liability of the two banks. PCIBank, the collecting bank, is liable because its employees were able to perpetrate the scam in the apparent course of their employment. A bank holding out its officers and agents as worthy of confidence will not be permitted to shirk its responsibilities for fraud committed by these employees even though no benefit accrued to the bank therefrom. Furthermore, Sec. 531 of CB Circular No. 580, Series of 1977 provides that any theft affecting items in transit for clearing shall be to the account of the sending bank in this case, PCIBank. CITIBANK, N.A., the drawee bank, is liable because it did not discover the irregularity seasonably constituting negligence in its duty to perform which was incumbent upon it, which is to ensure that the amount of the checks should be paid only to its designated payee. Ford is guilty of contributory negligence which would mitigate the banks liability. It failed as the depositor to examine its passbook, statements of account, and cancelled checks and to give notice within a reasonable time (or as required by statute) of any discrepancy which it may in the exercise of due care and diligence find therein. (PCIB v. Court of Appeals, et al.,
G.R. Nos. 121413, 121479 & 128704, January 29, 2001)

NOTES AND COMMENTS: a. Forgery committed by drawer-payors confidential employee does not automatically result to banks absolution. The mere fact that the forgery was committed by a
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 circumstance raising estoppel against the drawer. the rule likewise applies to checks

fraudulently negotiated or diverted by the confidential employees who hold them in their possession. (PCIB v. Court of Appeals, et al., G.R. Nos. 121413, 121479 & 128704, January 29, 2001) The bare fact that the forgery was committed by an employee of the party whose signature was forged does not necessarily imply that such partys negligence was the cause for the forgery. Employers do not possess the preternatural gift of cognition as to the evil that may lurk within the hearts and minds of their employees. (Samsung Construction Company Philippines, Inc. v. Far East Bank and Trust Company, et al., G. R. No. 129015, August 13, 2004)

22

drawee were not altered. The intended payee was the same. The sum of money due to the payee remained the same. An innocent alteration (generally, changes on items other than those required to be stated under Sec. 1, N.I.L.) and spoliation (alterations done by a stranger) will not avoid the instrument, but the holder may enforce it only according to its original tenor. (Vitug cited in Philippine National Bank v. Court of
Appeals, et al., 256 SCRA 491; International Corporate Bank, Inc. v. Court of Appeals, et al., G. R. No. 129910, September 5, 2006 )

b. Relationship between payee and collecting bank.

The relationship between the payee or holder of commercial paper and the bank to which it is sent for collection is, in the absence of agreement to the contrary, that of principal and agent. A bank which receives such paper for collection is the agent of the payee or holder. (PCIB v. Court of Appeals, et al., G.R. Nos. 121413, 121479 & 128704, January 29, 2001)

NOTES AND COMMENTS: a. The salary check of a government officer or employee does not belong to him before it is physically delivered to him. Until that time the check belongs to the
government. Under Sec. 16 of the Negotiable Instruments Law, every contract on a negotiable instrument is incomplete and revocable until delivery of the instrument for the purpose of giving effect thereto. As ordinarily understood, delivery means the transfer of the possession of the instrument by the maker or drawer with intent to transfer title to the payee and recognize him as the holder thereof. (De la Victoria vs. Burgos, et al., 245 SCRA 374)

20. A check with serial number 7-3666-223-3, dated August 7, 2005 in the amount of P97,650.00 was issued by "A" to "X" Marketing drawn against DE Bank. the check clearly shows the name of "A" printed on its face. On August 11, 2005, "X" Marketing a client of "R" Bank deposited the questioned check in its savings account in said bank. In turn, "R" Bank deposited the check with "Y" Bank which, in turn sent the check to DE Bank for clearing. DE Bank cleared the check as good and thereafter, "Y" Bank credited "R" Banks account for the amount stated in the check. However, on August 30, 2005, DE Bank returned the check to "Y" Bank and debited its account for the amount covered by the check because there was a material alternation of the checks number. "Y" Bank in turn debited "R" Banks account, and sent the check back to DE Bank. DE Bank however returned the check to "Y" Bank. "R" Bank could not debit "X" Marketings account which was already closed. Was the alteration of the serial number of the check a material alteration affecting the negotiability of the check ? SUGGESTED ANSWER: No, the alteration of the serial number is immaterial or innocent alteration. The aforementioned alteration did not change the relations between the parties. the name of the drawer and the

COMPLETE INSTRUMENT.
a.

BUT

NOT

DELIVERED

Delivery completes the contract 1) Between immediate and remote parties 2) Delivery effectual b. If under authority 1) To a holder in due course a) Valid delivery presumed b) Prior parties bound 2) If delivery conditional a) Prior parties not bound 21. A. Francisco Realty and Development Corporation (AFRDC) represented by its president Adelia as well as Herby Commercial and Construction Corporation (HCCC) represented by its president Jaime entered into a contract with GSIS for the construction of housing units and land development. GSIS partially paid on the contract the amount of P500,000.00. Jaime discovered that from the GSIS payment Adelia had received and signed seven

23

checks of various dates and amounts drawn against IBAA and payable to HCCC for completed and delivered work under the contract. Adelia forged Jaimes signature without his knowledge or consent, at the dorsal portion of the said checks to make it appear that HCCC had indorsed the checks, and then deposited the checks in her IBAA savings account. Adelia now claims that she was authorized to sign Jaimes name on the check by virtue of a Certification executed by Jaime in her favor giving her authority to collect all the receivables of HCCC from GSIS, including the questioned checks. Will the defense prosper ? SUGGESTED ANSWER: No. Where any person is under obligation to indorse in a representative capacity, he may indorse in such terms as to negative personal liability. An agent, when so signing, should indicate that he is merely signing in behalf of the principal and must disclose the name of his principal; otherwise he shall be held personally liable. Even assuming that Adelia was authorized by HCCC to sign Jaimes name, still, Adelia, did not indorse the instrument in accordance with law. Instead of signing Jaimes name, Adelia should have signed her own name and expressly indicated that she was signing as an agent of HCCC. (Francisco v. Court of Appeals, et al., G.R. No. 116320, November 29, 1999) Brad Jolie makes a promissory note payable to bearer and delivers the same to Angelina Pitt. Angelina Pitt, however, endorses it to X in this manner: Payable to X. Signed: Angelina. Later, X, without endorsing the promissory note, transfers and delivers the same to Michael. The note is subsequently dishonored by Brad Jolie. May Michael proceed against Brad Jolie for the note ? SUGGESTED ANSWER: Yes. The character of the note being a bearer instrument is not affected by the special indorsement made by Angelina Pitt. The note remained a bearer instrument and may be negotiated by merely delivery, as it was negotiated to Michael, who became the holder. Michael

being the holder may therefore proceed against the issuer of the note, Brad Jolie.

23. The XYZ Bank is willing to lend to your client the sum of P1,500,000.00 payable in five (5) years with interest at 12% per annum secured only by a surety bond. Suppose the bank requires your client to secure the signature of a person who is well-known to it before your clients promissory note can be accepted, what do you call that person and what are his liabilities ? SUGGESTED ANSWER: He is an accommodation party and he is liable on the instrument. NOTES AND COMMENTS: a. Accommodation party. One who has signed
the instrument as maker, drawer, acceptor, or indorser, without receiving value therefor, and for the purpose of lending his name to some other person. Such a person is liable on the instrument to a holder for value, notwithstanding such holder, at the time of taking the instrument knew him to be only an accommodation party. (Sec. 29, N.I.L.) b. Ambiguous negotiable instruments. Where a negotiable instrument is so ambiguous that there is doubt whether it is a bill or a note, the holder may treat it either as a bill of exchange or a promissory note at his election.

22.

24. Susan applied for a loan of P100,000.00 with BUR Bank. By way of accommodation, Susans sister, Amalia, executed a promissory note in favor of BUR Bank. When Susan defaulted BUR Bank sued Amalia, despite its knowledge that Amalia received no part of the loan. May Amalia be held liable ? Explain. SUGGESTED ANSWER: Yes. She is an accommodation party. She liable to BUR Bank which is a holder for value, despite knowledge by the Bank that Vilma was only an accommodation party. NOTES AND COMMENTS: A first party is not an accommodation party if he has a business arrangement with a second party who would lend money to a third party through the first party whose name would appear in the promissory note as the lender. The first party would then immediately indorse the note to the second party. Reason: The first party would appear as a payee in the promissory note and thereafter he would be

an endorser for the benefit of the second party as a result of their business arrangement and not in favor the borrower.

24

25. Alpha, Phi and Omega signed a promissory note in favor of Rho stating: We promise to pay Rho on December 31, 2004 the sum of P5,000.00. when the note fell due, Rho sued Phi and Omega who put up the defense that Rho should have impleaded Alpha. is the defense valid ? Why ? SUGGESTED ANSWER: The defense is not valid. As worded, the liability of Alpha, Phi and Omega on the note is joint. Rho could proceed against any of them individually.
26. On various occasions Remedios, a sari-sari store owner purchased from Monrico Mart various merchandise, and paid for them with checks issued by Arturo and signed at the back by Remedios. When presented for payment these checks were dishonored because the drawer' account was already closed. Both Arturo and Remedios were acquitted of estafa. May Remedios be held liable for the amount of the checks ? SUGGESTED ANSWER: Yes. Where a signature is so placed upon a negotiable instrument that it is not clear in what capacity the person making the same intended to sign, she is deemed to be an indorser. Thus, as an indorser, Remedios engages that upon due presentment, the checks are to be accepted or paid, or both, as the case may be and if dishonored and the necessary proceedings are taken, she will pay the amount thereof to the holder Monrico Mart. (Sapiera v. Court of Appeals, et al., G.R. No.
128927, September 14, 1999)

There is an element of certainty or assurance in an ordinary check that it will be paid upon presentation that is why it is perceived as a substitute for currency in commercial and financial transactions. (Tan vs. Court of Appeals, et al., 239 SCRA 310)

27. A foreign check in the amount of $7,500.00 was drawn against a U. S. Bank in favor of Eva, the other of Melva, a local bank employee. In accordance with the banks policy to accommodate its employees to receive the checks value without waiting clearing. Melva was requested to endorse the check, but another bank employee wrote up to P17,500.00 only. The whole amount was paid but when the check was presented to the foreign drawee bank it was dishonored with the notation END. IRREG. or irregular endorsement. Are Melva and Eva liable, as a result of their indorsement, for reimbursement of the amount of the check less salary deductions made from Melvas salary from the bank ? SUGGESTED ANSWER: No. The liabilities of Eva and Melva on their general indorsement cannot be used by the party that introduced the defect, in this case the bank, which qualifiedly endorsed the same to hold prior endorsers liable on the instrument because it results in the absurd situation whereby a subsequent party may render an instrument useless and inutile and let innocent parties bear the loss while he himself gets away scot-free. (Gonzales v. Rizal Commercial Banking
Corporation, G. R. No. 156294, November 29, 2006)

NOTES AND COMMENTS: a. Check. A bill of exchange drawn on a bank payable on

demand. (Bataan Cigar and Cigarette Factory, Inc. vs. Court of Appeals, et al. 230 SCRA 643; Moran vs. Court of Appeals, et al., 230 SCRA 799) b. Check distinguished from bill of exchange. A check, as distinguished from an ordinary bill of exchange, is supposed to be drawn against a previous deposit of funds for it is ordinarily intended for immediate payment. A bank is under no obligation to make part payment on a check up to only the amount of the drawers fund. (Moran, supra)

28. On July 13, 2004, Tocino Products Corporation (TPC), a firm engaged in the manufacture of longganisa, engaged one of its suppliers Mr. B. A. Boy, to deliver 5,000 kilos of carabeef, starting October 2004. TPC issued two (2) crossed postdated checks both dated March 21, 2005. Check no. 12345 in the amount of P200,000.00 and check no. 891011 in the amount of P250,000.00, in payment of the 5,000 kilos of carabeef. Relying on Mr. Boys representation that he would complete delivery within three months from December 2004, TPC agreed to purchase an additional 7,000 kilos of carabeef despite Mr. Boys failure to deliver. Again TPC issued two (2) postdated crossed checks, check no. 456789

25

amounting to P430,000.00 payable on March 5, 2005, and check no. 101112 amounting to P430,000.00 payable on March 7, 2005. Mr. Boy sold all the four checks at a discount to Indian Forex, Inc. As a result of Mr. Boys failure to deliver the meat, TPC issued stop order payments on all the four checks on March 1, 2005. Could Indian Forex, Inc. recover from TPC, the value of the four checks ? Why ? SUGGESTED ANSWER: No, because Indian Forex, Inc. is not a holder in due course. The crossing of the checks should have put Indian on inquiry and upon it devolves the duty to ascertain Mr. Boys title to the check or his possession. Failing in this respect, Indian is guilty of gross negligence and as such is not a holder in due course. It could recover from Mr. Boy, its immediate indorser. NOTES AND COMMENTS: a. Kinds of checks. There are different kinds of checks
among which are: Memorandum check, cashiers check, travellers check and crossed check.

so that the holder must inquire if he has received the check pursuant to that purpose. Otherwise stated the holder is not a holder in due course. (Bataan Cigar and Cigarette Factory, Inc. vs. Court of Appeals, et al., 230 SCRA 643) d. The crossed check cannot be presented for payment, but it can only be deposited and the drawee bank may only pay to another bank in the payees or indorsers account.
(Citibank, N.A., etc., v. Sabeniano, G.R.No. 156132, October 16, 2006)

What is a crossed check ? SUGGESTED ANSWER: A check is a bill of exchange drawn on a bank payable on demand.. Crossed check is one where two parallel lines are drawn across its face or across a corner thereof. It may be crossed generally or specially. a check is crossed specially when the name of a particular banker or a company is written between the parallel lines drawn. It is crossed generally when only the words and company are written or nothing is written between the parallel lines. It may be issued so that presentment can be made only by a bank. What are the effects of crossing a check ? SUGGESTED ANSWER: 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; and c. The act of crossing the check serves as a warning to the holder that the check has been issued for a definite purpose,

29..

Who is a holder in due course ? SUGGESTED ANSWER: Sec. 52 of the Negotiable Instruments Law states that a holder in due course is a holder who has taken the instrument under the following conditions: a. That it is complete and regular upon its face; b. That he became a holder of it before it was overdue, and without notice that it had been previously dishonored if such was the fact; c. That he took it in good faith and for value; 4. That at the time it was negotiated to him he had no notice of any infirmity in the instrument or defect in the title of the person negotiating it Sec. 59 of the same law further states that every holder is deemed prima facie a holder in due course. However, when it is shown that the title of any person who has negotiated the instrument was defective, the burden is on the holder to prove that he or some other person under whom he claims, acquired the title as holder in due course.

31.

30.

32. What are the kinds of defenses against the validity of a negotiable instrument ? SUGGESTED ANSWER: The defenses that may be raised against a negotiable instrument are: a. The real, legal or absolute defenses. These defenses attaches to the instrument and is available against the whole world including a holder in due course. b. The personal or equitable defenses. This is agreement or conduct which renders the enforcement of the instrument inequitable. These defenses are available only against a person who is not a holder in due course.

Give examples of real, legal or absolute defenses which are available against the whole world including a holder in due course. SUGGESTED ANSWER: a. Glaring alteration b. Forgery c. Want of delivery of incomplete instrument d. Fraud amounting to forgery e. Minority f. Fraud in factum or fraud in esse contractus g. Want of authority of agent h. Insanity without court appointed guardian i. Void contract j. Illegality of the contract or instrument by statute Give examples of personal or equitable defenses that are available against any person other than a holder in due course. SUGGESTED ANSWER: a. Absence or failure of consideration b. Want of delivery of a complete instrument c. Fraud in inducement d. Mistake e. Negotiation amounting to fraud f. Filing of wrong date or blanks contrary to authority g. Acquisition of instrument by force, duress or fear, by unlawful means, or for illegal consideration, in breach of faith h. Lack of agents authority where he has apparent authority NOTES AND COMMENTS: a. Presumption of consideration. Every negotiable
instrument is deemed prima facie to have been issued for a valuable consideration, and every person whose signature appears thereon to have become a party thereto for value. (Sec. 24, NIL)

33.

26

35. Is one who is not a holder in due course precluded from recovering on the instrument ? SUGGESTED ANSWER: No. It does not follow that because a holder is not a holder in due course, for having taken the instrument with notice that the same was for deposit only to the account of the payee, he would be altogether precluded from recovering on the instrument. The Negotiable Instruments Law does not provide that a holder not in due course can not recover on the instrument. The disadvantage of a holder who is not a holder in due course is that the instrument is subject to defenses as if it were non-negotiable. (Bataan Cigar and Cigarette Factory, Inc. vs. Court of Appeals, et al., 230 SCRA 643) One such defense is absence or failure of consideration. (Atrium Management Corp. v. Court of
Appeals, et al., G.R. Nos. 109491 & 121794, February 28, 2001)

34.

b. Absence of consideration available only against not holder in due course. Absence or failure of consideration is
a matter of defense as against any person not a holder in due course=; and partial failure of consideration is a defense pro tanto, whether the failure is an ascertained and liquidated amount or otherwise. (Sec. 28, NIL)

36. Po Press issued in favor of Jose a postdated crossed check, in payment of newsprint which Jose promised to deliver. Jose sold and negotiated the check to Excel, Inc., at a discount. Excel did not ask Jose the purpose of crossing the check. Since Jose failed to deliver the newsprint, P ordered the drawee bank to stop payment on the check. Efforts of Excel to collect from Po failed. Excel wants to know from you as counsel: 1) Whether as second indorser and holder of the crossed check, is it a holder in due course ? 2) Whether Pos defense of lack of consideration as against Jose is also available as against Excel ? SUGGESTED ANSWER: 1) No. The instrument is a crossed check and Excel did not take it for the purpose for which the check was issued, i.e. payment of newsprint. Since, Excel did not inquire as to the purpose it is not a holder in due course, having put on guard by the nature of the instrument being a crossed check. 2) Yes. Excel not being a holder in due course is subject to the personal defense of absence or lack of consideration which Po may raise against Jose. (Atrium
Management Corp. v. Court of Appeals, et al., G.R. Nos. 109491 & 121794, February 28, 2001)

NOTES AND COMMENTS:

a. Cashiers check. It is a primary obligation of the issuing

bank and accepted in advance by its mere issuance and, by its peculiar character and general use in the commercial world is regarded substantially to be as good as the money which it represents. (Tan vs. Court of Appeals, et al., 239 SCRA 310)

27

in due course. (State Investment v. Court of Appeals, et al., G.R. No.

101163, January 11, 1993)

NOTES AND COMMENTS: a. Presumption of consideration. In the absence of

evidence to the contrary it is presumed that a check was issued for valuable consideration. (Lee v. Court of Appeals, et al., G. R. No. 145498, January 17, 2005; Ty v. People, G. R. No. 149275, September 27, 2004, 439 SCRA 220) b. Valuable consideration may consist either in some right, int4erest, profit or benefit accruing to the party who makes the contract, or some forbearance, detriment, loss or some responsibility, to act, or labor, or service given, suffered or undertaken by the other side. It is an obligation do, or not to do in favor of the party who makes the contract, such as the maker or indorser. (Lee v. Court of Appeals, et al., G. R. No. 145498, January 17, 2005; Ty v. People, G. R. No. 149275, September 27, 2004, 439 SCRA 220)

37. Can a payee in a promissory note be a holder in due course within the meaning of the Negotiable Instruments Law (Act No. 2031) ? Explain your answer. SUGGESTED ANSWER: No. A payee is an immediate party in relation to the maker and is subject to all defenses, real or personal, available to the maker of the promissory note. 38. Eva issued to Imelda a check in the amount of P50,000.00 post-dated September 30, 2004, as security for a diamond ring to be sold on commission. On September 15, 2004, Imelda, negotiated the check to MT Investment which paid the amount of P40,000.00 to her. Eva failed to sell the ring, so she returned it to Imelda on September 19, 2004. Unable to retrieve her check, Eva withdrew her funds from the drawee bank. Thus, when MT Investment presented the check for payment, the drawee bank dishonored it. Later on, when MT Investment sued her, Eva raised the defense of absence of consideration, the check having been issued merely as security for the ring that she could not sell Does Eva have a valid defense ? SUGGESTED ANSWER: No. Reasons: a. Absence or lack of consideration is not available as a defense against a holder in due course. MT Investment is a holder in due course as it took the instrument complete and regular upon its face; that it became a holder of it before the instrument became overdue, and without notice that it had been previously dishonored if such was the fact; that it took the instrument in good faith and for value; and that at the time the was negotiated to it, it had no notice of any infirmity in the instrument or defect in the title of Imelda, the person negotiating it. b. That the check was issued merely as a security is not a ground for discharging an instrument in the hands of a holder

c. No assignment of funds when cashiers s checks are purchased from an insolvent bank. This is so because
there are no more funds that may be assigned by an insolvent bank. (Miranda v. Philippine Deposit Insurance Corporation, et al., G .R. No. 169334, September 8, 2006)

39. On April 25, 2005, Vicente invested in CIFC, a quasi-banking institution engaged in money market operations, the amount of P500,000.00 to mature after one month with interest at the rate of 20.5% for 32 days. Upon maturity CIFC issued a check of P514,390.94 in favor of Vicente representing the proceeds of his matured investment plus interest. When the check was deposited, BPI dishonored it with the annotations Subject to Investigation, and took custody of the check pending investigation of several counterfeit checks drawn against CIFCs checking account to trace the perpetrators of the forgery. CIFC now asserts that since BPI accepted the check, it becomes primarily liable for its payment. Consequently, when BPI offset the value of the check against its losses from the forged checks the check was deemed paid. Furthermore CIFC anchors its arguments of payment on SEc. 137 of the Negotiable Instruments Law which states that, Where a drawee to whom a bill is delivered for acceptance destroys the same, or refuses within twenty-four hours after such delivery or such other

28

period as the holder may allow, to return the bill accepted or non-accepted to the holder, he will be deemed to have accepted the same. Was there effective payment to Vicente ? SUGGESTED ANSWER: No. It is clear that a money market transaction is one of loan, which should have been paid for in cash. The delivery of a check produces only payment when it has been encashed or when through the fault of the creditor it has been impaired. A check is merely a substitute for money. (Cebu International Finance Corporation v. Court of Appeals,
et al., G.R. No. 123031, October 12, 1999)

40. When is notice of dishonor not required to be given to drawer? SUGGESTED ANSWER: a. Where the drawer and the drawee are the same person; b. When the drawee is a fictitious person or a person not having capacity to contract; c. When the drawer is the person to whom the instrument is presented for payment; d. Where the drawer has no right to expect or require that the drawee or acceptor will honor the instrument; e. Where the drawer has countermanded payment. (Sec. 114, N.I.L.) NOTES AND COMMENTS: a. Notice of dishonor. The term denotes that a check
has been presented for payment and was subsequently dishonored by the drawee bank. This means that the check must necessarily be due and demandable because only a check that has become due can be presented for payment and subsequently dishonored. (Dico v. Court of Appeals, et al., February 28, 2005) b. Postdated check cannot be dishonored if it was presented for payment before its due date. . (Dico v. Court of Appeals, et al., February 28, 2005) c, Notice of dishonor to be in writing. The notice of dishonor of a check may be sent to the drawer or maker by the drawee bank, the holder of the check, or the offended party either by personal delivery or by registered mail. (Rigor v. People, G. R. No. 144887, November 17, 2004 citing Sia v. People, G. R. No. 149695, April 28, 2004, 428 SCRA 206)

41. Gemma drew a check on September 13, 2001. The holder presented the check to the drawee bank only on March 5, 2005. The bank dishonored the check on the same date. After dishonor by the drawee bank, the holder gave a formal notice of dishonor to Gemma through a letter dated April 27, 2005. 1) What is meant by unreasonable time as applied to presentment ? 2) Is Gemma liable to the holder ? SUGGESTED ANSWER: 1) As applied to presentment for payment, reasonable time is meant not more than six (6) months from date of the issue of the check. Any period beyond six (6) months is considered unreasonable time and the check becomes stale. 2) No, for the following reasons: a) The check is already stale having been presented for payment only on March 5, 2005, which is beyond six (6) months from the issue of the check on September 13, 2001. She could not be held liable because the same was not presented within a reasonable period of time. b) As the drawer who is secondarily liable Gemma is discharged because of the failure to give notice of dishonor within thirty (30) days from dishonor. It is not shown that the holder and Gemma resided in the same place hence, the period to give notice of dishonor must be the same time that notice would reach Gemma if sent by mail. (Far East Realty Investment, Inc., v. Court of
Appeals, et al., 166 SCRA 256)

42. X issued a check to Y drawn against ABC Bank. When Y presented the check for payment, ABC Bank for reasons known to it refused encashment despite the sufficiency of funds. Assuming that there was no valid reason for the banks refusal, may Y the payeeholder sue the bank ? SUGGESTED ANSWER: No. Y, the payee-holder should instead sue X the drawer who might in turn sue the bank. No privity of contract exists between the drawee-bank and the payee, Y. (Villaneuva v. Nite, G.R.No. 148211, July 25,
2006)

29

PN is the holder of a negotiable promissory note within the meaning of the Negotiable Instruments Law (Act 2031). The note was originally issued by RP to XL as payee. XL indorsed the note to PN for goods bought by XL. The note mentions the place of payment on the specified maturity date as the office of the corporate secretary of PX Bank during banking hours. On maturity date, RP was at the aforesaid office ready to pay the note but PN did not show up. What PN later did was to sue XL for the face value of the note, plus interests and costs. Will the suit prosper ? Explain. SUGGESTED ANSWER: Yes, but only with respect to the face value of the note. The failure of PN to show up at the specified place of payment on the specified maturity date is tantamount to waiver of his right to recover the interest due after the maturity date of the note and costs of collection. 44. May the provisions of the Civil Code on common carriers be applied in determining liability of banks on negotiable instruments ? SUGGESTED ANSWER: Yes, if only to emphasize the fact that banking institutions have the duty to exercise the highest degree of diligence when transacting with the public. In the nature of their business, they are required to observe the highest standards of integrity and performance, and utmost assiduousness as well. [Solidbank Corporation/ Metro-politan Bank
and Trust Company v. Spouses Tan, G. R. No. 167346, April 2, 2007 citing Simex International (Manila) v. Court of Appeals, G. R. No. 88013, 19 March 1990, 183 SCRA 360]

43.

their responsibility to exercise the necessary care and prudence in handling their clients money. [Ibid., citing Canlas v. Asian Savings Bank, et al., 383 Phil. 315; 326 SCRA 415 (2000), see also Bank of Philippine Islands v. Court of Appeals, G. R. No. 102383, 26 November 1992, 216 SCRA 51]

(3) Insurance Code (P.D. 1460) 1. May a member of the Moro Islamic Liberation Front (MILF) or its breakaway group, Abu Sayyaf, be insured with a company licensed to do business under the Insurance Code of the Philippines (P.D. No. 1460) ? SUGGESTED ANSWER: Yes. What is prohibited to be insured is a public enemy which is defined as a citizen or national of a country with which the Philippines is at war. There is no showing in the problem that the member of the MILF or Abu Sayyaf is a citizen or national of a country with which the Philippines is at war. 2. BD has a bank deposit of half a million pesos. Since the limit of the insurance coverage of the Philippine Deposit Insurance Corporation Act (R.A. No. 3591) is only one tenth of BDs deposit, he would like some protection for the excess by taking out an insurance against all risks or contingencies of loss arising from any unsound or unsafe banking practices including unforeseen adverse effects of the continuing crisis involving the banking and financial sector in the Asian region. Does BC have an insurable interest within the meaning of the Insurance Code of the Philippines (P.D. 1460) ? SUGGESTED ANSWER: Yes. BD has an insurable interest in his own bank deposits because the contemplated peril might result to the loss of the said bank deposits. In short, he stands to be damaged to the extent of the deposit not covered by the deposit insurance. 3. Jeremiah was a most valued employee of Fortune Manufacturing Corporation for the past twenty years. He was insured by his employer with itself as the beneficiary. A company owned house at Dasmarinas Village was furnished for his use which was insured with

NOTES AND COMMENTS: a. Provisions of the Civil Code on common carriers applied to banks. Articles 1733, 1736, and 1756 that
make reference to the kind of diligence a bank should perform. Like a common carrier whose business is also imbued with public interest, a bank should exercise extraordinary diligence to negate its liability. (Solidbank Corporation/ Metropolitan Bank and Trust Company v. Spouses Tan, G. R. No. 167346, April 2, 2007 The doctrine of last clear chance (commonly used in transportation laws involving common carriers) to a banking transaction where it adjudged the bank responsible for the encashment of a forged check. The degree of diligence required of banks is more than that of a good father of a family in keeping with

30

the owner as the beneficiary. Both of the policies were up to December 31, 2007. On June 15, 2007 Jeremiah retired from the company. As part of his retirement package, the title of the house at Dasmarinas Village was transferred to Jeremiah's name. On July 4, 2007, the house was burned resulting to Jeremiah's death. Who could recover on the insurance policies ? Explain. SUGGESTED ANSWER: Nobody could recover on the insurance policy covering the house. Fortune could not recover on the policy covering the house because it did not have any insurable interest at the time of the loss on July 4,2007. This is so because the ownership was already transferred to Jeremiah. However there is no showing in the problem of any change in the insurance in Jeremiahs favor so his heirs could not also recover on the policy. Fortune could recover on the policy covering Jeremiah's life because insurable interest on life need not exist at the time of the death. NOTES AND COMMENTS: a. Insurable interest is required for a person who insures
the life of another . Every person has an insurable interest in the life and health: 1) Of himself, of his spouse and of his children; 2) Of any person on whom he depends wholly or in part for education or support, or in whom he has a pecuniary interest; 3) Of any person under a legal obligation to him for he payment of money, or respecting property or service, of which death or illness might delay or prevent the performance; and 4) Of any person upon whose life any estate or interest vested in him depends. (Sec. 10, Insurance Code)

such nature that a contemplated peril might directly damnify the insured. (Sec. 13, Insurance Code) e. Insurable interest in property must exist at the time of taking AND at the time of loss.

f. Insurable interest in life distinguished from insurable interest in property.

1) In insurable interest in life must exist at the time of taking and need not exist at the time of death WHILE insurable interest in property must exist both at the time of taking and time of loss. 2) The beneficiary need not have an insurable interest in the life of the insured WHILE the beneficiary in property insurance should have an insurable interest in the property insured both at the time of insurance and at the time of loss.

4. JQ, owner of a condominium unit, insured the same against fire with XYZ Insurance Co., and made the loss payable to his brother, MLQ. In case of loss by fire of the said condominium unit, who may recover on the fire insurance policy ? State the reason(s) for your answer. SUGGESTED ANSWER: Nobody. MLQ cannot recover although he was named the beneficiary because he had no insurable interest in the property at the time of the loss. Neither could JQ the owner recover because he is not the named beneficiary. NOTES AND COMMENTS: UP Law Center suggests the
following answer: JQ can recover on the fire insurance policy for the loss of the said condominium unit. He had insurable interest as owner-insured. As beneficiary in the fire insurance policy, MLQ cannot recover on the fire insurance policy. For the beneficiary to recover on the fire or property insurance policy, it is required that he must have insurable interest in the property insured. In this case, MLQ does not have insurable interest in the condominium unit.

b. Purpose for requirement of insurable interest in life. To remove the temptation of insuring a person's life and then
killing him to recover the insurance proceeds.

c. Insurable interest in life should exist at the time of taking and NOT necessarily at the time of death. d. Insurable interest in property is required for a person who secures property insurance . Every interest in property, whether real or personal, or any relation thereto or liability in respect thereof of

5. On September 1, 2004, Marion insured her own life naming her boyfriend Jeffrey as her irrevocable beneficiary. The insurance company's physician conducted a physical examination but was not able to detect the fact that Marion was already in the advance stage of cancer. In good faith Marion did not disclose the fact that she previously consulted an oncologist because after the medical consultation, numerous fortune tellers predicted that she will not die of cancer. On September 2, 2005 while Marion was on her way to attend Pre-Week

31

Review classes for the Bar she was run over by a bulldozer which caused her death on the spot. Jeffrey now claims the life insurance proceeds. Decide. SUGGESTED ANSWER: Jeffrey could not recover. There was concealment, which is a neglect to communicate that which a party knows and ought to communicate. The matter concealed was material and relevant to the approval and issuance of the policy, it having probable and reasonable influence upon the insurers forming an estimate of the disadvantages of the proposed contract. Good faith is not a defense to concealment, as materiality of the information withheld does not depend on the state of mind of the insured nor on the actual or physical events which ensue. It is settled that the insured need not die of the disease he had failed to disclose to the insurer. It is sufficient that the non-disclosure misled the insurer in forming his estimates on the risks of the proposed insurance policy or in making inquiries. (Sunlife Assurance Company of Canada vs. Court of Appeals, et al., 245 SCRA 268) In the above problem, the incontestability clause does not find application because the two year period has not yet lapsed. Supposing under the above set of facts that the insurance was secured on August 31, 2003, would your answer be the same ? SUGGESTED ANSWER: No. Since the policy is two years old, the incontestability clause has already set in which defeats the concealment. Would it make any difference in your answers to the above if Marion was married to Francis ? What about if it was Jeffrey who was married to Daniela ? SUGGESTED ANSWER: Under the above circumstances if Marion and Jeffrey were married to persons other than themselves, then there could be no recovery on the insurance policy of Marion. Jeffrey could not be a donee because of the illicit relationship hence cannot be a beneficiary in life insurance. NOTES AND COMMENTS:

a. Concealment defined. A neglect to communicate that which a party knows and ought to communicate. (Sec. 26, Insurance Code) Note that if the party does not know he is sick, there is no concealment. Define incontestability clause. SUGGESTED ANSWER: Where a policy of life insurance made payable on the death of the insured shall have been in force during the lifetime of the insured for a period of two years from the date of its issue or its last reinstatement, the insurer cannot prove that the policy is void ab initio or is rescindable by reason of the fraudulent concealment or misrepresentations of the insured or his agent. (2nd par., Sec. 48,
Insurance Code)

6.

7. On January 9, 1991, PhilAm Life Insurance received an application for life insurance from Florence an application for life insurance dated December 16, 1990, in the amount of P100,000.00 which designated her sister, Eliza, as principal beneficiary. Since the insurance was non-medical, PhilAm Life Insurance did not require a medical examination and on February 11, 1991 issued a policy on the sole basis of the application. In April, 2005 PhilAm Life received a claim from Eliza which declared that Florence died of acute pneumonia on September 10, 2004. PhilAm Life Insurance denied the claim and refused to pay on the ground of fraud because its investigator reported on the basis of interviews with witnesses that Florence had long died before the insurance policy was issued. However, the investigator was not presented. Eliza on the other hand presented the municipal health officer who issued the death certificate, and who likewise testified that he ministered to the ailing Florence two days immediately prior to her death. The Court ruled that there was no fraud. This is so because, death certificates and notes by a municipal health officer in the regular performance of his duties, are prima facie evidence of the facts therein stated. Furthermore the duly-registered death certificate is considered a public document and the entries found therein are presumed correct unless there is positive evidence to the contrary. Is

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Eliza entitled to her claim of interest at double the legal rate because of delay in the payment of her claim ? SUGGESTED ANSWER: Eliza is entitled to legal interest only and not the 24% she claims. Fraud being the ground invoked by PhilAm Life Insurance for refusing to honor the claim, there is no unreasonable delay. NOTES AND COMMENTS: a. Under Section 242 of the Insurance Code, the refusal of the insurer to pay a life insurance claim within the period prescribed will entitle the beneficiary to collect interest on the proceeds at the rate of twice the ceiling prescribed
by the Monetary Board for the duration of the delay, unless the refusal to pay is based on the ground that the claim is fraudulent. (Philippine American Life Insurance Company v. Court of Appeals, et al., G.R. No. 126223, November 15, 2000; Finman General Assurance Corp. v. Court of Appeals, et al., G.R. No. 138737, July 12, 2001)

the problem that negligence is an excepted risk. (Sun Insurance

v. Court of Appeals, et al., 211 SCRA 554)

NOTES AND COMMENTS:

a. Death by suicide recoverable but after policy has become incontestable. The insurer in a life insurance contract
shall be liable in case of suicide by the insured committed after the policy has been in force for a period of two years from the date of its issue or its last reinstatement, unless the policy provides a shorter period: provided, however, that suicide committed in a state of insanity shall make the insurer liable regardless of the date of the commission of the suicide. (Sec. 180-A, Insurance Code) b. Killer-beneficiary cannot recover. A beneficiary who participates in killing the insured, whether as accessory, accomplice or principal, cannot recover from the death of the insured by reason of public policy. The nearest of kin of the insured, if not disqualified, shall receive the insurance proceeds. (Sec. 12, Insurance Code)

8. Sun-Moon Insurance issued a Personal Accident Policy to Henry Dy with a face value of P500,000.00. A provision in the policy states that the company shall not be liable in respect of bodily injury consequent upon the insured person attempting to commit suicide or willfully exposing himself to needless peril except n an attempt to save human life. Six months later Henry Dy died of a bullet wound in his head. Investigation showed that one evening Henry was in a happy mood although he was not drunk. He was playing with his handgun from which he had previously removed its magazine. He pointed the gun at his sister who got scared. he assured her it was not loaded. He then pointed the gun at his temple and pulled the trigger. The gun fired and Henry slumped dead on the floor. Henrys wife Beverly, as the designated beneficiary, sought to collect under the policy. Sun-Moon Insurance rejected her claim on the ground that the death of Henry was not accidental. Beverly sued the insurer. Decide. Discuss fully. SUGGESTED ANSWER: Beverly can recover. It is clear that Henry did not commit suicide. The fact that Henry removed the magazine At the most Henry was negligent in not seeing to it that the gun was not loaded. There is no showing in

Exceptions or instances where killer-beneficiary could recover:

1) Where the killing is accidental; 2) Where the killing is in self-defense; and 3) Where the beneficiary was insane at the time of the killing.

c. Beneficiary cannot recover where insured lawfully executed.

