2016 BAR EXAMINATIONS

MERCANTILE LAW

I
What does "doing business in the Philippines" under the Foreign Investments Act of 1991
mean? (5%)

Under the Foreign Investments Act of 1991 of Section 3(d) doing business shall include
soliciting orders, service contracts, opening offices, whether called liaison offices or
branches; appointing representatives or distributors domiciled in the Philippines or who
in any calendar year stay in the country for a period or periods totaling one hundred
eighty [180] days or more; participating in the management, supervision or control of any
domestic business, firm, entity or corporation in the Philippines; and any other act or
acts that imply a continuity of commercial dealings or arrangements and contemplate to
that extent the performance of acts or works, or the exercise of some of the functions
normally incident to, and in progressive prosecution of commercial gain or of the
purpose and object of the business organization: Provided, however, That the phrase
doing business shall not be deemed to include mere investment as a shareholder by a
foreign entity in domestic corporations duly registered to do business, and/or the
exercise of rights as such investor; nor having a nominee director or officer to represent
its interests in such corporation; nor appointing a representative or distributor domiciled
in the Philippines which transacts business in its own name and for its own account;

II
Jason is the proud owner of a newly-built house worth PS million. As a protection against any
possible loss or damage to his house, Jason applied for a fire insurance policy thereon with
Shure Insurance Corporation (Shure) on October 11, 2016 and paid the premium in cash. It took
the company a week to approve Jason's application.

On October 18, 2016, Shure mailed the approved policy to Jason which the latter received five
(5) days later. However, Jason's house had been razed by fire which transpired a day before his
receipt of the approved policy. Jason filed a written claim with Shure under the insurance policy.
Shure prays for the denial of the claim on the ground that the theory of cognition applies to
contracts of insurance.

Decide Jason's claim with reasons. (5%)

Answer (1):
Jason cannot recover on the insurance policy since he had no knowledge of the insurer's
acceptance of his application before his house (insured property) was razed by fire.

An insurance contract is a consensual contract and is therefore perfected the moment

there is a meeting of minds with respect to the object and the cause or consideration.
What is being followed in insurance contracts is what is known as the cognition
theory. In Enriquez vs. Sun Life Assurance Co., the contract for a life annuity in was not
perfected because it has not been proved satisfactorily that the acceptance of the
application ever came to the knowledge of the applicant.

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In the case at bar, the policy was received by Jason only a day after the occurrence of the
insured risk. There was no perfected contract of fire insurance yet. Thus, Jason's claim
under said policy should be denied.

Answer (2):

Jason written claim with Shure under the insurance policy will prosper,

Fire insurance policy was paid in cash to Shure Insurance Corporation on October 11,
2016 and the contract was perfected on October 18, 2016 with receipt of the approved
policy.

Section 77. An insurer is entitled to payment of the premium as soon as the thing
insured is exposed to the peril insured against. Notwithstanding any agreement to the
contrary, no policy or contract of insurance issued by an insurance company is valid and
binding unless and until the premium thereof has been paid, except in the case of a life
or an industrial life policy whenever the grace period provision applies.

Article 78 of the Insurance Code 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

What is being followed in insurance contracts is what is known as the cognition theory
Thus, an acceptance made by letter shall not bind the person making the offer except
from the time it came to his knowledge.(Enriquez vs. Sun Life Assurance Co. of Canada,
41 Phil. 269

Essential elements of the general rule pertaining to the mailing and delivery of mail
matter as announced by the American courts, namely, when a letter or other mail matter
is addressed and mailed with postage prepaid there is a rebuttable presumption of fact
that it was received by the addressee as soon as it could have been transmitted to him in
the ordinary course of the mails. But if any one of these elemental facts fails to appear, it
is fatal to the presumption. For instance, a letter will not be presumed to have been
received by the addressee unless it is shown that it was deposited in the post-office,
properly addressed and stamped. (See 22 C.J., 96, and 49 L. R. A. [N. S.], pp. 458, et seq.,
notes.)

Cognition theory applies only to life and health insurance and not to property and liability
insurance.

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 III

ABC Appliances Corporation (ABC) is a domestic corporation engaged in the production and
sale of televisions and other appliances. YYY Engineers, a Taiwanese company, is the
manufacturer of televisions and other appliances from whom ABC actually purchases
appliances. From 2000, when ABC started doing business with YYY, it has been using the mark
"TTubes" in the Philippines for the television units that were bought from YYY. In 2015, YYY filed
a trademark application for "TTubes." Later, ABC also filed its application. Both claim the right
over the trademark "TTubes" for television products. YYY relies on the principle of "first to file"
while ABC invokes the "doctrine of prior use."

[a] Does the fact that YYY filed its application ahead of ABC mean that YYY has the prior right
over the trademark? Explain briefly. (2.5o/o)

[b] Does the prior registration also mean a conclusive assumption that YYY Engineers is in fact
the owner of the trademark "TTubes?"
Briefly explain your answer. (2.5%)

a. No.

RA 8293 espouses the first-to-file rule as stated under Sec. 123.1(d) which states: Section
123. Registrability. - 123.1. A mark cannot be registered if it: x x x x (d) Is identical with a
registered mark belonging to a different proprietor or a mark with an earlier filing or
priority date, in respect of: (i) The same goods or services, or (ii) Closely related goods
or services, or (iii) If it nearly resembles such a mark as to be likely to deceive or cause
confusion. Under this provision, the registration of a mark is prevented with the filing of
an earlier application for registration. This must not, however, be interpreted to mean that
ownership should be based upon an earlier filing date. While RA 8293 removed the
previous requirement of proof of actual use prior to the filing of an application for
registration of a mark, proof of prior and continuous use is necessary to establish
ownership of a mark. Such ownership constitutes sufficient evidence to oppose the
registration of a mark.

Once application has commenced, it is imperative that actual use of the mark in
commerce takes. Otherwise, such mark is open to cancellation proceedings from any
third party who may be minded to do so or motu propio by the Director of Trademarks.

b. NO.

As aptly stated by the Court in Shangri-la International Hotel Management, Ltd. v.

Developers Group of Companies, Inc.:[37] G.R. No. 159938 , March 31, 2006. Registration,
without more, does not confer upon the registrant an absolute right to the registered
mark. The certificate of registration is merely a prima facie proof that the registrant is the
owner of the registered mark or trade name. Evidence of prior and continuous use of the
mark or trade name by another can overcome the presumptive ownership of the
registrant and may very well entitle the former to be declared owner in an appropriate
case. x x x x Ownership of a mark or trade name may be acquired not necessarily by
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registration but by adoption and use in trade or commerce. As between actual use of a
mark without registration, and registration of the mark without actual use thereof, the
former prevails over the latter. For a rule widely accepted and firmly entrenched, because
it has come down through the years, is that actual use in commerce or business is a pre-
requisite to the acquisition of the right of ownership. x x x x By itself, registration is not a
mode of acquiring ownership. When the applicant is not the owner of the trademark
being applied for, he has no right to apply for registration of the same. Registration
merely creates a prima facie presumption of the validity of the registration, of the
registrants ownership of the trademark and of the exclusive right to the use thereof.
Such presumption, just like the presumptive regularity in the performance of official
functions, is rebuttable and must give way to evidence to the contrary.

