COMMERCIAL LAW

What is a corporation and what are its attributes?

A corporation is an artificial being created by operation of law, having the right of succession and the powers, attributes and properties especially authorized by law or incident to its existence. (Sec. 2, Corporation Code).

The definition of a corporation contains its attributes.

In a civil action, the certificate of nonforum shopping was signed by an officer of petitioner corporation with the authority of its board of directors. It was questioned by the respondents on the ground that it was not signed by the corporation. Was the objection to the certificate of non-forum shopping valid?

The objection was not valid. Physical acts like signing of documents can be performed only by natural persons duly authorized for the purpose by corporate by-laws or by a specific act of the board of directors. Since the one who signed for and in behalf of the corporation had the authority of the board of directors, it was a valid act of the corporation. (Cebu Bionic Builders Supply, Inc. vs. DBP, 635 SCRA 13, Nov. 17, 2010).

What is the meaning of the doctrine of legal entity of corporations?

It means that a corporation is a juridical person with a personality separate and distinct from that of each shareholder. It also means that the stockholders of a corporation are different from the corporation itself.[1]
(1) Section 2; Seaoil Petroleum Corp. vs. Autocorp Group, 569 SCRA 387, Oct. 17, 2008; SEC Opinions, Jan. 18, 1993 and June 18, 1993.

What are the consequences of the doctrine of legal entity?

1. The stockholders are not personally liable for the debts of the corporation and vice-versa.(1) The stockholders are not liable for corporate acts unless otherwise provided by law.(2)

[1] [2]

13A Fletcher, Sec. 6213. Wise and Co. vs. Man Sun Lung, 40 O. G. 50

2.

The stockholders are not the owners of corporate properties and assets.[1]

[1]

Berman Environmental Dev. Corp. vs. CA 167 SCRA, 540.

3. The stockholders cannot sell or maintain actions in their own name in connection with corporation affairs, business or property. Neither do stockholders have the right to recover possession of corporation property or to recover damages for injury to properties belonging to the corporation, and viceversa.[1]
[1] Sulo ng Bayan, Inc. vs. Araneta, Inc. 72 SCRA 347.

4. The property belonging to the corporation cannot be attached to satisfy the debt of a stockholder and vice versa, the latter having only an indirect interest in the assets and business of the former.[1]
[1] Delima vs. Gois, 554 SCRA 731, June 17, 2008; Mandaue Dinghow Dimsum

House, Inc. vs. NLRC, 547 SCRA 402, March 3, 2008.

The Labor Arbiter rendered judgment in favor of Delima for illegal dismissal against his employer, Golden Union Aquamarine Corporation (Golden). The judgment became final. Pursuant to a writ of execution, the sheriff attached an Isuzu Jeep registered in the name of Gois who filed a thirdparty claim over the said vehicle. The Labor Arbiter denied the third-party claim on the ground that Gois was one of the respondents in the case and an incorporator/officer of Golden. May the property of Gois be attached to satisfy the judgment claim against Golden on the ground that she is an incorporator/officer of said corporation?

The subject vehicle belonging to Gois cannot be attached to answer for the liabilities of a corporation of which she was an incorporator/officer. A corporation has a personality distinct and separate from its individual stockholders or members and from that of its officers who manage and run its affairs. The rule is that obligations incurred by the corporation, acting through its directors, officers and employees, are its sole liabilities. Thus, property belonging to a corporation cannot be attached to satisfy the debt of a stockholder and vice versa, the latter having only an indirect interest in the assets and business of the former.[1]
[1] Delima vs. Gois, 554 SCRA 737, June 17, 2008.

Explain the doctrine of piercing the veil of corporate fiction.

Piercing the veil of corporate fiction means that while a corporation can not generally be made liable for acts or liabilities of its stockholders or members, and vice versa because a corporation has a personality separate and distinct from its

stockholders or members, however, the corporate existence is

disregarded under this doctrine where the corporation is formed
or used for illegitimate purposes or justify wrong or evade a just and valid obligation. In such case, the corporation and the

stockholders shall be considered as one and the same.[1]

[1] Solidbank Corporation vs. Mindanao Ferroalloy Corporation, 464 SCRA 409, July 28, 2005; Federation of Labor Union vs. Ople, 143 SCRA 124; Telephone Engineering & Service Co., Inc. vs. Workmens Compensation Commission, 104 SCRA 354; Asked, 1985 and 1991 Bar Exams.; No. III, 2004 Bar Exams.; No. I (1), 2006 Bar Exams.

The doctrine of piercing the corporate veil applies only in three (3) basic instances, namely: a) when the separate and distinct corporate personality defeats public convenience, as when the corporate fiction is used as a vehicle for the evasion of an existing obligation; (b) in fraud cases, or when the corporate entity is used to justify a wrong, protect a fraud, or defend a crime; or (c) is used in alter ego cases, i.e., where a corporation is essentially a farce, since it is a mere alter ego or business conduit of a person, or where the corporation is so organized and controlled and its affairs are so conducted as to make it merely an instrumentality, agency, conduit, or adjunct of another corporation. 1]
1] Prisma Construction & Dev. Corp. vs. Menchaves, 614 SCRA 590, March 9, 2010; Asked, 1962 and

1985 Bar Exams.; Asked, No. I (2), 2006 Bar Exams.

However, the application of the doctrine of piercing the corporate veil should be done with caution. A court should be mindful of the milieu where it is to be applied. It must be certain that the corporate fiction was misused to such an extent that injustice, fraud, or crime was committed against another, in disregard of its rights. The wrongdoing must be clearly and convincingly established; it cannot be presumed. Otherwise, an injustice that was never intended may result from an erroneous application.[1] Bad faith or wrongdoing of a corporate officer must be established clearly and convincingly bad faith is never presumed. .[2]
[1] Philippine National Bank vs. Andrada Electric & Engineering Company, 381 SCRA

145, April 17, 2002

2 Seaoil

Petroleum Corp. vs. Autocorp Group, 569 SCRA 387, Oct. 17, 2008.

VMSC is a family-owned corporation of which Avelino was president. He offered to sell a car to his cousins, the Violago spouses. It turned out that he previously sold the said car to another cousin. Violago spouses signed the deed of sale, paid a down payment and executed a promissory note for the balance. The said promissory note was endorsed to BA Finance. When the car was not delivered to Violago spouses, they did not pay the installments. BA Finance sued the Violago spouses for replevin to recover the car or the amount of the promissory note with damages. Violago spouses filed a third-party complaint against Avelino without impleading VMSC. Avelino claimed that VMSC should have been included in the complaint and its non-inclusion bars an action against him. Decide with reasons.

The fact that VSMC was not included as defendant does not preclude recovery by Violago spouses against Avelino; neither would such non-inclusion constitute a bar to the application of the piercingof-the-corporate veil doctrine. Avelino, knowing fully well that the vehicle was already sold, and with abuse of his relationship with the spouses still proceeded with the sale and collected the down payment. His actions were the proximate cause of the Violago spouses loss. He cannot now hide behind the separate corporate personality of VMSC to escape from liability. For all legal intents and purposes defendant and the corporation are one and the same. The fiction of separate juridical personality conferred upon the corporation should be disregarded. [1]

[1]

Violago vs. BA Finance Corporation, 559 SCRA 69.

The employees of Prince Transport, Inc. (PTI) were holding meetings to form a union. PTI caused the transfer of all union members and sympathizers to Lubas Transport, a single proprietorship belonging to the majority stockholder of PTI. Despite the transfer, the schedule of drivers and conductors were made by PTI. When the employees made a claim for wages against PTI, the latter denied the claim on the ground that they were no longer its employees since they have been transferred to Lubas. May PTI and Lubas be treated as one and the same?

Lubas is a mere agent, conduit or adjunct of PTI. It is true that Lubas is a single proprietorship and not a corporation, however PTIs attempt to isolate itself from and hide behind the supposed separate and distinct personality of Lubas so as to evade its liabilities is precisely what the classical doctrine of piercing the veil of corporate entity seeks to prevent and remedy. (Prince Transport, Inc. vs. Garcia, 639 SCRA 312, Jan. 12, 2011).

What is meant by the alter ego doctrine or instrumentality rule?

Where one corporation is so organized and controlled and its affairs are conducted so that it is, in fact, a mere instrumentality or adjunct of the other, the fiction of the corporate entity of the 'instrumentality' may be disregarded. The control necessary to invoke the rule is not majority or even complete stock control but such domination of finances, policies and practices that the controlled corporation has, so to speak, no separate mind, will or existence of its own, and is but a conduit for its principal.[1]
[1] Lipat vs. Pacific Banking Corporation 402 SCRA 339, April 30, 2003.

How may a corporation be established as a mere alter ego of another corporation or person?

The question of whether a corporation is a mere alter ego is one of fact. Piercing the veil of
corporation fiction may be allowed only if the following elements concur:

(1) control not mere stock control, but

complete domination- not only of finances, but of policy and business practice in respect to the transaction attacked, must

have been such 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 a wrong doing to perpetuate the violation of a statutory or other positive legal duty, or a dishonest and an unjust act in contravention of the plaintiffs legal right;

(3) the said control and breach of duty must have proximately caused the injury or unjust loss complained of.[1]

[1] R & E Transport, Inc. vs. Latag, 422 SCRA 698, 707; Heirs of Ramon Durano, Sr. vs. Uy, 344 SCRA 238.

Is mere ownership by a single stockholder of nearly all or even all of the capital stock of a corporation sufficient ground to disregard the separate corporation personality?

While the veil of separate corporate personality may be pierced when the corporation is merely an adjunct, a business conduit, or alter ego of a person, the mere ownership by a single stockholder of nearly all or even all of the capital stock of a corporation is not be itself a sufficient ground to disregard the separate corporate personality.[1]
.

(1) Yamamoto vs. Nishino Leather Industries, Inc., 551 SCRA 447, April 16, 2008; Kukan International Corporation vs. Reyes, 631 SCRA 596, Sept. 29, 2010.

Is the mere fact that a single person owns or controls one or more corporation or substantial identity of incorporators of two corporations, sufficient to disregard the separate personalities of the corporations?

Mere ownership by a single stockholder or by another corporation of all or nearly all of the capital stocks of a corporation is not by itself a sufficient ground to disregard the separate corporate personality.[1] The substantial identity of the incorporators of two or more corporations does not imply that there was fraud so as to justify the piercing of the writ of corporate fiction. To disregard the said separate juridical personality, the wrong doing must be

proven clearly and convincingly.[2]

(1] Secosa vs. Heirs of Erwin Suarez Francisco, 433 SCRA 273, June 29, 2004. [2] Martinez vs. Court of Appeals, 438 SCRA 130, September 10, 2004.

It is lawful to obtain a corporate charter, even with a single substantial stockholder, to engage in specific activity and such activity may co-exist with the other private activities of the stockholder. If the corporation is a substantial one, conducted lawfully and without fraud on another, its separate identity is respected.[1]
[1] Lidell & Co., Inc. vs. Collector of Internal Revenue, 2 SCRA 632; Wise & Co., Inc. vs. Man Sun Lung, 69 Phil. 308; Asked, 1970 Bar Exams. ; Kukai International Corporation vs. Reyes, 631 SCRA 596, Sept. 29, 2010.

Respondent Equitable Savings Bank (ESB) was a subsidiary of Equitable PCI Bank (EPCIB) which later merged with Banco de Oro and thence known as Banco de Oro (BDO). Petitioners were client-depositors of EPCIB for more than 12 years. Petitioners obtained a loan amounting to P4,000,000 from EPCIB and to secure the loan, they mortgaged their land in Quezon City. Petitioners were able to draw from the loan the sum of P3,600,000. They demanded from EPCIB copies of the loan agreement which refused to give them the copies on the ground that as a matter of practice, they give copies only after the entire loan has been withdrawn.

Petitioners then did not continue payment of the amortization after paying a total of P500,000. Respondent, through counsel wrote a letter to the petitioner demanding payment of the entire loan released with interest thereon. Finally, petitioners got copy of the loan documents and they were surprised to find out that the lender was the respondent instead of EPCIB. When petitioners failed to pay the loan, respondent sought to extrajudicially foreclose the mortgage. Petitioners filed a case for injunction and claimed that respondent was not the real party in interest to foreclose the mortgage. May foreclose the mortgage made by the petitioners to secure a loan obtained from EPCIB?

An extrajudicial foreclosure instituted by a third party to the Loan Agreement and the real estate mortgage (REM) would be in violation of the petitioners rights over their property. Thus, respondent cannot exercise the right of foreclosure not being a party to the REM. Respondent, although a wholly-owned subsidiary of EPCIB, has an independent and separate juridical personality from its parent company. The fact that the corporation owns all of the stocks of another corporation, taken alone, is not sufficient to justify their being treated as one entity. If used to perform legitimate functions, a subsidiarys separate existence shall be respected. [1]
[1]

Borromeo vs. Court of Appeals, 550 SCRA 269, March 28, 2008.

When are officers of a corporation solidarily liable with the corporation?

The general rule is that obligations incurred by the corporation, acting through its directors, officers, and employees, are its sole liabilities. However, solidary liability may be incurred, but only under the following exceptional circumstances: 1) When directors and trustees or, in appropriate cases, the officers of a corporation: (a) vote for or assent to patently unlawful acts of the corporation; (b) act in bad faith or with gross negligence in directing the corporate affairs; (c) are guilty of conflict of interest to the prejudice of the corporation, its stockholders or members, and other persons; 2) When a director or officer has consented to the issuance of watered stocks or who, having knowledge thereof, did not forthwith file with the corporate secretary his written objection thereto; 3) When a director, trustee or officers has contractually agreed or stipulated to hold himself personally and solidarily liable with the corporation; 4) When a director, trustee or officer is made, by specific provision of law, personally liable for his personal action. 1]
1] Shrimp Specialists, Inc. vs. Fuji-Triumph Agri-Industrial Corp., 608 SCRA 1, Dec. 7, 2009.

