Pointers for Review in Commercial Law

1 COMMERCIAL LAW 2010 POINTERS FOR REVIEW INSURANCE Q. How may a contract of insurance be perfected? A. 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. There can be no contract of insurance unless the minds of the parties have met in agreement. Hence, it is only when the insurer accepts the application and communicates the same to the applicant that the contract of insurance is perfected. 1 If the offer and acceptance are made by correspondence, the acceptance shall not be binding until it has been made known to the one making the offer.2 Aside from meeting of the minds of the parties, premium on the policy must be paid before the contract can be valid and binding.3 Q. Perez applied for life insurance coverage with the BF Lineman Insurance Corporation and immediately paid part of the premium. The application was forwarded to the office of BF Lineman at Gumaca, Quezon for transmittal to its head office in Manila. Perez died before his application was brought to the Manila Office of BF Lineman. Without knowing of his death, BF Lineman approved the application and issued the corresponding policy. The beneficiary filed a claim with the insurer which refused to pay on the ground that the contract was not perfected. Was the insurance contract perfected? A. The contract was not perfected. It is only when the insurer accepts the application and communicates the same to the applicant and the latter pays the premium while he is in good health that the contract of insurance is perfected. The insurer‘s acceptance is manifested when it issues a corresponding policy to the applicant. Perez died before his application was brought to the head office of BF Lineman in Manila. There was absolutely no way the acceptance of the application could have been communicated to the applicant inasmuch as the applicant was already dead at that time. There can be no contract of insurance unless the minds of the parties have met in agreement.4 Q. How should insurance contracts be interpreted? A. In case there is no doubt as to the terms of an insurance contract, the provisions must be construed in their plain, ordinary and popular sense. However, when the terms of the policy are ambiguous, uncertain or doubtful, they should be interpreted strictly 1

Perez vs. Court of Appeals, G. R. No. 112329, January 28, 2000. Enriquez vs. Sun Life Insurance of Canada, 41 Phil. 269. 3 Section 77. 4 Perez vs. Court of Appeals, G. R. No. 112329, January 28, 2000. 2

2 against the insurer and liberally in favor of the insured, because the insured has no voice in the selection of the words used, and the language of the contract is selected by legal advisers of the insurance company.5 In such case, ambiguous provisions are construed strictissimi juris or of strictest terms6 against the insurer. An insurance contract, being a contract of adhesion, should be interpreted as to carry out the purpose for which the parties entered into the contract which is to insure against risks of loss or damage to the goods. Limitations of liability should be regarded with extreme jealousy and must be construed in such a way as to preclude the insurer from noncompliance with its obligations.7 Q. Are contracts of insurance entered into by the insurer and insured on equal footing? A. To characterize the insurer and the insured as contracting parties on equal footing is inaccurate at best. Insurance contracts are wholly prepared by the insurer with vast amounts of experience in the industry purposefully used to its advantage. More often than not, insurance contracts are contracts of adhesion containing technical terms and conditions of the industry confusing if at all understandable to lay persons, that are imposed on those who wish to avail of insurance. As such, insurance contracts are imbued with public interest that must be considered whenever the rights and obligations of the insurer and the insured are to be delineated. Hence, in order to protect the interest of insurance applicants, insurance companies must be obligated to act with haste upon insurance applications, to either deny or approve the same, or otherwise be bound to honor the application as a valid, binding and effective insurance contract.8 Q. Why are insurance contracts called contracts by adhesion or adherence? A. Insurance contracts are prepared only by the insurer and imposed upon parties dealing with it which may not be changed, the latter‘s participation in the agreement being reduced to the alternative to ―take it or leave it‖, in contrast to those entered into by parties bargaining on an equal footing and, therefore, any ambiguity thereon must be resolved against the insurer, the party preparing the contract.9 Q. Philamlife and Eternal Gardens entered into a Group Life Policy under which the clients of Eternal who purchased burial lots from it on installment would 5

Calanoc vs. Court of Appeals, 52 O. G. 191; Qua Chee Gan vs. Law Union Rock Ins. Co., Ltd., 52 O. G. 1982. 6

Mc Cullough & Co. vs. Taylor, 25 Phil. 113; Asked, No. V (2), 2003 Bar Exams. DBP Pool of Accredited Insurance Companies vs. Radio Mindanao Network, Inc., 480 SCRA 314 315, January 27, 2006. 8 Eternal Gardens Memorial Park Corporation vs. The Phil. American Life Insurance Co., G. R. No. 166245, April 9, 2008. 9 (Qua Chee Gan vs. Law Union Rock Ins. Co., Ltd., 52 O. G. 1982). 7

3 be insured by Philamlife. Eternal was required under the policy to submit a list of new lot purchasers , together with a copy of the application of each purchasers and the amounts of the respective unpaid balances of all insured lot purchasers. Eternal sent a letter dated December 29, 1982, containing a list of insurable balances of its lot buyers. On of those included in the list was John Chuang. Philamlife did not reply to the said letter. On August 2, 1984 Chuang died. Eternal demanded payment from Philamlife of the insurance claim for Chuang‟s death. Philamlife denied the claim on the ground that no application for Group Insurance was submitted to Philamlife prior to Chuang‟s death. The contact between Philamlife and Eternal stated that the “insurance of any eligible Lot Purchaser shall be effective on the date he contracts a loan with the Assured” (Eternal). It was further stated that “there shall be no insurance if the application of the Lot Purchaser is not approved by the Company (Philamlife). Was there a valid contract of insurance covering Chuang‟s life considering the conflicting provisions of the policy? A. The seemingly conflicting provisions must be harmonized to mean that upon a party‘s purchase of a memorial lot on installment basis from Eternal, an insurance contract covering the lot purchaser is created and the same is effective, valid and binding until terminated by Philamlife by disapproving the insurance application. Insurance is a contract by adhesion which must be construed liberally in favor of the insured and strictly against the insurer.10 Q. How should ambiguities in a Health Care Agreement be interpreted? A. Health Care Agreement is in the nature of a non-life insurance which is primarily a contract of indemnity11 and hence, it is a contract of adhesion the terms of which must be interpreted and enforced stringently against the insurer which prepared the contract.12 Q. Who may be a beneficiary in life insurance? A. Any person may be designated as beneficiary in a life insurance contract even though he is a stranger and has no insurable interest in the life insured,13 except those who are forbidden by law to receive donations from the insured14 such as: (a) Those made between persons who are guilty of adultery or concubinage at the time of the donation;

10

Eternal Gardens Memorial Park Corp. vs. Philamlife, G. R. 166245, April 9, 2008. Philamcare Health Systems, Inc. vs. CA, 379 SCRA 356 (2002). 12 Blue Cross Health Care, Inc. vs. Olivares, 544 SCRA 580, 586, February 12, 2008. 11

13

4 Couch 2d, 504; Asked, 1946 (Aug.) and 1969 Bar Exams.; No. IV, 1987 Bar Exams. Art. 2012, Civil Code; Asked, 1955 & 1962 Bar Exams.; No. 4, 1981 Bar Exams., No. 13, 1985 Bar Exams.; No. X, 1998 Bar Exams. 14

4 (b) Those made between persons found guilty of the same criminal offense, in consideration thereof; (c) Those made to a public officer or his wife, descendants and ascendants, by reason of his office.15 In essence, a life insurance policy is no different from a civil donation insofar as designation of beneficiary is concerned. Both are founded upon the same consideration: liberality. A beneficiary is like a donee, because from the premiums of the policy which the insured pays out of liberality, the beneficiary will receive the proceeds of the said insurance. As a consequence, the proscription in Article 739 of the Civil Code should equally operate in life insurance contracts. Any person who cannot receive a donation cannot be named as beneficiary in the life insurance policy of the person who cannot make the donation.16 Q. Must the beneficiary have insurable interest in life insured? A. A person procuring insurance on his own life may name anyone he chooses as beneficiary thereof, even though he is stranger and has no insurable interest in the life insured.17 However, a person who cannot receive donation from the insured under Article 739 of the Civil Code cannot be designated as beneficiary.18 Q. May the wife who abandoned her husband be a beneficiary of Social Security Benefits?

15

Article 739 Civil Code.

16

Insular Life Assurance Co., Ltd., vs. Ebrado, 80 SCRA 181; Asked, No. 4, 1981 Bar Exams.; No. 13, 1985 Bar Exams.; No. X, 1998 Bar Exams. 17

4 Couch 2d. 504; In re Saymanaki‘s Estate, 167 A. 420, 109 Pa. Super, 555; Asked 1949 Bar Exams.; No. IV, 1987 Bar Exams. 18

See discussions under Section 11.

5 A. In the case of Social Security System, et al., vs. Gloria de los Santos19 the Supreme Court ruled that a wife who left her husband and lived with another man is no longer entitled to receive Social Security benefits upon the death of the husband because she was no longer dependent upon him for her support. Q. Less than a year after the marriage of Antonio de los Santos and Gloria de los Santos, the latter left Antonio and contracted another marriage with Domingo Talens in 1965. In 1969, Gloria went back to Antonio and lived with him until 1983 when she again left Antonio and went to the United States where she obtained a divorce from Antonio. In the meantime, Antonio married Cirila de los Santos and amended his SSS records by changing his beneficiary from Gloria to Cirila. Antonio died and Gloria claimed the SSS insurance benefits. The Court of Appeals ruled that the marriage between Antonio and Gloria still subsisted and the subsequent marriages contracted by them were void. Thus, the Court of Appeals ruled that Gloria was still the legal wife of Antonio and hence entitled to the SSS benefits. Should Gloria be entitled to the SSS benefits? A. The divorce obtained by Gloria against Antonio was not binding in this jurisdiction. Under Philippine law, only aliens may obtain divorces abroad provided they are valid according to their national law. The divorce was obtained by Gloria while she was still a Filipino citizen, hence it did not sever her marriage with Antonio. However, although Gloria was the legal spouse, she is still disqualified to be his primary beneficiary under the SSS law. A wife who left her family until her husband died and lived with other men was not dependent upon her husband for support, financial or otherwise, during the same period. Gloria left the conjugal abode and lived with two different men. These facts remove her from qualifying as a primary beneficiary of her deceased husband.20 Q. What is the meaning of incontestable clause? A. An incontestable clause in a life insurance policy is an agreement by which the insurance company limits the period of time within which it will interpose objections to the validity of the policy or set up any defense.21 After a policy of life insurance made payable on the death of the insured shall have been in force during the lifetime of the insured for a period of two years from the date of its issue or its last reinstatement, the insurer cannot prove that the policy is void

19

G. R. No. 164790, August 29, 2008. Social Security System, et al., vs. Gloria de los Santos, August 29, 2008, Third Division, Supreme Court. 21 45 C. J. S. 758. 20

6 ab initio or is rescindable by reason of the fraudulent concealment or misrepresentations of the insured or his agent.22 Q. What are the requisites of incontestability? A. To become incontestable, a policy must have the following requisites: 1. It must be a life insurance policy; 2. It must be payable on the death of the insured; and 3. It must have been in force during the lifetime of the insured for a period of two years.23 Q. What are the effects of incontestability? A. Whenever all the requisites of incontestability are present, the insurer can no longer escape liability under the policy nor be allowed to prove that the policy is void ab initio or rescindable by reason of concealment or misrepresentation of the insured or his agent. In other words, the insurer is precluded from contesting the policy on any ground.24 Q. When may a third person sue the insurer? A. If the insurance contract was intended to benefit third persons, the latter may directly claim from the insurer. Thus, If the insurance contract should contain some stipulation in favor of a third person, the latter although not a party to the contract may enforce the stipulation in his favor before it is revoked by the contracting parties, 25or where the insurance contract provides for indemnity against liability to third persons, then third persons to whom the insured is liable, can sue the insurer.26 Q. The insurer issued a common carrier accident insurance policy to Manila Yellow Taxicab wherein it was stipulated that the insurer will indemnify any authorized driver who was driving the motor vehicle insured. A taxicab of the insured, driven by Coquia met a vehicular accident which caused the death of Coquia. May the heirs of Coquia hold the insurer liable?

22 23

Section 48, par. 2. Section 48, par. 2.

24

45 C. J. S. 780; Asked, Bar Exams. : 1947, 1953 & 1966; Asked, Bar Exams. 25 26

Coquia vs. Fieldmen‘s Ins.Co., 26 SCRA 179, 181.

Guingon vs. del Monte, et al., 20 SCRA 1043.

No. XII, 1998

7 A. The policy under consideration is typical of contracts pour autrui and therefore, the enforcement thereof may be demanded by a third party for whose benefit it was made, although not a party to the contract.27 Q. Aguilar insured his jeepneys against accidents and third-party liability. In the policy, the insurer agreed to indemnify the insured against “all sums which the insured shall become legally liable to pay in respect of death of or bodily injury to any person”. One of the jeepneys insured bumped Guingon who had just alighted from another jeepney. Guingon died. Can the insurer be made directly liable for the death of Guingon who was not a party to the insurance contract? A. The insurance taken was one for indemnity for liability to third persons and, therefore, such third person is entitled to sue the insurer.28 Q. What are the statutory exceptions to the rule that the insurer is entitled to the payment of premium as soon as the thing insured is exposed to the peril insured against? A. Notwithstanding any agreement to the contrary, no policy or contract of insurance is valid and binding unless and until the premium thereof has been paid.29 The statutory exceptions wherein the policy shall be binding notwithstanding the non-payment of premiums are: 1. In case of life or industrial life insurance whenever the grace period applies;30 2. When the insurer makes a written acknowledgment of the receipt of premium, such acknowledgment is a conclusive evidence of payment of premium to make the policy binding;31 3. Where the obligee has accepted the bond or suretyship contract in which case such bond or suretyship becomes valid and enforceable irrespective of whether or not the premium has been paid by the obligor to the surety.32 Q. Aside from the statutory exceptions mentioned above wherein the policy is valid and binding notwithstanding the non-payment of premiums, what are the other exceptions that evolved from cases decided by the Supreme Court:

27

Coquia vs. Fieldmen‘s Ins. Co., Inc., 26 SCRA 179.

28

Guingon vs. del Monte, 20 SCRA 1043.

29

Section 77, 2nd sentence. Section 77, 2nd sentence. 31 Section 78. 32 Section 177. 30

8 A. Aside from the statutory exceptions, the following are the instances when the Supreme Court ruled that the policy is valid and binding notwithstanding the nonpayment of premiums: 1. In case of cover notes which are binding even if premiums are not paid thereon because no premium could be fixed on the cover note until all the particulars of the insurance are known. Cover notes should be integrated to the regular policies so that the premiums on the regular policies include the consideration for the cover notes.33 2. When the parties agreed to have the premiums paid by installments or payment by installments is an established practice by the parties, acceptance of the payment of premium by installments would suffice to make the policy binding.34 3. When the insurer has granted the insured a credit term for the payment of premium, the insurer is barred by estoppel from claiming forfeiture of the policy due to non-payment of premium within the credit term.35 Q. Olivares obtained a health care coverage from Blue Cross Health Care, Inc.. In the health care agreement of the parties, ailments due to “pre-existing conditions” were excluded from the coverage. Barely 38 days from the effectivity of her health care coverage, Olivares suffered a stroke and was admitted at the Medical City hospital. She was treated by Dr. Saniel, her attending physician. She asked Blue Cross to pay her medical expenses but the latter suspended payment pending submission of a certification from her attending physician that the stroke she suffered was not caused by a pre-existing condition. After being discharged from the hospital, Olivares again claimed payment from Blue Cross but the latter insisted on Dr. Saniel‟s report. Blue Cross asked for a report from Dr. Saniel which was refused on the ground that Olivares invoked the patient-physician confidentiality. During the trial, Blue Cross never presented any evidence to prove that Olivares‟ stroke was due to a pre-existing condition. It merely speculated that Dr. Saniel‟s report would be adverse to Olivares, based on her invocation of the doctor-patient privilege. Should Blue Cross be exempted from liability? A. The rule that ―evidence willfully suppressed would be adverse if produced‖ does not apply if the suppression is an exercise of a privilege. The refusal of Olivares was justified. It was privileged communication between physician and patient. Furthermore, limitations of liability on the part of the insurer or health care provider must be construed in such a way as to preclude it from evading its obligations. Since Blue Cross had the burden of proving exception to liability, it should have made its own assessment of whether Olivares had a pre-existing condition when it failed to obtain the

33

Pacific Timber and Export Corporation vs. Court of Appeals, 112 SCRA 199. Makati Tuscany Condominium Corp. vs. Court of Appeals, 215 SCRA 462; Asked, No. V, 2006 Bar Exams. 35 UCPB vs. Masagana Telamart, Inc., 356 SCRA 307. There are however, strong dissenting opinions in this case. 34

9 attending physician‘s report. It could not just passively wait for Dr. Saniel‘s report to bail it out.36 Q. In an insurance suit, what is the actionable document, the policy or a memorandum thereof or a Marine Risk Note? A. In an insurance suit, the actionable document is the policy which must be attached to the complaint pursuant to Section 7, Rule 9 of the Rules of Court. However, there is no specific provision in the Rules of Court which prohibits the admission in evidence of an actionable document in the event a party fails to comply with the requirement of the rule on actionable document under Section 7, Rule 9. But what must be presented as evidence is the policy itself and not a mere Marine Risk Note.37 Q. 120 pieces of motors were air shipped from the US to ABB Koppel, Inc. in Manila. At the NAIA, the cargo was discharged and forwarded to the warehouse of Paircargo for temporary storage pending release by the Bureau of Customs. Later, Regis Brokerage withdrew the cargo and delivered it to ABB Koppel. However, it was discovered that only 65 of the 120 pieces of motors were actually delivered and the remaining 55 motors could not be accounted for. Paircargo and Regis both refused to pay the value of the missing motors. Thus, Malayan Insurance with which ABB Koppel insured the cargo paid ABB Koppel the insurance claim. Claiming subrogation to the right of ABB Koppel, Malayan Insurance filed an action against Paircargo and Regis at the MeTC of Manila where it presented Marine Risk Note as proof that Malayan Insurance insured the cargo. The complaint was dismissed on the ground that the Marine Risk Note presented as proof that the cargo was insured was invalid. (a) Was the Marine Risk Note sufficient to prove the existence of the insurance contract? (b) Was Malayan Insurance subrogated to the rights of ABB Koppel against the party responsible for the loss of the shipment? A. (a) The Marine Risk Note was not the insurance contract itself, but merely a complementary or supplementary document to the contract of insurance that may have existed between Malayan and ABB Koppel. (b) Since Malayan failed to introduce in evidence the Marine Insurance Policy itself as the main insurance contract, or even advert to said document in the complaint, it failed to establish its cause of action for restitution as a subrogee of ABB Koppel. Malayan‘s right to recovery is derived from contractual subrogation as an incident to an insurance relationship, and not from any proximate injury to it inflicted by the defendants. It is critical that Malayan establish the legal basis of such right to subrogation by presenting the contract constitutive of the insurance 36 37

Blue Cross Health Care, Inc. vs. Olivares, 544 SCRA 580, February 12, 2008. Malayan Insurance Co., Inc. vs. Regis Brokerage Corporation, G. R. No. 172156, Nov. 23, 2007.