IV

X's "MINI-ME" burgers are bestsellers in the country. Its "MINI-ME" logo, which bears the color
blue, is a registered mark and has been so since the year 2010. Y, a competitor of X, has her
own burger which she named "ME-TOO" and her logo thereon is printed in bluish-green. When
X sued Y for trademark infringement, the trial court ruled in favor of the plaintiff by applying the
Holistic Test. The court held that Y infringed on X's mark since the dissimilarities between the
two marks are too trifling and frivolous such that Y's "ME-TOO," when compared to X's "MINI-
ME," will likely cause confusion among consumers.

Is the application of the Holistic Test correct? ( 5%)

Yes, Holistic Test is correct.

The Holistic Test entails a consideration of the entirety of the marks as applied to the
products, including labels and packaging, in determining confusing similarity. The
scrutinizing eye of the observer must focus not only on the predominant words but also
on the other features appearing in both labels so that a conclusion may be drawn as to
whether one is confusingly similar to the other.

Relative to the question on confusion of marks and trade names, jurisprudence has
noted two (2) types of confusion, viz: (1) confusion of goods (product confusion), where
the ordinarily prudent purchaser would be induced to purchase one product in the belief
that he was purchasing the other; and (2) confusion of business (source or origin
confusion), where, although the goods of the parties are different, the product, the mark
of which registration is applied for by one party, is such as might reasonably be assumed
to originate with the registrant of an earlier product, and the public would then be
deceived either into that belief or into the belief that there is some connection between
the two parties, though in existent.
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Answer:

No. The application by the court of the holistic test is not correct. In determining
likelihood of confusion, jurisprudence has developed two tests, the dominancy test and
the holistic test.

The dominancy test focuses on the similarity of the prevalent features of the competing
trademarks that might cause confusion. Under this test, courts give greater weight to the
similarity of the appearance of the product arising from the adoption of the dominant
features of the registered mark, disregarding minor differences. Courts will consider
more the aural and visual impressions created by the marks in the public mind, giving
little weight to factors like prices, quality, sales outlets and market segments. In contrast,
the holistic test requires the court to consider the entirety of the marks as applied to the
products, including the labels and packaging, in determining confusing similarity. In the
case of Co Tiong Sa v. Director of Patents,the Court ruled: xxx It has been consistently
held that the question of infringement of a trademark is to be determined by the test of
dominancy. Similarity in size, form and color, while relevant, is not conclusive. If the
competing trademark contains the main or essential or dominant 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 suggest an
effort to imitate. (G. Heilman Brewing Co. vs. Independent Brewing Co., 191 F., 489, 495,
citing Eagle White Lead Co. vs. Pflugh (CC) 180 Fed. 579). The question at issue in cases
of infringement of trademarks is whether the use of the marks involved would be likely to
cause confusion or mistakes in the mind of the public or deceive purchasers. (Auburn
Rubber Corporation vs. Honover Rubber Co., 107 F. 2d 588; xxx) (Emphasis supplied

MS Brewery Corporation (MS) is a manufacturer and distributor of the popular beer "MS Lite." It
faces stiff competition from BA Brewery Corporation (BA) whose sales of its own beer product,
"BA Lighter," has soared to new heights. Meanwhile, sales of the "MS Lite" decreased
considerably. The distribution and marketing personnel of MS later discovered that BA has
stored thousands of empty bottles of "MS Lite" manufactured by MS in one of its warehouses.
MS filed a suit for unfair competition against BA before the Regional Trial Court (RTC). Finding a
connection between the dwindling sales of MS and the increased sales of BA, the RTC ruled
that BA resorted to acts of unfair competition to the detriment of MS. Is the RTC correct?
Explain. (5%)

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NO. in the case of G.R. No. 154491 November 14, 2008

COCA-COLA BOTTLERS, PHILS., INC. (CCBPI), Naga Plant, petitioner,

vs.
QUINTIN J. GOMEZ, a.k.a. "KIT" GOMEZ and DANILO E. GALICIA, a.k.a. "DANNY
GALICIA",respondents.

We do not agree with the petitioner's expansive interpretation of Section 168.3 (c).

"Unfair competition," previously defined in Philippine jurisprudence in relation with R.A. No. 166
and Articles 188 and 189 of the Revised Penal Code, is now covered by Section 168 of the IP
Code as this Code has expressly repealed R.A. No. 165 and R.A. No. 166, and Articles 188 and
189 of the Revised Penal Code.

Articles 168.1 and 168.2, as quoted above, provide the concept and general rule on the
definition of unfair competition. The law does not thereby cover every unfair act committed in
the course of business; it covers only acts characterized by "deception or any other means
contrary to good faith" in the passing off of goods and services as those of another who
has established goodwill in relation with these goods or services, or any other act
calculated to produce the same result.

From jurisprudence, unfair competition has been defined as the passing off (or palming
off) or attempting to pass off upon the public the goods or business of one person as the
goods or business of another with the end and probable effect of deceiving the public. It
formulated the "true test" of unfair competition: whether the acts of defendant are such as are
calculated to deceive the ordinary buyer making his purchases under the ordinary conditions
which prevail in the particular trade to which the controversy relates.13 One of the essential
requisites in an action to restrain unfair competition is proof of fraud; the intent to deceive must
be shown before the right to recover can exist.14 The advent of the IP Code has not significantly
changed these rulings as they are fully in accord with what Section 168 of the Code in its
entirety provides. Deception, passing off and fraud upon the public are still the key
elements that must be present for unfair competition to exist.

We hold that it is not. Hoarding as defined by the petitioner is not even an act within the
contemplation of the IP Code

NO. The RTC is not correct. Unfair competition has been defined as the passing off (or
palming off) or attempting to pass off upon the public the goods or business of one
person as the goods or business of another with the end and probable effect of
deceiving the public. It formulated the true test of unfair competition: whether the acts of
defendant are such as are calculated to deceive the ordinary buyer making his purchases
under the ordinary conditions which prevail in the particular trade to which the
controversy relates. One of the essential requisites in an action to restrain unfair
competition is proof of fraud; the intent to deceive must be shown before the right to
recover can exist. The advent of the IP Code has not significantly changed these rulings
as they are fully in accord with what Section 168 of the Code in its entirety provides.

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Deception, passing off and fraud upon the public are still the key elements that must be
present for unfair competition to exist. Hoarding - as defined and charged by MS does
not fall within the coverage of the IP. It does not relate to any patent, trademark, trade
name or service mark that BA have invaded, intruded into or used without proper
authority from the MS. Nor BA alleged to be fraudulently passing off their products or
services as those of the MS. The BA was not also alleged to be undertaking any
representation or misrepresentation that would confuse or tend to confuse the goods of
MS with those of BA, or vice versa. What in fact MS alleges is an act foreign to the Code,
to the concepts it embodies and to the acts it regulates; as alleged, hoarding inflicts
unfairness by seeking to limit the oppositions sales by depriving it of the bottles it can
use for these sales.