Lau was the president of Queensland, a corporation engaged in trading of commodity futures. Two unlicensed salesman convinced George to invest in Queensland. On behalf of Queensland, Collado who also an unlicensed salesman signed with George a Customers Agreement. SEC issued a cease and desist order against Queensland. Alarmed by the said order, George demanded the return of his investment from Queensland. When he failed to obtain a return of his investment, he sued Queensland, Lau and Collado. May the Lau and Collado as corporate officers be held solidarily liable with Queensland?

Both Lau and Collado may be held liable solidarily with Queensland. The presence of unlicensed salesmen, and Collados participation in the unlawful execution of orders under the customers account clearly established the fact that the management of Queensland failed to implement the rules and regulations against the hiring of, and associating with, unlicensed consultants or traders. How these unlicensed personnel been able to pursue their unlawful activities is a reflection of how negligent the management was. (Queensland-Tokyo Commodities, Inc. vs. George, 630 SCRA 304, Sept. 8, 2010).

When is a corporate officer guilty of bad faith in terminating employees and what is the consequence thereof?

Corporate directors and officers are solidarily liable with the corporation for termination of employment of corporate employees done with malice or in bad faith. Bad faith is never presumed. Bad faith does not simply connote bad judgment or negligence it imports a dishonest purpose or some moral obliquity and conscious doing of wrong. It means a breach of a known duty through some motive or interest or ill-will that partakes of the nature of fraud. (SHS Perforated Materials, Inc. vs. Diaz, 633 SCRA 258, Oct. 13, 2010; Solidbank Corporation vs. Gamier, 634 SCRA 554, Nov. 15, 2010).

May an officer of the corporation who acted in his official capacity be held solidarily liable with the corporation for the illegal dismissal of an employee?

As a general rule, a corporate officer cannot be held liable for acts done in his official capacity because a corporation, by legal fiction, has a personality separate and distinct from its officers, stockholders, and members. (Solidbank Corporation vs. Gamier, 364 SCRA 554. Nov. 15, 2010). To pierce this fictional veil, it must be shown that the corporate personality was used to perpetuate fraud or an illegal act, or to evade an existing obligation, or to confuse a legitimate issue. In illegal dismissal cases, corporate officers may be held solidarily liable with the corporation if the termination was done with malice or bad faith. (Culili vs. Eastern Telecommunications Philippines, Inc., 642 SCRA 338.)

In general, when may a person or officer of the corporation bind the corporation?

The general rule is that, in the absence of authority from the board of directors, no person, not even its officers, can validly bind a corporation. The power and responsibility to decide whether the corporation should enter into a contract that will bind the corporation is lodged in the board of directors. 1]

[1]Associated

Bank vs. Pronstroller, 558 SCRA 113.

What are kinds of authority of an individual to bind a corporation?

The authority of a corporate officer or agent in dealing with third persons may be actual or apparent. Actual authority is either express or implied. The extent of an agents express authority is to be measured by the power delegated to him by the corporation, while the extent of his implied authority is measured by his prior acts which have been ratified or approved, or their benefits accepted by his principal. (Banate vs. Philippine Countryside Rural Bank (Liloan, Cebu), Inc., 625 SCRA 21, July 13, 2010).

From what may apparent authority of an officer to bind the corporation be derived?

Apparent authority is derived not merely from practice. Its existence may be ascertained through: (1) the general manner in which the corporation holds out an officer or agent as having the power to act, or in other words, the apparent authority to act in general, with which it clothes him, or (2) the acquiescence in his acts of a particular nature with actual or constructive knowledge thereof, within or beyond the scope of his ordinary powers. [1]
[1]Associated Bank vs. Pronstroller, 558 SCRA 113; Banate vs. Philippine Countryside Rural Bank (Liloan, Cebu),Inc. 625 SCRA 21, July 13, 2010.

May the by-laws of a corporation provide for additional qualifications of directors?

The by-laws may provide for the qualifications of directors or trustees[1] provided they are not inconsistent with the Constitution, law or charter of the corporation and they are reasonable. The minimum qualification required by the Corporation Code must however, be met.[2]
[1] Section 47, par. 5. [2] SEC Opinion, Dec. 8, 1988.

The by-laws provide that only members in good standing for at least five (5) years shall be qualified to be elected as director. Is such additional qualification of directors valid?

Yes, it is valid because the bylaws may prescribe the qualifications of directors. Thus, one who was elected despite the fact that his membership in the corporation has not reached five (5) years is in violation of the by-laws and hence, his election is null and void.[1]

[1]

Garcia vs. Diapo, SEC Case No. 2169, July 30, 1990.

Who are disqualified from being elected as directors?

The following are disqualified from being elected as directors:

(a) those convicted by final judgment of an offense punishable by imprisonment for a period exceeding six (6) years; (b) those convicted by final judgment of a violation of the Corporation Code committed within five (5) years prior to the date of his election;[1] (Sec. 27); and (c) those disqualified by the by-laws.[2]
[1] Section 27. [2] Gokongwei vs. SEC, 89 SCRA 336.

The by-laws of San Miguel Corporation (SMC) disqualified from being elected as director those who were directors of another corporation whose business was in competition with or was antagonistic with SMC. Gokongwei was a director of other corporations whose lines of business were in direct competition with some of the business activities of SMC. May Gokongwei be elected as director of SMC?

Gokongwei was disqualified from being elected as director of SMC. The provision of the by-laws of SMC disqualifying a competitors director from being elected as director of SMC was valid. Sound principles of corporate management counsel against sharing sensitive information with a director whose fiduciary duty of loyalty may well require that he disclose this information to a competitive rival.[1]
[1] Gokongwei vs. SEC, 89 SCRA336; Asked, 1998 Bar Exams.; No. VIII (a), 2000 Bar Exams.; No. XI, 2001 Bar Exams.

Are members of the board of directors entitled to compensation? If so, is there any limitation thereto?

The directors of a corporation shall not receive any compensation for being members of the board of directors except for reasonable per diems. The two instances where the directors are to be entitled to compensation shall be when it is fixed by the corporations by-laws or when the stockholders, representing at least a majority of the outstanding capital stock, vote to grant the same at a regular or special stockholders meeting, subject to the qualification that, in any of the situations, the total yearly compensation of directors, as such directors, shall in no case exceed 10% of the net income before income tax of the corporation during the preceding year. (Singson vs. Commission on Audit, 627 SCRA 36, August 9, 2010).

As a general rule, are directors/trustees and officers of a corporation liable personally for their acts as such?

As a general rule, directors/trustees and officers of a corporation who purport to act for and in behalf of the

corporation, keep within the lawful scope of their

authority in so acting, and act in good faith, do not become liable, whether civilly or otherwise, for the

consequences of their acts. Those acts, when they are

of such a nature and are done under such circumstances, are properly attributed to the corporation

alone and no personal liability is incurred by such

officers and board members/directors.[1]
[1] Benguet Electric Cooperative, Inc. vs. NLRC, 209 SCRA 55.

Officers of a corporation who act as such within the scope of their authority have no personal liability for such acts unless it is shown that they have acted negligently or in bad faith. They are mere agents of the corporation who cannot be made liable if they acted within the scope of their authority.[1]
[1] Mindanao Motor Line, Inc. vs. Court of Industrial Relations, 6 SCRA 710; Asked, 1968 and 1999 Bar Exams.

For as long as the corporate officers acted within the scope of their authority and in good faith, they cannot be held personally liable for the consequences of their acts. The separate corporate personality is a shield against the personal liability of corporate officers, whose acts are property attributed to the corporation.[1]

[1] Solidbank Corporation vs. Mindanao Ferroalloy Corporation, et al., 464 SCRA 409, July 28, 2005.

Likewise, officers of a corporation are not personally liable for their acts as such officers unless it is shown that they have exceeded their authority. The corporation has a personality separate and distinct from its officers.[1]

[1] Prudential Bank vs. Alviar, 464 SCRA 353.

SSS filed an action against Impact Corporation and its directors for non-remittance of SSS premium contributions withheld by said corporation from its employees. Impact became insolvent and all directors died except director Garcia. Garcia claimed that only directors who participate in unlawful acts or are guilty of gross negligence and bad faith shall be personally liable, and that being a mere stockholder of the corporation, she could not be made liable. Is Garcia liable?

Among the exceptions when a director is liable for the obligations of the corporation is when a director, trustee or officer is made, by specific provision of law, personally liable for his corporate action. The situation of Garcia falls exactly under the aforesaid situation because Section 28 (f) of the Social Security Law imposes a civil liability upon its managing head, directors or partners for any act or omission pertaining to the violation of the Social Security Law when committed by a corporation, partnership or association.[1]
(1) Garcia vs. Social Security System Commission Legal and Collection, 540 SCRA 459, 475, Dec. 17, 2007

What are the requisites of a derivative suit?

The requisites of a derivative suit are: (a) The party bringing suit should be a shareholder during the time the act or transaction complained of, the number of shares not being material; (b) The party has tried to exhaust intra-corporate remedies i.e., has made a demand on the board of directors for the appropriate relief, but the latter has failed or refused to heed his pleas; and

The cause of action actually devolves on the corporation; the wrongdoing or harm having been caused to the corporation and not the particular stockholder bringing the suit. 1]
1] Reyes vs. RTC of Makati, 561 SCRA 593, Aug. 11, 2008.

When will merger or consolidation of two corporations take effect?

The merger or consolidation does not become effective upon the mere agreement of the constituent corporations. Since a merger or consolidation includes fundamental changes in the corporation, as well as in the rights of the stockholders and creditors, there must be compliance with the steps provided for by law such as: (a) The board of each corporation draws up a plan of merger or consolidation; (b) submission of the plan to stockholders or members for approval; execution of the formal agreement referred to as articles of merger or consolidation by the corporate officers of each constituent corporation; (d) submission of said articles of merger or consolidation to the SEC for approval; (e) if necessary, SEC shall set the same for hearing; (f) issuance of certificate of merger or consolidation. The merger or consolidation takes effect upon the issuance by the SEC of the certificate of merger or consolidation. (Mindanao Savings and Loan Association vs. Wilkom, 634 SCRA 392, Oct. 20, 2010).

What are the effects of failure to obtain the certificate of merger? On the other hand, what are the consequences of merger?

When the certificate of merger is not obtained, there is no merger and hence, the two corporations shall not be considered as one but two separate corporations, and being separate entities, the property of one cannot be considered as property of the other. On the other hand, when merger takes effect, the absorbed corporation ceases to exist and its rights, liabilities and properties shall be taken and deemed transferred to and vested in the surviving corporation. (Mindanao Savings and Loan Association, Inc. vs. Wilkom, 634 SCRA 392, Oct. 20, 2010).

Does the merger of two corporations carry with it the absorption of the employees of non-surviving corporation by the surviving corporation?

While it is true that in case of an approved merger, all the assets and liabilities of the dissolved corporation are transferred to the surviving corporation, however the employees are not automatically transferred to the surviving corporation. Human beings are not included in the terms, assets and liabilities. The Corporation Code does not mandate the absorption of the employees of the nonsurviving corporation by the surviving corporation in the case of merger. (Bank of the Philippine Islands vs. BPI Employees Union, 627 SCRA 590, August 10, 2010).

What right does a dissenting stockholder have when there is a fundamental change in the articles of incorporation which substantially prejudice the rights of the stockholders?

A stockholder who dissents from certain corporate actions such as amendment of the articles of incorporation which prejudice his interest has the right to demand payment of the fair value of his shares. This right is known as the appraisal right. (Turner vs. Lorenzo Shipping Corp., 636 SCRA 13, Nov. 24, 2010).

Petitioners were stockholders of respondent corporation. Said corporation amended its articles of incorporation by removing the stockholders pre-emptive rights to newly issued shares of stock. Petitioners voted against the amendment and demanded payment of the value of their shares. May the petitioners exercise appraisal rights?

The petitioners may exercise their appraisal right since there was a fundamental change in the charter or articles of incorporation substantially prejudicing the rights of the stockholders. It serves the purpose of enabling the dissenting stockholder to have his interest purchased and to retire from the corporation. (Turner vs. Lorenzo Shipping Corporation, 636 SCRA 13, Nov. 24, 2010).

Is there any limitation on the right of appraisal of a dissenting stockholder?

Yes, there is a limitation on the right of appraisal of a stockholder. No payment shall be made to any dissenting stockholder unless the corporation has unrestricted retained earnings in its books to cover the payment. In case the corporation has no available unrestricted retained earnings in its books, Section 83 of the Corporation Code provides that if the dissenting stockholder is not paid the value of his shares within 30 days after the award, his voting and dividend rights shall immediately be restored.
(continued at next slide)

The trust fund doctrine supports the requirement of unrestricted retained earnings to fund the payment of the shares of stocks of the withdrawing stockholders. Under this doctrine, the capital stock, property, and other assets of a corporation are regarded as equity in trust for the payment of corporate creditors who are preferred in the distribution of corporate assets. The creditors of the corporation have the right to assume that the board of directors will not use the assets of the corporation to purchase its own stock for as long as the corporation has outstanding debts and liabilities. (Turner vs. Lorenzo Shipping Corp., 636 SCRA 13, Nov. 24, 2010).

What may be the source of payment of dividends?

A corporation cannot lawfully declare dividends out of its capital stock, and thereby reduce the same, or out of assets which are needed to pay the corporate debts. They can be declared only out of surplus profits.[1] The reason for the rule is that it would be a fraud upon the creditors of a corporation who extend credit to it on the faith of its capital stock, to permit it to be diverted by a distribution among the stockholders as dividends. Moreover, each stockholder is entitled to have the capital stock preserved unimpaired for the purpose of carrying out the object for which the corporation is formed.[2]
[1] 11 Fletcher Cyc. Corp. Sec. 5319, 611; Steinberg vs. Velasco, 52 Phil. 953; Asked, No. V, a, 2005 Bar Exams. [2] 14 C. J. Sec. 1210; Asked, 1953 and 1957 Bar Exams.; No. V c, 2005 Bar Exams.