10 relationship between it and ABB Koppel. Without such legal basis, its cause of action cannot survive. The dismissal of the complaint is correct.38 Q. When may abandonment be made? A. Abandonment may be made in any of the following cases:39 (a) If more than ¾ of the value of the thing insured is actually lost; (b) If more than ¾ of the value of the thing insured would have to be expended to recover it from the peril;40 (c) If it is injured to such an extent as to reduce its value by more than ¾; (d) If the thing insured is a ship and the contemplated voyage cannot be lawfully performed without an expense to the insured of more than ¾ of the value of the thing abandoned; (e) If the thing insured is a ship and the contemplated voyage cannot be lawfully performed without incurring risk which a prudent man would not take under the circumstances; (f) 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 an expense of more than ¾ of the value of the thing41 or without incurring a risk which a prudent man would not under take under the circumstances. Q. What may be recovered by the insured when abandonment is properly made? A. When abandonment is properly made, the insured may recover a total loss, and the insurer acquires all the interests of the insured in the thing insured with all chances of recovery and indemnity. But if the insured omits to abandon, he may recover only his actual loss.42 Q. WG& A, as owner of Superferry 3 entered into a contract for dry docking and repairs of said vessel with Keppel. It was insured by WG&A with Pioneer Insurance for its total value of P360 million. In Clause 20 of the Ship Repair Agreement between WG& A and Keppel, it was agreed that in case of damage to the vessel, Keppel shall be liable only for P50 million . Due to the negligence of Keppel‟s 38

Malayan Insurance Co., Inc. vs. Regis Brokerage Corporation, supra. Section 139; Asked, X (b), 2005 Bar Exams. 40 Asked, 1971 Bar Exams. 41 Asked, No. 5, 1982 Bar Exams. 39

42

Sections. 146 and 155; Asked, No. 5, 1982 Bar Exams.

11 specially trained welder, fire broke out and burned Superferry 3. It was established that the damage to the ship would exceed P270 million, or ¾ of the total value of the policies. WG&A abandoned the ship and claimed P360 million, the total value of the policies. Pioneer paid the total loss and claimed reimbursement from Keppel by way of subrogation. Keppel refused to pay. (a) Was abandonment proper? As a consequence thereof, was it correct for Pioneer to pay WG&A a total loss? (b) Was subrogation proper? (c) Can the liability of Keppel exceed P50 million, the limitation of liability agreed upon with WG &A in Clause 20 of the Ship Repair Agreement? A. (a) The abandonment was proper since it could be made, when among others, ―more than three-fourths thereof in value is actually lost, or would have to be expended to recover it from the peril‖43. The total value of the property insured was P360 million and the damage was more than P270 million or more than ¾ of the vessel‘s insured value. As a consequence of the proper abandonment, the loss became a constructive total loss44 which entitles the insured to recover a total loss.45 (b) The subrogation was proper because under Art. 2207 of the Civil Code, if the insured ―has received indemnity from the insurance company for the injury or loss arising out ot 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 the contract. It contemplates full substitution such that it places the party subrogated in the shoes of the creditor, and he may use all means that the creditor could employ to enforce payment.46 (c) Clause 20 is a stipulation that may be considered contrary to public policy. To allow KCSI to limit its liability to only P50,000,000.00, notwithstanding the fact that there was a constructive total loss in the amount of P360,000,000.00, would sanction the exercise of a degree of diligence short of what is ordinarily required. It would not be difficult for a negligent party to escape liability by the simple expedient of paying an amount very much lower than the actual damage or loss sustained by the other.47 Q. How can the insurer be held liable under the “no fault indemnity” clause in motor vehicle third party liability insurance?

43

Section 139. Section 131. 45 Keppel Cebu Shipyard, Inc. vs. Pioneer Insurance & Surety Corp., G. R. 180880-81, Sept. 25, 2009. 46 Ibid. 47 Ibid. 44

12 A. An insurer may be held liable under the ―no fault indemnity‖ provision without the necessity of proving fault or negligence of any kind provided the following requisites are present:48 (a) The claim is for death or injury to any passenger or third party; (b) The total indemnity in respect of any one person does not exceed P5,000; and (c) The necessary proof of loss under oath to substantiate the claim must be submitted. Q. Which insurer is liable under the “no fault indemnity” provision? A. A claim under the ―no fault indemnity‖ provision may be made against the insurer of one motor vehicle only. Such claim may be made directly by the injured party against the insurer as follows: (a) In case of an occupant of a vehicle, claim shall lie against the insurer of the vehicle in which the occupant is riding, mounting or dismounting from. (b) In any other case, claim shall lie against the insurer of the directly offending vehicle.49 NEGOTIABLE INSTRUMENTS Q. Who is an accommodation party? What is the liability of an accommodation party?50 A. An accommodation party is one who has signed the instrument as maker, drawer, acceptor, or indorser, without receiving value therefor, and for the purpose of lending his name to some other person. Such person is liable on the instrument to a holder for value, notwithstanding such holder at the time of taking the instrument knew him to be only an accommodation party.51 Q. What is the relation between the accommodation party and the party accommodated?

48

Section 378; Asked, 1977 Bar Exams.; No. 6, 1983 Bar Exams.; No. III (1), 1989 Bar Exams.; No. 1 (1), 1994 Bar Exams. 49

Section 378; Asked, No. III (1), 1989 Bar Exams; No. 1 (1), 1994 Bar Exams.

50

Asked: 1952, 1963, 1964, 1973, 1974, 1975, 1976, 1982, 1985 and 1986 Bar Exams.; No. III (a), 1993 Bar Exams.; No. IX (1), 2003 Bar Exams. 51

Section 29; Ang vs. Associated Bank, 532 SCRA 244, September 5, 2007.

13 A. The accommodated party is the principal while the accommodation party is the surety. It is a settled rule that as surety, the accommodation party is bound equally and absolutely with the principal and is deemed an original promissor and debtor from the beginning. The liability of the accommodation party is immediate and direct.52 The relation between an accommodation party and the accommodated party is one of principal and surety—the accommodated party is one of principal and surety – the accommodated party being the surety. As such, he deemed to an original promissor and debtor from the beginning; he is considered in law as the same party as the debtor in relation to whatever is adjudged touching the obligation of the latter since their liabilities are interwoven as to be inseperable.53 Q. Are the liabilities and defenses of an accommodation party under the Negotiable Instruments Law available in case the instrument is non-negotiable? A. In case the instrument is non-negotiable, it is covered by the provisions of the Civil Code and not by the Negotiable Instruments Law. A non-negotiable note is merely a simple contract in writing and is evidence of such intangible rights as may have been created by the assent of the parties. Hence, where the note was made payable to a specific person rather than to bearer or to order – a requisite of the Negotiable Instruments Law, the parties cannot avail of the provisions of the Negotiable Instruments Law on the liabilities and defenses of an accommodation party.54 Q. What are the requisites in order that a party may be considered as an accommodation party? A. The following are the requisites in order that a party may be considered as an accommodation party: (a) He must have signed the instrument as maker, drawer, acceptor or indorser; (b) He signed without receiving value therefor; (c) He signed for the purpose of lending his name to some other person.55

52

Garcia vs. Llamas, 417 SCRA 292. Ang vs. Associated Bank, 532 SCRA 244. 54 Garcia vs. Llamas, supra. 55 Section 29; Asked, No. IX (c), 2003 Bar Exams. 53

14 Q. What is the effect of an extension of time to pay the obligation given by a holder for value to the accommodated party? Will it release the accommodation party of his liability? A. Even if the accommodated party receives an extension of the period for payment without the consent of the accommodation party, the latter is still liable for the whole obligation and such extension does not release him because as far as the holder for value is concerned, he is a solidary co-debtor. The liability of an accommodation party is not only primary but also unconditional to a holder for value.56 Q. What constitutes a holder in due course?57 A. 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 the holder of it before it was overdue, and without notice that it had been previously dishonored, if such was the fact; ©That he took it in good faith and for value; (d) That at the time it was negotiated to him he had no notice of any infirmity in the instrument or defect in the title of the person negotiating it.58 Q. Who is deemed a holder in due course? A. Every holder is deemed prima facie to be a holder in due course; but 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 person under whom he claims acquired the title as holder in due course. But the last mentioned rule does not apply in favor of a party who became bound on the instrument prior to the acquisition of such defective title.59 Under the above provision, every holder is presumed prima facie to be a holder in due course. One who claims otherwise has the onus probandi to prove that one or more of the conditions required to constitute a holder in due course are lacking.60 Q. Roxas sold to Rodrigo and Marissa Cawili vegetable oil. As payment therefore, spouses Cawili issued a personal check in the amount of P348,805.50. However, when Roxas tried to encash the check, it was dishonored by the drawee 56

Ang vs. Associated Bank, 532 SCRA 244, September 5, 2007. Asked: 1962, 1963, 1966, 1980 and 1987 Bar Exams.; No. I (b), 1992 and No. I (c). 1996 Bar Exams. 58 Section 52. 59 Section 59. 60 Bank of the Philippine Islands vs. Roxas, 536 SCRA 168, October 15, 2007. 57

15 bank. Spouses Cawili assured him that they would replace the bounced check with a cashier‟s check from BPI. Rodrigo Cawili and Roxas went to BPI branch in Mandaluyong and upon instructions of the Branch Manager, BPI Cashier‟s Check in the amount of P348,805.50 was issued, drawn against the account of Marissa Cawili, payable to Roxas. Rodrigo then handed the cashier‟s check to Roxas. The following day, Roxas returned to BPI‟s branch in Mandaluyong to encash the cashier‟s check but it was dishonored on the ground that Marissa‟s account was closed on that date. Upon being sued, BPI claimed that Roxas was not a holder in due course because the latter was not a holder for value. (a) Was Roxas a holder for value and hence, a holder in due course? (b) May BPI be relieved of its liability under the cashier‟s check it issued? A. (a) Roxas was a holder for value and a holder in due course. Roxas received the cashier‘s check as payment for the vegetable oil he sold to Cawili. The fact that Rodrigo was the one who purchased the cashier‘s check from BPI will not affect Roxas‘ status as a holder for value since the check was delivered to him as payment for the vegetable oil he sold to spouses Cawili. Roxas is presumed to be a holder in due course and the one who claims otherwise must prove that one or more of the conditions required to constitute a holder in due course are lacking. BPI failed to prove that Roxas was not a holder for value. 61 (b) BPI cannot be relived of its liability under the cashier‘s check it issued. A cashier‘s check is really the bank‘s own check and may be treated as a promissory note with the bank as maker. The check becomes the primary obligation of the bank which issues it and constitutes a written promise to pay upon demand. It is of judicial notice that a cashier‘s check is deemed as cash. This is because the mere issuance of a cashier‘s check is considered acceptance thereof. Hence, a bank becomes liable to the payee the moment it issued the cashier‘s check.62 Q. What are crossed checks? What are the kinds of crossed checks? A. A crossed check is one with two parallel lines diagonally written on the left top portion of the check.63 The crossing is special where the name of a bank or a business institution in written between the two parallel lines, which means the drawee should pay only with the intervention of that company. The crossing is general where the words written between the two parallel lines are ―and Co.‖ or ―for payee‘s account only,‖ 64 or nothing is written between the parallel lines. This means that the drawee bank should not encash the check but merely accept it for deposit.65

61

Ibid. Ibid. 63 Asked, No. III (b), 2004 Bar Exams.; No. II 2 (a), 2005 Bar Exams. 64 Associated Bank vs. Court of Appeals, 208 SCRA 495. 65 Associated Bank vs. Court of Appeals, supra; Asked, No. VI, 1995 Bar Exams. 62

16 Q. What are the effects of crossing a check?66 A. The effects of crossing a check are: (1) The check may not be encashed but deposited only in a bank; (2) The check may be negotiated only once; and (3) The act of crossing a check serves as a warning to the holder that the check has been issued for a definite purpose so that he must inquire if he has received the check pursuant to that purpose.67 However, issuing a crossed check imposes no legal obligation on the drawee not to honor such a check. It is more of a warning to the holder that the check cannot be presented to the drawee bank for payment in such case. Instead, the check can only be deposited with the payee‘s bank which in turn must present it for payment with the drawee bank in the course of normal banking transactions between banks. The crossed checks cannot be presented for payment but it can only be deposited and the drawee bank may only pay to another bank in the payee‘s or indorser‘s account.68 Q. E. T. Henry sold bunker fuel to Hi-Cement. In payment of the purchases, it issued post-dated checks payable to E. T. Henry. The checks were crossed and bore the restriction “deposit to payee‟s account only”. E. T. Henry discounted the checks with Insular Bank of Asia and America (Insular). The said checks were dishonored. Insular sued Hi-Cement which claimed that the former was not a holder in due course as it should not have discounted the post-dated checks being crossed checks. (a) Insular hold Hi-Cement liable? (b) If not, who may be held liable by Insular? A. (a) Insular cannot hold Hi-Cement liable as the former was not a holder in due course. The last two elements of Section 52 have not been met by Insular. Insular did not act in good faith since it was grossly negligent. Insular knew that the checks were crossed and bore restrictions that they were for deposit for payee‘s account only; hence, they could not be further negotiated to it. Crossing of checks should put the holder on inquiry and upon him devolves the duty to ascertain the indorser‘s title to the check or the nature of his possession. (b) Insular may hold the party who endorsed/encashed the checks. It was E. T. Henry that re-discounted the checks and received their value from Insular hence, it should pay the latter.69

66

Asked, No. III (1), 1994 and No. I (d), 1996 Bar Exams.; No. II 2 (a), 2005 Bar Exams. State Investment House vs. IAC, 175 SCRA 310; Associated Bank vs. Court of Appeals, 208 SCRA 465; Traders Royal Bank vs. Radio Phil. Network, Inc., 390 SCRA 608. 67

68

69

Gempesaw vs. Court of Appeals, G.R. No. 92244, Feb. 9, 1993. Hi-Cement Corporation vs. Insular Bank of Asia and America, 534 SCRA 269, September 28, 2007.

17 CORPORATION LAW

Q. What is the meaning of the doctrine of legal entity of corporations? A. It means that a corporation is a juridical person with a personality separate and distinct from that of each shareholder. It also means that the stockholders of a corporation are different from the corporation itself.70 Q. What are the consequences of the doctrine of legal entity? A. The consequences of the doctrine of legal entity regarding the separate identity of the corporation and its stockholders are as follows: 1. The stockholders are not personally liable for the debts of the corporation and vice-versa.71 The stockholders are not liable for corporate acts unless otherwise provided by law.72 2. The stockholders are not the owners of corporate properties and assets.73 3. The stockholders cannot sell or maintain actions in their own name in connection with corporation affairs, business or property. Neither do stockholders have the right to recover possession of corporation property or to recover damages for injury to properties belonging to the corporation, and vice-versa.74 4. The property belonging to the corporation cannot be attached to satisfy the debt of a stockholder and vice versa, the latter having only an indirect interest in the assets and business of the former.75 Q. The Labor Arbiter rendered judgment in favor of Delima for illegal dismissal against his employer, Golden Union Aquamarine Corporation (Golden). The judgment became final. Pursuant to a writ of execution, the sheriff attached an Isuzu Jeep registered in the name of Gois who filed a third-party claim over the said vehicle. The Labor Arbiter denied the third-party claim on the ground that Gois was one of the respondents in the case and an incorporator/officer of Golden. May the property of Gois be attached to satisfy the judgment claim against Golden on the ground that she is an incorporator/officer of said corporation? 70

Section 2; SEC Opinions, Jan. 18, 1993 and June 18, 1993. 13A Fletcher, Sec. 6213. 72 Wise and Co. vs. Man Sun Lung, 40 O. G. 50. 71

73 74 75

Berman Environmental Dev. Corp. vs. CA 167 SCRA, 540. Sulo ng Bayan, Inc. vs. Araneta, Inc. 72 SCRA 347.

Delima vs. Gois, 554 SCRA 731, June 17, 2008; Mandaue Dinghow Dimsum House, Inc. vs. NLRC, 547 SCRA 402, March 3, 2008.

