PRE-BAR REVIEW DIVISION

2007 PRE-WEEK REVIEW

NOTES
DOMONDONs CUT AND PASTE
The BAR STAR NOTES

MERCANTILE LAW
VER. 2007.08.13
copyrighted 2007

Prepared by Prof. Abelardo T. Domondon

How to use the Notes: These Notes in the

form of textual materials and representative review

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

selective in the use of review materials. Domondons Cut and

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

the concept you find difficulty understanding. If you intend to

do a self-review during the Pre-Week then you could annotate
the Domondons Cut and Paste, The Bar Star Notes by
writing your own comments and notes. Sometimes, it is easier
to understand the concept if it is in your own handwriting.
There may be no need to highlight the areas marked and

, because all the areas in this section are equally

dangerous.
2.
After you have mastered the areas marked
and
, you should next do a selective reading of the areas
marked and those that are not so marked. It is statistically
probable that 10% to 20% of the questions may be sourced
from these areas, especially more so, the so-called crazy
questions. You could if you so desire, highlight certain of
these areas, although it is not advisable to spend a lot of time
here, if you have not yet mastered the areas marked and

.
DO NOT MEMORIZE the suggested answers. Some of
the answers were purposely made to be lengthy in order to
serve as explanatory devices. This is so because you do not
have time anymore to refer back to your review materials. If
you still could not understand the concepts after reading these
Notes, then refer to the Doctrines and Illustrative cases as well
as to your other review materials.

These materials are copyrighted and/or based on the

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

AUTHORIZED SIGNATURE:

PRIMUS CONTROL NO. __________

The materials are arranged in accordance with the bar

examination coverage. The actual bar questions may not be
so arranged. Likewise, these Notes are only indicative of the
areas from where Bar questions may be sourced. The
questions shown in these Notes may or may not be exactly
worded in the actual Bar questions.
Finally, the purpose of Domondons Cut and Paste,
The Bar Star Notes is not to teach you Mercantile Law but to
provide a scientifically prepared guide on the areas where you
should focus during the Pre-Week, not only to enable you
pass the Bar, but also to place among the TOP TEN.

WARNING:

MERCANTILE LAW
(1) CODE OF COMMERCE

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

Commercial

1. What is meant by the theory of manifestation in

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

(b) Letters of Credit under the Code of

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

NOTES AND COMMENTS:

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

2. What

are the three distinct and independent

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

3. In letters of credit in banking transactions,

distinguish the liability of a confirming bank from a
notifying bank.
SUGGESTED ANSWER: A confirming bank adds its
credit to the letter of credit and therefore is liable if the opening
importer fails to pay the exporter while a notifying bank being
merely one who gives advice as to the existence does not incur
any such liability.

4. BV agreed to sell to AC, a Ship and

Merchandise Broker, 2,500 cubic meters of logs at $27 per
cubic meter FOB. After inspecting the logs, CD issued a
purchase order.
On the arrangements made upon instruction of the
consignee, H & T Corporation of Los Angeles, California,
the SP Bank of Los Angeles issued an irrevocable letter of
credit available at sight in favor of BV for the total purchase
price of the logs, The letter of credit was mailed to FE Bank
with the instruction to forward it to the beneficiary. The
letter of credit provided that the draft to be drawn is on SP
Bank and that it be accompanied by, among other things, a
certification from AC, stating that the logs have been
approved prior to shipment in accordance with the terms
and conditions of the purchase order.
Before loading on the vessel chartered by AC, the
logs were inspected by customs inspectors and
representatives of the Bureau of Forestry, who certified to
the good condition and exportability of the logs. After the
loading was completed, the Chief Mate of the vessel issued
a mates receipt of the cargo which stated that the logs are

in good condition. However, AC refused to issue the

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

b. No. FE Bank is merely a notifying bank because

there is no showing that it has added its credit to the letter of
credit.

5. On 26 March 1997 Transfield and Luzon

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

SUGGESTED ANSWER: Yes, ANZ acted correctly

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

(i) Bulk Sales Law (Act 3952)

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

d. What is the right of his creditors, if X failed to

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

2. What are the effects of failure to observe the

requirements under the Bulk Sales Act ?
SUGGESTED ANSWER:

a. The sale is null and void;

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

3. What are the instances when the sale,

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

Jerome. Is this a sale in bulk subject to the Bulk Sales

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

(ii) The Warehouse Receipts Law (Act

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

In this case, XYZs claim for storage fees was

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

NOTES AND COMMENTS:

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

2. Patrick deposited with Warehouse Company

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

a. I would advice the Warehouse Company not to deliver

the goods to the sheriff, otherwise it may be held liable for
conversion. It should deliver only to Patrick, the person who
deposited the goods and upon presentation of the warehouse
receipt.
b. Yes, because Roberto would be a person who has
stepped into the shoes of Patrick who made the deposit.

NOTES AND COMMENTS:

a.

Instances where warehousemen bound or

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

b.

Justification of warehouseman in making

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

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

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

WRL)

The above may be used by the warehouseman to

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

d. Instances where liable for conversion even

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

3. To guarantee the payment of a loan obtained

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

2) When can the warehouseman be obliged to

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

demanded delivery of the goods. Warren could not deliver

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

(iii)
Receipts

Presidential Decree 115 on Trust

1.

Herminio opened a letter of credit with the

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

NOTES AND COMMENTS:

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

pursuant to which a bank acquires a security interest in the goods. It

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

e. Violation of Trust Receipts Law is criminal in

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

f. Trusts receipts and domestic letters of credit are

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

g. Persons criminally liable for violation in case of

corporations, are the officers or employers or other persons
responsible for the offense are liable to suffer the penalty of
imprisonment.

2. Who is an entrustee for purposes of the Trust

Receipts Law ?
SUGGESTED ANSWER: An entrustee is one having or
taking possession of goods, documents or instruments under a

10

trust receipt transaction, and any successor in interest of such

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

3.

What are the obligations of an entrustee ?

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

(2) Negotiable
2031)

Instruments

Law (Act No.

1.

What is a negotiable instrument ?

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

a. Negotiability. The ability of the instrument to be

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

3. Distinguish a negotiable document from a

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

ANALYTICAL STEPS FOR SOLVING

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

11

condition as to source of funds only with respect

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

12

or sight, on or before a fixed or determinable

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

5. Miky brought a motor car payable in

installments from Autocars, Inc. for P550,000.00. He made
a down payment of P50,000.00 and executed a promissory
note for the balance. The company subsequently indorsed
the note to California Finance Corporation which financed
the purchase. The promissory note reads:
For value received, I promise to pay
Autocars, Inc. or order at its office in Makati City,
the sum of P500,000.00 with interest at twelve
percent (12%) per annum, payable in equal
installments of P50,000.00 monthly for ten (10)
months starting October 21, 2005.
Manila, September 21, 2005.

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

6. Discuss the negotiability or non-negotiability

of the following notes:
Manila, September 1, 2005

(Sgd.) Miky

P2,500.00

Pay to the order of California Finance Corp.

I promise to pay Pedro San Juan or order the

sum of P2,500.00.

Autocars, Inc.
By:
(Sgd.) Manager
Because Miky defaulted in the payment of his
installments, California Finance Corporation initiated a
case against her for sum of money. Miky argued that the

(Sgd.) NOEL CASTRO

SUGGESTED ANSWER: It is negotiable because it is in
writing signed by the maker, Noel Castro, it contains an
unconditional promise to pay a sum P2,500.00 which is a sum
certain in money, it is payable on demand as no date of maturity
is shown, and it is payable to order.

13

instruments because they are conditional in character, being

payable out of a specific fund.

Manila, June 3, 2005

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

7. State and explain whether the following are

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

8. Can a bill of exchange or a promissory note

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

14

b) Without forgery and alteration

INCOMPLETE INSTRUMENT BUT DELIVERED.

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

ILLUSTRATIVE PROBLEMS:
BUT DELIVERED INSTRUMENTS.

9.

INCOMPLETE

Meg issued a negotiable promissory note to

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

given and within a reasonable time. There is likewise conclusive

presumption of delivery.

10.

Ana a very busy businessperson does not

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

INCOMPLETE INSTRUMENT NOT DELIVERED.

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

15

due course, there is prima facie presumption

of delivery which may be rebutted.
c. Rules apply whether
1) Promissory note or bill of exchange
2) Payable to bearer or order
3) With or without forgery and material
alteration.

ILLUSTRATIVE PROBLEMS:
NOT DELIVERED INSTRUMENT.

INCOMPLETE

11. Pocholo signed a blank check and kept it

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

a. Rhia is a holder in due course, therefore there is a

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

COMPLETE AND DELIVERED INSTRUMENT.

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

16

Prior parties not bound. Reason:

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

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

OF
OF

13.

Dennis makes a promissory note payable to

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

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

14. Tina issued a check to Nellie or order as

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

17

Reason: The depository (drawee Eastern Bank) owes to

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

i. Drawer (Tina) is not liable to the collecting bank (Daya

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

bank would NOT have been liable as shown by the following

discussion.