Distinguish a corporation sole from a corporation aggregate.

A corporation sole is one formed by the chief archbishop, bishop, priest, minister, rabbi or other presiding elder of a religious denomination, sect, or church, for the purpose of administering or managing, as trustee the affairs, properties and temporalities of such religious denomination, sect or church. A corporation aggregate formed for the same purpose, on the other hand consists of two or more persons. (IEMELIF vs. Lazaro, 624 SCRA 224, July 6, 2010).

May a corporation sole be converted into a corporation aggregate by merely amending its articles of incorporation or should the corporation sole be dissolved first and a corporation aggregate be created later?

There is no point to dissolving the corporation sole of one member to enable the corporation aggregate to emerge from it. The conversion may be done by merely amending the articles of incorporation of the corporation sole.

If the amendment mechanism of a non-stock corporation shall be made to operate in a corporation sole, its one member in whom all the powers of the corporation technically belongs, needs to get the concurrence of twothirds of its membership. Thus, the one member with the concurrence of two-thirds of the membership of the organization for whom he acts as trustee, can self-will the amendment. He can, with the membership concurrence, increase the technical number of the members of the corporation from sole or one to the greater number authorized by its amended articles.

May a dissolved corporation still sue or be sued?

Under Section 122 of the Corporation Code, a dissolved corporation shall nevertheless continue as a body corporate for three (3) years for the purpose prosecuting and defending suits by or against it and enabling it to settle and close its affairs, to dispose and convey its property and to distribute its assts, but not the purpose of continuing the business for which it was established. Within those three (3) years, the corporation may appoint a trustee or receiver who shall carry out the said purposes beyond the three year winding-up period. Thus, a trustee of a dissolved corporation may commence a suit which can proceed to final judgment even beyond the three (3) year period of liquidation. (Metropolitan Bank & Trust Co., Inc. vs. Board of Trustees of RMCPRF, 630 SCRA 350, Sept. 8, 2010).

Is a foreign corporation not licensed to do business in the Philippines absolutely incapacitated from filing a suit in local courts?

When a foreign corporation does business in the Philippines without the proper license, it cannot maintain any action of proceeding before Philippine Courts. Doing business implies a continuity of commercial dealings or arrangement which involve profit-making. Soliciting purchases has been deleted from the enumeration of acts or activities which constitute doing business. Thus, where a foreign company merely imports goods from a Philippine exporter, without opening an office or appointing an agent in the Philippines, is not doing business in the Philippines and hence, not barred from bringing action in Philippine courts. .[1]
.[1] Cargill, Inc. vs. Intra Strata Assurance Corporation, 615 SCRA 304, March 15, 2010.

Only when a foreign corporation is transacting or doing business in the Philippines will a license be necessary before it can institute suits. It may however, bring suits on isolated business transactions, which is not prohibited under Philippine Law. Thus, a foreign insurance company may sue in Philippine courts for subrogation arising out of marine insurance policies issued by it abroad to cover international-bound cargoes shipped by a Philippine carrier, even if it has no license to do business in the country. It is the act of engaging in business without the prescribed license, and not the lack of license per se which bars a foreign corporation from access to our courts. .[1]
[1] Aboitiz Shipping Corporation vs. Insurance Company of North America, 561 SCRA 262.

When may an unlicensed foreign corporation doing business in the Philippines sue in Philippine Courts?

The exception to the rule that an unlicensed foreign corporation doing business in the Philippines cannot sue in Philippine courts is when the principle of estoppel applies. Thus, a foreign corporation doing business in the Philippines without license may sue in Philippine courts a Filipino citizen or a Philippine entity that had contracted with and benefited from it. A party is estopped from challenging the personality of a corporation after having acknowledged the same by entering into a contract with it. The principle is applied to prevent a person contracting with foreign corporation from later taking advantage of its non-compliance with the statutes where such person has received benefits from such contract. (Global Business Holdings, Inc. vs. Surecomp Software, B. V., 633 SCRA 94, Oct. 13, 2010).

The Securities Regulation Code

Questions: What are exempt securities? What are exempt transactions?

What is a tender offer? What is its purpose?

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 public company i. e., one listed on an stock exchange. It is also defined as an offer by the acquiring person to stockholders of a public company for them to tender their shares therein on the terms specified in the offer.[1]
[1]

Osmena III vs Social Security System of the Philippines, 533 SCRA, Sept. 13, 2007.

Tender offer is in place to protect the interests of minority stockholders of a target company against any scheme that dilutes the share value of their investments. It affords such minority shareholders the opportunity to withdraw or exit from the company under reasonable terms, a change to sell their shares at the same price as those of the majority stockholders.[2]
[2] Ibid.

When must tender offer be made to shareholders?

Any person or group of persons acting in concert who intends to acquire at least fifteen percent (15%) of any class of any equity security of a listed corporation or of any class of any equity security of a corporation with assets of at least Fifty million pesos (P50,000,000.00) and having two hundred (22) or more stockholders with at least one hundred (100) shares each or who intends to acquire at least thirty percent (30%) of such equity over a period of twelve (12) months shall make a tender offer to stockholders by filing with the Commission a declaration to that effect; and furnish the issuer, a statement containing such of the information required in Section 17 of this Code as the Commission may prescribe.

Such person or group of persons shall publish all requests or invitations for tender, or materials making a tender offer or requesting or inviting letters of such a security. Copies of any additional material soliciting or requesting such tender offers subsequent to the initial solicitation or request shall contain such information as the Commission may prescribe, and shall be filed with the Commission and sent to the issuer not later than the time copies of such materials are first published or sent or given to security holders.[1]
[1]

Section 19.1; Asked, No. VI, 2002 Bar Exams.

What is the meaning of Swiss Challenge?

Under the Swiss Challenge format, one

of the bidders is given the option or

preferential right to match the winning bid.[1]

[1] Osmena III vs. Social Security System of the Philippines, 533 SCRA 313, 321, September 13, 2007.

PRESIDENTIAL DECREE NO. 902-A

(As amended by Securities Regulation Code)

Which court has jurisdiction over cases previously cognizable by the SEC?

The court designated by the Supreme Court as Special Commercial Court is vested with jurisdiction over cases previously cognizable by the Securities and Exchange Commission. When a case is erroneously filed in the regular Regional Trial Court, such court does not have the authority or power to order the transfer of cases erroneously filed with it to another branch of the Regional Trial Court the only action that it could take on the matter is to dismiss the petition for lack of jurisdiction.

What is an intra-corporate controversy?

An intra-corporate controversy or dispute is a suit arising from intra-corporate relations or between or among stockholders or between any or all of them and the corporation. (Strategic Alliance Dev. Corp. vs. Star Infrastructure Dev. Corp., 635 SCRA 380, Nov. 17, 2010).

Are all conflicts between stockholders and the corporation considered as intracorporate controversies so as to fall within the jurisdiction of SEC (Now Regional Trial Court)?

Not all conflicts between the stockholders and the corporation are classified as intra-corporate so as to fall within the jurisdiction of the SEC (Now the Regional Trial Court). The better policy to be followed in determining jurisdiction over a case should be to consider concurrent factors such as the status or relationship of the parties or the nature of the question that is the subject of their controversy. (Strategic Alliance Dev. Corp. vs. Star Infrastructure Dev. Corp., 635 SCRA 380, Nov. 17, 2010). Under the nature of the controversy test, the incidents of that relationship must also be considered for the purpose of ascertaining whether the controversy itself is intra-corporate. If the relationship and its incidents are merely incidental to the controversy or if there will still be conflict even if the relationship does not exist, then no intra-corporate controversy exists. (Real vs. Sangu Phils., Inc., 640 SCRA 67, Jan. 19, 2011).

Real was a stockholder, director and manager of respondent corporation. He was dismissed by the Board for various reasons. Claiming illegal dismissal, he filed a case with the NLRC. Respondent claims that NLRC did not have jurisdiction because the case was an intra-corporate controversy over which the SEC (now Regional Trial Court) has jurisdiction. Was the case intra-corporate issue?

The case was not intra-corporate controversy. The case arose from the alleged illegal dismissal of the petitioner as an employee and not by reason of his capacity as a stockholder or director. He is not trying to recover a seat in the board of directors or to any appointive or elective corporate position which has been declared vacant by the board. This case is one of termination of employment which is a labor controversy and not an intra-corporate dispute. (Real vs. Sangu Phil., Inc., 640 SCRA 67, Jan. 19, 2011).

Is the dismissal of a vice-president an intra-corporate controversy so as to fall under the jurisdiction of SEC (Now Regional Trial Court)?

If the vice-president is a corporate officer, his dismissal falls under the jurisdiction of the court, otherwise it falls under the jurisdiction of the National Labor Relations Commission.
The vice-president is a corporate officer if his position is provided for in the Corporation Code or in the by-laws otherwise, he is not a corporate officer. To be a corporate officer, it is essential that his position is one of those expressly mentioned in the Corporation Code or in the companys by-laws. Thus, the creation of an office pursuant to or under a by-law provision is not enough to make a position a corporate office. The corporate officers mentioned by the Corporation Code are the President, Treasurer, Secretary and such other officers as may be provided for in the by-laws. (Matling Industrial and Commercial Corporation vs. Ricardo Coros, G.R. 157802; 633 SCRA 12, Oct. 13, 2010.)

What is the nature of all orders and decisions under the Interim Rules on Intra-corporate controversies?

All decisions and orders issued under the Interim Rules of Procedure Governing Intra-corporate Controversies shall immediately be executory. No appeal or petition taken therefrom shall stay the enforcement or implementation of the decision or order, unless restrained by an appellate court. Interlocutory orders shall not be subject to appeal. (Dee Ping Wee vs. Lee Hiong Wee, 629 SCRA 145, August 25, 2010).

Who may file a petition for rehabilitation of a corporation?

The petitioner in a Petition for Rehabilitation of the corporation must either be: (1) an actual insolvent debtor; (2) a technically insolvent debtor; or (3) a creditor or stockholder of the debtor.

What is technical insolvency? What is the remedy of the corporate debtor with technical insolvency.

Technical insolvency is the inability of a corporation to pay its obligations although it has sufficient assets, for a period longer than one year from filing of the petition. Its remedy is to file a Petition for Rehabilitation. [1]

[1] Union Bank of the Philippines vs. ASB Development Corporation, 560 SCRA 578.

Distinguish actual insolvency from technical insolvency.

There is actual insolvency when the corporations assets are not enough to cover its liabilities, while technical insolvency exists when the corporation has enough assets but it foresees its inability to pay its obligations for more than one year from the filing of the petition. [1]
[1] PNB vs. Court of Appeals, 576 SCRA 537, January 7, 2009.

When may a party apply for the appointment of a management committee for the corporation, partnership or association?

A party may apply for the appointment of a management committee for the corporation, partnership or association when there is imminent danger of:

(1) Dissipation, loss, wastage or destruction or assets or other properties; and

(2)

Paralyzation of its business operations which may be prejudicial to the interest of the minority stockholders, parties-litigants

or the general public. [1]

[1] Sy Chim vs. Sy Siy Ho & Sons, Inc., 480 SCRA 465, January 27, 2006, citing Section 1, Rule 9 of the Interim Rules on Corporate Rehabilitation.

When may receivers appointed for a corporation?

be

A. Receivers may be appointed whenever:

(1) necessary in order to preserve the rights of the parties-litigant, and/or (2) protect the interest of the investing public and creditors.[1]
[1] Section 6 (c), P. D. 902-A, as amended.

The situations contemplated in these instances are serious in nature. There must exist a clear and imminent danger of losing the corporate assets if a receiver is not appointed.[1]

[1] Pryce Corporation vs. Court of Appeals, 543 SCRA 657, February 4, 2008.

What is the Serious Situation Test in corporate rehabilitation cases?

The Serious Situation Test in a petition for rehabilitation case means that there is a clear and imminent danger that the corporate petitioner will lose its corporate assets if a receiver is not appointed.[1]
[1]

Pryce Corporation vs. Court of Appeals, supra.

What is the effect of the appointment of a rehabilitation receiver? What is the purpose thereof?

Upon appointment by the SEC (now, RTC Special Commercial Court) of a rehabilitation receiver, all actions for claims against the corporation pending before any court, tribunal or board shall ipso jure be suspended.[1]
[1]

Garcia vs. Philippine Air Lines, Inc., 531 SCRA 574.

When will the suspension of the enforcement of all claims against the corporation commence?

The suspension of the enforcement of all claims against the corporation shall commence only from the time the Rehabilitation Receiver is appointed. (Equitable PCI Bank, Inc. vs. DNG Realty, supra, citing RCBC vs IAC, 320 SCRA 279).

What are the actions that are suspended during the process of rehabilitation?

The actions that are suspended cover all claims against the corporation whether for damages founded on a breach of contract of carriage, labor cases, collection suits or any other claims of a pecuniary nature. No exception in favor of labor claims is mentioned in the law.[1] No exception either is made therein in favor of maritime claims. Thus, since the law does make any exemptions or distinctions, neither should we. [2]

[1] Philippine Airlines, Inc. vs. Heirs of Bernardin J. Zamora, 538 SCRA 456, November 23, 2007.
[2] Negros Navigation Co., Inc. vs. Court of Appeals, 573 SCRA 434, December 10, 2008.

What is the purpose of suspending the proceedings initiated by the creditors for the collection of their credits whenever a corporation is undergoing rehabilitation?

The purpose for the suspension of the proceedings is to prevent a creditor from obtaining an advantage or preference over another and to protect and preserve the rights of party litigants as well as the interest of the investing public or creditors. Such suspension is intended to give enough breathing space for the management committee or rehabilitation receiver to make the business viable again, without having to divert attention and resources to litigations in various fora.