18

A. The subject vehicle belonging to Gois cannot be attached to answer for the liabilities of a corporation of which she was an incorporator/officer. A corporation has a personality distinct and separate from its individual stockholders or members and from that of its officers who manage and run its affairs. The rule is that obligations incurred by the corporation, acting through its directors, officers and employees, are its sole liabilities. Thus, property belonging to a corporation cannot be attached to satisfy the debt of a stockholder and vice versa, the latter having only an indirect interest in the assets and business of the former.76 Q. Pursuant to a writ of execution in “Felipe Javier, Jr. vs. Rufino Booc,” the sheriff levied the land owned by Five Star Marketing Corporation. The said corporation, not being a party in the civil case demanded the cancellation of the notice of levy. The sheriff, on the other hand claimed that Rufino Booc was the owner of around 200 shares of stock in Five Star Marketing Corporation and the levy was made on the share, rights and/or interest and participation which Rufino Booc, as president and stockholder, may have in the parcel of land owned by Five Star Marketing Corporation. Was the levy on the corporate property proper? A. The sheriff overstepped his authority when he disregarded the distinct and separate personality of the corporation from that of Rufino Booc as stockholder of the corporation by levying on the property of the corporation. It is settled that a corporation is clothed with a personality separate and distinct from that of its stockholders. The mere fact one is a president of the corporation does not render the property which the corporation owns or possesses the property of the president of the corporation since the latter, as an individual and the corporation are separate entities.77 Q. May a corporation file an action on behalf of its members or stockholders for the recovery of properties belonging to the latter? A. No, the corporation cannot file an action to recover properties belonging to its stockholders. A corporation is a distinct legal entity considered as separate and apart from its individual stockholders or members who compose it, and is not affected by the personal rights, obligations and transactions of its stockholders or members.78 Q. Explain the doctrine of “piercing the veil of corporate fiction”. A. ―Piercing the veil of corporate fiction‖ means that while a corporation can not generally be made liable for acts or liabilities of its stockholders or members, and vice versa because a corporation has a personality separate and distinct from its stockholders or members, however, the corporate existence is disregarded under this doctrine where the corporation is formed or used for illegitimate purposes or justify wrong or evade a 76

Delima vs. Gois, 554 SCRA 737, June 17, 2008. Booc vs. Bantuas, 354 SCRA 279. 78 Sulo ng Bayan, Inc. vs. Araneta, Inc., 72 SCRA 347. 77

19 just and valid obligation. In such case, the corporation and the stockholders shall be considered as one and the same.79 However, the application of the doctrine of piercing the corporate veil should be done caution. A court should be mindful of the milieu where it is to be applied. It must be certain that the corporate fiction was misused to such an extent that injustice, fraud, or crime was committed against another, in disregard of its rights. The wrongdoing must be clearly and convincingly established; it cannot be presumed. Otherwise, an injustice that was never intended may result from an erroneous application.80 Q. Give additional examples when the veil of corporate fiction may be pierced?81 A. When the corporate entity is used to defeat public convenience, justify wrong, protect fraud, or defend crime, the law will regard the corporation as the same as the stockholders and members composing it.82 The veil of corporate fiction may likewise be pierced when the corporation is a mere alter ego, or business conduit of a person or an instrumentality, agency or adjunct of another corporation.83 To establish the alter ego doctrine it must be shown that the stockholders‘ disregard of the corporate entity made it a mere instrumentality for the transaction of their own affairs, that there is such unity of interest and ownership that the separate personalities of the corporation and the owners no longer exist, and to adhere to the doctrine of corporate entity would promote injustice or protect fraud.84 Also, the separate personality of the corporation may be disregarded when the corporation is used as a cloak or cover for fraud or illegality, or to work injustice, 85 or when necessary for the protection of the creditors,86 or when the notion of separate entity is used as a vehicle for the evasion of an existing obligation or to confuse legitimate issues,87 or to perpetrate a social injustice.88 79

Solidbank Corporation vs. Mindanao Ferroalloy Corporation, 464 SCRA 409, July 28, 2005; Federation of Labor Union vs. Ople, 143 SCRA 124; Telephone Engineering & Service Co., Inc. vs. Workmen‘s Compensation Commission, 104 SCRA 354; Asked, 1985 and 1991 Bar Exams.; No. III, 2004 Bar Exams.; No. I (1), 2006 Bar Exams. 80

Philippine National Bank vs. Andrada Electric & Engineering Company, 381 SCRA 145, April 17, 2002. 81 Asked, 1962 and 1985 Bar Exams.; Asked, No. I (2), 2006 Bar Exams. 82 Fletcher, Vol. I, 166. 83

Solidbank Corporation vs. Mindanao Ferroalloy Corporation, 464 SCRA 409, July 28, 2005; San Juan Structural and Steel Fabrication, Inc. vs. Court of Appeals, 296 SCRA 631. 84 1 Fletcher Cyc. Corp., p. 171; Asked, 1991 and 1996 Bar Exams. 85 86 87 88

Gala vs. Ellice Agro-Industrial Corporation, 418 SCRA 431, December 11, 2003. Luxuria Homes, Inc. vs. Court of Appeals, 302 SCRA 315.

Pabalan vs. NLRC 184 SCRA 495. Azcor Mfg., Inc. vs. NLRC, 303 SCRA 26.

20

Q: What is meant by the alter ego doctrine or “instrumentality rule”? A: Where one corporation is so organized and controlled and its affairs are conducted so that it is, in fact, a mere instrumentality or adjunct of the other, the fiction of the corporate entity of the 'instrumentality' may be disregarded. The control necessary to invoke the rule is not majority or even complete stock control but such domination of finances, policies and practices that the controlled corporation has, so to speak, no separate mind, will or existence of its own, and is but a conduit for its principal.89 Q. How may a corporation be established as a mere alter ego of another corporation or person? A. The question of whether a corporation is a mere alter ego is one of fact. Piercing the veil of corporation fiction may be allowed only if the following elements concur: (1) control – not mere stock control, but complete domination- not only of finances, but of policy and business practice in respect to the transaction attacked, must have been such that the corporate entity as to this transaction had at the time no separate mind, will or existence of its own; (2) such control must have been used by the defendant to commit fraud or a wrong doing to perpetuate the violation of a statutory or other positive legal duty, or a dishonest and an unjust act in contravention of the plaintiffs legal right; (3) the said control and breach of duty must have proximately caused the injury or unjust loss complained of.90 Q. Is mere ownership by a single stockholder of nearly all or even all of the capital stock of a corporation sufficient ground to disregard the separate corporation personality? A. While the veil of separate corporate personality may be pierced when the corporation is merely an adjunct, a business conduit, or alter ego of a person, the mere ownership by a single stockholder of nearly all or even all of the capital stock of a corporation is not be itself a sufficient ground to disregard the separate corporate personality.91

89 90

Lipat vs. Pacific Banking Corporation 402 SCRA 339, April 30, 2003.

R & E Transport, Inc. vs. Latag, 422 SCRA 698, 707; Heirs of Ramon Durano, Sr. vs. Uy, 344 SCRA 238. 91 Yamamoto vs. Nishino Leather Industries, Inc., 551 SCRA 447, April 16, 2008; Edsa Shangri-la Hotel and Resort, Inc. vs. BF Corp., 556 SCRA 25, June 27, 2008.

21 Q. Is the mere fact that a single person owns or controls one or more corporation or substantial identity of incorporators of two corporations, sufficient to disregard the separate personalities of the corporations? A. Mere ownership by a single stockholder or by another corporation of all or nearly all of the capital stocks of a corporation is not by itself a sufficient ground to disregard the separate corporate personality.92 The substantial identity of the incorporators of two or more corporations does not imply that there was fraud so as to justify the piercing of the writ of corporate fiction. To disregard the said separate juridical personality, the wrong doing must be proven clearly and convincingly.93 It is lawful to obtain a corporate charter, even with a single substantial stockholder, to engage in specific activity and such activity may co-exist with the other private activities of the stockholder. If the corporation is a substantial one, conducted lawfully and without fraud on another, its separate identity is respected.94 However, the separate identity of the corporation may be disregarded where it serves but as a shield for tax evasion and treat the person who actually may take the benefits of the transactions as the person taxable.95 Q. De Guzman was the President and controlling stockholder of EPG Construction Co., Inc. Said corporation entered into a contract with the University of the Philippines for the construction of its law library. Claiming defects in the airconditioning installed by EPG, UP filed an action against EPG and its President, de Guzman. Should de Guzman be made liable? A. De Guzman should not be made liable. 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. The president or general manager of a corporation therefore, should not be made personally answerable for the payment of the obligations of the corporation unless he had acted maliciously or in bad faith. That exception is not applicable to de Guzman because it was not proved that he acted maliciously or in bad faith when, as President of EPG, he sought to protect its interests and resisted UP‘s claims. Whatever damage was

92 93 94

Secosa vs. Heirs of Erwin Suarez Francisco, 433 SCRA 273, June 29, 2004. Martinez vs. Court of Appeals, 438 SCRA 130, September 10, 2004. Lidell & Co., Inc. vs. Collector of Internal Revenue, 2 SCRA 632; Wise & Co., Inc. vs. Man Sun Lung,

69 Phil. 308; Asked, 1970 Bar Exams.

95

Lidell & Co., Inc. vs. Collector of Internal Revenue, supra.

22 caused to UP as a result of his acts is the sole responsibility of EPG even though de Guzman was its principal officer and controlling stockholder.96 Q. Emmanuel C. Onate owned the majority of the shares in ECO Management Corporation (ECO). Land Bank of the Philippines (LBP) extended a series of credit accommodations to ECO. The proceeds of the credit accommodations were received on behalf of ECO by Onate. ECO failed to pay the loans. LBP filed a complaint for collection of sum of money against ECO and Onate. LBP claimed that ECO and Onate should be treated as one person so Onate can be made liable for the loans obtained by ECO from LBP. Furthermore, LBP claimed, Onate owns the majority shares in ECO; ECO stands for the initials of Emmanuel C. Onate; Onate personally paid P1 Million from his own trust account; Onate controlled the corporation by holding two corporate positions such as Chairman and treasurer; and no meeting of the stockholders or directors had been held. Should the Onate and ECO be treated as one so as to hold Onate liable for ECO‟s debts? A. Onate and ECO cannot be treated as one person so as to make Onate liable for ECO‘s debts. In the absence of any malice or bad faith, a stockholder or an officer of a corporation cannot be made personally liable for corporate liabilities. The mere fact that Onate owned the majority of the shares of ECO is not a ground to conclude that Onate and ECO is one and the same. Mere ownership by a single stockholder of all or nearly all of the capital stock of a corporation is not by itself sufficient reason for disregarding the fiction of separate corporate personalities. Neither is the fact that the name ‗ECO‘ represents the first three letters of Onate‘s name sufficient reason to pierce the veil. Even if it did, it does not mean that the said corporation is merely a dummy of Onate. A corporation may assume any name provided it is lawful. There is nothing illegal in a corporation acquiring the name or as in this case, the initials of one of its stockholders. It has not been shown that ECO was used as a mere alter ego of Onate to obtain the loans. Bad faith or fraud on the part of ECO and Onate was not also shown. Payment of P1 Million out of the trust account of Onate and other investors merely showed that a shareholder wants to held his corporation. The evidence presented does not suffice to hold Onate personally liable for ECO‘s loans.97 Q. Aircon and Refrigeration Industries, Inc. supplied JRB Realty, Inc. with air-conditioning units. After the units were installed, they could not provide the desired cooling temperature. Aircon undertook to replace the units with new ones but this was never done. JRB Realty, Inc. filed an action not only against Aircon and Refrigeration Industries, Inc. but also against Jardine Davies, Inc. on the ground that Aircon was a subsidiary of Jardine. Can Jardine be made liable? 96

EPG Construction Co., Inc. vs. Court of Appeal, 210 SCRA 230; Asked, 1996 Bar Exams.

97

Onate vs. Land Bank of the Philippines, 364 SCRA 375, 383-384.

23 A. Jardine can not be made liable. While it is true that Aircon is a subsidiary of Jarine, it does not necessarily follow that Aircon‘s corporate legal existence can just be disregarded. A subsidiary has an independent and separate juridical personality, distinct from that of its parent company, hence, any claim or suit against the latter does not bind the former, and vice versa. Before the separate personality of the subsidiary may be disregarded the following requisites must be established: (1) control, not merely majority or complete stock control; (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 acts in contravention of plaintiff‘s legal rights; and (3) the aforesaid control and breach of duty must proximately cause the injury or unjust loss complained of.98 Aircon is a subsidiary of Jardine only because the latter acquired the majority of Aircon‘s capital stock. It however, does not exercise complete control over Aircon; nowhere can it be gathered that the petitioner manages the business affairs of Aircon. Indeed, no management agreement exists between Jardine and Aircon and the latter is an entirely different entity from the Jardine.99 Q. Philippine National Bank (PNB) and Ritratto Group, Inc. are both domestic corporations. PNB International Finance, Ltd. (PNB-IFL), a wholly-owned subsidiary company of PNB, organized and doing business in Hong Kong, extended a letter of credit in favor of the Ritratto group secured by real estate mortgages constituted over four lots in Makati. When the Ritratto group failed to settle their obligations, PNB-IFL, through its attorney-in-fact PNB, notified the respondents of the foreclosure of the mortgaged properties. The Ritratto group filed a complaint for injunction against PNB. PNB filed a motion to dismiss on the ground of absence of privity between them. The RTC held that the suit against PNB is a suit against PNB-IFL. Should the veil of corporate fiction be pierced so that a suit against PNB may be considered as a suit against PNB-IFL? A. No, the veil of corporate fiction should not be pierced. The mere fact that a corporation owns all of the stocks of another corporation, taken alone is not sufficient to justify their being treated as one entity. If used to perform legitimate functions, a subsidiary‘s separate existence may be respected, and the liability of the parent corporation as well as the subsidiary will be confined to those arising in their respective business. The Ritratto group failed to show any cogent reason why the separate entities of the PNB and PNB-IFL should be disregarded. The doctrine of piercing the corporate veil is applicable only when the corporate fiction is used to defeat public convenience, justify wrong, protect fraud or defend crime, or when it is made as a shield to confuse the

98

Jardine Davies, Inc. vs. JRB Realty, Inc. 463 SCRA 555, July 15, 2005, citing Velarde vs. Lopez, Inc. 419 SCRA 422, January 14, 2004. 99 Jardine Davies, Inc. vs. JRB Realty, Inc., supra.

24 legitimate issues, or where a corporation is the mere alter ego or business conduit of a person or another corporation.100 Q. What are elements to determine the application of the principle of “piercing the veil of corporation fiction”? A. The elements determinative of the applicability of the doctrine of piercing the veil of corporation fiction are as follows: 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 corporation 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 the plaintiff‘s legal rights; and 3. The aforesaid control and breach of duty must proximately cause the injury , or unjust loss complained of. The absence of any one of these elements prevents ―piercing the corporate veil.‖101 Q. Yamamoto, a Japanese national organized under Philippine Laws, Wako Enterprises Manila, Inc., later known as Nishino Leather Industries, Inc. (NLII). Yamamoto and another Japanese national. Nishino forged a Memorandum of Agreement under which they agreed to enter into a joint venture under which Nishino would acquire 70% of the authorized capital stock of Wako. Nishino and his brother acquired more than 70% of the authorized capital stock thereby reducing Yamamoto‟s investment to about 10%. Wako‟s name was changed to NLII. Yamamoto and Nishino started to negotiate for the buy-out of the shares of Yamamoto. During the negotiations, Yamamoto claimed the machineries and equipment which he contributed to pay his shares to the corporation on the ground that Nishino agreed that he could take out the machineries provided the value of the said machineries would be deducted from his capital contribution. But later, Nishino frustrated Yamamoto‟s claim by refusing the same. The Court of Appeals ruled that the machineries claimed by Yamamoto are corporate properties of NLII and cannot be retrieved by Yamamoto without the authority of NLII board of directors. On the other hand, Yamamoto claimed that Nishimo cannot hide behind the shield of corporate fiction because NLII is a mere instrumentality of Nishimo and his brother. Decide the case with reasons.

100 101

Philippine National Bank vs. Ritratto Group, Inc., 362 SCRA 216, July 31, 2001. Yamamoto vs. Nishino Leather Industries, Inc., supra.

25 A. The separate personality of NLII cannot be disregarded since there is no showing that Nishimo used the separate personality of NLII to unjustly act or do wrong to Yamamoto in contravention of his legal rights. The machineries and equipment, which comprised Yamamoto‘s investment in NLII thus remained part of the capital property of the corporation.102 Q. Respondent Equitable Savings Bank (ESB) was a subsidiary of Equitable PCI Bank (EPCIB) which later merged with Banco de Oro and thence known as Banco de Oro (BDO). Petitioners were client-depositors of EPCIB for more than 12 years. Petitioners obtained a loan amounting to P4,000,000 from EPCIB and to secure the loan, they mortgaged their land in Quezon City. Petitioners were able to draw from the loan the sum fo P3,600,000. They demanded from EPCIB copies of the loan agreement which refused to give them the copies on the ground that as a matter of practice, they give copies only after the entire loan has been withdrawn. Petitioners then did not continue payment of the amortization after paying a total of P500,000. Respondent, through counsel wrote a letter to the petitioner demanding payment of the entire loan released with interest thereon. Finally, petitioners got copy of the loan documents and they were surprised to find out that the lender was the respondent instead of EPCIB. When petitioners failed to pay the loan, respondent sought to extrajudicially foreclose the mortgage. Petitioners filed a case for injunction and claimed that respondent was not the real party in interest to foreclose the mortgage. May foreclose the mortgage obtained by the petitioners to secure a loan obtained by EPCIB? A. An extrajudicial foreclosure instituted by a third party to the Loan Agreement and the real estate mortgage (REM) would be in violation of the petitioners‘ rights over their property. Thus, respondent cannot exercise the right of foreclosure not being a party to the REM. Respondent, although a wholly-owned subsidiary of EPCIB, has an independent and separate juridical personality from its parent company. The fact that the corporation owns all of the stocks of another corporation, taken alone, is not sufficient to justify their being treated as one entity. If used to perform legitimate functions, a subsidiary‘s separate existence shall be respected. 103 Q. May the by-laws of a corporation provide for additional qualifications of directors? A. The by-laws may provide for the qualifications of directors or trustees104 provided they are not inconsistent with the Constitution, law or charter of the corporation and they are reasonable. The minimum qualification required by the Corporation Code must however, be met.105

102 103 104 105

Ibid. Borromeo vs. Court of Appeals, 550 SCRA 269, March 28, 2008. Section 47, par. 5. SEC Opinion, Dec. 8, 1988.

26

Q. The by-laws provide that only members in good standing for at least five (5) years shall be qualified to be elected as director. Is such additional qualification of directors valid? A. Yes, it is valid because the by–laws may prescribe the qualifications of directors. Thus, one who was elected despite the fact that his membership in the corporation has not reached five (5) years is in violation of the by-laws and hence, his election is null and void.106 Q. Who are disqualified from being elected as directors? A. The following are disqualified from being elected as directors: (a) those convicted by final judgment of an offense punishable by imprisonment for a period exceeding six (6) years; (b) those convicted by final judgment of a violation of the Corporation Code committed within five (5) years prior to the date of his election;107 (Sec. 27); and (c) those disqualified by the by-laws.108 Q. The by-laws of San Miguel Corporation (SMC) disqualified from being elected as director those who were directors of another corporation whose business was in competition with or was antagonistic with SMC. Gokongwei was a director of other corporations whose lines of business were in direct competition with some of the business activities of SMC. May Gokongwei be elected as director of SMC? A. Gokongwei was disqualified from being elected as director of SMC. The provision of the by-laws of SMC disqualifying a competitor‘s director from being elected as director of SMC was valid. Sound principles of corporate management counsel against sharing sensitive information with a director whose fiduciary duty of loyalty may well require that he disclose this information to a competitive rival.109 Page 89 Q. As a general rule, are directors/trustees and officers of a corporation liable personally for their acts as such? 106

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

107

Section 27.

108

Gokongwei vs. SEC, 89 SCRA 336.

109

Gokongwei vs. SEC, 89 SCRA 336; Asked, 1998 Bar Exams.; No. VIII (a), 2000 Bar Exams.; No. XI, 2001 Bar Exams.