a. Checks with forged indorsements should be

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

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

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

d. Effects of a forged indorsement on an instrument

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

18

3) A collecting bank where a check is deposited and

which indorses the check upon presentment with the drawee
bank is a general indorser which warrants the genuineness of
the instrument. So, even if the indorsement on the check
deposited by the banks client is forged, the collecting bank is
bound by its warranties as an indorser and cannot set up the
defense of forgery as against the drawee bank.
Since a forged indorsement is inoperative, the
collecting bank had no right to be paid by the drawee bank.
The collecting bank must necessarily return the money to the
drawee bank because it was paid wrongfully.
This liability scheme operates without regard to fault
on the part of the collecting/presenting bank. Even if it was
not negligent, it would still be liable to the drawee bank
because of his indorsement.
4) The collecting bank or last endorser generally
suffers the loss because it has the duty to ascertain the
genuineness of all prior endorsements considering that the
act of presenting the check for payment to the drawee is an
assertion that the party making the presentment had done its
duty to ascertain the genuineness of the endorsements.
5) Moreover, the collecting bank is made liable
because it is privy to the depositor who negotiated the check.
The bank knows him, his address and history because he is a
client. It has taken a risk on the deposit. The bank is also in a
better position to detect forgery, fraud or irregularity in the
endorsement.
6) The drawee bank is not similarly situated as the
collecting bank because the drawee bank makes no warranty
as to the genuineness of the endorsements. The drawee
banks duty is but to verify the genuineness of the drawers
signature and not of the endorsement because the drawer is
its client.
The drawee bank is under strict liability to pay the
check to the order of the payee. The drawers instructions are
reflected on the face and by the terms of the check.
Payment under a forged endorsement is not to the
drawers order. When the drawee bank pays a person other
than the payee, it does not comply with the terms of the check
and violates its duty to charge its customers (the drawers)
account only for properly payable items.
Where the drawee bank did not pay a holder or other
person entitled to receive payment, it has no right to
reimbursement from the drawer.
The general rule then is that the drawee bank may
not debit the drawers account and is not entitled to

indemnification from the drawer. The risk of loss must

perforce fall on the drawee bank.
7) The chain of liability does not end with the drawee
bank. While the drawee bank may not debit the drawers
account, it may generally pass liability back through the
collection chain to the party who took from the forger and. of
course, to the forger himself, if available.
The drawee bank can seek reimbursement or a return
of the amount it paid from the presentor/collecting bank or
person. Eventually, the loss falls on the party who took the
check from the forger (the collecting bank), or on the forger
himself. Hence, the drawee bank can recover the amount
paid on the check bearing the forged endorsement from the
collecting bank.
8) A drawee bank has the duty to promptly inform the
presentor/collecting bank of the forgery upon discovery. If the
drawee bank delays in informing the presentor/collecting bank
of the forgery, thereby depriving said presentor/collecting
bank of the right to recover from the forger, the drawee bank is
deemed negligent and can no longer recover from the
presentor/collecting bank.
9) If the drawee bank can prove a failure by the
customer/drawer to exercise ordinary care that substantially
contributed to the making of the forged signature, the drawer
is precluded from asserting the forgery as a defense.
If at the same time the drawee bank was also
negligent to the point of substantially contributing to the loss,
then such loss from the forgery can be apportioned between
the negligent drawer and the negligent bank. (Associated
Bank, supra)

e. Effects where the drawers signature was forged.

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

f. Rationale for banks liability if it pays on a forged

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

19

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

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

16. Nini makes a promissory note payable to

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

20

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

17. On 12 November 1994, Cabilzo issued a

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

NOTES AND COMMENTS:

a. Material alteration. An alteration is said to be material
if it alters the effect of the instrument. It means an unauthorized
change in an instrument that purports to modify in any respect the
obligation of a party or an unauthorized addition of words or numbers
or other change to an incomplete instrument relating to he obligation

of a party. In other words, a material alteration is one which changes

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

18. On August 31, 2006, Julio demanded from

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

21

account was already closed or had insufficient balances. It

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

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

As a result of the BIR did not receive the tax

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

NOTES AND COMMENTS:

a. Forgery committed by drawer-payors confidential
employee does not automatically result to banks
absolution. The mere fact that the forgery was committed by a
drawer-payors confidential employee or agent, who by virtue of his
position had unusual facilities for perpetrating the fraud and imposing
the forged paper upon the bank, does not entitle the bank to shift the
loss to the drawer-payor, in the absence of some circumstance raising
estoppel against the drawer. the rule likewise applies to checks

fraudulently negotiated or diverted by the confidential employees who

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

b. Relationship between payee and collecting bank.

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

20. A check with serial number 7-3666-223-3, dated

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

22

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

NOTES AND COMMENTS:

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

COMPLETE
INSTRUMENT.

BUT

NOT

DELIVERED

a.

Delivery completes the contract

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

23

checks of various dates and amounts drawn against IBAA

and payable to HCCC for completed and delivered work
under the contract.
Adelia forged Jaimes signature
without his knowledge or consent, at the dorsal portion of
the said checks to make it appear that HCCC had indorsed
the checks, and then deposited the checks in her IBAA
savings account.
Adelia now claims that she was
authorized to sign Jaimes name on the check by virtue of a
Certification executed by Jaime in her favor giving her
authority to collect all the receivables of HCCC from GSIS,
including the questioned checks.
Will the defense
prosper ?
SUGGESTED ANSWER: No. Where any person is
under obligation to indorse in a representative capacity, he may
indorse in such terms as to negative personal liability. An agent,
when so signing, should indicate that he is merely signing in
behalf of the principal and must disclose the name of his
principal; otherwise he shall be held personally liable.
Even assuming that Adelia was authorized by HCCC to
sign Jaimes name, still, Adelia, did not indorse the instrument in
accordance with law. Instead of signing Jaimes name, Adelia
should have signed her own name and expressly indicated that
she was signing as an agent of HCCC. (Francisco v. Court of
Appeals, et al., G.R. No. 116320, November 29, 1999)

22.

Brad Jolie makes a promissory note payable

to bearer and delivers the same to Angelina Pitt. Angelina
Pitt, however, endorses it to X in this manner:
Payable to X. Signed: Angelina.
Later, X, without endorsing the promissory note,
transfers and delivers the same to Michael. The note is
subsequently dishonored by Brad Jolie. May Michael
proceed against Brad Jolie for the note ?
SUGGESTED ANSWER: Yes. The character of the
note being a bearer instrument is not affected by the special
indorsement made by Angelina Pitt. The note remained a
bearer instrument and may be negotiated by merely delivery, as
it was negotiated to Michael, who became the holder. Michael

being the holder may therefore proceed against the issuer of

the note, Brad Jolie.

23. The XYZ Bank is willing to lend to your client

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

24. Susan applied for a loan of P100,000.00 with

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

an endorser for the benefit of the second party as a result of their

business arrangement and not in favor the borrower.

25. Alpha, Phi and Omega signed a promissory

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

NOTES AND COMMENTS:

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

24

There is an element of certainty or assurance in an ordinary

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

27. A foreign check in the amount of $7,500.00

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

28. On July 13, 2004, Tocino Products

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

25

amounting to P430,000.00 payable on March 5, 2005, and

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

29..

What is a crossed check ?

SUGGESTED ANSWER: A check is a bill of exchange
drawn on a bank payable on demand..
Crossed check is one where two parallel lines are drawn
across its face or across a corner thereof. It may be crossed
generally or specially. a check is crossed specially when the
name of a particular banker or a company is written between
the parallel lines drawn. It is crossed generally when only the
words and company are written or nothing is written between
the parallel lines. It may be issued so that presentment can be
made only by a bank.

30.

What are the effects of crossing a check ?

SUGGESTED ANSWER:
a. The check may not be encashed but only deposited
in the bank;
b. The check may be negotiated only once - to one who
has an account with a bank; and
c. The act of crossing the check serves as a warning to
the holder that the check has been issued for a definite purpose,

so that the holder must inquire if he has received the check

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

31.

Who is a holder in due course ?

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

32. What are the kinds of defenses against the

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

33.

Give examples of real, legal or absolute

defenses which are available against the whole world
including a holder in due course.
SUGGESTED ANSWER:
a. Glaring alteration
b. Forgery
c. Want of delivery of incomplete instrument
d. Fraud amounting to forgery
e. Minority
f. Fraud in factum or fraud in esse contractus
g. Want of authority of agent
h. Insanity without court appointed guardian
i. Void contract
j. Illegality of the contract or instrument by statute

34.

Give examples of personal or equitable

defenses that are available against any person other than a
holder in due course.
SUGGESTED ANSWER:
a. Absence or failure of consideration
b. Want of delivery of a complete instrument
c. Fraud in inducement
d. Mistake
e. Negotiation amounting to fraud
f. Filing of wrong date or blanks contrary to authority
g. Acquisition of instrument by force, duress or fear, by
unlawful means, or for illegal consideration, in breach of faith
h. Lack of agents authority where he has apparent
authority
NOTES AND COMMENTS:
a. Presumption of consideration. Every negotiable
instrument is deemed prima facie to have been issued for a valuable
consideration, and every person whose signature appears thereon to
have become a party thereto for value. (Sec. 24, NIL)

b. Absence of consideration available only against

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

26

35. Is one who is not a holder in due course

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

36. Po Press issued in favor of Jose a

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

NOTES AND COMMENTS:

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

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

37. Can a payee in a promissory note be a

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

27

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

101163, January 11, 1993)

NOTES AND COMMENTS:

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

c. No assignment of funds when cashiers s checks

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

39. On April 25, 2005, Vicente invested in CIFC, a

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

28

period as the holder may allow, to return the bill accepted

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

40. When is notice of dishonor not required to be

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

41. Gemma drew a check on September 13, 2001.

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

42. X issued a check to Y drawn against

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

29

43.

PN is the holder of a negotiable promissory

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

NOTES AND COMMENTS:

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

their responsibility to exercise the necessary care and prudence in

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

(3) Insurance Code (P.D. 1460)

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

30

the owner as the beneficiary. Both of the policies were up

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

b. Purpose for requirement of insurable interest in

life. To remove the temptation of insuring a person's life and then
killing him to recover the insurance proceeds.

c. Insurable interest in life should exist at the

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

such nature that a contemplated peril might directly damnify the

insured. (Sec. 13, Insurance Code)
e. Insurable interest in property must exist at the
time of taking AND at the time of loss.

f. Insurable interest in life distinguished from

insurable interest in property.

1) In insurable interest in life must exist at the time of taking

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

4. JQ, owner of a condominium unit, insured the

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

5. On September 1, 2004, Marion insured her

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

31

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

a. Concealment defined. A neglect to communicate that

which a party knows and ought to communicate. (Sec. 26, Insurance
Code)
Note that if the party does not know he is sick, there is no
concealment.

6.

Define incontestability clause.

SUGGESTED ANSWER:
Where a policy of life
insurance made payable on the death of the insured shall have
been in force during the lifetime of the insured for a period of two
years from the date of its issue or its last reinstatement, the
insurer cannot prove that the policy is void ab initio or is
rescindable by reason of the fraudulent concealment or
misrepresentations of the insured or his agent. (2nd par., Sec. 48,
Insurance Code)

7. On January 9, 1991, PhilAm Life Insurance

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

32

Eliza entitled to her claim of interest at double the legal rate

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

8. Sun-Moon Insurance issued a Personal

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

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

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

NOTES AND COMMENTS:

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

Exceptions or instances where killer-beneficiary

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

c. Beneficiary cannot recover where insured lawfully

executed.