VI

Nautica Shipping Lines (Nautica) bought a second hand passenger ship from Japan. It modified
the design of the bulkhead of the deck of the ship to accommodate more passengers. The ship
sunk with its passengers in Tablas Strait due to heavy rains brought by the monsoon. The heirs
of the passengers sued Nautica for its liability as a common carrier based on the reconfiguration
of the bulkhead which may have compromised the stability of the ship. Nautica raised the
defense that the monsoon is a fortuitous event and, at most, its liability is prescribed by the
Limited Liability Rule. Decide with reasons. ( 5%)

Nautica Shipping Lines liability is prescribed by the Limited Liability Rule:

If the ship owner or agent may in any way be held civilly liable at all for injury to or death
of passengers arising from the negligence of the captain in cases of collisions or
shipwrecks, his liability is merely co-extensive with his interest in the vessel such that a
total loss thereof results in its extinction. (Yangco vs. Laserna, et al., supra).

The rationale therefor has been explained as follows:

The real and hypothecary nature of the liability of the ship owner or agent embodied in
the provisions of the Maritime Law, Book III, Code of Commerce, had its origin in the
prevailing conditions of the maritime trade and sea voyages during the medieval ages,
attended by innumerable hazards and perils. To offset against these adverse conditions
and to encourage ship building and maritime commerce, it was deemed necessary to
confine the liability of the owner or agent arising from the operation of a ship to the
vessel, equipment, and freight, or insurance, if any, so that if the ship owner or agent
abandoned the ship, equipment, and freight, his liability was extinguished. (Abueg vs.
San Diego, 77 Phil. 730 [1946])

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Without the principle of limited liability, a ship owner and investor in maritime commerce
would run the risk of being ruined by the bad faith or negligence of his captain , and the
apprehension of this would be fatal to the interest of navigation. Yangco vs. Lasema,
supra).

As evidence of this real nature of the maritime law we have (1) the limitation of the
liability of the agents to the actual value of the vessel and the freight money, and (2) the
right to retain the cargo and the embargo and detention of the vessel even in cases
where the ordinary civil law would not allow more than a personal action against the
debtor or person liable. It will be observed that these rights are correlative, and naturally
so, because if the agent can exempt himself from liability by abandoning the vessel and
freight money, thus avoiding the possibility of risking his whole fortune in the business,
it is also just that his maritime creditor may for any reason attach the vessel itself to
secure his claim without waiting for a settlement of his rights by a final judgment, even to
the prejudice of a third person. (Phil. Shipping Co. vs. Vergara, 6 Phil. 284 [1906]).

The limited liability rule, however, is not without exceptions, namely: (1) where the injury
or death to a passenger is due either to the fault of the ship owner, or to the concurring
negligence of the ship owner and the captain (Manila Steamship Co., Inc. vs.
Abdulhaman supra); (2) where the vessel is insured; and (3) in workmens compensation
claims Abueg vs. San Diego, supra). In this case, there is nothing in the records to show
that the loss of the cargo was due to the fault of the private respondent as shipowners,
or to their concurrent negligence with the captain of the vessel.

What about the provisions of the Civil Code on common carriers? Considering the real
and hypothecary nature of liability under maritime law, these provisions would not have
any effect on the principle of limited liability for ship owners or ship agents. As was
expounded by this Court:

In arriving at this conclusion, the fact is not ignored that the ill fated, Nautica, as a vessel
engaged in interisland trade, is a common carrier, and that the relationship between the
petitioner and the passengers who died in the mishap rests on a contract of carriage. But
assuming that petitioner is liable for a breach of contract of carriage, the exclusively real
and hypothecary nature of maritime law operates to limit such liability to the value of the
vessel, or to the insurance thereon, if any. In the instant case it does not appear that the
vessel was insured. (Yangco vs. Laserila, et al., supra).

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Moreover, Article 1766 of the Civil Code provides:

Art. 1766. In all matters not regulated by this Code, the rights and obligations of common
carriers shall be governed by the Code of Commerce and by special laws.

In other words, the primary law is the Civil Code (Arts. 1732-1766) and in default thereof,
the Code of Commerce and other special laws are applied. Since the Civil Code contains
no provisions regulating liability of ship owners or agents in the event of total loss or
destruction of the vessel, it is the provisions of the Code of Commerce, more particularly
Article 587, that govern in this case.

Article 587 of the Code of Commerce provides:

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 the goods which
he loaded on the vessel; but he may exempt himself therefrom by abandoning the vessel
with all the equipment and the freight it may have earned during the voyage.

In sum, it will have to be held that since the ship agents or ship owners liability is
merely co-extensive with his interest in the vessel such that a total loss thereof results in
its extinction (Yangco vs. Laserna, supra), and none of the exceptions to the rule on
limited liability being present, the liability of private respondents for the loss of the cargo
of copra must be deemed to have been extinguished. There is no showing that the vessel
was insured in this case.

Answer (2)
Nautica Shipping Lines liability is prescribed by the Limited Liability Rule:

If the ship owner or agent may in any way be held civilly liable at all for injury to or death of
passengers arising from the negligence of the captain in cases of collisions or shipwrecks, his
liability is merely co-extensive with his interest in the vessel such that a total loss thereof results
in its extinction. (Yangco vs. Laserna, et al., supra).

The rationale therefor has been explained as follows:

The real and hypothecary nature of the liability of the ship owner or agent embodied in the
provisions of the Maritime Law, Book III, Code of Commerce, had its origin in the prevailing
conditions of the maritime trade and sea voyages during the medieval ages, attended by
innumerable hazards and perils. To offset against these adverse conditions and to encourage ship
building and maritime commerce, it was deemed necessary to confine the liability of the owner
or agent arising from the operation of a ship to the vessel, equipment, and freight, or insurance, if
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any, so that if the ship owner or agent abandoned the ship, equipment, and freight, his liability
was extinguished. (Abueg vs. San Diego, 77 Phil. 730 [1946])

Without the principle of limited liability, a ship owner and investor in maritime commerce would
run the risk of being ruined by the bad faith or negligence of his captain, and the apprehension of
this would be fatal to the interest of navigation. Yangco vs. Lasema, supra).

As evidence of this real nature of the maritime law we have (1) the limitation of the liability of
the agents to the actual value of the vessel and the freight money, and (2) the right to retain the
cargo and the embargo and detention of the vessel even in cases where the ordinary civil law
would not allow more than a personal action against the debtor or person liable. It will be
observed that these rights are correlative, and naturally so, because if the agent can exempt
himself from liability by abandoning the vessel and freight money, thus avoiding the possibility
of risking his whole fortune in the business, it is also just that his maritime creditor may for any
reason attach the vessel itself to secure his claim without waiting for a settlement of his rights by
a final judgment, even to the prejudice of a third person. (Phil. Shipping Co. vs. Vergara, 6 Phil.
284 [1906]).