27 A. As a general rule, directors/trustees and officers of a corporation who purport to act for and in behalf of the corporation, keep within the lawful scope of their authority in so acting, and act in good faith, do not become liable, whether civilly or otherwise, for the consequences of their acts. Those acts, when they are of such a nature and are done under such circumstances, are properly attributed to the corporation alone and no personal liability is incurred by such officers and board members/directors.110 Officers of a corporation who act as such within the scope of their authority have no personal liability for such acts unless it is shown that they have acted negligently or in bad faith. They are mere agents of the corporation who cannot be made liable if they acted within the scope of their authority.111 For as long as the corporate officers acted within the scope of their authority and in good faith, they cannot be held personally liable for the consequences of their acts. The separate corporate personality is a shield against the personal liability of corporate officers, whose acts are property attributed to the corporation.112 Likewise, officers of a corporation are not personally liable for their acts as such officers unless it is shown that they have exceeded their authority. The corporation has a personality separate and distinct from its officers.113 However, when the legal fiction that a corporation has a personality separate and distinct from the stockholders and members is disregarded, as when it is used as a means to perpetrate fraud or an illegal act or as a vehicle for the evasion of an existing obligation, or to confuse legitimate issues, the officers of such corporation shall be liable for their acts.114 Q. Saludaga was a sophomore law student of Far Eastern University (FEU) when he was shot by Rosete, one of the security guards on duty at the school premises. Rosete claimed that the shooting was accidental. Saludaga filed an action for damages against FEU and de Jesus, President of FEU on the ground that FEU failed to provide students with a safe and secure environment and an atmosphere conducive to learning. The Trial Court rendered judgment finding FEU and its President jointly and severally liable for damages. Is the judgment of the court against FEU‟s President correct?

110

Benguet Electric Cooperative, Inc. vs. NLRC, 209 SCRA 55.

111

Mindanao Motor Line, Inc. vs. Court of Industrial Relations, 6 SCRA 710; Asked, 1968 and 1999 Bar Exams. 112 Solidbank Corporation vs. Mindanao Ferroalloy Corporation, et al., 464 SCRA 409, July 28, 2005. 113 Prudential Bank vs. Alviar, 464 SCRA 353. 114

Pabalan vs. NLRC, 184 SCRA 495; Asked, 1996 Bar Exams.).

28 A. A corporation is invested by law with a personality separate and distinct from those of the persons composing it, such that, save for certain exceptions, corporate officers who entered into contracts in behalf of the corporation cannot be held personally liable for the liabilities of the latter. Personal liability of a corporate director, trustee or officer along (although not necessarily) with the corporation may so validly attach, as a rule, only when (1) he assents to a patently unlawful act of the corporation, or when he is guilty of bad faith or gross negligence in directing its affairs, or when there is a conflict of interest resulting in damages to the corporation, its stockholders or other persons; (2) he consents to the issuance of watered down stocks or who, having knowledge thereof, does not forthwith file with the corporate secretary his written objection thereto; (3) he agrees to hold himself personally liable with the corporation; or (4) he is made by a specific provision of law personally answerable for his corporate action.115 None of the foregoing exceptions was established in this case, hence, FEU President de Jesus should not be held solidarily liable with FEU.116 Q. SSS filed an action against Impact Corporation and its directors for nonremittance of SSS premium contributions withheld by said corporation from its employees. Impact became insolvent and all directors died except director Garcia. Garcia claimed that only directors who participate in unlawful acts or are guilty of gross negligence and bad faith shall be personally liable, and that being a mere stockholder of the corporation, she could not be made liable. Is Garcia liable? A. Among the exceptions when a director is liable for the obligations of the corporation is ―when a director, trustee or officer is made, by specific provision of law, personally liable for his corporate action.‘ The situation of Garcia falls exactly under the aforesaid situation because Section 28 (f) of the Social Security Law imposes a civil liability upon its managing head, directors or partners for any act or omission pertaining to the violation of the Social Security Law when committed by a corporation, partnership or association.117 Q. When are directors/trustees liable for damages suffered by the corporation, its stockholders/members and other persons? A. Directors or trustees who (a) willfully and knowingly vote for or assent to patently unlawful acts of the corporation or (b) who are guilty of gross negligence or bad faith in directing the affairs of the corporation or (c) acquire any personal or pecuniary interest in conflict with their duty as such directors or trustees shall be jointly and

115

Powton Conglomerate Inc. vs. Agcolicol, 400 SCRA 523, April 3, 2003, cited in Saludaga vs. Far Eastern University, 553 SCRA 741, 755, April 30, 2008. 116 Saludaga vs. Far Eastern University, 553 SCRA 741, 755, April 30, 2008. 117 Garcia vs. Social Security System Commission Legal and Collection, 540 SCRA 459, 475, Dec. 17, 2007

29 severally liable for all damages resulting therefrom suffered by the corporation, its stockholders or members and other persons.118 In letter (c) mentioned above, the director, trustee or officer who attempts to acquire or acquires, in violation of his duty, any interest adverse to the corporation in respect of any matter which has been reposed in him in confidence, shall likewise be liable as a trustee for the corporation and must account for the profits which otherwise would have accrued to the corporation.119 Consistent with the foregoing provision, it has been held that personal liability of a corporate director, trustee or offer along (although not necessarily) with the corporation may so validly attach, as a rule, only when (1) he assents to a patently unlawful act of the corporation, or when he is guilty of bad faith or gross negligence in directing its affairs, or when there is a conflict of interest resulting in damages to the corporation, its stockholders or other persons; (2) he consents to the issuance of watered down stocks or who, having knowledge thereof, does not forthwith file with the corporate secretary his written objection thereto; (3) he agrees to hold himself personally liable with the corporation; or (4) he is made by a specific provision of law personally answerable for his corporate action.120 Q. Petitioner D. M. Wenceslao and Associates, Inc. (WENCESLAO) had a contract with the Public Estates Authority for the improvement of the main expressway along the Coastal Road. To fulfill its obligations to the PEA, the petitioner entered into a contract with the respondent where Readycon Trading and Construction Corporation (READYCON) agreed to sell to petitioner asphalt materials valued at P 1.7 M. The contract bore the signature of co-petitioner Dayrit, the vice-president of the WENCESLAO. It was agreed that WENCESLAO would pay 20% upon delivery and the remaining balance was to be paid 15 days thereafter. It was further stipulated that READYCON was to furnish, deliver, lay, roll the asphalt, and if necessary, make the needed corrections on a prepared base at the jobsite. READYCON delivered, laid and rolled the asphalt. WENCESLAO failed to pay the balance contending that it was payable only upon acceptance of the work by the government. READYCON filed a complaint against WENCESLAO and Dayrit. Can Dayrit be made personally liable for the corporation‟s failure to comply with its obligation? A. Since Dayrit merely acted as representative of Wenceslao, in signing the contract, he could not be made personally liable for the corporation‘s failure to comply with its obligation.121 118

Section 31, paragraph 1.

119

Section 31, par. 2; Asked, 1996 and 1997 Bar Exams.

120

Powton Conglomerate Inc. vs. Agcolicol, 400 SCRA 523, April 3, 2003. D. M. Wenceslao and Associates, Inc. vs. Readycon Trading and Construction Corp., 433 SCRA 251, June 29, 2004. 121

30 Q. The officers and directors of Crispa, Inc. passed a resolution terminating several workers on the ground of serious business losses. The dismissed employees filed an action for illegal dismissal. Crispa was unable to prove its financial losses and merely presented a Statement of Profit and Losses which did not bear the signature of a certified public accountant nor audited by an independent auditor. The NLRC found the officers and directors of Crispa solidarily liable with said corporation for the payment of back wages and separation pay. Was such decision correct? A. Corporate officers and directors are solidarily liable with the corporation for the termination of employment of corporate employees done with malice or in bad faith. They were the ones, who as high-ranking officers and directors of Crispa signed the board resolution retrenching the employees on the feigned ground of serious business losses that had no basis apart from an unsigned and unaudited Profit and Loss Statement which has no evidentiary value whatsoever. This is indicative of bad faith on the part of the officers and directors for which they can be held jointly and severally liable with Crispa for all the money claims of the illegally terminated employees.122 Q. Cuesta sold to Tramat Mercantile, Inc. a tractor. In payment thereof, David Ong, Tramat‟s president and manager, issued a check. Tramat in turn, sold the tractor together with a lawn mower fabricated by it to NAWASA. Ong stopped payment of the check issued to Cuesta on the ground that NAWASA refused to pay the tractor and lawn mower because of some defects in the mower and that the engine of the tractor was a reconditioned unit. Cuesta sued Tramat and Ong. Was Ong liable? A. Ong was not liable because he acted not in his personal capacity, but as an officer of Tramat which has a distinct personality. Only the corporation and not the person acting for and on its behalf could be made liable thereon. Personal liability of a corporate director, trustee or officer along with the corporation (although not necessarily) may so validly attach, as a rule, only when – 1. He assents (a) to a patently unlawful act of the corporation, or (b) for bad faith or gross negligence in directing its affairs, or (c) for conflict of interest, resulting in damages to the corporation, its stockholders or other persons; 2. He consents to the issuance of watered stocks or who, having knowledge thereof, does not forthwith file with the corporate secretary his written objection thereto; 3. He agrees to hold himself personally and solidarily liable with the corporation; or 4. He is made, by a specific provision of law, to personally answer for his corporate action.123 122

123

Uichico vs. NLRC, 273 SCRA 35. Tramat Mercantile, Inc. vs. Court of Appeals, 238 SCRA 14; Asked, 1995 and 1996 Bar Exams.

31

Q. Define dividend. A. Dividend is that portion of the profits and surplus funds of the corporation which has been actually set apart, by a valid act of the corporation, for distribution among the stockholders according to their respective interests.124 It is the fund set aside and declared by the directors of the corporation and in case of stock dividends, with the approval (sic) of the stockholders, to be divided or distributed among the stockholders according to their respective interests.125 The term is also used to designate the shares of the individual stockholders or members in the fund so set apart, and also to designate the assets distributed by a corporation among its stockholders out of capital on reduction of the capital stock or dissolution.126 Corporate profits when set apart, declared and ordered by the directors for distribution among the shareholders are known as dividends.127 Q. Distinguish dividends from profits. A. Dividends are declared only from profit after they are earned. 128 Profits in the coffers of a corporation do not become a dividend until they have been set apart or at least declared as a dividend.129 Q. What may be the source of payment of dividends? A. A corporation cannot lawfully declare dividends out of its capital stock, and thereby reduce the same, or out of assets which are needed to pay the corporate debts. They can be declared only out of surplus profits.130 The reason for the rule is that it would be a fraud upon the creditors of a corporation who extend credit to it on the faith of its capital stock, to permit it to be diverted by a distribution among the stockholders as dividends. Moreover, each stockholder is entitled to have the capital stock preserved

124 125

128

14 C. J. Sec. 1207. Nielson & Co., Inc. vs. Lepanto Consolidated Mining Co., 26 SCRA 542. 126

11 Fletcher Cyc. Corp., Sec. 53 18, p. 603; Asked, 1990 Bar Exams.

127

SEC Opinion, January 3, 1983.

Indiana Veneer and Lumber Co. vs. Hageman, 57 Ind. App. 668, 105 NE 253. Lord v. Territory of Hawaii, 79 F 2d, 761; 11 Fletcher Cyc. Corp., Sec. 5319, p. 609; Asked, No. V, b, 2005 Bar Exams. 130 11 Fletcher Cyc. Corp. Sec. 5319, 611; Steinberg vs. Velasco, 52 Phil. 953; Asked, No. V, a, 2005 Bar Exams. 129

32 unimpaired for the purpose of carrying out the object for which the corporation is formed.131 Q. What is the effect of declaration of stock dividends? A. The declaration of stock dividends is akin t5o a forced purchase of stocks. By declaring stock dividends, a corporation ploughs back a portion or its entire unrestricted retained earnings either to its working capital or for capital asset acquisition or investments. When the dividend is distributed, it ceases to be a property of the corporation as the entire portion or its unrestricted retained is distributed pro rata to corporate stockholders. When stock dividends are distributed, the amount declared ceases to belong to the corporation but is distributed among the stockholders. Consequently, the unrestricted retained earnings of the corporation are diminished by the amount of the declared dividend while the stockholders‘ equity is increased.132

THE SECURITIES REGULATION CODE Q. What are the provisions under the Securities Regulation Code intended to protect the interest of shareholders? A. The following are the provisions under the Securities Regulation Code intended to protect the interest of shareholders: (1) Tender offers to stockholders whenever any person or group of persons intends to acquire 15% of the equity of a listed corporation or one with a capital of at least P50 million, or 30% of the equity of such corporation over a period of 12 months, as the case may be.133 (2) Restrictions on proxy solicitations;134 and (3) Requirements for internal record-keeping and accounting controls.135 Q. What is a “tender offer”? What is its purpose? A. A ―tender offer‖ is a publicly announced intention by a person acting alone or in concert with other persons to acquire equity securities of a public company i. e., one listed on an stock exchange. It is also defined as an offer by the acquiring person to

131

132

14 C. J. Sec. 1210; Asked, 1953 and 1957 Bar Exams.; No. V c, 2005 Bar Exams.

PLDT vs. NTC, 539 SCRA 365, December 4, 2007. Section 19.1, Asked, No. VI, 2002 Bar Exams. 134 Section 20. 135 Section 22. 133

33 stockholders of a public company for them to tender their shares therein on the terms specified in the offer.136 Tender offer is in place to protect the interests of minority stockholders of a target company against any scheme that dilutes the share value of their investments. It affords such minority shareholders the opportunity to withdraw or exit from the company under reasonable terms, a change to sell their shares at the same price as those of the majority stockholders.137 Q. When must tender offer be made to shareholders? A. Any person or group of persons acting in concert who intends to acquire at least fifteen percent (15%) of any class of any equity security of a listed corporation or of any class of any equity security of a corporation with assets of at least Fifty million pesos (P50,000,000.00) and having two hundred (22) or more stockholders with at least one hundred (100) shares each or who intends to acquire at least thirty percent (30%) of such equity over a period of twelve (12) months shall make a tender offer to stockholders by filing with the Commission a declaration to that effect; and furnish the issuer, a statement containing such of the information required in Section 17 of this Code as the Commission may prescribe. Such person or group of persons shall publish all requests or invitations for tender, or materials making a tender offer or requesting or inviting letters of such a security. Copies of any additional material soliciting or requesting such tender offers subsequent to the initial solicitation or request shall contain such information as the Commission may prescribe, and shall be filed with the Commission and sent to the issuer not later than the time copies of such materials are first published or sent or given to security holders.138 Q. SSS, a government financial institution took steps to sell its shareholdings in Equitable PCI Bank (EPCIB). SSS and Banco de Oro and its subsidiary entered into Share Purchase Agreement (SPA) covering SSS‟s shares in EPCIB at P43.50 per share which was at a premium of 30% of the then market value in the stock market where the shares were traded at P34.50 per share. SSS advertised an invitation to bid its block of shares in EPCIB subject to the right of BDO to match the highest bid. Petitioners filed the present action for prohibition. In the meantime, BDO and EPCIB announced its intention to merge. SM Investment Corporation, an affiliate of BDO commenced a mandatory tender offer of the entire outstanding capital stock of EPCIB at P92.0 per share. SSS manifested in court that the case is already moot in view of the tender offer for P92.00 per share. Petitioners claimed that the tender offer cannot render the case moot and academic unless SSS withdraws the sale of the shares under its Share Purchase Agreement. Decide with reasons.

136

Osmena III vs/ Social Security System of the Philippines, 533 SCRA, Sept. 13, 2007. Ibid. 138 Section 19.1; Asked, No. VI, 2002 Bar Exams. 137

34 A. The case is already moot and academic. The condition under which the parties have agreed into a SPA case to exist because of the tender offer at a higher price. The pricing component – at P43.50 per share – has ceased to exist.139 Q. What is the meaning of “Swiss Challenge”? A. Under the ―Swiss Challenge‖ format, one of the bidders is given the option or preferential right to match the winning bid.140

PRESIDENTIAL DECREE NO. 902-A (As amended by Securities Regulation Code) Q. Which court has jurisdiction over cases previously cognizable by the SEC? A. The court designated by the Supreme Court as Special Commercial Court is vested with jurisdiction over cases previously cognizable by the Securities and Exchange Commission. When a case is erroneously filed in the regular Regional Trial Court, such court does not have the authority or power to order the transfer of cases erroneously filed with it to another branch of the Regional Trial Court – the only action that it could take on the matter is to dismiss the petition for lack of jurisdiction.141 Q. When may a party apply for the appointment of a management committee for the corporation, partnership or association? A. A party may apply for the appointment of a management committee for the corporation, partnership or association when there is imminent danger of: (1) Dissipation, loss, wastage or destruction or assets or other properties; and (2) Paralyzation of its business operations which may be prejudicial to the interest of the minority stockholders, parties-litigants or the general public. 142 Q. When may receivers be appointed for a corporation? A. Receivers may be appointed whenever: (1) necessary in order to preserve the rights of the parties-litigant, and/or 139

Osmena III vs. Social Security System of the Philippines, infra. Osmena III vs. Social Security System of the Philippines, 533 SCRA 313, 321, September 13, 2007. 141 Ibid. 142 Sy Chim vs. Sy Siy Ho & Sons, Inc., 480 SCRA 465, January 27, 2006, citing Section 1, Rule 9 of the Interim Rules on Corporate Rehabilitation. 140

35 (2) protect the interest of the investing public and creditors.143 The situations contemplated in these instances are serious in nature. There must exist a clear and imminent danger of losing the corporate assets if a receiver is not appointed.144 Q. What is the “Serious Situation Test” in corporate rehabilitation cases? A. The ―Serious Situation Test‖ in a petition for rehabilitation case means that there is a clear and imminent danger that the corporate petitioner will lose its corporate assets if a receiver is not appointed.145 Q. What is the effect of the appointment of a rehabilitation receiver? What is the purpose thereof? A. Upon appointment by the SEC (now, RTC Special Commercial Court) of a rehabilitation receiver, all actions for claims against the corporation pending before any court, tribunal or board shall ipso jure be suspended.146 The purpose of the automatic stay of all pending actions for claims is to enable the rehabilitation receiver to effectively exercise its/his powers free from any judicial or extrajudicial interference that might unduly hinder or prevent the rescue of the corporation. More importantly, the suspension of all actions for claims against the corporation embraces all phases of the suit, be it before the trial court or any tribunal or before the Supreme Court. No other action may be taken, including the rendition of judgment during the state of suspension. It must be stresses that what are automatically stayed or suspended are the proceedings of a suit and not just the payment of claims during the execution stage after the case had become final and executory.147 Q. What are the actions that are suspended during the process of rehabilitation? A. The actions that are suspended cover all claims against the corporation whether for damages founded on a breach of contract of carriage, labor cases, collection suits or any other claims of a pecuniary nature. No exception in favor of labor claims is mentioned in the law.148 Q. What is the purpose of suspending the proceedings initiated by the creditors for the collection of their credits whenever a corporation is undergoing rehabilitation? 143