9. Juan de la Cruz was issued Policy No. 888 of the Midland Life Insurance Co. on a whole life plan for P20,000.00, on August 19, 2001. Juan de la Cruz is married to Cynthia with whom he has three legitimate children. He, however, designated Purita, his common-law wife, as the revocable beneficiary. Juan de la Cruz referred to Purita in his application and policy as the legal wife. Three years later, Juan de la Cruz died. Purita filed her claim for the proceeds of the policy as the designated beneficiary therein. The widow, Cynthia, also filed a claim as the legal wife. To whom should the proceeds of the insurance policy be awarded ? SUGGESTED ANSWER: The proceeds of the insurance policy to the estate of Juan de la Cruz. Purita, the common-law wife, is disqualified to be a beneficiary of Juan de la Cruz because she is a prohibited donee because of their illicit relation. NOTES AND COMMENTS:

33

a. The concept of prohibited donees. Persons who are

disqualified under the provisions of the Civil Code from being designated as donees are also prohibited to be beneficiaries of a life insurance contract. Among such persons are the following: 1) Persons guilty of adultery or concubinage could not take a life insurance and name the other as a beneficiary. 2) Persons found guilty of adultery and concubinage could not take a life insurance and name the other as a beneficiary in consideration of the adultery or concubinage as the case may be. 3) Person who takes an insurance policy on his own life and by the reason of the office of a public officer designates as the beneficiary such public officer, his wife, ascendants, or descendants.

SUGGESTED ANSWER: A double insurance exists where the same person or property is insured by several insurers separately in respect of the same subject and interest. (Geagonia v. Court of Appeals, et al., 241 SCRA 152, 164) NOTES AND COMMENTS:

a. Example where there is no double insurance. The insurable interests of a mortgagor and a
mortgagee on the mortgaged policy are separate and distinct hence there is no double insurance if the mortgagor and the mortgagee take out separate insurances.

10. GOYU applied for credit facilities and accommodations with Rizal Bank. As security for its credit facilities with Rizal Bank, GOYU executed two real estate mortgages and two chattel mortgages in favor of Rizal Bank, with were registered with the Registry of Deeds. Under the four mortgages, GOYU committed itself to insure the mortgaged property with MICO, an insurance company approved by Rizal Bank, and subsequently to endorse and deliver the insurance policies to Rizal Bank. Alchester, MICOs underwriter, from whom GOYU secured the insurance prepared the indorsements but it turned out that the endorsements do not bear the signature of any officer of GOYU. Who could recover on the insurance claim ? SUGGESTED ANSWER: Rizal Bank could recover up to the extent of its interest on the mortgage. While it is settled that a mortgagor and a mortgagee have separate and distinct insurable interests in the same mortgaged property, such that each one of them may insure the same property for his own sole benefit, the intention of the parties should govern. In the case at bar the endorsements made in favor of Rizal Bank, clearly indicate that Rizal Bank is truly the entity for whose benefit the policies were clearly intended. (Rizal Commercial Banking Corporation, et al., v. Court of
Appeals, et al., and companion cases. 289 SCRA 1292)

What is co-insurance ? SUGGESTED ANSWER: Where an insured insures his property for less than its value, he is deemed to have acted as a co-insurer with the insurer up to the extent of the deficiency. In such a case, where there is loss or damage, the insurer shall be liable only for such proportion of the loss or damage that the amount of insurance bears to the designated percentage of the full value of the property insured. For example, property valued as P1,000,000.00 was insured only for P700,000.00. In such a case there is coinsurance by the insured up to the extent of 30%. In case of loss there could only be 70% recovery of the damage or loss. What is reinsurance ? SUGGESTED ANSWER: This is a situation where the insurer procures a third party, called the reinsurer, to insure him against the liability by reason of such original insurance. Basically, a reinsurance is an insurance against liability which the original insurer may incur in favor of the original insured. Julie and Alma formed a business partnership. Under the business name Pino Shop, the partnership engaged in a sale of construction materials. Julie insured the stocks in trade of Pino Shop with WGC Insurance Company for P350,000.00. Subsequently, she again got an insurance contract with RSI for P1,000,000.00 and then from EIC for P200,000.00. A fire of unknown origin gutted the store of the partnership. Julie filed her claims with the three insurance companies. However, her claims were denied separately for breach of policy

12.

13.

14.

11. What is double insurance ?

34

condition which required the insurer to give notice of any insurance effected covering the stocks in trade. Julie went to court and contended that she should not be blamed for the omission, alleging that the insurance agents for WGC, RSI and EIC knew of the existence of the additional insurance coverages and that she was not informed about the requirement that such other or additional insurance should be stated in the policy. 1) Is the contention of Julie tenable ? Explain. 2) May she recover on her fire insurance policies ? Explain. SUGGESTED ANSWER: 1) No. It is Julies duty as the insured to disclose the other insurances covering the same subject matter of the insurance being applied for. (New Life Enterprises, et al., v. Court of Appeals, et al., G.R. No. 94071, March 31, 1992) 2) No. Julies failure to disclose the other insurances is considered as violation of a warranty. (Ibid.) NOTES AND COMMENTS: a. Other insurance prohibition clause. An insurance
policy contains the following clause: The insured shall give notice to the Company of any insurance or insurances already effected, or which may subsequently be effected covering any of the property or properties hereby insured unless such notice be given and the particulars be stated therein before the occurrence of the loss otherwise all benefits under the policy shall be deemed forfeited. The condition is a provision which invariably appears in fire insurance policies and is intended to prevent an increase in the moral hazard. It is commonly known as the additional or other insurance clause and has been upheld as valid and as a warranty that no other insurance exists. b. Effect of violation. The violation of the other insurance clause would avoid the policy. Exception: The other insurance must be upon the same subject matter, the same interest therein, and the same risk. There is no violation where the mortgagor and the mortgagee took separate insurances, in violation of the other insurance clause because their insurable interest is different. (Geagonia vs. Court of Appeals, et al., G.R. No. 114427, February 6, 1995)

fire for P750,000.00 with Croft Insurance with the policy stating that any other insurances shall be declared otherwise all benefits under the policy shall be forfeited. Angelina likewise insured the house, also against fire with Raider Insurance in the amount of P500,000. The insurance policy also contained an other insurance clause. Both Lara and Angelina did not advise their respective insurers of the existence of the other insurances. While both of the insurance policies were in force the house was burned. a) Both insurance companies now disclaim responsibility because of the violation of the other insurance clause. Could they legally do so ? b) In case, both Lara and Angelina could recover, how much would be the extent of their respective liabilities ? c) Could Lara refuse to pay her obligation of P500,000.00 considering that the house was already burned ? Reason out your answers. SUGGESTED ANSWERS: a. No. There is no violation of the other insurance clause where the mortgagor and the mortgagee took separate insurances, because their insurable interest is different. (Geagonia vs. Court of Appeals, et al., 241 SCRA 152) b. Lara could recover P750,000.00 and Angelina, P500,000.00, the extent of their respective insurable interests. For reasons see above. c. No. Raider Insurance takes the place of Angelina. In other words it is subrogated to the interest of Angelina. NOTES AND COMMENTS: a. Insurable in mortgaged properties. The
mortgagor has an insurable interest in the full value of the mortgaged property irrespective of the amount for which it is mortgaged. The mortgagee has an insurable interest only up to the extent of the credit he has granted to the mortgagor. b. Mortgaged properties. The mortgagor and the mortgagee have each an independent insurable interest on the property and both interests may be covered by one policy or each may take out a separate policy covering his interest, wither at the same time or at separate times.

15. Lara obtained a loan of P500,000.00 from Angelina and as security she mortgaged her house worth P750,000.00 to Angelina. Lara insured the house against

The mortgagors insurable interest covers the full value of the mortgaged property, even though the mortgage debt is equivalent to the full value of the property, The mortgagees insurable interest is to the extent of the debt, since the property is relied upon as security thereof, and in insuring he is not insuring the property but his interest or lien thereon. His insurable interest is prima facie the value mortgaged and extends only to the amount of the debt, not exceeding the value of the mortgaged property, Thus, separate insurances covering different insurable interests may be obtained by the mortgagor and the mortgagee, and this would not violate the other insurance clause in the policy. (Geagonia vs. Court of Appeals, et al., 241 SCRA 152) c. Effect of change of interest in property. Any change unaccompanied by a change in insurance suspends the insurance until the interest in the thing and the insurance is vested in the same person. (Sec. 20, Insurance Code) d. Subrogation. If the plaintiffs property has been insured, and he has received indemnity from the insurance company for the injury or loss arising our of the wrong or breach of contract complained of, the insurance company shall be subrogated to the rights of the insured against the wrongdoer or the person who violated he contract. (Article 2207, Civil Code) The right of subrogation is not dependent upon, nor does it grow out of, any privity of contract or upon written assignment of claim. It accrues simply upon payment of the insurance claim by the insurer. (Coastwise Lighterage Corporation vs. Court of Appeals, et al., 245 SCRA 796)

35

16. Grepalife and DBP entered into a contract of group life insurance with Grepalife agreeing to insure the lives of eligible housing loan mortgagors of DBP. On November 11, 2004, Dr. Leuterio, a housing debtor of DBP, applied for membership in the group life insurance plan. In his application. Dr. Leuterio stated that he never had high blood pressure, cancer, etc., and that to the best of his knowledge, he was in good health. Thus, on November 15, 2004, Grepalife issued the certificate on Dr. Leuterios insurance coverage to the extent of his DBP mortage indebtedness of P86,200.00. The policy state that upon receipt of proof of debtors death during the terms of the insurance, a death benefit in the amount of P86,000.00 shall be paid. In the event of the debtors death before his indebtedness with the creditor shall have been fully paid, an amount to pay the

outstanding indebtedness shall first be paid to the Creditor and the balance of the sum assured, if there is any shall then be paid to the beneficiary/ies designated by the debtor. In August 6, 2005, Dr. Leuterio died due to massive cerebral hemorrhage. DBP submitted a claim, on the mortgage redemption insurance but it was denied by Grepalife on the ground of non-disclosure that Dr. Leuterio was suffering from hypertension, the cause of his death. As a result of the non-payment insurance claim, which would have resulted to a full payment of the mortgage debt to DBP, DBP then foreclosed on the property. Upon being sued by Dr. Leuterios heirs for the insurance proceeds Grepalife now raises, the defense of concealment of Dr. Leuterios being hypertensive, and no showing of the exact amount of Dr. Leuterios outstanding indebtedness to DBP at the time of his death. Could Dr. Leuterios heirs recover ? State your reasons. SUGGESTED ANSWER: Yes. Concealment of the state of health of the insured mortgagor as basis for refusing payment of insurance claims should be established by sufficient proof of the real state of health of the insured. The insurance taken was a life insurance policy which is a valued policy. Unless the interest of the person insured is susceptible of exact pecuniary estimation, the measure of indemnity under a policy of insurance upon life or health is the sum fixed in the policy, in this case P86,200.00. Since DBP has already foreclosed on the residential lot in satisfaction of Dr. Leuterios outstanding loan, the insurance proceeds shall inure to the benefit of the heirs of Dr. Leuterio. DBP should not unjustly enrich itself by collecting the insurance proceeds after it has foreclosed the property. (Great Pacific Life Assurance Corporation v. Court of Appeals, et al., G.R. No. 113899, October 13, 1999) NOTES AND COMMENTS: a. Insurable interest in mortgaged properties in mortgage redemption insurance. 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 debt, 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 so that in the event of his death, the mortgage obligation will be extinguished by the application of the insurance proceeds to the mortgage indebtedness. Consequently, where the mortgagor pays the insurance premium under the group insurance policy, making the loss payable to the mortgagee, the insurance is on the mortgagors interest, and the mortgagor continues to be a party to the contract. In this type of insurance, the mortgagee is simply an appointee of the insurance fund, such loss payable clause does not make the mortgagee a party to the contract. This could be seen from the provisions of Section 8 of the Insurance Code, which reads: Unless the policy provides, where a mortgagor of property effects insurance in his own name providing that the loss shall be payable to the mortgagee, or assigns a policy of insurance to a mortgagee, the insurance is deemed to be upon the interest of the mortgagor, who does not cease to be a party to the original contract, and any act of his, prior to the loss, which would otherwise avoid the insurance, will have the same effect, although the property is In the hands of the mortgagee, but any act which, under the contract of insurance, is to be performed by the mortgagor, may be performed by the mortgagee therein named, with the same effect as if it had been performed by the mortgagor. (Great Pacific Life Assurance Corporation v. Court of Appeals, et al., G.R. No. 113899, October 13, 1999

36

on the policy for recovery of the damages caused to the cargo. May the insured recover damages ? SUGGESTED ANSWER: No. The loss was caused by perils of the ship and not of the sea. This is so because the defective drainpipe is attributable to the condition of the ship. 19. What is meant by actual total loss in marine insurance ? SUGGESTED ANSWER: An actual total loss for insurance purposes is caused by: a. A total destruction of the thing insured; b. The irretrievable loss of thing by sinking or by being broken up; c. Any damage to the thing which renders it valueless to the owner for the purpose for which he held it; or d. Any other event which effectively deprives the owner of the possession, at the port of destination, of the thing insured. (Sec. 130, Insurance Code)

17. What damages may be recovered in marine insurance ? SUGGESTED ANSWER: Recovery could be made only if the damage was caused by perils of the sea not by perils of the ship. Defects of the ship are perils of the ship.

18. A marine insurance policy on a cargo states that the insurer shall be liable for losses incident to perils of the sea. During the voyage, seawater entered the compartment where the cargo was stored due to the defective drainpipe of the ship. the insured filed an action

20. An insurance company issued a marine insurance policy covering a shipment by sea from Mindoro to Batangas of 1,000 pieces of Mindoro garden stones against total loss only. The stones were loaded in two lighters, the first with 600 pieces and the second with 400 pieces. Because of rough seas, damage was caused the second lighter resulting in the loss of 325 out of the 400 pieces. The owner of the shipment filed claims against the insurance company on the ground of constructive total loss inasmuch as more than three-fourths (3/4) of the value of the stones had been lost in one of the lighters. Is the insurance company liable under its policy ? SUGGESTED ANSWER: No. There is no constructive total loss because the three-fourths loss is to be computed on the whole shipment of 1,000 stones which are covered by the single policy coverage. (Oriental Assurance Corporation v. Court of
Appeals, et al., 200 SCRA 459)

NOTES AND COMMENTS: a. Constructive total loss in marine insurance. One which gives to a person a right to abandon. (Sec. 131, Insurance
Code)

37

b. Instances where there is a constructive total loss of the thing insured which would entitle an insured to abandon in marine insurance: 1) If more than three-fourths of its value is actually lost or would have to be expended to recover it from the peril; 2) If it is injured to such an extent as to reduce its value more than three-fourths; 3) If the thing insured, is a ship and the contemplated voyage cannot be lawfully performed without incurring either an expense to the insured of more than three-fourths the value of the thing abandoned or a risk which a prudent man would not take under the circumstances; or 4) If the thing insured, being cargo or freightage, and the voyage cannot be performed nor another ship procured by the master, within a reasonable time and with reasonable diligence, to forward the cargo, without incurring the like expense or risk. But freightage cannot in any case be abandoned unless the ship is also abandoned. (Sec. 139, Insurance Code) c. (U)pon an actual total loss, a person insured is entitled to payment without notice of abandonment. (Sec.
135, Insurance Code)

the cargo by the process of decomposition or other chemical agency no longer remains the same kind of thing as before.
(Pan Malayan Insurance Corporation v. Court of Appeals, et al., G.R. No. 95070, September 5, 1991 citing various cases)

RC Corporation purchased rice from Thailand, which it intended to sell locally. Due to stormy weather, the ship carrying the rice became submerged in sea water, and with it the rice cargo. When the cargo arrived in Manila, RC filed a claim for total loss with the insurer, because the rice was no longer fit for human consumption. Admittedly the rice could still be used as animal feed. Is RCs claim for total loss justifiable ? Explain. SUGGESTED ANSWER: Yes. The rice was imported to be sold for human consumption. It is now fit only for animal feed. Complete physical destruction of the subject matter is not essential to constitute actual total loss. Such a loss may exist where the form and specie of the thing is destroyed, although the materials of which it consisted still exist, as where

21.

22. The general rule provided in Sec. 77 of the Insurance Code is that notwithstanding any agreement to the contrary, no policy or contract of insurance issued by an insurance company is valid and binding until the premium thereof has been paid. Are there any exceptions to the rule ? Explain your answer briefly. SUGGESTED ANSWER: The following are the instances where the nonpayment of the premium does not render the insurance contract or policy invalid: a. In case of a life or industrial life policy whenever the grace period provision applies. b. Any acknowledgment in a policy or contract of insurance of the receipt of premium is conclusive evidence of its payment, so far as to make the policy binding, notwithstanding any stipulation therein that it shall not be binding until premium is actually paid. (Sec. 78, Insurance Code) c. Section 77 may not apply if the parties have agreed to the payment in installments of the premiums and partial payment has been made at the time of the loss. (Makati Tuscany
Condominium Corporation v. Court of Appeals, et al., 215 SCRA 463)

d. Estoppel. The insurer may grant credit extension for the payment of premium and if this has been the consistent practice, the insurer could not take refuge in the non-payment of the premium. (UPCB General Insurance Co., v. Masagana Telamart,
G.R. No. 137172, April 4, 2001)

23. In 2005 Antonio obtained a fire insurance from American Home Assurance Company the stock in trade of his business, Moonlight Enterprises. The insurance was due to expire on 25 March 1990. On 5 April 2005, Antonio issued a check in the amount of P2,983.50 to Americans agent James as payment for the renewal of the policy. In turn, James delivered to Antonio Renewal Certificate No. 00099047. On 6 April 2005, Moonlight Enterprises was completely razed by fire with a total estimated loss of

38

between P 4 million to P 5 million. The check was drawn against a Manila bank and deposited in Americans Cagayan de Oro bank account. The corresponding official receipt was issued on 10 April 2005. Subsequently, a new insurance policy, Policy No. 206-4234498-7 , was issued, whereby American undertook to indemnify Antonio for any damage or loss arising from fire up to P200,000.00 for the period 25 March 2005 to 25 March 2006. Antonio then filed an insurance claim with American and four other co-insurers, namely: Pioneer, Prudential, Filipino and Domestic. American denied the claim raising the issue that there was no existing insurance contract as a result of non-payment of the premium. It also contends that assuming the existence of a contract, that Antonio violated several provisions of the contract, among others, failure to notify American of any insurance already effected to cover the insured goods. Could Antonio recover ? SUGGESTED ANSWER: Yes. There was payment. The renewal certificate issued to Antonio contained the acknowledgment that the premium had been paid. The check drawn by Antonio in Americans favor and delivered to its agent was honored when presented and American forthwith issued its official receipt. Section 306 of the Insurance Code provides that any insurance company which delivers a policy or contract of insurance to an insurance agent or broker shall be deemed to have authorized such agent or broker to receive on its behalf payments of premiums. Sec. 78 of the same Code explicitly provides, An acknowledgment in a policy or contract of insurance of the receipt of premium is conclusive evidence of its payment, so far as to make the policy binding, notwithstanding any stipulation therein that it shall not be binding until the premium is actually paid. Section. 78 establishes a legal fiction of payment and should be interpreted as an exception to Section 77. (American
Home Assurance Company v. Chua, G.R. No. 1304421, June 28, 1999)

24. In 1998, Primitivo was insured with BF Lifeman Insurance Corporation for P20,000.00. On October 20, 2004, he applied for an additional insurance coverage of

P50,000.00. His wife paid P2,075.00 as premiums to the agent who issued a receipt indicating that the amount was merely a deposit. The application form was lost, so Primitivo accomplished another one. On November 1, 2004, he underwent a physical examination which he passed. As is the procedure, all of Primitivos papers were then sent to the Manila office of BF Lifeman Insurance Corporation which received the papers on November 27, 2004. On December 2, 2004, the insurer then approved the policy and issued the corresponding policy not knowing that in the meantime, Primitivo drowned and died on November 25, 2004. The insurer now disclaims liability on the additional P50,000.00 coverage because of failure to comply with the following requisites stated in the application form for the perfection of the contract of insurance: There shall be no contract of insurance unless and until a policy is issued on this application and that the said policy shall not take effect until the premium has been paid and the policy delivered to and accepted by me/us in person while I/We, am/are in good health. Is Primitivos beneficiary entitled to the proceeds additional P50,000.00 additional insurance which amounts to P150,000.00 in view of a triple indemnity rider on the policy? Explain briefly. SUGGESTED ANSWER. Primitivos beneficiary is not entitled to the insurance proceeds for the following reasons: a. The filing of the insurance application, payment of the premium, and submission to the insurer, were all subject to the acceptance of the insurer. There was no acceptance by the insurance as of the date when Primitivo died on November 25, 1987. The conditions imposed by the insurer for the protection of the contract is not a potestative or facultative condition, but is a suspensive one whereby the acquisition of rights depends upon the happening of an event which constitutes the condition. In this case, the suspensive condition was the policy must have been delivered and accepted by the applicant while he is in good health. There was non-fulfillment of the condition, however, inasmuch as the applicant was already dead at the time the

39

policy was issued. Hence, the non-fulfillment of the condition resulted in the non-perfection of the contract. b) A contract of insurance, like other contracts, must be assented to by both parties either in person or by their agents. So long as an application for insurance has not been either accepted or rejected, it is merely an offer or proposal to make a contract. The contract, to be binding from the date of application, must have been a completed contract, one that leaves nothing to be done, nothing to be completed, nothing to be passed upon, or determined, before it shall take effect. There can be no contract of insurance unless the minds of the parties have net in agreement. c) The insurer cannot be held for gross negligence. It should be noted that an application is a mere offer which requires the overt act of the insurer for it to ripen into a contract. Delay in acting on the application does not constitute acceptance even though the insured has forwarded his first premium with his application. The corporation may not be penalized for the delay in the processing of the application papers. (Perez v. Court of Appeals, et al., G.R. No. 11239, January 28, 2000) NOTES AND COMMENTS; a. When insurance contract perfected. Contract of
insurance is perfected where there is an offer to be covered and the insurance has accepted the offer absolutely. b. Requisites for a contract of insurance. Insurance is a contract whereby, for a stipulated consideration, one party undertakes to compensate the other for loss on a specified subject by specified perils. A contract, on the other hand, is a meeting of the minds between two persons whereby one binds himself, with respect to the other to give something or to render some service. Under Article 1318 of the Civil Code, there is no contract unless the following requisites concur: (1) Consent of the contracting parties; (2) Object certain which is the subject matter of the contract; (3) Cause of the obligation which is established. Consent must be manifested by the meeting of the offer and the acceptance upon the thing and the cause which are to constitute the contract. The offer must be certain and the acceptance absolute. (Perez v. Court of Appeals, et al., G.R. No. 11239, January 28, 2000)

25. Name instances when an insured is entitled to a return of the premium paid. SUGGESTED ANSWER: The insured is entitled to a return of the premium paid in the following instances: a. To the whole premium, if no part of the insureds interest in the thing insured be exposed to any of the perils agreed upon. b. Where the insurance is made for a definite period of time and the insured surrenders his policy, he shall be entitled to such portion of the premium corresponding to the unexpired time at a pro rata rate, unless a short period rate has been agreed upon and appears on the face of the policy, after deducting from the whole premium any claim for loss or damage under the policy which has previously accrued. c. When the contract is voidable on account of the fraud or misrepresentation of the insurer or of his agent or on account of facts the existence of which the insured was ignorant without his fault; or when, by any default of the insured other than actual fraud, the insurer never incurred any liability under the policy. d. In case of over insurance by several insurers, the insured is entitled to a ratable return of the premium, proportioned to the amount by which the aggregate sum insured in all the policies exceeds the insurable value of the thing at risk. 26. A collision between a truck driven by Guillermo owned by the National Food Authority (NFA) and a public utility Tamaraw FX owned and operated by Victor resulted to the death of five persons and injury to ten others, all of whom were passengers of the FX. Several cases were filed against Guillermo, NFA and GSIS, NFAs insurer of the truck for death and injuries, Victor as well as his insurer. It was found that Guillermos negligence was he proximate cause of the accident. NFA, Guillermo, GSIS and the insurer of the FX were required to pay jointly and severally the heirs of the deceased passengers. May the insurer be impleaded directly by the victims or their heirs ? If so, could they be held solidarily liable ? Explain your answers. SUGGESTED ANSWER: Yes. It is now established that the injured or the heirs of the victims of a vehicular accident may sue directly the insurer of the vehicle. This is so because

40

common carriers are required to secure the Compulsory Motor Vehicle Liability Insurance (CMVLI). Although the victims or their heirs may proceed directly against the insurer for indemnity, the third party liability is only up to the extent of the insurance policy and those required by law. While it is true that where the insurance contract provides for indemnity against liability to third persons, and such third persons can directly sue the insurer, the direct liability of the indemnity contracts against third party liability does not mean that the insurer can be held liable in solidum with the insured and/or the other parties found at fault. This is so because the liability of the insurer is based on contract; that of the insured carrier or vehicle owner is based upon tort. The liability of the insurer therefore, being primary, is not dependent on the recovery of judgment from the judgment insured. (Government Service Insurance System v. Court of Appeals,
et al., G.R. No. 101439, June 21, 1999)

against the insurer of the directly offending vehicle. In all cases, the right of the party paying the claim to recover against the owner of the vehicle responsible for the accident shall be maintained. (Sec. 378, Insurance Code)

27. What is no fault insurance and what is the proof required in these cases ? SUGGESTED ANSWER: No need to prove fault or negligence of any kind in order of recover. Proofs of loss shall be sufficient to substantiate the claim, among which include a. Police report of accident; b. Death certificate and evidence sufficient to establish the proper payee; or medical report and evidence of medical or hospital disbursement in respect of which refund is claimed.
(Sec. 378, Insurance Code)

29. While driving his car along EDSA, Cesar sideswiped Roberto, causing injuries to the latter. Roberto sued Cesar and the third party liability insurer for damages and/or insurance proceeds. The insurance company moved to dismiss the complaint contending that the liability of Cesar has not yet been determined with finality. a) Is the contention of the insurer correct ? Explain. b) May the insurer be held liable with Cesar ? SUGGESTED ANSWER: a) No. The insurer is not correct. There is no need to wait for a determination of Cesars liability with finality. Where an insurance policy insures directly against liability, the insurers liability accrues immediately upon the occurrence of the injury or event upon which the liability depends. (Shafer v. Judge, etc., et al., G.R. L-78848, November 14, 1988) b) No. The insurer cannot be held solidarily liable with Cesar because its liability is based on contract while that of Cesar is based on tort. (vda. de Maglana, et al., v. Hon. Consolacion, et al., G.R. No. 60506, August 6, 1992) 30. X was riding in a suburban utility vehicle (SUV) covered by a comprehensive motor vehicle liability insurance (CMVLI) underwritten by Fast Pay Insurance Company when it collided with a speeding bus owned by RM Travel, Inc. The collision resulted in serious injuries to X; Y, a passenger of the bus, and Z, a pedestrian waiting for a ride at the scene of the collision. the police report established that the bus was the offending vehicle. The bus had a CMVLI policy issued by Dragon Insurance Corporation, X, Y and Z jointly sued RM Travel and Dragon Insurance for indemnity under the Insurance Code of the Philippines (P.D. 1460) The lower court applied the nofault indemnity policy of the statute, dismissed the suit against RM Travel, and ordered Dragon Insurance to pay indemnity to all three plaintiffs. Do you agree with the courts judgment ? Explain. SUGGESTED ANSWER: No. The court should not have applied the no-fault indemnity policy, dismissed the suit

28. What are the conditions for the availment of a no fault insurance ? SUGGESTED ANSWER: a. Only for claims for death or injury of any passenger or third party. It does not include property damage; b. Total indemnity in respect of one person shall not exceed P5,000.00; c. Claim may be made against one motor vehicle only. In the case of an occupant if a vehicle, claim shall lie against the insurer of the vehicle in which the occupant is riding, mounting or dismounting from. In any other case, claim shall be

41

against RM Travel and ordered Dragon Insurance to pay indemnity for the following reasons: a. It does not appear from the facts that X, Y and Z chose to avail of the no-fault indemnity clause. b. The case against RM Travel Insurance should not be dismissed to enable the parties to recover against it any damages which may not have been covered by the insurance policy issued by Dragon.

31. Robin insured his building against fire with EFG Assurance. The insurance policy contained the usual stipulation that any action or suit must be filed within one year after the rejection of the claim. After his building burned down, Robin filed his claim for fire loss with EFG. On February 28, 2003, EFG denied Robins claim. On April 3, 2004, Robin sought reconsideration of the denial, but EFG reiterated its position. On March 20, 2005, Robin commenced action against EFG. Should Robins action be given due course ? Explain. SUGGESTED ANSWER: No. The prescriptive period of one (1) year from rejection of claim stated in policy for filing suit is not suspended by a request for reconsideration of claim denial. (Sun Insurance v. Court of Appeals, et al., G.R. No. 89741, March 13, 1991) More than one year had lapsed when the suit was filed only on March 20, 2005 despite the denial having taken place on February 28, 2003.
32. Joseph Chua bought and imported from Taipei 50 metric tons of Dicalcium Phospate, Feed Grade. These were contained in 1,250 bags shipped to the Philippines and insured by First Insurance Co., against all risks at the port of origin under a Marine Policy with the notation, Claim, if any, payable in U.S. Currency at Manila, and stamped at the lower left side of the policy as Claim Agent, Smith, Bell and Co. As a result of damages suffered, Joseph brought suit against Smith, Bell as a result of its refusal to pay claiming to be a mere settling or claim agent because it has

not even taken part in the contract of insurance. May Smith, Bell be held liable ? Explain. SUGGESTED ANSWER: No. As a settling agent acting within the scope of its authority, Smith, Bell cannot be held personally liable and/or solidarily liable for the obligations of its disclosed principal merely because there is allegedly a need for a speedy settlement of the claim. Smith, Bell could not be held liable because there is no privity of contract between it and Joseph, the insured. There is solidary liability only when the obligation expressly so states or when the law or the nature of the obligation requires solidarity. Furthermore, Sec. 190 of the Insurance Code clarifies the role of the resident agent of a foreign insurance company to be merely the representative tasked to receive legal processes on behalf of its principal and not to answer personally for any insurance claims. (Smith, Bell &
Co., Inc. v. Court of Appeals, et al., 267 SCRA 530)

33. What warranties are implied in marine insurance ? SUGGESTED ANSWER: The following are the implied warranties in marine insurance: a. That the ship is seaworthy to make the voyage and/or to take in certain cargoes; b. That the ship shall not deviate from the voyage insured; c. That the ship shall carry the necessary documents to show nationality or neutrality and that it will not carry document which will cast reasonable suspicion thereon; d. That the ship shall not carry contraband, especially if it is making a voyage through belligerent waters. NOTES AND COMMENTS: a. Warranty, defined. A warranty is a statement or
promise set forth in the policy or by reference incorporated therein, the untruth or non-fulfillment of which in any respect and without reference to whether the insurer was in fact prejudiced by such untruth or non-fulfillment, renders the policy voidable by the insurer. (Prudential Guarantee and Assurance, Inc. v. Trans-Asia Shipping Lines, Inc., G. R .No. 151890, June 20, 2006, and companion case) b. Breach must be proved to void policy. The violation of a material warranty, or other material provision of a policy

on the part of either party entitles the other to rescind. However, the breach must be duly shown by the party alleging the same. There may be waiver of the right to rescind on the basis of the breach if the premium was accepted for two consecutive years. (Prudential Guarantee and Assurance, Inc. v. Trans-Asia Shipping Lines, Inc., G. R .No. 151890, June 20, 2006, and companion case)

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34. Distinguish one from the other: concealment, representation and warranty as used in insurance. SUGGESTED ANSWER: a. Inclusion in contract: The facts concealed are not part of the contract; representations are mere collateral inducements to the contract; those warranted are part of the contract. b. Nature of statements: Concealment is neglect to communicate; representations oral or written statement; warranties may be express or implied. c. Extent: The facts concealed must be material; so also with representations, while warranties are conclusively presumed material. d. Consequences: Concealment vitiates the contract and entitles the insurer to rescind, even if the death or loss was die to a cause not at all related to the concealed matter; if the representation is false on a material point, the injured party is entitled to rescind from the time when the representation becomes false; upon breach of a warranty the insurer has the right to rescind.
35. On March 13, 2004, Rizal Surety & Insurance Company issued Fire Insurance Policy No. 45727 in favor of Transworld Knitting Mills, Inc. for P 1,500,000.00 which amount was increased to P1,500,000.00 for the period August 14, 2004 to March 13, 2005. The coverage of the policy reads, included among others those, xxx contained and/or stored during the coverage of this Policy in the premises occupied by them forming part of the buildings situated within own Compound xxx. On January 12, 2005, fire broke out in the compound of Transworld. It razed the middle portion of its four-span building and partly gutted the left and right sections thereof. A two-storey building that was behind the

four-span building where fun and amusement machines and spare parts were stored, was also destroyed by the fire. Rizal now refuses to pay contending that the fire insurance policy covered only the contents of the fourspan building, and not the damage caused on the twostorey annex building. Is the contention correct ? SUGGESTED ANSWER: No. Rizal is liable for the damage caused on the two-storey building. The two storey-building was already existing when the fires insurance policy contract was entered into. Rizal should have specifically excluded said two-storey building from the coverage of the fire insurance if minded to exclude the same, but it did not. It went on to provide such fire insurance policy which covers the products, raw materials and supplies stored in the premises of Transworld which was an integral part of the four-span building. (Rizal Surety & Insurance Company v. Court of Appeals, et al., July 18, 2000) NOTES AND COMMENTS: a. Interpretation of insurance contracts. A stipulation
as to the coverage of the fire insurance policy which has created doubt should be resolved against the insurer whose lawyer or managers would have drafted the fire insurance policy. This is in accord with the provisions of Article 1377 of the New Civil Code which provides that, The interpretation of obscure words or stipulations in a contract shall not favor the party who caused the obscurity. (Rizal Surety & Insurance Company v. Court of Appeals, et al., July 18, 2000)

36. HL insured his brand new car with P Insurance Company for comprehensive coverage wherein the insurance company undertook to indemnify him against loss or damage to the car (a) by accidental collision xxx (b) by fire, external explosion, burglary, or theft, and (c) malicious act. After a month, the car was carnapped while parked in the parking space in front of the Intercontinental Hotel in Makati. HLs wife who was driving said car before it was carnapped reported immediately the incident to various government agencies in compliance with the insurance requirements. Because the car could not be recovered, HL filed a claim for the loss of the car with the insurance company

43

but it was denied on the ground that his wife who was driving the car when it was carnapped was in possession of an expired drivers license, a violation of the authorized driver clause of the insurance company. May the insurance company be held liable to indemnify HL for the loss of the insured vehicle ? Explain. SUGGESTED ANSWER: Yes. The loss of the car by theft is a covered loss. It is immaterial that HLs wife was driving the car with an expired drivers license at the time it was carnapped. (Perla Compania de Seguros v. Court of Appeals, et al.,
208 SCRA 487)

obligor and the obligee. (Republic v. Court of Appeals, et al., G.R. No. 103073, March 13, 2001)

Philippine Deposit Insurance Corporation Act (R.A. 3591), as amended by P.D. No. 1937 and R.A. No. 7400
1. Horace maintains a P10,000.00 savings account, a P20,000.00 checking account, a P30,000.00 money market placement and a P40,000.00 trust fund in a medium size commercial bank. State which of the four accounts are deemed insured by the Philippine Deposit Insurance Corporation. SUGGESTED ANSWER: The P10,000.00 savings account and the P20,000.00 checking account are deemed insured by the Philippine Deposit Insurance Corporation.

37. X Company procured a group accident insurance policy for its construction employees variously assigned to its provincial infrastructure projects. Y Insurance Company underwrote the coverage, the premiums of which were paid for entirely by X Company without any employee contributions. While the policy was in effect, five of the covered employees perished at sea on their way to their provincial assignments. Their wives sued Y Insurance Company for payment of death benefits under the policy. While the suit was pending, the wives signed a power of attorney designating an X Company executive , PJ, as their authorized representative to enter into a settlement with the insurance company. When a settlement was reached, PJ instructed the insurance company to issue the settlement check to the order of X Company, which will undertake the payment to the individual claimants of their respective shares. PJ misappropriated the settlement amount and the wives pursued their case against Y Insurance Company. Will the suit prosper ? Explain. SUGGESTED ANSWER: Yes. It is the standard practice in the group insurance business that the employeremployee policyholder is the agent of the insurer. Since X Company, through its executive PJ, acted as agent of the Y Insurance Company, it is bound by the conduct of its agent. NOTES AND COMMENTS: a. Liabilities on contract of suretyship. Section 176 of
the Insurance Code provides that the liability of the surety of sureties shall be joint and several with the obligor and shall be limited to the amount of the bond. It is determined strictly by the terms of the contract of suretyship in relation to the principal contract between the

(4) Transportation Laws (a) Common Carriers (New Civil Code, Arts. 1732 to 1766) (b) Commercial Contracts for Transportation Overland (Code of Commerce Arts. 349 to 379)
Define a common carrier. SUGGESTED ANSWER: A person, corporation, firm or association engaged in the business of carrying OR transporting passengers or goods or both, by land, water of air for compensation, offering its services to the public. (Art. 1732, Civil Code) It is not necessary for a transport company to have a certificate of public convenience and necessity before it could be considered as a common carrier. (De Guzman v. Court of Appeals,
et al., 168 SCRA 612)

1.