9. Juan de la Cruz was issued Policy No. 888 of

the Midland Life Insurance Co. on a whole life plan for
P20,000.00, on August 19, 2001. Juan de la Cruz is married
to Cynthia with whom he has three legitimate children. He,
however, designated Purita, his common-law wife, as the
revocable beneficiary. Juan de la Cruz referred to Purita in
his application and policy as the legal wife.
Three years later, Juan de la Cruz died. Purita filed
her claim for the proceeds of the policy as the designated
beneficiary therein. The widow, Cynthia, also filed a claim
as the legal wife. To whom should the proceeds of the
insurance policy be awarded ?
SUGGESTED ANSWER:
The proceeds of the
insurance policy to the estate of Juan de la Cruz.
Purita, the common-law wife, is disqualified to be a
beneficiary of Juan de la Cruz because she is a prohibited
donee because of their illicit relation.
NOTES AND COMMENTS:

33

a. The concept of prohibited donees. Persons who are

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

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

11. What is double insurance ?

SUGGESTED ANSWER: A double insurance exists

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

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

12.

What is co-insurance ?
SUGGESTED ANSWER: Where an insured insures his
property for less than its value, he is deemed to have acted as a
co-insurer with the insurer up to the extent of the deficiency. In
such a case, where there is loss or damage, the insurer shall be
liable only for such proportion of the loss or damage that the
amount of insurance bears to the designated percentage of the
full value of the property insured.
For example, property valued as P1,000,000.00 was
insured only for P700,000.00. In such a case there is coinsurance by the insured up to the extent of 30%. In case of
loss there could only be 70% recovery of the damage or loss.

13.

What is reinsurance ?
SUGGESTED ANSWER: This is a situation where the
insurer procures a third party, called the reinsurer, to insure him
against the liability by reason of such original insurance.
Basically, a reinsurance is an insurance against liability which
the original insurer may incur in favor of the original insured.

14.

Julie and Alma formed a business

partnership. Under the business name Pino Shop, the
partnership engaged in a sale of construction materials.
Julie insured the stocks in trade of Pino Shop with WGC
Insurance Company for P350,000.00. Subsequently, she
again got an insurance contract with RSI for P1,000,000.00
and then from EIC for P200,000.00. A fire of unknown
origin gutted the store of the partnership. Julie filed her
claims with the three insurance companies. However, her
claims were denied separately for breach of policy

34

condition which required the insurer to give notice of any

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

15. Lara obtained a loan of P500,000.00 from

Angelina and as security she mortgaged her house worth
P750,000.00 to Angelina. Lara insured the house against

fire for P750,000.00 with Croft Insurance with the policy

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

The mortgagors insurable interest covers the full value of the

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

16. Grepalife and DBP entered into a contract of

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

35

outstanding indebtedness shall first be paid to the Creditor

and the balance of the sum assured, if there is any shall
then be paid to the beneficiary/ies designated by the
debtor. In August 6, 2005, Dr. Leuterio died due to
massive cerebral hemorrhage. DBP submitted a claim,
on the mortgage redemption insurance but it was denied
by Grepalife on the ground of non-disclosure that Dr.
Leuterio was suffering from hypertension, the cause of his
death.
As a result of the non-payment insurance claim,
which would have resulted to a full payment of the
mortgage debt to DBP, DBP then foreclosed on the
property.
Upon being sued by Dr. Leuterios heirs for the
insurance proceeds Grepalife now raises, the defense of
concealment of Dr. Leuterios being hypertensive, and no
showing of the exact amount of Dr. Leuterios outstanding
indebtedness to DBP at the time of his death.
Could Dr. Leuterios heirs recover ? State your
reasons.
SUGGESTED ANSWER: Yes. Concealment of the
state of health of the insured mortgagor as basis for refusing
payment of insurance claims should be established by sufficient
proof of the real state of health of the insured.
The insurance taken was a life insurance policy which is
a valued policy. Unless the interest of the person insured is
susceptible of exact pecuniary estimation, the measure of
indemnity under a policy of insurance upon life or health is the
sum fixed in the policy, in this case P86,200.00.
Since DBP has already foreclosed on the residential lot
in satisfaction of Dr. Leuterios outstanding loan, the insurance
proceeds shall inure to the benefit of the heirs of Dr. Leuterio.
DBP should not unjustly enrich itself by collecting the insurance
proceeds after it has foreclosed the property. (Great Pacific
Life Assurance Corporation v. Court of Appeals, et al., G.R. No.
113899, October 13, 1999)
NOTES AND COMMENTS:
a. Insurable interest in mortgaged properties in
mortgage redemption insurance. The rationale of a group
insurance policy of mortgagors, otherwise known as the mortgage
redemption insurance, is a device for the protection of both the
mortgagee and the mortgagor.

On the part of the mortgagee, it has to enter into such form of

contract so that in the event of the unexpected demise of the
mortgagor during the subsistence of the mortgage debt, the proceeds
from such insurance will be applied to the payment of the mortgage
debt, thereby relieving the heirs of the mortgagor from paying the
obligation.
In a similar vein, ample protection is given to the mortgagor so
that in the event of his death, the mortgage obligation will be
extinguished by the application of the insurance proceeds to the
mortgage indebtedness.
Consequently, where the mortgagor pays the insurance
premium under the group insurance policy, making the loss payable to
the mortgagee, the insurance is on the mortgagors interest, and the
mortgagor continues to be a party to the contract. In this type of
insurance, the mortgagee is simply an appointee of the insurance
fund, such loss payable clause does not make the mortgagee a party
to the contract.
This could be seen from the provisions of Section 8 of the
Insurance Code, which reads: Unless the policy provides, where a
mortgagor of property effects insurance in his own name providing
that the loss shall be payable to the mortgagee, or assigns a policy of
insurance to a mortgagee, the insurance is deemed to be upon the
interest of the mortgagor, who does not cease to be a party to the
original contract, and any act of his, prior to the loss, which would
otherwise avoid the insurance, will have the same effect, although the
property is In the hands of the mortgagee, but any act which, under
the contract of insurance, is to be performed by the mortgagor, may be
performed by the mortgagee therein named, with the same effect as if
it had been performed by the mortgagor. (Great Pacific Life
Assurance Corporation v. Court of Appeals, et al., G.R. No. 113899,
October 13, 1999

17. What damages may be recovered in marine

insurance ?
SUGGESTED ANSWER: Recovery could be made only
if the damage was caused by perils of the sea not by perils of
the ship. Defects of the ship are perils of the ship.

18. A marine insurance policy on a cargo states

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

36

on the policy for recovery of the damages caused to the

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

20. An insurance company issued a marine

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

NOTES AND COMMENTS:

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

37

b. Instances where there is a constructive total loss

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

21.

RC Corporation purchased rice from

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

the cargo by the process of decomposition or other chemical

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

22. The general rule provided in Sec. 77 of the

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

d. Estoppel. The insurer may grant credit extension for

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

23. In 2005 Antonio obtained a fire insurance from

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

38

between P 4 million to P 5 million. The check was drawn

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

24. In 1998, Primitivo was insured with BF Lifeman

Insurance Corporation for P20,000.00. On October 20,
2004, he applied for an additional insurance coverage of

P50,000.00. His wife paid P2,075.00 as premiums to the

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

39

policy was issued. Hence, the non-fulfillment of the condition

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

25. Name instances when an insured is entitled to a

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

40

common carriers are required to secure the Compulsory Motor

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

27. What is no fault insurance and what is the

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

28. What are the conditions for the availment of

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

against the insurer of the directly offending vehicle. In all cases,

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

29. While driving his car along EDSA, Cesar

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

41

against RM Travel and ordered Dragon Insurance to pay

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

31. Robin insured his building against fire with

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

not even taken part in the contract of insurance. May

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

33. What warranties are implied in marine

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

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

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

42

four-span building where fun and amusement machines

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

36. HL insured his brand new car with P

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

43

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

37. X Company procured a group accident

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

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

Philippine Deposit Insurance Corporation

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

(4) Transportation Laws

(a) Common Carriers (New Civil Code,
Arts. 1732 to 1766)
(b)
Commercial
Contracts
for
Transportation Overland (Code of Commerce
Arts. 349 to 379)
1.

Define a common carrier.

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

NOTES AND COMMENTS:

a. No distinction between principal business and
sideline offering of service to public. Art. 1732 of the Civil
Code makes no distinction between one whose principal business
activity is the carrying of persons or goods or both, and one who does

such carrying only as an ancillary activity (in local idiom, as a

sideline) It carefully avoids making any distinction between a person
or enterprise offering transportation service on a regular or scheduled
basis and one offering such service on an occasional, episodic or
unscheduled basis. Neither does it distinguish between a carrier
offering its services to the general public, i.e., the general community
or population, and one who offers services or solicits business only
from a narrow segment of the general population. (Loadstar Shipping
Co., Inc. v. Court of Appeals, et al., G.R. No. 131621, September 28,
1999)
b. Customs broker is a common carrier. It is
considered as such even if its principal function is to prepare the
correct customs declaration and proper shipping documents as
required by law if it undertakes to deliver the goods for pecuniary
consideration. No distinction is made between one whose principal
business activity is the carrying of goods and one who does such
carrying only as an ancillary activity. It should exercise extraordinary
diligence in the care of goods. (A .F. Sanchez Brokerage, Inc. v. Court
of Appeals, et al., G. R. No. 147079, December 21, 2004 citing De
Guzman v. Court of Appeals, 168 SCRA 612, 617 (1988)
c. Common carrier ceases to be common carrier if
chartered and becomes a private carrier.

2. Christine charters a vessel owned and operated

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

44

applicable only to common carriers.

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

45

The doctrine of limited liability does not apply where

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

4.

What do you understand by a bill of

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

5.