Section 6 (c), P. D. 902-A, as amended. Pryce Corporation vs. Court of Appeals, 543 SCRA 657, February 4, 2008. 145 Pryce Corporation vs. Court of Appeals, supra. 146 Garcia vs. Philippine Air Lines, Inc., 531 SCRA 574. 147 Ibid. 148 Philippine Airlines, Inc. vs. Heirs of Bernardin J. Zamora, 538 SCRA 456, November 23, 2007. 144

36

A. The purpose for the suspension of the proceedings is to prevent a creditor from obtaining an advantage or preference over another and to protect and preserve the rights of party litigants as well as the interest of the investing public or creditors. Such suspension is intended to give enough breathing space for the management committee or rehabilitation receiver to make the business viable again, without having to divert attention and resources to litigations in various fora. The suspension would enable the management committee or rehabilitation receiver to effectively exercise its/his powers free from any judicial or extrajudicial interference that might unduly hinder or prevent the ―rescue‖ of the debtor company. To allow such other action to continue would only add to the burden of the management committee or rehabilitation receiver, whose time, effort and resources would be wasted in defending claims against the corporation instead of being directed toward its restructuring and rehabilitation.149 Q. What is the difference between Suspension of Payments under the Insolvency Law and suspension of payments of a corporation undergoing rehabilitation under Presidential Decree 902-A? A. Unlike the provisions in the Insolvency Law which exempts secured creditors from the suspensive effect of the order issued by the court in an ordinary suspension of payment proceedings, the provisions of P.D. No. 902-A, when it comes to the appointment of a management committee or a rehabilitation receiver, do not contain an exemption for secured creditors.150 Q. Victorias Milling Corporation (VMC) obtained loans from CICM Missionaries, Inc. and Congregation of the Most Holy Redeemer which were assigned to PICTD. When the loans matured, PICTD demanded payment from VMC which failed to pay. PITC filed a complaint against VMC with a prayer for preliminary attachment which the court granted. The court lifted the attachment when VMC filed a counterbond. Thereafter, VMC filed with the SEC a petition to declare itself in a state of suspension of payments and sought the appointment of a management committee that would oversee its proposed rehabilitation plan. SEC ordered the suspension of all actions against VMC. PICTD filed a motion to lift the suspension of proceedings on the ground that it is a secured creditor having previously obtained an attachment over VMC‟s properties. Is the contention of PICTD correct. A. We are not persuaded by PICTD‘s argument that it should be exempt from the suspension order because it is a secured creditor. Unlike the provisions in the Insolvency Law which exempts secured creditors from the suspensive effect of the order issued by the court in an ordinary suspension of payment proceedings, the provisions of P.D. No. 149

Philippine Islands Corporation for Tourism Development, Inc. vs. Victorias Milling Company, Inc.. 554 SCRA 561, June 17, 2008. 150 Philippine Islands Corporation for Tourism Development, Inc. vs. Victorias Milling Company, Inc., supra.

37 902-A, when it comes to the appointment of a management committee or a rehabilitation receiver, do not contain an exemption for secured creditors.151 Q. What is the effect of the appointment of a management committee or rehabilitation receiver on the right of the secured creditor to foreclose the mortgage in its favor? A. The right to foreclose such mortgage is merely suspended upon the appointment of a management committee or rehabilitation receiver or upon the issuance of a stay order by the trial court. However, the creditor-mortgagee may exercise his right to foreclose the mortgage upon the termination of the rehabilitation proceedings or upon the lifting of the stay order.152 Q. What is the consequence if rehabilitation is no longer feasible and the assets of the corporation are finally liquidated? A. Secured creditors shall then enjoy preference over unsecured creditors, subject only to the provisions of the Civil Code on concurrence and preference of credits. Creditors of secured obligations may pursue their security interest on lien, or they may choose to abandon the preference and prove their credits as ordinary claims.153 NEGOTIABLE INSTRUMENTS Q. The promissory note signed by the makers reads, “Received from Atty. Dionisio V. Llamas, the sum of P4,000, Philippine currency payable on or before January 23, 1997 at No. 144 K-10 Kamias, Quezon City, with interest at the rate of 5% per month or fraction thereof. It is understood that our liability under this loan is jointly and severally.”(sic). Is the said promissory note negotiable? A. By its terms, the note was made payable to a specific person rather than to bearer or to order – a requisite for negotiability under the Negotiable Instruments Law. Hence, the note is non-negotiable.154 Q. Is a stipulation that payment will be made in a foreign currency stated in the instrument valid? Does it affect negotiability? A. An obligation for the payment of money may be discharged by payment in a currency which is the legal tender in the Philippines.155 However, a stipulation to pay in a foreign currency shall be valid and the obligation need not be converted to its equivalent in Philippine peso at the rate of exchange prevailing at the time of payment.156 R. A. 529 151

Ibid. Consuelo Metal Corporation vs. Planters Development Bank, 465 SCRA 465. 153 Consuelo Metal Corporation vs. Planters Development Bank, 465 SCRA 465, June 26, 2008. 154 Garcia vs. Llamas, 417 SCRA 292, December 8, 2003. 155 Article 1249, Civil Code, as amended. 156 RA 529 as amended by RA 4100 and R. A. 8183; Asked, 1971 Bar Exams. 152

38 as amended, was repealed by R. A. 8183 which was enacted into law on June 11, 1996. Under the said law, all monetary obligations shall be settled in the currency which is the legal tender in the Philippines. However, the parties may agree that the obligation or transaction shall be settled in any other currency at the time of payment.157 Q. Casa Montessori had a current account with Bank of P. I. (BPI), with its President, Lebron as one of the signatories. In 1991, Casa discovered that nine of its checks had been encashed by a certain Sonny D. Santos from March, 1990 to December, 1990 by forging the signature of Lebron as drawer. It turned out that Sonny D. Santos was a fictitious name used by Yabut, an external auditor of Casa, who had account with BPI‟s Greenbelt Branch, using said fictitious name. Yabut admitted the forgery. Casa sued BPI for recovery of the amount of the checks debited by said bank from the account of Casa. BPI denied liability and claimed that Casa was negligent while said bank was not. Decide with reasons. A. The signatures of the drawer of the checks were forged and therefore, the drawer is deemed to have never become a party thereto and to have never consented to the contract that gave rise to it. BPI, the drawee erred in making payments by virtue thereof. The forged signatures are wholly inoperative, and Casa, the drawer whose authorized signatures do not appear on the negotiable instruments, cannot be held liable thereon. Neither is the latter precluded from raising the defense of forgery.158 Since banking business is impressed with public interest, of paramount importance thereto is the trust and confidence of the public in general. Consequently, the highest degree of diligence159 is expected, and high standards of integrity and performance are even required, of it.160 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.161 The drawer, despite signature verification, failed to deter the instances of forgery. Its negligence consisted in the omission of that degree of diligence required of a bank. A bank is bound to know the signatures of its customers; and if it pays a forged check, it must be considered as making the payment out of its own funds, and cannot ordinarily charge the amount so paid to the account of the depositor whose name was forged. BPI must therefore, return the amount of the checks it debited from the account of the drawer.162 Q. Samsung had a current account with FEBTC at its Makati Bel-Air branch. The sole signatory was Jong Kyu Lee. A certain Gonzaga presented to FEBTC at its Makati Bel-Air branch a check payable to cash for P999,500. After ascertaining that Samsung has sufficient balance to cover the check, the teller compared the signature on the check with the specimen signature of Jong as 157

R. A. 8183. Bank of the Philippine Islands vs. Casa Montessori Internationale, 430 SCRA 261, 283. 159 Ibid., citing Bank of P. I. vs. Court of Appeals, 383 Phil. 538. 160 Ibid., citing Section 2 of R. A. 8791, otherwise known as ―The General Banking Law of 2000.‖ 161 Ibid., citing Simex International (Manila), Inc. vs. Court of Appeals, 232 SCRA 559. 162 Bank of the Philippine Islands vs. Casa Montessori Internationale, supra., citing San Carlos Milling Co. vs. Bank of P. I., 50 Phil. 59. 158

39 contained in the specimen signature card with the bank. After being satisfied of the authenticity of the signature on the check, the teller asked Gonzaga to submit proof of his identity, and the latter presented three identification cards. The teller forwarded the check to Velez, the senior assistant cashier pursuant to the bank policy requiring two officers to approve the check when the amount of the check for encashment was more than P100,000. Velez concluded that the check was indeed signed by Jong. Velez forwarded the check to Syfu, another officer of the bank, for approval. Syfu noticed Sempio well-known to Syfu as assistant accountant of Samsung and showed the check to him. Sempio vouched for the genuineness of Jong‟s signature and said it was for the purchase of equipment for Samsung. Satisfied with the genuineness of Jong‟s signature, Syfu authorized the encashment of the check to Gonzaga and debited the payment from the account of Samsung. The following day, the forgery of the check was discovered. Samsung asked reimbursement from FEBTC which refused on the ground that Samsung was negligent while the bank was not. It turned out that Sempio stole the blank check and was presumably responsible for its encashment through the forged signature of Jong. (1) Is FEBTC liable to Samsung? Reasons. (2) Is the participation of Sempio sufficient to estop Samsung from raising the defense of forgery? Reasons. A. (1) FEBTC is liable since it authorized the discharge of the forged check. Such liability attaches even if the bank 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. The forgery may be so near like the genuine one as to defy detection by the depositor himself, and yet the bank is liable to the depositor if it pays the check.163 If payment is made by the drawee bank despite the forgery of the drawer‘s signature, the drawee cannot charge it to the drawer‘s account because the drawee is in a superior position to detect a forgery because he has the drawer‘s 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.164 (2) Samsung is not barred from raising the claim of forgery. The bare fact that the forgery was committed by an employee of the party whose signature was forged cannot do not possess the preternatural gift of cognition as to the evil that may lurk with the necessarily imply that such party‘s negligence was the cause of the forgery. Employers hearts and minds of their employees. It was incumbent upon FEBTC to prove that Samsung was negligent which it failed to do.165

163 164 165

Samsung Construction Company Philippines, Inc. vs. Far East Bank & Trust Co., 436 SCRA 402. Ibid. Samsung Construction Company Philippines, Inc. vs. Far East Bank and Trust Co., supra.

40 Q. To settle their tax obligations to the Bureau of Internal Revenue, plaintiffs purchased from Traders Royal Bank (TRB) three manager‘s checks payable to the order of BIR, for a total of P9,790,716.87. Said checks, one of which was a crossed check were turned over to Vera, plaintiffs‘ controller who was supposed to deliver the same to the BIR. Later, BIR assessed the plaintiffs again for tax liabilities and it was then that they discovered that said manager‘s checks were never paid to the BIR. Instead, the checks were presented for payment by unknown persons allegedly to Security Bank (SB) which in turn, allegedly indorsed the check for collection. What if any, are the liabilities of TRB and SB? A. The three manager‟s checks issued by TRB were payable to the BIR and yet said checks were never delivered or paid to the BIR but were presented for payment by some unknown persons who, in order to receive payment therefor, forged the name of the payee. Despite this fraud, TRB paid the three checks. TRB ought to know that when a check is drawn payable to order and is presented for payment, it is the primary duty of said bank to know that the check was duly indorsed by the original payee and where it pays to a third person who forged the signature of the payee, the loss falls upon TRB who cashed the check. Aside therefrom, one of the checks was crossed. The crossing of one of the checks should have put TRB on guard; it was duty-bound to ascertain the indorser‟s title to the check or the nature of his possession. By encashing the checks in favor of unknown persons checks which were on their face payable to the BIR, a government agency which can only act through its agents, TRB did so at its peril and must suffer the consequences of the unauthorized or wrongful endorsement. TRB cannot exculpate itself from liability. Its only remedy is against the person to whom it paid the money. If proven that SB was a collecting bank which indorsed the checks bearing a forged indorsement and presents it to the drawee bank, it should ultimately be bound to pay. However, it is doubtful if the checks were ever presented to and accepted by SB so as to hold it as a collecting bank.166 Q. Ford drew and issued a check drawn against Citibank payable to the order of the Commissioner of Internal Revenue for the payment of taxes. Later, Ford drew another check likewise payable to the order of the Commissioner of Internal Revenue. Both checks were crossed checks. It turned out that an accountant of Ford, Rivera instead of delivering the checks to the payee, passed them on to a co-conspirator, Castro, a promanager of PCIB who opened a checking account in the name of a fictitious person, ―Reynaldo Reyes‖ at PCIB branch in Meralco. A worthless check in exactly the same amount as the first Ford check was deposited in said account and while this worthless 166

Traders Royal Bank vs. Radio Philippines Network, Inc., 390 SCRA 608.

41 check was en route to the Central Bank for clearing, it was replaced with Ford‘s first check. As a result the Ford check was cleared by Citibank, and the fictitious account of ―Reynaldo Reyes‖ was credited with the amount of the Ford check. The same method was used for the second Ford check. PCIB stamped at the back of the checks, ―all prior indorsements and/or lack of indorsements guaranteed.‖ Citibank in turn, debited the amount paid from the account of Ford. From the ―Reynaldo Reyes‖ account, checks were issued in favor of the members of the syndicate and thus, the deposit was effectively withdrawn. The amount of the checks was never paid to or received by the payee, the Commissioner of Internal Revenue. As a consequence, BIR demanded from Ford payment of the tax anew. What, if any are the liabilities of the drawee, Citibank and the collecting bank, PCIB? A. As drawee, Citibank should have scrutinized the checks before paying the proceeds thereof. Had Citibank examined the checks it would have discovered that the clearing stamps on the checks do not bear any initials. For this reason, Citibank had indeed failed to perform what was incumbent upon it, which is to ensure that the amount of the checks should be paid only to its designated payee. The fact that the drawee bank did not discover the irregularity seasonably, constitutes negligence in carrying out its duty to its depositors. Citibank breached its contractual obligation to the drawer, Ford. Citibank therefore, is liable to Ford. Castro as pro-manager of PCIB and his co-conspirator performed their activities using facilities in their official capacity or authority but for their personal and private gain or benefit. A bank hold out its officers and agents as worthy of confidence will not be permitted to profit by the fraud of these officers or agents; nor will it be permitted to shirk its responsibility for such frauds, even though no benefit may accrue to the bank therefrom. The bank is liable for the fraudulent acts or representations of an officer or agent acting within the course and apparent scope of his employment or authority. Hence, PCIB is liable to Ford. Both PCIB and Citibank failed in their respective obligations and both were negligent in the selection and supervision of their employees resulting in the encashment of the checks of Ford. Thus, both of them are equally liable for the proceeds of the checks to Ford. However, the contributory negligence of Ford in failing to examine its passbook, statements of account, and cancelled checks and to give notice within a reasonable time, serves to mitigate the banks‘ liability by reducing the award of interest from 12% to 6% per annum.167 Q. Yang and Chandiramani entered into an agreement whereby the latter was to give Yang a PCIB manager‘s check in the amount of P4.2 million in exchange for two of Yang‘s manager‘s checks in the amount of P2.087 million, both payable to the order of David. Yang and Chandiramani agreed that the difference of P26,000 in the exchange would be their profit to be divided equally between them. They also agreed that Yang 167

Philippine Commercial International Bank vs. Court of Appeals, 350 SCRA 446.

42 would secure a dollar draft from FEBTC for US $200,000 payable to PCIB FCDU Account No. 4195-001165-2 which Chandiramani would exchange for another dollar draft in the same amount to be issued by Hang Seng Bank of Hongkong. Yang procured two manager‘s checks for P2.087 million both payable to David and a dollar draft payable to said PCIB FCDU Account for US $200,000. At about one o‘clock in the afternoon, Yang delivered the said checks and dollar draft to a business associate, Liong who in turn delivered them to his messenger, Ramigo. The latter was supposed to meet Chandiramani and give him the manager‘s checks and dollar draft in exchange for a PCIB manager‘s check for P4.2 million and a Hang Seng Bank dollar draft for US $200,000. At half past four in the afternoon Ramigo reported that he lost the checks and draft. It turned out however, that the checks and draft were not lost, for Chandiramani was able to get hold of the said instruments, without delivering the exchange consideration consisting of the PCIB manager‘s check and the Hang Seng Bank dollar draft. At three o‘clock in the afternoon, Chandiramani delivered to David the two manager‘s checks in exchange for US $360,000 which Chandiramani deposit in the savings account of his wife and mother. Chandiramani also deposited the dollar draft in PCIB FCDU Account No. 4195-01165-2 on the same date. Later, Yang sued the banks, Chandiramani and David. David claimed to be a holder in due course but Yang countered that he was not a holder in due course as there was no showing that he gave Chandiramani any consideration of value in exchange for the aforementioned checks. Was consideration given by David in exchange for the manager‘s checks or was he a part of Chandiramani‘s scheme to defraud Yang? A. Section 24 of the Negotiable Instruments Law creates a presumption that every party to an instrument acquired the same for a consideration or for value. Thus, the law itself creates a presumption in David‟s favor that he gave valuable consideration for the checks in question. In alleging otherwise, Yang has the onus to prove that David got hold of the checks absent said consideration. In other words, Yang must present convincing evidence to overthrow the presumption. Yang failed to discharge her burden of proof. Yang‟s averment that David did not give valuable consideration when he took possession of the checks is unsupported, devoid of any concrete proof to sustain it. On the contrary, it was shown that David did not receive the checks gratis but instead gave Chandiramani US $360,000 as consideration for the said checks.168 Q. Ybanez authorized Saban to sell his 1,000 sq. m. lot in Cebu City for P200,000 with the agreement that Saban may mark up the selling price to cover the taxes, transfer of title and other expenses of the sale, as well as Saban‘s commission for the sale. Saban was able to sell the property to Lim for P600,000, inclusive of commission, taxes and other incidental expenses. Lim paid P200,000 to Ybanez, remitted to Saban P113,257 for payment of the taxes and P50,000 as broker‘s commission. Lim also issued four postdated checks in the name of Saban in the total sum of P236,743. Ybanez asked Lim to cancel the postdated checks issued in favor of Saban 168

Yang vs. Court of Appeals, 409 SCRA 159.