NOTES AND COMMENTS: a. No distinction between principal business and sideline offering of service to public. Art. 1732 of the Civil
Code makes no 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 (in local idiom, as a sideline) It carefully avoids making any 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 it distinguish between a carrier offering its services to the general public, i.e., the general community or population, and one who offers services or solicits business only from a narrow segment of the general population. (Loadstar Shipping Co., Inc. v. Court of Appeals, et al., G.R. No. 131621, September 28, 1999) b. Customs broker is a common carrier. It is considered as such even if its principal function is to prepare the correct customs declaration and proper shipping documents as required by law if it undertakes to deliver the goods for pecuniary consideration. No distinction is made between one whose principal business activity is the carrying of goods and one who does such carrying only as an ancillary activity. It should exercise extraordinary diligence in the care of goods. (A .F. Sanchez Brokerage, Inc. v. Court of Appeals, et al., G. R. No. 147079, December 21, 2004 citing De Guzman v. Court of Appeals, 168 SCRA 612, 617 (1988) c. Common carrier ceases to be common carrier if chartered and becomes a private carrier.

44

applicable only to common carriers. A common carrier undertaking to carry a special cargo or chartered to a special person becomes a private carrier hence not subject to the above prohibition. (Home Insurance Co., v. American Steamship Agencies, 23 SCRA 24) 3. Loadstar received, from a single consignee, on board its M/V Cherokee lawanit hardwood, tile wood assemblies and apitong mouldings with a total value of P6,067,178.00, and insured for the same amount with MIC against various risks, including total loss by total loss of the vessel. It likewise carried passengers. The vessel, in turn was insured by PGAI for P4 million. On 20 November 1984, the vessel sank off Limasawa Island, allegedly as a result of a typhoon, resulting to total loss of the vessel and the cargo. Evidence shows that the wind condition in the area where the vessel sank was moderate. The consignee made a claim with Loadstar which was ignored. MIC then paid the consignee and the latter signed a subrogation receipt. MIC then filed suit against both Loadstar and PGAI. Loadstar raises the defense that it is not a common carrier because it does not have a CPCN, that there was only one shipper consignee for a special cargo. It likewise posits the application of the limited liability theory, and that the claim was barred by prescription. Rule on the contentions. SUGGESTED ANSWER: Loadstar is a common carrier. It is not necessary that the carrier be issued a certificate of public convenience, and this public character is not altered by the fact that the carriage of the goods in question was periodic, occasional, episodic or unscheduled. The records do not disclose that M/V Cherokee on the date in question, undertook to carry a special cargo or was chartered to a special person only. There was no charter party. Further, the bare fact that the vessel was carrying a particular type of cargo for one shipper, which appears to be purely coincidental, is not reason enough to convert the vessel from a common carrier to a private carrier, especially where, as in this case, it was shown that the vessel was also carrying passengers.

2. Christine charters a vessel owned and operated by Star Shipping Co., a common carrier, for the purpose of transporting two generators to Cebu. Star Shippings employees negligently stowed the two generators by failing to properly lash and secure them in the vessels hold. During the trip, a strong wind hits the vessel, causing severe damages to the generators which slid in the hold and hit each other. When sued for damages Star Shipping cites a stipulation in the charter agreement exempting the company from liability for loss or damage a rising from the negligence of its agents. Christine countered by stating that the aforementioned stipulation is against public policy and therefore, null and void. Is the stipulation valid ? Would you hold the shipping company liable ? SUGGESTED ANSWER: Yes. The stipulation is valid, hence the shipping company is not liable. The prohibition against exempting a carrier from liability as a result of the acts or omissions of its employees is

45

The doctrine of limited liability does not apply where there was negligence on the part of the vessel owner or agent. Loadstar was at fault or negligent in not maintaining a seaworthy vessel and in having allowed its vessel to sail despite knowledge of an approaching typhoon. In any event, it did not sink because of any storm that may be deemed as force majeure, inasmuch as the wind condition in the area where it sank was determined to be moderate. Prescription has not yet set in. Neither the Civil Code nor the Code of Commerce states a specific period on the matter, hence the COGSA which provides for a one-year period of limitation on claims for loss of, or damage to, cargoes sustained during transit, may be applied suppletorily to the case at bar. (Loadstar Shipping Co., Inc. v. Court of Appeals, et al., G.R. No.
131621, September 28, 1999)

contract are clear and leave no doubt upon the intention of the contracting parties, the literal meaning of the stipulations shall control. (Provident Insurance Corporation v. Court of Appeals, et al., G. R. No. 118030, January 15, 2004)

b. A bill of lading is a contract of adhesion but once accepted it is binding. Contracts of adhesion are not invalid per
se. REASON: One who adheres to the contract is free to reject it entirely; if he adheres he gives his consent. (Telengtan Brothers & Sons, Inc. vs. Court of Appeals, 236 SCRA 617) Obscurities and ambiguities in the restrictive provisions of contracts of adhesion strictly interpreted but not unreasonably against the drafter thereof when justified in the light of the operative facts and surrounding circumstances. (Philippine Airlines, Inc., v. Court of Appeals, 255 SCRA 48) A bill of lading is in the nature of a contract of adhesion where one of the parties imposes a ready-made form of contract which the other party may accept or reject, but which the latter cannot modify. One party prepares the stipulation in the contract while the other party merely affixes his signature or his adhesion thereto, giving no room for negotiation and depriving the latter of the opportunity to bargain on equal footing. Nevertheless, these types of contracts have been declared as binding as ordinary contracts, the reason being that the party who adheres to the contract is fee to reject it entirely. (Provident Insurance Corporation v. Court of Appeals, et al., G. R. No. 118030, January 15, 2004 citing Philippine Commercial International Bank v. Court of Appeals, 325 Phil. 588; 255 SCRA 299 (1996)

4.

What do you understand by a bill of

lading ? SUGGESTED ANSWER: A written acknowledgment of the receipt of goods and an agreement to transport and to deliver them at a specified place to a person named therein or on his order.

5.

Explain the two-fold character of a bill of

lading. SUGGESTED ANSWER: a. It is a receipt of the goods shipped; and b. It is a contract by which three parties, namely, the shipper, the carrier and the consignee undertake specific responsibilities and assume stipulated obligations. (Keng Hua
Paper Products Co., Inc. v. Court of Appeals, et al., 286 SCRA 257)

6. What are the three kinds of stipulations made in bills of lading regarding liability ?
SUGGESTED ANSWERS:
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. 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. According to an almost uniform weight of authority, the first and second kinds of stipulations are invalid as being contrary to public policy, but the third is valid and enforceable. (Loadstar Shipping Co., Inc. v. Court of Appeals, et
al., G.R. No. 131621, September 28, 1999)

Once delivered and accepted it constitutes a contract of carriage even though not signed. REASON: There is actual and constructive notice of the contents giving rise to the presumption that the same was a perfected and binding contract.

NOTES AND COMMENTS:

a. Nature of a bill of lading and interpretation. The bill of lading defines the rights and liabilities of the parties in reference to the contract of carriage. Stipulations therein are valid and binding in the absence of any showing that the same are contrary to law, morals, customs, public order and public policy. Where the terms of the

COMMENTS AND NOTES:

a. Stipulations considered
and contrary to public policy:

46

unreasonable, unjust

1) That the goods are transported at the risk of the owner or shipper; 2) That the common carrier will not be liable for any loss, destruction, or deterioration of the goods; 3) That the common carrier need not observe any diligence in the custody of the goods; 4) That the common carrier shall exercise a degree of diligence less than that of a good father of a family, or of a man of ordinary prudence in the vigilance over the movables transported; 5) That the common carrier shall not be responsible for the acts or omissions of his or its employees; 6) that the common carriers liability for acts committed by thieves, or of robbers who do not act with grave or irresistible threat, violence or force, is dispensed with or diminished; 7) that the common carrier is not responsible for the loss, destruction, or deterioration of goods on account of the defective condition of the car, vehicle, ship, airplane or other equipment used in the contract of carriage. (Art. 1745, Civil Code)

of the barges struck an unknown sunken object causing damage to the barge and the molasses. It turned out that the patron employed by Coastwise was not licensed. Was Coastwise Lighterage transformed into a private carrier by virtue of the contract of affreightment with Pag-Asa ? What degree of diligence should Coastwise observe ? Reasons. SUGGESTED ANSWER: No, and it should observe extraordinary diligence. For reasons, see Loadstar case, no. 3 above. NOTES AND COMMENTS: a. Breach of duty by a common carrier. The
failure of a common carrier to maintain in seaworthy condition the vessel involved in a contract of carriage is a clear breach of its duty prescribed in Article 1755 of the Civil Code, which provides that, A common carrier is bound to carry the passengers safely as far as human care and foresight can provide, using the utmost diligence of very cautious persons, with a due regard for all the circumstances. A common carrier, in allowing its unseaworthy vessel to leave the port of origin and undertake the contracted voyage, with full awareness that it was exposed to perils of the sea, deliberately disregarded its solemn duty to exercise extraordinary diligence and obviously acted with bad faith and in a wanton and careless manner, thus making it liable for moral and exemplary damages. Where the delay in a contracted voyage is incurred after the commencement of such voyage, Article 269 of the Code of Commerce, not Article 1169 of the Civil Code applies. (Trans-Asia Shipping Lines, Inc. v. Court of Appeals, et al., 254 SCRA 260) Article 698 of the Code of Commerce reads: In case a voyage already begun should be interrupted, the passengers shall be obliged to pay the fare in proportion to the distance covered, without right to recover for losses and damages if the interruption is due to fortuitous event or force majeure, but with a right to indemnity if the interruption should have been caused by the captain exclusively. If the interruption should be caused by the disability of the vessel and a passenger should agree to await the repairs, he may not be required to pay any increased price of passage, but his living expenses during the stay shall be for his own account. Article 1169 of the Civil Code states in part, Those obliged to deliver or do something incur in delay from the time the obligee judicially or extrajudicially demands from them the fulfillment of their obligation.

b. Acceptance by the consignee of the bill of lading binds it to the terms which includes payment of demurrage
charges for the failure to discharge the containerized shipment beyond the grace period allowed by the tariff rules. (Keng Hua Paper Products Co., Inc. v. Court of Appeals, et al., 286 SCRA 257) c. Demurrage defined. An allowance or compensation for the delay or detention of a vessel. It is the true measure of damages in all cases of mere detention, for that allowance has reference to the ship's expenses, wear and tear and common employment. (Keng Hua Paper Products Co., Inc. v. Court of Appeals, et al., 286 SCRA 257)

d. A letter of credit and a bill of lading are separate contracts. Hence, the contract of carriage as stipulated
in the bill of lading must be treated independently of the contract of sale between the seller and the buyer and he contract for the issuance of a letter of credit between the buyer and the issuing bank. (Keng Hua Paper Products Co., Inc. v. Court of Appeals, et al., 286 SCRA 257)

7. Pag-asa Sales, Inc. entered into a contract to transport molasses from Negros to Manila with Coastwise Lighterage Corporation, using the latters dumb barges. Upon reaching Manila Bay while approaching Pier 19, one

b. No absolute obligation on the part of a carrier to accept a cargo. However, where a common carrier accepts a cargo
for shipment for valuable consideration, it takes the risk of delivering it

in good condition as when it was loaded. Even if the fact of improper packing is known to the carrier or its personnel, or apparent upon observation but it accepts the goods notwithstanding such condition, it is not relieved of liability for loss or injury resulting therefrom. (Philippine Airlines, Inc. v. Court of Appeals, et al. 155 SCRA 48) c. Degree of care. A common carrier is obliged to transport its passengers to their destinations with the utmost diligence of a very cautious person. Where the vessels crew took a calculated risk when it proceeded despite the typhoon brewing somewhere in the general direction to which the vessel was going, the sinking of the vessel was due to gross negligence. The vessel took a greater risk when, instead of dropping anchor in or at the periphery of the Port of Calapan, or returning to the port of Manila which is nearer, proceeded on its voyage on the assumption that it will be able to beat and race with the typhoon and reach its destination before it. (Sulpicio Lines, Inc., vs. Court of Appeals, et al., 246 SCRA 376) d. Extraordinary diligence is that extreme measure of care and caution which persons of unusual prudence and circumspection use for securing and preserving their own property and rights. (Republic, et al., v. Lorenzo Shipping Corporation, G. R. No. 153563, February 7, 2005) e. Rationale for extraordinary diligence. The exacting standard of extraordinary diligence is imposed on common carriers is intended to tilt the scales in favor of the shipper who is at the mercy of the common carrier, once the goods have been lodged for shipment. (Republic, et al., v. Lorenzo Shipping Corporation, G. R. No. 153563, February 7, 2005) f. When duty starts. The mere proof of delivery of goods in good order to a carrier 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. It follows that the presumption of negligence that attaches to common carriers, once the goods it transports are lost, destroyed or deteriorated. This presumption can be overcome only by proof of the exercise of extraordinary diligence. The carrier has not exercised this burden if the patron of its vessel is unlicensed. The carrier cannot safely claim to have exercised extraordinary diligence, by placing a person whose navigational skills are questionable at the helm of the vessel, which eventually met the accident. It may also logically, follow that a person without license to navigate, lacks not just the skill to do so, but also the utmost familiarity with the usual and safe routes taken by seasoned and legally authorized ones. Had the patron been licensed. he could be presumed to have both the skill and the knowledge that

47

would have prevented the accident. (Coastwise Lighterage Corporation vs. Court of Appeals, et al., 245 SCRA 796) g. When duty ends. The extraordinary responsibility of the common carrier lasts until actual or constructive delivery of the cargoes to the consignee or to the person who has a right to receive them. (Macam, etc., v. Court of Appeals, et al., G.R. No. 125524, August 25, 1999) h. Proximate cause. That which, in natural and continuous sequence, unbroken by any efficient intervening cause, produces injury and without which the result would not have occurred. (Sabena Belgian World Airlines v. Court of Appeals, et al., supra) i. Transhipment is the act of taking cargo out of one ship and loading it in another. It is immaterial whether or not the same person, firm or entity owns the two (2) vessels. (Magellan v. Court of Appeals, et al., 201 SCRA 102)

8. In a court case involving claims for damages arising from death and injury of bus passengers, counsel for the bus operator files a demurrer to evidence arguing that the complaint should be dismissed because the plaintiffs did not submit any evidence that the operator or its employees were negligent. If you were the judge, would you dismiss the complaint ? SUGGESTED ANSWER: No. In case of death of or injuries to passengers, common carriers are presumed to have been at fault or to have acted negligently, unless they prove that they observed extraordinary diligence. Since no evidence was presented to overcome this presumption the case should not be dismissed and the bus operator should now be required to present its evidence. NOTES AND COMMENTS: a. No finding of negligence needed. When the
goods shipped either are lost or arrived in damaged condition, a presumption arises against the carrier of its failure to observe that requisite diligence, and there need not be an express finding of negligence to hold it liable. (Eastern Shipping Lines, Inc. vs. Court of Appeals, et al., 234 SCRA 78) In a contract of carriage, it is presumed that the common carrier was at fault or was negligent when a passenger dies or is injured. Unless the presumption is rebutted, the court need not even make an express finding of fault or negligence on the part of the common carrier. .This statutory presumption may only be overcome by evidence that the carrier exercised extraordinary diligence as

prescribed in Articles 1733 and 1755 of the Civil Code. (Baliwag Transit, Inc. v. Court of Appeals, et al., 256 SCRA 746) b. Fault or negligence defined. Fault or negligence consists in the omission of that diligence which is demanded by the nature of an obligation and corresponds with the circumstances of the person, of the time and place.

48

c. When loss occurs common carrier presumed to be at fault or is negligent. In case of loss of goods in transit, the common carrier is presumed under the law to have been at fault or negligent. (Republic, et al., v. Lorenzo Shipping Corporation, G. R. No. 153563, February 7, 2005) REASON: Common carriers in the carriage of goods are bound to observe not just the due diligence of a good father of a family but that of extraordinary care in the vigilance over the goods. This rule remains basically unchanged even when the contract is breach by tort or although non-contradictory principles on quasi-delict may then be assimilated as also forming part of the governing law. (Sabena Belgian World Airlines v. Court of Appeals, et al., 255
SCRA 38)

b. Carrier is liable for defective packing if improper packing is known to the carrier or his employees or is apparent upon ordinary observation, but he nevertheless accepts the same without protest or exception notwithstanding such condition. (A .F. Sanchez Brokerage, Inc. v. Court of Appeals, et al., G. R. No. 147079, December 21, 2004 c. Carrier is liable for defective packing if improper packing is known to the carrier or his employees or is apparent upon ordinary observation, but he nevertheless accepts the same without protest or exception notwithstanding such condition. (A .F. Sanchez Brokerage, Inc. v. Court of Appeals, et al., G. R. No. 147079, December 21, 2004 Martin shipped an expensive video equipment to a friend in Cebu. Martin had bought the equipment from Hong Kong for US$ 5,000.00. the equipment was shipped through M/S Lapu-Lapu under a bill of lading which contained the following provision in big bold letters: The limit of the carriers liability for any loss or damage to cargo shall be P200.00 regardless of the actual value of suchcargo, whether declared by its shipper or otherwise. The cargo was totally damaged before reaching Cebu. Martin claimed for the value of his cargo, $5,000.00 or P225,000.00 instead of just P200.00 as per the limitation on the bill of lading. Is there any legal basis for Martins claim ? SUGGESTED ANSWER: None. A stipulation in the bill of lading limiting the carriers liability unless the shipper declares a higher value and a higher rate of freight is valid and enforceable. There being no showing that Martin declared a higher value of the video equipment and had paid a higher rate of freight, he is bound on the stipulation in the bill of lading limiting liability. NOTES AND COMMENTS: a. Stipulation limiting liability valid. A stipulation that the common carriers liability is limited to the value of the goods appearing in the bill of lading, unless the shipper or owner declares a greater value, is binding. (Art. 1749, Civil Code)

10.

As a general rule common carriers are responsible for the loss, destruction, or deterioration of the goods. In what instances are common carriers not liable ? SUGGESTED ANSWER: Common carriers are not liable where the loss, destruction or deterioration was caused by: a. Flood, storm, earthquake, lightning, or other natural disaster or calamity; b. Act of the public enemy in war, whether international or civil; c. Act or omission of the shipper or owner of the goods; d. The character of the goods or defects in the packaging or in the containers; e. Order or act of competent public authority. (Art. 1734, Civil Code) NOTES AND COMMENTS: a. Fire not natural. Fire may not be considered a natural
disaster or calamity since it almost always arises from some act of man or by human means. It cannot be an Act of God unless caused by lightning or a natural disaster or casualty not attributable to human agency. (Philippine Home Assurance Corp. v. Court of Appeals, et al., 257 SCRA 468)

9.

49

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. (Art. 1750, Civil Code) b. Criteria to determine reasonableness. The fact that the common carrier has no competitor along the line or route, or a part thereof, to which the contract refers shall be taken into consideration on the question of whether or not a stipulation limiting the common carriers liability is reasonable, just and in consonance with public policy. (Art. 1751, Civil Code)

11. Five (5) coils of steel arrived in the Philippines on board vessel already damaged. When they were loaded, there was notation on the bill of lading metal envelopes rust stained and slightly dented. The letter of credit indicated that a higher valuation of the cargo has been declared by the shipper. Furthermore, there was no notice of loss filed within the three-day period provided under the Carriage of Goods by Sea Act. Is the carrier liable and to what extent? SUGGESTED ANSWER: The carrier is liable up to the extent of the loss that could be proved by the cargo owner. The carrier could not claim exemption from liability due to deficiency of packing because it accepted the cargo in that condition. There could be recovery up to the extent of damage proven because there is no stipulation on the bill of lading limiting liability. The notation on the bill of lading is not sufficient to limit liability. Finally, the three day notice is dispensable so long as the claim is filed within the one year prescriptive period. (Belgian
Chartering and Shipping N.V., et al., v. Phil. First Insurance Co., Inc., G. R. No. 143133, June 5, 2002)

discovered that they were forcibly opened and were emptied of their contents. Forthwith he demanded that he be paid the value of the goods and that the fare he paid for them be returned. The shipping line pointed to him the provision on the bill of lading limiting liability to only P500.00 per box. Harold claimed that the letters were so small that they could barely be read, as a matter of fact he did not read them because of poor eyesight. He likewise claimed that he is not bound by the conditions since he did not sign the same, and that it would be unfair for the shipping line to disclaim responsibility when it is very clear that the loss occurred while in its custody. If you are consulted by Harold, what advice shall you give him ? SUGGESTED ANSWER: He should try to settle the case considering that the shipping line's contentions are correct. The stipulation in the bill of lading limiting the common carriers liability to the value of goods appearing in the bill, unless the shipper or owner declares a greater value, is valid and binding. (Art. 1749, Civil Code) REASON: The limitation of the carriers liability is sanctioned by the freedom of the contracting parties to establish such stipulations, clauses, terms, or conditions as they may be deemed convenient, provided they are not contrary to law, morals, good customs and public policy. (Philippine Airlines, Inc., v. Court of Appeals, et al., 255 SCRA 48) The stipulation is valid even if the shipper has not read nor signed the stipulation.

NOTES AND COMMENTS:

a. Instance where shipper could collect higher value.
The Supreme Court has cautioned against blind reliance on adhesion contracts where the facts and circumstances warrant that they should be disregarded. A common carrier is estopped from blaming a passenger for not declaring the value of the cargo shipped and which would have otherwise entitled her to recover a higher amount of damages where she had been effectively prevented from doing so upon the advice of the carriers personnel for reasons best known to themselves. (Philippine Airlines, Inc., v. Court of Appeals, et al., 255 SCRA 48)

12. Harold just arrived from Singapore. He immediately proceeded to Manila North Harbor where he boarded a boat bound for Cebu City. He loaded on the same boat two balikbayan boxes full of goodies for "pasalubong" to his relatives. Each of the boxes contained goods worth P15,000.00. The shipping agent issued to him a bill of lading for the two boxes. When he claimed the boxes at the Cebu City terminal of the shipping lines he

b. Shipper could collect higher value despite limitation on the bill of lading unless a higher freight payment is

made, where the value of the articles are specifically declared on the face of the bill of lading even if no higher freight payment was made.

50

c. Where timely filing of formal claim dispensed with.

Where the failure to file the formal claim within the prescriptive period contemplated in the air waybill was largely due to the carriers own doing, the consequence of which cannot , in all fairness, be attributed to the passenger, the same is to be dispensed with. Thus, it was not the passengers fault that the letter of demand for damages could only be filed, after months of exasperating follow-up of the claim. If there was any failure to file the formal claim within the prescriptive period, this was largely because of the carriers own doing, the consequences of which cannot, in all fairness, be attributed to the passenger. Even if the claim for damages was conditioned on the timely filing of a formal claim, under Article 1186 of the Civil Code (The condition shall be deemed fulfilled when the obligor voluntarily prevents its fulfillment.), that condition was deemed fulfilled considering that the collective action of the carriers personnel in tossing around the claim and leaving it unresolved for an indefinite period of time was tantamount to voluntarily preventing its fulfillment. On grounds of equity, the filing of the baggage freight claim, which sufficiently informed the carrier of the damage sustained by the cargo, constituted substantial compliance with the requirement of the contract for the filing of a formal claim. (Philippine Airlines, Inc., v. Court of Appeals, et al., 255 SCRA 48)

and insensitivity to their customers plight tantamount to bad faith and renders unquestionable the carriers liability for damages. (Philippine Airlines, Inc. v. Court of Appeals, et al., 255 SCRA 48)

d. Bill of lading may provide period within which to file claims. A bill of lading may provide for a period within to file
claims for damages, e.g. 24 hours from delivery, which agreement would be a sine qua non for the accrual of the right of action to recover damages from the carrier. (Provident Insurance Corporation v. Court of Appeals, et al., G. R. No. 118030, January 15, 2004) e. Rationale for limiting period to file claims. Such a requirement is not an empty formalism. It has a definite purpose, i.e. to afford the carrier or depositary a reasonable opportunity and facilities to check the validity of the claims while the facts are still fresh in the minds of the persons who took part in the transaction and the documents are still available. (Provident Insurance Corporation v. Court of Appeals, et al., G. R. No. 118030, January 15, 2004 citing Consunji v. Manila Port Service, 110 Phil. 231 (1960))

d. Carriers liability for actual, moral and exemplary damages and attorneys fees. The unexplained cause of damage
to the cargo constitutes gross carelessness or negligence which by itself justifies the award of damages. The unprofessional indifference of the carriers personnel despite full and actual knowledge of the damage to the cargo, just to be exculpated from liability on pure technicality and bureaucratic subterfuge, smacks of willful misconduct

Pasahero, a paying passenger, boarded a Victory Liner bus bound for Olongapo. He chose a seat at the front near the bus driver. Pasahero told the bus driver that he had valuable items in his bag which was placed near his feet. Since he had not slept 24 hours, he requested the driver to keep an eye on the bag should be doze off during the trip. a. While Pasahero was asleep, another passenger took the bag away and alighted at Guagua, Pampanga. is Victory Liner liable to Pasahero ? Explain. b. Supposing that two armed men staged a hold-up while the bus was speeding along the North Expressway. One of them pointed a gun a Pasahero and stole not only his bag, but his wallet as well. Is Victory Liner liable to Pasahero ? Explain. c. There have been incidents of unknown persons throwing stones at passing vehicles from the overpasses in the North Expressway. While the bus was traversing the superhighway, a stone hurled from the Sto. Domingo overpass smashed the front windshield and hit Pasahero in the face. Pasahero lost an eye and suffered other injuries. Can Pasahero hold the bus company liable for damages ? Explain. SUGGESTED ANSWERS: a. Yes, because the responsibility of common carriers in the case of loss or damage to hand carried baggage is governed by the rule on necessary deposits. b. No. The hold-up is a force majeure under the rule on necessary deposits, .because of the use of arms hence the bus company would not be liable. c. Yes. Victory Liner did not exercise utmost diligence. Considering the fore knowledge of stone-throwing incidents, it should have undertaken the necessary precautions to avoid injury to its paying passengers, like Pasahero. NOTES AND COMENTS: a. Act of thief when force majeure. The act of a thief or
robber, who has entered the hotel is not deemed force majeure, unless

13.

it is done with the use of arms or through an irresistible force. (Art. 2001, Civil Code) b. If stone throwing isolated no liability. If there is no showing that the stone throwing incident previously happened so as to impose a an obligation on the part of the personnel of the bus company to warn the passengers and to take the necessary precaution, such stone throwing would constitute fortuitous event negating liability on the part of the bus company. After all the bus company is not an insurer. (Pilapil v. Court of Appeals, et al., 180 SCRA 346)

51

14. In going home, Noe boarded a Fiera passenger jeepney driven by Geminiano and owned by Cecilia. On the way the jeepney picked up an old woman passenger so Noe offered his seat and he proceeded to hung or stood on the left rear carriage of the jeepney. Further along the route the jeepney stopped at the right shoulder of the road to pick up other passengers. Suddenly a cargo truck driven by Bienvenido and owned by Larry hit the rear end portion of the jeepney causing Noe to fall and lost his leg. Rule on the following defenses raised by Larry to negate liability for the damages caused to Noe. a. That before the cargo truck was dispatched for the trip, it was properly checked by a mechanic and found to be in good condition; that he check Bienvenidos drivers license; that he rode together with Bienvenido on his first two trips to determine his competence, that he hired a mechanic to continuously check the condition of the cargo truck; that he exercised the diligence of a good father of a family in the selection and supervision of Bienvenido and maintaining his cargo truck roadworthy and in good operating condition. However, no records were submitted to support the defenses. SUGGESTED ANSWER: All of the above were disregarded because of failure to support the same with evidence. As Bienvenidos employer, Larry is primarily and solidarily liable for the quasi-delict committed by the former. Larry is presumed to be negligent in the selection and supervision of his employee by operation of law and may be relieved of responsibility for the negligent acts of his driver, who at the time was acting within the

scope of his assigned task, only if he can show that he observed all the diligence of a good father of a family to prevent damages. (Estacion v. Bernardo, etc., et al., G. R. No. 144723, February 27, 2006) b. He further contends that if any damages be awarded to Noe, it should be mitigated by his contributory negligence. SUGGESTED ANSWER: The contention is with merit. To hold a person as having contributed to his injuries it must be shown that he performed an act that brought about his injuries, as in the case of Noes act of standing on the left rear carrier portion of the jeepney, in disregard of signs of an impending danger to health and body because such act showed his lack of ordinary care and foresight that such act could cause him harm or put his life in danger. (Estacion v. Bernardo, etc., et al., G. R. No. 144723, February 27, 2006) c. That Geminiano and Cecilia should also be liable and share in the payment for damages caused to Noe. SUGGESTED ANSWER: The defense is meritorious. Driver Geminiano was negligent in allowing Noe to stand on the jeepneys rear portion in disregard of the Land Transportation Code which prohibits such act. By such act Geminiano failed to observe that degree of care, precaution and vigilance that the circumstances justly demand and this created undue risk which resulted to the injuries suffered by Noe. Since Geminiano is negligent there arises a presumption of negligence on the part of his employer, Cecilia, which was not rebutted by the latter. Hence, both Geminiano and Cecilia are also liable to Noe. (Estacion v. Bernardo, etc., et al., G. R. No.
144723, February 27, 2006)

For a cargo of machinery shipped from abroad to a sugar central in Dumaguete, Negros Oriental, the Bill of Lading (B/L) stipulated To Shippers Order, with notice of arrival to be addressed to the Central. The cargo arrived at its destination and was released to the Central without surrender of the B/L on the basis of the latters undertaking to hold the carrier free and harmless from any liability.

15.

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Subsequently, a Bank to whom the central was indebted claimed the cargo and presented the original of the B/L stating that the Central had failed to settle its obligations with the Bank. Was there misdelivery by the carrier to the sugar central considering the non-surrender of the B/L ? Why ? SUGGESTED ANSWER: Yes. Goods covered by a B/L are to be delivered only to the holder thereof upon surrendered of the original B/L. Since the B/L is To Shippers Order, it must be indorsed by the shipper in favor of the Central. Since this was not done but the goods were delivered, there is misdelivery of the goods. Sam boarded a passenger bus. Another passenger, Ed, brought a gallon of gasoline placed in a plastic bag into the same bus where Sam was riding. The gasoline ignited and exploded causing injury to Sam who filed a civil suit for damages against the bus company claiming that Ed should have been subjected to inspection by the conductor. The bus company disclaimed liability resulting from the explosion contending that it was unaware of the contents of the plastic bag and invoking the right of Ed to privacy. Should the bus company be held liable for damages A? SUGGESTED ANSWER: Yes, for breach of the contract of carriage. The bus company is presumed to have been at fault unless it observed extraordinary diligence. It is bound to carry Sam safely as far as human care and foresight provide. It is clear that the gasoline should have smelled considering that it was placed only in a plastic bag and would have been noticed by the bus company employees and kept in a safe place. NOTES AND COMMENTS: In a 1992 Bar question with
similar factual antecedents U.P. Law Center suggests that in overland transportation the common carrier is not bound nor empowered to make an examination of the contents of packages or bags, particularly those handcarried by passengers. True, but ordinary diligence, not even extraordinary diligence, could have resulted to the discovery of the gasoline. a. Duty of common carrier. A common carrier is bound to carry the passengers safely as far as human care and foresight can

provide, using the utmost diligence of very cautious persons, with a due regard for all the circumstances. (Art. 1755, Civil Code) b. Presumption of fault. In case of death of or injuries to passengers, common carriers are presumed to have been at fault or to have acted negligently, unless they prove that they observed extraordinary diligence as prescribed in articles 1733 and 1755. (Art. 1756, Civil Code) c. Degree of care. 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 and for the safety of the passengers transported by them, according to all the circumstances of each case. (1st par., Art. 1733, Civil Code)

16.

If it were an airline company involved in the above problem, would your answer be the same ? Explain your answer briefly. SUGGESTED ANSWER: Yes. The same reasons would be advanced as in the above answer. Furthermore, in the case of air carriers, it is not lawful to carry flammable materials in passenger aircraft, and airline companies may open and investigate suspicious packages and cargoes. (Rep. Act No. 6235)

17. Suppose A was riding on an airplane of a common carrier when the accident happened and A suffered serious injuries. In an action by A against the common carrier, the latter claimed that: (1) there was a stipulation in the ticket issued to A absolutely exempting the carrier from liability from the passengers death or injuries and notices were posted by the common carrier dispensing with the extraordinary diligence of the carrier; and (2) A was given a discount on his plane fare thereby reducing the liability of the common carrier with respect to A in particular. a. Are those defenses valid ? b. What are the defenses available to any common carrier to limit or exempt it from liability ? SUGGESTED ANSWER: a. No. The defenses are contrary to law because they negate the extraordinary diligence required of common carriers. b. The following are: 1) Observance of extraordinary diligence.

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2) Flood, storm, earthquake, lightning, or other natural disaster or calamity; 3) Act of the public enemy in war, whether international or civil; 4) Act or omission of the shipper or owner of the goods; 5) The character of the goods or defects in the packaging or in the containers; 6) Order or act of competent public authority. (Art. 1734, Civil Code) NOTES AND COMMENTS: a. Degree of diligence cannot be reduced by reduced fare. When a passenger is carried gratuitously, a
stipulation limiting the common carriers liability for negligence is valid, but not for wilful acts or gross negligence. The reduction of fare does not justify any limitation of the common carriers liability. (Art. 1758, Civil Code)

(c) Maritime Commerce (Code of Commerce, Arts. 573 to 736; also Arts. 580-584 of Code of Commerce, as superseded by R.A. 6106; Arts. 806 to 845 of the Code of Commerce); Paragraph 6 of Section 3 of Carriage of Goods by Sea Act (Com. Act 65)
1. On December 19, 1987, motor tanker MT Vector left Limay, Bataan enroute for Masbate loaded with petroleum products shipped by Caltex. On December 20, 1987, the passenger ship MV Dona Paz owned and operated by Sulpicio Lines, Inc, left the port of Tacloban headed for Manila with a complement of 59 crew and 1,493 manifested passengers. On December 20, 1987 the two vessels collided in the open sea. All the crew members of Dona Paz died, and of the estimated 4,000 passengers (unmanifested), only 24 survived. Two survived from MT Vector. The issues are whether Caltex, Inc, the charterer of MT Vector is liable to the passengers, and whether Sulpicio Lines is the one liable for the passengers.

SUGGESTED ANSWER: No. Caltex as the charterer has no liability for damages under Philippine Maritime laws. It should be Sulpicio Lines who should be liable for the death of the passengers. The respective rights and duties of a shipper and the carrier depends not on whether the carrier is public or private but on whether the contract of carriage is a bill of lading or equivalent shipping documents on the one hand, or a charter party or similar contract on the other. Caltex and Vector entered into a contract of affreightment, also known as a voyage charter. 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. v. Sulpicio Lines, Inc., et al., G.R. No. 131166, September 30, 1999) On the other hand, Sulpicio Lines being a common carrier is liable for actual and compensatory damages under Article 2206 in relation to Article 1764 of the Civil Code for deaths of its passengers caused by the breach of the contract of carriage, which has been increased to P50,000.00. The general rule is that moral damages are not recovered in culpa contractual except when the presence of bad faith was proven. However, in breach of contract of carriage, moral damages may be recovered when it results in the death of a passenger. Article 2232 of the Civil Code gives the Court the discretion to grant exemplary damages in breach of contract when the defendant acted in a wanton, fraudulent and reckless manner. The Supreme Court took judicial notice of the dreadful regularity with which grievous Maritime disasters occur in our waters with massive loss of life. One of the ends of law and public policy, of special importance in an archipelagic state like the Philippines, is the safe and reliable carriage of people and goods by sea. To achieve this end, an instrument may be used which is the grant of exemplary damages by the Court. (Sulpicio
Lines, Inc., vs. Court of Appeals, et al., 246 SCRA 299)

NOTES AND COMMENTS:

a. Charter party, defined. A charter party is a contract by which an entire ship, or some principal part thereof, is let by the owner

to another person for a specified time or use. (Caltex (Philippines), Inc. v. Sulpicio Lines, Inc., et al., G.R. No. 131166, September 30, 1999)

54

b. Kinds of charter party agreement.

1) Demise or bareboat. The charterer mans the vessel with his own people and becomes, in effect, the owner for the voyage of service stipulated, subject to liability for damages caused by negligence. 2) Time charter, 3) Voyage charter. The parties into a voyage charter retains the character of the vessel as a common carrier. A charter party agreement does not turn a common carrier into a private one. (Caltex (Philippines), Inc. v. Sulpicio Lines, Inc., et al., G.R. No. 131166, September 30, 1999) c. Contract of affreightment, defined. A contract of affreightment is one by which the owner of as ship or other vessel lets the whole or part of her to a merchant or other person for the conveyance of goods, on a particular voyage, in consideration of the payment of freight. (Caltex (Philippines), Inc. v. Sulpicio Lines, Inc., et al., G.R. No. 131166, September 30, 1999) d. Kinds of contract of affreightment. A contract of affreightment may be either 1) Time charter, wherein the leased vessel is leased to the charterer for a fixed period of time, or 2) Voyage charter, wherein the ship is leased for a single voyage. In both cases, the charter party provides for the hire of the vessel only, either for a determinate period of time or for a single or consecutive voyage, the ship owner to supply the ships store, pay for the wages of the master of the crew, defray the expenses for the maintenance of the ship.

affreightment,, the owner remains as carrier and must answer for any breach of duty as to the care, loading and unloading of the cargo. Although a charter party may transform a common carrier into a private one, the same however is not true in a contract of affreightment on account of the distinctions between the two. (Coastwise Lighterage Corporation v,. Court of Appeals, et al., 245 SCRA 706)

f. Zones of time in collision:

1) First Zone, which covers all the time up to the moment when the risk of collision begins. 2) Second Zone, which covers the time between the moment when the risk of collision begins and the moment when it becomes a practical certainty. 3) Third Zone, which covers the time when the collision is certain and the time of impact.