Explain the two-fold character of a bill of

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

Once delivered and accepted it constitutes a contract of

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

NOTES AND COMMENTS:

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

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

b. A bill of lading is a contract of adhesion but once

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

6. What are the three kinds of stipulations

made in bills of lading regarding liability ?
SUGGESTED ANSWERS:
The first is one exempting the carrier from any and all
liability for loss or damage occasioned by its own negligence.
The second is one providing for an unqualified limitation
of such liability to an agreed valuation.
The third is one limiting the liability of the carrier to an
agreed valuation unless the shipper declares a higher value and
pays a higher rate of freight. According to an almost uniform
weight of authority, the first and second kinds of stipulations are
invalid as being contrary to public policy, but the third is valid
and enforceable. (Loadstar Shipping Co., Inc. v. Court of Appeals, et
al., G.R. No. 131621, September 28, 1999)

COMMENTS AND NOTES:

a. Stipulations considered

46

unreasonable, unjust

and contrary to public policy:

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

b. Acceptance by the consignee of the bill of lading

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

d. A letter of credit and a bill of lading are

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

7. Pag-asa Sales, Inc. entered into a contract to

transport molasses from Negros to Manila with Coastwise
Lighterage Corporation, using the latters dumb barges.
Upon reaching Manila Bay while approaching Pier 19, one

of the barges struck an unknown sunken object causing

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

b. No absolute obligation on the part of a carrier to

accept a cargo. However, where a common carrier accepts a cargo
for shipment for valuable consideration, it takes the risk of delivering it

in good condition as when it was loaded. Even if the fact of improper

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

47

would have prevented the accident.

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

8. In a court case involving claims for damages

arising from death and injury of bus passengers, counsel
for the bus operator files a demurrer to evidence arguing
that the complaint should be dismissed because the
plaintiffs did not submit any evidence that the operator or
its employees were negligent. If you were the judge, would
you dismiss the complaint ?
SUGGESTED ANSWER: No. In case of death of or
injuries to passengers, common carriers are presumed to have
been at fault or to have acted negligently, unless they prove that
they observed extraordinary diligence. Since no evidence was
presented to overcome this presumption the case should not be
dismissed and the bus operator should now be required to
present its evidence.
NOTES AND COMMENTS:

a. No finding of negligence needed. When the

goods shipped either are lost or arrived in damaged condition, a
presumption arises against the carrier of its failure to observe that
requisite diligence, and there need not be an express finding of
negligence to hold it liable. (Eastern Shipping Lines, Inc. vs. Court of
Appeals, et al., 234 SCRA 78)
In a contract of carriage, it is presumed that the common
carrier was at fault or was negligent when a passenger dies or is
injured. Unless the presumption is rebutted, the court need not even
make an express finding of fault or negligence on the part of the
common carrier. .This statutory presumption may only be overcome
by evidence that the carrier exercised extraordinary diligence as

prescribed in Articles 1733 and 1755 of the Civil Code. (Baliwag

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

c. When loss occurs common carrier presumed

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

9.

As a general rule common carriers are

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

48

b. Carrier is liable for defective packing if improper

packing is known to the carrier or his employees or is apparent upon
ordinary observation, but he nevertheless accepts the same without
protest or exception notwithstanding such condition. (A .F. Sanchez
Brokerage, Inc. v. Court of Appeals, et al., G. R. No. 147079, December
21, 2004
c. Carrier is liable for defective packing if improper
packing is known to the carrier or his employees or is apparent upon
ordinary observation, but he nevertheless accepts the same without
protest or exception notwithstanding such condition. (A .F. Sanchez
Brokerage, Inc. v. Court of Appeals, et al., G. R. No. 147079, December
21, 2004

10.

Martin shipped an expensive video equipment

to a friend in Cebu. Martin had bought the equipment from
Hong Kong for US$ 5,000.00. the equipment was shipped
through M/S Lapu-Lapu under a bill of lading which
contained the following provision in big bold letters:
The limit of the carriers liability for any loss
or damage to cargo shall be P200.00 regardless of
the actual value of suchcargo, whether declared by
its shipper or otherwise.
The cargo was totally damaged before reaching
Cebu. Martin claimed for the value of his cargo, $5,000.00
or P225,000.00 instead of just P200.00 as per the limitation
on the bill of lading.
Is there any legal basis for Martins claim ?
SUGGESTED ANSWER: None. A stipulation in the bill
of lading limiting the carriers liability unless the shipper declares
a higher value and a higher rate of freight is valid and
enforceable.
There being no showing that Martin declared a higher
value of the video equipment and had paid a higher rate of
freight, he is bound on the stipulation in the bill of lading limiting
liability.
NOTES AND COMMENTS:
a. Stipulation limiting liability valid. A stipulation that
the common carriers liability is limited to the value of the goods
appearing in the bill of lading, unless the shipper or owner
declares a greater value, is binding. (Art. 1749, Civil Code)

49

A contract fixing the sum that may be recovered by the

owner or shipper for the loss, destruction, or deterioration of the
goods is valid, if it is reasonable and just under the circumstances,
and has been fairly and freely agreed upon. (Art. 1750, Civil Code)
b. Criteria to determine reasonableness. The fact that
the common carrier has no competitor along the line or route, or a part
thereof, to which the contract refers shall be taken into consideration
on the question of whether or not a stipulation limiting the common
carriers liability is reasonable, just and in consonance with public
policy. (Art. 1751, Civil Code)

11. Five (5) coils of steel arrived in the

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

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

discovered that they were forcibly opened and were

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

NOTES AND COMMENTS:

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

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

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

c. Where timely filing of formal claim dispensed with.

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

d. Bill of lading may provide period within which to

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

d. Carriers liability for actual, moral and exemplary

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

50

and insensitivity to their customers plight tantamount to bad faith and

renders unquestionable the carriers liability for damages. (Philippine
Airlines, Inc. v. Court of Appeals, et al., 255 SCRA 48)

13.

Pasahero, a paying passenger, boarded a

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

it is done with the use of arms or through an irresistible force. (Art.

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

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

51

scope of his assigned task, only if he can show that he observed

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

15.

For a cargo of machinery shipped from

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

52

Subsequently, a Bank to whom the central was

indebted claimed the cargo and presented the original of
the B/L stating that the Central had failed to settle its
obligations with the Bank.
Was there misdelivery by the carrier to the sugar
central considering the non-surrender of the B/L ? Why ?
SUGGESTED ANSWER: Yes. Goods covered by a B/L
are to be delivered only to the holder thereof upon surrendered
of the original B/L. Since the B/L is To Shippers Order, it must
be indorsed by the shipper in favor of the Central. Since this
was not done but the goods were delivered, there is misdelivery
of the goods.

16.

Sam boarded a passenger bus. Another

passenger, Ed, brought a gallon of gasoline placed in a
plastic bag into the same bus where Sam was riding. The
gasoline ignited and exploded causing injury to Sam who
filed a civil suit for damages against the bus company
claiming that Ed should have been subjected to inspection
by the conductor.
The bus company disclaimed liability resulting from
the explosion contending that it was unaware of the
contents of the plastic bag and invoking the right of Ed to
privacy.
Should the bus company be held liable for damages
A?
SUGGESTED ANSWER: Yes, for breach of the contract
of carriage. The bus company is presumed to have been at fault
unless it observed extraordinary diligence. It is bound to carry
Sam safely as far as human care and foresight provide. It is
clear that the gasoline should have smelled considering that it
was placed only in a plastic bag and would have been noticed
by the bus company employees and kept in a safe place.
NOTES AND COMMENTS: In a 1992 Bar question with
similar factual antecedents U.P. Law Center suggests that in overland
transportation the common carrier is not bound nor empowered to
make an examination of the contents of packages or bags, particularly
those handcarried by passengers. True, but ordinary diligence, not
even extraordinary diligence, could have resulted to the discovery of
the gasoline.
a. Duty of common carrier. A common carrier is bound
to carry the passengers safely as far as human care and foresight can

provide, using the utmost diligence of very cautious persons, with a

due regard for all the circumstances. (Art. 1755, Civil Code)
b. Presumption of fault. In case of death of or injuries to
passengers, common carriers are presumed to have been at fault or to
have acted negligently, unless they prove that they observed
extraordinary diligence as prescribed in articles 1733 and 1755. (Art.
1756, Civil Code)
c. Degree of care. Common carriers, from the nature of
their business and for reasons of public policy, are bound to observe
extraordinary diligence in the vigilance over the goods and for the
safety of the passengers transported by them, according to all the
circumstances of each case. (1st par., Art. 1733, Civil Code)

If it were an airline company involved in the above

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

17. Suppose A was riding on an airplane of a

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

53

2) Flood, storm, earthquake, lightning, or other

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

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

SUGGESTED ANSWER: No. Caltex as the charterer

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

NOTES AND COMMENTS:

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

to another person for a specified time or use. (Caltex (Philippines), Inc.

v. Sulpicio Lines, Inc., et al., G.R. No. 131166, September 30, 1999)

b. Kinds of charter party agreement.

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

e.

Distinction between two kinds of charter

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

54

affreightment,, the owner remains as carrier and must answer

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

f. Zones of time in collision:

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

2. What does general average or gross average

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

3. MV SuperFast, a passenger-cargo vessel owned

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

55

complaint demanding all the other cargo owners to share

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

4. What is meant by the doctrine of limited

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

d.

In case the vessel is not a common, but special

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

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

NOTES AND COMMENTS:

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

b. Principle of limited liability applies ONLY if the

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

c. Limited liability DOES NOT apply where captains

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

Court of Appeals, G.R. No. 94867; Equitable Insurance Corporation v.

Court of Appeals, etc., et al., G.R. No. 95578, June 8, 2000)

6. X Shipping Company spent almost a fortune

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

56

sinking. The vessel owner defended by seeking refuge

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

NOTES AND COMMENTS:

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

8.

1. Two vessels coming from opposite

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

57

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

9. A severe typhoon was raging when the vessel

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

SUGGESTED ANSWER: I would advice RC to file with

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

11. A local consignee sought to enforce

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

58

only to prescriptive periods under the said Code, and not to

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

12. Lavine entered into a contract with Mitsui,

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

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

loss under the Carriage of Goods by Sea Act (COGSA) after

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

59

US$545,000.00 in favor of Citibank. A promissory note was

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

NOTES AND COMMENTS;

a. Maritime Lien, nature. A maritime lien constitutes a
present right of property in the ship, a jus in re, to be afterward

enforced in admiralty by process in rem. From the moment the claim

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

60

c. Interpretation. The provisions of our Ship Mortgage

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

(d) Public Service Act (Com. Act 146), as

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

a) The applicant must be a citizen of the Philippines, or

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

2. When can the Land Transportation Franchising

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

3. Robert is a holder of a certificate of public

convenience to operate a taxicab service in Manila and
suburbs. One evening, one of his taxicab units was
boarded by three (3) robbers as they escaped after staging
a hold-up.
Because of said incident, the Land
Transportation Franchising and Regulatory Board revoked
the certificate of public convenience of Robert on the
ground that said operator failed to render safe, proper and
adequate service as required under Section 19 (a) of the
Public Service Act.
Was the revocation of the certificate of public
convenience of Robert justified ? Explain. (
SUGGESTED ANSWER: No. A single hold-up incident,
which is not related at all in the manner by which Robert
operates his certificate of public convenience, should not be
construed as rendering service that is unsafe, inadequate and
improper. (Mansanal v. Ausejo, 164 SCRA 36)

4.