The limited liability rule, however, is not without exceptions, namely: (1) where the injury
or death to a passenger is due either to the fault of the ship owner, or to the concurring
negligence of the ship owner and the captain (Manila Steamship Co., Inc. vs. Abdulhaman
supra); (2) where the vessel is insured; and (3) in workmens compensation claims Abueg
vs. San Diego, supra). In this case, there is nothing in the records to show that the loss of
the cargo was due to the fault of the private respondent as shipowners, or to their
concurrent negligence with the captain of the vessel.

What about the provisions of the Civil Code on common carriers? Considering the real and
hypothecary nature of liability under maritime law, these provisions would not have any effect
on the principle of limited liability for ship owners or ship agents. As was expounded by this
Court:

In arriving at this conclusion, the fact is not ignored that the illfated, Nautica, as a vessel engaged
in interisland trade, is a common carrier, and that the relationship between the petitioner and the
passengers who died in the mishap rests on a contract of carriage. But assuming that petitioner is
liable for a breach of contract of carriage, the exclusively real and hypothecary nature of
maritime law operates to limit such liability to the value of the vessel, or to the insurance
thereon, if any. In the instant case it does not appear that the vessel was insured. (Yangco vs.
Laserila, et al., supra).

Moreover, Article 1766 of the Civil Code provides:

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Art. 1766. In all matters not regulated by this Code, the rights and obligations of common
carriers shall be governed by the Code of Commerce and by special laws.

In other words, the primary law is the Civil Code (Arts. 1732-1766) and in default thereof, the
Code of Commerce and other special laws are applied. Since the Civil Code contains no
provisions regulating liability of ship owners or agents in the event of total loss or destruction of
the vessel, it is the provisions of the Code of Commerce, more particularly Article 587, that
govern in this case.

Article 587 of the Code of Commerce provides:

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 the goods which he loaded on the
vessel; but he may exempt himself therefrom by abandoning the vessel with all the equipment
and the freight it may have earned during the voyage.

In sum, it will have to be held that since the ship agents or ship owners liability is merely co-
extensive with his interest in the vessel such that a total loss thereof results in its extinction
(Yangco vs. Laserna, supra), and none of the exceptions to the rule on limited liability being
present, the liability of private respondents for the loss of the cargo of copra must be deemed to
have been extinguished. There is no showing that the vessel was insured in this case.

VII

A railroad track of the Philippine National Railway (PNR) is located near a busy intersection of
Puyat Avenue and Osmefia Highway. One afternoon, the intersection was heavily congested, as
usual. Juan, the driver of a public utility jeepney (PUJ), drove onto the railroad tracks but could
go no farther because of the heavy traffic at the intersection. After the jeepney stopped right on
the railroad track, it was hit and overturned by a PNR train, resulting in the death of Kim, a
passenger of the PUJ, and injuries to Juan and his other passengers. Juan, the injured
passengers and Kim's family sued the PNR for damages for its negligence.
It was established that the steel pole barrier before the track was broken, and that the PNR had
the last clear chance of avoiding the accident. On the other hand, the PNR raised the defense
that the track is for the exclusive use of the train and that motorists are aware that it is
negligence per se to stop their vehicles on the tracks.

Decide the case and explain. (5%)

I will rule in favor of PNR.

The doctrine of last clear chance states that where both parties are negligent but the
negligent act of one is appreciably later than that of the other, or where it is impossible to
determine whose fault or negligence caused the loss, the one who had the last clear
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opportunity to avoid the loss but failed to do so, is chargeable with the loss.[29] Stated
differently, the antecedent negligence of the plaintiff does not preclude him from
recovering damages caused by the supervening negligence of the defendant, who had
the last fair chance to prevent the impending harm by the exercise of due diligence.

We do not apply the doctrine of last clear chance to the present case. It cannot be
expected for a train to avoid the jeepney since it can only go one way trailing the railings.
Moreover, the rail road is exclusive the PNR and the jeepney should not have stopped
right in the rail road. The jeepney failed to observe extraordinary diligence.

Alternative Answer:

G.R. No. 70547 January 22, 1993

PHILIPPINE NATIONAL RAILWAYS and HONORIO CABARDO, petitioners, vs.

INTERMEDIATE APPELLATE COURT, and BALIWAG TRANSIT, INC., respondents.

absence of a crossing bar, signal light, flagman or switchman to warn the public of an
approaching train constitutes negligence per the pronouncement of this Court in Lilius
vs. Manila Railroad Company (59 Phil 758 [1934]).

VIII

In 2015, Total Bank (Total) proposed to sell to Royal Bank (Royal) its banking business for P 10
billion consisting of specified assets and liabilities. The parties reached an eventual agreement,
which they termed as "Purchase and Assumption (P & A) Agreement," in which Royal would
acquire Total's specified assets and liabilities, excluding contingent claims, with the further
stipulation that it should be approved by the Bangko Sentral ng Pilipinas (BSP). BSP imposed
the condition that Total should place in escrow Pl billion to cover for contingent claims against it.
Total complied. After securing the approval of the BSP, the two banks signed the agreement.
BSP thereafter issued a circular advising all bank and non-bank intermediaries that effective
January 1, 2016, "the banking activities of Total Bank and Royal Bank have been consolidated
and the latter has carried out their operations since then."

[a] Was there a merger and consolidation of the two banks in point of the Corporation Code?
Explain. (2.5%)

[b] What is meant by a de facto merger? Discuss. (2.5%)

NO.
Merger is a re-organization of two or more corporations that results in their consolidating
into a single corporation, which is one of the constituent corporations, one disappearing

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or dissolving and the other surviving. To put it another way, merger is the absorption of
one or more corporations by another existing corporation, which retains its identity and
takes over the rights, privileges, franchises, properties, claims, liabilities and obligations
of the absorbed corporation(s). The absorbing corporation continues its existence while
the life or lives of the other corporation(s) is or are terminated.

The Corporation Code requires the following steps for merger or consolidation: (1) The
board of each corporation draws up a plan of merger or consolidation. Such plan must
include any amendment, if necessary, to the articles of incorporation of the surviving
corporation, or in case of consolidation, all the statements required in the articles of
incorporation of a corporation. (2) Submission of plan to stockholders or members of
each corporation for approval. A meeting must be called and at least two (2) weeks
notice must be sent to all stockholders or members, personally or by registered mail. A
summary of the plan must be attached to the notice. Vote of two-thirds of the members or
of stockholders representing two thirds of the outstanding capital stock will be needed.
Appraisal rights, when proper, must be respected. (3) Execution of the formal agreement,
referred to as the articles of merger o[r] consolidation, by the corporate officers of each
constituent corporation. These take the place of the articles of incorporation of the
consolidated corporation, or amend the articles of incorporation of the surviving
corporation. (4) Submission of said articles of merger or consolidation to the SEC for
approval. (5) If necessary, the SEC shall set a hearing, notifying all corporations
concerned at least two weeks before. (6) Issuance of certificate of merger or
consolidation. Indubitably, it is clear that no merger took place between Total Bank and
Royal Bank as the requirements and procedures for a merger were absent. A merger
does not become effective upon the mere agreement of the constituent corporations. All
the requirements specified in the law must be complied with in order for merger to take
effect. Section 79 of the Corporation Code further provides that the merger shall be
effective only upon the issuance by the Securities and Exchange Commission (SEC) of a
certificate of merger. Here, Total Bank and Royal Bank remained separate corporations
with distinct corporate personalities. What happened is that TRB sold and Bancommerce
purchased identified recorded assets of TRB in consideration of Bancommerces
assumption of identified recorded liabilities of TRB including booked contingent
accounts. There was no merger or consolidation but a mere "sale of assets with
assumption of liabilities".