2. What does general average or gross average include ? SUGGESTED ANSWER: General or gross average includes all damages and expenses which are deliberately caused in order to save the vessel, its cargo, or both at the same time, from a real and known risk. Where the formalities prescribed under Articles 813 and 814 of the Code of Commerce in order to incur the expenses and cause the damage corresponding to gross average were not complied with the carrier cannot claim for contribution from the consignees for additional freight and salvage charges .
(Philippine Home Assurance Corp. v. Court of Appeals, et al., 257 SCRA 649)

Distinction between two kinds of charter parties (i.e. bareboat or demise) and contract of affreightment (voyage charter)
1) Control of vessel. Under demise or bareboat, the charterer will generally be regarded as the owner for the voyage or service stipulated. The charterer mans the vessel with his own people and becomes the owner pro hac vice. The owner must completely and exclusively relinquish possession, command and navigation to the charterer. Under a contract of affreightment, the general owner retains possession, command and navigation of the ship, the charterer merely having use of the space in the vessel in return for his payment of the charter hire. 2) Liability. Under demise or bareboat charter, the charterer is liable to others for damages. Under a contract of

e.

3. MV SuperFast, a passenger-cargo vessel owned by SF Shipping Company plying the inter-island routes, was on its way to Zamboanga City from the Manila port when it accidentally, and without fault or negligence of anyone on the ship, hit a huge floating object. The accident caused damage to the vessel and loss of an accompanying crated cargo of passenger PR. In order to lighten the vessel and save it from sinking and in order to avoid risk of damage to or loss of the rest of the shipped items (none of which was located on the deck), some had to be jettisoned. SF Shipping had the vessel repaired at its port of destination. SF Shipping thereafter filed a

55

complaint demanding all the other cargo owners to share in the total repair costs incurred by the company and in the value of the lost and jettisoned cargoes. In answer to the complaint, the shippers sole contention was that, under the Code of Commerce, each damaged party should bear its or own damage and those that did not suffer any loss or damage were not obligated to make any contribution in favor of those who did. Is the shippers contention valid ? Explain. SUGGESTED ANSWER: No. Jettison of cargoes in order the save the vessel constitute general average. The owners of the cargo saved as well as the owners of the vessel should contribute to the value of the cargo jettisoned. SF Shipping is not entitled to contribution/reimbursement from the shippers for the cost of repairs on the vessel.

d. carrier.

In case the vessel is not a common, but special

(Monarch Insurance Co., Inc., et al. v. Court of Appeals, et al., G.R. No. 92735 and companion cases, June 8, 2000)

e. Where the vessel is insured; and f. In Workmens Compensation claims.

NOTES AND COMMENTS: a. Provisions on principle of limited liability. The

principle of limited liability is enunciated in the following provisions of the Code of Commerce: Art. 587. The ship agent shall also be civilly liable for the indemnities in favor of third persons which may arise from the conduct of the captain in the care of goods which he loaded on the vessel; but he may exempt himself therefrom by abandoning the vessel with all the equipments and the freight it may have earned during the voyage. Art. 590. The co-owners of a vessel shall be civilly liable in the proportion of their interests in the common fund for the results of the acts of the captain referred to in Art. 587. Each co-owner may exempt himself from his liability by the abandonment, before a notary, of the part of the vessel belonging to him. Art. 837. The civil liability incurred by shipowners in the case prescribed in this section, shall be understood as limited to the value of the vessel with all its appurtenances and the freightage served during the voyage. (cited in Monarch Insurance Co. Inc., et al., v. Court of Appeals, et al., G.R. No. 92735; Allied Guarantee Insurance Co. v. Court of Appeals, G.R. No. 94867 , Equitable Insurance Corp. v. Court of Appeals, etc., et al., G.R. No. 95578, June 8, 2000)

4. What is meant by the doctrine of limited liability or real and hypothecary nature of maritime law ? SUGGESTED ANSWER: The liability of the ship owner or ship agent arising from the operation of a ship (in the transportation of goods and passengers) is confined to the vessel, equipment, and freight, or insurance, if any, so that if ship owner or ship agent abandons the ship, equipment and freight, as well as insurance, his liability would be extinguished, just as well if the vessel would totally sink or be a total loss, and there is no insurance. 5. When are the instances where the doctrine of limited liability or real and hypothecary nature of maritime law does not find any application ? SUGGESTED ANSWER: The doctrine of limited liability does not apply: a. When death, injury or damage sustained is attributable to the fault or negligence of the ship owner or to the concurring fault or negligence of the ship owner or ship agent and the captain (patron) of the vessel.; b. In case the voyage is not maritime, but only in a bay, river, lake or gulf; c. In case of the expenses for equipping, repairing or provisioning the vessel;

b. Principle of limited liability applies ONLY if the captain is at fault in loading goods. Article 587 speaks only of
situations where the fault or negligence is committed solely by the captain. In cases where the ship owner is likewise to be blamed, Article 587 does not apply. Such a situation will be covered by the provisions of the Civil Code on common carriers. A finding that a fortuitous event was the sole cause of the loss of the vessel would absolve the shipowner from any and all liability pursuant to Article 1734(1) of the Civil Code which provides in part that common carriers are responsible for the loss, destruction, or deterioration of the goods they carry, unless the same is due to flood, storm, earthquake, lightning, or other natural disaster or calamity.

c. Limited liability DOES NOT apply where captains fault is not on loading goods. On the other hand, a finding that
the vessel sank by reason of fault and/or negligence of the shipowner, the ship captain and crew of the vessel would render inapplicable the rule on limited liability. (Monarch Insurance Co., Inc., et al., v. Court of Appeals, et al., G.R. No. 92735; Allied Guarantee Insurance Co., v.

Court of Appeals, G.R. No. 94867; Equitable Insurance Corporation v. Court of Appeals, etc., et al., G.R. No. 95578, June 8, 2000)

56

6. X Shipping Company spent almost a fortune in refitting and repairing its luxury passenger vessel, the MV Marina, which plied the inter-island routes of the company from La Union in the north to Davao City in the south. The MV Marina met an untimely fate during its postrepair voyage. It sank off the coast of Zambales while en route to La Union from Manila. The investigation showed that the captain alone was negligently. There were no casualties in that disaster, Faced with a claim for payment of the refitting and repair, X Shipping Company asserted exemption from liability on the basis of the hypothecary or limited liability rule under Article 587 of the Code of Commerce. Is X Shipping Companys assertion valid ? Explain. SUGGESTED ANSWER: No. The concept of the hypothecary or limited liability rule finds application to liability for loss or damage or goods and not for expenses of refitting, repairing, equipping or provisioning the vessel.
7. M/V P. Aboitiz was advised by the Japanese Meteorological Center that it was safe to travel to its destination. While at sea, the vessel received a report of a typhoon moving within its general path. To avoid the typhoon, the vessel changed its course. It was still at the fringe of the typhoon when the hull leaked which caused the vessel to sink together with all its cargoes. The captain and his crew were saved. In the Marine Protest that was filed the captain stated that the wind force was at 10 to 15 knots at the time the ship foundered and described the weather as moderate breeze, small waves, becoming longer, fairly frequent white horses. A subsequent investigation conducted by the Board of Marine Inquiry (BMI), exonerated the captain and crew of any administrative liability and declared the vessel seaworthy and concluded that the sinking was due to the vessels exposure to the approaching typhoon. The insurance company acting as the subrogee of the cargo owners claimed for the loss caused by the

sinking. The vessel owner defended by seeking refuge under the limited liability doctrine. May the insurance company recover ? SUGGESTED ANSWER: Yes. The insurance company may recover because the vessel owner cannot invoke the limited liability doctrine. For the limited liability doctrine to apply, the vessel owner must show that it exercised extraordinary diligence in the transport of the goods. The vessel owner has the burden of proving that the unseaworthiness of the vessel was not due to its fault or negligence. The facts do no show compliance with the burden. The sinking was not due to the typhoon but due to the unseaworthy condition of the vessel. The weather was moderate when the vessel sank. The BMI findings do not bind the court. Furthermore, BMI exoneration of the vessels officers and crew merely concerns their administrative liabilities. It does not in any way operate to absolve the common carrier from the civil liabilities arising from its failure to exercise extraordinary diligence, the determination of which properly belongs to the courts. (Aboitiz
Shipping Corporation v. New India Assurance Company, Ltd., G.R. No. 156978, May 2, 2006)

NOTES AND COMMENTS:

a. Limited liability may be waived. Benefits of limited liability are subject to waiver such as when the air carrier failed to raise timely objections during the trial when questions and answers regarding the actual claims and damages sustained by the passengers were asked. (British Airways v. Court of Appeals, 285 SCRA 450)

1. Two vessels coming from opposite directions collided with each other due to fault imputable to both. What are the liabilities of the two vessels with respect to the damage caused to them and their cargoes ? Explain. 2. If it cannot be determined which of the two vessels was at fault resulting in the collision, which party should bear the damage caused to the vessels and the cargoes, Explain. 3. Which party should bear the damage to the vessels and the cargoes if the cause of the collision was a fortuitous event ? Explain.

8.

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SUGGESTED ANSWER: 1. Since both of them are fault then each must bear its own damage. 2. Where fault is established but it cannot be determined which of the two vessels was at fault, the doctrine of inscrutable fault finds application and both shall be deemed to be at fault. Consequently, each vessel shall bear their respective damages. 3. Nobody. The carrier is not liable if the cause is a fortuitous event since it is not an insurer of loss or damage.

9. A severe typhoon was raging when the vessel SS Masdaam collided with M/V Princess. It is conceded that the typhoon was the major cause of collision, although there was a very strong possibility that it could not have been avoided if the captain of the SS Masdaam was not drunk and the captain of the M/V Princess was not asleep at the tie of collisions. Who should bear the damages to the vessels and their cargoes ? SUGGESTED ANSWER: The shipowners shall each bear their respective loss of their vessels. For the losses and damages suffered by their cargoes, both shipowners are solidarily liable. Collision caused by storm results to both vessels bearing own loss. This despite both of the captains were negligent. 10. RC imported computer motherboards from the United States and had them shipped to Manila aboard an ocean-going cargo ship owned by BC Shipping Company. When the cargo arrived at the Manila seaport and delivered to RC, the crate appeared intact; but upon inspection of the contents, RC discovered that the items inside had all been badly damaged. He did not file any notice of damage or anything with anyone, least of all with BC Shipping Company. What he did was to proceed directly to your office to consult you about whether he should have given a notice of damage and how long a time he had to initiate a suit under the provisions of the Carriage of Goods by Sea Act (C.A. 65). What would your advice be ?

SUGGESTED ANSWER: I would advice RC to file with BC Shipping Company a notice of damage within three days from discovery of damage, together with his claim. If BC Shipping does not pay his claim RC should file suit against BC Shipping Company to recover the value of the damage within one (1) year from delivery. NOTES AND COMMENTS: a. Prescriptive period for lost or damaged cargoes under the Carriage of Goods by Sea Act is one (1) year from delivery or when should be delivered. In any event the carrier
and the ship shall be discharged from all liability in respect of loss or damaged unless suit is brought within one year after delivery of the goods or the date when the goods should have been delivered: provided, that, if a notice of loss or damage, either apparent or concealed, is not given as provided, that fact shall not affect or prejudice the right of the shipper to bring suit within one year after the delivery of the goods or the date when the goods should have been delivered. (Sec. 3 [6], COGSA)

11. A local consignee sought to enforce judicially a claim against the carrier for loss of a shipment f drums of lubricating oil from Japan under the Carriage of Goods by Sea Act (COGSA) after the carrier had rejected its demand. the carrier pleaded in its Answer the affirmative defense of prescription under the provisions of said Act inasmuch as the suit was brought by the consignee after one (1) year from delivery of the goods. In turn, the consignee contended, that the period of prescription was suspended by the written extrajudicial demand it had made against the carrier within the one-year period, pursuant to Article 1155 of the Civil Code providing that the prescription of actions is interrupted when there is a written extra judicial demand by the creditors. a. Has the action, in fact, prescribed ? Why ? b. If the consignees action were predicated on misdelivery or conversion of the goods, would your answer be the same ? Explain briefly. SUGGESTED ANSWER: a. Yes. The one (1) year period provided under the COGSA is not interrupted by the written extrajudicial demand as provided under the Civil Code. The provisions of the Civil Code relative to suspension of prescriptive periods find application

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only to prescriptive periods under the said Code, and not to prescriptive periods provided for in special laws unless specially provided for. (Dole Phil. Inc., v. Maritime Company, 148 SCRA 118) The COGSA does not provide for the application of this provision of the Civil Code. b. No. The answer would not be the same because the provisions of COGSA relative to the prescriptive period does not apply. Instead the provisions of the Civil Code on prescription including those on suspension of the prescriptive period should be applied. (Ang v. Compania Maritima, 133 SCRA 600)

12. Lavine entered into a contract with Mitsui, through Meister, to transport ladies wear from Manila to France with transhipment at Taiwan. Somehow or the other, the goods were not loaded at Taiwan on time hence when the goods arrived in France they arrived "off-season" and Lavine was paid only for one-half of the value by its buyer. Is Lavine's claim covered by the one year prescriptive period under the Carriage of Goods by Sea Act considering the "loss" in value ? SUGGESTED ANSWER: No. It shall be covered by the Civil Code provisions providing for a ten (10) year prescriptive period. Deterioration in value of goods as a result of delayed delivery is not "loss or damage" contemplated under the Carriage of Goods by Sea Act (COGSA). 'Loss" refers to the deterioration or disappearance of goods. The deterioration or disappearance or destruction of goods must be caused by the carrier's breach of contract as in damage while in transit. Thus, the loss or damage must refer to mishandling of the cargo and not to the carrier's general liability under its contract of carriage. The fact that the ladies wear became "off-season" is not loss or damage therefore not subject to the prescriptive period of one year under the COGSA. The prescriptive period therefore is ten (10) years under the Civil Code. (Mitsui O.S.K.
Lines, Ltd., v. Court of Appeals, et al., 287 SCRA 366)

loss under the Carriage of Goods by Sea Act (COGSA) after the carrier had rejected its demand. The carrier pleaded prescription under the provisions of said Act inasmuch as the suit was brought by the consignee after one (1) year from delivery of the goods. In turn, the consignee contended that the period of prescription was suspended by the written extrajudicial demand it had made against the carrier within the one-year period, pursuant to Article 1155 of the Civil Code providing that the prescription of actions is interrupted when there is a written extrajudicial demand by the creditors. Has the action prescribed ? Why ? SUGGESTED ANSWER: Yes. The one year period under COGSA is not interrupted by the written extrajudicial demand. The provisions of Article 1155 of the Civil Code on interruption of the prescriptive period applies only to the periods provided for under the Civil Code, not under special laws like the GOGSA. (Dole Phil. Inc. v, Maritime Company, 148 SCRA 118) If the consignees action were predicated on misdelivery or conversion of the goods, would your answer be the same ? Explain briefly. SUGGESTED ANSWER: No. This time the provisions of the Civil Code on interruption of the prescriptive period will apply. (Ang v. Compania Maritima, 133 SCRA 600) 14. The Philippine International Shipping Corporation (PISC) was granted guaranty accommodations by National Investment and Development Corporation to finance the acquisition of seven (7) ocean-going vessels subject to the terms and conditions set forth in the Guaranty Agreements. As security for the guaranty accommodations, PISC executed in favor of PNB/NIDC Chattel Mortgages over the seven vessels. Later, prior to the recording of the Chattel Mortgages, one of the vessels, M/V Asean Liberty needed repair and conversion. PISC entered into a Contract Agreement with Hongkong United Dockyards, Ltd. to do the job at a contract price of HK$2,200,000.00. To cover the contract price, PISC opened a standby letter of credit with China Banking Corporation (CBC) for the amount of

13. The consignee of a shipment of drilling equipment from Norway filed suit against the carrier for

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US$545,000.00 in favor of Citibank. A promissory note was executed for the amount by PISC in favor of Citibank. PISC defaulted in its obligation under the promissory note, the costs of repair were debited against CBC and remitted to Citibank. When PISC failed to settle its obligation with PNB, six of the mortgaged vessels were auctioned and sold to NIDC as the highest bidder. PISC instituted before the RTC an action for the annulment of the foreclosure sale. CBC filed suit in the amount of US$242,225.00 for the Standby Letter of Credit in favor of Citibank. It insists that its claim is a preferred maritime lien which is superior to PNB/NDCs mortgage lien. Rule on CBCs contention of having a maritime lien. SUGGESTED ANSWER; Yes, CBC has a preferred maritime lien. The maritime lien over the vessel M/V Asean Liberty arose or was constituted at the time Hongkong United Drydocks, Ltd. made repairs on the said vessel on credit. As such, the date of the contract for the repair and conversion of M/V Asean Liberty, a maritime lien had already been attached to the said vessel. When Citibank advanced the amount of US$242,225.00 for the purpose of paying off PISCs debt to Hongkong United Dockyards, Ltd., it acquired the existing maritime lien over the vessel. When CBC honored its contract of guarantee with Citibank, it likewise acquired by subrogation the maritime lien that was already existing over the vessel M/V Asean Liberty. Thus, when CBC chose to exercise its right to the maritime lien during the proceedings in the trial court, it was actually enforcing a privilege that attached to the ship before the mortgage to PNB/NIDC. CBCs maritime lien has priority over the said mortgage lien. Pursuant to Section 17 of the Ship Mortgage Decree of 1978, a preferred mortgage lien shall have priority over all claims against the vessel except, among others, maritime liens arising prior in time to the recording of the preferred mortgage.
(Philippine National Bank/National Investment Development Corporation v. Court of Appeals, et al., G.R. No. 128661, August 8, 2000)

NOTES AND COMMENTS; a. Maritime Lien, nature. A maritime lien constitutes a

present right of property in the ship, a jus in re, to be afterward

enforced in admiralty by process in rem. From the moment the claim or privilege attaches, it is inchoate, and when carried into effect by legal process, by a proceeding in rem, it relates back to the period when it first attached. (Philippine National Bank/National Investment Development Corporation v. Court of Appeals, et al., G.R. No. 128661, August 8, 2000) b. Maritime lien, when it exists. The applicable law on the matter is Presidential Decree No. 1521, otherwise known as the Ship Mortgage Decree of 1978. Sections 17 and 21 of the said Presidential Decree provides as follows: Sec. 17. Preferred Liens, Priorities, Other Liens (a) Upon the sale of any mortgaged vessel in any extra-judicial sale or by order of a district court of the Philippines in any suit in rem in admiralty for the enforcement of a preferred mortgage lien thereon, all pre-existing claims on the vessel, including any possessory common-law lien of which a lienor is deprived under the provisions of Section 16 of this Decree, shall be held terminated and shall thereafter attach, in like amount and in accordance with the priorities established herein to the proceeds of the sale. The preferred mortgage lien shall have priority over all claims in the order stated: (1) expenses and fees allowed and costs taxed by the court and taxes due to the government; (2) crews wages; (3) general average; (4) salvage; including contract salvage; (5) maritime liens arising prior in time to the recording of the preferred mortgage; and (6) damages arising out of tort; and (7) preferred mortgage registered prior in time. (b) If the proceeds of the sale should not be sufficient to pay all creditors included in one number or grade, the residue shall be divided among them pro rata. All credits not paid, whether fully or partially shall subsist as ordinary credits enforceable by personal action against the debtor. The record of judicial sale or sale by public auction shall be recorded in the Record of Transfers & Encumbrances of Vessels in the port of documentation. (Arrangement supplied) Sec. 21. Maritime Lien for Necessaries; persons entitled to such lien. Any person furnishing repairs, supplies, towage, use of dry dock or maritime railway, or other necessaries to any vessel, whether foreign or domestic; upon the order of the owner, shall have a maritime lien on the vessel, which may be enforced by suit in rem, and it shall be necessary to allege or prove that credit was given to the vessel. (Ibid.)

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c. Interpretation. The provisions of our Ship Mortgage

Decree of 1978 were patterned quite closely after the U.S. Ship Mortgage Act of 1920.30. Significantly, the Federal Maritime Lien Act of the United States, like our Ship Mortgage Decree of 1978, provides that any person furnishing repairs, supplies, towage, use of drydock, or marine railway, or other necessaries, to any foreign or domestic vessel, on the order of the owner of such vessel, or of a person authorized by the owner has a maritime lien on the vessel, which may be enforced by suit in rem. Being of foreign origin, the provision of the Ship Mortgage Decree of 1978 may thus be construed with the aid of foreign jurisprudence from which they are denied except insofar as they conflict with existing laws or are inconsistent with local customs and institutions. Those who provide credit to a master of a vessel for the purpose of discharging a maritime lien also acquire a lien over the said vessel. Under American jurisprudence, furnishing money to a master in good faith to obtain repairs or supplies or to remove liens, in order to forward the voyage of the vessel, raises a lien just as though the things (for which) money was obtained to pay for had been furnished by the lender. Likewise, (a) advances to discharge maritime liens create a lien on the vessel, and one advancing money to discharge a valid lien gets a lien of equal dignity with the one discharged. (Ibid.) d. Preference. Under these provisions, any person furnishing repairs, supplies, or other necessaries to a vessel on credit will have a maritime lien on the said vessel. Such maritime lien, if it arose prior to the recording of a preferred mortgage lien, shall have priority over the said mortgage lien. (Ibid.) e. Subrogation. By definition, subrogation is the transfer of all the rights of the creditor to a third person, who substitutes him in all his rights. Article 2067 of the New Civil Code provides that the guarantor who pays is subrogated by virtue thereof to all the rights which the creditor had against the debtor. (Ibid.)

a) The applicant must be a citizen of the Philippines, or a corporation or co-partnership, association, or joint stock company constituted and organized under the laws of the Philippines, at least sixty percentum (60%) of its stock or paid-up capital must belong entirely to citizens of the Philippines; b) The applicant must be financially capable of undertaking the proposed service and meeting the responsibilities incident to its operation; and c) The applicant must prove that the operation of the public service proposed and the authorization to do business will promote the public interest in a proper and suitable manner (Kilusang Mayo Uno Labor Center vs. Garcia, Jr., 239 SCRA 386) . In short, proof of public necessity. NOTES AND COMMENTS: a. Legislative franchise to operate jai-alai imbued with public interest and involves an exercise of police power. The familiar rule is that laws which grant the right to exercise
a part of the police power of the state are to be construed strictly and any doubt must be resolved against the grant. The legislature is regarded as the guardian of society, and therefore is not presumed to disable itself or abandon the discharge of its duty. Thus, courts do not assume that the legislature intended to part away with its power to regulate public morals. The presumption is influenced by constitutional considerations. Constitutions are widely understood to withhold from legislatures any authority to bargain away their police power for the power to protect the public interest is beyond abnegation. (Del Mar v. Philippine Amusement and Gaming Corporation, et al., G.R. No. 138298, November 29, 2000 and companion case)

(d) Public Service Act (Com. Act 146), as amended 1. What are the requisites for the issuance of a certificate of public convenience (CPC) ? Alternatively, what requirements must be met before a certificate of public convenience may be granted under the Public Service Act ? SUGGESTED ANSWER:

2. When can the Land Transportation Franchising and Regulatory Board exercise its power to suspend or revoke a certificate of public convenience ? SUGGESTED ANSWER: The following are some of the instances: a. When the operator fails to provide a service that is safe, proper or adequate. b. When the operator refuses to render any service which can be reasonably demanded and furnished. (Sec. 19 [a], Public Service Act)

3. Robert is a holder of a certificate of public convenience to operate a taxicab service in Manila and suburbs. One evening, one of his taxicab units was boarded by three (3) robbers as they escaped after staging a hold-up. Because of said incident, the Land Transportation Franchising and Regulatory Board revoked the certificate of public convenience of Robert on the ground that said operator failed to render safe, proper and adequate service as required under Section 19 (a) of the Public Service Act. Was the revocation of the certificate of public convenience of Robert justified ? Explain. ( SUGGESTED ANSWER: No. A single hold-up incident, which is not related at all in the manner by which Robert operates his certificate of public convenience, should not be construed as rendering service that is unsafe, inadequate and improper. (Mansanal v. Ausejo, 164 SCRA 36) The City of Manila passed an ordinance banning provincial buses from the city. The ordinance is challenged as invalid under the Public Service Act by X who had a certificate of public convenience to operate auto-trucks with fixed routes from certain towns in Bulacan and Rizal to Manila and within Manila. Firstly, he claimed that the ordinance was null and void because, among other things, it in effect amends his certificate of public convenience, a thing which only the Land Transportation Franchising and Regulatory Board (LTFRB) can do under Section 16 of the Public Service Act. Under said section, the Commission is empowered to amend, modify or revoke a certificate of public convenience after notice and hearing. Secondly, he contended that even if the ordinance was valid, it is only the LTFRB which can require compliance with its provisions under Section 17 (j) of said Act and since the implementation of the ordinance was without sanction or approval of the Commission, its enforcement was unauthorized and illegal. 1) May the reliance of X on Section 16 (m) of the Public Service Act be sustained ? Explain. 2) Was X correct in his contention that under Section 17 (j) of the Public Service Act it is only the

61

Commission which can require compliance with the provisions of the ordinance ? SUGGESTED ANSWER: 1) No. The power of the LTFRB under Section 16 (m) of the Public Service Act is subordinate to the authority of the City of Manila under Section 18 (hh) of its revised charter, to superintend, regulate or control the streets of the City of Manila. (Lagman v. City of Manila, 17 SCRA 579) 2) No. The powers conferred by law upon the LTFRB were not designed to deny or supersede the regulatory power of the local government units over motor traffic in the streets subject to their control. The Batong Bakal Corporation filed with the Board of Energy an application for a Certificate of Public Convenience for the purpose of supplying electric power and lights to the factory and its employees living within the compound. The application was opposed by the Bulacan Electric Corporation, contending that the Batong Bakal Corporation has not secured a franchise to operate and maintain an electric plant. Is the oppositions contention correct ? SUGGESTED ANSWER: No. A legislative franchise not required for an entity to operate as a supplier of electric power and light to its own factory and its employees living in the compound provided that it does not make an offer of service to the public in general. 6. PETRON is a petroleum company which owns the largest, most modern complex refinery in the Philippines. It is also the countrys biggest combined retail and wholesale market of refined petroleum products. Section 7 of R.A. No. 387, the Petroleum Act of 1949, provides that: Petroleum operation a public utility. - Everything relating to the exploration for and exploitation of petroleum which may consist naturally or below the surface of the earth, and everything relating to the manufacture, refining, storage, or transportation by special methods of petroleum, as provided for in this Act, is hereby declared to be of public utility. Is PETRON a public utility ? Why?

5.

4.

62

SUGGESTED ANSWER: No. A public utility under the Constitution and the Public Service Act is one organized for hire or compensation to serve the public, which is given the right to demand its service. PETRON is not engaged in oil refining for hire and compensation to process the oil of other parties. Likewise, the activities considered as public utility under Section 7 of R.A. No. 387 refer only to petroleum which is indigenous to the Philippines. Hence, the refining of petroleum products sourced from abroad as is done by PETRON is not within the contemplation of the law. (Bagatsing v. Committee on
Privatization, 241 SCRA 334)

7. WWW Communications, Inc., is an e-commerce company whose present business activity is limited to providing its clients with all types of information technology hardware. It plans to re-focus its corporate direction of gradually converting itself into a full convergence organization. Towards this objective, the company has been aggressively acquiring telecommunications businesses and broadcast media enterprises, and consolidating their corporate structures. The ultimate plan is to have only two organizations: one to own the facilities of the combined business and to develop and produce content materials, and another to operate the facilities and provide mass media and commercial telecommunications services. WWW Communications will be the flagship entity which will own the facilities and provide the services. WWW Communications seeks your professional advice on whether or not its reorganized business activity would be considered a public utility requiring a franchise or certificate or any other form of authorization from the government. What will be your advice ? Explain. SUGGESTED ANSWER: The reorganized business activity of WWW Communications would not be considered as a public utility requiring a franchise. What constitutes a public utility is not their ownership but their use to serve the public. While a franchise is needed to operate these facilities to serve the public, they do not by themselves constitute a public utility.

The Constitution, in no uncertain terms, requires a franchise for the operation of a public utility. However, it does not require a franchise before one can own the facilities needed to operate a public utility so long as it does not operate them to serve the public. In law, there is a clear distinction between the operation of a public utility and the "ownership" of the facilities and equipment used to serve the public. The right to operate a public utility may exist independently and separately from the ownership of the facilities thereof. One can own said facilities without operating them as a public utility or conversely, one may operate a public utility without owning the facilities used to serve the public. The devotion of property to serve the public may be done by the owner or by the person in control thereof who may not necessarily be the owner thereof. The dichotomy between the operation of a public utility and the ownership of the facilities used to serve the public can be very well appreciated when we consider the transportation industry. Enfranchised airline and shipping companies may lease their aircraft and vessels instead of owning them themselves. (Tatad, et al., v. Garcia, Jr., et al., 243 SCRA 436) NOTES AND COMMENTS: a. Build-operate-transfer (BOT). One where the
contractor undertakes the construction and financing of an infrastructure facility, and operates and maintains the same. The contractor operates the facility for a fixed period during which it may recover its expenses and investment in the project plus a reasonable rate of return thereon. After the expiration of the agreed term, the contractor transfers the ownership and operation of the project to the government. The owner of the infrastructure facility must comply with the citizenship requirement of the Constitution on the operation of a public utility. (Tatad, et al., v. Garcia,. Jr., et al., 243 SCRA 436) b. Build-and-transfer (BT). The contractor undertakes the construction and financing of the facility, but after completion, the ownership and operation thereof are turned over to the government. The government, in turn, shall pay the contractor the total investment on the project in addition to a reasonable rate of return. This arrangement may be employed in the construction of any infrastructure project including critical facilities which for security or strategic reasons, must be operated directly by the government. Filipino ownership is not required. (Tatad, et al., v. Garcia, Jr., et al., 243 SCRA 436)

63

c. Distinctions between BOT and BT: a. BOT contractor operates; BT government

operates.

b. BOT compliance with citizenship requirement; BT

no.

d. Value-added services (VAS) such as SMS, are deregulated but National Telecommunications Commission (NTC) still has jurisdiction over SMS offerings, including questions of rates and customer complaints. There is an
implicit recognition that VAS is not strictly a public service offering in the way that voice-to-voice lines are, for example, but merely supplementary to the basic services.

8. Is an international gateway facility (IGF) a telephone system ? SUGGESTED ANSWER: No. It is not. An IGF system which would mediate between a domestic telephone system and the transmitting and carrying facilities of an international carrier. It will permit messages originating from a person using PLDTs domestic telephone system to enter the transmitting and carrying facilities of an international carrier and as well allow messages incoming from abroad through the international carriers carrying facilities to enter the domestic system.
(Philippine Long Distance Telephone Company v. NTC, et al., 241 SCRA 486)

SUGGESTED ANSWER :In operating a truck without the transfer thereof having been approved by the Public Service Commission (now LTFRB), the transferee acted merely as agent of the registered owner and should be responsible to him (the registered owner) for any damages he may cause the latter through his negligence. (Y Transit Co., Inc. vs. NLRC, et al., G.R. 88195-96, January 27, 1994 ) REASON: Since a franchise is personal in nature any transfer or lease thereof should be notified to the Public Service Commission (LTFRB) so that the latter may take proper safeguards to protect the interest of the public. Of course it follows that if there are any damage caused to the general public the registered owner is directly answerable and not the unregistered transferee.

NOTES AND COMMENTS: a. Telecommunications. Communication over distance

making no limiting reference to the means or mode of such communication. When the statutory text speaks of messages, there should be no distinction between voice or oral and data or ,non-voice messages or transmissions. Voice messages do not travel via wires (cables whether submarine or underground or, aerial) or any other media qua voice (i.e., as sound waves); voice transmissions, exactly like data (or non-voice) messages, travel in the form of electronic impulses through cables (or any other media) and are simply converted at the point of reception or destination into other forms visually or audibly perceptible by human beings (Philippine Long Distance Telephone Company v. NTC, et al., 241 SCRA 486)

10. Pepay, a holder of a certificate of public convenience, failed to register the complete number of units required by her certificate. However, she tried to justify such failure by the accidents that allegedly befell her, claiming that she was so shocked and burdened by the successive accidents and misfortunes that she did not know what she was doing, she was confused and thrown off tangent momentarily, although she always had the money and financial ability to buy new trucks or repair the destroyed ones. Are the reasons given by Pepay sufficient grounds to excuse her from completing her units ? Explain. SUGGESTED ANSWER: No. Pepay could have undertaken the registration of the complete number of units through her authorized representatives. (Halili v. Herras, 10 SCRA
769)

9. What is the effect of failure to get approval of sale or mortgage of franchise ?

Antonio was granted a Certificate of Public Convenience (CPC) in 2000 to operate a ferry between Mindoro and Batangas using the motor vessel MV Lotus. He stopped operations in 2003 due to unserviceability of the vessel. In 2005, Basilio was granted a CPC for the same route. After a few months, he discovered that Carlos was operating on his route under Antonios CPC. because Basilio filed a complaint for illegal operations with the

11.

64

Maritime Industry Authority, Antonio and Carlos jointly filed an application for sale and transfer of Antonios CPC and substitution of the vessel MV Lotus with another owned by Carlos. Should Antonios and Carlos joint application be approved ? Give your reasons. SUGGESTED ANSWER: No. The joint application should be disapproved. The unserviceability of the vessel covered by the certificate rendered ineffective the certificate itself, and the holder may not legally transfer the same to another. (Cohon v. Court of Appeals, et al., 188 SCRA 719)

of contract or as an absolute limit of the extent of liability. (Philippine Airlines, Inc. v. Court of Appeals, et al.,255 SCRA 48) 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 an absolute limit of the extent of that liability- it must not be construed to preclude the operation of the Civil Code and pertinent laws. (Philippine Airlines, Inc., v. Court of Appeals, 257 SCRA 33) b. Warsaw Convention may be ignored. Within our jurisdiction, the Warsaw Convention can be applied, or ignored, depending on the peculiar facts presented by each case. (United Airlines v. Uy, 318 SCRA 576)

(e) The Warsaw Convention of 1929 (Limited to the Carriers Liability)

1. What is the Warsaw Convention ? SUGGESTED ANSWER: It is another name for the Convention for the Unification of Certain Rules Relating to International Carriage by Air, as amended by the Hague Protocol of 1955, the Montreal Agreement of 1966, the Guatemala Protocol of 1971 and the Montreal Protocols of 1975). It has the force and effect of law in the country being a treaty commitment assumed by the Philippine Government. It denies to the carrier availment of the provisions which exclude or limit his liability, if the damage is caused by his willful misconduct or by such default on his part is considered to be equivalent to damage caused by any agent of the carrier acting within the scope of his employment. (Sabena Belgian World
Airlines v. Court of Appeals, et al., 255 SCRA 38)

NOTES AND COMMENTS: a. Recognition of the Warsaw Convention does not preclude the operation of the Civil Code and other pertinent laws in the determination of the extent of liability of the
common carrier. The Warsaw Convention, being a treaty to which the Philippines is a signatory, is much a part of Philippine law as the Civil Code, Code of Commerce, and other municipal special laws. The provisions therein contained specifically on the limitation of carriers liability, are operative in the Philippines but only in appropriate situations. The Warsaw Convention does not operate as an exclusive enumeration of the instances when a carrier shall be liable for breach

2. Rolando, on a special mission to purchase firearms for the Philippine Senate, purchased a round trip ticket from Northwest for his travel to Chicago, U.S.A. and back to Manila. After purchasing firearms and on the way back to Manila Rolando checked-in and presented before Northwest representatives two identical baggage which were required to be opened and supporting documents were presented. Rolando then sealed the baggage and a Northwest representative placed a red tag on the baggage with firearms with the marking CONTAINS FIREARMS. Upon arrival at Manila, it was found out that one baggage was missing, and when it finally arrived the firearms were missing. Northwest now claims that under the Warsaw Convention and the contract of carriage its liability is limited only to US$9.07 per pound or US$20 per kilo or a total of US$640.00. Rule on the claim of limited liability. SUGGESTED ANSWER: Claim without merit. The Warsaw Convention does not operate as an exclusive enumeration of the instances of an airlines liability, or as an absolute limit of the extent of that liability. The conventions provisions do not regulate or exclude liability for other breaches of contract by the carrier or misconduct of its officers and employees, or for some particular or exceptional type of damage. (Northwest Airlines, Inc., v. Court of Appeals, et al., and
companion case, 284 SCRA 408)

NOTES AND COMMENTS: a. Obligations of carrier in confirmed flights. When

an airline issues a ticket to a passenger confirmed for a particular flight on a certain date, a contract of carriage arises. The passenger

has every right to expect that he be transported on that flight and on that date and it becomes the carriers obligation to carry him and his luggage safely to the agreed destination. If the passenger is not transported or if in the process of transporting he does or is injured the carrier may be held liable for a breach of contract of carriage. Thus, a common carrier is bound to carry its passengers safely as far as human care and foresight can provided, using the utmost diligence of very cautious persons, with due regard for all the circumstances. (Japan Airlines v. Asuncion, et al., G. R. No. 161730, January 28, 2005)

65

good and subject to the test of economic viability. (Sec. 16,

Article XII, 1987 Constitution)

(a) The Corporation Code (BP Blg. 68) 1. As a result of perennial business losses a corporations net worth has been wiped out. In fact, it is now in negative territory. Nonetheless, the stockholders did not like to give up: Creditor-banks, however, do not share the confidence of the stockholders and refuse to grant more loans. What tools are available to the stockholders to replenish capital ? SUGGESTED ANSWER: The stockholders may resort to the following: a. Increase the capital stock of the corporation, thereby infusing additional funds. b. Issue a call for the payment of unpaid subscriptions if there are any. c. If the stockholders do not want to dilute their shares through increase in capital stock, they could give advances to the corporation. 2. An educational corporation sued two radio broadcasters for libel because of malicious imputations against the school. Is it entitled to moral damages as a corporation ? SUGGESTED ANSWER: Yes. Article 2219 (7) of the Civil Code which expressly authorizes the recovery of moral damages in cases of libel, slander, or any other form of defamation does not distinguish whether the plaintiff is a natural or juridical person. (Filipinas Broadcasting Network, Inc. v. Ago
Medical and Educational Center-Bicol Christian College of Medicine (AMEC-BCCM, et al. G. R. No. 141994, January 17, 2005)

5. Corporation Law
1. May Congress, by law, create a private corporation ? Reason out briefly. SUGGESTED ANSWER: Congress cannot enact a law creating a private corporation. The Constitution emphatically prohibits the creation of private corporations except by a general law applicable to all citizens. (Feliciano, etc. v. Commission on Audit, etc., G. R. No. 147402, January 14, 2004 citing National Development Company v. Philippine Veterans Bank, G. R. No. 84132-33, 10 December 1990, 192SCRA 257) The purpose of this constitutional prohibition is to ban private corporations created by special charters, which historically gave certain individuals, families or groups special privileges denied to other citizens. (Feliciano, etc. v. Commission
on Audit, etc., G. R. No. 147402, January 14, 2004 citing Bernas)

NOTES AND COMMENTS:

a. Two classes of corporations recognized under the Constitution: 1) Private corporations created under a general law. 2) Government-owned or controlled corporations created by special charters. . (Feliciano, etc. v.
Commission on Audit, etc., G. R. No. 147402, January 14, 2004)

b. Constitutional basis for classification. The Congress shall not, except by general law, provide for the formation, organization, or regulation of private corporations. Government-owned or controlled corporations may be created or established by special charters in the interest of the common

NOTES AND COMMENTS:

a. Generally corporation not entitled to damages. A juridical person is generally not entitled to moral damages because, unlike a natural person, it cannot experience physical suffering or such sentiments as wounded feelings, serious anxiety, mental anguish or moral shock. The statement in Mambulao Lumber Co. v. PNB, et al., 130 Phil. 366; 22 SCRA 359 (1963) that a corporation

may have a good reputation which, if besmirched, may also be a good ground for the award of moral damages is an obiter dictum. The award of moral damages to AMEC-BCCM was not premised upon the Mambulao obiter but upon Article 2219 (7) of the Civil Code which does not make a distinction whether the plaintiff is a juridical or natural person to be entitled to damages. (Filipinas Broadcasting Network, Inc. v. Ago Medical and Educational Center-Bicol Christian College of Medicine (AMEC-BCCM, et al. G. R. No. 141994, January 17, 2005 citing People v. Manero, Jr., G. R. Nos. 86883-85, 29 January 1993, 218 SCRA 85)

66

Purpose of corporate set-up. The concept of corporations was evolved to make possible the aggregation and assembling of huge amounts of capital upon which big business depends. It also has the advantage of non-dependence on the lives of those who compose it even as it enjoys certain rights and conducts activities of natural persons. (Reynoso, IV v. Court of Appeals, et al., G.R. Nos. 116124-25, November 22, 2000) c. The trust fund doctrine considers unpaid subscribed capital as a trust fund for the payment of the debts of
the corporation, to which the creditors may look for satisfaction. Until the liquidation of the corporation, no part of the subscribed capital may be returned or released to the stockholder (except in the redemption of redeemable shares) without violating this principle. Thus, dividends must never impair the subscribed capital; subscription commitments cannot be condoned or remitted; nor can the corporation buy its own shares using the subscribed capital as the consideration therefore. (National Telecommunications Commission v. Court of Appeals, et al., G.R. No. 127937, July 28, 1999) Another variation of the trust fund doctrine posits that any distribution of corporate assets as a consequence of corporate liquidation are considered as held in trust by the recipient stockholder for the benefit of the creditors of the corporation.