The City of Manila passed an ordinance

banning provincial buses from the city. The ordinance is
challenged as invalid under the Public Service Act by X
who had a certificate of public convenience to operate
auto-trucks with fixed routes from certain towns in Bulacan
and Rizal to Manila and within Manila. Firstly, he claimed
that the ordinance was null and void because, among other
things, it
in effect amends his certificate of public
convenience, a thing which only the Land Transportation
Franchising and Regulatory Board (LTFRB) can do under
Section 16 of the Public Service Act. Under said section,
the Commission is empowered to amend, modify or revoke
a certificate of public convenience after notice and hearing.
Secondly, he contended that even if the ordinance was
valid, it is only the LTFRB which can require compliance
with its provisions under Section 17 (j) of said Act and
since the implementation of the ordinance was without
sanction or approval of the Commission, its enforcement
was unauthorized and illegal.
1) May the reliance of X on Section 16 (m) of the
Public Service Act be sustained ? Explain.
2) Was X correct in his contention that under
Section 17 (j) of the Public Service Act it is only the

61

Commission which can require compliance with the

provisions of the ordinance ?
SUGGESTED ANSWER:
1) No. The power of the LTFRB under Section 16 (m) of
the Public Service Act is subordinate to the authority of the City
of Manila under Section 18 (hh) of its revised charter, to
superintend, regulate or control the streets of the City of Manila.
(Lagman v. City of Manila, 17 SCRA 579)
2) No. The powers conferred by law upon the LTFRB
were not designed to deny or supersede the regulatory power of
the local government units over motor traffic in the streets
subject to their control.

5.

The Batong Bakal Corporation filed with the

Board of Energy an application for a Certificate of Public
Convenience for the purpose of supplying electric power
and lights to the factory and its employees living within the
compound. The application was opposed by the Bulacan
Electric Corporation, contending that the Batong Bakal
Corporation has not secured a franchise to operate and
maintain an electric plant.
Is the oppositions contention correct ?
SUGGESTED ANSWER: No. A legislative franchise not
required for an entity to operate as a supplier of electric power
and light to its own factory and its employees living in the
compound provided that it does not make an offer of service to
the public in general.
6. PETRON is a petroleum company which owns the
largest, most modern complex refinery in the Philippines.
It is also the countrys biggest combined retail and
wholesale market of refined petroleum products. Section 7
of R.A. No. 387, the Petroleum Act of 1949, provides that:
Petroleum operation a public utility. - Everything relating
to the exploration for and exploitation of petroleum which
may consist naturally or below the surface of the earth, and
everything relating to the manufacture, refining, storage, or
transportation by special methods of petroleum, as
provided for in this Act, is hereby declared to be of public
utility.
Is PETRON a public utility ? Why?

62

SUGGESTED ANSWER: No. A public utility under the

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

7. WWW Communications, Inc., is an e-commerce

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

The Constitution, in no uncertain terms, requires a

franchise for the operation of a public utility. However, it does
not require a franchise before one can own the facilities needed
to operate a public utility so long as it does not operate them to
serve the public.
In law, there is a clear distinction between the
operation of a public utility and the "ownership" of the facilities
and equipment used to serve the public.
The right to operate a public utility may exist
independently and separately from the ownership of the facilities
thereof. One can own said facilities without operating them as a
public utility or conversely, one may operate a public utility
without owning the facilities used to serve the public. The
devotion of property to serve the public may be done by the
owner or by the person in control thereof who may not
necessarily be the owner thereof.
The dichotomy between the operation of a public utility
and the ownership of the facilities used to serve the public can
be very well appreciated when we consider the transportation
industry. Enfranchised airline and shipping companies may
lease their aircraft and vessels instead of owning them
themselves. (Tatad, et al., v. Garcia, Jr., et al., 243 SCRA 436)
NOTES AND COMMENTS:
a.
Build-operate-transfer (BOT).
One where the
contractor undertakes the construction and financing of an
infrastructure facility, and operates and maintains the same. The
contractor operates the facility for a fixed period during which it may
recover its expenses and investment in the project plus a reasonable
rate of return thereon. After the expiration of the agreed term, the
contractor transfers the ownership and operation of the project to the
government. The owner of the infrastructure facility must comply with
the citizenship requirement of the Constitution on the operation of a
public utility. (Tatad, et al., v. Garcia,. Jr., et al., 243 SCRA 436)
b. Build-and-transfer (BT). The contractor undertakes
the construction and financing of the facility, but after completion, the
ownership and operation thereof are turned over to the government.
The government, in turn, shall pay the contractor the total investment
on the project in addition to a reasonable rate of return. This
arrangement may be employed in the construction of any
infrastructure project including critical facilities which for security or
strategic reasons, must be operated directly by the government.
Filipino ownership is not required. (Tatad, et al., v. Garcia, Jr., et al.,
243 SCRA 436)

63

c. Distinctions between BOT and BT:

a.
BOT contractor operates; BT government
operates.

b. BOT compliance with citizenship requirement; BT

no.

d. Value-added services (VAS) such as SMS, are

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

8. Is an international gateway facility (IGF) a

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

NOTES AND COMMENTS:

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

9. What is the effect of failure to get approval of sale

or mortgage of franchise ?

SUGGESTED ANSWER :In operating a truck without the

transfer thereof having been approved by the Public Service
Commission (now LTFRB), the transferee acted merely as agent
of the registered owner and should be responsible to him (the
registered owner) for any damages he may cause the latter
through his negligence. (Y Transit Co., Inc. vs. NLRC, et al., G.R.
88195-96, January 27, 1994 ) REASON: Since a franchise is
personal in nature any transfer or lease thereof should be
notified to the Public Service Commission (LTFRB) so that the
latter may take proper safeguards to protect the interest of the
public.
Of course it follows that if there are any damage caused
to the general public the registered owner is directly answerable
and not the unregistered transferee.

10. Pepay, a holder of a certificate of public

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

11.

Antonio was granted a Certificate of Public

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

64

Maritime Industry Authority, Antonio and Carlos jointly

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

of contract or as an absolute limit of the extent of liability. (Philippine

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

(e) The Warsaw Convention of 1929

(Limited to the Carriers Liability)

2. Rolando, on a special mission to purchase

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

1. What is the Warsaw Convention ?

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

NOTES AND COMMENTS:

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

companion case, 284 SCRA 408)

NOTES AND COMMENTS:

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

has every right to expect that he be transported on that flight and on

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

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

65

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

Article XII, 1987 Constitution)

(a) The Corporation Code (BP Blg. 68)

1. As a result of perennial business losses a
corporations net worth has been wiped out. In fact, it is
now in negative territory. Nonetheless, the stockholders
did not like to give up:
Creditor-banks, however, do not share the
confidence of the stockholders and refuse to grant more
loans.
What tools are available to the stockholders to
replenish capital ?
SUGGESTED ANSWER: The stockholders may resort
to the following:
a. Increase the capital stock of the corporation, thereby
infusing additional funds.
b. Issue a call for the payment of unpaid subscriptions if
there are any.
c. If the stockholders do not want to dilute their shares
through increase in capital stock, they could give advances to
the corporation.

a. Two classes of corporations recognized under

the Constitution:
1) Private corporations created under a general
law.
2) Government-owned or controlled corporations
created by special charters.
. (Feliciano, etc. v.

2. An educational corporation sued two radio

broadcasters for libel because of malicious imputations
against the school. Is it entitled to moral damages as a
corporation ?
SUGGESTED ANSWER: Yes. Article 2219 (7) of the
Civil Code which expressly authorizes the recovery of moral
damages in cases of libel, slander, or any other form of
defamation does not distinguish whether the plaintiff is a natural
or juridical person. (Filipinas Broadcasting Network, Inc. v. Ago

Commission on Audit, etc., G. R. No. 147402, January 14,

2004)

Medical and Educational Center-Bicol Christian College of Medicine

(AMEC-BCCM, et al. G. R. No. 141994, January 17, 2005)

on Audit, etc., G. R. No. 147402, January 14, 2004 citing Bernas)

NOTES AND COMMENTS:

b. Constitutional basis for classification. The

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

NOTES AND COMMENTS:

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

may have a good reputation which, if besmirched, may also be a good

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

3. As a result of perennial business losses a

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

66

Purpose of corporate set-up.

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

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

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

b. Corporate stockholders only have inchoate right

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

5.

A, B and C are shareholders of XYZ

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

67

incorporation, the place of incorporation determines nationality

irrespective of nationality of stockholders.

7. What is the nationality of a corporation

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

NOTES AND COMMENTS:

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

9.

When is the veil of corporate fiction pierced

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

b. When the fiction is used as a means of perpetrating a

fraud or an illegal act or as a vehicle for the evasion of an

68

existing obligation, the circumvention of statutes, the

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

d. When the corporate fiction is used as a shield to

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

e. Two entities cannot be deemed separate and distinct

where there is a showing that one is merely the continuation of
the other, as where the second corporation merely continued the
operations of the first corporation under the same owners, the
same business venture, at the same address, and even
continued to hire the same employees. (Avon Dale Garments, Inc.
vs. NLRC, et al., G.R. No. 117932, July 20, 1995)

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

g. Piercing the veil of corporate fiction is warranted,

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

NOTES AND COMMENTS:

a. The principle requiring the piercing of the corporate

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

10. Mr. Doggie owns 90% of the shares of the

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

NOTES AND COMMENTS:

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

corporate fiction is necessary to achieve justice or equity. (Republic v.