[b] What is meant by a de facto merger? Discuss. (2.5%)

In Bank of Commerce v Radio Philippines Network, citing the book Philippine Corporate
Law by Dean Cesar Villanueva, explained that under the Corporation Code, "a de facto
merger can be pursued by one corporation acquiring all or substantially all of the
properties of another corporation in exchange of shares of stock of the acquiring
corporation. The acquiring corporation would end up with the business enterprise of the
target corporation; whereas, the target corporation would end up with basically its only
remaining assets being the shares of stock of the acquiring corporation." No de facto
merger took place in the present case simply because the Royal Bank owners did not get
in exchange for the banks assets and liabilities an equivalent value in Total Banks
shares of stock. Total Bank and Royal Bank agreed with BSP approval to exclude from
the sale the TRBs contingent judicial liabilities. The BSP Circular is not an indication of a
de facto merger because what was "consolidated" per the above letter was the banking
activities and transactions of Total Bank and Royal Bank, not their corporate existence.
The BSP did not remotely suggest a merger of the two corporations. What controls the
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relationship between those corporations cannot be the BSP letter circular, which had
been issued without their participation, but the terms of their P & A Agreement that the
BSP approved through its Monetary Board and the requirements of law.

IX

X insured his life for P20 million. X, plays golf and regularly exercises every day, hence is
considered in good health. He did not know, however, that his frequent headache is really
caused by his being hypertensive. In his application form for a life insurance for himself, he did
not put a check to the question if he is suffering from hypertension, believing that because of his
active lifestyle, being hypertensive is a remote possibility. While playing golf one day, X
collapsed at the fairway and was declared dead on arrival at the hospital. His death certificate
stated that X suffered a massive heart attack.

[a] Will the beneficiary of X be entitled to the proceeds of the life insurance under the
circumstances, despite the non-disclosure that he is hypertensive at the time of application?
(2.5%)

[b] If X died in an accident instead of a heart attack, would the fact of X's failure to disclose that
he is hypertensive be considered as material information? (2.5%)

a. Yes. The beneficiary of X shall be entitled to the proceeds of the insurance.

Section 28 of the Insurance Code provides that each party to a contract of insurance
must communicate to the other, in good faith, all facts within his knowledge which are
material to the contract and as to which he makes no warranty, and which the other has
not the means of ascertaining. The fraudulent intent on the part of the insured must be
established to entitle the insurer to rescind the contract.

Misrepresentation as a defense of the insurer to avoid liability is an affirmative defense

and the duty to establish such defense by satisfactory and convincing evidence rests
upon the insurer. In the case at bar, the insurer failed to clearly and satisfactorily
establish its defense, and is therefore liable to pay the proceeds of the insurance. There
was no fraudulent intent on the part of the insured. (GREAT PACIFIC LIFE ASSURANCE
CORP., vs. COURT OF APPEALS AND MEDARDA V. LEUTERIO)

b. Yes. It is a material information.

Section 26 of The Insurance Code is explicit in requiring a party to a contract of

insurance to communicate to the other, in good faith, all facts within his knowledge
which are material to the contract and as to which he makes no warranty, and which the
other has no means of ascertaining. Said Section provides: A neglect to communicate
that which a party knows and ought to communicate, is called concealment.

Materiality is to be determined not by the event, but solely by the probable and
reasonable influence of the facts upon the party to whom communication is due, in
forming his estimate of the disadvantages of the proposed contract or in making his
inquiries (The Insurance Code, Sec. 31).

The terms of the contract are clear. The insured is specifically required to disclose to the
insurer matters relating to his health. The information which the insured failed to
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disclose were material and relevant to the approval and issuance of the insurance policy.
The matters concealed would have definitely affected petitioner's action on his
application, either by approving it with the corresponding adjustment for a higher
premium or rejecting the same. Moreover, a disclosure may have warranted a medical
examination of the insured by petitioner in order for it to reasonably assess the risk
involved in accepting the application.

In Vda. de Canilang v. Court of Appeals, 223 SCRA 443 (1993), we held that materiality of
the information withheld does not depend on the state of mind of the insured. Neither
does it depend on the actual or physical events which ensue. Anent the finding that the
facts concealed had no bearing to the cause of death of the insured, it is well settled that
the insured need not die of the disease he had failed to disclose to the insurer. It is
sufficient that his non-disclosure misled the insurer in forming his estimates of the risks
of the proposed insurance policy or in making inquiries (Henson v. The Philippine
American Life Insurance Co., 56 O.G. No. 48 [1960]).
(SUNLIFE ASSURANCE COMPANY OF CANADA vs. The Hon. COURT OF APPEALS and
Spouses ROLANDO and BERNARDA BACANI)

After securing a Pl million loan from B, A drew in B's favor a bill of exchange with C as drawee.
The bill reads: "October 1, 2016. Pay to the order of B the sum of Pl million. To: C (drawee).
Signed, A." A then delivered the bill to B who, however, lost it. It turned out that it was stolen by
D, B's brother. D lost no time in forging B's signature and negotiated it to E who acquired it for
value and in good faith.

May E recover on the bill from C, the drawee? Explain. (5%)

Yes. E may recover on the bill from C, the drawee; Provided, that C accepts the
instrument presented by E. Section 62 of the Negotiable Instruments Law, provides that
the acceptor, by accepting the instrument, engages that he will pay it according to the to
the tenor of his acceptance and admits: a) the existence of the drawer, the genuineness
of his signature, and his capacity and authority to draw the instrument; and b) the
existence of the payee and his then capacity to indorse. Upon Cs acceptance of the
instrument, he shall automatically be primarily liable to the holder of the instrument even
if the drawers signature is really forged, because at the time of making his acceptance,
he warrants that the drawers signature is genuine.

Can the cut-off principle apply?

XI
Royal Links Golf Club obtained a loan from a bank which is secured by a mortgage on a titled
lot where holes 1, 2, 3 and 4 are located. The bank informed the Board of Directors (Board) that
if the arrearages are not paid within thirty (30) days, it will extra-judicially foreclose the
mortgage. The Board decided to offer to the members 200 proprietary membership shares,
which are treasury shares, at the price of Pl 75,000.00 per share even when the current market
value is P200,000.00.