3. As a result of perennial business losses a corporations net worth has been wiped out. In fact, it is now in negative territory. Nonetheless, the stockholders did not like to give up: Creditor-banks, however, do not share the confidence of the stockholders and refuse to grant more loans. Assuming that the corporation continues to operate even with depleted capital would the stockholders or the managers be solidarily liable for the obligations incurred by the corporation ? Explain. SUGGESTED ANSWER: No. The corporation has a personality distinct and separate from that of its stockholders or managers. However, where the corporation is already insolvent all its assets are considered held in trust by its directors and officers for the benefit of creditors, hence they may be held liable for negligence or mismanagement. NOTES AND COMMENTS: a. Corporate fiction. Rudimentary is the rule that a
corporation is invested by law with a personality distinct and separate from its stockholders or members. In the same vein, a corporation by legal fiction and convenience is an entity shielded by a protective mantle and imbued with a character alien to the persons comprising it. It may not generally be held liable for that of the persons composing it. It may not be held liable for the personal indebtedness of its stockholders of those of the entities connected with it. (Lim v. Court of Appeals, et al., G.R. No. 124715, January 24, 2000) b. Purpose of corporate fiction. Corporate personality is a shield against the personal liability of officers or the personal indebtedness of the stockholders. (D.R. CATV Systems, Inc. v. Ramos, etc., A. M. No. P 05 2031, December 9, 2005)

4. Fifteen individuals formed a private corporation pursuant to the provisions of the Corporation Code of the Philippines (Batas Pambansa Blg. 68). Incorporator Mr. Leon was elected director and president general manager. Part of his emolument is a Mercedes Benz, which the corporation owns. After a few years, Mr. Leon lost his corporate positions but he refused to return the motor vehicle claiming that as a stockholder with a substantial equity share, he owns that portion of the corporate assets now in his possession. Is the contention of Mr. Leon valid ? Explain. SUGGESTED ANSWER: No. The corporation has a personality distinct and separate from that of its stockholders. Consequently, corporate property such as the Mercedes Benz is not property of any stockholder such as Mr. Leon. NOTES AND COMMENTS: a. Corporate property not owned by stockholders.
The distinction between the title of a corporation, and the interest of its members or stockholders in the property of the corporation is familiar and well-settled. The ownership of that property is in the corporation,

and not in the holders of shares of its stock. The interest of each stockholder consists in the right to a proportionate part of the profits whenever dividends are declared by the corporation, during its existence, under its charter, and to a like proportion of the property remaining, upon the termination or dissolution of the corporation after payment of its debts. (Mobilia Products, Inc. v. Umezawa, G. R. No. 149357, March 4, 2005 and its companion case)

67

incorporation, the place of incorporation determines nationality irrespective of nationality of stockholders.

b. Corporate stockholders only have inchoate right over corporate assets. Corporate assets belong to the
corporation and stockholders have no claim on them as owners, but have merely an inchoate right to the same should any remain upon the dissolution of the corporation after all the corporate creditors have been paid. (D.R. CATV Systems, Inc. v. Ramos, etc., A. M. No. P 05 2031, December 9, 2005)

7. What is the nationality of a corporation organized and incorporated under the laws of a foreign country, but owned 100% by Filipinos ? SUGGESTED ANSWER: Under the control test, the nationality of the corporation subject of the problem, is Filipino. NOTES AND COMMENTS: a. Alien may be elected to Board of Directors of a partially nationalized corporation provided the election does not exceed their allowable participation in the capital stock.
8. A corporation was created by special law. Later, the law creating it was declared invalid. May such corporation claim to be a de facto corporation ? SUGGESTED ANSWER: Yes from the time the law became effective up to the declaration of its invalid. Certain legal acts flowed prior to the invalidating of the law which should have recognition.

A, B and C are shareholders of XYZ Company. A has an unpaid subscription of P100,000.00. Bs shares are fully paid up, while C owns only nominal but fully paid up shares and is a director and officer. XYZ Corporation becomes insolvent, and it is established that the insolvency is the result of fraudulent practices within the company. If you were counsel for a creditor of XYZ Company, would you advise legal action against A, B and C ? SUGGESTED ANSWER: a. An action may be instituted against A up to the extent of his unpaid subscription, which he is supposed to hold in trust for the benefit of corporate creditors. As liability is limited only up to his unpaid subscription. b. There is no cause of action against B because he has fully paid up his subscription. A corporation has a personality separate and distinct from that of the stockholders, hence corporate liabilities could not be collected against stockholders. c. C, as director, may be held liable jointly and severally with the corporation because it appears in the problem that there were fraudulent practices in directing corporate affairs. 6. What are the tests of corporate nationality ? SUGGESTED ANSWER: The tests are the nationality theory and the theory of incorporation. Under the nationality theory the citizenship of the stockholders determines nationality irrespective of the place of incorporation. Under the theory of

5.

NOTES AND COMMENTS:

a. A corporation acquires juridical personality through State consent. It is a basic postulate that before a
corporation

9.
?

When is the veil of corporate fiction pierced

SUGGESTED ANSWER: The following were the instances where the Supreme Court ruled that the veil of corporation fiction may be pierced: a. When the corporate fiction is used to defeat public convenience, justify wrong, protect fraud, or defend crime or when a corporation is the mere alter ego or business conduit of a person. (Pamplona Plantation, Inc. v. Tinghil, et al., G.R. No. 159121, February 3, 2005 citing various cases) To disregard the separate juridical personality of a corporation, the wrong-doing must be clearly and convincingly, established. It cannot be presumed. ( Yu, et al vs. NLRC, et al., G.R.. Nos. 111810-11, June
16, 1995)

b. When the fiction is used as a means of perpetrating a fraud or an illegal act or as a vehicle for the evasion of an

68

existing obligation, the circumvention of statutes, the achievement or perfection of a monopoly or generally the perpetration of knavery or crime, the veil with which the law covers and isolates the corporation from the members or stockholders who composed it will be lifted to allow for its consideration merely as an aggregation of individuals. c. To avoid a judgment credit; to avoid inclusion of corporate assets as part of the estate of a decedent; to avoid liability arising from debt; when made use as a shield to perpetrate fraud and/or confuse legitimate issues; or to promote unfair objectives or otherwise to shield them. (First Philippine
International Bank, et al., v. Court of Appeals, G.R. No. 115849, January 24, 1996, citing various cases)

a. The principle requiring the piercing of the corporate veil mandates courts to see through the protective shroud that distinguishes one corporation from a seemingly separate one. When the notion of separate legal entity should be set aside and the factual truth upheld, the corporate character is not necessarily abrogated. It continues for other legitimate objectives. The veil is pierced only in certain instances in order to promote substantial justice (Pamplona Plantation, Inc. v. Tinghil, et al., G.R. No. 159121, February 3, 2005) and to thwart the fraudulent and illegal schemes of those who use the corporate personality as a shield for undertaking certain proscribed activities. (Velarde v. Lopez, Inc. G. R. No. 153886, January 14, 2004 citing Francisco Motors Corporation v. Court of Appeals, 309 SCRA 72 (1999)

d. When the corporate fiction is used as a shield to further an end subversive of justice; or for purposes that could not have been intended by the law that created it; or to defeat public convenience, justify wrong, protect fraud, or defend crime; or to perpetuate deception; or as an alter ego, adjunct or business conduit for the sole benefit of the stockholders. (ARB
Construction Co. Inc., et al., v. Court of Appeals, et al.,, G.R. No. 126554, May 31, 2000)

e. Two entities cannot be deemed separate and distinct where there is a showing that one is merely the continuation of the other, as where the second corporation merely continued the operations of the first corporation under the same owners, the same business venture, at the same address, and even continued to hire the same employees. (Avon Dale Garments, Inc.
vs. NLRC, et al., G.R. No. 117932, July 20, 1995)

f. Where badges of fraud exist, where public convenience is defeated; where a wrong is sought to be justified, the corporate fiction or the notion of legal entity should come to naught. (Lim v. Court of Appeals, et al., G.R. No. 124715, January 24,
2000)

10. Mr. Doggie owns 90% of the shares of the capital stock of ANIMAL Corporation. On one occasion, ANIMAL Corporation, represented by Mr. Doggie as President and General Manager, executed a contract to sell a subdivision lot in favor of Mr. Cow. For failure of ANIMAL Corporation to develop the subdivision, Mr. Cow filed an action for rescission and damages against ANIMAL Corporation and Mr. Doggie. Will the action prosper ? SUGGESTED ANSWER: The action will prosper against ANIMAL Corporation because it is the real party in interest. Mr. Doggie merely acted in representation of the corporation which has a personality distinct and separate from Mr. Doggie. The fact that Mr. Doggie owns 90% of the shares of ANIMAL Corporation is of no moment. Mere ownership by a single stockholder or by another corporation of all or nearly all of the capital stock of a corporation is not of itself sufficient ground for disregarding the separate corporate personality. (Sunio v.
NLRC, 127 SCRA 390,397-398 cited in Santos v. NLRC, et al., G.R. No. 101699, March 13, 1996; Lim v. Court of Appeals, et al., G.R. No. 124715, January 24, 2000)

g. Piercing the veil of corporate fiction is warranted, however, only in cases when the separate legal entity is used to defeat public convenience, justify wrong, protect fraud, or defend crime, such that in the case of two corporations, the law will regard the corporations as merged into one. (Velarde v. Lopez,
Inc. G. R. No. 153886, January 14, 2004 citing Tan Boon Bee & Co., Inc. v. Jarenao, 163 SCRA 205 (1988) and Yutivo Sons hardware Co. v. Court of Tax Appeals, 1 SCRA 160 (1961)

NOTES AND COMMENTS: a. Mere majority ownership of stocks of a corporation is not per se a cause for piercing the corporate veil. There must be evidence that the corporate entity was used to
commit fraud or to do wrong, that the corporate entity was merely a farce and that it was used as an alter ego, business conduit or instrumentality of a person or another entity or that piercing the

NOTES AND COMMENTS:

corporate fiction is necessary to achieve justice or equity. (Republic v. Sandiganbayan, etc., G.R. No. 128606, December 4, 2000) Mere ownership of a single or small group of stockholders of nearly all of the capital stock of the corporation is not, without more, sufficient to disregard the fiction of separate personality. (Union Bank of the Philippines v. Sps. Ong, et al, G. R. No. 152347, June 21, 2006)

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11. Plaintiffs filed a collection action against X Corporation. Upon execution of the courts decision, X Corporation was found to be without assets. Thereafter plaintiffs filed an action against its present and past stockholder Y corporation which owned substantially all of the stocks of X Corporation. The two corporations have the same board of directors and Y Corporation financed the operations of X Corporation. May Y Corporation be held liable for the debts of X Corporation ? Why ? SUGGESTED ANSWER: Yes. X and Y Corporation should be treated as one. It is clear that there is complete domination by Y of X, not only of the finances, but of policy and business practice. This is evident from the fact that Y owned substantially all the stocks of X, and that they have the same board of directors, which determines policy. NOTES AND COMMENTS: a. Tests in determining whether to pierce veil of corporate personality.
1) Control, not mere majority or complete stock control, but complete domination, not only of the 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 violation of a statutory or other positive legal duty, or dishonest and unjust act in contravention of plaintiffs legal right; 3) The aforesaid control and breach of duty must proximately prevent piercing the corporate veil. 4) The aforesaid control and breach of duty must proximately cause the injury or unjust loss complained of. (Velarde v. Lopez, Inc. G. R. No. 153886, January 14, 2004 citing Heirs of Ramon Durano, Sr., v. Uy, 344 SCRA 238 (2000) Moreover, to disregard the separate juridical personality of a corporation, the wrong-doing must be clearly and convincingly

established. It cannot be presumed. (Lim v. Court of Appeals, et al., G.R. No. 124715, January 24, 2000) 5) The defense of separateness will be disregarded where the business affairs of a subsidiary corporation are so controlled by the mother corporation to the extent that it becomes an instrument or agent of its parent. But even when there is dominance over the affairs of the subsidiary, the doctrine of piercing the veil of corporate fiction applies only when such fiction is used to defeat public convenience, justify wrong, protect fraud or defend crime. (Reynoso, IV v. Court of Appeals, et al., G.R. Nos. 116124-25, November 22, 2000)

b. Merely interlocking directorate does not justify piercing. The existence of interlocking directors, corporate officers
and shareholders is not enough justification to pierce the veil of corporate fiction in the absence of fraud or other public policy considerations. (Velarde v. Lopez, Inc. G. R. No. 153886, January 14, 2004)

12. What is the effect of a change in corporate name ? SUGGESTED ANSWER: It does not make a new corporation, whether effected by a special act or under a general law, it has no effect on the identity of the corporation, or on its property, rights, or liabilities. (Avon Dale Garments, Inc. vs. NLRC,
et al., G.R. No. 117932, July 20, 1995)

Define an ultra vires act. SUGGESTED ANSWER: It is an act which refers to a. one which is not within the corporate powers conferred by the Corporation Code or articles of incorporation b. or not necessary or incidental in the exercise of the powers so conferred. (Lopez Realty, Inc., et al., vs. Fontecha, et al.,
G.R. No. 76801, August 11, 1995)

13.

Providing gratuity pay for its employees is one of the express powers of the corporation under the Corporation Code. (Ibid.)

NOTES AND COMMENTS:

a. Consequences of ultra vires acts. An act of a corporation which is either illegal or outside of express, implied or incidental powers as so provided by law or the charter would be void under Article 5 of the Civil Code. The act is not susceptible to ratification, and an unauthorized act (if within corporate powers) of the board or a corporate officer, would only be unenforceable conformably with Article 1403 of the Civil

Code. (Rural Bank of Milaor, Camarines Sur v. Ocfemia, et al., G.R. No. 137686, February 8, 2000)

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14. What is capital ? How is it differentiated with subscribed capital and stock dividends ? What is meant by the trust fund doctrine ? SUGGESTED ANSWER: Capital refers to the value of the property or assets of a corporation. The subscribed capital is the total amount of the capital that persons (subscribers or shareholders) have agreed to take and pay for, which need not necessarily be, and can be more than, the par value of the shares. In fine, it is the amount that the corporation receives, inclusive of the premiums if any, in consideration of the original issuance of the shares. In the case of stock dividends, it is the amount that the corporation transfers from its surplus profit account to its capital account. It is the same amount that can loosely be termed as the trust fund of the corporation. The trust fund doctrine considers unpaid subscribed capital as a trust fund for the payment of the debts of the corporation, to which the creditors may look for satisfaction. Until the liquidation of the corporation, no part of the subscribed capital may be returned or released to the stockholder (except in the redemption of redeemable shares) without violating this principle. Thus, dividends must never impair the subscribed capital; subscription commitments cannot be condoned or remitted; nor an the corporation buy its own shares using the subscribed capital as the consideration therefore. (National
Telecommunications Commission v. Court of Appeals, et al., G.R. No. 127937, July 28, 1999)

c. To a proportionate share in the assets of the corporation upon liquidation; d. The right of appraisal; e. The preemptive right to shares; f. To inspect corporate books and records; g. To elect directors and to be elected as such; h. Such other rights as may contractually be granted to the stockholders by the corporation or by special law. NOTES AND COMMENTS: a. Stockholders of unpaid subscriptions have all the above rights of stockholders including right to vote.
However, if already declared delinquent, and the call for the unpaid subscription is issued with the expiration, the delinquent subscriber loses all of the above rights. b, Stockholders right to vote. 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 is a right inherent in and incidental to the ownership of corporate stock and as such is a property right. The stockholder cannot be deprived of the right 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, et al., v. Balinghasay, et al., G. R. No. 150976, October 18, 2004 citing Fletcher)

16. Corporate mergers take effect after SEC approval. (Associated Bank v. Court of Appeals, et al., G.R. No.
123793, June 29, 1998)

Another variation of the trust fund doctrine posits that any distribution of corporate assets as a consequence of corporate liquidation are considered as held in trust by the recipient stockholder for the benefit of the creditors of the corporation. State the rights of a stockholder. SUGGESTED ANSWER: a. To vote, including the right to appoint a proxy; b. To share in the profits of the corporation including the right to declare stock dividends, but an unpaid subscriber does not have a right to stock dividends;

15.

17. What is meant by the doctrine of corporate opportunity ? SUGGESTED ANSWER: Corporation could prohibit by rules election of director of competitor because such director might be privy to business secrets that may be passed on to the competitor. NOTES AND COMMENTS: a. Disloyalty of director. Where a director by virtue
of his office, acquires for himself a business opportunity which should belong to the corporation thereby obtaining profits to corporations prejudice. PENALTY: Director must account to the corporation for such profits by refunding the same even if he risked his own funds in the venture. WHEN NO REFUND: If the act is ratified by 2/3 vote of outstanding capital stock.

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18. Who is an independent director ? SUGGESTED ANSWER: An independent director means a person who, apart from his fees and shareholdings, is independent of management and free from any business or other relationship which could, or could reasonably be perceived to, materially interfere with his exercise of independent judgment in carrying our his responsibilities as a director in any corporation required to make periodic reports to the SEC. (SRC
Rule 38.1)

conducted at arms length and are immaterial. 38.1)

(SRC Rule

NOTES AND COMMENTS: a. An independent director includes among others a person who:
1) Is not a director or officer of the corporation or of its related companies or any of its substantial shareholders (other than as an independent director of any of the foregoing); 2) Is not a substantial shareholder of the corporation or its related companies or any of its substantial shareholders; 3) Is not a relative of any director, officer or substantial shareholder of the corporation, any of its related companies or any of its substantial shareholders. For this purpose, relatives includes spouse, parent, child, brother, sister, and the spouse of such child, brother or sister; 4) Is not acting as a nominee or representative of any director or substantial shareholder of the corporation, any of its related companies or any of its substantial shareholders; 5) Has not been employed in any executive capacity by that public company, any of its related companies or by any of its substantial shareholders within the last five (5) years; 6) Is not retained as professional adviser, by that public company, any of its related companies or any of its substantial shareholders within the last five (5) years; 7) Is not retained as professional adviser, by that public company, any of its related companies or by any of its substantial shareholders, either personally or through his firm; or 8) Has not engaged and does not engage in any transaction with the corporation or with any of its related companies or with any of its substantial shareholders, whether by himself or with other persons or through a firm of which he is a partner or a company of which he is a director or substantial shareholder, other than transactions which are

19. What are the conditions for a corporation to invest its funds in another corporation or business or for any other purpose than that stated in its primary purpose ? SUGGESTED ANSWER: a. Approval by a majority of the Board of Directors; b. Said approval is ratified by two-thirds of the stockholders representing the outstanding capital stock; c. Written notice of the proposed investment and the date, time and place of the stockholders' meeting at which such proposal will be taken up must be sent to each stockholder.
(Sec. 42, Corporation Code)

If the investment is in accord with the principal purposes only the approval of the Board of Directors is required. 20. On August 6, 1997, the Court of Appeals resolved to deny due course to a Petition for Certiorari filed by BA Savings Bank, on the ground that the Certification on anti-forum shopping incorporated in the petition was signed not by the duly authorized representative of the petitioner as required under Supreme Court Circular No. 28-91, but by its counsel, in contravention of said circular x x x. A Motion for Reconsideration was subsequently filed by BA Savings Bank which attached a Corporate Secretarys Certificate, dated August 14, 1997 which showed that a May 21, 1997 Resolution authorized its lawyers to represent it in any action or proceeding before any court, tribunal or agency; and to sign, execute and deliver the Certificate of Non-forum Shopping, among others. May the corporate lawyers execute the Certificate of Non-forum shopping ? Explain briefly. SUGGESTED ANSWER: Yes. The Board Resolution was sufficient to vest such persons with the authority to bind the corporation and was specific enough as to the acts they were empowered to do. (BA Savings Bank v. Sia, et al., G.R. No. 131214,
July 27, 2000)

NOTES AND COMMENTS:

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a. A corporation acts through its board, officers or agents. A corporation exercises the powers expressly conferred on it
by the Corporation Code and those that are implied by or are incidental to its existence, through its board of directors and/or its duly authorized officers and agents. Physical acts, like signing of documents, can be performed only by natural persons duly authorized for the purpose by corporate bylaws or by specific act of the board of directors. All acts within the powers of a corporation may be performed by agents of its selection; and except so far as limitations or restrictions which 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 once appointed, or members acting in their stead, are subject to the same rules, liabilities and incapacities as are agents of individuals and private persons. (BA Savings Bank v. Sia, et al., G.R. No. 131214, July 27, 2000)

e. When acts of corporate officers DO NOT bind the corporation. If the act of corporate officers comes within
corporate powers but it is not done without any express or implied authority therefor from the by-laws, board resolutions or corporate practices, such an act does not bind the corporation. (Rural Bank of Milaor, Camarines Sur v. Ocfemia, et al., G.R. No. 137686, February 8, 2000) This is specially true where the party with whom the corporate officer contract is aware of the latters limits of powers, in which case as far as the corporation is concerned, the unauthorized act is declared void under Article 1898 of the Civil Code, although susceptible to ratification by the corporate principal. This is so because any person dealing with corporate boards and officers may be said to be charged with the knowledge that the latter can only act within their respective limits of power, and he is put to notice accordingly. Thus, it would generally behoove such a person to look into the extent of the authority of corporate agents since the onus would ordinarily be with him. (Ibid.)

b.

Corporate officers may bind the corporation.

Corporate officers may act on such matters as may be authorized either expressly by the Bylaws or Board Resolutions or impliedly as such as by general practice or policy or as are implied by express powers. When officers are allowed to act in particular cases, their acts conformably therewith can bind the company. Hence, a corporate officer entrusted with general management and control of the business has the implied authority to act or contract for the corporation which may be necessary or appropriate to conduct the ordinary business. (Rural Bank of Milaor, Camarines Sur v. Ocfemia, et al., G.R. No. 137686, February 8, 2000)

Knowledge by agents of the corporation binds corporation. It is true that knowledge of facts acquired or
possessed by an officer or agent of the corporation in the course of his employment, and in relation to matters within the scope of his authority, is notice to the corporation, whether he communicates such knowledge or not. (Carrascoso, Jr. v. Court of Appeals, et al., G. R. Mo.123672, December 14, 2005 and companion case) However, the self-serving and uncorroborated statement of a corporate adversary to the effect that he advised several corporate directors of a particular transaction does not bind the corporatoion. (Ibid.)

c. Corporation may be estopped in questioning officers authority to enter into transactions. It is a familiar
doctrine that if a corporation knowingly permits one of its officers, or any other agent , to act within the scope of an apparent authority, it holds him out to the public as possessing the power to do those acts, and thus, the corporation will, as against anyone who has in good faith dealt with it through such agent, be estopped from denying the agents authority. (Lapulapu Foundation, Inc., et al., v. Court of Appeals, et al., G. R. No. 126006, January 29, 2004 citing Soler v. Court of Appeals, 358 SCRA 57 (2001) d. Source of authority to bind corporation. The authority of certain individuals to bind the corporation is generally derived from law, corporate by-laws or authorization from the board, either expressly or impliedly, by habit, custom or acquiescence in the general course of business. (Peoples Aircargo and Warehousing Corporation, Inc. v. Court of Appeals, 297 SCRA 170)

f. When UNAUTHORIZED acts of corporate officers BIND the corporation. 1) If ratified. The Board, acting within its

competence, may ratify the unauthorized act of the corporate officer. (Rural Bank of Milaor, Camarines Sur v. Ocfemia, et al., G.R. No. 137686, February 8, 2000) An action of the board of directors during a meeting, which was illegal for lack of notice, may be ratified either expressly, by the action of the directors in a subsequent legal meeting, or impliedly by the corporations subsequent course of conduct. (Lopez Realty, Inc., et al. vs. Fontencha, et al., G.R. No. 76801, August 11, 1995) 2) Under estoppel. So, too, a corporation may be held in estoppel from denying as against innocent third persons the authority of its officers or agents who have been clothed by it with ostensible or apparent authority. (Rural

Bank of Milaor, Camarines Sur v. Ocfemia, et al ., G.R. No. 137686, February 8, 2000) A corporation may be held to be in estoppel from denying as against third persons the authority of its officers or agents who have been clothed by it with ostensible or apparent authority. (Hydro Resources Contractors Corporation v. National Irrigation Administration, G. R. No. 160215, November 10, 2004) In both of the above instances the act must not be an ultra vires act. In order to be ratified or enforceable under estoppel, the unauthorized act of the corporate officer must be within the authorized corporate powers. Otherwise, the act if ultra vires would be void and not be the source of any rights and obligations. Of course, damages may be awarded to the aggrieved party if the corporation or the corporate officer misled the other party into believing that the act is a valid corporate act. Do not forget that there is a distinction between a valid corporate act but the officer is not authorized to bind the corporation, from one where the act is not a valid corporate act, and neither is the officer authorized to bind the corporation. In the last instance, there is no corporate liability.

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e. When 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; f. When he agrees to hold himself personally and solidarily liable with the corporation; or g. When he is made, by a specific provision of law, to personally answer for the corporate action. (FCY Construction
Group, Inc., et al. v. Court of Appeals, et al., G. R. No. 123358, February 1, 2000 citing Tramat Mercantile, Inc. et al., v. Court of Appeals, et al., 238 SCRA 14)

NOTES AND COMMENTS: a. When corporate officers liable. The general rule
is that officers of a corporation are not personally liable for their official acts unless it is shown that they have exceeded their authority. (ARB Construction Co., Inc., et al., v. Court of Appeals, et al., G. R. No. 126554, May 31, 2000) This is so because the corporation has a separate legal personality of its own. (Carag v. National Labor Relations Commission, et al., G. R. No. 147590, April 2, 2007)

20 A. P was removed as director and R was removed as director and corporate secretary of Nephro. P and R were incorporators of Nephro but questioned the plan of the other stockholders to enter into a joint venture with the Butuan Doctors Hospital and Clinic.

b. Meaning of bad faith to hold a director, trustee or officer personally liable. Bad faith is never presumed.
Bad faith does not connote bad judgment or negligence. Bad faith imports a dishonest purpose or some moral obliquity and conscious doing of a wrong, (Filipinas Port Services, Inc., etc., v. Go, et al., G. R No. 161886, March 16, 2007) a breach of a known duty through some ill motive or interest. bad faith partakes of the nature of fraud. (Ibid., citing Philippine Stock Exchange v .Court of Appeals, G. R. No. 125469, October 27, 1997, 281 SCRA 232; Carag v. National Labor Relations Commission, et al., G. R. No. 147590, April 2, 2007)

21. In what instances may corporate director, trustee or officer be held personally liable to the corporation? SUGGESTED ANSWER: a. When he willfully and knowing votes for or assents to patently unlawful acts of the corporation; b. When he is guilty of gross negligence or bad faith in directing the affairs of the corporation, c. When he acquires any personal or pecuniary interest in conflict with his duty as such director or trustee, (Sec. 31, Corp. Code) or d. When he is in conflict with the interest of the corporation resulting in damages to the corporation, its stockholders or other persons;

c. Bad faith does not arise automatically just because a corporation fails to comply with the notice requirement of labor laws on company closure or dismissal of employees. The failure to give notice is not an unlawful act
because the law does not define such failure as unlawful. Such failure to give notice is a violation of procedural due process but does not amount to an unlawful or criminal act. Such procedural defect is called illegal dismissal because it fails to comply with mandatory procedural requirements, but it is not illegal in the sense that it constitutes an unlawful or criminal act. (Carag v. National Labor Relations Commission, et al., G. R. No. 147590, April 2, 2007)

d. Patently unlawful acts are those declared unlawful by law which imposes penalties for commission of such unlawful acts. There must be a law declaring the act unlawful and penalizing the act. (Carag v. National Labor Relations
Commission, et al., G. R. No. 147590, April 2, 2007)

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e. Directors and/or officers not liable if the cause of losses is merely error in business judgment, not amounting to bad faith or negligence. (Filipinas Port Services,
Inc., etc., v. Go, et al., G. R No. 161886, March 16, 2007 citing Board of Liquidators v. Heirs of Maximo M. Kalaw, et al., G. R. No. L- 18805, August 15, 1967, 20 SCRA 987)

22. Are contracts entered into by a corporation with its directors, trustees, or officers valid ? SUGGESTED ANSWER: The general rule is that a contract entered into by a corporation with its directors, trustees, or officers is voidable at corporation's option. NOTES AND COMMENTS: a. The following are the instances where such contracts entered by a corporation with its directors, trustees, or officers are valid:
1) That the presence of such director or trustee in the board meeting in which the contract was approved was not necessary to constitute a quorum for such meeting; 2) That the vote of such director or trustee was not necessary for the approval of the contract; 3) That the contract is fair and reasonable under the circumstances; and 4) That in the case of an officer, the contract has been previously authorized by the board. (Sec. 32, Corporation Code) Where any of the first two conditions is absent, in the case of a contract with a director or trustee, such contract may be ratified by the vote of two-thirds (2/3) of the stock outstanding, or of two-thirds (2/3) of the stockholders present in a meeting called for the purpose: Provided, That full disclosure of the adverse interest of the trustee or director involved is made at such meeting, provided further that the contract is fair and reasonable under the circumstances. (Ibid.)

The raison detre behind the concentration in the board of directors of control over corporate powers of corporate business and of appointment of corporate officers and managers is efficiency in any large organization. Stockholders are too numerous, scattered and unfamiliar with the business of a corporation to conduct its business directly, And so the plan of corporate organization is for the stockholders to choose the directors who shall control and supervise the conduct of corporate business. (Filipinas Port Services, Inc., etc., v. Go, et al.,
G. R No. 161886, March 16, 2007)

NOTES AND COMMENTS: a. Sole authority of board of directors. With the

exception only of some powers expressly granted by law to stockholders (or members, in case of non-stock corporations), the board of directors (or trustees, in case of non-stock corporations) has the sole authority to determine policies, enter into contracts, and conduct the ordinary business of the corporation within the scope of its charter, i.e. its articles of incorporation, by-laws and relevant provisions of law. Verily, the authority of the board of directors is restricted to the Management of the regular business affairs of the corporation, unless more extensive power is expressly conferred. (Filipinas Port Services, Inc., etc., v. Go, et al., G. R No. 161886, March 16, 2007)

b. Courts bereft of authority to substitute its judgment with that of the board of directors. Questions of policy or of management are left solely to the honest decision of the board as the business manager of the corporation and the court is without authority to substitute its judgment for that of the board, and as long as it acts in good faith and in the exercise of honest judgment in the interest of the corporation, its orders are not reviewable by the courts. (Philippine Stock Exchange, Inc. v.
Court of Appeals, G. R. No. 125469, October 27, 1997, 281 SCRA 232 cited in Filipinas Port Services, Inc., etc., v. Go, et al., G. R No. 161886, March 16, 2007)

22-A. What is the governing body of a corporation ? Why ? SUGGESTED ANSWER: The governing body of a corporation is its board of directors. Unless otherwise provided in the Corporation Code, the corporate powers of all corporations formed under the Corporation Code shall be exercised, all business conducted and all property of the corporation shall be controlled and held by a board of directors. (Sec. 23, Corporation Code)

23. D is the stockholder of almost all the stockholdings in XYZ Corporation. XYZ owns a parcel of land which W claiming to have been authorized by D has offered to various parties the sale of the XYZ property. B acting on the representations of W made an offer to buy the land which W forwarded the offer to to D, who accepted Is the corporation bound by Ds acceptance ?

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SUGGESTED ANSWER: No. A corporation is a juridical person separate and distinct from its members or stockholders and is not affected by the personal rights, obligations and transactions of the latter. A corporation may contract only through its Board of Directors. While D owns almost of the shares of stock of XYZ, the property of the corporation is not the property of a stockholder. The corporate Board of Directors should authorize the party who should negotiate for it for such negotiations to be binding upon the corporation. (Litonjua, et al., v. Eternit Corporation, et al., G. R.
No. 144805, June 8, 2006)

laws. There were two reasons advanced by the Supreme Court for
not so ruling: 1) There is absence of showing of as to the true nature and functions of said executive committee considering that the executive committee referred to in Section 35 of the Corporation Code is as powerful as the board of directors and in effect acting for the board itself, as distinguished from other committees which are within the competency of the board to create at any time and whose actions require ratification and confirmation by the board. 2) the board of directors has the power to create positions not provided for in the by-laws since the board is the corporations governing body, upholding thereby the power of the board to exercise its prerogatives in managing the business affairs of the corporation. (Filipinas Port Services, Inc., etc., v. Go, et al., G. R No. 161886, March 16, 2007)

23-A. What is the nature of an executive committee ? SUGGESTED ANSWER: The executive committee is as powerful as the board of directors and in effect acting for the board itself. It should be distinguished from the other committees which are within the competency of the board to create at any time and whose actions require ratification and confirmation by the board. (Filipinas Port Services, Inc., etc., v. Go, et al., G. R No.
161886, March 16, 2007) The by-laws of a corporation may create an executive committee, composed of not less than three members of the board, to be appointed by the board. Said committee may act, by majority vote of all its members on such specific matters within the competence of the board, as may be delegated to it in the by-laws or on a majority vote of the board, except with respect to: 1) approval of any action for which shareholders approval is also required; 2) the filling of vacancies in the board; 3) the amendment or repeal of by-laws or the adoption of new by-laws; 4) the amendment or repeal of any resolution of the board which by its express terms is not so amendable or repealable; and 5) a distribution of cash dividends to the shareholders. (Sec. 35, Corporation Code, arrangement supplied)

c. RTC has the discretion to grant or deny an application for the creation of a management committee.
This was part of the former powers of the SEC, under P. D .No. 902-A, which were transferred to the RTC through Rep. Act No. 8799. (Punongbayan v. Punongbayan, Jr., G. R. No. 157671, June 20, 2006)

NOTES AND COMMENTS: a. The executive committee.

b. Supreme Court did not rule as illegal or unlawful the creation by the board of directors of an executive committee notwithstanding the silence in the by-

24. Dico is the registered owner of Proprietary Ownership Certificate (POC) No. 0668 in the Cebu Country Club. Subsequently, he resigned as proprietary member of said club, which resignation was duly entered in the minutes of the meeting of the Clubs Board of Directors. Dico then transferred the POC to Garcia. In a case filed by the spouses Atinon against Dico, the prevailing spouses levied on the POC and a schedule for public auction was set. Garcia then claimed that the POC was his. He further alleged that Dico is the manager of his (Garcias) business, and that the POC was merely used by Dico in order to assist him in entertaining clients. Who has a better right to the POC, the spouses Atinon or Garcia? Explain. SUGGESTED ANSWER: The spouses Atinon have a better right. The transfer was not recorded in the corporate books, hence it does not bind other parties. (Garcia v. Jomoaud,
et al., G.R. No. 133969, January 26, 2000)

NOTES AND COMMENTS:

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a. The operative act which determines ownership of shares of stocks. The transfer of shares of stocks in corporate
books require indorsement on the shares. If not so indorsed, presumption is that person whose name appears thereon is the owner. (Razon v. Intermediate Appellate Court, 207 SCRA 234)

shares from the lawful owner to the new transferee. (Bitong, v. Court of Appeals, et al., 281 SCRA 503)

d. Reason why attachment prevails over unrecorded transfer. Sec. 63 of the Corporation Code is explicit in
its provisions that No transfer, however, shall be valid, except as between the parties, until the transfer is recorded in the books of the corporation showing the names of the parties to the transaction, the date of the transfer, the number of the certificate or certificates and the number of shares transferred. The true meaning of the language is, and the obvious intention of the legislature in using it was, that all transfers of shares should be entered, as here required, on the books of the corporation. And it is equally clear that all transfers of shares be so entered are invalid as to attaching or execution creditors of the assignors, as well as to the corporation and to subsequent purchasers in good faith, and, indeed, as to all persons interested, except the parties to such transfers. All transfers not so entered on the books of the corporation are absolutely void; not because they are without notice or fraudulent in law or fact, but because they are made so void by statute. (Garcia v. Jomouad, et al., G.R. No. 133969, January 26, 2000 citing Uson v. Diosomito)

Requirements for the issuance of a formal certificate of stock.