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

11. Plaintiffs filed a collection action against

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

69

established. It cannot be presumed. (Lim v. Court of Appeals, et al.,

G.R. No. 124715, January 24, 2000)
5) The defense of separateness will be disregarded where the
business affairs of a subsidiary corporation are so controlled by the
mother corporation to the extent that it becomes an instrument or
agent of its parent. But even when there is dominance over the affairs
of the subsidiary, the doctrine of piercing the veil of corporate fiction
applies only when such fiction is used to defeat public convenience,
justify wrong, protect fraud or defend crime. (Reynoso, IV v. Court of
Appeals, et al., G.R. Nos. 116124-25, November 22, 2000)

b. Merely interlocking directorate does not justify

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

12. What is the effect of a change in corporate name

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

13.

Define an ultra vires act.

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

Providing gratuity pay for its employees is one of the

express powers of the corporation under the Corporation Code.
(Ibid.)

NOTES AND COMMENTS:

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

Code. (Rural Bank of Milaor, Camarines Sur v. Ocfemia, et al., G.R.

No. 137686, February 8, 2000)

14. What is capital ? How is it differentiated with

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

Another variation of the trust fund doctrine posits that

any distribution of corporate assets as a consequence of
corporate liquidation are considered as held in trust by the
recipient stockholder for the benefit of the creditors of the
corporation.

15.

State the rights of a stockholder.

SUGGESTED ANSWER:
a. To vote, including the right to appoint a proxy;
b. To share in the profits of the corporation including the
right to declare stock dividends, but an unpaid subscriber does
not have a right to stock dividends;

70

c. To a proportionate share in the assets of the

corporation upon liquidation;
d. The right of appraisal;
e. The preemptive right to shares;
f. To inspect corporate books and records;
g. To elect directors and to be elected as such;
h. Such other rights as may contractually be granted to
the stockholders by the corporation or by special law.
NOTES AND COMMENTS:
a. Stockholders of unpaid subscriptions have all
the above rights of stockholders including right to vote.
However, if already declared delinquent, and the call for the unpaid
subscription is issued with the expiration, the delinquent subscriber
loses all of the above rights.
b, Stockholders right to vote. One of the rights of a
stockholder is the right to participate in the control and management
of the corporation that is exercised through his vote. The right to vote
is a right inherent in and incidental to the ownership of corporate stock
and as such is a property right. The stockholder cannot be deprived of
the right to vote his stock nor may the right be essentially impaired,
either by the legislature or by the corporation, without his consent,
through amending the charter, or the by-laws. (Castillo, et al., v.
Balinghasay, et al., G. R. No. 150976, October 18, 2004 citing
Fletcher)

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

17. What is meant by the doctrine of corporate

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

71

18. Who is an independent director ?

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

NOTES AND COMMENTS:

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

conducted at arms length and are immaterial.

38.1)

(SRC Rule

19. What are the conditions for a corporation to

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

If the investment is in accord with the principal purposes

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

NOTES AND COMMENTS:

72

a. A corporation acts through its board, officers or

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

b.

Corporate officers may bind the corporation.

Corporate officers may act on such matters as may be authorized

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

c. Corporation may be estopped in questioning

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

e. When acts of corporate officers DO NOT bind

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

Knowledge by agents of the corporation binds

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

f. When UNAUTHORIZED acts of corporate

officers BIND the corporation.
1) If ratified. The Board, acting within its

competence, may ratify the unauthorized act of the corporate

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

Bank of Milaor, Camarines Sur v. Ocfemia, et al., G.R. No.

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

20 A. P was removed as director and R was

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

21. In what instances may corporate director,

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

73

e.
When he consents to the issuance of watered
stocks or who, having knowledge thereof, does not forthwith file
with the corporate secretary his written objection thereto;
f.
When he agrees to hold himself personally and
solidarily liable with the corporation; or
g.
When he is made, by a specific provision of law,
to personally answer for the corporate action. (FCY Construction
Group, Inc., et al. v. Court of Appeals, et al., G. R. No. 123358,
February 1, 2000 citing Tramat Mercantile, Inc. et al., v. Court of
Appeals, et al., 238 SCRA 14)

NOTES AND COMMENTS:

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

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

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

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

74

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

22. Are contracts entered into by a corporation

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

22-A. What is the governing body of a

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

The raison detre behind the concentration in the board

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

NOTES AND COMMENTS:

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

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

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

75

SUGGESTED ANSWER: No. A corporation is a

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

23-A.
What is the nature of an executive
committee ?
SUGGESTED ANSWER: The executive committee is as
powerful as the board of directors and in effect acting for the
board itself. It should be distinguished from the other committees
which are within the competency of the board to create at any
time and whose actions require ratification and confirmation by
the board. (Filipinas Port Services, Inc., etc., v. Go, et al., G. R No.
161886, March 16, 2007)

NOTES AND COMMENTS:

a.
The executive committee.

The by-laws of a
corporation may create an executive committee, composed of not less
than three members of the board, to be appointed by the board. Said
committee may act, by majority vote of all its members on such
specific matters within the competence of the board, as may be
delegated to it in the by-laws or on a majority vote of the board, except
with respect to:
1) approval of any action for which shareholders
approval is also required;
2) the filling of vacancies in the board;
3) the amendment or repeal of by-laws or the adoption of
new by-laws;
4) the amendment or repeal of any resolution of the
board which by its express terms is not so amendable or
repealable; and
5) a distribution of cash dividends to the shareholders.
(Sec. 35, Corporation Code, arrangement supplied)

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

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

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

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

NOTES AND COMMENTS:

76

a. The operative act which determines ownership of

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

b.

Requirements for the issuance of a

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

c.

Requirements for valid transfer of

stocks:

1) There must be a delivery of the stock certificate;

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

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

d. Reason why attachment prevails over

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

24. Distinguish cash dividends from stock

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

Otherwise it can no longer be revoked once the right thereto

has already vested in the stockholders. Stated otherwise, revocation
may be had prior to the declaration of cash dividends and for stock
dividends prior to the issuance.

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

NOTES AND COMMENTS:

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

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

77

home office is clearly doing business in this country. (Georg Grotjahn

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

26. On 25 May 1995, a Lease and Development

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

78

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

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

This doctrine of estoppel was initiated as early as 1924

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

b. However, foreign corporations not licensed to do

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

c. The purpose for requiring foreign firms to obtain

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

Philippines Limited v. Subic Bay Metropolitan Authority, et al., G.R. No.

131367, August 31, 2000)
The object of requiring a license is not to prevent the foreign
corporation from performing single acts, but to prevent it from
acquiring domicile for the purpose of business without taking the steps
necessary to render it amenable to suits in the local courts.
(European Resources and Technologies, Inc., et a., v. Ingenieruburo
Birkhahn + Nolte, etc., et al., G. R. 159586, July 26, 2004 citing
Marshall-Wells Co. v. Elser and Co., 46 Phil.70 (1924) In other words,
the foreign corporation is merely prevented from being in a position
where it takes the good without accepting the bad. (European
Resources and Technologies, Inc., et a., v. Ingenieruburo Birkhahn +
Nolte, etc., et al., G. R. 159586, July 26, 2004)

d. Exception or instance where licensing requirement

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

27. What act is constitutive of a dissolution of a

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

79

dissolution of an entity took place. For example, there must be a

showing that there was indeed an actual closure and cessation
of operations. (Avon Dale Garments, Inc., vs. NLRC, et al., G.R. No.
117932, July 20, 1995)

NOTES AND COMMENTS:

a. Three (3) year period after dissolution.

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

b.

Grounds for involuntary dissolution of a

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

28.

What is the cumulative rule ?

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

principle among as many candidates as the voter shall see fit,

PROVIDED: the total number of votes cast shall not exceed the
number of shares shown on the books multiplied by the whole
numbers of directors to be voted.

b. The Securities Regulation Code (R.A.

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

2. What are the powers and functions of the

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

80

b) Formulate policies and recommendations on issues

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

n) Exercise such other powers as may be provided by

law as well as those which may be implied from, or which are
necessary or incidental to the carrying out of, the express
powers granted the Commission to achieve the objectives and
purposes of these laws. (Sec. 5.1, SRC)

3.

What is the jurisdiction of the SEC over

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

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

NOTES AND COMMENTS:

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

5. What are the tests to determine whether a

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

81

2) Those between and among stockholders and

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

NOTES AND COMMENTS:

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

b. Supervisory authority of SEC over corporate ends

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

6.

Explain the concept of a derivative suit.

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

NOTES AND COMMENTS:

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

a stockholder may institute a suit in behalf of himself and other

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

7.

What are the requisites of a derivative suit ?

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

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

82

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

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

7-A. Does the approval by the Securities and

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

The creditors preferred status over the unsecured

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

NOTES AND COMMENTS:

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

83

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

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

NOTES AND COMMENTS:

a.
Rehabilitation
does
not
dissolution of the distressed corporation.

contemplate

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

8. What is a public company ?

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

9. What is a Self Regulatory Organization or SRO ?

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

11.

What are considered as manipulative

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

84

(i) By effecting any transaction in such security

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

Securities Regulation Code or by rules of the SEC.

(SRC Rule

24.1, arrangement and rewording supplied)

12. What are some of the non-exclusive

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

b. Marking the close. Buying and selling securities at

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

f. Squeezing the float. Taking advantage of a shortage

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

13. Ms. OB was employed in MAS Investment

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

85

stock exchange priced at P20 per share. When WICs

tender offer was announced, DOP stocks jumped to P30
per share. Thus OB earned a sizeable profit.
Is OB liable for breach and misuse of confidential or
insider information gained from her employment ? Is she
also liable for damages to sellers or buyers with whom she
traded ? if so, what is the measure of such damages ?
Explain briefly.
SUGGESTED ANSWER:
Yes. OB is liable because
she is an insider. As an employee of the Bank, in connection
with her work, was able to material information with respect to
DOP, the issuer, that is not generally available. As such insider
she is prohibited to buy or sell shares of stock of the issuer, in
this case DOP. (Sec. 27.1 in relation to Sec. 3.8, both of the SRC)
OB is subject to penalty imposable upon those who violate any
provision of the Securities Regulation Code which is a fine of not
less than P50,000.00 nor more than P5 million or imprisonment
of not less than seven years nor more than 21 years, or both, in
the discretion of the court. (Sec. 73, SRC)
OB is liable to any investor from whom, as such insider,
she purchased the shares or to whom she sold the shares.
She is liable to damages in an amount not exceeding
triple the amount of the transaction plus actual damages.
Exemplary damages may also be awarded in cases of bad faith,
fraud, malevolence or wantonness in the violation of the
Securities Regulation Code. (Sec. 63, SRC)

142.