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In behalf and for the benefit of the corporation, Peter, a stockholder, filed a derivative suit
against the members of the Board for breach of trust for selling the shares at P25,000.00, lower
than its market value, and asked for the nullification of the sales and the removal of the board
members. Peter claims the Club incurred a loss of PS million. The Board presented the defense
that in its honest belief any delay in the payment of the arrearages will be prejudicial to the Club
as the mortgage on its assets will be foreclosed and the sale at a lower price is the best solution
to the problem. Decide the suit and explain. (5%)

The suit shall be ruled against Peter. Under the Business Judgment Rule embodied in
Sec. 23 of the Corporation Code, it provides that unless otherwise provided in the Code,
all corporate powers and prerogatives are vested directly in the Board of Directors.
Directors cannot be held liable for mistakes or errors in the exercise of their business
judgment if they acted in good faith, with due care & prudence. Contracts intra vires
entered into by the board of directors are binding upon the corporation & courts will not
interfere. Furthermore, in order for a derivative suit to prosper, it must be shown with
particularity that the Stockholder had exhausted the intra corporate remedies available.

In this case, the sale of the shares by the Board of Directors is not shown to have
been made in bad faith nor was it in breach of trust of the stockholders. The said act is
within the sound business judgment of the Board. Moreover, it was not shown that Peter
had exhausted all intra-corporate remedies which is required in a derivative suit.

Hence, the derivative suit shall be ruled against Pete for failure to show that the
act was made in bad faith and for his failure to exhaust all intra-corporate remedies.

Treasury shares does not have fix value. It is for the board of directors to fix the value of
the shares.

XII

X owns I 0,000 shares in Z Telecoms Corp. As he is in immediate need of money, he offered to

sell all his shares to his friend, Y, at a bargain price. Upon receipt of the purchase price from Y,
X proceeded to indorse in blank the certificates of shares and delivered these to Y. The latter
then went to the corporate secretary of Z Telecoms Corp. and requested the transfer of the
shares in his name.

The corporate secretary refused since X merely indorsed the certificates in blank to Y.
According to the corporate secretary, the certificates should have been specifically indorsed to
the purchaser, Y. Was the corporate secretary justified in declining Y's request? Discuss. ( 5%)

Sec. 63 of the Corporation Code provides xxx Shares of stock so issued are personal
property and may be transferred by delivery of the certificate or certificates endorsed by
the owner or his attorney-in-fact or other person legally authorized to make the transfer
xxx. Sec. 34 of the negotiable instruments law further provides that an indorsement in

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blank specifies no indorsee, and an indorsement so indorsed is payable to bearer, and
may be negotiated by delivery.

In this case, X indorsed in blank the certificate of stock and delivered the same to Y.
Hence, there was a valid transfer of stocks to Y, and the corporate secretary is not
justified in declining Ys request.

Considered as street certificate considered as quasi-negotiable.

XIII

C Corp. is the direct holder of 10% of the shareholdings in U Corp., a nonlisted (not public) firm,
which in turn owns 62% of the shareholdings in H Corp., a publicly listed company. The other
principal stockholder in H Corp. is C Corp. which owns 18% of its shares. Meanwhile, the
majority stocks in U Corp. are owned by B Corp. and V Corp. at 22% and 30%, respectively. B
Corp. and V Corp. later sold their respective shares in U Corp. to C Corp., thereby resulting in
the increase of C Corp. 's interest in U Corp., whether direct or indirect, to more than 50%.

[a] Explain the Tender Offer Rule under the Securities Regulation Code. (2.5%)

[b) Does the Tender Offer Rule apply in this case where there has been an indirect acquisition of
the shareholdings in H Corp. by C Corp.? Discuss. (2.5%)

a) Tender offer is a publicly announced intention by a person acting alone or in concert

with other persons to acquire equity securities of a corporation which is listed on an
exchange, (public corp.) or a corporation with assets exceeding P50, 000,000.00 and with
200 or more stockholders, at least 200 of them holding not less than 100 shares of such
company.

Tender offer is in place to protect minority shareholders against any scheme that dilutes
the share value of their investments. It gives the minority shareholders the chance to exit
the company under reasonable terms, giving them the opportunity to sell their shares at
the same price as those of the majority shareholders.

b) Yes. The Supreme Court held that the coverage of the mandatory tender offer rule
covers not only direct acquisition but also indirect acquisition or any type of acquisition.

For the purpose of protecting the minority stockholders of a listed corporation,

mandatory tender offer applies whatever may be the method by which control of a public
company is obtained, either through the direct purchase of its stocks or through an
indirect means such as in this case.

It needs computation.

CEMCO HOLDINGS, INC., v. NATIONAL LIFE INSURANCE COMPANY OF THE

PHILIPPINES, INC., G.R. No. 171815

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 XIV

X, a government official, has a number of bank accounts in T Bank containing millions of pesos.
He also opened several trust accounts in the same bank which specifically covered the
placement and/or investment of funds. X was later charged with graft and corruption before the
Sandiganbayan (SB) by the Ombudsman. The Special Prosecutor filed a motion praying for a
court order authorizing it to look into the savings and trust accounts of X in T Bank. X opposed
the motion arguing that the trust accounts are not "deposits" under the Law on Secrecy of Bank
Deposits (Rep. Act No. 1405). Is the contention of X correct? Explain. (5%)

No. The contention of X is not correct.

In the case of Ejercito vs. Sandiganbayan, the Supreme Court held that The contention
that trust accounts are not covered by the term "deposits," as used in R.A. 1405, by the
mere fact that they do not entail a creditor-debtor relationship between the trustor and
the bank, does not lie. An examination of the law shows that the term "deposits" used
therein is to be understood broadly and not limited only to accounts which give rise to a
creditor-debtor relationship between the depositor and the bank. Section 2 of RA 1405 in
fact even more clearly shows that the term "deposits" was intended to be understood
broadly:

SECTION 2. All deposits of whatever nature with banks or banking institutions in the
Philippines 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 into by any
person, government official, bureau or office, except upon written permission of the
depositor, or in cases of impeachment, or upon order of a competent court in cases of
bribery or dereliction of duty of public officials, or in cases where the money deposited
or invested is the subject matter of the litigation. The phrase "of whatever nature"
proscribes any restrictive interpretation of "deposits." Moreover, it is clear from the
immediately quoted provision that, generally, the law applies not only to money which is
deposited but also to those which are invested. This further shows that the law was not
intended to apply only to "deposits" in the strict sense of the word. Otherwise, there
would have been no need to add the phrase "or invested." Clearly in the case at bar, R.A.
1405 is broad enough to cover Trust Accounts.

xv

ABC Corp. is engaged in the pawnshop business involving cellphones, laptops and other
gadgets of value. In order to expand its business and attract investors, it offered to any person
who invests at least Pl 00,000.00 a "Promissory Note" where it obligated itself to pay the holder
a 50% return on investment within one month. Due to the attractive offer, many individuals
invested in the company but not one of them was able to realize any profit after one month. Has
ABC Corp. violated any law with its scheme? Explain. ( 5%)

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Yes, ABC Corp. violated Securities Regulation Code or R.A. No. 8799. Its business
constitutes investment contracts which should be registered with Securities and
Exchange Commission before its sale or offer for sale or distribution to the public.