1) The certificates must be signed by the president or vicepresident, countersigned by the secretary or assistant secretary, and sealed with the seal of the corporation. A mere typewritten statement advising a stockholder of the extent of his ownership in a corporation without qualification and/or authentication cannot be considered as a formal certificate of stock. 2) Delivery of the certificate is an essential element of its issuance. Hence, there is no issuance of a stock certificate where it is never detached from the stock books although blanks therein are properly filled up, if the person whose name is inserted therein has no control over the books of the company. 3) The par value, as to par value shares, or the full subscription as to no par value shares, must first be fully paid. 4) The original certificate must be surrendered where the person requesting the issuance of a certificate is a transferee from a stockholder. (Bitong v. Court of Appeals, et al., 291 SCRA 503) Stock issued without authority and in violation of law is void and confers no rights on the person to whom it is issued and subjects him to no liabilities. Where there is an inherent lack of power in the corporation to issue the stock, neither the corporation nor the person to whom the stock is issued is estopped to question its validity since an estoppel cannot operate to create stock which under the law cannot have existence. (Bitong v. Court of Appeals, et al., 281 SCRA 503)

b.

stocks:

c.

Requirements for valid transfer of

1) There must be a delivery of the stock certificate; 2) The certificate must be endorsed by the owner or his attorney-in-fact or other persons legally authorized to make the transfer; and 3) To be valid against third parties, the transfer must be recorded in the books of the corporation. The rule is that the endorsement of the certificate of stock by the owner or his attorney-in-fact or any other person legally authorized to make the transfer shall be sufficient to effect the transfer of shares only if the same is coupled with delivery. The delivery of the stock certificate duly endorsed by the owner is the operative act of transfer of

24. Distinguish cash dividends from stock dividends. SUGGESTED ANSWER: a. Cash dividends withdraw assets from the corporation in the form of cash (money) and near cash WHILE stock dividends do not; b. In cash dividends, money is received by the stockholders WHILE in stock dividends shares of stock of the corporation are received; c. Cash dividends may be declared by the Board alone WHILE stock dividend declaration requires the approval of at least two-thirds (2/3) of the outstanding capital stock entitled to vote. NOTES AND COMMENTS: a. Similarities between cash dividends and stock dividends:
1) Both must be declared from unrestricted surplus. 2) Both must be declared by the Board of Directors. b. Dividend declaration may be revoked if the same was irregularly declared, such as when the same is violative of the trust fund doctrine.

Otherwise it can no longer be revoked once the right thereto has already vested in the stockholders. Stated otherwise, revocation may be had prior to the declaration of cash dividends and for stock dividends prior to the issuance.

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25. Litton Mills, Inc. (Litton) entered into an agreement with Empire Sales Philippines Corporation, as local agent of Gelhaar Uniform Company (Gelhaar), a corporation organized under the laws of the United States, whereby Litton agreed to supply Gelhaar 7,770 dozens of soccer jerseys. Considering this single transaction, is Gelhaar doing business in the Philippines? SUGGESTED ANSWER: Yes. It is not really the fact that there is only a single act done that is material to the consideration of whether a foreign corporation is doing business in the Philippines. Where a single act or transaction of a foreign corporation is not merely incidental or casual but is of such character as distinctly to indicate a purpose on the part of the foreign corporation to do other business in the state, such act will be considered as constituting doing business. Gelhaars act in purchasing soccer jerseys to be within the ordinary course of business of the company considering that it was engaged in the manufacture of uniforms. The acts noted above are of such a character as to indicate a purpose to do business. (Litton Mills, Inc. v. Court of Appeals, et al., G.R. No. 94980,
May 15, 1996)

home office is clearly doing business in this country. (Georg Grotjahn GMBH & Co. vs. Isnani, et al., 235 SCRA 216) 2) Participating in the bidding process constitutes doing business because it shows the foreign corporations intention to engage in business here. The bidding for the concession contract is but an exercise of the corporations reason for creation or existence. Thus, it has been held that a foreign company invited to bid for IBRD and ADB international projects in the Philippines will be considered as doing business in the Philippines for which a license is required. In this regard, it is the performance by a foreign corporation of the acts for which it was created, regardless of volume of business, that determines whether a foreign corporation needs a license or not. (Hutchinson Ports Philippines Limited v. Subic Bay Metropolitan Authority, et al., G.R. No. 131367, August 31, 2000)

NOTES AND COMMENTS: a. Doing business. There is no general rule or governing

principle ;laid down as to what constitutes doing or engaging in or transacting business in the Philippines. Each case must be judged in the light of its peculiar circumstances. Thus, it has often been held that a single act or transaction may be considered as doing business when a corporation performs acts for which it was created or exercises some of the functions for which it was organized. The amount or volume of the business is of no moment, for even a singular act cannot be merely incidental or casual if it indicates the foreign corporations intention to do business. (Hutchinson Ports Philippines Limited v. Subic Bay Metropolitan authority, et al., G.R. No. 131367, August 31, 2000)

Examples:
1) A foreign corporation performing acts pursuant to its primary purpose and functions as regional/area headquarters for its

26. On 25 May 1995, a Lease and Development Agreement was executed by UIG and SBMA under which UIG shall lease from petitioner SBMA the Binictican Golf Course and appurtenant facilities thereto to be transformed into a world class 18-hole golf course, golf club/resort, commercial tourism and residential center. The contract in pertinent part contains pre-termination clauses. On 7 March 1997, SBMA sent a letter to UIG declaring the latter in default of its contractual obligations to SBMA under Section 22.1 of the lease and Development Agreement and required it to show cause why SBMA should not preterminate the agreement. UIG then paid the rental arrearages but the other obligations remained unsatisfied. On 8 September 1997, a letter of pre-termination was served by SBMA requiring UIG to vacate the premises. On 12 September 1997, SBMA served the formal notice of closure of Subic Bay Golf Course and took over possession of the subject premises. On even date, UIG filed a complaint against SBMA for Injunction and Damages with prayer for a writ of temporary restraining order and writ of preliminary injunction. Does UIG have the capacity to sue? SUGGESTED ANSWER; Yes. SBMA is estopped from questioning the capacity to sue of UIG. In entering into the LDA with UIG, SBMA effectively recognized its personality and capacity to institute the suit before the trial court. It is common ploy of defaulting local companies which are sued by unlicensed foreign companies not engaged in

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business in the Philippines to invoke lack of capacity to sue.

(Subic Bay Metropolitan Authority, et al., v. Universal International Group of Taiwan, et al., G.R. No. 131680, September 14, 2000)

This doctrine of estoppel was initiated as early as 1924 in Asia Banking Corporation v. Standard Products and reiterated in Georg Grotjohn GMBH v. Isnani and Communication Materials and Design v. CA. NOTES AND COMMENTS; a. General rule: Unlicensed foreign non-resident corporations cannot file suits in the Philippines. Section 133 of
the Corporation Code specifically provides that, No foreign corporation transacting business in the Philippines without a license, or its successors or assigns, shall be permitted to maintain or intervene in any action, suit or proceeding in any court or administrative agency of the Philippines, but such corporation may be sued or proceeded against before Philippine courts or administrative tribunals on any valid cause of action recognized under Philippine laws. Reason: A corporation has legal status only within the state or territory in which it was organized. For this reason, a corporation organized in another country has no personality to file suits in the Philippines unless it acquires a license from the SEC and appoint an agent for service of process. Without such license it cannot institute suit in the Philippines. (European Resources and Technologies, Inc., et a., v. Ingenieruburo Birkhahn + Nolte, etc., et al., G. R. 159586, July 26, 2004 citing Subic Bay Metropolitan Authority, et al., v. Universal International Group of Taiwan, et al., G.R. No. 131680, September 14, 2000)

Philippines Limited v. Subic Bay Metropolitan Authority, et al ., G.R. No. 131367, August 31, 2000) The object of requiring a license is not to prevent the foreign corporation from performing single acts, but to prevent it from acquiring domicile for the purpose of business without taking the steps necessary to render it amenable to suits in the local courts. (European Resources and Technologies, Inc., et a., v. Ingenieruburo Birkhahn + Nolte, etc., et al., G. R. 159586, July 26, 2004 citing Marshall-Wells Co. v. Elser and Co., 46 Phil.70 (1924) In other words, the foreign corporation is merely prevented from being in a position where it takes the good without accepting the bad. (European Resources and Technologies, Inc., et a., v. Ingenieruburo Birkhahn + Nolte, etc., et al., G. R. 159586, July 26, 2004)

d. Exception or instance where licensing requirement not applied. Requirement for foreign corporations to secure license
was never intended to favor domestic corporations who enter into solitary transactions with unwary foreign firms and then repudiate their obligations simply because the latter are not licensed to do business in this country. (National Sugar Trading Corporation, et al., vs. Court of Appeals, et al., G.R. No. 110910, July 17, 1995) After contracting with a foreign corporation, a domestic firm is estopped from denying the formers capacity to sue. Hence, in Merrill Lynch Futures v. CA, the Supreme Court ruled that, One who has dealt with a corporation of foreign origin as a corporate entity is estopped to deny its existence and capacity. The principle will be applied to prevent a person contracting with a foreign corporation from later taking advantage of its noncompliance with the statutes, chiefly in cases where such person has received the benefits of the contract. x x x (Subic Bay Metropolitan Authority, et al., v. Universal International Group of Taiwan, et al., G.R. No. 131680, September 14, 2000) A 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 corporation 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 commodatum ex injuria sua non habere debet no person ought to derive any advantage from his own wrong. (European Resources and Technologies, Inc., et a., v. Ingenieruburo Birkhahn + Nolte, etc., et al., G. R. 159586, July 26, 2004)

b. However, foreign corporations not licensed to do

business in the Philippines may exercise the right to file an action in Philippine courts on an isolated transaction. (New York Marine Managers, Inc. vs. Court of Appeals, G.R. 111837, October 24, 1995)

c. The purpose for requiring foreign firms to obtain license. The primary purpose of the license requirement is to compel
a foreign corporation desiring to do business within the Philippines to submit itself to the jurisdiction of the courts of the state and to enable the government to exercise jurisdiction over them for the regulation of their activities in this country. If a foreign corporation operates a business in the Philippines without a license, and thus does not submit itself to the Philippine laws, it is only just that said foreign corporation be not allowed to invoke them in our courts when the need arises. It must register with the SEC and appoint an agent for service of process. Without such license, it cannot institute a suit in the Philippines (Hutchinson Ports

27. What act is constitutive of a dissolution of a corporation ? SUGGESTED ANSWER: The mere filing of the Articles of Dissolution with the Securities and Exchange Commission, without more, is not enough to support the conclusion that actual

79

dissolution of an entity took place. For example, there must be a showing that there was indeed an actual closure and cessation of operations. (Avon Dale Garments, Inc., vs. NLRC, et al., G.R. No.
117932, July 20, 1995) A corporation continues to be a body corporate for three (3) years after its dissolution for purposes of prosecuting and defending suits by and against it and for enabling it to settle and close its affairs, culminating in the disposition and distribution of its remaining assets. It may, during the three (3) year term, appoint a trustee or a receiver who may act beyond that period. The termination of the life of a juridical entity does not by itself cause extinction or diminution of the rights and liabilities of such entity., nor those of its owners and creditors. If the three-year extended life has expired without a trustee or receiver having been expressly designated by the corporation within that period,, the board of directors (or trustees) itself, may be permitted to continue as trustees by legal implication to complete the corporate liquidation. Still in the absence of a board of directors or trustees, those having any pecuniary interest in the assets, including not only the shareholders but likewise the creditors of the corporation, acting for and its behalf, might make proper representations with the Securities and Exchange Commission, which has primary and sufficient broad jurisdiction in matters of this nature, for working out a final settlement of the corporate concerns. (Clemente, et al., vs. Court of Appeals, et al., G.R. No. 82407, March 27, 1995)

NOTES AND COMMENTS: a. Three (3) year period after dissolution.

principle among as many candidates as the voter shall see fit, PROVIDED: the total number of votes cast shall not exceed the number of shares shown on the books multiplied by the whole numbers of directors to be voted.

b. The Securities Regulation Code (R.A. No. 8799) 1. What is the state policy that impelled the enactment of the Securities Regulation Code ? SUGGESTED ANSWER: The State policy that impelled the enactment of the Securities Regulation Code a. To establish a socially conscious, free market that regulates itself, b. Encourage the widest participation of ownership in enterprises, c. Enhance the democratization of wealth, d. Promote the development of the capital market, e. Protect investors, f. Ensure full and fair disclosure about securities, g. Minimize if not totally eliminate insider trading and other fraudulent or manipulative devices and practices which create distortions in the free market. (Sec. 2, SRC) NOTES AND COMMENTS: The above discussion may be
used to answer the questions What is the principal purpose of laws and regulations governing securities in the Philippines ? and What are the main purposes of the Securities Regulation Code ?

Grounds for involuntary dissolution of a corporation under quo warranto proceedings:

1) When the Corporation has offended against a provision or an act for its creation or renewal; 2) When it has forfeited its privileges and franchises by nonuse; 3) When it has committed or omitted an act which amounts to a surrender of its corporate rights, privilege or franchises; 4) When it misused a right, privilege or franchise conferred upon it by law, or when it has exercised a right, privilege or franchise in contravention of law. (Philippine National Bank vs. CFI, etc., 209 SCRA 294)

b.

What is the cumulative rule ? SUGGESTED ANSWER: One candidate may be given as many votes as the number of directors to be elected multiplied by the number of shares or distribute under the same

28.

2. What are the powers and functions of the Securities and Exchange Commission ? SUGGESTED ANSWER: The Commission shall have the powers and functions provided by the Securities Regulation Code, Presidential Decree No. 902-A, the Corporation Code, the Investment Houses Law, the Financing Company Act and other existing laws. Pursuant thereto, the Commission shall have, among others, the following powers and functions: a) Have jurisdiction and supervision over all corporations, partnerships or associations who are the grantees of primary franchises and/or a license or permit issued by the Government.

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b) Formulate policies and recommendations on issues concerning the Securities market, advise Congress and other government agencies on all aspects of the securities market and propose legislation and amendments thereto; c) Approve, reject, suspend, revoke or require amendments to registration statements, and registration and licensing applications; d) Regulate, investigate or supervise the activities of persons to ensure compliance; e) Supervise, monitor, suspend or take over the activities of exchanges, clearing agencies and other SROs; f) Impose sanctions for the violation of laws and the rules, regulations and orders issued pursuant thereto; g) Prepare, approve, amend or repeal rules, regulations and orders, and issue opinions and provide guidance on and supervise compliance with such rules, regulations and orders; h) Enlist the aid and support of and/or deputize any and all enforcement agencies of the Government, civil or military as well as any private institution, corporation, firm, association or person in the implementation of its powers and functions under this Code; i) Issue cease and desist orders to prevent fraud or injury to the investing public; j) Punish for contempt of the Commission, both direct and indirect, in accordance with the pertinent provisions of and penalties prescribed by the Rules of Court; k) Compel the officers of any registered corporation or association to call meetings of stockholders or members thereof under its supervision; l) Issue subpoena duces tecum and summon witnesses to appear in any proceedings of the Commission and in appropriate cases, order the examination, search and seizure of all documents, papers, files and records, tax returns, and books of accounts of any entity or person under investigation as may be necessary for the proper disposition of the cases before it, subject to the provisions of existing laws; m) Suspend, or revoke, after proper notice and hearing the franchise or certificate of registration of corporations, partnerships or associations, upon any of the grounds provided by law; and

n) Exercise such other powers as may be provided by law as well as those which may be implied from, or which are necessary or incidental to the carrying out of, the express powers granted the Commission to achieve the objectives and purposes of these laws. (Sec. 5.1, SRC) What is the jurisdiction of the SEC over intra-corporate controversies ? SUGGESTED ANSWER: SEC has been divested of its jurisdiction over all cases enumerated under Section 5 of Presidential Decree No 902-A was transferred to the Courts of general jurisdiction or the appropriate Regional Trial Court. (Sec. 5.2 SRC), including intra-corporate controversies such as election or appointment of directors, trustees, officers, or managers of corporations, partnerships, or associations. NOTES AND COMMENTS: a. The holding in Velarde v. Lopez, Inc., that SEC has jurisdiction is NOT doctrinal because at the time the case was filed with the RTC on August 18, 1998 before the approval of the SRC on July 19, 2000. However, the other
doctrines still find application such as the following: Sec. 5 (c), of P.D. 902-A (as amended by R. A. 8799, the Securities Regulation Code) (Controversies in the election or appointments of directors, trustees, officers or managers of such corporations, partnerships or associations) applies to corporate officers dismissal. For a corporate officers dismissal is always a corporate act and/or an intra-corporate controversy and that its nature is not altered by the reason or wisdom which the Board of Directors may have in taking such action. (Velarde v. Lopez, Inc. G. R. No. 153886, January 14, 2004 citing Ongkiko v. National Labor Relation Commission, 270 SCRA 613 (1997) likewise citing other cases) Even if the complaint by a corporate officer includes money claims since such claims are actually part of the prerequisite of his position and, therefore interlinked with his relations with the corporation. (Ibid.) The question of remuneration involving a person who is not a mere employee but a stockholder and officer of the corporation is not a simple labor problem but a matter that comes within the area of corporate affairs and management, and is in fact a corporate controversy in contemplation of the Corporation Code. (Velarde citing Dy v. National Labor Relations Commission, 145 SCRA 211) Thus, the appropriate RTC would have jurisdiction.

3.

4. What are the civil cases involving corporations, partnerships, or associations relations which fall within the jurisdiction of the regular courts ? SUGGESTED ANSWER: These are the civil cases involving the following: a. Devices or schemes employed by, or any act of, the board of directors, business associates, officers or partners, amounting to fraud or misrepresentation which may be detrimental to the interest of the public and/or of the stockholders, partners, or members of any corporation, partnership, or association; b. Controversies arising out of intra-corporate, partnership, or association relations between and among stockholders, members, or associates; and between, any or all of them and the corporation, partnership, or association of which they are stockholders, members, or associates, respectively; c. Controversies in the election or appointment of directors, trustees, officers, or managers of corporations, partnerships, or associations; d. Derivative suits; and e. Inspection of corporate books. (Sec. 1, Rule 1, Interim
Rules of Procedure Governing Intracorporate Controversies under R. A. No. 8799)

81

2) Those between and among stockholders and members, on one hand, and the corporation, on the other hand; and 3) Those between the corporation and the State but only insofar as its franchise or right to exist as an entity is concerned. The SECOND test, focuses on the nature of the controversy itself. Recent decisions of the Supreme Court consider not only the subject of their controversy but also the status of the parties. (Pascual, et al., v. Court of Appeals, et al., G.
R. No. 138542, August 25, 2000)

NOTES AND COMMENTS: a. No corporate relation where a corporate officer holds

in trust for another person his corporate interests. Thus, where a stockholders properties are being litigated, there would be no corporate relation where it is alleged that upon the death of the stockholder, his heir became a co-owner of the estate left by him including his corporate interests. (Pascual, supra)

b. Supervisory authority of SEC over corporate ends

where the property has been completely dissolved. (Pascual, supra)

NOTES AND COMMENTS: a. RTC has the power to create a management committee. RTC has the discretion to grant or deny an application
for the creation of a management committee. This was part of the former powers of the SEC, under P. D .No. 902-A, which were transferred to the RTC through Rep. Act No. 8799. (Punongbayan v. Punongbayan, Jr., G. R. No. 157671, June 20, 2006)

5. What are the tests to determine whether a controversy is intracorporate or not ? SUGGESTED ANSWER: Sec. 5 (b) of P.D. No. 902-A does not define what an intra-corporate controversy is, but case law has fashioned two tests: The FIRST test uses the enumeration in Sec. 5 (b) of the relationships to determine jurisdiction, to wit: 1) Those between and among stockholders and members;

Explain the concept of a derivative suit. SUGGESTED ANSWER: An individual is permitted to institute a derivative suit a. on behalf of the corporation b. wherein he holds stock in order c. to protect or vindicate corporate rights, d. whenever the officials of the corporation refuse to sue, or are the ones to be sued or hold the control of the corporation. In such actions, the suing stockholder is regarded as the nominal party, with the corporation as the real party in interest.
(Gamboa v. Victoriano, 90 SCRA 40, 47 cited in First Philippine International Bank, et al., v. Court of Appeals, et al., G. R. No. 115849, January 24, 1996; Filipinas Port Services, Inc., etc., et al., v. Go, et al., G. R. No. 161886, March 16, 2007)

6.

NOTES AND COMMENTS: a. Alternative definition. A derivative action is a suit

by a stockholder/member to enforce a corporate cause of action. [ R. M. Symaco Corporation v. Santos, 467 SCRA 312 (2005)] b. Nature of derivative suit. Where corporate directors are guilty of a breach of trust, not of mere error of judgment or abuse of discretion, and intra-corporate remedy is futile or useless,

a stockholder may institute a suit in behalf of himself and other stockholders and for the benefit of the corporation, to bring about a redress of the wrong inflicted directly upon the corporation and indirectly upon the stockholders. The stockholders right to institute a derivative suit is not based on any express provision of the Corporation Code but is impliedly recognized when the law makes corporate directors or officers liable for damages suffered by the corporation and is stockholders for violation of their fiduciary duties. In effect, the suit is an action for specific performance of an obligation owed by the corporation to the stockholders to assist its rights of action where the corporation has been put in default by the wrongful refusal of the directors or management to make suitable measures for its protection. c. Basis of derivative suit. The basis of a stockholders suit is always one of equity. However, it cannot prosper without first complying with the legal requirements for its institution, The moist important of these is the bona fide ownership by a stockholder of a stock in his own right at the time of the transaction complained of which invests him with standing to institute a derivative action for the benefit of the corporation. d. Purpose of d derivative suit. To allow the stockholder/member to enforce rights which are derivative (secondary) in nature. R. M. Symaco Corporation v. Santos, 467 SCRA 312 (2005)]

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c. No appraisal rights are available for the act or acts complained of; and d. The suit is not a nuisance or harassment suit .
(Sec. 1, Rule 8, Interim Rules of Procedure Governing Intra-Corporate Controversies under R. A. No. 8799)

e. The cause of action actually devolves on the corporation, the wrongdoing or harm having been, or being caused to the corporation and not to the particular stockholder bringing the suit. (Filipinas Port Services, Inc., etc., et al., v. Go, et
al., G. R. No. 161886, March 16, 2007 citing San Miguel Corporation, etc., v. Khan, G. R. No. 85339, August 11, 1989, 176 SCRA 447, 462)]

7-A. Does the approval by the Securities and Exchange Commission (SEC) of the Rehabilitation Plan and the appointment of a receiver submitted by a petitioner for rehabilitation impair a secured creditors lien over the mortgage properties ? SUGGESTED ANSWER: No. The law provides that upon appointment of a management committee, rehabilitation receiver, board or body pursuant to this Decree, all actions for claims against corporations, partnerships or associations under management or receivership pending before any court, tribunal, board or body shall be suspended. [Sec. 6 (c), Pres. Decree No.
902-A]

What are the requisites of a derivative suit ? SUGGESTED ANSWER: A stockholder or member may bring an action in the name of a corporation or association, as the case may be, provided, that: a. He was a stockholder or member at the time the acts or transactions subject of the action occurred and at the time the action was filed; [The number of shares not being material
(Filipinas Port Services, Inc., etc., et al., v. Go, et al., G. R. No. 161886, March 16, 2007 citing San Miguel Corporation, etc., v. Khan, G. R. No. 85339, August 11, 1989, 176 SCRA 447, 462)]

7.

The creditors preferred status over the unsecured creditors relative to the mortgage is retained, it is the enforcement of such preference that is suspended. (Metropolitan
Bank & Trust Company v. ASB Holdings, Inc., et al., G. R. No. 166197, February 27, 2007)

NOTES AND COMMENTS: a. Approval of the Rehabilitation Plan and the appointment of a rehabilitation receiver merely suspend the claims against the corporation sought to be rehabilitated.
The loan agreements between the corporation sought to be rehabilitated and its creditors have not been set aside and the secured creditors may still enforce their preference over the assets of the corporation sought to be rehabilitated. They may still enforce their preferential lien when the assets of the corporation will be liquidated. Considering that the provisions of the loan agreement are merely suspended, there is no impairment of contracts specifically the lien in the mortgaged properties. (Metropolitan Bank & Trust Company v. ASB Holdings, Inc., et al., G. R. No. 166197, February 27, 2007)

b. He exerted all reasonable efforts, and alleges the same with particularity in the complaint, to exhaust all remedies available under the articles of incorporation, by-laws, laws or rules governing the corporation or partnership to obtain the relief he desires; [Has made a demand on the board of directors for the
appropriate relief but the latter has failed or refused to heed is plea (Filipinas Port Services, Inc., etc., et al., v. Go, et al., G. R. No. 161886, March 16, 2007 citing San Miguel Corporation, etc., v. Khan, G. R. No. 85339, August 11, 1989, 176 SCRA 447, 462)]

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b. Rationale for the suspension of claims against the corporation sought to be rehabilitated. This arrangement provided by law is intended to give the receiver a chance to rehabilitate the corporation if there should still be a possibility for doing so, without being unnecessarily disturbed by the creditors action against the distressed corporation. However, in the event that rehabilitation is no longer feasible and the claims against the distressed corporation would eventually have to be settled, the secured creditors shall enjoy preference over the unsecured creditors. (Rizal Commercial
Banking Corporation v. Intermediate Appellate Court, G. R. No. 74851m December 9, 1999, 320 SCRA 279 cited in Metropolitan Bank & Trust Company v. ASB Holdings, Inc., et al., G. R. No. 166197, February 27, 2007)

8. What is a public company ? SUGGESTED ANSWER: Any corporation a) with a class of equity securities listed on an Exchange or b) with assets in excess of Fifty Million Pesos (P50,000,000.00) and having two hundred (200) or more holders, at least two hundred (200) of which are holding at least one hundred (100) shares of a class of its equity securities.
(SRC Rule 3.1.i)

7 B. What is the purpose of corporate rehabilitation proceedings ? Explain briefly. SUGGESTED ANSWER: The purpose of rehabilitation proceedings is to enable the company to gain new lease on lie and thereby allows creditors to be paid their claims from its earnings. [Metropolitan Bank & Trust Company v. ASB Holdings, Inc.,
et al., G. R. No. 166197, February 27, 2007 citing Rubberworld (Phils.), Inc. v. National Labor Relations Commission, G. R. No. 126773, April 14,1999, 305 SCRA 721]

9. What is a Self Regulatory Organization or SRO ? SUGGESTED ANSWER: An organized Exchange, registered clearing agency and any organization or association registered as an SRO under the provisions of the Securities Regulation Code to enforce compliance with relevant provisions of the Code and rules and regulations adopted thereunder, and mandated to make and enforce its own rules, which have been approved by the Securities and Exchange Commission, by their members and/or participants. (SRC Rule 3.1.j) 10. What is a fraudulent transaction ? SUGGESTED ANSWER: The purchase of sale of any securities to engage in any act, transaction, practice, or course of business which operates or would operate as a fraud or deceit upon any person. Fraud here is akin to bad faith which implies a conscious and intentional design to do a wrongful act for a dishonest purpose or moral obliquity; it is unlike that of the negative idea of negligence in that fraud or bad faith contemplates a state of mind affirmative operating with furtive objectives. (Securities and
Exchange Commission vs. Court of Appeals, et al., G.R. Nos. 106425 & 106431-32, July 21, 1995)

NOTES AND COMMENTS: a. Rehabilitation does not dissolution of the distressed corporation.

contemplate

Rehabilitation contemplates a continuance of corporate life and activities in an effort to restore and reinstate the financially distressed corporation to its former position of successful operation and solvency. (Metropolitan Bank & Trust Company v. ASB Holdings, Inc., et al., G. R. No. 166197, February 27, 2007 citing Ruby Industrial Corporation v. Court of Appeals, G. R. Nos. 124185-87, January 20, 1998, 284 SCRA 445) This is in consonance with the States objective to promote a wider and more meaningful equitable distribution of wealth to protect investments and the public. (Ibid., citing P. D. 902-A, as amended ,first Whereas clause) Approval of the Rehabilitation Plan is in furtherance of the rationale behind P.D. No. 902-A, as amended which is to effect a feasible and viable rehabilitation (Ibid., citing Rizal Commercial Banking Corporation v. Intermediate Appellate Court, G. R. No. 74581, September 14,1992, 213 SCRA 830)of ailing corporations which affect the public welfare.

What are considered as manipulative practices relative to securities trading ? SUGGESTED ANSWER: It shall be unlawful for any person acting for himself or through a dealer or broker, directly or indirectly: a) To create a false or misleading appearance of active trading in any listed security traded in an Exchange or any other trading market:

11.

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(i) By effecting any transaction in such security which involves no change in the beneficial ownership thereof; (ii) By entering an order or orders for the purchase or sale of such security with the knowledge that a simultaneous order or orders of substantially the same size, time or prize, for the sale or purchase of any such security, has or will be entered by or for the same or different parties; or (iii) By performing similar acts where there is no change in beneficial ownership. b) To effect, alone or with others, a series of transactions in securities that: (i) Raises their price to induce the purchase of a security, whether of the same or a different class of the same issuer or of a controlling, controlled, or commonly controlled company by others; (ii) Depresses their price to induce the sale of a security, whether of the same or a different class, of the same issuer or of a controlling, controlled, or commonly controlled company by others; or (iii) Creates active trading to induce such a purchase or sale through manipulative devices such as marking the close, painting the tape, squeezing the float, hype and dump, boiler room operations and such other similar devices. c) To circulate or disseminate information that the price of any security listed in an Exchange will or is likely to rise or fall because of manipulative market operations of any one or more persons conducted for the purpose of raising or depressing the price of the security for the purpose of inducing the purchase or sale of such security. d) To make false or misleading statement with respect to any material fact, which he knew or had reasonable ground to believe was so false or misleading, for the purpose of inducing the purchase or sale of any security listed or traded in an Exchange. e) To effect, either alone or others, any series of transactions for the purchase and/or sale of any security traded in an Exchange for the purpose of pegging, fixing or stabilizing the price of such security; unless otherwise allowed by the

Securities Regulation Code or by rules of the SEC.

24.1, arrangement and rewording supplied)

(SRC Rule

12. What are some of the non-exclusive examples of types of prohibited conduct considered as manipulation of stock market prices ? Define each. SUGGESTED ANSWER:
a. Painting the tape. Engaging in a series of transactions in securities that are reported publicly to give the impression of activity or price movement in a security . [SRC Rule
24.1 (b) 1.5 (a)]

b. Marking the close. Buying and selling securities at the close of the market in an effort to alter the closing price of the security. [SRC Rule 24.1 (b) 1.5 (b)] c. Improper matched orders. Engaging in transactions where both the buy and sell orders are entered at the same time with the same price and quantity by different but colluding parties. [SRC Rule 24.1 (b) 1.5 (c)] d. Hype and dump. Engaging in buying activity at increasingly higher prices and then selling securities in the market at the higher prices. [SRC Rule 24.1 (b) 1.5 (d)] e. Wash sales. Engaging in transactions in which there is no genuine change in actual ownership of a security. [SRC
Rule 24.1 (b) 1.5 (e)]

f. Squeezing the float. Taking advantage of a shortage of securities in the market by controlling the demand side and exploiting market congestion during such shortages in a way as to create artificial prices. [SRC Rule 24.1 (b) 1.5 (f)] g. Disseminating false or misleading market information through media, including the internet, or any other means to move the price of a security in a direction that is favorable to a position held or a transaction. [SRC Rule 24.1 (b)
1.5 (g)]

13. Ms. OB was employed in MAS Investment Bank. WIC, a medical drug company, retained the Bank to assess whether it is desirable to make a tender offer for DOP Company, a drug manufacturer. OB overheard in the course of her work the plans of WIC. By herself and thru associates, she purchased DOP stocks available at the

85

stock exchange priced at P20 per share. When WICs tender offer was announced, DOP stocks jumped to P30 per share. Thus OB earned a sizeable profit. Is OB liable for breach and misuse of confidential or insider information gained from her employment ? Is she also liable for damages to sellers or buyers with whom she traded ? if so, what is the measure of such damages ? Explain briefly. SUGGESTED ANSWER: Yes. OB is liable because she is an insider. As an employee of the Bank, in connection with her work, was able to material information with respect to DOP, the issuer, that is not generally available. As such insider she is prohibited to buy or sell shares of stock of the issuer, in this case DOP. (Sec. 27.1 in relation to Sec. 3.8, both of the SRC) OB is subject to penalty imposable upon those who violate any provision of the Securities Regulation Code which is a fine of not less than P50,000.00 nor more than P5 million or imprisonment of not less than seven years nor more than 21 years, or both, in the discretion of the court. (Sec. 73, SRC) OB is liable to any investor from whom, as such insider, she purchased the shares or to whom she sold the shares. She is liable to damages in an amount not exceeding triple the amount of the transaction plus actual damages. Exemplary damages may also be awarded in cases of bad faith, fraud, malevolence or wantonness in the violation of the Securities Regulation Code. (Sec. 63, SRC) Who is an insider ? SUGGESTED ANSWER: a. The issuer; b. A director or officer of, or a person controlling, controlled by, or under common control with, the issuer, c. A person whose relationship or former relationship o the issuer gives or gave him access to a fact of special significance about the issuer or the security that is not generally available, or d. A person who learns such a fact from any of the foregoing insiders with knowledge that the person from whom he learns the fact is such an insider. (Sec. 3.8, SRC)

SUGGESTED ANSWER: Prospectus is the document made by or on behalf of an issuer, underwriter or dealer to sell or offer securities for sale to the public through a registration statement filed with the Commission. (Sec. 3.11 SRC) 16. Who is a broker? SUGGESTED ANSWER: Broker is a person engaged in the business of buying and selling securities for the account of others. (Sec. 3.3 SRC) 17. Who is a dealer? SUGGESTED ANSWER: Dealer means any person who buys and sells securities for his/her own account in the ordinary course of business. (Sec. 3.4 SRC) What is a "fact of special significance" ? SUGGESTED ANSWER: a. One which in addition to being material, would be likely to affect the market price of a security to a significant extent on being made generally available b. One which a reasonable person would consider especially important under the circumstances in determining his course of action in the light of such factors as the degree of its specificity, the extent of its difference from information generally available previously and is nature and reliability. What are securities ? SUGGESTED ANSWER: These are shares, participation or interests in a corporation or in a commercial enterprise or profit-making venture and evidenced by a certificate, contract, instrument, whether written or electronic in character. (1st par., Sec. 3.1, SRC) 20. Give examples of securities ? SUGGESTED ANSWER: a) Shares of stock, bonds, debentures, notes, evidences of indebtedness, asset-backed securities; b) Investment contracts, certificates of interest or participation in a profit sharing agreement, certificates of deposit for a future subscription;

18.

142.

19.

15.

What is a prospectus?

86

c) Fractional undivided interests in oil, gas or other mineral rights; d) Derivatives like option and warrants; e) Certificates of assignments, certificates of participation, trust certificates, voting trust certificates or similar instruments; f) Proprietary or nonproprietary membership certificates in corporations; and g) Other instruments as may in the future be determined by the Commission. (Sec. 3.1 SRC) What are over-the-counter securities ? These are securities sold without passing through the stock exchange. NOTES AND COMMENTS: a. Over-the-counter markets. Markets made or created
for the purchase and sale of securities other than on a stock exchange.

21.