Who is an insider ?
SUGGESTED ANSWER:
a. The issuer;
b. A director or officer of, or a person controlling,
controlled by, or under common control with, the issuer,
c. A person whose relationship or former relationship o
the issuer gives or gave him access to a fact of special
significance about the issuer or the security that is not generally
available, or
d. A person who learns such a fact from any of the
foregoing insiders with knowledge that the person from whom he
learns the fact is such an insider. (Sec. 3.8, SRC)

15.

What is a prospectus?

SUGGESTED ANSWER: Prospectus is the document

made by or on behalf of an issuer, underwriter or dealer to sell
or offer securities for sale to the public through a registration
statement filed with the Commission. (Sec. 3.11 SRC)
16. Who is a broker?
SUGGESTED ANSWER: Broker is a person engaged
in the business of buying and selling securities for the account of
others. (Sec. 3.3 SRC)
17. Who is a dealer?
SUGGESTED ANSWER: Dealer means any person
who buys and sells securities for his/her own account in the
ordinary course of business. (Sec. 3.4 SRC)

18.

What is a "fact of special significance" ?

SUGGESTED ANSWER:
a. One which in addition to being material, would be
likely to affect the market price of a security to a significant
extent on being made generally available
b. One which a reasonable person would consider
especially important under the circumstances in determining his
course of action in the light of such factors as the degree of its
specificity, the extent of its difference from information generally
available previously and is nature and reliability.

19.

What are securities ?

SUGGESTED ANSWER:
These are shares,
participation or interests in a corporation or in a commercial
enterprise or profit-making venture and evidenced by a
certificate, contract, instrument, whether written or electronic in
character. (1st par., Sec. 3.1, SRC)
20. Give examples of securities ?
SUGGESTED ANSWER:
a) Shares of stock, bonds, debentures, notes,
evidences of indebtedness, asset-backed securities;
b) Investment contracts, certificates of interest or
participation in a profit sharing agreement, certificates of deposit
for a future subscription;

86

c) Fractional undivided interests in oil, gas or other

mineral rights;
d) Derivatives like option and warrants;
e)
Certificates of assignments, certificates of
participation, trust certificates, voting trust certificates or similar
instruments;
f) Proprietary or nonproprietary membership certificates
in corporations; and
g) Other instruments as may in the future be determined
by the Commission. (Sec. 3.1 SRC)

21.

What are over-the-counter securities ?

These are securities sold without passing through the
stock exchange.
NOTES AND COMMENTS:
a. Over-the-counter markets. Markets made or created
for the purchase and sale of securities other than on a stock
exchange.

22. What is meant by the registration

requirement for securities ?
SUGGESTED ANSWER:
The requirement that
securities shall not be sold or offered for sale or distribution
within the Philippines, without a registration statement duly filed
with and approved by the SEC. Prior to such sale, information
on the securities, in such form and with such substance as the
SEC may prescribe, shall be made available to each prospective
purchaser. (Sec. 8.1, SRC)
23.

What are exempt securities ?

SUGGESTED ANSWER: Those that do not require
registration either because the law itself exempts them
therefrom or the Securities and Exchange Commission finds that
the enforcement of the registration requirement is not necessary
in the public interest and for the protection of the investors by
reason of the amount involved or the limited character of the
public offering.

24.

Give examples of exempt securities.

SUGGESTED ANSWER:

a)
Any security issued or guaranteed by the
Government of the Philippines, or by any political subdivision or
agency thereof, or by any person controlled or supervised by,
and acting as an instrumentality of said Government.
b) Any security issued or guaranteed by the government
or any country with which the Philippines maintains diplomatic
relations, or by any state, province or political subdivision thereof
on the basis of reciprocity: Provided, That the Commission may
require compliance with the form and content of disclosures the
Commission may prescribe.
c) Certificates issued by a receiver or by a trustee in
bankruptcy duly approved by the proper adjudicatory body.
d) Any security or its derivatives the sale or transfer of
which, by law, is under the supervision and regulation of the
Office of the Insurance Commission, Housing and Land Use
Regulatory Board, or the Bureau of Internal Revenue.
e) Any security issued by a bank except its own shares
of stock. (Sec. 9.1 SRC)
The Commission may, by rule or regulation after public
hearing, add to the foregoing any class of securities if it finds
that the enforcement of this Code with respect to such securities
is not necessary in the public interest and for the protection of
investors. (Sec. 9.2 SRC)

25.

What transactions are exempt ?

SUGGESTED ANSWER: Sale of any security in any of
the following transactions:
a) At any judicial sale, or sale by an executor,
administrator, guardian or receiver or trustee in insolvency or
bankruptcy.
b) By or for the account of a pledge holder, or
mortgagee or any other similar lien holder selling or offering for
sale or delivery in the ordinary course of business and not for
the purpose of avoiding the provisions of this Code, to liquidate a
bona fide debt, a security pledged in good faith as security for
such debt.
c) An isolated transaction in which any security is sold,
offered for sale, subscription or delivery by the owner thereof, or
by his representative for the owners account, such sale or offer
for sale subscription or delivery not being made in the course of
repeated and successive transactions of a like character by

87

such owner, or on his account by such representative and such

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

j) The exchange of securities by the issuer with its

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

88

of the security for which the registration statement has

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

27. What are the grounds for suspension of the

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

be made until the same is lifted or set aside by the Commission.

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

29. What is a commodity ?

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

30.

What is a derivative ?
SUGGESTED ANSWER:
With respect to equity
securities a financial instrument, including options and warrants,
whose value depends on the interest in or performance of an
underlying security, but does not require any investment of
principal in the underlying security. (SRC Rule 3.1.1.2)

31.

What are options ?

SUGGESTED ANSWER: These are contracts that give
the buyer the right, but not the obligation, to buy or sell an
underlying security at a predetermined price, called the exercise
or strike price, on or before a predetermined date, called the
expiry date, which can only be extended in accordance with
Exchange rules. (SRC Rule 3.1.1.2.a)
32. What are the different kinds of options ?
SUGGESTED ANSWER: A call option and a put option.

33.

What are call options ?

SUGGESTED ANSWER: A contract that gives the
buyer the right, but not the obligation to buy an underlying

89

security at a predetermined price on or before a predetermined

date. (SRC Rule 3.1.1.2.a.b.)

34.

What are put options ?

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

35.

What is meant by a straddle ?

SUGGESTED ANSWER:
Straddle involves the
purchase of an equal number of put options and call options on
the same underlying security at the same strike price and
maturity date. Each option may be exercised separately,
although the combination of options is usually bought and sold
as a unit. ( SRC Rule 25.1.2)
36. What is a block sale ?
SUGGESTED ANSWER:
A block sale shall mean a
matched trade that does not go through the automated order
matching system of an Exchange trading system but instead has
been pre-arranged by and among the Broker Dealers clients
and is then entered as a done deal directly into the trading
system. ( SRC Rule 30.2-8.2)

37.

What are Chinese Walls ?

SUGGESTED ANSWER:
The proper segregation of
functions within a firm by any Broker Dealer which assumes
more than one function whether as a dealer, adviser, or
underwriter, or which engages in market making transactions to
prevent:
a. the flow of information between the different parts of
its organization which perform each function; and
b. any conflict of interest which may result.
A Broker Dealer shall at all times ensure that its trading
functions and back-office settlement functions are properly
segregated and shall establish written procedures to ensure
compliance with this Rule. ( SRC Rule 34.1-3, arrangement
supplied)

NOTES AND COMMENTS:

a. Information defined. Information:

1) of a specific nature which has not been made

public; and
2) relating to one or more public companies or any
securities of a public company; and
3) which, if it were made public, would likely affect the
market price of the securities. ( SRC Rule 34.1-3)

c. Banking Laws (General Terms and

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

2. What is the primary objective of the Bangko

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

b.
Pilipinas

Corporate powers of the Bangko Sentral ng

1) Adopt, alter and use a corporate seal

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

3. What is meant by legal tender ?

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

4. In what amounts may coins be accepted as

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

5. Are checks legal tender ? When is payment

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

NOTES AND COMMENTS:

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

90

delivery of checks does not discharge the obligation under a tender of

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

6. What are the instruments of Bangko Sentral

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

must be pointed out that such powers must be related to the

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

b. Liquidation court has jurisdiction to adjudicate all

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

8. When a bank is placed under a receiver, may it

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

91

9. What are the substantial differences in the

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

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

92

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

R. A. No. 1405)

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

NOTES AND COMMENTS:

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

2. What are the exceptions or instances when

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

g. Where the Bureau of Internal Revenue makes an

inquiry into the deposits of a deceased depositor for the purpose
of determining his gross estate;

h. Where there is a BIR inquiry into the deposits of a

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

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

93

completed per Union Banks original instruction and

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

3. The Senate Blue Ribbon Committee acting on a

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

5. Margaret opened a dollar account in her

name depositing various dollar checks with her and Jose,
her father, as co-payees. Jose sued Margaret to account
for the funds. Upon application from Jose, the court issued
am order to require the bank to show the records of
Margarets accounts. The bank refused an inquiry into the
bank balances as Jose is not the depositor neither was
there any showing of an authority from Jose. Is the bank
correct ?
SUGGESTED ANSWER: No. As the owner of the funds
Jose is entitled to a hearing on the whereabouts of these funds.
The Supreme Court rendering a limited pro hac vice
ruling allowed for the inquiry in the light of the distinctive
circumstances attendant to the case. Clearly it was not the intent
of the legislature when it enacted the law on secrecy n foreign
currency deposits to perpetuate injustice. The allowance of the
inquiry would be in accord with the rudiments of fair play, the
upholding of fairness in our judicial system and would be an
avoidance of delay and time-wasteful and circuitous way of
administering justice. (China Banking Corporation v. Court of
Appeals, et al., G. R .No. 140687, December 18, 2006)

NOTES AND COMMENTS;

a. Pro hac vice, defined.