43 because the latter was not a licensed real estate broker and not entitled to any commission for the sale since he concealed the actual selling price. Lim cancelled the checks. Saban sued Lim for the amount of the four postdated checks. It was claimed that Lim was merely an accommodation drawer of Ybanez. Decide with reasons. A. Under Section 29 of the Negotiable Instruments Law, the accommodation party is one who meets all of the following requisites: (1) he signed the instrument as maker, drawer, acceptor or indorser; (2) he did not receive value for the signature; and (3) he signed for the purpose of lending his name to some other person. While Lim signed as drawer of the checks she did not satisfy the two other remaining requisites. She drew the checks in payment of the balance of the purchase price of the lot subject of the transaction. In other words, the amounts covered by the checks form part of the cause or consideration for the purchase of the lot, ergo, Lim received value for her signature on the checks. Neither is there any indication that Lim issued the checks for the purpose of enabling Ybanez, or any other person to obtain credit or to raise money, thereby totally debunking the presence of the third requisite of an accommodation party. Lim was not therefore, an accommodation party, and she was liable for the amounts of the check to Saban.169 Q. Stelco sold steel bars and G. I. Wire to RYL Construction. At the behest of Romeo Y. Lim, President of RYL Construction, Limson and Torre issued a check on behalf Steelweld payable to bearer by way of accommodation ―only as guaranty but not to pay for anything.‖ R.Y.Lim indorsed the check and gave it to Armstrong Industries which in turn, indorsed and deposited the same in its account. The check was dishonored. Stelco filed an action against Steelweld, the drawer. Can Steelweld be made liable by Stelco? A. Stelco cannot hold Steelweld liable there being no showing that Stelco was a holder for value of the check. Possession by Stelco of the check after presentment and dishonor or payment, is utterly inconsequential; it does not make the possessor a holder for value within the meaning of the law; it gives rise to no liability on the part of the maker or drawer and indorsers. There is even no evidence that Armstrong Industries to whom R.Y.Lim negotiated the check accepted the instrument and attempted to encash it in behalf of and as agent of Stelco.170 Q. Pursuant to a business transaction with Chandiramani, Yang obtained two cashier‘s checks payable to the order of David which were supposed to be delivered by Chandiramani to David in exchange for cash. Chandiramani gave David the checks and the latter gave the former the cash agreed upon. Chandiramani did not give Yang the 169 170

Lim vs. Saban, 447 SCRA 233. Stelco Marketing Corp. vs. Court of Appeals, supra.

44 cash and instead deposited the same in the accounts of his wife and mother. Yang sued David who claimed to be a holder in due course. Can David, the payee of the checks be considered a holder in due course? A. Every holder of a negotiable instrument is deemed prima facie a holder in due course. However, this presumption arises only in favor of a person who is a holder as defined in Section 191 of the Negotiable Instruments Law, meaning a “payee or indorsee of a bill or note, who is in possession of it, or the bearer thereof.” David was the payee of the checks in question who was in possession thereof and therefore, a holder. The weight of authority sustains the view that a payee may be a holder in due course. The presumption that every holder is deemed prima facie to be a holder in due course applies in his favor. However, said presumption may be rebutted. In case any of the qualifications of a holder in due course provided for in Section 52 was proven to be lacking, David cannot be deemed a holder in due course.171 Q. Astro was granted several loans by Philtrust evidenced by three promissory notes payable to the order of Philtrust. Roxas signed notes twice, as President of Astro and in his personal capacity. Philguarantee with the consent of Astro guaranteed in favor of Philtrust the payment of 70% of Astro‘s loans, subject to the condition that upon payment by Philguarantee, it shall be proportionately subrogated to the rights of Philtrust. As a result of Astro‘s failure to pay its loan, Philguarantee paid 70% of the guaranteed loan to Philtrust. Philguarantee subsequently sued Astro and Roxas. Roxas disowned liability and claimed that he merely signed his name in blank and the phrases ―in his personal capacity‖ and ―in his official capacity‖ were fraudulently inserted. Can Roxas be made liable? A. Roxas signed the promissory notes twice: first, as president of Astro and second, in his personal capacity. Since he signed the notes twice, it necessarily implied that he was undertaking the obligation in the notes in two different capacities, official and personal. Persons who write their names on the face of promissory notes are makers, promising that they will pay to the order of the payee or any holder according to its tenor. Thus, even without the phrase ―personal capacity,‖ Roxas will still be primarily liable under the notes.172 Q. Tuazon purchased rice from Ramos. In payment of the rice, Tuazon indorsed the checks issued by Santos and gave the same to Ramos. The checks bounced. An action was filed by Ramos against Tuazon for collection of the amount of the checks, without including the drawer of the checks, Santos. Was the non-inclusion of Santos in the action fatal to the case filed by Ramos? 171 172

Yang vs. Court of Appeals, 409 SCRA 159, 168-169. Astro Electronics Corporation vs. Philguarantee, 411 SCRA 462.

45

A. As indorser, Tuazon warranted that upon due presentment, the checks were to be accepted or paid, or both, according to their tenor; and that in case they were dishonored, she would pay the corresponding amount. After an instrument is dishonored by nonpayment, indorsers cease to be merely secondarily liable; they become principal debtors whose liability becomes identical to that of the original obligor. The holder of a negotiable instrument need not even proceed against the drawer before suing the indorser. Clearly, Santos – as the drawer of the checks is not indispensable party in action against Tuazon, the indorser of the checks.173 Q. Ford drew two checks against Citibank to pay percentage taxes, payable to the Commissioner of Internal Revenue. Both checks were ―crossed checks‖ and contained two diagonal lines on its upper left corner between which were written the words, ―payable to the payee‘s account only.‖ The checks never reached the payee for which reason the BIR demanded payment of the taxes from Ford. Instead the checks were deposited with PCIBank in the name of Reynaldo Reyes, a fictitious person. PCIB sent them to the Central Clearing with the indorsement at the back, ―all prior indorsements and/or lack of indorsement guaranteed,‖ and were presented to and paid by the drawee bank, Citibank. Who can be made liable by Ford, PCIBank as collecting bank or Citibank, the drawee bank? A. PCIBank is liable. Since the questioned checks were deposited with PCIBank, it had the responsibility to make sure that the check in question is deposited in payee‟s account only, Indeed, the crossing of the check with the phrase “Payee‟s Account Only” is a warning that the check should be deposited only in the account of the Commissioner of Internal Revenue. Thus, it is the duty of the collecting bank PCIBank to ascertain that the check be deposited in payee‟s account only. Therefore, it is the collecting bank (PCIBank) which is bound to scrutinize the check and to know its depositors before it could make the clearing indorsement “all prior indorsements and/or lack of indorsement guaranteed.” The drawee bank has a right to believe that the cashing bank (or the collecting bank) had, by the usual proper investigation, satisfied itself of the authenticity of the negotiation of the checks.174 Q. Plaintiffs purchased from defendant Traders Royal Bank three manager‘s checks payable to the Bureau of Internal Revenue. One of the said checks were crossed. The checks were never delivered to the payee but were presented for payment by

173

Tuazon vs. Heirs of Bartolome Ramos, 463 SCRA 408, 416-417, citing Metropol vs. Sambok Motors Co., 205 Phil. 758, 762; 120 SCRA 864, 868. 174 Philippine Commercial International Bank vs. Court of Appeals, 350 SCRA 446, 467-468, citing Banco de Oro Savings and Mortgage Bank vs. Equitable Banking Corporation, 157 SCRA 188.

46 unknown persons who forged the signature of the payee. Traders Royal Bank paid the said checks. Is Traders Royal Bank liable? A. By encashing in favor of unknown persons checks which were on their face payable to the BIR, a government agency which can only act through its agents, Traders Royal Bank did so at its peril and must suffer the consequences of the unauthorized or wrongful endorsement. It should be noted further that one of the checks was crossed. The crossing of the check should have put Traders Royal Bank on guard; it was duty-bound to ascertain the indorser‘s title to the check or the nature of his possession. The bank should have known the effects of a crossed check: (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 he must inquire if he has received the check pursuant to that purpose, otherwise, he is not a holder in due course. Traders Royal Bank is therefore, liable.175 Q. Pursuant to a Compromise Agreement, Pio Barretto Realty delivered to Moslares a check in payment of the interest of the latter in a real property. Moslares never cashed the check nor questioned the tender done despite the lapse of three years. Later, Moslares claimed that the delivery of the check to him did not produce the effect of payment because he never cashed the check. Was Pio Barretto Realty discharged from its obligation to pay Moslares considering that the latter did not cash the check delivered to him? A. The fact that the check paid him by Pio Barretto Realty was never encashed should not be invoked against the latter. Moslares never questioned the tender of the check to him done three years earlier. While delivery of a check produces the effect of payment only when it is encashed, the rule is otherwise if the debtor was prejudiced by the creditor‘s unreasonable delay in presentment. Acceptance of a check implies an undertaking of due diligence in presenting it for payment. If no such presentment was made, the drawer cannot be held liable irrespective of loss or injury sustained by the payee. Payment will be deemed effected and the obligation for which the check was given as conditional payment will be discharged.176 Q. What is a Negotiable Order of Withdrawal (NOW) Account?

175 176

Traders Royal Bank vs. Radio Philippines Network, Inc., 390 SCRA 608, 614. Pio Barretto Realty Development Corporation vs. Court of Appeals, 360 SCRA 126.

47 A. Negotiable Order of Withdrawal (NOW) Account is an interest-bearing deposit account that combines the payable on demand feature of checks and the investment feature of savings accounts.177 Q. The check issued under the Negotiable Order of Withdrawal (NOW) Account is payable to a specific person and not to ―order‖ or to ―bearer‖. Is it negotiable? A. It is not negotiable since it does not comply with one of the requisites of negotiability that it must be payable to order or to bearer.178

TRANSPORTATION

IV – TRANSPORTATION

Q. What is a test to determine a common carrier? A. The test to determine a common carrier is whether the given undertaking is a part of the business engaged in by the carrier which he has held out to the general public as his occupation rather than the quantity or extent of the business transacted.179 Q. TCTSI, owned by Calvo, entered into a contract with SMC to transfer 114 reels of fluting paper and 124 reels of Kraft liner from the port area to the SMC warehouse in Ermita, Manila. The cargo was insured by UCPB. Upon delivery to the warehouse, it was found that 15 reels of fluting paper and 3 reels of kraft paper were damaged. SMC collected from UCPB which then as subrogee of SMC, brought a collection suit against TCTSI. Petitioner contends that she is not a common carrier but a private carrier because as a customs broker and warehouseman, she does not indiscriminately hold her services out to the public but only to select parties with whom she may contract in the course of her business. Is petitioner, a customs broker considered a common carrier? A. The petitioner is a common carrier. There is greater reason for holding the petitioner to be a common carrier because the transportation of goods is an integral part of her business. To uphold petitioner‘s contention would be to deprive those with whom 177 178 179

People vs. Reyes, 454 SCRA 636. Section 1; See People vs. Reyes, supra. Asia Lighterage and Shipping, Inc. vs. Court of Appeals, 409 SCRA 340, August 19, 2003.

48 she contracts the protection which the law affords them notwithstanding the fact that the obligation to carry goods for her customers is part and parcel of petitioner‘s business. The definition of common carriers under Article 1732 of the Civil Code makes no distinction between one who whose principal activity is the carrying of passengers or goods or both and one who does such carrying only as an ancillary activity. It does not make any distinction between a person or enterprise offering such service on a regular or scheduled service and one on an occasional basis. Neither does the article distinguish between carriers offering its services to the ―general public‖ nor one who offers services only from a narrow segment of the general population.180 Q. GPS Trucking Corporation undertook to deliver (30) units of Condura refrigerators aboard one of its Isuzu truck. While the truck was traversing the north diversion road it collided with an unidentified truck, causing it to fall into a deep canal, resulting in damage to the cargoes. FGU as insurer of the shipment, paid to Concepcion Industries, Inc., the value of the covered cargoes. FGU sought reimbursement of the amount it paid to Concepcion Industries from GPS. It was contended that GPS was only the exclusive hauler of Concepcion Industries, Inc., since 1988, and it was not so engaged in business as a common carrier. Respondent further claimed that the cause of damage was purely accidental. (a) May GPS be considered as a common carrier? (b) May GPS, either as a common carrier or a private carrier, be presumed negligent when the goods it undertook to transport safely were damaged while in its protective custody and possession? A. (a) No, GPS cannot be considered as a common carrier. GPS, being an exclusive contractor and hauler of Concepcion Industries, Inc., rendering or offering its services to no other individual or entity, cannot be considered a common carrier. Common carriers are persons, corporations, firms or associations engaged in the business of carrying or transporting passengers or goods or both, by land, water, or air, for hire or compensation, offering their services to the public, whether to the public in general or to a limited clientele in particular, but never on an exclusive basis. The true test of a common carrier is the carriage of passengers or goods, providing space for those who opt to avail themselves of its transportation service for a fee. GPS scarcely falls within the term "common carrier." (b) Yes, notwithstanding the fact that GPS cannot be considered as a common carrier it still cannot escape liability. In culpa contractual, upon which the action of petitioner rests as being the subrogee of Concepcion Industries, Inc., the mere proof of the existence of the contract and the failure of its compliance justify, prima facie, a corresponding right of relief. The law, recognizing the obligatory force of contracts, will not permit a party to be set free from liability for any kind of non-performance of the contractual undertaking or a contravention of the tenor thereof. A breach upon the

180

Calvo vs. UCPB General Insurance Co., Inc., 379 SCRA 510, March 19, 2002.

49 contract confers upon the injured party a valid cause for recovering that which may have been lost or suffered.181 Q. Will charter party of a vessel belonging to a common carrier necessarily convert the carrier into a private carrier? A. The public or common carrier shall remain as such, notwithstanding the charter of the whole or portion of a vessel by one or more persons, provided the charter is limited to the ship only, as in the case of a time-charter or voyage-charter. It is only when the charter includes both the vessel and its crew, as in a bare-boat or demise that a common carrier becomes private, at least insofar as the particular voyage covering the charterparty is concerned. The reason is that a shipowner in a time or voyage-charter retains possession and control of the ship, although her holds may, for the moment, be the property of the charterer.182 On the other hand, in a demise or bare-boat charter, the charterer will generally be considered as the owner of the voyage or service stipulated because the owner of the vessel completely and exclusively relinquishes possession, command and navigation of the vessel to the charterer. Thus, a demise or bare-boat charter indicates a business undertaking that is private in character. Consequently, the rights and obligations of the parties to a contract of private carriage are governed principally by their stipulations, not by the law on common carriers.183 Q. Loadstar Shipping Co., Inc. is the registered owner and operator of the vessel M/V Weasel. Loadstar entered into a voyage-charter with Northern Mindanao Transport Co., Inc. for the carriage of 65,000 bags of cement from Iligan City to Manila. The shipment was insured with Pioneer Asia Insurance Corp. M/V Weasel left Iligan City in good weather on June 24 at 12:50 in the afternoon. However, at 4:31 in the morning of June 25, the captain of M/V Weasel ordered the vessel to be forced aground. Consequently, the entire shipment of cement was damaged due to exposure to sea water. The insurer paid the consignee the amount of the shipment which was insured and claimed reimbursement from the Loadstar. Loadstar claimed that at the time of the voyage the carrier‟s voyage-charter converted it into a private carrier and thus, the presumption of negligence against common carriers cannot apply. Is such contention correct? A. The voyage-charter agreement between Loadstar and Northern Mindanao Transport did not in any way convert the common carrier into a private carrier. Loadstar remains a common carrier notwithstanding the existence of the charter agreement with Northern Mindanao Transport since the said charter is limited to the ship only and does not involve both the vessel and its crew. As a common carrier, Loadstar is required to 181

FGU Insurance Corporation vs. G. P. Sarmiento Trucking Corporation, 386 SCRA 312, August 6, 2002. 182 Planters Products, Inc. vs. Court of Appeals, 226 SCRA 476. 183 Lea Mer Industries, Inc. vs. Malayan Insurance Co., Inc., 471 SCRA 698, September 30, 2005.

50 observe extraordinary diligence in the vigilance over the goods it transports. When the goods placed in its care are lost, Loadstar is presumed to have been at fault or to have acted negligently. Loadstar has the burden of proving that it observed extraordinary diligence in order to avoid responsibility for the lost cargo.184 Q. Crisostomo contracted the services of Caravan, a travel agency to arrange and facilitate her booking, ticketing and accommodation for a package tour to Europe. Her niece who also worked for the agency went to her house to deliver petitioner‟s travel documents and plane tickets. Petitioner, in turn gave her the full payment for the package tour. Her niece informed her that her flight was on a Saturday. Without checking her travel documents, petitioner went to NAIA to take her flight. To her dismay she discovered that the flight she was supposed to take had already departed the previous day, a Friday. She learned that her plane ticket was for the flight scheduled the day before. She complained to Caravan which allowed the petitioner to take another tour to Europe but with a different itinerary. Upon her return she demanded from the travel agency reimbursement representing the difference between the sum she paid for her first tour and the amount she owed for the second tour. Caravan refused to reimburse the amount contending it was nonrefundable and it can no longer reimburse the amount paid considering that the same had already been remitted to its principal in Singapore which had already billed the same even if petitioner did not take the tour. Was the travel agency, Caravan a common carrier? A. Caravan, the travel agency was not a common carrier. Caravan was not an entity engaged in the business of transporting either passengers or goods and is therefore, neither a private nor a common carrier. Caravan did not undertake to transport petitioner from one place to another since its covenant with its customers is simply to make travel arrangements in their behalf. While petitioner concededly bought her plane ticket through the efforts of Caravan, this does not mean that the latter ipso facto is a common carrier. At most, Caravan acted merely as an agent of the airline, with whom petitioner ultimately contracted for her carriage to Europe. Caravan‘s obligation to petitioner in this regard was simply to see to it that petitioner was properly booked with the airline for the appointed date and time. Her transport to the place of destination, meanwhile, pertained directly to the airline. The object of petitioner‘s contractual relation with respondent is the latter‘s service of arranging and facilitating petitioner‘s booking, ticketing and accommodation in the package tour. In contrast, the object of a contract of carriage is the transportation of passengers or goods. It is in this sense that the contract between the parties in this case was an ordinary one for services and not one of carriage.185 Q. Is a travel agency required to exercise the same degree of extraordinary diligence of a common carrier? 184

185

Loadstar Shipping Co., Inc. vs. Pioneer Asia Insurance Corp., 479 SCRA 655, January 24, 2006. Crisostomo vs. Court of Appeals, (409 SCRA 528, August 25, 2003.