22. What is meant by the registration requirement for securities ? SUGGESTED ANSWER: The requirement that securities shall not be sold or offered for sale or distribution within the Philippines, without a registration statement duly filed with and approved by the SEC. Prior to such sale, information on the securities, in such form and with such substance as the SEC may prescribe, shall be made available to each prospective purchaser. (Sec. 8.1, SRC)
What are exempt securities ? SUGGESTED ANSWER: Those that do not require registration either because the law itself exempts them therefrom or the Securities and Exchange Commission finds that the enforcement of the registration requirement is not necessary in the public interest and for the protection of the investors by reason of the amount involved or the limited character of the public offering.

a) Any security issued or guaranteed by the Government of the Philippines, or by any political subdivision or agency thereof, or by any person controlled or supervised by, and acting as an instrumentality of said Government. b) Any security issued or guaranteed by the government or any country with which the Philippines maintains diplomatic relations, or by any state, province or political subdivision thereof on the basis of reciprocity: Provided, That the Commission may require compliance with the form and content of disclosures the Commission may prescribe. c) Certificates issued by a receiver or by a trustee in bankruptcy duly approved by the proper adjudicatory body. d) Any security or its derivatives the sale or transfer of which, by law, is under the supervision and regulation of the Office of the Insurance Commission, Housing and Land Use Regulatory Board, or the Bureau of Internal Revenue. e) Any security issued by a bank except its own shares of stock. (Sec. 9.1 SRC) The Commission may, by rule or regulation after public hearing, add to the foregoing any class of securities if it finds that the enforcement of this Code with respect to such securities is not necessary in the public interest and for the protection of investors. (Sec. 9.2 SRC) What transactions are exempt ? SUGGESTED ANSWER: Sale of any security in any of the following transactions: a) At any judicial sale, or sale by an executor, administrator, guardian or receiver or trustee in insolvency or bankruptcy. b) By or for the account of a pledge holder, or mortgagee or any other similar lien holder selling or offering for sale or delivery in the ordinary course of business and not for the purpose of avoiding the provisions of this Code, to liquidate a bona fide debt, a security pledged in good faith as security for such debt. c) An isolated transaction in which any security is sold, offered for sale, subscription or delivery by the owner thereof, or by his representative for the owners account, such sale or offer for sale subscription or delivery not being made in the course of repeated and successive transactions of a like character by

25.

23.

24.

Give examples of exempt securities. SUGGESTED ANSWER:

87

such owner, or on his account by such representative and such owner or representative not being the underwriter of such security. d) The distribution by a corporation, actively engaged in the business authorized by its articles of incorporation, of securities to its stockholders or other security holders as a stock dividend or other distribution out of surplus. e) The sale of capital stock of a corporation to its own stockholders exclusively, where no commission or other remuneration is paid or given directly or indirectly in connection with the sale of such capital stock. f) The issuance of bonds or notes secured by mortgage upon real estate or tangible personal property, where the entire mortgage together with all the bonds or notes secured thereby are sold to a single purchaser at a single sale. g) The issue and delivery of any security in exchange for any other security of the same issuer pursuant to a right of conversion entitling the holder of the security surrendered in exchange to make such conversion: Provided, That the security so surrendered has been registered under this Code or was, when sold, exempt from the provision of this Code, and that the security issued and delivered in exchange, if sold at the conversion price, would at the time of such conversion fall within the class of securities entitled to registration under this Code. Upon such conversion the par value change shall be deemed the price at which the securities issued and delivered in such exchange are sold. h) Brokers transactions, executed upon customers orders, or any registered Exchange or other trading market. i) Subscriptions for shares of the capital stock of a corporation prior to the incorporation thereof or in pursuance of an increase in its authorized capital stock under the Corporation Code, when no expense is incurred, or no commission, compensation or remuneration is paid or given in connection with the sale or disposition of such securities, and only when the purpose for soliciting, giving or taking of such subscription is to comply with the requirements of such law as to the percentage of the capital stock of a corporation which should be subscribed before it can be registered and duly incorporated, or its authorized capital increased.

j) The exchange of securities by the issuer with its existing security holders exclusively, where no commission or other remuneration is paid or given directly or indirectly for soliciting such exchange. k) The sale of securities by an issuer to fewer than twenty (20) persons in the Philippines during the twelve-month period. l) The sale of securities to any number of the following qualified buyers: (i) Bank; (ii) Registered investment house; (iii) Insurance company; (iv) Pension fund or retirement plan maintained by the Government of the Philippines or any political subdivision thereof or managed by a bank or other persons authorized by the Bangko Sentral to engage in trust functions. (v) Investment company; or (vi) Such other person as the Commission may by rule determine as qualified buyers, on the basis of such factors as financial sophistication, net worth, knowledge, and experience in financial and business matters, or amount of assets under management. (Sec. 10.1 SRC) 26. What are the grounds for SEC to reject and revoke registration of securities ? SUGGESTED ANSWER: If SEC finds that: (a) The issuer: (i) Has been judicially declared insolvent; (ii) Has violated any of the provisions of the Securities Regulation Code, the rules promulgated pursuant thereto, or any order of the SEC of which the issuer has notice in connection with the offering for which a registration statement has been filed; (iii) Has been or is engaged or is about to engage in fraudulent transactions; (iv) Has made any false or misleading representation of material facts in any prospectus concerning the issuer or its securities; (v) Has failed to comply with any requirement that the SEC may impose as a condition for registration

88

of the security for which the registration statement has been filed; or (b) The registration statement is on its face incomplete or inaccurate in any material respect or includes any untrue statement of a material fact or omits to state a material fact required to be stated therein or necessary to make the statements therein not misleading; or (c) The issuer, any officer, director or controlling person of the issuer, or person performing similar functions, or any underwriter has been convicted, by a competent judicial or administrative body, upon plea of guilty, or otherwise, of an offense involving moral turpitude and/or fraud or is enjoined or restrained by the SEC or other competent judicial or administrative body for violations of securities, commodities, and other related laws. (Sec. 13, SRC arrangement and rewording
supplied)

be made until the same is lifted or set aside by the Commission. Otherwise, such sale shall be void. (Sec. 15 SRC numbering and arrangement supplied) 28. What is a commodity futures contract ? SUGGESTED ANSWER: Commodity futures contract means a contract providing for the making or taking delivery at a prescribed time in the future of a specific quantity and quality of a commodity or the cash value thereof, which is customarily offset prior to the delivery date, and includes standardized contracts having the indicia of commodities futures, commodity options and commodity leverage, or margin contracts. ( SRC
Rule 11.1.1)

27. What are the grounds for suspension of the registration of securities ? SUGGESTED ANSWER: a. The SEC may also suspend the right to sell and offer for sale such security pending further investigation, by entering an order specifying the grounds for such action, and by notifying the issuer, underwriter, dealer or broker known as participating in such offering. b. The SEC may also suspend upon a refusal of the issuer upon order of the SEC to furnish such further information as may in its judgment be necessary to enable the SEC to ascertain whether the registration of such security should be revoked: 1) If at any time, the information contained in the registration statement filed is or has become a) misleading, b) incorrect, c) inadequate or incomplete in any material respect, or 2) the sale or offering for sale of the security registered thereunder may work or tend to work a fraud, Upon the issuance of any such order and notification to the issuer, underwriter, dealer or broker known as participating in such offering, no further offer or sale of any such security shall

29. What is a commodity ? SUGGESTED ANSWER: Commodity means any goods, articles, services, rights and interests, including any group or index of any of the foregoing, in which commodity interests contracts are presently or in the future dealt in. ( SRC
Rule 11.1.2)

What is a derivative ? SUGGESTED ANSWER: With respect to equity securities a financial instrument, including options and warrants, whose value depends on the interest in or performance of an underlying security, but does not require any investment of principal in the underlying security. (SRC Rule 3.1.1.2) What are options ? SUGGESTED ANSWER: These are contracts that give the buyer the right, but not the obligation, to buy or sell an underlying security at a predetermined price, called the exercise or strike price, on or before a predetermined date, called the expiry date, which can only be extended in accordance with Exchange rules. (SRC Rule 3.1.1.2.a) 32. What are the different kinds of options ? SUGGESTED ANSWER: A call option and a put option. What are call options ? SUGGESTED ANSWER: A contract that gives the buyer the right, but not the obligation to buy an underlying

30.

31.

33.

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security at a predetermined price on or before a predetermined date. (SRC Rule 3.1.1.2.a.b.) What are put options ? SUGGESTED ANSWER: A contract that gives the seller the right, but not the obligation to sell an underlying security at a predetermined price on or before a predetermined date. (SRC
Rule 3.1.1.2.a.b.)

34.

1) of a specific nature which has not been made public; and 2) relating to one or more public companies or any securities of a public company; and 3) which, if it were made public, would likely affect the market price of the securities. ( SRC Rule 34.1-3)

What is meant by a straddle ? SUGGESTED ANSWER: Straddle involves the purchase of an equal number of put options and call options on the same underlying security at the same strike price and maturity date. Each option may be exercised separately, although the combination of options is usually bought and sold as a unit. ( SRC Rule 25.1.2) 36. What is a block sale ? SUGGESTED ANSWER: A block sale shall mean a matched trade that does not go through the automated order matching system of an Exchange trading system but instead has been pre-arranged by and among the Broker Dealers clients and is then entered as a done deal directly into the trading system. ( SRC Rule 30.2-8.2) What are Chinese Walls ? SUGGESTED ANSWER: The proper segregation of functions within a firm by any Broker Dealer which assumes more than one function whether as a dealer, adviser, or underwriter, or which engages in market making transactions to prevent: a. the flow of information between the different parts of its organization which perform each function; and b. any conflict of interest which may result. A Broker Dealer shall at all times ensure that its trading functions and back-office settlement functions are properly segregated and shall establish written procedures to ensure compliance with this Rule. ( SRC Rule 34.1-3, arrangement
supplied)

35.

c. Banking Laws (General Terms and Provisions) (i) The New Central Bank Act (R.A. 7653) (Basics)
1. What are the responsibilities of the Bangko Sentral ng Pilipinas ? SUGGESTED ANSWER: a. To provide policy directions in the areas of money, banking and credit. b. To supervise operations of banks and exercise such regulatory powers as provided in the Central Bank Act and other pertinent laws over the operations of finance companies and non-bank financial institutions performing quasi-banking transactions, such as quasi-banks and institutions performing similar functions.

37.

2. What is the primary objective of the Bangko Sentral ng Pilipinas.? SUGGESTED ANSWER: a. To maintain price stability conducive to a balanced and sustainable growth of the economy. b. It shall also promote and maintain stability and convertibility of the peso. NOTES AND COMMENTS: a. The nature of the Bangko Sentral ng Pilipinas. It is
the central monetary authority that functions and operates as an independent and accountable body corporate in the discharge of its mandated responsibilities concerning money banking and credit. While being a government-owned corporation, it enjoys fiscal and administrative autonomy.

NOTES AND COMMENTS:

a. Information defined. Information:

b. Pilipinas

Corporate powers of the Bangko Sentral ng

1) Adopt, alter and use a corporate seal 2) Enter into contracts 3) Lease or own real and personal property 4) Sell or otherwise dispose of property 5) Sue and be sued 6) Perform all necessary and proper acts 7) Acquire and hold such assets in connection with its operations 8) Incur such liabilities in connection with its operations 9) Compromise, condone or release any claim or settled liability as prescribed by Monetary Board

90

delivery of checks does not discharge the obligation under a tender of payment. The obligation is not extinguished and remains suspended until the payment by commercial document is actually realized. (Citibank, N.A., etc., v .Sabeniano, G. R. No. 156132, October 16, 2006)

3. What is meant by legal tender ? SUGGESTED ANSWER: Notes and coins issued by the Bangko Sentral ng Pilipinas fully guaranteed by the Government of the Republic of the Philippines and accepted for the payment of all debts, both public and private.

4. In what amounts may coins be accepted as legal tender ?

SUGGESTED ANSWER: One thousand pesos (P1,000.00) for denominations of 1- Piso, 5 Piso and 10 Piso coins; and One hundred pesos (P100.00) for denominations of 1 sentimo, 5 sentimo, 10 sentimo, and 25 sentimo coins. (BSP Circular No. 537, series of 2006, issued July 18, 2006)

5. Are checks legal tender ? When is payment by check considered as extinguishing an obligation ? SUGGESTED ANSWER: Checks representing demand
deposits do not have legal tender power and their acceptance in the payment of debts, both public and private, is at the option of the creditor, Provided, however, That a check which has been cleared and credited to the account of the creditor shall be equivalent to a delivery to the creditor of cash in an amount equal to the amount credited to his account. (Sec. 60, New Central Bank Act)

6. What are the instruments of Bangko Sentral action in order to achieve the primary objective of price stability ? SUGGESTED ANSWER: a. In general the Monetary Board shall rely on its moral influence. b. It may also rely on the powers granted it for the management of monetary aggregates like: 1) Operations in gold and foreign exchange a.) Purchase and sales of gold; b) Purchase and sales of foreign exchange; c) Acquisition of inconvertible currencies; d) Determination of the exchange rate policy of the country; e) Grant and receive loans from foreign banks and other foreign or international entities; 2) Use of credit policy a) Use of rediscounts, discounts, loans and advances b) Grant emergency loans and advances 3) Engage in open market operations like purchases and sales of securities.
7. Who is a conservator ? SUGGESTED ANSWER: The person appointed by the Monetary Board to take charge of the assets, liabilities, and the management of a bank or a quasi-bank which is in a state of continuing inability or unwillingness to maintain a condition of liquidity deemed adequate to protect the interest of depositors and creditors, reorganize the management thereof, collect all monies and debts due said institution, and exercise all powers necessary to restore its viability. (Sec. 29, New Central Bank Act) NOTES AND COMMENTS: a. Powers of bank conservator. While the Central Bank
law gives vast and far reaching powers to the conservator of a bank, it

NOTES AND COMMENTS: a. Check whether ordinary or managers check is not legal tender. A negotiable instrument is only a substitute for
money and not money, hence the delivery of such an instrument does not, by itself, operate as payment. An offer of a check in payment of a debt is not a valid tender of payment and may be refused receipt by the oblige or creditor. Mere

must be pointed out that such powers must be related to the (preservation of) the assets of the bank, (the reorganization of) the management thereof and (the restoration of) its viability. Such powers, enormous and extensive as they are, cannot extend to the post-facto repudiation of perfected transactions otherwise they would infringe against the non-impairment clause of the Constitution. The bank conservator merely takes the place of the banks board of directors. What the said board cannot do - such as repudiating a contract validly entered into under the doctrine of implied authority - the conservator cannot do either. His authority would be only to bring court actions to assail such contracts. The power of a conservator to revoke contracts, extends only to those which under existing law are deemed to be defective- i.e. void, voidable, unenforceable or rescissible. (First Philippine International Bank, et al., v. Court of Appeals, et al., January 24, 1996)

91

b. Liquidation court has jurisdiction to adjudicate all disputed claims against the insolvent bank. The Monetary
Boards order for the liquidation of an insolvent bank shall be implemented through the filing by the Solicitor General for the Central Bank of a petition with the Regional Trial Court. Said Court shall have jurisdiction to adjudicate all disputed claims against the insolvent bank and enforce individual liabilities of the stockholders and do all that is necessary to preserve the assets of such institution and to implement the liquidation plan approved by the Monetary Board. The rationale behind judicial liquidation is 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 litigation and to avoid injustice and arbitrariness. Furthermore, it is not necessary that a claim be initially disputed in a court or agency before it is filed with the liquidation court. (Ong v. Court of Appeals, G.R. No. 112830, February 1, 1996)

9. What are the substantial differences in the procedure for involuntary dissolution and liquidation of a corporation under the Corporation Code and that ofa banking corporation under the New Central bank Act ? SUGGESTED ANSWER: a. Under the Corporation Code, the SEC may dissolve a corporation, upon the filing of a verified complaint and after proper notice and hearing, on grounds provided by existing laws, rules and regulations WHILE the Monetary Board may summarily and without need for prior hearing forbid the banking corporation from doing business in the Philippines. b. The SEC issues an order of suspension both to the corporation and the BIR, the BIR issues a tax clearance and the SEC issues the final order of dissolution WHILE in the case of a banking corporation the PDIC is appointed as receiver who now files with the proper RTC without a requirement of proper notice a petition for assistance in the liquidation of the bank There is no requirement for tax clearance. c. In case of involuntary dissolution the SEC may proceed with the dissolution, but the corporation is allowed continue as a corporate body for three years and it may undertake its own liquidation WHILE in the case of banks it is the PDIC it is the PDIC that undertakes the liquidation. (In Re:
Petition for Assistance in the Liquidation of the Rural Bank of Bokod (Benguet) Inc., PDIC v. Bureau of Internal Revenue, G. R. No. 158261, December 18, 2006)

(ii) Law on Secrecy of Bank Deposits (R.A. 1405, as amended) 1.. What accounts are considered subject to the protection provided under the Law on Secrecy of Bank Deposits ? SUGGESTED ANSWER: a. All deposits of whatever nature with banks or banking institutions in the Philippines, b. including investments in bonds issued by the government of the Philippines, its political subdivisions and its instrumentalities are hereby considered as of an absolutely confidential nature and may not be examined, inquired or looked

8. When a bank is placed under a receiver, may it collect interest on loans granted prior to the receivership? Does it cease to do business ? SUGGESTED ANSWER: Yes, it may collect the interests. The receiver is in fact obliged to collect debts owing to the bank, which debts form part of the assets of the bank No the bank continues its business. When a bank is placed under receivership, it would not only be able to do new business, that is, to grant new loans or to accept new deposits.
(Sps. Aguilar v. The Manila Banking Corporation, G. R. No. 157911, September 19, 2006)

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into by any person, government official, bureau or office. (Sec. 2,

R. A. No. 1405)

c. All foreign currency deposits authorized under Republic Act No. 6426, as amended by Sec. 8, Presidential Decree Nos. 1246, and 1035, as well as foreign currency deposits authorized under Presidential Decree No. 1034 are considered absolutely confidential in nature and may not be inquired into, except where the disclosure is allowed upon written permission of the depositor. (Sec. 8, Republic Act No.
6426, as amended)

NOTES AND COMMENTS: a. Foreign currency deposits entitled to protection.

Deposits mean funds in foreign currencies which are accepted and held by an offshore banking unit in the regular course of business, with the obligation to return an equivalent amount to the owner thereof, with or without interest. (China Banking Corporation v. Court of Appeals, et al., G. R .No. 140687, December 18, 2006)

2. What are the exceptions or instances when bank deposits may be inquired into ? SUGGESTED ANSWER: a. Where the examination is made in the course of a special or general examination of a bank and is specifically authorized by the Monetary Board after being satisfied that there is reasonable ground to believe that a bank fraud or serious irregularity has been or is being committed and that it is necessary to look into the deposit to establish such fraud or irregularity; b. When the examination is made by an independent auditor hired by the bank to conduct its regular audit provided that the examination is for audit purposes only and the results thereof shall be for the exclusive use of the bank; c. Upon written permission of the depositor; d. In cases of impeachment, e. Upon order of a competent court in cases of bribery or dereliction of duty of public officials; f. In cases where the money is deposited or invested is the subject matter of the litigation. (Sec. 2, R.A. No. 1405, as
amended by P.D. No. 1792)

h. Where there is a BIR inquiry into the deposits of a taxpayer who is entering into a compromise with the BIR premised upon financial difficulties to pay. i. Inquiry under the Anti-Graft and Corrupt Practices Act into "illegally" or "not legitimately" acquired property. j. The Anti-Money Laundering Council may inquire into or examine any particular deposit or investment with any banking institution or nonblank financial institution upon order of any competent courting case of violation of the Anti-Money laundering Act, when it has been established that there is probable cause that the deposits or investments are related to an unlawful activity as defined under the Anti-Money Laundering Act or money laundering offense except that no court order is required involving unlawful activities under the Comprehensive Dangerous Drugs Act of 2002 and hijacking under R. A. No. 6235; destructive arson and murder, as defined under the Revised Penal Code, as amended, including those perpetrated by terrorists against non-combatant persons and similar targets.
(1st par., Sec. 11, AMLA, as amended by R. A. No. 9194)

k. To ensure compliance with the Anti-Money Laundering Law, the Bangko Sentral ng Pilipinas (BSP) may inquire into or examine any deposit or investment with any banking institution or nonblank financial institution when the examination is made in the course of a periodic or special examination, in accordance with the rules of examination of the BSP. . (1st par., Sec. 11, AMLA, as amended by R. A. No. 9194) 3. On March 21, 2005 a check for P 1 million was drawn against an account with Allied Bank payable to Jose Alvarez. The payee deposited the check with Union Bank which credited the amount of P 1 million to the account of Jose. When Union presented the check for clearing through the Philippine Clearing House Corporation, a clearing discrepancy was committed by Union Banks clearing staff when the amount of P 1 million was erroneously under-coded to P1,000 only. Union discovered the under-coding only a year later and it notified Allied by way of an automatic debiting of the amount of P999,000.00 from Allieds account. Allied refused to accept the charge slip since the transaction was

g. Where the Bureau of Internal Revenue makes an inquiry into the deposits of a deceased depositor for the purpose of determining his gross estate;

93

completed per Union Banks original instruction and clients account is now insufficiently funded. Union filed a complaint against Allied before the Clearing House for the recovery of the amount plus interest and other damages. Thereafter Union filed a petition with the RTC for the examination of the Account with Allied. May the account be examined ? SUGGESTED ANSWER: No, its does not fall under any of the exceptions because it should be the money deposited itself which should be the subject matter of the litigation. (Union
Bank of the Philippines v. Court of Appeals, et al., G.R. No. 134699, December 23, 1999)

3. The Senate Blue Ribbon Committee acting on a report made by Atty. A, conducted an investigation in aid of legislation on the alleged multimillion bank deposits of Swapang, a public official with various local banks. May the Committee subpoena records of the local banks to determine the extent of Swapangs deposits? Explain. SUGGESTED ANSWER: No. The Senate Blue Ribbon Committee is not a competent court hearing cases of bribery or dereliction of duty of public officials. The hearings of the Committee are in aid of legislation and not for any purpose. Swapangs deposit has nothing to do with the investigation. 4. A a foreigner was charged with rape and subsequently sentenced to serve imprisonment and to pay civil damages. His dollar deposit under the Expanded Foreign Currency Deposit System was garnished by the victim but the bank refused to release the same invoking the secrecy of bank deposits. Is bank correct ? Explain. SUGGESTED ANSWER: No. It would be unthinkable, that the questioned law exempting foreign currency deposits from attachment, garnishment, or any other order or process of any court, legislative body, government agency or any administrative body whatsoever would be used as a device by an accused for wrongdoing, and in so doing, acquitting the guilty at the expense of the innocent. (Salvacion v. Central Bank of the
Philippines, 343 Phil. 539; 278 SCRA 27 (1997); Estrada v. Desierto, G. R. No. 156160,9 December 2004, 445 SCRA 655, 672)

5. Margaret opened a dollar account in her name depositing various dollar checks with her and Jose, her father, as co-payees. Jose sued Margaret to account for the funds. Upon application from Jose, the court issued am order to require the bank to show the records of Margarets accounts. The bank refused an inquiry into the bank balances as Jose is not the depositor neither was there any showing of an authority from Jose. Is the bank correct ? SUGGESTED ANSWER: No. As the owner of the funds Jose is entitled to a hearing on the whereabouts of these funds. The Supreme Court rendering a limited pro hac vice ruling allowed for the inquiry in the light of the distinctive circumstances attendant to the case. Clearly it was not the intent of the legislature when it enacted the law on secrecy n foreign currency deposits to perpetuate injustice. The allowance of the inquiry would be in accord with the rudiments of fair play, the upholding of fairness in our judicial system and would be an avoidance of delay and time-wasteful and circuitous way of administering justice. (China Banking Corporation v. Court of
Appeals, et al., G. R .No. 140687, December 18, 2006) xxx for this turn, for this particular occasion only. (China Banking Corporation v. Court of Appeals, et al., G. R .No. 140687, December 18, 2006, citing various cases) In short, the Supreme Court is saying that the doctrine enunciated in China finds application in this case only and is not to serve as a precedent. b. Depositor, defined. A depositor in bank deposits is one who pays money into the bank in the usual course of business, to be placed to his credit and subject to his check or the beneficiary of the funds held by the bank as trustee. (China Banking Corporation v. Court of Appeals, et al., G. R .No. 140687, December 18, 2006)

NOTES AND COMMENTS; a. Pro hac vice, defined.

(ii) General Banking Law of 2000, R.A. No. 8791 (Basics)

1. Canlas and Manosca agreed to do business together. To raise capital, Canlas authorized Manosca to mortgage two parcels of land belonging to him and to his wife,

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Later, Canlas agreed to sell the parcels to Manosca for a total consideration of P850,000.00, P500,000.00 of which is payable within one week and P300,000.00 to serve as Canlas investment in the business. Canlas then delivered the titles to Manosca. However, the P460,000.00 check given by Manosca to Canlas as part of the consideration bounced. Later with the help of impostors posing as the spouses Canlas, Manosca was able to mortgage the parcels of land for P100,000.00 to a certain Atty. Magno and later for P500,000.00 to the Asian Savings Bank. It turned out that the Bank did not require the impostors to present a single identification card. The Bank merely relied upon their representatives on the basis of residence certificates bearing signatures which tended to match the signatures affixed on a previous deed of mortgage to a certain Atty. Magno covering the same parcels of land in question. For non-payment of the loan, the Bank foreclosed on the mortgaged property. Canlas contested foreclosure on the ground of Manoscas lack of authority to constitute the mortgage. On the other hand, the Bank alleged that Canlas was negligent in entrusting the owners TCT to Manosca which provided him with the opportunity to perpetuate the fraud. Furthermore, on two occasions, Canlas allowed Manosca to introduce him (Canlas) a Leonardo to the bank employees. Finally, after the loan was finally approved, Canlas accompanied Manosca to the bank when the loan was released. At that time, a managers check for P200,000.00 was issued in the name of Oscar Motorworks which Canlas admits he owns and operates. Under the above circumstances, is the mortgage null and void, and who shall bear the loss? SUGGESTED ANSWER; The mortgage is null and void and the Bank should bear the loss. The bank did not observe the requisite diligence in ascertaining the identity of the impostors. The degree of diligence required of banks is more than that of a good father of a family; in keeping with their responsibility to exercise the necessary care and prudence in dealing even on a registered or titled property. The business of a bank is affected with public

interest, holding in trust the money of the depositors, which bank deposits the bank should guard against loss due to negligence or bad faith, by reason of which the bank would be denied the protective mantle of the land registration law, accorded only to purchasers or mortgagees for value and in good faith. (Canlas,
et al., v. Court of Appeals, et al., G.R. No. 112160, February 28, 2000)

Assuming that Canlas was negligent in giving Manosca the opportunity to perpetrate the fraud by entrusting to latter the owners copy of the transfer certificates of title of subject parcels of land, it cannot be denied that the bank had the last clear chance to prevent the fraud, by the simple expedient of faithfully complying with the requirements for banks to ascertain the identity of the persons transacting with them. (Canlas, et al., v.
Court of Appeals, et al., G.R. No. 112160, prom. February 28, 2000)

Under the doctrine of last clear chance, which is applicable here, the respondent bank must suffer the resulting loss. In essence, the doctrine of last clear chance is to the effect that where both parties are negligent but the negligent act of one is appreciably later in point of time than that of the other, or where it is impossible to determine whose fault or negligence brought about the occurrence of the incident, the one who had the last clear opportunity to avoid the impending harm but failed to do so, is chargeable with the consequence arising therefrom. Stated differently, the rule is that the antecedent negligence of a person does not preclude recovery of damages caused by the supervening negligence of the latter, who had the last fair chance to prevent the impending harm by the exercise of due diligence. (Canlas, et al., v. Court of Appeals, et al., G.R. No. 112160,
February 28, 2000)

By the nature of its functions, a bank is under obligation to treat the accounts of its depositors with meticulous care, always having in mind the fiduciary nature of their relationship. As such, in dealing with its depositors, a bank should exercise its functions not only with the diligence of a good father of a family but it should do so with the highest degree of care. (Bank
of the Philippine Islands, v. Court of Appeals, G.R. No. 112392, February 29, 2000)

2. On September 3, 1987, Napiza deposited in his Foreign Currency Deposit Unit (FCDU) Savings Account with the Bank, a Managers check dated August 17, 1984, payable to cash in the amount of $2,500.00 and duly

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endorsed by Napiza on the dorsal side. The owner of the check was a certain Chan whom Napiza accommodated for the purpose of clearing the check. Napiza agreed to deliver to Chan a signed blank withdrawal slip with the understanding that as soon as the check is cleared, both of them would go to the Bank to withdraw the amount of the check upon Napizas presentation to the Bank of his passbook. This is so because, the Banks rules which are printed on the depositors passbook requires presentation to the Bank of 1) a duly filled-up withdrawal slip, and 2) in all instance whether the withdrawal is made by the depositor personally, or in certain exceptional instances where the Bank allows it, withdrawal by another person upon the depositors written authority duly authenticated. The passbook further shows that deposits of checks and similar items shall be subject to collection only and credited to the account only upon receipt of the notice of final payment. On October 23, 1984, one Gayon, Jr., using the signed blank withdrawal slip given by Napiza to Chan, was able to withdraw $2,541.67 from the depositors account. Notably, the withdrawal slips shows that the amount was payable to Roman and Agnes, and duly initialed by the Banks branch assistant manager Teresita. On November 20, 1984, the Bank received a communication from the foreign bank that the check deposited by Napiza was a counterfeit check. On August 12, 1986, the Bank sued Napiza praying for the return of the amount of P2,500.00 plus interest. The Bank asserts that Napiza should be held liable as an indorser when he affixed his signature at the dorsal side of the check, and that by signing the withdrawal slip, Napiza presented the opportunity for the withdrawal of the amount in question. Is the depositor Napiza liable? Explain briefly. SUGGESTED ANSWER; No Napiza should not be held liable on the basis of his indorsement. Ordinarily Napiza may be held liable as an indorser of the check or even as an accommodation party. However, to hold Napiza liable for the amount of the check he deposited by the strict application of the law and without considering the attending circumstances in the case would result in an injustice

and in the erosion of the public trust in the banking system. The interest of justice thus demands looking into the events that led to the encashment of the check. (Bank of Philippine Islands v.
Court of Appeals, G.R. No. 112392, February 29, 2000)

The Bank was negligent in allowing withdrawal prior to clearance of the check. By depositing the check with Bank, Napiza was, in a way, merely designating the Bank as the collecting bank. This is in consonance with the rule that a negotiable instrument such as a check, whether a managers check or ordinary check, is not legal tender. 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' check. (Bank of Philippine Islands v. Court of Appeals, G.R. No. 112392, February 29, 2000) It was likewise negligent in allowing withdrawal despite non-presentation of the passbook. While it is true that Napizas having signed a blank withdrawal slip set in motion the events that resulted in the withdrawal and encashment of the counterfeit check, the negligence of the Banks personnel was the proximate cause of the loss that the Bank sustained. Proximate cause, which is determined by a mixed consideration of logic, common sense, policy and precedent, is that cause, which, in natural and continuous sequence, unbroken by any efficient intervening cause, produces the injury, and without which the result would not have occurred. The proximate cause of the withdrawal and eventual loss of the amount of $2,500.00 on the Banks part was its personnels negligence in allowing such withdrawal in disregard of its own rules and the clearing requirement in the banking system. In so doing, the Bank assumed the risk of incurring a loss on account of a forged or counterfeit foreign check and hence, it should suffer the resulting damage. ( Bank
of Philippine Islands v. Court of Appeals, G.R. No. 112392, February 29, 2000)

96

3. Leticia opened a savings and current account with Prudential Bank, with automatic transfer of funds from the savings account to the current account. On June 1, 1988, she deposited in her savings account a check drawn against PCIB in the amount of P35,271.60. On June 21, 1988, she had P35,993.48 in her savings account and P776.93 in her current account or a total deposit of P36,770.41. Leticia then issued a Prudential Bank check in the amount of P11,500.00 postdated June 20, 1988 in favor of Belen , who endorsed it to Lhuiller. When the latter deposited the check in his account with PCIB, it was dishonored for being drawn against insufficient funds. When Lhuillers secretary informed Belen of the dishonor, the latter told the former to redeposit it. Surprised by the dishonor, Leticia was told by the officer-in-charge of the Bank that he had debited P300.00 penalty from her current account for the dishonor of the check. Leticia later found out that the amount of P35,271.60 which she had deposited was credited to her savings account only on June 29, 1998, or 23 days after she redeposited it. Thus, when Lhuiller redeposited the P11,500.00 check on June 24, 1988, it was cleared on June 27, 1988. Sued for damages, the Bank defends by saying that Leticia did not suffer any damage as a result of the dishonor. It acted in good faith, and the dishonor was an honest mistake and the Bank Manager and the other employees profusely apologized to Leticia for the error. They also offered to make restitution and apologies to Belen and Lhuiller. Is the Bank liable? SUGGESTED ANSWER; Yes. It dishonored the check issued by Leticia who turned out to have sufficient funds with the Bank. The Banks negligence was the result of lack of due care and caution required of managers and employees of a firm engaged in so sensitive and demanding business as banking. A bank is under obligation to treat the accounts of its depositors with meticulous care whether such account consists only of a few hundred pesos or of millions of pesos. Responsibility arising from negligence in the performance of every kind of obligation is demandable. While petitioners

negligence in this case may not have been attended with malice and bad faith, nevertheless, it caused serious anxiety, embarrassment and humiliation. (Prudential Bank v. Court of
Appeals, et al., G.R. No. 125536, March 16, 2000 citing Philippine National Bank v. Court of Appeals, G.R. No. 126152, September 28, 1999)

NOTES AND COMMENTS: a. Bank is liable for erroneous dishonor of checks.

Bank are responsible for their employees mistakes in dishonor of checks. The fiduciary nature of relationship between banks and depositors demand the award of moral damages for mistakes committed by the formers employees that result in dishonor of checks. In Simex International (Manila), Inc. v. Court of Appeals, 183 SCRA 360, 367 (1990) and Bank of Philippine Islands v. IAC, et al., 206 SCRA 408, 412-413 (1992), Supreme Court had occasion to stress the fiduciary nature of the relationship between a bank and its depositors and the extent of diligence expected of the former in handling the accounts entrusted to its care, thus: In every case, the depositor expects the bank to treat his account with the utmost fidelity, whether such account consists only of a few hundred pesos or of millions. The bank must record every single transaction accurately, down to the last centavo, and as promptly as possible. This has to be done if the account is to reflect at any given time the amount of money the depositor can dispose of as he sees fit, confident that the bank will deliver it as and to whomever he directs. A blunder on the part of the bank, such as the dishonor of a check without good reason, can cause the depositor not a little embarrassment if not also financial loss and perhaps even civil and criminal litigation. The point is that as a business affected with public interest and because of the nature of its functions, the bank is under obligation to treat the accounts of its depositors with meticulous care, always having in mind the fiduciary nature of their relationship. x x x. (Prudential Bank v. Court of Appeals, et al., G.R. No. 125536, March 16, 2000 citing Simex International (Manila), Inc. v. Court of Appeals, 183 SCRA 360, 367 (1990) and Bank of Philippine Islands v. IAC, et al., 206 SCRA 408, 412-413 (1992)

4. What are some of the prohibited transactions of a borrower of a bank ? SUGGESTED ANSWER: No borrower of a bank shall: a) Fraudulently overvalue property offered as security for a loan or other credit accommodation from the bank;

97

b) Furnish false or make representation or suppression of material facts for the purpose of obtaining, renewing, increasing a loan or other credit accommodation or extending the period thereof; c) Attempt to defraud the said bank in the event of a court action to recover a loan or other credit accommodation; or d) Offer any director, officer, employee or agent of a bank any gift, fee, commission, or any other form of compensation in order to influence such persons into approving a loan or other credit accommodation application. (Sec. 55.2,
R.A. No. 8791)

5. Distinguish between equity of redemption and the right of redemption. SUGGESTED ANSWER: The equity of redemption is different from and should be confused with the right of redemption. The right of redemption in relation to a mortgage understood in the sense of a prerogative to reacquire mortgaged property after registration of the foreclosure sale exists only in the case of the extrajudicial foreclosure of the mortgage. No such right is recognized in a judicial foreclosure except only where the mortgagee is a bank or banking institution. The period to exercise the right of redemption is within one (1) year from the registration of the sheriffs certificate of foreclosure sale. Where no right of redemption exists in case of a judicial foreclosure because the mortgagee is not a bank or a banking institution, the foreclosure sale when confirmed by an order of the court shall operate to divest the rights of all parties to the action and to vest their rights in the purchaser. There then exists only what is simply known as the equity of redemption. This is simply the right of the defendant mortgagor to extinguish the mortgage and retain ownership of the property by paying the secured debt within the 90-day period after the judgment becomes final, in accordance with Rule 68 of the Rules of Court, or even after the foreclosure sale, but prior to confirmation.
(Huerta Alba Resort, Inc. v. Court of Appeals, et al., G.R. No. 128567, September 1, 2000) In the event of foreclosure by a bank, whether judicially or extrajudicially, of any mortgage on real estate which is security for any loan or other credit

accommodation granted, the mortgagor or debtor whose real property has been sold for the full or partial payment of his obligation shall have the right within one year after the sale of the real estate, to redeem the property by paying the amount due under the mortgage deed with interest thereon at the rate specified in the mortgage, and all the costs and expenses incurred by the bank or institution from the sale and custody of said property less the income derived therefrom. However, the purchaser at the auction sale concerned whether in a judicial or extrajudicial foreclosure shall have the right to enter upon and take possession of such property immediately after the date of the confirmation of the auction sale and administer the same in accordance with law. Any petition in court to enjoin or restrain the conduct of foreclosure proceedings instituted pursuant to this provision shall be given due course only upon the filing by the petitioner of a bond in an amount fixed by the court conditioned that he will pay all the damages which the bank may suffer by the enjoining or the restraint of the foreclosure proceeding. Notwithstanding Act 3135, juridical persons whose property is being sold pursuant to an extrajudicial foreclosure shall have the right to redeem the property in accordance with this provision until, but not after, the registration of the certificate of foreclosure sale with the applicable Register of Deeds which in no case shall be more than three (3) months after foreclosure, whichever is earlier. Owners of property that has been sold in a foreclosure sale prior to the effectivity of the General banking Law of 2000 shall retain their redemption rights until their expiration. (Sec. 47, R.A. No. 8791, arrangement supplied)

b. Instances when a bank may acquire real estate. Acquisition of real estate by way of satisfaction of claims.A bank may acquire, hold or convey real property under the following circumstances: 1) Such as shall be mortgaged to it in good faith by way of security for debts; 2) Such as shall be conveyed to it in satisfaction of debts previously contracted in the course of its dealings; or 3) Such as it shall purchase at sales under judgments, decrees, mortgages, or trust deeds held by it and such as it shall purchase to secure debts due it. Any other real property acquired or held under the circumstances enumerated in the above paragraph shall be disposed of by the bank within a period of five (5) years or as may be prescribed by the Monetary Board; provided, however, that the bank may, after said period, continue to hold the property for its own use subject to the limitations on ceilings on investment in real estate. (Sec. 52, R.A. No. 8791)

NOTES AND COMMENTS: a. Right of mortgagor to redeem.