The suspension would enable the management committee or rehabilitation receiver to effectively exercise its/his powers free from any judicial or extrajudicial interference that might unduly hinder or prevent the rescue of the debtor company. To allow such other action to continue would only add to the burden of the management committee or rehabilitation receiver, whose time, effort and resources would be wasted in defending claims against the corporation instead of being directed toward its restructuring and rehabilitation.[1]
[1] Philippine Islands Corporation for Tourism Development, Inc. vs. Victorias Milling Company, Inc.. 554 SCRA 561, June 17, 2008

What is the consequence if no rehabilitation plan is approved by the court within 180 days from the date of the initial hearing?

Under Section 11, Rule 4 of the Interim Rules of Procedure in Corporate Rehabilitation, a petition for rehabilitation shall be dismissed is no rehabilitation plan is approved by the court upon the lapse of 180 days from the date of initial hearing. The Interim Rules, however allows extension beyond the 180-day period for justifiable cause. (De Castro vs. Liberty Broadcasting Network, Inc., 629 SCRA 77, Aug. 25, 2010).

Will the suspension of all proceedings as a consequence of rehabilitation include suspension of criminal prosecution for violation of BP 22 or Bouncing Check Law?

Violation of BP 22 is not a claim that can be enjoined within the purview of P.D. No. 902-A although the conviction of the accused for the alleged crime could result in the restitution, reparation or indemnification of the offended party for the damage or injury he sustained by reason of the felonious act of the accused because prosecution for violation of B.P. 22 is a criminal action. The dominant and primordial objective of the criminal action is the punishment of the offender. The civil action is merely incidental to and consequent to the conviction of the accused. Criminal actions are primarily intended to vindicate an outrage against the sovereignty of the state and to impose the appropriate penalty for the vindication of the disturbance to the social order caused by the offender. On the other hand, the action between the private complainant and the accused is intended solely to indemnify the former. [1]

[1] Rosario vs. Co, 563 SCRA 239, Aug. 26, 2008.

What is the difference between Suspension of Payments under the Insolvency Law and suspension of payments of a corporation undergoing rehabilitation under Presidential Decree 902-A?

Unlike the provisions in the Insolvency Law which exempts secured creditors from the suspensive effect of the order issued by the court in an ordinary suspension of payment proceedings, the provisions of P.D. No. 902-A, when it comes to the appointment of a management committee or a rehabilitation receiver, do not contain an exemption for secured creditors.[1]

[1] Philippine Islands Corporation for Tourism Development, Inc. vs. Victorias Milling Company, Inc., supra.

What is the effect of the appointment of a management committee or rehabilitation receiver on the right of the secured creditor to foreclose the mortgage in its favor?

The right to foreclose such mortgage is merely suspended upon the appointment of a management committee or rehabilitation receiver or upon the issuance of a stay order by the trial court. However, the creditor-mortgagee may exercise his right to foreclose the mortgage upon the termination of the rehabilitation proceedings or upon the lifting of the stay order.[1]
[1] Consuelo Metal Corporation vs. Planters Development Bank, 465 SCRA 465.

What is the consequence if rehabilitation is no longer feasible and the assets of the corporation are finally liquidated?

Secured creditors shall then enjoy preference over unsecured creditors, subject only to the provisions of the Civil Code on concurrence and preference of credits. Creditors of secured obligations may pursue their security interest on lien, or they may choose to abandon the preference and prove their credits as ordinary claims.[1]
1] Consuelo Metal Corporation vs. Planters Development Bank, 465 SCRA 465, June 26, 2008.

What is the proper mode of appeal in corporate rehabilitation cases?

The proper mode of appeal in cases of corporate rehabilitation is through a petition for review under Rule 43 of the Rules of Court to be filed within fifteen (15) days from notice of the decision or final order of the Regional Trial Court. (China Banking Corporation vs. Cebu Printing and Packaging Corp., 628 SCRA 154, Aug. 11, 2010).

 INSURANCE

Q. What laws govern insurance?

A. The laws governing insurance in their order of priority are: (a) Insurance Code; (b) in the absence of applicable provisions in the Insurance Code, the Civil Code, and (c) in the absence of applicable provisions in the Insurance and the Civil Code, the general principles prevailing on the subject in the United States, particularly in the State of California where our Insurance Code was based.[1] [1] Constantino vs. Asia Life Ins. Co., 87 Phil. 248; Gercio vs. Sun Life Assur. Of Canada, 48 Phil. 375.

Q. For purposes of insurance, who is a public enemy?

A. Public enemy is a nation at war with the Philippines and every citizen or subject of such nation. Such term does not include robbers, thieves and riotous mobs.[1] A public enemy cannot be insured because the purpose of war is to cripple the power and exhaust the resources of the enemy, and it inconsistent that one country should destroy its enemy and repay in insurance the value of what has been so destroyed. [1] Blacks L. D., citing State v. Moore, 74 Mo. 417, 41 Am. Rep. 322; Asked, VIII (a), 2000 Bar Exams.

Q. Who may insure a mortgaged property? A. Both the mortgagor and the mortgagee may take out separate policies with the same or different insurance companies. The mortgagor may insure the property mortgaged to the full value of such property while the mortgagee can insure the same only to the extent of the amount of his credit.[1] [1] Cosio vs. Panlilio, 17 SCRA 196; Asked, No. IV (a), 1999 Bar Exams.; 44 C. J. S. 884.

Q. What are the consequences where the mortgagor insures the property mortgaged in his own name but makes the loss payable to the mortgagee or assigns the policy to the latter?

A. The consequences of such insurance[1] are as follows: 1. The insurance is still deemed to be upon the interest of the mortgagor who does not cease to be a party to the original contract. Hence, if the policy is cancelled, notice of cancellation must be given to the mortgagor and not to the mortgagee.[2] 2. Any act of the mortgagor, 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. Thus, violation by the mortgagor of the policy entitles the insurer to rescind and will prevent the beneficiary (mortgagee) from recovering from the insurer.[3] 3. Any act which, under the contract of insurance, is to be performed by the mortgagor, may be performed by the mortgagee with the same effect as if it has been performed by the mortgagor. As for example, the policy requires the insured to give notice and proof of loss without unnecessary delay. Notice or proof of loss may be given by the mortgagee to whom the loss is made payable with the same effect as if the same was given by the mortgagor.[4] 4. Upon occurrence of the loss, the mortgagee is entitled to recover to the extent of his credit[5] and the balance, if any, is payable to the mortgagor since such policy is for the benefit of both the mortgagor and mortgagee.[6] The mortgagee is the proper party to prosecute an action for a loss sustained under a policy of insurance where the loss was made payable to him and such action may be brought by the mortgagee even without including the mortgagor as party to the action.[7] 5. Upon recovery by the mortgagee to the extent of his credit from the insurer, the mortgagor is released from his indebtedness.[8]

Q. What are the effects of insurance procured by the mortgagee without reference to the right of the mortgagor?

1. The mortgagee may collect from the insurer upon the occurrence of the loss to the extent of his credit.[1] 2. Unless otherwise stated in the policy, the mortgagor has no right to collect the balance of the proceeds of the policy after payment of the interest of the mortgagee.[2] 3. The insurer, upon payment to the mortgagee-insured, becomes subrogated to the rights of the mortgagee against the mortgagor and may collect the debt of the mortgagor to the extent of the amount paid to the mortgagee.[3] This principle applies only where the policy obtained by the mortgagee covers his interest alone.[4] 4. The mortgagee-insured can no longer collect the mortgagors indebtedness after receiving full payment of his credit from the insurer since the latter thereby acquires the right to collect from the mortgagor by virtue of subrogation.[5] However, if the mortgagee-insured is unable to collect the whole amount of his credit from the insurer, he may still charge the mortgagor for the deficiency.[6] 5. The mortgagor is not released from his debt by the insurers payment to the mortgagee-insured.[7]

Who may be beneficiaries in life insurance contracts?

Any person may be designated as beneficiary in a life insurance contract even though he is a stranger and has no insurable interest in the life insured, except those who are forbidden by law to receive donations from the insured such as: (a) Those made between persons who are guilty of adultery or concubinage at the time of the donation; (b) Those made between persons found guilty of the same criminal offense, in consideration thereof; (c) Those made to a public officer or his wife, descendants and ascendants, by reason of his office.

In essence, a life insurance policy is no different from a civil donation insofar as designation of beneficiary is concerned. Both are founded upon the same consideration: liberality. A beneficiary is like a donee, because from the premiums of the policy which the insured pays out of liberality, the beneficiary will receive the proceeds of the said insurance. As a consequence, the proscription in Article 739 of the Civil Code should equally operate in life insurance contracts. Any person who cannot receive a donation cannot be named as beneficiary in the life insurance policy of the person who cannot make the donation. No legal proscription exists in naming as beneficiaries the children of illicit relationships of the insured, and thus they may be named as beneficiaries.

Q. Must the beneficiary have insurable interest in the life insured? A. A person procuring insurance on his own life may name anyone he chooses as beneficiary thereof, even though he is stranger and has no insurable interest in the life insured. However, a person who cannot receive donation from the insured under Article 739 of the Civil Code cannot be designated as beneficiary.

Q. May the wife who abandoned her husband be a beneficiary of Social Security Benefits? A. In the case of Social Security System, et al., vs. Gloria de los Santos, the Supreme Court ruled that a wife who left her husband and lived with another man is no longer entitled to receive Social Security benefits upon the death of the husband because she was no longer dependent upon him for her support.

Q. Distinguish insurable interest in property from insurable interest in life.

1. Insurable interest in property is based on pecuniary interest [1] while in life, the interest need not necessarily be strictly and exclusively a pecuniary one, as in case of consanguinity or affinity;[2] 2. In property insurance, the interest must exist at the time the policy takes effect and at the time of the loss,[3] while in life insurance interest need exist only at the time the insurance takes effect[4] except insurance taken by a creditor on the life of the debtor wherein interest must also exist at the time of the loss. 3. Insurable interest in property is limited to the actual value of the damage the insured may suffer, while in life there is no limit on the amount of insurable interest unless it is based on creditordebtor relationship

Q. Must the beneficiary in property insurance have insurable interest on the property insured?

A. Yes. No contract or policy of insurance on property shall be enforceable except for the benefit of some person having an insurable interest in the property insured.[1] Thus, the beneficiary in property insurance must have insurable in the property insured. A stranger having no insurable interest in the property insured could not be made a beneficiary in a policy covering the said property.[2] This principle does not apply to life insurance wherein insurable interest on the part of the beneficiary is not necessary.

Q. How is materiality of concealment or representation determined?

A. 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 the communication is due, in forming his estimate of the disadvantages of the proposed contract, or in making his inquiries.[1] [1] Section 31.

Q. To be material, must there be a causal connection between the fact concealed and the cause of the loss?

A. Concealment need not, in order to be material, be of facts which bring about, or contribute to, or are connected with the insureds loss. It is immaterial that there is no causal relationship between the fact concealed and the loss sustained. The insured, therefore, need not die of the very disease he failed to reveal to the insurer. It is sufficient that his nonrevelation has misled the insurer in forming its estimate of the disadvantages of the proposed policy or in making its inquiries in order to entitle the insurer to avoid the contract.[1]

Q. When is causal connection between the fact concealed and the case of the loss necessary? A. In marine insurance, in the matters mentioned in Sec. 110.

Q. In property insurance, after payment to the insured what is the right of the insurer as against persons liable to the insured by reason of thing insured? A. In property insurance, after the insured has received payment from the insurer of the loss covered by the policy, the insurance company shall be subrogated to the rights of insured against the wrongdoer or the person who violated the contract. The insurers right to subrogation accrues upon payment of the insurance claim.[1]

Q. What are instances when there is no subrogation in favor of the insurer? A. The insurer will not be subrogated to the rights of the insured in the following cases: (1) In life insurance because subrogation exists only when insurance is a contract of indemnity.[1] Subrogation therefore, exists only in property insurance.[2] (2) When the proximate cause of the damage was the negligence of the insured himself.[3]

(3) When the insurer pays to the insured a loss not covered by the policy.[4]
4. When the insured failed to comply with the legal or stipulated condition precedent prior to the filing of an action against the wrongdoer, as when no notice of loss was given by the insured to the carrier liable for the loss despite the stipulation to that effect, [5] or the notice of claim required by

Q. Oriental Assurance issued a fire insurance policy in favor of Paramount covering its properties in Manila. The said properties were partially burned. It turned out that said properties were likewise insured with five other insurance companies. The insured revealed to Oriental Assurance only two of these policies and failed to declare to the insurer the existence of the three other policies despite the requirement in the policy that the insured must declare other policies on the same property insured. Was Oriental Assurance liable?

A. The insurer was not liable. The insured failed to declare the actual number of other insurances taken over the subject property. Consequently, the whole foundation of the contract fails, the risk does not attach and the policy never becomes a contract between the parties.[1]

Q. In multiple insurance covering stocks-in-trade, when is there no violation of the prohibition against double insurance? A. In case of insurance upon stock-in-trade, there is no violation of the prohibition against double insurance where the policies taken cover less than the entire quantity of the stock-in-trade,[1] or where the total amount of the policies taken is less than the total value of the stock in trade.[2]

Q. Distinguish over-insurance from double insurance. A. The following are the distinctions between over-insurance and double insurance: 1. In double insurance, there must be two or more insurers while in over-insurance, one insurer is sufficient; 2. In double insurance, the total amount of the polices taken need not exceed the value of insurable interest while in over-insurance, the insurance taken must always be more than the amount of insurable interest.