51

A. No, a travel agency not being a common carrier is not required to exercise the same degree of extraordinary diligence of a common carrier. The object of a passenger‘s contractual relation with a travel agency is the latter‘s service of arranging and facilitating passenger‘s booking, ticketing and accommodation in the package tour. In contrast, the object of a contract of carriage is the transportation of passengers or goods. The contract between the passenger and a travel agency is an ordinary one for services and not one of carriage. Since the contract between the parties is an ordinary one for services, the standard of care required of a travel agency is only that of a good father of a family.186 Q. Two hundred forty two (242) coiled of Prime Cold Rolled Steel were consigned to Philippines Steel it was insured through Philippine First Insurance. When the shipment arrived it was discovered that four (4) coils were in bad order and was unfit for the intended purpose. Philippine Steel demanded payment for the loss from the insurance company but despite the receipt of the formal demand, it refused to pay Philippine Steel. Consequently Belgian Overseas as the common carrier paid for the damaged coils amounting to 506,086.50. Belgian Overseas thinking that is was subrogated to the rights of Philippine Steel instituted a complaint for recovery of the amount paid by them to the consignees as insured. However the lower court ruled that Belgian Overseas cannot recover from Philippines First Insurance because there is a presumption that the lost was due to its own negligence as a common carrier and therefore cannot recover from the insurance company. Was the ruling of the lower court correct? A. Yes. Well-settled is the rule that common carriers, from the nature of their business and for reasons of public policy, are bound to observe extraordinary diligence and vigilance with respect to the safety of the goods and the passengers they transport. Thus, common carriers are required to render service with the greatest skill and foresight and "to use all reasonable means to ascertain the nature and characteristics of the goods tendered for shipment, and to exercise due care in the handling and stowage, including such methods as their nature requires." The extraordinary responsibility lasts from the time the goods are unconditionally placed in the possession of and received for transportation by the carrier until they are delivered, actually or constructively, to the consignee or to the person who has a right to receive them. Owing to this high degree of diligence required of them, common carriers, as a general rule, are presumed to have been at fault or negligent if the goods they transported deteriorated or got lost or destroyed. That is, unless they prove that they exercise extraordinary diligence in transporting the goods.187 Q. The Department of Health (DOH) and Cooperative for American Relief Everywhere, Inc. (CARE) entered into an agreement wherein CARE would acquire 186

Crisostomo vs. Court of Appeals, supra. Belgian Overseas Chartering & Shipping N. V. vs. Philippines First Insurance Co., Inc., 383 SCRA, 23, June 5, 2002. 187

52 from the United States government donations of non-fat dried milk, and other food products to be transported and distributed to the intended beneficiaries in the Philippines. The government entered into a contract of carriage of goods with National Trucking and Forwarding Corporation (NTFC). The latter shipped 4,868 bags of non-fat dried milk through respondent Lorenzo Shipping Corporation (LSC). The consignee in the Bills of Lading was Abdurahman Jama, petitioner NTFC‟s branch supervisor. LSC‟s agent unloaded 4868 bags and delivered the goods to petitioner‟s warehouse. Before each delivery, the checkers of LSC‟s agent requested Abdurahman Jama to surrender the original bills of lading, but the latter merely presented delivery receipts. Abdurahman or his designated subordinates signed the delivery receipts upon completion of each delivery. Notwithstanding the precautions taken, the petitioner allegedly did not receive the subject goods which prompted the petitioners to file a complaint against LSC for breach of contract of carriage. May the LSC as carrier be held liable for its failure to exercise extraordinary diligence required of common carriers? A. Respondent LSC is not liable because it observed extraordinary diligence. 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 or rights. The presumption of fault or negligence may be overturned by competent evidence showing that the common carrier has observed extraordinary diligence over the goods. In this case, the respondent adequately proved that it exercised extraordinary diligence. Although, the original bills of lading remained with petitioner, respondent‘s agent demanded from Abdurahman Jama the certified true copies of the bills of lading. They also asked the latter to sign the cargo delivery receipts. The surrender of the original bills of lading is not a condition precedent for a common carrier to be discharged of its contractual obligation. If surrender of the bill of lading is not possible, acknowledgement of the delivery by signing the delivery receipt suffices. And this is what respondent did, making him not liable to petitioner although the latter allegedly did not receive the goods.188 Q. Navidad, then drunk, paid the fare and entered the EDSA LRT station. An altercation between the security guard and Navidad ensued while the latter was waiting for the train on the platform. As the train approached, Navidad fell on the tracks and was struck by the moving train killing him instantaneously. The operator of the train was an employee of Metro Transit that was contracted by Light Rail Transit Authority (LRTA). The widow of Navidad filed a suit against LRTA for damages. LRTA claimed that Navidad was not a passenger and that the train operator was not an employee of LRTA but that of Metro Transit. (a) Can LRTA be held liable as a common carrier even if the deceased had not yet boarded the train? (b) Can LRTA be made liable for the acts of the train operator who was not its employee? A. (a) LRT was liable as a common carrier. A contract of carriage was deemed created from the moment Navidad paid the fare and entered the LRT station, entitling 188

Republic vs. Lorenzo Shipping Corporation, 450 SCRA 550, February 7, 2005.

53 him to all the rights and protection under a contractual relation. LRTA was liable due to its failure to exercise extraordinary diligence imposed on a common carrier. Such duty to provide safety to its passengers so obligates it not only during the course of the trip but for so long as the passengers are within its premises and where they ought to be in pursuance of the contract of carriage. The foundation of LRTA‘s liability is the contract of carriage and its obligation to indemnify the victim arises from the breach of that contract by reason of its reason of its failure to exercise the high diligence required of the common carrier. (b) In the discharge of its commitment to exercise extraordinary diligence in ensuring the safety of passengers, a carrier may choose to hire its own employees or avail of the services of a third person to undertake the task. In either case, the common carrier is not relieved of its responsibilities under the contract of carriage.189 Q. What are the instances wherein the presumption of fault or negligence will not arise? A. The presumption of fault or negligence will not arise if the loss is due to any of the following causes: (1) Flood, storm, earthquake, lightning, or other natural disaster or calamity; (2) An act of the public enemy in war, whether international or civil; (3) An act or omission of the shipper or owner of the goods; (4) The character of the goods or defects in the packing or the container; or (5) An order or act of competent public authority.190

Q. J Trading Co. Ltd. Of Seoul, Korea, loaded a shipment of four units of parts and accessories on board the vessel of M/V “National Honor”. The shipment was for the delivery to Manila. The shipment was contained in two wooden crates. There was no marking on the outer portion of the crates except the name of the consignee. Upon arrival at the port of destination, the inspector found the cargoes in good condition. The stevedore began unloading the crates from vessel. It was at this time that the mid-portion of the wooden flooring of the crates snapped in the air, sending all its contents crashing down hard, resulting in extensive damage to the shipment. The shipper claims that the loss of the cargo was due to the common carrier‟s fault on the ground that the carrier‟s duty to exercise extraordinary diligence is extinguished only when the goods are directly discharged to the consignee. Is the shipper‟s contention proper?

189 190

Light Rail Transit Authority vs. Navidad, 397 SCRA 75, February 6, 2003. Ibid.

54 A. No. Under Article 1734 of the New Civil Code, the presumption does not apply in five causes. One of which is the ―character of the goods or defects in the packing or in the containers‖. To exculpate itself from liability, the common carrier has the burden to prove any of the five causes claimed by it by a preponderance of evidence. If the carrier succeeds, the burden of evidence is shifted to the shipper to prove that the carrier is negligent. On the one hand, ―defect‖ is the want or absence of something necessary for completeness or perfection: a lack or absence of something essential to completeness; a deficiency in something essential to the proper use for the purpose for which a thing is to be uses. On the other hand, ―inferior‖ means a poor quality, mediocre, or second rate. A thing may be of inferior quality but not necessarily defection. In other words, ―defectiveness‖ is not synonymous to ―inferiority‖. In the case at bar, the crate should have three solid and strong wooden batten placed side by side underneath or on the flooring of the crate to support its contents. However, in this case, although there were three wooden battens on its flooring, the middle batten, which carried the substantial volume of the cargo, had a knot hole, which considerably affected, reduced and weakened its strength.191 Q. Berde Plants delivered trees to C.F. Sharp, the General Agent of DSRSenator Lines for transportation and delivery to Saudi Arabia. Federal Phoenix Assurance insured the cargo against all risks. However, while in transit, the vessel and all its cargo caught fire. Federal Phoenix Assurance paid Berde Plants the amount of insurance for the cargo and demanded payment from C.F. Sharp. C.F. Sharp however, denied liability on the ground that such liability was extinguished when the vessel carrying the cargo was gutted by fire. Will a common carrier‟s liability be extinguished by reason of fire? A. The common carrier‘s liability will not be extinguished by reason of fire. Article 1734 of the Civil Code provides, common carriers are responsible for the loss, destruction, or deterioration of the goods, unless the same is due to any of the following causes only: 1. 2. 3. 4. 5.

Flood, storm, earthquake, lightning, or other natural disaster or calamity; Act of the public enemy in war, whether international or civil; Act or omission of the shipper or owner of the goods; The character of the goods or defects in the packing or in the containers; Order or act of competent public authority.

Fire is not one of those enumerated under the above provision which exempts a carrier from liability for loss or destruction of the cargo. Even if fire were to be considered a natural disaster within the purview of Article 1734, it is required under Article 1739 of the same Code that the natural disaster must have been the proximate and

191

Philippine Charter Insurance Corporation vs. Unknown Owner of the Vessel M/V ―National Honor‖, 463 SCRA 202, July 8, 2005.

55 only cause of the loss, and that the carrier has exercised due diligence to prevent or minimize the loss before, during or after the occurrence of the disaster.192 Q. San Miguel Corporation insured several cases of beer bottles with Philippine American General Insurance Co. Inc. The beer bottles were loaded on board the M/V Peatheray. When cleared by the Coast Guard, the vessel left the port of Mandaue for Bislig, Surigao del Sur. The weather was calm when the vessel started with the voyage. However, the following day there were strong winds and enormous waves which caused the vessel to list, keel over, and lose the cargo contained therein. Is the M/V Peatheray absolved from liability? A. The answer is in the affirmative. In order for common carriers are absolved from liability where the loss, destruction, or deterioration of goods is due to a natural disaster or calamity, it must further be shown that such natural disaster or calamity was the proximate and only cause of the loss, there must be ―an entire exclusion of human agency from the cause of the injury or the loss‖. Moreover, a common carrier is required to exercise due diligence to prevent or minimize the loss before, during and after the occurrence of the natural disaster. All this present, the common carrier is exempt from liability under the law for the loss of goods. Since the presence of strong winds and enormous waves was shown to be the proximate and only cause of the sinking of the M/V Peatheray and the loss of the cargo belonging to San Miguel Corporation, the carrier cannot be held liable for the said loss.193 Q. Petitioner Central Shipping Company received on board its vessel, M/V Central Bohol 376 pieces of apitong logs and undertook to transport said shipment to Manila for delivery to Alaska Lumber Co., Inc. During the voyage, the vessel encountered weather disturbance which caused the logs to shift in the hold of the vessel. Consequently, the vessel sunk together with the logs loaded therein. The weather disturbance was not a storm but strong southwest monsoon winds. The owner of the logs filed a complaint against petitioner for the loss of the logs due to the fault and negligence of the petitioner and its captain. The petitioner raised the defense that the proximate cause of the sinking of its vessel and its cargo was a natural disaster which could not be foreseen. Is the petitioner liable for the loss of the cargo? A. Yes, the petitioner is liable for the loss of the cargo because it failed to observe extraordinary diligence required of a common carrier, under Art 1733 of the Civil Code. In the event of loss, destruction or deterioration of the goods, common carriers are responsible; that is, unless they prove that such loss, destruction or deterioration was 192

193

DSR-Senator Lines vs. Federal Phoenix Assurance Co., Inc., 413 SCRA 14. October 7, 2003.

Philippine American General Insurance co., Inc. vs. MGG Marine Services, Inc., 378 SCRA 650.

56 brought about - - among others – by ―flood, storm, earthquakes, lightning or other natural disaster or calamity‖, as provided in Article 1734 of the Civil Code. In the present case, the weather disturbance encountered by the vessel was not a storm but a strong southwest monsoon winds. In other words, the defense of natural disaster or fortuitous event cannot be used by petitioner because the injury could have been avoided by the petitioner. Furthermore, petitioner failed to prove that such natural disaster or calamity was the proximate and only cause of the loss. The defense of fortuitous event or natural disaster cannot be successfully made when the injury could have been avoided by human precaution. Therefore, petitioner cannot be exempt from liability.194

Q. General Milling Corporation (GMC) contracted the services of Asia Lighterage as carrier to deliver the cargo to the GMC‟s warehouse. GMC insured the cargo with Prudential. The transport of said cargo was suspended due to a warning of an incoming typhoon. The carrier however, proceeded to pull the barge to seek shelter from the approaching typhoon and was tied down to other barges. A few days after, the barge developed a list because of a hole it sustained after hitting an unseen protuberance underneath the water. The hole was then patched with clay and cement. The barge was then towed to a terminal before it was brought to the consignee‟s wharf. The barge again ran aground due to strong current. To avoid the complete sinking of the barge, a portion of the goods was transferred to three other barges. The next day, the towing bits of the barge broke. It sank completely, resulting in the total loss of the remaining cargo. Prudential indemnified GMC for the loss and sought recovery from the carrier which refused to pay on the ground that it was not a common carrier but a private carrier and that if it were indeed a common carrier, it would be exempt from liability because the barge sank due to a typhoon. (a) Was the petitioner a common carrier or a private carrier? (a) Was the petitioner‟s liability extinguished ? A. (a) The principal business of the petitioner is that of lighterage and drayage and it offers its barges to the public for carry or transporting goods by water for compensation. Petitioner is a common carrier, not private. The Supreme Court held that petitioner is a common carrier whether carrying of goods is done on an irregular rather than scheduled manner, and with an only limited clientele. A common carrier need not have fixed and publicly known routes. Neither does it have to maintain terminals or issue tickets. (b) In the case at bar, the barge completely sank after its towing bits broke, resulting in the total loss of its cargo. Petitioner claims that this was caused by a typhoon; hence, it should not be held liable for the loss of the cargo. However, petitioner failed to prove that the typhoon is the proximate and only cause of the loss of the goods, and that it exercised due diligence before, during and after the occurrence of the typhoon to prevent 194

Central Shipping Company, Inc. vs. Insurance company of North America, 438 SCRA 511, September 20, 2004.

57 or minimize the loss. The evidence shows that, even before the towing bits of the barge broke, it had already previously sustained damage when it hit a sunken object. It even suffered a hole. Clearly, this could not be solely attributed to the typhoon. The partlysubmerged vessel was refloated but its hole was patched with only clay and cement. The patchwork was merely a provisional remedy, not enough for the barge to sail safely. Thus, when petitioner persisted to proceed with the voyage, it recklessly exposed the cargo to further damage. In addition, testimonies have shown that the petitioner still headed to the consignee‘s wharf despite knowledge of an incoming typhoon. Accordingly, the petitioner cannot invoke the occurrence of the typhoon as force majeure to escape liability for the loss sustained by the General Milling. Surely, meeting a typhoon head-on falls short of due diligence required from a common carrier. More importantly, the officers/employees themselves of petitioner admitted that when the towing bits of the vessel broke that caused its sinking and the total loss of the cargo, it was no longer affected by the typhoon. The typhoon then is not the proximate cause of the loss of the cargo; a human factor, i.e., negligence had intervened.195 Q. Wyeth-Pharma shipped on board an aircraft of KLM Royal Dutch Airlines at Dusseldorf, Germany oral contraceptives. The tablets were placed in cartons and were packed together in an aluminum container. Upon arrival of the shipment at the airport, it was delivered to the warehouse of the Philippine Skylanders, Inc. (PSI). To secure the release of the cargoes from PSI, to assess its customs duties, and to handle delivery to Hizon Laboratories Inc., Wyeth-Suaco engaged the services of Sanchez Brokerage. When Sanchez Brokerage picked up the cargoes, its representative acknowledged the receipt of the cargoes in good condition. Wyeth-Suaco being a regular importer, the Customs Examiner did not inspect the cargoes, which were then stripped from the aluminum containers and loaded inside two transport vehicles hired by Sanchez Brokerage. The cargoes however arrived in bad order because the cartons were wetted. May Sanchez Brokerage be held liable as a common carrier? A. Article 1732 of the Civil Code does not distinguish between one whose principal business activity is the carrying of goods and one who does such carrying only as an ancillary activity. The contention of Sanchez Brokerage that it is not a common carrier but a customs broker whose principal function is to prepare correct customs declaration and proper shipping documents as required by law is bereft of merit. It suffices that petitioner undertakes to deliver the goods for pecuniary consideration.196 Q. What is the diligence required of a common carrier? 195

196

Asia Lighterage and Shipping, Inc. vs. Court of Appeals, (409 SCRA 340, Autust 19, 2003. A.F. SANCHEZ BROKERAGE, INC. vs. CA, 447 SCRA 427, December 21, 2004.

58

A. A common carrier is mandated under Art. 1733 of the Civil Code, to observe extraordinary diligence in the vigilance over the goods it transports according to all the circumstances of each case. In the event that the goods are lost, destroyed or deteriorated, it is presumed to have been at fault or to have acted negligently, unless it proves that it observed extraordinary diligence. When a common carrier received the cargoes in good order, it was incumbent upon it to prove that it exercised extraordinary diligence in the carriage of the goods.197 Common carriers are obliged to observe extraordinary diligence in the vigilance over the goods transported by them. Accordingly they are presumed to have been at fault or to have acted negligently if the goods are lost, destroyed or deteriorated. There are very few instances when the presumption of negligence does not attach and these instances are enumerated in Article 1734. In those cases where the presumption is applied, the common carrier must prove that it exercised extraordinary diligence in order to overcome the presumption.198

Q. Wyeth-Pharma shipped on board an aircraft of KLM oral contraceptives. The tablets were placed in cartons and were packed together in an aluminum container. It was delivered to the warehouse of the Philippine Skylanders, Inc. (PSI). Wyeth-Suaco engaged the services of Sanchez Brokerage to deliver it to Hizon Laboratories. The cargoes however arrived in bad order because the cartons were wetted. Sanchez Brokerage claims that it received the goods in bad order and that the damage was due to the fault or negligence of the shipper for failing to properly pack them and to the inherent characteristics of the goods. May Sanchez Brokerage be exempted from liability?