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c. Limitation or ceiling on bank investments in real estate. Any bank may acquire real estate as shall be necessary for its
own use in the conduct of its business: provided, however, That the total investment in such real estate and improvements thereof, including bank equipment, shall not exceed fifty percent (50%) of combined capital accounts: provided, further, That the equity investment of a bank in another corporation engaged primarily in real estate shall be considered as part of the banks total investment in real estate, unless otherwise provided by the Monetary Board. (Sec. 51, R.A. No. 8791)

knowledge and information for the promotion of national development and progress for the common good. d. It is also the policy of the State to 1) streamline administrative procedures of registering patents, trademarks and copyrights, to 2) liberalize the registration on the transfer of technology, and to 3) enhance the enforcement of intellectual property rights in the Philippines. (Sec. 2, R. A. No. 8293, numbering and arrangement supplied) 2. What are some differences between the Intellectual Property Code of the Philippines and the former intellectual property laws ? SUGGESTED ANSWER: a. Former covered only patents, trademarks, and copyrights WHILE new law covers addition, service marks, geographic indications, industrial designs, lay-out designs (Topographies) of integrated circuits; and protection of undisclosed information. b. Former had the Bureau of Patents, Trademarks and Technology Transfer WHILE the new abolished said office and established and organized the Intellectual Property Office. c. The former laws definition of patentable inventions was expanded under the new law. 3. What is the rule on reciprocity relative to intellectual property protection ? SUGGESTED ANSWER: Any person who is a national or who is domiciled or has a real and effective industrial establishment in a country which is a party to any convention, treaty or agreement relating to intellectual property rights or the repression of unfair competition, to which the Philippines is also a party, or extends reciprocal rights to nationals of the Philippines by law, shall be entitled to benefits to the extent necessary to give effect to any provision of such convention, treaty or reciprocal law, in addition to the rights to which any owner of an intellectual property right is otherwise entitled under the Intellectual Property Code of the Philippines. (Sec. 3, R.A. No. 8293)

6. Intellectual Property Code (R.A. No. 8923, Basics) EXCLUDE: Implementing Rules and Regulations
GENERAL NOTES AND COMMENTS: Some of the jurisprudence cited were decided upon factual antecedents that occurred prior to the effectivity of R. A. No. 8293, the Intellectual Property Code of the Philippines. If there are any differences between the old laws and the R. A. No. 8293, there shall be appropriate NOTES AND COMMENTS below the doctrinal rulings. If there are no such comments, the the doctrinal rulings are still valid under the new law. 1. What is the State policy on intellectual property ? SUGGESTED ANSWER: a. The State recognizes that an effective intellectual and industrial property system is 1) vital to the development of domestic and creative activity, 2) facilitates transfer of technology, 3) attracts foreign investments, and 4) ensures market access for our products. b. The State shall protect and secure the exclusive rights of scientists, inventors, artists and other gifted citizens to their intellectual property and creations, particularly when beneficial to the people, for such periods as provided in the Intellectual Property Code of the Philippines. c. The use of intellectual property bears a social function. to this end, the State shall promote the diffusion of

4. What does the term intellectual property rightsconsist of ? SUGGESTED ANSWER: It consists of a. Copyright and Related Rights; b. Trademarks and Service Marks; c. geographical Indications; d. Industrial Designs; e Patents; f. Layout-Designs (Topographies) of Integrated Circuits; and g. Protection of Undisclosed Information. (Sec. 4, R.A.
No. 8293)

99

d. Plant varieties or animal breeds or essentially biological process for the production of plants or animals. This provision shall not apply to micro-organisms and non-biological and microbiological processes. Provisions under this provision shall not preclude Congress to consider the enactment of a law providing sui generis protection of plant varieties and animal breeds and a system of community intellectual rights protection; e. Aesthetic creations; f. Anything which is contrary to public order or morality.
(Sec. 22, R.A.No. 8293)

What is a patent ? SUGGESTED ANSWER: A patent is an exclusive right conferred by law to an inventor to make, use, offer, sell or import the product covered by the patent and to restrain, prohibit and prevent any unauthorized person or entity from performing the protected right. The right includes also the assignment, or transfer by succession of the patent, and to conclude licensing contracts for the same. What inventions are patentable ? SUGGESTED ANSWER: Any technical solution of a problem in any field of human activity which is new, involves an inventive step and is industrially applicable shall be patentable. It may relate to a product, or a process, or an improvement of the foregoing. (Sec. 21, R. A. No. 8293; Kho, etc., v. Hon. Court of
Appeals, et al., G. R. No. 115758, March 19, 2002)

5.

8. What is meant by the First to File Rule ? SUGGESTED ANSWER: If two (2) or more persons have made the invention separately and independently of each other, the right to the patent shall belong to the person who filed an application for such invention, or where two or more applications are filed for the same invention, to the applicant who has the earliest filing date or, the earliest priority date. (Sec.
29,R.R. No. 8293)

6.

9. When may a patent holder be compelled to allow others to license his product ? SUGGESTED ANSWER: The provisions of the Patent Law (now Intellectual Property Code) on compulsory licensing may be proper if the patented product is medicinal in nature, and therefore necessary for the promotion of public health and safety, give others a chance to supply the public with the quantity of the patented article and to prevent the building up of patent monopolies. (Smith Kline & French Laboratories, Ltd.. v.
Court of Appeals et al., G.R. No. 121267,October 23, 2001)

7. Give some non-patentable inventions. SUGGESTED ANSWER: a. Discoveries, scientific theories and mathematical methods; b. Schemes, rules and methods of performing mental sets, playing games or doing business, and programs for computers; c. Methods for treatment of the human and animal body by surgery or therapy and diagnostic methods practices on the human and animal body. This provision shall not apply to products and composition for use in any of these methods;

What is meant by patent infringement ? SUGGESTED ANSWER: Patent infringement is the making, using, offering for sale, selling, or importing a patented product or a product obtained directly or indirectly from a patented process without the authorization of the patentee.
(Sec. 76, R.A. No. 8293)

10.

11. The remedies for patent infringement are the (a) civil action with an injunction, and the (b) criminal action for repetition of infringement.

A civil action before a court of competent jurisdiction may be bought by any patentee, or anyone possessing any right, title or interest in and to the patented invention, whose rights have been infringed, to recover from the infringer a. such damages sustained thereby, plus attorneys fees and other expenses of litigation, and to secure an injunction for the protection of his rights. (Sec. 76.2, R.A. No. 8293) b. If the damages are inadequate or cannot be readily ascertained with reasonable certainty, the court may award by way of damages a sum equivalent to reasonable royalty. (Sec. 76.3, Ibid.) c. The court may, in its discretion, order that the infringing goods, materials and implements predominantly used in the infringement be disposed of outside the channels of commerce or destroyed, without compensation. (Sec. 76.5, Ibid.)

12.

100

16. Trade name is the name or designation identifying or distinguishing an enterprise. (Kho, etc., v. Hon. Court of Appeals,
et al., G.R.No. 115758, March 19, 2002)

13. If infringement is repeated by the infringer or by anyone in connivance with him after finality of the judgment of the court against the infringer, the offenders without prejudice to the action for damages, be criminally liable therefore. (Sec. 84,
R.A. No. 8293)

In an action for infringement, the defendant, a. in addition to other defenses available to him, b. may show the invalidity of the patent, or any claim thereof, on any of the following grounds: 1) That what was claimed as the invention is not new or patentable; 2) That the patent does not disclose the invention in a manner sufficiently clear and complete for it to be carried out by any person skilled in the art; or 3) That the patent is contrary to public order or morality. (Sec. 81 in relation to Sec. 61, R.A.No. 8293)

14.

15. Mark is any visible sign capable of distinguishing the goods (trademark) or services (service mark) of an enterprise and shall include a stamped or marked container of goods. (Sec. 121.1, R.A. No. 8293; Kho, etc., v. Hon. Court of
Appeals, et al., G.R.No. 115758, March 19, 2002)

17. Pearl and Dean (Phils.), Inc. (P & D) has a Certificate of Copyright Registration dated January 20, 1981, under Sec. 2 (o) of P.D. No. 49 (The Intellectual Property Decree) over advertising display units referred to as light boxes. These units utilize specially printed posters sandwiched between plastic sheets and illuminated with back lights and are marketed under the trade mark Poster Ads. The application for registration of trademark was approved on September 12, 1988. From 1981 to about 1988 P & D employed the services of MIS to manufacture its Poster Ads. Sometime in 1991, Shoemart, Incorporated (SMI) engaged the services of EYD Rainbow Corporation to make the light boxes and 300 units were installed at SM Megamall and SM City. Likewise North Edsa Marketing, Inc. (NEMI), a sister company of SMI, through its marketing arm, Prime Spots Marketing Services, was set up primarily to sell advertising space in lighted display units located in SMIs different branches. Upon discovery of such acts of SMI, P & D sued for infringement of trademark and copyright, unfair competition and damages. Would the suit prosper ? Explain briefly. NOTES AND COMMENTS: The following answer shall be crafted in the light of doctrinal rulings in the case of Pearl & Dean as adjusted to conform to present law. SUGGESTED ANSWER: No. P & Ds suit will not prosper for the following reasons: a. The light boxes may not properly be the subject of copyrights which cover only subjects enumerated in the law. The copyright was issued under Sec. 2 (o) of P.D. No. 49 which includes Prints, pictorial illustrations, advertising copies, labels, and box wraps. The copyright certificate entitled Advertising Display Units (which depicted the box-type electrical devices) extended only to the technical drawings and not to the box itself.
(Pearl & Dean (Phil.), Inc. v. Shoemart, Inc., et al., G. R. No. 148222,

101 August 15, 2003) Under present law the light boxes may properly

be covered by copyright as Literary and artistic works classified as Drawing or plastic works of a scientific or technical character. (Sec. 172 (j), Intellectual Property Code) or as original ornamental designs or models for articles of manufacture, whether or not registerable as an industrial design, and other works of applied art (Sec. 172 (h), Ibid.). b. There is no trademark infringement because the mark Poster Ads was able to obtain a trademark certificate only for stationeries such as letter heads, envelopes, calling cards and newsletters and not for the specific use on the light boxes. (Pearl & Dean (Phil.), Inc. v. Shoemart, Inc., et al., supra)

items or works that exclusively pertain to the others. (Pearl & Dean (Phil.), Inc. v. Shoemart, Inc., et al., G. R. No. 148222, August 15, 2003 citing Kho, etc., v. Hon. Court of Appeals, et al., G.R .No. 115758, March 19, 2002)

c. There is no infringement of the patent because there was no showing that a patent was issued over the light boxes. (Ibid.)
d. There was no unfair competition because there can be no unfair competition under the law on copyrights but applicable to disputes over the use of trademarks. Granting that there was a trademark, the same must be so distinctive or well known as to be associated in the mind of the public, the goods and services carrying the trademark Power Ads as different from others. As it is the words Power Ads is so generic that the said trademark could not be distinguished from the goods and services of other entities. (Ibid.)

The phrase Power Ads is too generic that it could not fall under the concept of the doctrine of secondary meaning to be able to obtain protection. Secondary meaning means that a word or phrase originally incapable of exclusive appropriation with reference to an article in the market (because it is geographically or otherwise descriptive) might nevertheless have been used for so long and so exclusively by one producer with reference this article that, in the trade and to that branch of the purchasing public, the word or phrase has come to mean that the article was his property. (Ibid.) NOTES AND COMMENTS: a. Limitations of copyright, Copyright is confined to
literary and artistic works which are original intellectual creations in the literary and artistic domain protected from the moment of their creation. (Kho, etc., v. Hon. Court of Appeals, et al., G.R .No. 115758, March 19, 2002)

b. Copyrights, patents and trademarks are completely distinct and separate from one another and the
protection afforded by one cannot be used interchangeably to cover

18. It appears that DGCI was issued on May 31, 1983, by the then Bureau of Patents, Trademarks and Technology Transfer (BPTTT) a certificate of registration, pursuant to Secs. 2 and 4 of Rep. Act No. 166, covering the Shangri-La mark and S logo. Since then, DGCI started using the said mark and logo in its restaurant business. On the other hand, since 1975 and up to the present, the Shangri-La mark and S logo have been used consistently and continuously by all the Kuok Group in all Shangri-La hotels and companies in their paraphernalia world-wide. The mark and logo is registered in the patent offices of different countries around the world. However, the Shangri-La hotels did not operate any establishment in the Philippines until 1987 or 1988, but they have advertised abroad extensively since 1972 in magazines widely circulated in the world including the Philippines. They too, maintained reservations and booking agents in airline companies, hotel reservations and booking agents in airline companies, hotel organizations, tour operators, tour promotion organizations, and in other allied fields in the Philippines. The Kuok Group started operations in the Philippines sometime in 1987 or 1988 under the name Shangri-La International Hotel Management, Ltd. (SLIHM) using both the mark and the logo. DGCI sued SLIHM for infringement and damages, claiming that a prior registrant it had the right to use the mark and logo. On the other hand SLIHM defended by claiming that it owns the mark and the logo, being entitled to protection under the Paris Convention. The mark and logo being internationally well-known. Will the suit prosper ? SUGGESTED ANSWER: No. While the defense of protection under the Paris Convention is unavailing because the said right was recognized only upon the effectivity of the Intellectual Property Code, still SLIHM cannot be held guilty of infringement.

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The law in force at the time of the controversy was Rep. Act No. 166, amended (which was in effect up to December 31, 1997, before the Intellectual Property Code), requires that before a trademark can be registered, it must have been actually used in commerce and service for not less than two months in the Philippines prior to registration, which mark must not have been appropriated by another. DGCI was not qualified to register because it is neither the owner of the trademark nor have used it for at least two months in the Philippines. SLIHM has previously appropriated the trademark although it was used only internationally.
(Shangri-La International Hotel Management, Ltd., et al., v. Developers Group of Companies, Inc., G.R. No. 159938, March 31, 2006)

2006 citing Secs. 123 (3) and 131,3, Intellectual Property Code, R. A. No. 9283]

19. The earlier filing of petition to cancel a mark with the

Bureau of Legal Affairs of the Intellectual Property Office shall not constitute a prejudicial question that must be resolved before an action to enforce the rights to the same registered mark may be decided. (Shangri-La International Hotel Management,
Ltd., et al. v. Court of Appeals, et al., G.R. No. 11580; Development Group of Companies, Inc. v. Court of Appeals, et al., June 21, 2001)

May SLIHM bring suit for the cancellation of DGCIs registration on the basis of the Paris Convention ? Reason out your answer. SUGGESTED ANSWER: No. SLIHM has not shown that it has used the mark in the Philippines for at least two months. The provisions of the Intellectual Property Code on the application of the Paris Convention took effect only after December 31, 1997. WARNING: If the problem is dated as in the above problem then the suggested answer is correct. If the events in the problem is shown to have taken place after December 31, 1997 then apply the Intellectual Property Code. The conclusion would still be the same, that the suit for infringement against SLIHM would not prosper, but the reasons would be different. However, SLIHM could invoke the Paris Convention. NOTES AND COMMENTS:
a. The present Intellectual Property Code has dispensed with the requirement of prior actual use at the time of registration. b. The present Intellectual Property Code shows observance and compliance with the Paris Convention by incorporating the relevant portions of the Convention such that persons who may question a mark (that is, oppose registration, petition for the cancellation thereof, sue for unfair competition) include persons whose internationally well-known mark, whether or not registered is identical with or confusingly similar to or constitutes a translation of a mark that is sought to be registered or is actually registered. [Shangri-La International Hotel Management, Ltd., et al., v. Developers Group of Companies, Inc., G.R. No. 159938, March 31,

20. An infringement within the competence of the regular courts can and should proceed independently from the cancellation case with the Bureau of Patents, Trademarks and Technology (now the Intellectual Property Office) so as to afford redress and injunctive writs. (Shangri-La International Hotel
Management, Ltd., et al. v. Court of Appeals, et al., G.R. No. 11580; Development Group of Companies, Inc. v. Court of Appeals, et al., June 21, 2001)

21. The earlier filing of petition to cancel a mark with the

Bureau of Legal Affairs of the Intellectual Property Office shall not constitute a prejudicial question that must be resolved before an action to enforce the rights to the same registered mark may be decided. (Shangri-La International Hotel Management,
Ltd., et al. v. Court of Appeals, et al., G.R. No. 11580; Development Group of Companies, Inc. v. Court of Appeals, et al., June 21, 2001)

22. An infringement within the competence of the regular courts can and should proceed independently from the cancellation case with the Bureau of Patents, Trademarks and Technology (now the Intellectual Property Office) so as to afford redress and injunctive writs. (Shangri-La International Hotel
Management, Ltd., et al. v. Court of Appeals, et al., G.R. No. 11580; Development Group of Companies, Inc. v. Court of Appeals, et al., June 21, 2001)

23. Test of dominancy requires that if the competing trademark contains the main or essential features of another and confusion and deception is likely to result, infringement takes place. duplication or imitation is not necessary; nor is it necessary that the infringing label should

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suggest an effort to imitate. Similarity in size, form and color, while relevant, is not conclusive. (Asia Brewery, Inc. v. Court of
Appeals, et al., 224 SCRA 437)

24. A person to be entitled of a copyright must be the original creator of the work, he must have created it by his own skill, labor and judgment without directly copying or evasively imitating the work of another. Thus, if there is doubt as to the validity of the copyright, infringement and the damages caused by such infringement then an injunctive writ does not lie. (Chuan
v. Court of Appeals, et al., G.R.No. 130360, August 15, 2001)

vendor of such goods or any agent of any vendor engaged in selling such goods with a like purpose; (b) Any person who by any artifice, or device, or who employs any other means calculated to induce the false belief that such person is offering the services of another who has identified such services in the mind of the pubic; or (c) Any person who shall make any false statement in the course of trade or who shall commit any other act contrary to good faith of a nature calculated to discredit the goods, business or services of another. (Sec. 168, Intellectual Property Code of the Philippines)

25. What is unfair competition ? SUGGESTED ANSWER: Unfair competition is the employment by any person of deception or any other means contrary to good faith by which he shall pass off the goods manufactured by him or in which he deals, or his business, or services for those of the another who has established such goodwill, or who shall commit any acts calculated to produce said result (Sec. 168.2, Intellectual Property Code of the Philippines) to deceive the public or defraud a competitor. NOTES AND COMMENTS: a. Acts constituting unfair competition under the Intellectual Property Code of the Philippines:
168.2 Any person who shall employ deception or any other means contrary to good faith by which he shall pass off the goods manufactured by him or in which he deals, or his business, or services for those of the one having established such goodwill, or who shall commit any acts calculated to produce said result, shall be guilty of unfair competition , and shall be subject to an action therefor. 168.3 In particular, and without in anyway limiting the scope of protection against unfair competition, the following shall be deemed guilty of unfair competition: (a) Any person who is selling his foods and gives them, the general appearance of goods of another manufacturer or dealer, either as to the goods themselves or in the wrapping of the packages in which they are contained, or the devices or words thereon, or in any other feature of their appearance, which they are likely to influence purchasers to believe that the goods offered are those of a manufacturer or dealer, other than the actual manufacturer or dealer, or who otherwise clothes the goods with such appearance as shall deceive the public and defraud another of is legitimate trade, or any subsequent

b. Elements of unfair competition under Article 189 (1) of the Revised Penal Code.
1) That the offender gives his goods the general appearance of the goods of another manufacturer or dealer; 2) That the general appearance is shown in the (a) goods themselves, or in the (b) wrapping of their packages, or in the (c) device or words therein, or in (4) any other feature of their appearance; 3) That the offender offers to sell or sells those goods or gives other persons a chance or opportunity to do the same with a like purpose; and 4) That there is actual intent to deceive the public or defraud a competitor. (Sony Computer Entertainment, Inc. v. Supergreen, Incorporated, G. R. No. 161823, March 22, 2007 citing NBI-Microsoft Corporation v. Hwang, G. R. No. 147043, June 21, 2005, 460 SCRA 428, 444-445)

26-A. Supergreen, Inc. is engaged in the reproduction and distribution of counterfeit PlayStation software, consoles and accessories in violation of Sony Computers Intellectual property rights. It does its reproduction activities in Cavite City while it sells the counterfeit items in Mandaluyong City and other places within Metro Manila. The NBI applied for search warrants with the RTC of Manila on the basis of which it raided Supergreens premises in Cavite City and Paranaque City. NBI was able to seize a replicating machine and several units of counterfeit PlayStation consoles, joy pads, housing labels and game software. Supergreen now seeks a quashal of the warrants and the return of the seized items on the grounds improper venue and that the warrants were served outside the territorial jurisdiction of the issuing court.

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SUGGESTED ANSWER: No. Supergreens imitation of the general appearance of Sonys goods was allegedly done in Cavite, and sold in Mandaluyuong City. The alleged acts would constitute a transitory or continuing offense. Thus, under the Intellectual Property Code of the Philippines and the Revised Penal Code, Sony may apply for a search warrant in any court where any element of the alleged offense was committed, including any court within the National Capital Region (Manila). NOTES AND COMMENTS: a. Regional Trial Courts have jurisdiction over intellectual property rights violations. The Intellectual Property
Code of the Philippines is a special law that confers jurisdiction over violations of intellectual property rights to the Regional Trial Courts which should prevail over R. A. No. 7691, which is a general law [Samson v. Daway, 434 SCRA 612 (2004)] on jurisdiction of courts.

b. Issuance of search warrants in special criminal cases by the Regional Trial Courts of Manila and Quezon City. The Executive Judges and, whenever they are on
official leave of absence or are not physically present in the station, the Vice-Executive Judges of the RTCs of Manila and Quezon City shall have authority to act on applications filed by the National Bureau of Investigation (NBI), the Philippine National Police (PNP) and the AntiCrime Task Force (ACTAF), of search warrants involving heinous crimes, illegal gambling, illegal possession of firearms and ammunitions as well as violations of the Comprehensive Dangerous Drugs Act of 2002, the Intellectual Property Code, the Anti-Money Laundering Act of 2001, the Tariff and Customs Code, as amended, and other relevant laws that may hereafter be enacted by Congress, and included herein by the Supreme Court. x x x (Sec. 12, A.M. No. 03-8-02-SC)

and fixtures hereafter purchased by the mortgagor shall be included in and covered by the mortgage. Upon default by X, Y sought to foreclose the mortgage on the goods then found in the drugstore, half of which were admittedly acquired after the execution of the chattel mortgage. If you were the lawyer of X, what arguments would you advance to defeat the foreclosure on the after-acquired property ? If you were the judge, how would you decide. SUGGESTED ANSWER: After acquired stocks in trade are not covered by the chattel mortgage. As judge, foreclosure would be allowed. Where stocks in trade are the subject of a chattel mortgage, they could include stocks subsequently purchased to replenish those which existed at the execution of the mortgage but are not anymore available because they have been sold in the meantime.

NOTES AND COMMENTS:

a. Insurance on car covered by chattel mortgage.
Where the provisions of the Chattel Mortgage does not authorize the mortgagee to apply previous payments for the car to the insurer, the mortgagee has to send notice to the mortgagor if it decides to convert any of the previous installments made by the mortgagor to the payment for the renewal of the insurance. (Servicewide Specialists, Incorporated v. Court of Appeals, et al., G.R. No. 110597, May 8, 1996)

2.

What is the nature of a chattel mortgage

7. Special Laws (a) The Chattel Mortgage Law (Act 1508 in relation to Arts. 1484, 1485, 2140 and 2141 of the New Civil Code)
BAR: 1. To secure a debt to Y, X, the owner of Supreme Drugstore, executed a chattel mortgage covering the goods contained in the drugstore. The deed of chattel mortgage provides that all goods, stock-in-trade, furniture

contract ? SUGGESTED ANSWER: A contract of chattel mortgage is in the nature of a conditional sale of personal property given as a security for the payment of a debt, or the performance of some other obligation specified therein, the condition being that the sale shall be void upon the seller paying to the purchaser a sum of money or doing some other act named. If the condition is performed according to its terms, the mortgage and sale immediately becomes void, and the mortgagee is thereby diverted of title. (Magna Financial Services Group, Inc. v. Colarina,
G. R. No. 158635, December 9, 2005)

NOTES AND COMMENTS:

a. Foreclosure of chattel mortgage. Foreclosure is one of the remedies available to a mortgagee in case of nonpayment of a chattel mortgage by which he subjects the mortgaged property to the satisfaction of the obligation to secure that for which

the mortgage was given. (Magna Financial Services Group, Inc. v. Colarina, G. R. No. 158635, December 9, 2005) b. Kinds of foreclosure. Foreclosure may be effected either judicially or extrajudicially, that is, by ordinary action or by foreclosure under the power of sale contained in the mortgage. It may be effected by the usual methods, including sale of goods at public auction. Extrajudicial foreclosure is attained by causing the mortgaged property to be seized by the sheriff, as agent of the mortgagee, and have it sold at public auction in the manner prescribed by Section 14 of Act No. 1508, or the Chattel Mortgage Law. (Magna Financial Services Group, Inc. v. Colarina, G. R. No. 158635, December 9, 2005)

105

c. When foreclosure is deemed to have taken place. It has been deemed that there has been foreclosure of the
property when all the proceedings of the foreclosure including the sale of the property at public auction, have been accomplished. In short, actual foreclosure of the property is required. While the foregoing is the general rule, it has been held that no actual foreclosure is not necessary where the mortgaged property is already in the physical possession of the mortgagee, who has persistently and consistently avowed that it elects the remedy of foreclosure. (Magna Financial Services Group, Inc. v. Colarina, G. R. No. 158635, December 9, 2005)

P500,000.00 as additional loan from mortgaged property TCT RT-43723. Is TCT No. RT-43723 also bound for the the P150,000.00 and P500,000.00 additional loans? SUGGESTED ANSWER: No. There is no stipulation that the mortgaged realty should also secure future loans and advancements. An obligation is not secured by a mortgage unless it comes fairly within the terms of the mortgage contract. In order to constitute a legal mortgage, it must be executed in a public document, besides being recorded. A provision in a private document, such as the acknowledgments for the P150,000.00 and the P500,00 loans, although denominating the agreement as one of mortgage, cannot be considered as it is not susceptible of inscription in the property mortgage. A mortgage in legal form is not constituted by a private document, even if such mortgage be accompanied with delivery of possession of the mortgaged property. (Spouses
Cuyco v. Spouses Cuyco, G.R. No. 168736, April 19, 2006)

NOTES AND COMMENTS:

a. Requirements for real estate mortgage. By express provision of Section 127 of Act No. 496, a mortgage affecting land, whether registered under said Act or not registered at all, is not deemed to be sufficient in law nor may it be effective to encumber or bind land unless made substantially in the form therein prescribed. It is required, among other things, that the document be signed by the mortgagor executing the same, in the presence of two witnesses, and acknowledged as his free act and deed before a notary public. A mortgage constituted by means of a private document obviously does not comply with such legal requirements. (Spouses Cuyco v. Spouses Cuyco, G.R. No. 168736, April 19, 2006) xxx The owner of registered land may mortgage or lease it by executing the deed in a form sufficient in law. Such deed of mortgage or lease and all instruments which assign, extend, discharge or otherwise deal with the mortgage or lease shall be registered, and shall take effect upon the title only from time of registration. (2nd sentence, 1st par., Property Registration Decree, Pres. Decree No. 1529) Registration is not required to bind parties in a mortgage involving unregistered land. It is only required to bind parties. (Sec. 113m Property Registration Decree, Pres. Decree No.1529) b. Property Registration Decree (Pres. Decree No. 1529) has not repealed Act No. 496. The repealing clause of Pres. Decree No. 1529 reads as follows: All laws, decrees orders, rules and regulations, or parts thereof, in conflict or inconsistent with any of the

d. No personal notice to mortgagor is required in extrajudicial foreclosure sale. (Philippine National Bank v.
Rabat, 344SCRA 706)

e. Foreclosure of chattel mortgage on subject of mortgage precludes recovery of deficiency if article foreclosed is
article purchased and covered by the chattel mortgage. If the chattel mortgage is to secure a loan transaction, other than one involving a purchase, there could be recovery of the deficiency.

(b) Real Estate Mortgage Law (Act 3135, as amended by R.A. 4118)
1. Adelina borrowed P 1.5 million from Renato, payable within one year at 18% per annum, and secured by a Real Estate mortgage over a parcel of land with improvements covered by TCT No. RT-43723. Later on July 1, 1992 Adelina received from Renato the amount of P150,000.00 as additional loan against mortgaged property TCT No.RT-43723. On September 5, 1992, Adelina likewise received from Renato, the amount of

provisions of this Decree are hereby repealed or modified accordingly. (Sec.120, Pres. Decree No. 1529)

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2. What is meant by a dragnet clause ?

SUGGESTED ANSWER: A dragnet clause, also known as the blanket mortgage clause provides that the amounts named as consideration in a contract of mortgage may stand as security if from the four corners of the instrument the intent to secure future and other indebtedness can be gathered. It operates as a convenience and accommodation to the borrower as it makes available additional funds without their having to execute additional security documents, thereby saving time, travel, loan closing costs, costs of extra legal services, recording fees, et cetera. (Spouses Cuyco v. Spouses Cuyco, G.R.
No. 168736, April 19, 2006 citing Union Bank of the Philippines v. Court of Appeals, G. R. No. 164910, September 30, 2005, 471 SCRA 751,758)

Is a dragnet Philippines ?

clause

recognized

in

the

SUGGESTED ANSWER: Yes, subject to certain conditions. While a real estate mortgage may exceptionally secure future loans or advancements, these future debits must be sufficiently described in the mortgage contract. An obligation is not secured by a mortgage unless it comes fairly within the terms of the mortgage contract. [Spouses Cuyco v. Spouses
Cuyco, G.R. No. 168736, April 19, 2006 citing Philippine Bank of Communications v. Court of Appeals, 323 Phil. 197, 313; 253 SCRA 241, 254 (1996)]

BAR: a. Procedure for suspension of payments. If natural persons are insolvent, petition should be filed with the Regional Trial Court. 1) Filing of a petition accompanied by an inventory of assets and a detailed schedule of obligations, amounts and their due dates; 2) Issue by the court of an order setting the place and date for meeting of creditors; 3) Publication of the order and service of summons to all creditors listed in the petition; 4) Meeting of creditors and approval of debtors proposal by creditors, at least 2/3 in number representing 3/5 of all the liabilities; 5) Objections, if any, by the other creditors; 6) Order of the court to implement the agreement.. b. Insolvency distinguished from suspension of payments. 1) In insolvency, the liabilities of the debtor are more than his assets WHILE in suspension of payments the assets of the debtor are more than his liabilities; 2) In insolvency, the assets of the debtor are to be converted into cash for distribution among his creditors, WHILE in suspension of payments the debtor is asking for time within which to convert his properties into cash with which to pay his creditors as the obligations fall due. 3) In insolvency the purpose is to obtain discharge from all debts and liability WHILE in suspension of payments the purpose is to delay payment of debts which remain unaffected although a postponement of payments is declared. 2. What is voluntary insolvency ? SUGGESTED ANSWER: A proceeding taken by a debtor, having obligations exceeding P1,000.00 who, with his existing assets cannot meet all of them goes to the court to have himself be declared as an insolvent. NOTES AND COMMENTS: a. Procedure for voluntary insolvency: 1) Filing of petition accompanied by an inventory of assets and schedule of liabilities; 2) The court issues an order declaring him as an insolvent;

(c) The Insolvency Law (Act 1956)

1. What is suspension of payments ? SUGGESTED ANSWER: The remedy available under the Insolvency law for a natural or juridical person who, having sufficient assets to meet his obligations, foresees the impossibility of meeting them when they fall due, and therefore presents a proposal to pay his obligations on dates later than their due dates. NOTES AND COMMENTS:

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3) Publication of the order, and service of the order on the creditors mentioned in the petition; 4) Creditors meet to elect an assignee, to whom are conveyed all the debtors assets; 5) Liquidation and payment of creditors; 6) Composition (agreement between debtor and creditor), if agreed; 7) Order of discharge of the insolvent. NOTES AND COMMENTS: a. The obligations of an insolvent debtor that survives adjudication of insolvency or claims that could be pursued against a debtor despite his having been pronounced as insolvent.
1) national or local; 2) Obligations arising from embezzlement or fraud; 3) Obligation of any person liable with the insolvent debtor for the same debt, either as solidary co-debtor, surety, guarantor, partner, indorser or otherwise; 4) Alimony or claims for support; and 5) Debts not provable against the estate (such as after incurred obligations) of, or not included in the schedule submitted by, the insolvent debtor. Taxes and assessments due the government,

insolvent because he has committed any one of the acts of insolvency enumerated by law. NOTES AND COMMENTS: BAR: a. Procedure for involuntary insolvency.
1) Filing of petition; 2) Answer of defendant; 3) Trial and order of court adjudging debtor as an insolvent, if supported by the facts; 4) Publication of the order and service of it on all creditors; 5) Election by creditors of an assignee and conveyance of debtors assets to him; 6) Liquidation and payment of creditors; 7) Composition; 8) Discharge of the insolvent.

b. Acts of insolvency which warrants filing of petition for involuntary insolvency: The debtor:
1) 2) 3) 4) 5) 6) against him; 7) Allowed judgment by default against him; 8) Allowed property to be taken by legal process to give preference to certain creditors; 9) Make assignment, gift or sale; 10) In contemplation of insolvency, made payments or gift to another; 11) Defaulted in payment of obligations for 30 days; 12) Failed after 30 days to surrender money deposited in trust with him; 13) Found to have insufficient properties to satisfy a judgment. Is departing from the Philippines; Is absent and continued to be absent; Conceals himself from judicial process; Removes or conceals his properties; Allowed his properties to be attached by others; Confessed or allowed judgment to be taken

b. Involuntary voluntary insolvency.

insolvency

distinguished

from

1) Involuntary three or more creditors are required WHILE for voluntary one creditor may be sufficient; 2) Involuntary, the creditors must be residents of the Philippines whose credits or demand accrued in the Philippines and none of the creditors has become a creditor by assignment within thirty (30) days prior to the filing of the petition WHILE no such requirements exist for voluntary insolvency; 3) Involuntary, the amount of indebtedness must not be less than P1,000.00 WHILE for voluntary, it must exceed P1,000.00; 4) Involuntary, the petition must be accompanied by a bond, WHILE voluntary does not require a bond

3. What is involuntary insolvency ? SUGGESTED ANSWER: A proceeding filed by three or more creditors whose credits aggregates not less than P1,000.00, or by a corporation or partnership to declare a debtor

(d) Truth in the Lending Act (R.A. No. 3765), (As amended by the Consumer Act of 1992) 1. What are required to furnished under the Truth in the Lending Act, as amended by the Consumer Act of 1992, to a person to whom credit sales is extended ?

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SUGGESTED ANSWER: Any creditor shall furnish to each person to whom credit is extended, prior to the consummation of the transaction, a clear statement in writing setting forth, to the extent applicable and in accordance with rules and regulations prescribed by the Monetary Board of the Bangko Sentral ng Pilipinas, the following information: 1) the cash price or delivered price of the property or service to be acquired; 2) the amounts, if any, to be credited as down payment and/or trade-in; 3) the difference between the amounts set forth under clauses (1) and (2); 4) the charges, individually itemized, which are paid or to be paid by such person in connection with the transaction but which are not incident to the extension of credit; 5) the total amount to be financed; 6) the finance charge expressed in terms of pesos and centavos; and 7) the percentage that the finance charge bears to the total amount to be financed expressed as a simple annual rate on the outstanding unpaid balance of the obligation. ; 8) the effective interest rate; 9) the repayment program; and 10)the default or delinquency charges on late payments. NOTES AND COMMENTS: a. Required to furnished under the Truth in the Lending Act, as amended by the Consumer Act of 1992, to a person to whom consumer loan is extended:
1) the amount of credit extended; 2) the charges, individually itemized, which are paid or to be paid by such person in connection with the transaction but which are not incident to the extension of credit; 3) the total amount to be financed; 4) the amount of finance charge expressed in terms of pesos and centavos; 5) the effective interest rate; 6) the percentage that the finance charge bears to the total amount to be financed expressed as a simple annual rate on the outstanding unpaid balance of the obligation. ; 7) the default or delinquency charges on late payments; and 8) the description of the security.

b. Transactions disclosures:

which

require

the

above

1) Credit sales; 2) Open consumer credit plan; 3) Consumer loans not open and consumer credit; and 4) Sale of consumer products on installment basis.

c. Handling charges not reflected on the promissory notes could not be collected by the bank. Banks are
authorized under Central Bank Circular No. 504 to collect handling charges. Section 7 of the same Circular, however, provides that all banks and non-bank financial intermediaries authorized to engage in quasi-banking functions are required to strictly adhere to the provisions of the Truth in Lending Act and shall make the true and effect cost of borrowing an integral part of every loan contract. (Consolidated Bank and Trust Corporation [Solidbank] vs. Court of Appeals, et al., G.R. No. 91494, July 14, 1995)

GOOD LUCK ! ADVANCE CONGRATULATIONS ! SEE YOU IN COURT !