The Court held in the case of Power Homes Unlimited Corp. v. SEC that any investment
contract covered by the Howey Test must be registered under the Securities Act,
regardless of whether its issuer was engaged in fraudulent practices. R.A. No. 8799
defines an investment contract as a contract, transaction or scheme whereby a person
invests his money in a common enterprise and is led to expect profits not solely but
primarily from the efforts of others.

In the case at bar, a person will invest at least P100,000.00 with ABC Corp. with the
expectation of profit or return of investment of 50% within a month. Hence, ABC Corp. is
engaged in the sale or offer for sale or distribution of investment contracts.

XVI

Henry is a board director in XYZ Corporation. For being the "fiscalizer" in the Board, the majority
of the board directors want him removed and his shares sold at auction, so he can no longer
participate even in the stockholders' meetings. Henry approaches you for advice on whether he
can be removed as board director and stockholder even without cause. What is your advice?
Explain "amotion" and the procedure in removing a director. (5%)

Amotion is the ousting of an officer from his or her post in the corporation prior to
the end of the term for which the officer was appointed or elected, without taking
away the person's right to be a member of the corporation.

The procedure of removal of directors are: 1. it must take place either at a regular
meeting or special meeting of the stockholders or members called for the purpose; 2.
there must be previous notice to the stockholders or members of the intention to
remove;3. the removal must be by a vote of the stockholders representing two-thirds of
Outstanding capital stock or two-thirds of its members and; 4. the director may be
removed with or without cause unless he was elected by the minority, in which case, it is
required that there is cause of removal

Removal of shareholders?

XVII

PJ Corporation (PJ) obtained a loan from ABC Bank (ABC) in the amount ofPl0 million for the
purchase of 100 pieces of ecodoors. Thereafter, a Letter of Credit was obtained by P J against
such loan. The beneficiary of the Letter of Credit is Scrap Metal Corp. (Scrap Metal) in Beijing,
China. Upon arrival of 100 pieces of ecodoors, PJ executed a Trust Receipt in favor of ABC to
cover for the value of the ecodoors for its release to PJ. The terms of the Trust Receipt is that
any proceeds from the sale of the ecodoors will be delivered to ABC as payment. After the

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ecodoors were sold, PJ, instead of paying ABC, used the proceeds of the sale to order from
Scrap Metal another I 00 pieces of ecodoors but using another bank to issue a new Letter of
Credit fully covered by such proceeds. PJ refused to pay the proceeds of the sale of the first set
of ecodoors to ABC, claiming that the ecodoors that were delivered were defective. It then
instructed ABC not to negotiate the Letter of Credit that was issued in favor of Scrap Metal.

[a] Explain what is a "Letter of Credit" as a financial device and a "Trust Receipt" as a security to
the Letter of Credit. (2.5%)

[b] As counsel of ABC, you are asked for advice on whether or not to grant the instruction of PJ.
What will be your advice? (2.5%)

a. In commercial transactions, a letter of credit is a financial device developed by

merchants as a convenient and relatively safe mode of dealing with sales of
goods to satisfy the seemingly irreconcilable interests of a seller, who refuses to
part with his goods before he is paid, and a buyer, who wants to have control of
the goods before paying.[30] The use of credits in commercial transactions serves
to reduce the risk of nonpayment of the purchase price under the contract for the
sale of goods.

A letter of credit-trust receipt arrangement is endowed with its own distinctive

features and characteristics. Under that set-up, a bank extends a loan covered by
the letter of credit, with the trust receipt as security for the loan. In other words,
the transaction involves a loan feature represented by the letter of credit, and a
security feature which is in the covering trust receipt. x x x. A trust receipt,
therefore, is a security agreement, pursuant to which a bank acquires a security
interest in the goods. It secures an indebtedness and there can be no such thing
as security interest that secures no obligation.

b. As counsel for ABC, I will tell them not to follow the instructions of ABC Company
because a trust receipt transaction is independent from the contract of sale.
The so-called "independence principle" assures the seller or the beneficiary of
prompt payment independent of any breach of the main contract and precludes the
issuing bank from determining whether the main contract is actually accomplished or
not. Under this principle, banks 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 or
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.

The independent nature of the letter of credit may be: (a) independence in toto where
the credit is independent from the justification aspect and is a separate obligation
from the underlying agreement like for instance a typical standby; or (b)
independence may be only as to the justification aspect like in a commercial letter of
credit or repayment standby, which is identical with the same obligations under the
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 underlying agreement. In both cases the payment may be enjoined if in the light of the
purpose of the credit the payment of the credit would constitute fraudulent abuse of
the credit.

XVIII

B Bank, a large universal bank, regularly extends revolving credit lines to business
establishments under what it terms as socially responsible banking and private business
partnership relations. All loans that are extended to clients have a common "Escalation Clause,"
to wit: "B Bank hereby reserves its right to make successive increases in interest rates in
accordance with the bank's adopted policies as approved by the Monetary Board; Provided that
each successive increase shall be with the written assent of the depositor."

[a] X, a regular client of the bank, contends that the "Escalation Clause" is unfair,
unconscionable and contrary to law, morals, public policy and customs. Rule on the issue and
explain. (2.5%)

Escalation clauses are generally valid and do not contravene public policy. They are
common in credit agreements as means of maintaining fiscal stability and retaining the
value of money on long-term contracts. To prevent any one-sidedness that these clauses
may cause, we have held in Banco Filipino Savings and Mortgage Bank v. Judge
Navarro, that there should be a corresponding de-escalation clause that would authorize
a reduction in the interest rates corresponding to downward changes made by law or by
the Monetary Board.

[b) Suppose that the "Escalation Clause" instead reads: "B Bank hereby reserves the right to
make reasonable increases in interest rates in accordance with bank policies as approved by
the Monetary Board; Provided, there shall be corresponding reasonable decreases in interest
rates as approved by the Monetary Board." Would this be valid?
Explain. (2.5%)

Basic is the rule that there can be no contract in its true sense without the mutual assent
of the parties. If this consent is absent on the part of one who contracts, the act has no
more efficacy than if it had been done under duress or by a person of unsound mind.
Similarly, contract changes must be made with the consent of the contracting parties.
The minds of all the parties must meet as to the proposed modification, especially when
it affects an important aspect of the agreement. In the case of loan contracts, the interest
rate is undeniably always a vital component, for it can make or break a capital venture.
Thus, any change must be mutually agreed upon, otherwise, it produces no binding
effect.

Nevertheless, the validity of the escalation clause did not give petitioner the unbridled
right to unilaterally adjust interest rates. The adjustment should have still been subjected
to the mutual agreement of the contracting parties. In light of the absence of consent on
the part of respondents to the modifications in the interest rates, the adjusted rates

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cannot bind them notwithstanding the inclusion of a de-escalation clause in the loan
agreement. (PSB vs Spouses Castillo)

In short, it should have the consent of the contracting parties--- the bank and the client.