Q. When is reinsurance compulsory? A. The insurer must obtain reinsurance in the following cases: (1) When a non-life insurer insures in any one risk or hazard an amount exceeding 20% of its net worth, the insurer needs reinsurance of the excess over said limit so that the retention of the insurer will be reduced to a maximum of 20% of its net worth.[1] (2) When a foreign insurance company withdraws from the Philippines, it should cause its primary liabilities under policies insuring residents of the Philippines to be reinsured and assumed by another insurance company authorized to transact business in the Philippines.[2]

Q. Distinguish reinsurance from double insurance. A. Reinsurance may be distinguished from double insurance as follows: (1) In double insurance, the insurer remains as insurer while in reinsurance, the insurer becomes an insured; (2) In double insurance, the subject matter is property, while in reinsurance, it is the insurers risk or liability; (3) In double insurance, the same interest and risk are insured with another insurer, while in reinsurance, the different risk and interest is insured.[1]

Q. Distinguish insurance compact from facultative reinsurance. A. Facultative reinsurance is one wherein the reinsurer has the right to accept or not to accept participation in the risk insured.[1] On the other hand, reinsurance compact is a contract whereby two or more insurance companies agree in advance that each will reinsure a part of any line of insurance taken by the other, and is a self-executing contract. In such case, reinsurance attaches automatically upon the acceptance of a risk by any one of the companies. [2]

Q. What is the meaning of incontestable clause? A. An incontestable clause in a life insurance policy is an agreement by which the insurance company limits the period of time within which it will interpose objections to the validity of the policy or set up any defense. After 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.

What are the statutory exceptions to the rule that the insurer is entitled to the payment of 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 is valid and binding unless and until the premium thereof has been paid.[1] The statutory exceptions wherein the policy shall be binding notwithstanding the non-payment of premiums are: 1. In case of life or industrial life insurance whenever the grace period applies;[2] 2. When the insurer makes a written acknowledgment of the receipt of premium, such acknowledgment is a conclusive evidence of payment of premium to make the policy binding;[3] 3. Where the obligee has accepted the bond or suretyship contract in which case such bond or suretyship becomes valid and enforceable irrespective of whether or not the premium has been paid by the obligor to the surety.[4]
[

Aside from the statutory exceptions mentioned above wherein the policy is valid and binding notwithstanding the non-payment of premiums, what are the other exceptions that evolved from cases decided by the Supreme Court?

Aside from the statutory exceptions, the following are the instances when the Supreme Court ruled that the policy is valid and binding notwithstanding the non-payment of premiums: 1. In case of cover notes which are binding even if premiums are not paid thereon because no premium could be fixed on the cover note until all the particulars of the insurance are known. Cover notes should be integrated to the regular policies so that the premiums on the regular policies include the consideration for the cover notes.[1] 2. When the parties agreed to have the premiums paid by installments or payment by installments is an established practice by the parties, acceptance of the payment of premium by installments would suffice to make the policy binding.[2] 3. When the insurer has granted the insured a credit term for the payment of premium, the insurer is barred by estoppel from claiming forfeiture of the policy due to non-payment of premium within the credit term.[3]
[1] Pacific Timber and Export Corporation vs. Court of Appeals, 112 SCRA 199. [2] Makati Tuscany Condominium Corp. vs. Court of Appeals, 215 SCRA 462; Asked, No. V, 2006 Bar Exams. [3] UCPB vs. Masagana Telamart, Inc., 356 SCRA 307. There are however, strong dissenting opinions in this case.

In case of a continuing bond, is payment of the premium for the succeeding year indispensable for the continued validity of the bond?

Q. When are premiums not recoverable? A. In the following cases, the insured cannot recover the premium paid: 1. If the peril insured against has existed, and the insurer has been liable for any period, the peril being entire and indivisible. 2. In life insurance.

3. When the insured is guilty of fraud or misrepresentation.

Q. What are the losses for which the insurer is liable? A. The insurer is liable for the following losses: 1. Loss of which a peril insured against was the proximate cause. 2. Loss caused by efforts to rescue the thing insured from a peril insured against. 3. Loss caused by a peril not insured against to which the thing insured was exposed in the course of rescuing the same from the peril insured against. 4. Loss, the immediate cause of which was the peril insured against unless the proximate cause thereof was excepted in the contract. 5. Loss caused by the negligence of the insured.

Q. Is the insurer liable for losses caused by negligence of the insured? A. The insurer is not relieved from liability by the mere fact that the loss was caused by the negligence of the insured, or of his agents or others. Accordingly, it is no defense to an action on the policy that the negligence of the insured caused or contributed to the injury. However, when the insureds negligence is so gross that it is tantamount to a willful act, the insurer is not liable.

No, the continuing bond will not only be valid for one year corresponding to the premium paid. In fact, the effectivity of the bond is not wholly dependent on the payment of premium. Sec. 177 of the Insurance Code provides, x x x No contract of suretyship or bonding shall be valid and binding unless and until the premium is paid, except when the obligee has accepted the bond, in which case the bond become valid and enforceable irrespective of whether or not the premium has been paid by the obligor to the surety x x x.

A continuing bond where there is no fixed expiration date, may be cancelled only by the obligee. In such case, the obligor shall pay the subsequent annual premium as it falls due until the contract of suretyship is cancelled by the obligee. (Country Bankers Ins. Corp., vs. Lagman, G. R. 165487, July 13,m 2011).

Q. Under the present law, must the subject of marine insurance be exposed to the perils of marine navigation? A. The present law has expanded the coverage of marine insurance so as to include risks that would otherwise have been classified as some other form of insurance. Thus, the present law includes within the coverage of marine insurance risks not connected with marine navigation such as insurance of aircraft, goods while being packed or assembled, injury to passengers, precious stones, jewels, jewelry whether in the course of transportation or not. [1] [1] Section 99.

Q. Distinguish perils of the sea from perils of the ship. A. Perils of the sea embrace all kinds of marine casualties and damages done to the ship or goods at sea by the violent action of the winds or waves, one that could not be foreseen and not attributable to the fault of anybody. Perils of the ship, on the other hand, are losses or damages resulting from (a) natural and inevitable action of the sea, (b) ordinary wear and tear of the ship, or (c) negligent failure of the ships owner to provide the vessel with proper equipment to convey the cargo under ordinary condition.[1]

Q. Distinguish concealment in marine insurance from concealment in other insurance. A. Concealment in marine insurance may be distinguished from concealment in other insurance as follows: (1) In ordinary insurance, opinion or belief of a third person or the own judgment of the insured is not material and need not be communicated,[1] while in marine insurance information of the belief or expectation of a third person in reference to a material fact, is material and must be communicated to the other party.[2] (2) In ordinary insurance, causal connection between the fact concealed and the cause of the loss is not necessary to entitle the other party to rescind the contract,[3] while in marine insurance, concealment of any of the matters mentioned in Section 110 exonerates the insurer only if the loss resulted from the risk concealed.

Q. What warranties are implied in marine insurance? A. In marine insurance the following warranties are implied:[1] (a) the ship is seaworthy; [2] (b) no improper deviation from the voyage will be made; [3] (c) the vessel will not engage in illegal venture;[4] and (d) where nationality or neutrality of a ship or cargo is expressly warranted, it is implied that the ship will carry the requisite documents to show such nationality or neutrality and will not carry any document which casts reasonable suspicion thereon

Q. When is deviation proper? And when is it improper?

A. A deviation is proper: (a) When caused by circumstances over which neither the master nor the owner of the ship has any control; (b) When necessary to comply with a warranty or avoid a peril, whether or not the peril is insured against; (c) When made in good faith, and upon reasonable grounds of belief in its necessity to avoid a peril, or (d) When in good faith, for the purpose of saving human life, or relieving another vessel in distress.[1] (Sec. 124) Every deviation which is not proper is improper.[2]

Q. Explain constructive total loss or technical total loss. A. A constructive total loss is actually a partial loss, however, by making abandonment in the cases provided by law, the loss is thereby converted to a total loss. Illustration: A vessel valued at P100 million is insured for the said amount. The vessel suffers damage amounting to P80 million. Although the loss is partial, upon making an abandonment, the insured is entitled to recover the full value of the vessel, P100 million which is equivalent to a total loss. In such case, the insurer becomes the owner of whatever may remain of the vessel. But if no abandonment is made, the insured may recover only P80 million.[1]

Q. What are the kinds of averages? A. Averages may be:[1] 1. Simple or particular average which includes all expenses and damages caused to the vessel or to her cargo which have not inured to the common benefit and profit of all the persons interested in the vessel and her cargo.[2] 2. General or gross average which includes all the damages and expenses which are deliberately caused in order to save the vessel, its cargo, or both at the same time, from real and known risk.[3] All persons having an interest in the vessel and cargo at the time of the occurrence of the average shall contribute to the average.[4]

Q. What are the effects of a stipulation that the marine insurance shall be free from particular average? A. The effects of a stipulation that the vessel or cargo insured shall be free from particular average are: If the damage to the thing insured is a particular average, the insurer shall not be liable unless the loss suffered is total i. e., the insured is deprived of the whole of such thing.[1] If the damage to the thing insured is a general average, the insurer shall be liable whether the loss is partial or total or for the contribution of the insured for his proportion of all general average losses assessed upon the thing insured which was saved.[2]
[1] Section 136. [2] Sections 164 and 165; Asked, No. XIII (b), 2000 Bar Exams.

Q. Define co-insurance. A. Co-insurance is a form of insurance in which the person who insures his property for less than the entire value is understood to be his own insurer for the difference which exists between the true value of the property and the amount of insurance.[1]

Q. What is the effect of co-insurance? A. Whenever co-insurance exists, the insurer is liable upon a partial loss only for such proportion of the amount insured by him as the loss bears to the value of the whole interest of the insured in the property insured.[1] It results in a proportionate division of risk between the insured and the insurer with the following formula: Loss x Insurance = Liability of Insurer Value

A vessel valued at P100,000 was insured for only P80,000. The vessel was damaged to the extent of P50,000. How much is the liability of the insurer in marine insurance? Answer: P50,000 (Loss) _________ x P80,000(Insurance) =P40,000 P100,000 (Value) The insurer is liable only for P40,000 because in marine insurance, there is coinsurance.

In the example given above, suppose a house was insured against fire. Using the figures above, how much is the liability of the insurer? Answer: The insurer is liable for P50,000 because in fire insurance, there is no coinsurance and the insurer is liable for the full amount of the partial loss.[1] However, if the parties agreed that there will be co-insurance, the insurer is liable only for P40,000 pursuant to the computation shown above.

Q. For what kind of fire is the insurer liable in fire insurance?

A. In fire insurance, the insured is entitled to recover the loss suffered where the cause of the damage is a hostile fire, that is, one which burns at a place where it is not intended to be, or breaks out from where it is intended to be and becomes uncontrollable. And where the fire that caused the loss is a friendly fire, that is, one which is confined within the place where it was intended to be and employed for the ordinary purpose of lighting, heating or manufacturing, recovery cannot be had for loss or damage caused thereby.[1]

Q. What is the effect of alteration in the use or condition of the thing insured? A. An alteration in the use or condition of the thing insured will entitle the insurer to rescind the contract of insurance provided the following requisites are present, to wit: (a) there must be a violation of the provisions of the policy; (b) the alteration was made without the consent of the insurer; (c) the alteration was made by means within the control of the insured and (d) the alteration increased the risk of loss.[1] (Secs. 168 and 169).

Q. Must alteration be within the control of the insured? A. An alteration in the use or condition of the thing insured must be by means within the control of the insured so as to entitle the insurer to rescind the contract. Thus, where the alterations were made by a tenant of the insured without the consent of the insured, the policy was not thereby avoided.[1] But a material alteration made by a tenant with the knowledge of the insured will forfeit the policy.[2]

Q. When is there is prima facie evidence of arson? A. Any of the following circumstances shall constitute prima facie evidence of arson: [1] 1. If the fire started simultaneously in more than one part of the building or establishment. 2. If substantial amount of flammable substance or materials are stored within the building not necessary in the business of the offender nor for household use. 3. If gasoline, kerosene, petroleum or other flammable or combustible substances or materials soaked therewith or containers thereof, or any mechanical, electrical, chemical, or electric contrivance designed to start a fire, or ashes or traces of any of the foregoing are found in the ruins or premises of the insured building or property.

4. If the building or property is insured for substantially more than its actual value at the time of the issuance of the policy. 5. If during the lifetime of the corresponding fire insurance policy more than two fires have occurred in the same or other premises owned or under the control of the offender and/or insured. 6. If shortly before the fire, a substantial portion of the effects insured on a building or property had been withdrawn from the premises except in the ordinary course of business. 7. If a demand for money or other valuable consideration was made before the fire in exchange for the desistance of the offender or for the safety of the person or property of the victim.

Q. Is the insurer liable when the insured suffered a violent death and assault or murder is excluded in the policy?

A. In a life insurance policy where death by the insured by assault or murder, or intentional killing is excepted from its coverage, the mere fact that the insured suffered a violent death by the hands of another person will not necessarily relieve the insurer of liability. The insurers liability in such case will depend on whether the insureds death was intended or not. Thus, if the insured was killed by another person intentionally the insurer is not liable.[1] But where the insured was not an intended victim of a felonious assault, the insurer is still liable.[2]

Q. While they were standing in front of the main gate of Ojedas residence, a shot was fired by a robber. Basilio was hit in the abdomen and died. The insurer refused to pay the proceeds of the policy on the ground that Basilios death was caused by murder or assault and therefore, excepted from the policy. Was the insurer liable?

A. The insurer was liable. There was no proof that Basilios death was caused by murder or assault nor can it be said that the killing was intentional for there was the possibility that the robber fired the shot merely to scare away the people around and not necessarily to kill the victim. The happening was pure accident on the part of the victim. It cannot be pretended that the robber aimed at the deceased precisely because he wanted to take his life.[1] [1]Calanoc vs. Court of Appeals, 98 Phil. 79.

Q. Death due to an injury intentionally inflicted by a third party was expressly excepted in Bs life insurance policy. Bs house was robbed. In committing the robbery, the robbers rushed towards the doors of the second floor room where they suddenly met B, the insured. B was stabbed nine times. Five of the wounds inflicted caused the death of B. The robbers were apprehended, charged and convicted of robbery with homicide. The insurer refused to pay the additional P5,000 under the accidental benefit clause on the ground that the insureds death resulted from injuries intentionally inflicted by third parties and therefore, not covered by the policy. Was the insurer liable?