xxx for this turn, for this

particular occasion only. (China Banking Corporation v. Court of
Appeals, et al., G. R .No. 140687, December 18, 2006, citing various
cases) In short, the Supreme Court is saying that the doctrine
enunciated in China finds application in this case only and is not to
serve as a precedent.
b. Depositor, defined. A depositor in bank deposits is one
who pays money into the bank in the usual course of business, to be
placed to his credit and subject to his check or the beneficiary of the
funds held by the bank as trustee. (China Banking Corporation v.
Court of Appeals, et al., G. R .No. 140687, December 18, 2006)

(ii) General Banking Law of 2000,

R.A. No. 8791 (Basics)
1. Canlas and Manosca agreed to do business
together. To raise capital, Canlas authorized Manosca to
mortgage two parcels of land belonging to him and to his
wife,

94

Later, Canlas agreed to sell the parcels to Manosca

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

interest, holding in trust the money of the depositors, which bank

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

Assuming that Canlas was negligent in giving Manosca

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

Under the doctrine of last clear chance, which is

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

By the nature of its functions, a bank is under obligation

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

2. On September 3, 1987, Napiza deposited in his

Foreign Currency Deposit Unit (FCDU) Savings Account
with the Bank, a Managers check dated August 17, 1984,
payable to cash in the amount of $2,500.00 and duly

95

endorsed by Napiza on the dorsal side. The owner of the

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

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

The Bank was negligent in allowing withdrawal prior to

clearance of the check. By depositing the check with Bank,
Napiza was, in a way, merely designating the Bank as the
collecting bank. This is in consonance with the rule that a
negotiable instrument such as a check, whether a managers
check or ordinary check, is not legal tender. The collecting bank
or last endorser generally suffers the loss because it has the
duty to ascertain the genuineness of all prior endorsements
considering that the act of presenting the check for payment to
the drawee is an assertion that the party making the
presentment has done its duty to ascertain the genuineness of
the endorsements. The rule finds more meaning in this case
where the check involved is drawn on a foreign bank and
therefore collection is more difficult than when the drawee bank
is a local one even though the check in question is a manager'
check. (Bank of Philippine Islands v. Court of Appeals, G.R. No.
112392, February 29, 2000) It was likewise negligent in allowing
withdrawal despite non-presentation of the passbook.
While it is true that Napizas having signed a blank
withdrawal slip set in motion the events that resulted in the
withdrawal and encashment of the counterfeit check, the
negligence of the Banks personnel was the proximate cause of
the loss that the Bank sustained. Proximate cause, which is
determined by a mixed consideration of logic, common sense,
policy and precedent, is that cause, which, in natural and
continuous sequence, unbroken by any efficient intervening
cause, produces the injury, and without which the result would
not have occurred. The proximate cause of the withdrawal and
eventual loss of the amount of $2,500.00 on the Banks part was
its personnels negligence in allowing such withdrawal in
disregard of its own rules and the clearing requirement in the
banking system. In so doing, the Bank assumed the risk of
incurring a loss on account of a forged or counterfeit foreign
check and hence, it should suffer the resulting damage. ( Bank
of Philippine Islands v. Court of Appeals, G.R. No. 112392, February
29, 2000)

96

3. Leticia opened a savings and current account

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

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

NOTES AND COMMENTS:

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

4. What are some of the prohibited transactions of a

borrower of a bank ?
SUGGESTED ANSWER:
No borrower of a bank shall:
a) Fraudulently overvalue property offered as security for
a loan or other credit accommodation from the bank;

97

b) Furnish false or make representation or suppression

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

5. Distinguish between equity of redemption and

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

NOTES AND COMMENTS:

a. Right of mortgagor to redeem.

In the event of
foreclosure by a bank, whether judicially or extrajudicially, of any
mortgage on real estate which is security for any loan or other credit

accommodation granted, the mortgagor or debtor whose real property

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

b. Instances when a bank may acquire real estate.

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

98

c. Limitation or ceiling on bank investments in real

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

6. Intellectual Property Code (R.A. No. 8923,

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

knowledge and information for the promotion of national

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

4. What does the term intellectual property

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

5.

What is a patent ?
SUGGESTED ANSWER: A patent is an exclusive right
conferred by law to an inventor to make, use, offer, sell or import
the product covered by the patent and to restrain, prohibit and
prevent any unauthorized person or entity from performing the
protected right. The right includes also the assignment, or
transfer by succession of the patent, and to conclude licensing
contracts for the same.

6.

What inventions are patentable ?

SUGGESTED ANSWER: Any technical solution of a
problem in any field of human activity which is new, involves an
inventive step and is industrially applicable shall be patentable.
It may relate to a product, or a process, or an improvement of
the foregoing. (Sec. 21, R. A. No. 8293; Kho, etc., v. Hon. Court of
Appeals, et al., G. R. No. 115758, March 19, 2002)

7. Give some non-patentable inventions.

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

99

d. Plant varieties or animal breeds or essentially

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

8. What is meant by the First to File Rule ?

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

9. When may a patent holder be compelled to allow

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

10.

What is meant by patent infringement ?

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

11. The remedies for patent infringement are the (a)

civil action with an injunction, and the (b) criminal action for
repetition of infringement.

 12.

A civil action before a court of competent

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

13. If infringement is repeated by the infringer or by

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

14.

In an action for infringement, the defendant,

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

15. Mark is any visible sign capable of distinguishing

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

100

16. Trade name is the name or designation identifying

or distinguishing an enterprise. (Kho, etc., v. Hon. Court of Appeals,
et al., G.R.No. 115758, March 19, 2002)

17. Pearl and Dean (Phils.), Inc. (P & D) has a

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

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

be covered by copyright as Literary and artistic works

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

c. There is no infringement of the patent because

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

The phrase Power Ads is too generic that it could not

fall under the concept of the doctrine of secondary meaning to
be able to obtain protection. Secondary meaning means that a
word or phrase originally incapable of exclusive appropriation
with reference to an article in the market (because it is
geographically or otherwise descriptive) might nevertheless
have been used for so long and so exclusively by one producer
with reference this article that, in the trade and to that branch of
the purchasing public, the word or phrase has come to mean
that the article was his property. (Ibid.)
NOTES AND COMMENTS:
a. Limitations of copyright, Copyright is confined to
literary and artistic works which are original intellectual creations in
the literary and artistic domain protected from the moment of their
creation. (Kho, etc., v. Hon. Court of Appeals, et al., G.R .No. 115758,
March 19, 2002)

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

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

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

102

The law in force at the time of the controversy was Rep.

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

May SLIHM bring suit for the cancellation of DGCIs

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

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

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

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

20. An infringement within the competence of the

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

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

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

22. An infringement within the competence of the

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

23. Test of dominancy requires that if the

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

103

suggest an effort to imitate. Similarity in size, form and color,

while relevant, is not conclusive. (Asia Brewery, Inc. v. Court of
Appeals, et al., 224 SCRA 437)

24. A person to be entitled of a copyright must be the

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

25. What is unfair competition ?

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

vendor of such goods or any agent of any vendor engaged in

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

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

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

104

SUGGESTED ANSWER: No. Supergreens imitation of

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

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

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

and fixtures hereafter purchased by the mortgagor shall be

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

NOTES AND COMMENTS:

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

2.

What is the nature of a chattel mortgage

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

NOTES AND COMMENTS:

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

the mortgage was given. (Magna Financial Services Group, Inc. v.

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

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

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

e. Foreclosure of chattel mortgage on subject of

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

(b) Real Estate Mortgage Law (Act 3135,

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

105

P500,000.00 as additional loan from mortgaged property

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

NOTES AND COMMENTS:

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

provisions of this Decree are hereby repealed or modified accordingly.

(Sec.120, Pres. Decree No. 1529)

2. What is meant by a dragnet clause ?

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

Is a dragnet
Philippines ?

clause

recognized

in

the

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

(c) The Insolvency Law (Act 1956)

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

106

BAR: a. Procedure for suspension of payments. If

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

107

3) Publication of the order, and service of the order on

the creditors mentioned in the petition;
4) Creditors meet to elect an assignee, to whom are
conveyed all the debtors assets;
5) Liquidation and payment of creditors;
6)
Composition (agreement between debtor and
creditor), if agreed;
7) Order of discharge of the insolvent.
NOTES AND COMMENTS:
a. The obligations of an insolvent debtor that
survives adjudication of insolvency or claims that could be
pursued against a debtor despite his having been
pronounced as insolvent.
1)

Taxes and assessments due the government,

national or local;
2) Obligations arising from embezzlement or fraud;
3) Obligation of any person liable with the insolvent
debtor for the same debt, either as solidary co-debtor, surety,
guarantor, partner, indorser or otherwise;
4) Alimony or claims for support; and
5) Debts not provable against the estate (such as
after incurred obligations) of, or not included in the schedule submitted
by, the insolvent debtor.

b.
Involuntary
voluntary insolvency.

insolvency

distinguished

from

1) Involuntary three or more creditors are required

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

3. What is involuntary insolvency ?

SUGGESTED ANSWER: A proceeding filed by three or
more creditors whose credits aggregates not less than
P1,000.00, or by a corporation or partnership to declare a debtor

insolvent because he has committed any one of the acts of

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

b. Acts of insolvency which warrants filing of

petition for involuntary insolvency: The debtor:
1)
2)
3)
4)
5)
6)

Is departing from the Philippines;

Is absent and continued to be absent;
Conceals himself from judicial process;
Removes or conceals his properties;
Allowed his properties to be attached by others;
Confessed or allowed judgment to be taken

against him;
7) Allowed judgment by default against him;
8) Allowed property to be taken by legal process to
give preference to certain creditors;
9) Make assignment, gift or sale;
10) In contemplation of insolvency, made payments or
gift to another;
11) Defaulted in payment of obligations for 30 days;
12) Failed after 30 days to surrender money deposited
in trust with him;
13) Found to have insufficient properties to satisfy a
judgment.

(d) Truth in the Lending Act (R.A. No.

3765),
(As amended by the Consumer Act of
1992)
1. What are required to furnished under the
Truth in the Lending Act, as amended by the Consumer Act
of 1992, to a person to whom credit sales is extended ?

108

SUGGESTED ANSWER: Any creditor shall furnish to

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

b.
Transactions
disclosures:

which

require

the

above

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

c. Handling charges not reflected on the promissory

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

GOOD LUCK !
ADVANCE
CONGRATULATIONS !
SEE YOU IN COURT !