1. De escalation clause
2. Prevailing market rate
3. Consistent with the nature of the contract

XIX

In 2015, R Corp., a domestic company that is wholly owned by Filipinos, filed its opposition to
the applications for Mineral Production Sharing Agreements (MPSA) of 0 Corp., P Corp., and Q
Corp. which were pending before the Panel of Arbitrators (POA) of the Department of
Environment and Natural Resources (DENR). The three corporations wanted to undertake
exploration and mining activities in the province of Isabela. The oppositor alleged that at least
60% of the capital shareholdings of the applicants are owned by B Corp., a 100% Chinese
corporation, in violation of Sec. 2, Art. XII of the Constitution. The applicants countered that they
are qualified corporations as defined under the Philippine Mining Act of 1995 and the Foreign
Investments Act of 1991 since B Corp. holds only 40% of the capital stocks in each of them and
not 60% as alleged by R Corp.

The Summary of Significant Accounting Policies statement of B Corp. reveals that the joint
venture agreements of B Corp. with Sigma Corp. and Delta Corp. involve the 0 Corp., P Corp.,
and Q Corp. The ownership of the layered corporations and joint venture agreements show that
B Corp. practically exercises control over the 0, P and Q corporations. 0, P and Q corporations
contend that the control test should be applied and its MPSA applications granted. On the other
hand, R Corp. argues that the "grandfather rule" should be applied. Decide with reasons. (5%)
Basically, there are two acknowledged tests in determining the nationality of a
corporation: the control test and the grandfather rule. Paragraph 7 of DOJ Opinion No.
020, Series of 2005, adopting the 1967 SEC Rules which implemented the requirement of
the Constitution and other laws pertaining to the controlling interests in enterprises
engaged in the exploitation of natural resources owned by Filipino citizens, provides:

Shares belonging to corporations or partnerships at least 60% of the capital of which is

owned by Filipino citizens shall be considered as of Philippine nationality, but if the
percentage of Filipino ownership in the corporation or partnership is less than 60%, only
the number of shares corresponding to such percentage shall be counted as of
Philippine nationality. Thus, if 100,000 shares are registered in the name of a corporation
or partnership at least 60% of the capital stock or capital, respectively, of which belong to
Filipino citizens, all of the shares shall be recorded as owned by Filipinos. But if less
than 60%, or say, 50% of the capital stock or capital of the corporation or partnership,
respectively, belongs to Filipino citizens, only 50,000 shares shall be counted as owned
by Filipinos and the other 50,000 shall be recorded as belonging to aliens.

The first part of paragraph 7, DOJ Opinion No. 020, stating shares belonging to
corporations or partnerships at least 60% of the capital of which is owned by Filipino
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citizens shall be considered as of Philippine nationality, pertains to the control test or
the liberal rule. On the other hand, the second part of the DOJ Opinion which provides,
if the percentage of the Filipino ownership in the corporation or partnership is less than
60%, only the number of shares corresponding to such percentage shall be counted as
Philippine nationality, pertains to the stricter, more stringent grandfather rule.

In ending, the control test is still the prevailing mode of determining whether or not a
corporation is a Filipino corporation, within the ambit of Sec. 2, Art. II of the 1987
Constitution, entitled to undertake the exploration, development and utilization of the
natural resources of the Philippines. When in the mind of the Court there is doubt, based
on the attendant facts and circumstances of the case, in the 60-40 Filipino-equity
ownership in the corporation, then it may apply the grandfather rule.

XX

Company X issued a Bank A Check No. 12345 in the amount of P500,000.00 payable to the
Bureau of Internal Revenue (BIR) for the company's taxes for the third quarter of 1997. The
check was deposited with Bank B, the collecting bank with which the BIR has an account. The
check was subsequently cleared and the amount of P500,000.00 was deducted from the
company's balance. Thereafter, Company X was notified by the BIR of its non-payment of its
unpaid taxes despite the P500,000.00 debit from its account. This prompted the company to
seek assistance from the proper authorities to investigate on the matter.

The results of the investigation disclosed that unknown then to Company X, its chief accountant
Bonifacio Santos is part of a syndicate that devised a scheme to syphon its funds. It was
discovered that though deposited, the check was never paid to the BIR but was passed on by
Santos to Winston Reyes, Bank B's branch manager and Santos' co-conspirator. Instead of
bringing the check to the clearing house, Reyes replaced Check No. 12345 with a worthless
check bearing the same amount, and tampered documents to cover his tracks. No amount was
then credited to the BIR. Meanwhile, Check No. 12345 was subsequently cleared and the
amount therein credited into the accounts of fictitious persons, to be later withdrawn by Santos
and Reyes.

Company X then sued Bank B for the amount of P500,000.00 representing the amount
deducted from its account. Bank B interposed the defense that Company X was guilty of
contributory negligence since its confidential employee Santos was an integral part of the
scheme to divert the proceeds of Check No. 12345. Is Company X entitled to reimbursement
from Bank B, the collecting bank? Explain. ( 5%)

On this point, jurisprudence regarding the imputed negligence of employer in a master-

servant relationship is instructive. Since a master may be held for his servants wrongful
act, the law imputes to the master the act of the servant, and if that act is negligent or
wrongful and proximately results in injury to a third person, the negligence or wrongful
conduct is the negligence or wrongful conduct of the master, for which he is liable. The
23 Suggested Answers to the 2016 Commercial Law Bar QuestionsCAVEAT
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general rule is that if the master is injured by the negligence of a third person and by the
concurring contributory negligence of his own servant or agent, the latters negligence is
imputed to his superior and will defeat the superiors action against the third person,
assuming, of course that the contributory negligence was the proximate cause of the
injury of which complaint is made.

As defined, proximate cause is that which, in the natural and continuous sequence,
unbroken by any efficient, intervening cause produces the injury, and without which the
result would not have occurred.

It appears that although the employee initiated the transactions attributable to an

organized syndicate, their actions were not the proximate cause of encashing the checks
payable to the BIR. The degree of the companys negligence, if any, could not be
characterized as the proximate cause of the injury to the parties.

As to the preparation of Checks, it was established that these checks were made payable
to the BIR. Both were crossed checks. These checks were apparently turned around by
company employees, who were acting on their own personal capacity.

Given these circumstances, 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. This rule likewise applies to the
checks fraudulently negotiated or diverted by the confidential employees who hold them
in their possession.

Indeed, the crossing of the check with the phrase Payees Account Only, is a warning that
the check should be deposited only in the account of the CIR. Thus, it is the duty of the
collecting bank to ascertain that the check be deposited in payees account only.
Therefore, it is the collecting bank which is bound to scrutinize the check and to know its
depositors before it could make the clearing indorsement all prior indorsements and/or
lack of indorsement guaranteed. (PCIB vs CA)

24 Suggested Answers to the 2016 Commercial Law Bar QuestionsCAVEAT

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