A. The insurer was not liable because the nine wounds inflicted on the insured were intentionally caused. This case was different from the Calanoc case where it was found that the victim was not intentionally killed for there was the possibility that the robber had fired the shot to scare the people around for his own protection and not necessarily to kill or hit the victim. While a single shot fired from a distance, and by a person who was not even seen aiming at the victim, could have been fired without intent to kill or injure, nine wounds inflicted with bladed weapons at close range cannot be considered as innocent insofar as such intent is concerned.[1] [1] Biagtan vs. Insular Life Assur. Co., Ltd., 44 SCRA 58.

Q. Is the insurer in a life insurance contract liable where the insured committed suicide? A. The insurer in a life insurance contract shall be liable in case of suicide only when it is committed after the policy has been in force for a period of two years from the date of its issue or of its last reinstatement, unless the policy provides a shorter period; provided, however, that suicide committed in the state of insanity shall be compensable regardless of the date of commission.[1] [1] Section 180-A.

In an insurance suit, what is the actionable document, the policy or a memorandum thereof or a Marine Risk Note? A. In an insurance suit, the actionable document is the policy which must be attached to the complaint pursuant to Section 7, Rule 9 of the Rules of Court. However, there is no specific provision in the Rules of Court which prohibits the admission in evidence of an actionable document in the event a party fails to comply with the requirement of the rule on actionable document under Section 7, Rule 9. But what must be presented as evidence is the policy itself and not a mere Marine Risk Note.[1]
[1]

Malayan Insurance Co., Inc. vs. Regis Brokerage Corporation, G. R. No. 172156, Nov. 23, 2007.

Malayan Insurance with which ABB Koppel insured the cargo paid ABB Koppel the insurance claim. Claiming subrogation to the right of ABB Koppel, Malayan Insurance filed an action against Paircargo and Regis at the MeTC of Manila where it presented Marine Risk Note as proof that Malayan Insurance insured the cargo. The complaint was dismissed on the ground that the Marine Risk Note presented as proof that the cargo was insured was invalid. (a) Was the Marine Risk Note sufficient to prove the existence of the insurance contract? (b) Was Malayan Insurance subrogated to the rights of ABB Koppel against the party responsible for the loss of the shipment?

(a) The Marine Risk Note was not the insurance contract itself, but merely a complementary or supplementary document to the contract of insurance that may have existed between Malayan and ABB Koppel. (b) Since Malayan failed to introduce in evidence the Marine Insurance Policy itself as the main insurance contract, or even advert to said document in the complaint, it failed to establish its cause of action for restitution as a subrogee of ABB Koppel. Malayans right to recovery is derived from contractual subrogation as an incident to an insurance relationship, and not from any proximate injury to it inflicted by the defendants. It is critical that Malayan establish the legal basis of such right to subrogation by presenting the contract constitutive of the insurance relationship between it and ABB Koppel. Without such legal basis, its cause of action cannot survive. The dismissal of the complaint is correct.[1]
[1] Malayan Insurance Co., Inc. vs. Regis Brokerage Corporation, supra.

In an action by the insurance company claiming the right of subrogation upon payment of the loss to the insured, only the subrogation receipt and not the insurance policy was presented as evidence, is such failure to present the policy fatal to the claim of the insurer?

As a general rule, the insurance policy needs to be presented before the trial court or even belatedly before the appellate court in a case where the very existence of the contract is an issue, however where there is no question on the validity or existence of the contract of insurance, failure to present the policy is not fatal to the claim of the insurer for subrogation. The presentation of the Subrogation Receipt is sufficient specially where the petitioner never questioned the respondents right of subrogation, not did it dispute the coverage of the insurance contract or policy. (Asian Terminals, Inc. vs. Malayan Ins. Co., Inc., G. R. 171406, April 4, 2011).

Q. How can the insurer be held liable under the no fault indemnity clause in motor vehicle third party liability insurance?

A. An insurer may be held liable under the no fault indemnity provision without the necessity of proving fault or negligence of any kind provided the following requisites are present:[1] The claim is for death or injury to any passenger or third party; The total indemnity in respect of any one person does not exceed P5,000; and (c) The necessary proof of loss under oath to substantiate the claim must be submitted. [

Q. Which insurer is liable under the no fault indemnity provision? A. A claim under the no fault indemnity provision may be made against the insurer of one motor vehicle only. Such claim may be made directly by the injured party against the insurer as follows: (a) In case of an occupant of a vehicle, claim shall lie against the insurer of the vehicle in which the occupant is riding, mounting or dismounting from. (b) In any other case, claim shall lie against the insurer of the directly offending vehicle.[1]
[1] Section 378; Asked, No. III (1), 1989 Bar Exams; No. 1 (1), 1994 Bar Exams.

Q. Must the driver of the insured vehicle be a licensed driver? A. It is a common practice of the insurers to provide in the policy that the authorized drivers of the insured vehicle are the insured himself, or a person permitted or ordered by him to drive who has a license to do so.[1]

Q. When is license to drive not necessary?

A. If the insured himself is the driver of the vehicle insured, he has the right to recover damage thereto even if he has no drivers license or the same had expired at the time of the accident.[1] Likewise, when a motor vehicle is covered by a comprehensive policy that includes theft, the insurer is liable for the damage to the motor vehicle in case such damage is sustained on the occasion of or while the theft is being committed even if the thief is not licensed to drive. This principle applies notwithstanding the provision in the policy that requires the driver at the time of the accident to be duly licensed.[2] Also, when the thief had an expired license when the car insured was stolen, the insured is nonetheless liable because there is no causal connection between the possession of a valid drivers license and the loss of a vehicle.[3]

 NEGOTIABLE

INSTRUMENTS

Q. What is the meaning of negotiability? A. Negotiability is the ability to transfer to another a title and right better than what the transferor had. Through the process of negotiation, the instrument could pass to a holder in due course[1] who acquires the instrument free from any defect of title of prior parties, and free from defenses available to prior parties.[2]

Q. What is a coupon bond? A. Coupon bond is an instrument payable to bearer and are provided with interest warrants called coupons for each installment of interest, also payable to bearer, which when detached are negotiable and payable to bearer.

Q. How is negotiability of an instrument determined? A. The negotiability or non-negotiability of an instrument is determined from the writing, that is, on the face of the instrument itself. While the writing may be read in the light of the surrounding circumstances in order to more perfectly understand the intent and meaning of the parties, yet as they have constituted the writing to be the only outward and visible expression of their meaning, no other words are to be added to it or substituted in its stead.[1]

Q. What is the meaning of stated installments? A. Stated installments means that the number of installments, the maturity of each installment and the amount of each installment are specified. The time for payment of installments must at least, be determinable.[1] Thus, an instrument payable in two installments is not negotiable as it is not payable in stated installments since the amount of each installment and the maturity of each installment are not stated in the instrument.[2] [1] Victor v. Warner, 248 Ill. App. 35. [2] Asked, No. I (b), 1993 Bar Exams.

Q. Will statement of a particular fund in the instrument render it non-negotiable? Give examples.
A. It depends on whether the fund indicated is the direct source of payment or merely a source of reimbursement. Thus,

1. Where the fund indicated is the direct source of payment or one out of which payment is to be made, the instrument is non-negotiable because in such case, the promise or order to pay is contingent on the sufficiency of the fund on which it is drawn.
2. Where the particular fund is referred to in an instrument, not for the purpose of charging payment exclusively thereon, but merely to indicate the source of reimbursement, or the account to be debited, the instrument is still negotiable because in such case, payment of the instrument is not contingent on the sufficiency of the fund indicated.

Q. When is an instrument payable on demand? A. An instrument is payable on demand:[1] 1. Where it is expressed to be payable on demand, or at sight, or on presentation; 2. In which no time of payment is expressed; 3. Where the instrument is issued, accepted, or indorsed when overdue, it is, as regards the person so issuing, accepting, or indorsing it, payable on demand.

Q. When is the instrument payable to bearer? A. The instrument is payable to bearer:[1] (a) When it is expressed to be so payable; or (b) When it is payable to a person named therein or bearer; or (c) When it is payable to the order of a fictitious or non-existing person, and such fact was known to the person making it so payable; or (d) When the name of the payee does not purport to be the name of any person; or (e) When the only or last indorsement is an indorsement in blank. [1] Section 9.

Q. When is an instrument payable to a fictitious or non-existing person and therefore, payable to bearer? A. Such an instrument is payable to bearer only if the fictitious or non-existent character of the payee is known to or intended by the party making it payable to such person.[1] The reason for this rule is that when a negotiable instrument was made payable to a nonexistent or fictitious person there was no one to indorse it, and hence, if the maker intended to give it negotiability, it could only be on the theory that it became payable to bearer.[2]

Q. May an instrument payable to order be converted into an instrument payable to bearer? A. Yes, by indorsing it in blank. When the only or last indorsement is an indorsement in blank, the instrument is payable to bearer.[1] However, an instrument originally payable to bearer cannot be converted into an order instrument. Thus, where an instrument, payable to bearer, is indorsed specially, it may nevertheless be further negotiated by delivery.[2] [1] Section 9 (e). [2] Section 40.

Q. What are the kinds of incomplete instruments under the Negotiable Instruments Law? A. The following are the kinds of incomplete instruments: Mechanically incomplete but duly delivered instrument;[1] Mechanically complete but undelivered instrument;[2] and Mechanically incomplete and undelivered instrument.[3]

[1] Section 14. [2] Section 16. [3] Section 15.

Q. What are the liabilities of the parties when a mechanically incomplete instrument has been delivered and the blank has been filled up? A. When an instrument is a mechanically incomplete but delivered instrument, the liability of the parties when the instrument is completed, are as follows:[1] 1. Any person who became a party thereto prior to its completion shall be liable to: Person not a holder in due course provided the instrument has been filled up (i) Strictly in accordance with the authority given and (ii) within a reasonable time; Holder in due course as if it had been filled up strictly in accordance with the authority given and within a reasonable time.[2] 2. Any person who became a party thereto after its completion shall be liable to any holder in accordance with his warranties.[3]

Q. Is a mechanically incomplete and undelivered instrument valid? A. When an incomplete instrument has not been delivered it will not, if completed and negotiated without authority, be a valid contract in the hands of any holder, as against any person whose signature was placed thereon before delivery.[1]

Q. A made and signed a promissory note payable to bearer for P10,000. A kept the note in his desk. It was stolen by B who negotiated it to C. May C hold A liable?

A. If C is not a holder in due course, A is not liable to him because the latter may raise the defense that he did not deliver the instrument. On the other hand, if C is a holder in due course, A is liable to him since the latter cannot raise the defense of lack of delivery against a holder in due course. In the hands of a holder in due course, a valid and effectual delivery of the instrument by all parties prior to him is conclusively presumed.[1]

Q. What are the kinds of forgery under the Negotiable Instruments Law? A. The various kinds of forgery are: 1. Simple forgery which occurs when a person signs the name of another without the authority of the person whose signature it purports to be.[1] The counterfeiting of any writing, consisting in the signing of anothers name with intent to defraud, is forgery.[2] 2. Fraudulent impersonation leading to forgery, which occurs when the person to whom the instrument has been delivered impersonated the real person named as payee and signs his name.[3] Likewise, falsely personating another and signing his name is forgery.[4] 3. Fraud on the very nature of the paper signed such that the person signing it had no intention of signing a negotiable instrument.[5] This is also referred to as fraud in factum or fraud in esse contractus.[6] 4. Signature on a blank paper which was converted into a promissory note or other apparently valid instrument without authority.[7]

Q. What are the effects of forgery?

A. When a signature is forged or made without the 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 thereon 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.

Q. Who are precluded from raising the defense of forgery? A. The following cannot raise the defense of forgery: The forger as he cannot raise his own malfeasance as a defense; 2. The indorsers and persons negotiating the instrument by delivery as they warrant that the instrument is genuine and in all respects what it purports to be; 3. The acceptor with respect to the signature of the drawer as he admits the existence of the drawer, the genuineness of his signature, and his capacity and authority to draw the instrument; 4. Those that are barred by estoppel or by their own negligence from raising the defense of forgery; 5. Others who admit the genuineness of the signature expressly or impliedly, such as those who failed to deny specifically under oath the genuineness of an actionable document.

Q. What is the effect if both the drawer and drawee bank are guilty of negligence in failing to prevent damage caused by forgery of an indorsement?

A. Banking business is so impressed with public interest where the trust and confidence of the public in general is of paramount importance such that the appropriate standard of diligence must be a high degree of diligence, if not the utmost diligence. Where the drawee bank cannot claim it exercised such a degree of diligence that is required of it, it cannot escape liability for such negligence even where the drawers negligence is the proximate cause of the loss due to forgery of an indorsement. The drawee banks liability is based on law and substantial justice and not on mere equity. In such case, the drawer and the drawee bank must share fifty-fifty the loss suffered.[1]
[1] Gempesaw vs. Court of Appeals, G. R. No. 92244, Feb. 9, 1993.

Q. What is the effect of want of consideration? A. 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.

Q. Who is an accommodation party? What is the liability of an accommodation party?[1] A. An accommodation party is 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 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.[2]
[1] Asked: 1952, 1963, 1964, 1973, 1974, 1975, 1976, 1982, 1985 and 1986 Bar Exams.; No. III (a), 1993 Bar Exams.; No. IX (1), 2003 Bar Exams. [2] Section 29; Ang vs. Associated Bank, 532 SCRA 244, September 5, 2007.