A. No. Art. 1734 paragraph 4 of the civil Code exempts a common carrier from liability if the loss or damage is due to the character of the goods or defects in the packing or in the containers. The rule is that if the 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, he is not relieved of liability for the resulting damage. In this case, if the claim of Sanchez Brokerage that some cartons were already damaged upon delivery to it were true, then it should naturally have received the cargo under protest or with reservations duly noted on the receipt issued by PSI. But it made no such protest or reservation.199 197

Ibid. DSR-Senator Lines vs. Federal Phoenix Assurance Co., Inc. 413 SCRA 14, October 7, 2003. 199 A.F. SANCHEZ BROKERAGE, INC. vs. CA, 447 SCRA 427 December 21, 2004. 198

59

Q. A judgment was rendered finding Pestano to have been negligent in driving the passenger bus that hit the deceased. It was shown that Pestano negligently attempted to overtake the motorcycle at a dangerous speed as they were coming upon a junction in the road. Metro Cebu was also held to be directly and primary liable, along with Pestano, for failure to observe the diligence of a good father of a family in the supervision of its employees and in the maintenance of vehicles. Pestano and Metro Cebu appealed contending that the motorcycle was not in the middle of the road as found by the trial and appellate courts, but was on the inner lane. This explains the location of the dents on the bumper and the grill. Hence, they insist it was the victim who was negligent. Should the findings of the lower court be disturbed? A. No. There is no cogent reason to reverse or modify the factual findings of the lower and appellate courts. The CA agreed with the trail court that the vehicular collision was caused by Pestano‘s negligence when he attempted to overtake the motorcycle. As a professional driver operating a public transport bus, he should have anticipated that overtaking at a junction was a perilous maneuver and should thus have exercised extreme caution. 200 Q. The lower court rendered a judgment finding the employer, Metro Cebu vicariously liable to the victims of a vehicular accident. The appellate court held that allowing its driver, Pestano, to ply his route with a defective speedometer showed laxity on the part of Metro Cebu in the operation of its business and in the supervision of its employees. Did the employer exercise the care and diligence of a good father of a family in the selection and supervision of its employees? A. The fact that Pestano was able to use a bus with a faulty speedometer shows that Metro Cebu was remiss in the supervision of its employees and in the proper care of its vehicles. It had thus failed to conduct its business with the diligence required by law.201 Q. ECSLI issued 2 separate Bills of Lading wherein the value of the cargoes declared by the shippers/consignees were P6,500 and P14,000 respectively. Legaspi insured the same cargoes with UCPB for P50,000 and P100,000 respectively. Fire ensued in the engine room of the vessel destroying the entire vessel resulting in the loss of the vessel and the cargoes therein including the goods of Legaspi. UCPB, as subrogee of Legaspi, filed a complaint anchored on torts against ECSLI for the collection of the total principal amount of P148,500 which it paid to Legaspi for the loss of the cargo. UCPB contends that ECSLI‟s liability should be based on the actual insured value of the goods. On the other hand, ECSLI claims that its liability should be limited to the value declared by the shipper/consignee in the Bill of

200 201

Pestano vs. Sumayang, 346 SCRA 870, December 4, 2000. Ibid.

60 Lading. May ECSLI may held liable for more than what was declared by the the shippers/consignees as the value of the goods in the Bills of Lading? A.In Aboitiz Shipping Corp. vs. CA, the description of the nature and the value of the goods shipped were declared and reflected in the bill of lading, like the present case. The Court therein considered this declaration as the basis of the carrier‘s liability and ordered payment based on such amount. Following this ruling, ECSLI should not be held liable for more than what was declared by the shippers/consignees as the value of the goods in the bills of lading.202 Q. ECSLI issued Bills of Lading containing the stipulation that in case of claim for loss or for damage to the shipped property, “the liability of the common carrier xxx shall not exceed the value of the goods as appearing in the bill of lading.” Is such a stipulation limiting the common carrier‟s liability valid? A. Yes. A stipulation that limits liability is valid as long as it is not against public policy. In Everett Steamship Corp. v. CA the Court stated: ―A stipulation in the bill of lading limiting the common carrier‘s liability for loss or destruction of a cargo to a certain sum, unless the shipper or owner declares a greater value, is sanctioned by law, particularly Articles 1749 and 1750 of the Civil Code.203 Q. When does the contract of carriage for Air Transportation commence? A. When an airline issues a ticket to a passenger, confirmed for a particular flight on a certain date, a contract of carriage arises and the passenger has every right to expect that he be transported on that flight and on that date and it becomes the carrier‘s obligation to carry him and his luggage safely to the agreed destination. If the passenger is not so transported or if in the process of transporting he dies or is injured, the carrier may be held liable for a breach of contract of carriage.204 Q. Plaintiff was an acclaimed soprano singer who was invited to sing before the King and Queen of Malaysia. For this singing engagement, she purchased from defendant Singapore Airlines a confirmed ticket that would transport her from Frankfurt, Germany to Manila with a stop-over in Singapore, and then from Manila to Malaysia. It was necessary for plaintiff to pass by Manila to gather her wardrobe and rehearse with her pianist. However, she missed her connecting flight from Singapore to Manila because the plane arrived 2 hours late due to inclement weather. She tried to arrange for another flight but the defendant‟s employees were rude and unkind. Plaintiff never made it to Manila and was forced to take a direct 202 203 204

Edgar Cokaliong Shipping Lines, Inc. vs. UCPB General Insurance Co., Inc., 404 SCRA 706. Edgar Cokaliong Shipping Lines, Inc. vs. UCPB General Insurance Co., Inc., 404 SCRA 706. JAPAN AIRLINES vs. ASUNCION, 449 SCRA 544 January 28, 2005

61 flight from Singapore to Malaysia. She sued for damages arising from breach of contract of carriage. Singapore Airlines argued that it exercised extraordinary diligence required by law under the given circumstances and that the delay was caused by a fortuitous event. Was Singapore Airlines liable for moral and exemplary damages?

A. Singapore Airlines was liable for moral and exemplary damages. When an airline issues a ticket to a passenger, confirmed for a particular flight on a certain date, a contract of carriage arises. Since the defendant did not transport the plaintiff as covenanted by it on said terms, it clearly breached its contract of carriage. The defense of fortuitous event was unavailing. Singapore Airlines was not without recourse to enable it to fulfill its obligation to transport the plaintiff safely as scheduled as far as human care and foresight can provide to her destination. Tagged as a premiere airline as it claims to be and with the complexities of air travel, it was certainly well-equipped to be able to foresee and deal with such situation. Singapore Airlines was guilty of bad faith when its employees did not accord plaintiff the attention and treatment allegedly warranted under the circumstances. The inattentiveness and rudeness of its personnel to plaintiff‘s plight was gross enough amounting to bad faith. Also, knowing fully well that even before the plaintiff boarded defendant‘s Jumbo aircraft in Frankfurt bound for Singapore, it has already incurred a delay for two hours, and it did not take the trouble of informing plaintiff of such a delay. Thus, the award of exemplary damages was proper.205 Q. Plaintiff, a dentist and a member of the Board of Directors of the Sorsogon Dental Association, was scheduled to attend the National Convention of the Philippine Dental Association from May 8 to 14, 1988 at the PICC. She purchased from PAL three confirmed plane tickets for her and her infant son as well as her sister for May 8, 1988, 7:10am flight. On the said date, they arrived at the Legaspi Airport at 6:20 am. However, while plaintiff‟s companions were on queue, the check-in clerk on duty wrote “late check-in” on their tickets. Plaintiff and her family were not allowed to board their scheduled flight. PAL argued that they were late in checking-in and that they were only chance or waitlisted passengers. Other non-revenue passengers were given priority and were allowed to board. Was PAL liable for exemplary damages?

A. Yes. Waitlisted and non-revenue passengers were accommodated while plaintiff who had fully paid her fare and was a confirmed passenger was unduly deprived of enplaning. PAL was also of guilty of overbooking its flight to the prejudice of its confirmed passengers. This practice cannot be countenanced especially considering that the business of air carriage is imbued with public character. We have ruled that where in breaching the contract of carriage, the airline is shown to have acted in bad faith, as in 205

Singapore Airlines Limited vs. Andion Fernandez, G.R. No. 142305, December 10, 2003.

62 this case, the award of exemplary damages in addition to moral and actual damages is proper.206 Q. Michael and Jeanette Asuncion left Manila on board a Japan Airlines (JAL) flight bound for Los Angeles. Their itinerary included a stopover in Narita and an overnight stay at Hotel Nikko Narita. Upon arrival, they applied for a shore pass, which is required for a foreigner aboard an aircraft who desires to stay in the neighborhood of the port of call for not more than 72 hours. The Japanese immigration official denied their application because of inconsistency in Michael‟s height in his passport. They were brought instead to the Narita Airport Rest House where they were billeted overnight. The spouses sued JAL for breach of contract of carriage. Is JAL liable for failure to carry them safely to their destination? A. JAL did not breach its contract of carriage with the Asuncion spouses. It may be true that JAL has the duty to inspect whether its passengers have the necessary travel documents, however, such duty does not extend to checking the veracity of every entry in these documents. JAL could not vouch for the authenticity of a passport and the correctness of the entries therein. The power to admit or not an alien into the country is a sovereign act, which cannot be interfered with even by JAL.207 Q. The spouses Vasquez traveled to Hong Kong with their friends via Cathay Pacific Airways. On the flight back to Manila, it turned out that the Business Class was overbooked in that there were more passengers than the number of seats. Thus, the seat assignments of the Vazquezes were given to waitlisted passengers and the Vazquezes being members of the Marco Polo Club were upgraded from Business Class to First Class. The spouses Vasquez were informed that they have been upgraded from Business Class to First Class. Their friends however remained in Business Class. The Spouses Vasquez refused. They were told that if they would not avail of the privilege, they would not be allowed to take the flight. They gave in but in protest. In Manila, the spouses Vasquez filed a suit for damages. Can the Cathay Pacific be made liable for damages? A. Cathay Pacific could be made liable for damages. By upgrading the seat accommodation of the Vasquezes, Cathay Pacific breached its contract of carriage with the latter. The contract between Cathay Pacific and the Vasquezes by which the latter gave their consent was the transportation of the Vasquezes from Manila to Hong Kong and back to Manila in the Business class section of the aircraft and whose cause or consideration was the fare paid by them to Cathay Pacific. The Spouses Vasquez should have been consulted first whether they would consent to a change of seat accommodation. The upgrade should not have been imposed on them over their 206 207

Philippine Airlines, Inc. vs. Court of Appeals, 417 SCRA 196, G.R. No. 127473, December 8, 2003. JAPAN AIRLINES vs. ASUNCION, 449 SCRA 544 January 28, 2005

63 objection. By insisting on the upgrade, Cathay Pacific breached its contract of carriage with the Vasquezes.208 Q. Is the period of prescription of action based on the relationship between passenger and carrier on an international flight governed by the Warsaw Convention that sets the period of prescription of two years from the accrual of the cause of action? A. In case of damage to passengers baggage, the period of prescription is two years as mandated by the Warsaw Convention but in case of damages caused by humiliation, embarrassment, mental anguish, serious anxiety, fear and distress or hurt feelings, the civil code provisions on tort shall apply and hence, outside the coverage of the Warsaw Convention. The period of prescription is four years.209 Q. What is a ship agent? A. A ship agent is the person entrusted with provisioning or representing the vessel in the port in which it may be found.210 Q. When may a ship agent be held civilly liable? A. A ship agent, may be held civilly liable in certain instances as provided for in Articles 586 and 587 of the Code of Commerce, to wit: (1) The shipowner and the ship agent shall be civilly liable for the acts of the captain and for the obligations contracted by the latter to repair, equip and provision the vessel, provided the creditor proves that the amount claimed was invested for the benefit of the same.211 (2) Art. 587. The ship agent shall also be civilly liable for the indemnities in favor of third persons which may arise from the conduct of the captain in the care of the goods which hew loaded on the vessel; but he may exempt himself therefrom by abandoning the vessel with all her equipments and the freight it may have earned during the voyage.212 Q. Canpotex Shipping Services Limited Inc. (SHIPPER), shipped and loaded on board the vessel M/V Trade Carrier 5,000 metric tons of Standard Grade Muriate of Potash for transportation and delivery in favor of Atlas Fertilizer Corporation (CONSIGNEE). The same was insured with the respondent Provident. When the shipment arrived, CONSIGNEE discovered that the shipment sustained 208

209

Cathay Pacific Airways, Ltd. vs. Vasquez, 399 SCRA 207, March 14, 2003.

Philippine Airlines vs. Savillo, 557 SCRA 66. Article 586, Code of Commerce. 211 Article 586, Code of Commerce. 212 Article 587, Code of Commerce. 210

64 losses/shortage of 476.14 metric tons valued at P1,657,700.95. Provident paid the losses. Formal claims were then filed with Trade & Transport and Macondray. For failure to effect service of summons, the case against Trade & Transport was considered dismissed without prejudice. Macondary denied liability over the losses, having no absolute relation with Trade & Transport, the alleged operator of the vessel who transported the subject shipmen; that accordingly, Macondray is the local representative of the SHIPPER; the charterer of M/V TRADE CARRIER and not a party to this case; that it has no control over the acts of the captain and crew of the Carrier and cannot be held responsible for any damage arising from the fault or negligence of said captain and crew; that upon arrival at the port of Sangi Toledo City, Cebu, the M/V Trade Carrier discharged the full amount of shipment and delivered to the CONSIGNEE. Can Macondray, as an agent be made responsible for any loss sustained by any party from the vessel owned by Trade & Transport? A. Whether acting as an agent of the owner of the vessel or as agent of the charterer, petitioner will be considered as the ship agent and may be held liable as such, as long as the latter is the one that provisions or represents the vessel. Macondray was appointed as local agent of the vessel, which duty includes arrangement for the entrance and clearance of the vessel. Evidence shows that petitioner represented the vessel. The latter prepared the Notice of readiness, the Statement of Facts, the Completion Notice, the Sailing Notice and Custom‘s Clearance. Petitioner‘s employees were present at Sangi, Toledo City, one day before the arrival of the vessel, where they stayed until it departed. They were also present during the actual discharging of the cargo. Moreover, Mr. Dela Cruz, the representative of the petitioner, also prepared for the needs of the vessel, like money, provision, water and fuel. These acts all point to the conclusion that it was the entity that represented the vessel in the Port of Manila and was the ship agent within the meaning and context of Article 586 of the Code of Commerce. Macondray, therefore, was liable to the respondent for the losses sustained by the subject shipment.213 Q. Dolor was driving an owner-type jeepney, while Gonzales was driving a passenger jeepney owned by Hernandez. As Dolor was traversing the road at Barangay Anilao East, Batangas, his vehicle collided with the passenger jeepney. Dolor and his passenger died as result of the collision. Some of the passengers of the jeepney driven by Gonzales suffered physical injuries. Consequently, they commenced an action against Spouses Hernandez alleging that Gonzales was guilty of negligence and lack of care and that Hernandez spouses were guilty of negligence in the selection and supervision of their employees. In their defense, the spouses contended that Gonzales was not the driver-employee of the spouses as the former only leased the passenger jeepney on a daily basis. Moreover, the spouses claimed even if an employer-employee relationship existed between them, they cannot be held liable because as employers they exercised due care in the selection and supervision of their employee. Are the defenses of the spouses proper?

213

Macondray & Co., Inc. vs. Provident Insurance Corporation, 445 SCRA 644, December 9, 2004.

65

A. The Hernandez spouses are mistaken. Jurisprudence has held that an employeremployee relationship exists in a Boundary System. To exempt from liability the owner of a public vehicle who operates it under the ―boundary system‖ on the ground that he is a mere lessor would be not only to abet flagrant violations of the Public Service Law, but also to place the riding public at the mercy of reckless and irresponsible drivers. Moreover, the spouses cannot hide behind non-liability die to the proper due care in the selection and supervision of their employee. Article 2180 of the Civil Code provides, ―Employers shall be liable for the damages caused by their employees and household helpers acting within the scope of their assigned tasks, even though the former are not engaged in any business or industry. In the case at bar, it was established that Gonzales obtained his professional driver‘s license only 3 months before the accident. Hence, he lacked the experience to drive a common carrier.214 Q. What is the „Ridjo” doctrine? A. The ―Ridjo‖ doctrine simply states that the public utility has the imperative duty to make reasonable and proper inspection of its apparatus and equipment to ensure that they do not malfunction.215 Q. What is effect of the failure of the public utility to discover the defect of its electric meter or failure to repair or replace the same? A. The failure of the public utility to discover the defect, if any, amounts to inexcusable negligence and its failure to make the necessary repairs and replace the defective electric meter installed within the consumer‘s premises limits the latter‘s liability.216 Q. Wilcon is one of the customers of Meralco. With the installation in 1981 of 7.5 ton air-conditioning, the electric consumption of Wilcon increased. In 1985, the said unit started to break down and 1986 it was no longer functional, which caused the abrupt decrease in its electric consumption. In 1991, Meralco‟s service inspectors conducted routine inspection of the electric meters installed at the premises of Wilcon. Meralco claimed the meter to be tampered with and demanded payment of the alleged unregistered electric consumption. Meralco claimed that there was a sudden drop in the electric consumption of Wilcon in 1984. May Meralco hold Wilcon liable? A. Meralco noted the sudden drop of electric consumption of Wilcon in 1984 and yet it conducted an inspection only in 1991 allowing the ―defect‖ to remain unrepaired for a period of more or less seven (7) years. It would be highly inequitable if we are to 214

215 216

Hernandez vs. Dolor, 435 SCRA 668, July 30, 2004. Meralco vs. Wilcon Builders Supply, Inc., 556 SCRA 742. Ibid.

66 allow a public utility company to be continuously remiss in its duty and then later on charge the consumer exorbitant amounts for the alleged unbilled consumption or differential billing when such a situation could have been easily averted. Following the ―Ridjo‖ doctrine, negligence could be imputed on Meralco and bar it from collection its claim of differential billing.217

217

Ibid.