Q. Can an accommodation party raise the defense of absence or failure of consideration? A. An accommodation party cannot raise the defense of absence or failure of consideration because such kind of party does not really receive value for lending his name. He shall be liable to a holder for value, notwithstanding that such holder knew him to be only an accommodation party. Thus, where one of the signers of a joint and several promissory note affixes his signature thereto for the accommodation of his comaker and the payee advances the face value of the note to the accommodated party at the time of the creation of the note, the consideration for the note, as regards both makers, is the money so advanced to the accommodated party; and it cannot be said that the note is lacking in consideration as to the accommodating party because he himself received none of the money. It is enough that value was given for the note at the

Q. In whose favor must a party sign as accommodation party? A. In favor of the debtor and never in favor of the creditor. If a person signed to accommodate the creditor, he is not an accommodation party. (Maulini vs. Serrano)

Q. What are the kinds and modes of transfer of a negotiable instrument as distinguished from the method of transfer of an ordinary chose in action or non-negotiable instrument? A. The method of transfer of ordinary choses in action is by assignment, and in such case, the assignee takes only the title of the assignor. In case of negotiable instruments, the modes of transfer are: (1) by indorsement and delivery;(2) by mere delivery without indorsement, if payable to bearer, or may constitute a mere assignment where the instrument is payable to order and (3) by a written assignment on a separate paper. If the transfer is by indorsement and delivery, or by mere delivery without indorsement where the instrument is payable to bearer, it constitutes negotiation.

Q. In case a bearer instrument is pledged as security for a loan, is mere delivery sufficient to vest title thereon to the creditor?

A. Under ordinary circumstances, delivery of a negotiable bearer instrument is sufficient to negotiate the same. However, where the negotiation is for the purpose of giving the instrument as a mere security for purchases to be made, mere delivery is not sufficient since the terms thereof and the subsequent disposition of such security, in the event of non-payment of the principal obligation, must be contractually provided for. The pertinent law on this point is that where the holder has a lien on the instrument arising from contract, he is deemed a holder for value to the extent of his lien. As such holder of collateral security, he would be a pledgee but the requirements therefor and the effects thereof, not being provided for by the Negotiable Instruments Law, shall be governed by the Civil Code provisions on pledge of incorporeal rights, which provides in Article 2095 thereof that The instrument proving the right pledged shall be delivered to the creditor, and if negotiable, must be indorsed. Indorsement therefore, is necessary in such case.[1] [1] Caltex (Phils.) Inc. vs. Court of Appeals, G. R. 97753, August 10, 1992.

Q. What is a qualified indorsement? How is it done? A. A qualified indorsement constitutes the indorser a mere assignor of the title to the instrument. It may be made by adding to the indorsers signature the words without recourse or any words of similar import. Such an indorsement does not impair the negotiable character of the instrument.

Q. What are the effects of a qualified indorsement?

A. The fact that indorsement is without recourse does not mean that the qualified indorser has absolutely no more liability on the instrument as he is still chargeable with the implied warranties of a seller of the paper,but he has a lesser liability than a general indorser, since a qualified indorsement restrains, limits, or qualifies the liability of the indorser in a manner different from what the law generally imports as his true liability as indorser. Continuation see following slide

A qualified indorser has the same warranties as a person negotiating by delivery. But since the qualified indorser is a mere assignor of the title in the instrument, the transferee acquires no greater right or interest than the transferor then holds and he is liable on his indorsement only when he violates any one of his warranties under Section 65.

Q. What is the effect of specially indorsing an instrument payable to bearer? A. Where an instrument, payable to bearer, is indorsed specially, it may nevertheless be further negotiated by delivery; but the person indorsing specially is liable as indorser to only such holders as make title through his indorsement.

Section 40 is applicable only to instruments originally payable to bearer.Thus, this section does not apply to an instrument originally payable to order and became a bearer instrument only by reason of a blank indorsement. In such case, the instrument will remain as payable to payable to bearer only for as long as the only or last indorsement is an indorsement in blank.[ In effect therefore, an instrument originally payable to bearer is always payable to bearer even when indorsed specially and therefore, may be negotiated by mere delivery.On the other hand, an instrument originally payable to order can be converted into a bearer instrument by a blank indorsement.

Q. When may the holder strike out an indorsement? A. The holder may at any time strike out any indorsement which is not necessary to his title. The indorser whose indorsement is struck out, and all indorsers subsequent to him, are thereby relieved from liability on the instrument. (Sec. 48).

Q. What is the effect of striking out an indorsement? A. The indorser whose indorsement is struck out, and all indorsers subsequent to him, are thereby relieved from liability on the instrument.[1] [1] Section 48, 2nd sentence.

Q. What is the effect of transfer without indorsement of an instrument payable to order? A. Where the holder of an instrument payable to his order transfers it for value without indorsing it, the transfer vests in the transferee such title as the transferor had therein, and the transferee acquires in addition, the right to have the indorsement of the transferor. But for the purpose of determining whether the transferee is a holder in due course, the negotiation takes effect as of the time when the indorsement is actually made.[1] [1] Section 49.

Q. What constitutes a holder in due course?[1] A. A holder in due course is a holder who has taken the instrument under the following conditions: That it is complete and regular upon its face; (b) That he became the holder of it before it was overdue, and without notice that it had been previously dishonored, if such was the fact; That he took it in good faith and for value; (d) 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.[2]

Q. What are the rights of a holder in due course?[1] A. A holder in due course holds the instrument free from any defect of title of prior parties, and free from defenses available to prior parties among themselves, and may enforce payment of the instrument for the full amount thereof against all parties liable thereon.[2] Aside therefrom, he has the basic rights of a holder to sue in his own name and payment to him in due course discharges the instrument.[3]

Q. Section 52 provides that a holder in due course is free from defenses available to prior parties among themselves. Does it mean that no defense whatsoever could be raised against a holder in due course?

A. A holder in due course is free only from personal defenses available to prior parties among themselves. However, he is still subject to real or absolute defenses. Personal defenses or equities are those which grow out of the agreement or conduct of a particular person in regard to the instrument which renders it equitable for him, though holding the legal title, to enforce it against the defendant but which are not available against a holder in due course. They are called personal defenses because they are available only against that person or subsequent holder who stands in privity with him.[1] Continuation on next slide

Real or absolute defenses are those that attach to the thing irrespective of the parties to it. In other words, they are those which attach to the instrument itself and are good against all persons, thus they are good against a holder in due course. They are called real defenses because they attach to the res, that is, the instrument itself, regardless of the merits or demerits of the holder.[1]

Q. What are the exceptions to the rule that a holder in due course may enforce payment of the instrument for the full amount thereof against all parties liable thereon?

A. When a valid defense even if merely personal, is available to a party being held liable, even a holder in due course cannot enforce the instrument for the full amount thereof in the following cases: (1) When the holder is a holder for value only to the extent of his lien since he is a holder in due course only to that extent;[1] (2) When the holder acquired notice of any infirmity in the instrument or defect in the title of the person negotiating the same before he has paid the full amount agreed to be paid therefor, since he is a holder in due course only to the extent of the amount theretofore paid by him;[2] (3) In case of alteration as to amount when a holder in due course may enforce payment of the instrument only according to its original tenor.[3]

Q. When is the instrument subject to original defenses? A. In the hands of any holder other than a holder in due course, a negotiable instrument is subject to the same defenses as if it were non-negotiable. But a holder who derives his title through a holder in due course, and who is not himself a party to any fraud or illegality affecting the instrument, has all the rights of such former holder in respect of all parties prior to the latter.[1] [1] Section 58.

Q. When does a person not a holder in due course have the same rights as a holder in due course? A. When a holder (a) derives his title through a holder in due course, and (b) he is not himself a party any fraud or illegality affecting the instrument, he has all the rights of a holder in due course in respect of all parties prior to the latter.[1] [1] Section 58.

Q. What is the nature of the liability of the maker? A. The maker is primarily and unconditionally liable[1] as his liability is not conditioned on presentment to any other party for payment or otherwise.[2] Even where a note was made payable to the order of myself, and was indorsed by the maker, such indorsement did not change his obligation from that of a maker to one of an indorser[3] and thus, he is still primarily and unconditionally liable on the note.[4]

Q. What is the nature of the liability of the drawer? A. The drawer is only secondarily and conditionally liable on the instrument,[1] as he only becomes liable for the payment of the bill on its non-payment or non-acceptance by the acceptor or the drawee, as the case may be, and after giving him notice of dishonor.[2]

Q. May the drawer restrict his liability on the bill? A. The drawer may insert in the instrument an express stipulation negativing or limiting his own liability to the holder,[1] and therefore, the drawers liability may be qualified by express terms.[2] Thus, the drawer may state in the bill that he will not be liable in case the instrument is dishonored by the drawee or acceptor.

Q. What are the warranties of a person negotiating by delivery or by qualified indorsement? A. Every person negotiating an instrument by delivery or by a qualified indorsement warrants: That the instrument is genuine and in all respects what it purports to be; The he has a good title to it; That all prior parties had capacity to contract; (d) That he has no knowledge of any fact which would impair the validity of the instrument or render it valueless. But when the negotiation is by delivery only, the warranty extends in favor of no holder other than the immediate transferee.

Q. Do persons negotiating the instrument by delivery or by qualified indorsement warrant the solvency of prior parties? A. A person negotiating by delivery or by qualified indorsement does not warrant the solvency of the parties to it. However, if the transferor knows at the time of the transfer that the parties to it are insolvent, the transferee may hold the transferor liable. In such case, it may be said that the transferor has knowledge of a fact which would impair the validity of the instrument or render it valueless for which reason, he is liable to the transferee.

Q. What are the warranties of a general indorser? A. Every indorser who indorses without qualification, warrants to all subsequent holders in due course: That the instrument is genuine and in all respects what it purports to be; That he has a good title to it; That all prior parties had capacity to contract; That the instrument is at the time of his indorsement valid and subsisting. And, in addition, he engages that on due presentment, it shall be accepted or paid, or both, as the case may be, according to its tenor, and that if it be dishonored, and the necessary proceedings on dishonor be duly taken, he will pay the amount thereof to the holder, or to any subsequent indorser who may be compelled to pay it.

Q. While the first three warranties under Section 65 and Section 66 are the same, is there a distinction between the fourth warranty under these two sections? A. Under Section 65, a person negotiating by delivery or qualified indorsement warrants that he has no knowledge of any fact which would impair the validity of the instrument or render it valueless. Their warranty is violated only if they have such knowledge and withhold the same from the transferee.[1] On the other hand under Section 66, a general indorser warrants that the instrument is at the time of his indorsement valid and subsisting. Knowledge on the part of the general indorser of a fact affecting the validity of the instrument is immaterial.

Q. What is the order in which indorsers are liable? A. As respects one another, indorsers are liable prima facie in the order in which they indorse; but evidence is admissible to show that as between or among themselves they have agreed otherwise. Joint payees or joint indorsees who indorse are deemed to indorse jointly and severally.[1] [1] Section 68.

Q. Distinguish the order of liability of the indorsers insofar as the holder is concerned from their order of liability among themselves. A. Insofar as the holder is concerned, once the instrument is dishonored and notice of dishonor is given, the indorsers are liable in any order that the holder may choose. The holder may even prefer to collect from any of the indorsers instead of collecting from the maker or acceptor. The reason is that when the instrument is dishonored by nonpayment, an immediate right of recourse to all parties secondarily liable thereon accrues to the holder.[1] The same principle applies when the instrument is dishonored by nonacceptance i.e., an immediate right of recourse against the drawers and indorsers accrues to the holder.[2]

What is the effect of want of demand on the principal debtor? A. Presentment for payment is not necessary in order to charge the person primarily liable on the instrument; but if the instrument is, by its terms, payable at a special place, and he is able and willing to pay it there at maturity, such ability and willingness are equivalent to a tender of payment upon his part. But, except as herein otherwise provided, presentment for payment is necessary in order to charge the drawer and the indorsers.[1] [1] Section 70.

Q. When is presentment not required in order to charge the drawer? A. Presentment for payment is not required in order to charge the drawer where he has no right to expect or require that the drawee or acceptor will pay the instrument.[1] [1] Section 79.

Q. When is presentment not required to charge the indorser? A. Presentment for payment is not required in order to charge an indorser where the instrument was made or accepted for his accommodation and he has no reason to expect that the instrument will be paid if presented.[1] [1] Section 80.

Q. What constitutes payment in due course? A. Payment is made in due course when it is made at or after the maturity of the instrument to the holder thereof in good faith and without notice that his title is defective.[1] [1] Section 88.

Q. To whom must notice of dishonor be given? A. Except as herein otherwise provided, when a negotiable instrument has been dishonored by non-acceptance or non-payment, notice of dishonor must be given to the drawer and to each indorser, and any drawer or indorser to whom such notice is not given is discharged.[1] [1] Section 89; Asked, 1958, 1963 and 1986 Bar Exams.

Q. How may a negotiable instrument be discharged? A. A negotiable instrument is discharged: By payment in due course by or on behalf of the principal debtor; (b) By payment in due course by the party accommodated, where the instrument is made or accepted for accommodation; (c) By intentional cancellation thereof by the holder; (d) By any other act which will discharge a simple contract for the payment of money; (e) When the principal debtor becomes the holder of the instrument at or after maturity in his own right.

Q. What is the effect of alteration of an instrument? A. Where a negotiable instrument is materially altered without the assent or all parties liable thereon, it is avoided, except as against a party who has himself made, authorized, or assented to the alteration and subsequent indorsers. But when an 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 payment thereof according to its original tenor.

Q. Is a bill an assignment of funds in the hands of the drawee? What is the liability of the drawee? A. A bill of itself does not operate as assignment of the funds in the hands of the drawee available for the payment thereof, and the drawee is not liable on the bill unless and until he accepts the same.[1] [1] Section 127.

Q. What are crossed checks? What are the kinds of crossed checks? A. A crossed check is one with two parallel lines diagonally written on the left top portion of the check.[1] The crossing is special where the name of a bank or a business institution in written between the two parallel lines, which means the drawee should pay only with the intervention of that company. The crossing is general where the words written between the two parallel lines are and Co. or for payees account only,[2] or nothing is written between the parallel lines. This means that the drawee bank should not encash the check but merely accept it for deposit.[3]
[1] Asked, No. III (b), 2004 Bar Exams.; No. II 2 (a), 2005 Bar Exams. [2] Associated Bank vs. Court of Appeals, 208 SCRA 495. [3] Associated Bank vs. Court of Appeals, supra; Asked, No. VI, 1995 Bar Exams.

Q. What are the effects of crossing a check?[1]

III (1), 1994 and No. I (d), 1996 Bar Exams.; No. II 2 (a), 2005 Bar Exams. [1] Asked, No.Asked, III No. (1), 1994 and No. I (d), 1996 Bar Exams.; No. II 2 (a), 2005 Bar Exams.
[1]

The effects of crossing a check are: The check may not be encashed but deposited only in a bank; The check may be negotiated only once; and (3) The act of crossing a check serves as a warning to the holder that the check has been issued for a definite purpose so that he must inquire if he has received the check pursuant to that purpose.[1] However, issuing a crossed check imposes no legal obligation on the drawee not to honor such a check. It is more of a warning to the holder that the check cannot be presented to the drawee bank for payment in such case. Instead, the check can only be deposited with the payees bank which in turn must present it for payment with the drawee bank in the course of normal banking transactions between banks. The crossed checks 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.[2]
[1] State Investment House vs. IAC, 175 SCRA 310; Associated Bank vs. Court of Appeals, 208 SCRA 465; Traders Royal Bank vs. Radio Phil. Network, Inc., 390 SCRA 608. [2] Gempesaw vs. Court of Appeals, G.R. No. 92244, Feb. 9, 1993.

 TRANSPORTATION

Q. What is a test to determine a common carrier? A. The test to determine a common carrier is whether the given undertaking is a part of the business engaged in by the carrier which he has held out to the general public as his occupation rather than the quantity or extent of the business transacted.[1]
[1] Asia Lighterage and Shipping, Inc. vs. Court of Appeals, 409 SCRA 340, August 19, 2003.

Petitioner contends that she is not a common carrier but a private carrier because as a customs broker and warehouseman, she does not indiscriminately hold her services out to the public but only to select parties with whom she may contract in the course of her business. Is petitioner, a customs broker considered a common carrier?

The petitioner is a common carrier. There is greater reason for holding the petitioner to be a common carrier because the transportation of goods is an integral part of her business. To uphold petitioners contention would be to deprive those with whom she contracts the protection which the law affords them notwithstanding the fact that the obligation to carry goods for her customers is part and parcel of petitioners business. The definition of common carriers under Article 1732 of the Civil Code makes no distinction between one who whose principal activity is the carrying of passengers or goods or both and one who does such carrying only as an ancillary activity. It does not make any distinction between a person or enterprise offering such service on a regular or scheduled service and one on an occasional basis. Neither does the article distinguish between carriers offering its services to the general public nor one who offers services only from a narrow segment of the general population.[1]
[1] Calvo vs. UCPB General Insurance Co., Inc., 379 SCRA 510, March 19, 2002.

GPS Trucking Corporation undertook to deliver (30) units of Condura refrigerators aboard one of its Isuzu truck. While the truck was traversing the north diversion road it collided with an unidentified truck, causing it to fall into a deep canal, resulting in damage to the cargoes. FGU as insurer of the shipment, paid to Concepcion Industries, Inc., the value of the covered cargoes. FGU sought reimbursement of the amount it paid to Concepcion Industries from GPS. It was contended that GPS was only the exclusive hauler of Concepcion Industries, Inc., since 1988, and it was not so engaged in business as a common carrier. Respondent further claimed that the cause of damage was purely accidental. (a) May GPS be considered as a common carrier? (b) May GPS, either as a common carrier or a private carrier, be presumed negligent when the goods it undertook to transport safely were damaged while in its protective custody and possession?

(a) No, GPS cannot be considered as a common carrier. GPS, being an exclusive contractor and hauler of Concepcion Industries, Inc., rendering or offering its services to no other individual or entity, cannot be considered a common carrier. Common carriers are persons, corporations, firms or associations engaged in the business of carrying or transporting passengers or goods or both, by land, water, or air, for hire or compensation, offering their services to the public, whether to the public in general or to a limited clientele in particular, but never on an exclusive basis. The true test of a common carrier is the carriage of passengers or goods, providing space for those who opt to avail themselves of its transportation service for a fee. GPS scarcely falls within the term "common carrier."

(b) Yes, notwithstanding the fact that GPS cannot be considered as a common carrier it still cannot escape liability. In culpa contractual, upon which the action of petitioner rests as being the subrogee of Concepcion Industries, Inc., the mere proof of the existence of the contract and the failure of its compliance justify, prima facie, a corresponding right of relief. The law, recognizing the obligatory force of contracts, will not permit a party to be set free from liability for any kind of non-performance of the contractual undertaking or a contravention of the tenor thereof. A breach upon the contract confers upon the injured party a valid cause for recovering that which may have been lost or suffered.[1]
[1] FGU Insurance Corporation vs. G. P. Sarmiento Trucking Corporation, 386 SCRA 312, August 6, 2002.

Q. What is the presumption when the goods delivered to a common carrier are lost or destroyed? A. Common carriers, as a general rule, are presumed to have been at fault or negligent if the goods they transported deteriorated or got lost or destroyed. Mere proof of delivery of the goods in good order to a common carrier and of their arrival in bad order at their destination constitutes a prima facie case of fault or negligence against the carrier. (Unsworth Trasport Intl. Phils. Inc. vs. Court of Appeals, 625 SCRA 357, July 26, 2010).

Q. What are the instances wherein the presumption of fault or negligence will not arise? A. The presumption of fault or negligence will not arise if the loss is due to any of the following causes: (1) Flood, storm, earthquake, lightning, or other natural disaster or calamity; (2) An act of the public enemy in war, whether international or civil; (3) An act or omission of the shipper or owner of the goods; (4) The character of the goods or defects in the packing or the container; or (5) An order or act of competent public authority.[1]
[1] Ibid.

The carrier denied liability on the ground that such liability was extinguished when the vessel carrying the cargo was gutted by fire. Will a common carriers liability be extinguished by reason of fire?

The common carriers liability will not be extinguished by reason of fire. Fire is not one of those enumerated under Art. 1734 which exempts a carrier from liability for loss or destruction of the cargo. Even if fire were to be considered a natural disaster within the purview of Article 1734, it is required under Article 1739 of the same Code that the natural disaster must have been the proximate and only cause of the loss, and that the carrier has exercised due diligence to prevent or minimize the loss before, during or after the occurrence of the disaster.[1]
[1] DSR-Senator Lines vs. Federal Phoenix Assurance Co., Inc., 413 SCRA 14. October 7, 2003.

Q. What is the diligence required of a common carrier? A. A common carrier is mandated under Art. 1733 of the Civil Code, to observe extraordinary diligence in the vigilance over the goods it transports according to all the circumstances of each case. In the event that the goods are lost, destroyed or deteriorated, it is presumed to have been at fault or to have acted negligently, unless it proves that it observed extraordinary diligence. When a common carrier received the cargoes in good order, it was incumbent upon it to prove that it exercised extraordinary diligence in the carriage of the goods.[1]
[1] Ibid.

ECSLI issued Bills of Lading containing the stipulation that in case of claim for loss or for damage to the shipped property, the liability of the common carrier xxx shall not exceed the value of the goods as appearing in the bill of lading. Is such a stipulation limiting the common carriers liability valid?

Yes. A stipulation that limits liability is valid as long as it is not against public policy. In Everett Steamship Corp. v. CA the Court stated: A stipulation in the bill of lading limiting the common carriers liability for loss or destruction of a cargo to a certain sum, unless the shipper or owner declares a greater value, is sanctioned by law, particularly Articles 1749 and 1750 of the Civil Code.[1] [1] Edgar Cokaliong Shipping Lines, Inc. vs. UCPB General Insurance Co., Inc., 404 SCRA 706.

(a) In maritime transportation, what is the meaning of Limited Liability Rule? (b) Who may claim limited liability?

(a) No vessel, no liability, expresses in a nutshell the limited liability rule. The shipowners or agents liability is merely coextensive with his interest in the vessel such that a total loss thereof results in its extinction. The total destruction of the vessel extinguishes maritime liens because there is no longer any res to which it can attach. This doctrine is based on the real and hypothecary nature of maritime law which has 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 shipbuilding and maritime commerce, it was deemed necessary to confine the liability of the owner or agent arising from the operation of any ship to the vessel, equipment, and freight, or insurance of any. (de la Torre, et al., vs. Concepcion, et al., G. R. 160565, July 13, 2011).

(b) The Limited Liability Rule is available to the shipowner or ship agent and hence, it can not be used against them. (de la Torre, et al., vs. Concepcion, et al., supra).

Is the period of prescription of action based on the relationship between passenger and carrier on an international flight governed by the Warsaw Convention that sets the period of prescription of two years from the accrual of the cause of action?

In case of damage to passengers baggage, the period of prescription is two years as mandated by the Warsaw Convention but in case of damages caused by humiliation, embarrassment, mental anguish, serious anxiety, fear and distress or hurt feelings, the civil code provisions on tort shall apply and hence, outside the coverage of the Warsaw Convention. The period of prescription is four years.[1] [1] Philippine Airlines vs. Savillo, 557 SCRA 66.

Q. Under the Code of Commerce, within what period should the notice of claim be given to the shipper? A. Under the Code of Commerce, the notice of claim must be made within twenty-four (24) hours from receipt of the cargo if the damage is not apparent from the outside of the package. For damages that are visible from the outside of the package, the claim must be made immediately.[1]
[1] Aboitiz Shipping Corporation vs. Insurance Company of North America, 561 SCRA 262, Aug. 6, 2008.

In case of danger of collision between two aircrafts, which aircraft has the right of way?

An aircraft taxiing on the maneuvering area of an aerodrome shall give way to an aircraft taking off or about to take off. Therefore, in case of collision, an aircraft taking off or about to take off has the right of way. (GSIS vs. Pacific Airways Corp., 629 SCRA 220, Aug. 25, 2010).

 SPECIAL

LAWS

Q. Are letters of credit and trust receipts negotiable instruments? A. Letters of credit and trust receipts are not negotiable instruments because they do not conform to the requirements of a negotiable instrument stated in Section 1 of the Negotiable Instruments Law. However, drafts issued in connection with letters of credit are negotiable instruments[1] if they comply with the requirements of Section 1 of the Negotiable Instruments Law. [1] Ibid.

In view of the suspension of the Usury Law, is there any limit to the interest rate that may be charged by the lender?

In view of Central Bank Circular NO. 905, s. 1982, which suspended the Usury Law ceiling on interest effective January 1, 1983, parties to a loan agreement have wide latitude to stipulate interest rates. However, such stipulated interest rates may be declared illegal if the same is unconscionable. The Supreme Court has annulled a stipulated 5.5% per month or 66% per annum interest with additional service charge of 2% per annum and penalty charge of 1% per month for being excessive, iniquitous, unconscionable and exorbitant. (Toledo vs. Hyden, 637 SCRA 540, Dec. 8, 2010),

Q. Where should an action involving trademarks, including charges of unfair competition, cancellation of trademark and damages for violation of intellectual property rights be filed? A. A complaint involving trademarks, including charges of unfair competition, cancellation of trademark and damages for violation of intellectual property rights fall within the jurisdiction of the Intellectual Property Office Director of Legal Affairs and must therefore be filed in the said office. Any appeal therefrom should be filed with the Intellectual Property Office Director General.[1]
[1] In-N-Out Burger, Inc. vs. Sehwani, Inc., 575 SCRA 535, December 24, 2008.

Q. What are the tests to determine likelihood of confusion in trademark infringement cases?

There are two tests to determine likelihood of confusion: the dominancy test and the holistic test. Dominancy test focuses on the similarity of the main, prevalent or essential features of the competing trademarks that might cause confusion. Infringement takes place when the competing trademark contains the essential features of another. Imitation or an effort to imitate is unnecessary. The question is whether the use of the marks is likely to cause confusion or deceive purchasers. The holistic test considers the entirety of the marks, including labels and packaging, in determining confusing similarity. The focus is not only on the predominant words but also on the other features appearing on labels. Dominancy test was applied by the court in the Philippines. (Societe Des Produits Nestle, S. A. vs. Dy, Jr., 627 SCRA 222, Aug. 9, 2010;
Dermaline, Inc. vs. Myra Pharmaceuticals, Inc. 628 SCRA 356, Aug. 16, 2010).

Q. Is NANNY confusingly similar to NAN to warrant a claim for trademark infringement?

A. Yes, they are confusingly similar and the element of likelihood of confusion is the gravamen of trademark infringement. (Societe Des Produits Nestle, S. A. vs. Dy, 627 SCRA 223Aug. 9, 2010).

May the registration of the trademark Harvard and its identification of origin as Cambridge, Massachusetts be allowed in the Philippines?

No, it cannot be registered. Harvard is rated as one of the most famous marks in the world. It has established considerable goodwill worldwide since the founding of Harvard University more than 350 years ago. Harvard is a mark already protected under Article 6 and 8 of the Paris Convention. Aside therefrom, Section 4 (a) of RA 166 prohibits the registration of a mark which may disparage or falsely suggest a connection with persons, living or dead, institutions, or beliefs. (Fredco vs. Fellows of Harvard University, G. R. 185917, June 1, 2011).

For how long does the exclusive right of the patentee to make, use and sell a patented product exist?

A: The exclusive right of a patentee to make, use and sell a patented product, article or process exists only during the term of the patent. (Phil. Pharmawealth, In. vs. Pfizer, Inc. , 635 SCRA 140, Nov. 17, 2010).

Q. Is proof of actual use prior to the filing of the application for patent necessary?

RA 8293 espouses the first to file rule. The said law 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. (E. Y. Industrial Sales, Inc. vs. Shen Dar Electricity & Machinery Co., Ltd., 634 SCRA 363, Oct. 20, 2010).

Thank You!