UP LAW Mercantile Preweek

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LETTERS OF CREDIT Q1: W hat is the nature of letters of credit? A1: Letters of credit are those issued by one merchant to another, or for the purpose of attending to a commercial transaction. [Art. 567, Code of Commerce] A letter of credit is sui generis, but to understand it as a secured transaction, it is appropriately viewed as an original undertaking by the issuer (usually a bank) to substitute its financial strength for that of another (the applicant) with the undertaking to be conditioned on the presentation of a draft or a demand for payment by the beneficiary. [Transfield Philippines, Inc. v. Luzon Hydo Corporation Australia, et al., (2004)] Q2: W hat are the essential conditions of letters of credit? A2: The essential conditions of letters of credit shall be: 1. To be issued in favor of a determined person and not to order. 2. To be limited to a fixed and specified amount, or to one or more undetermined amounts, but all within a maximum the limit of which must be stated exactly. Those which do not have one of these conditions shall be considered as mere letters of recommendation. [Art. 568, Code of Commerce]

NEGOTIABLE INSTRUMENTS Q3: W hat are the requisites of a negotiable instrum ent? A3: An instrument to be negotiable must conform to the following requirements: 1. It must be in writing and signed by the maker or drawer; 2. Must contain an unconditional promise or order to pay a sum certain in money; 3. Must be payable on dem and, or at a fixed or determ inable future tim e; 4. Must be payable to order or to bearer; and 5. Where the instrument is addressed to a drawee, he must be named or otherwise indicated therein with reasonable certainty. [Sec. 1, Negotiable Instruments Law] Q4: W hat constitutes a holder in due course? A4: A holder in due course is a holder who has taken the instrument under the following conditions: 1. That it is complete and regular upon its face; 2. That he became the holder of it before it was overdue, and without notice that it had been previously dishonored, is such was the fact; 3. That he took it in good faith and for value; 4. That at the time it was negotiated to him he had no notice of any infirmity in the instrument or defect in the title of the person negotiating it. [Sec. 52, NIL]

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Q5: W hat is the effect of a forged signature? A5: When a signature is forged or made without authority of the person whose signature it purports to be, it is wholly inoperative, and no right to retain the instrument, or to give a discharge therefor, or to enforce payment thereof against any party thereto, can be acquired through or under such signature, unless the party against whom it is sought to enforce such right is precluded from setting up the forgery or want of authority. [Sec. 23, NIL] Section 23 does not avoid the instrument but only the forged signature. Rights and obligations may therefore exist by virtue of such instrument. [Campos] If payment is made, the drawee cannot charge it to the drawer’s account. The traditional justification for the result is that the drawee is in a superior position to detect a forgery because he has the maker’s signature and is expected to know and compare it. [Samsung Construction Company Philippines, Inc. v. Far East Bank and Trust Company and CA, (2004)] In cases involving a forged check, where the drawer’s signature is forged, the drawer can recover from the drawee bank. The drawee may recover from the recipient of paym ent, such as the collecting bank, under a forged indorsement. [Associated Bank v. CA, (1996)] Q6: W hat is the liability of an accom m odation party ? A6: 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 a person is liable on the instrument to a holder for value, notwithstanding such holder at the time of the taking of the instrument knew him to be only an accommodation party. [Sec. 29, NIL] Q7: W hat is a check? A7: A check is a bill of exchange drawn on a bank payable on dem and. Except as otherwise provided, the provisions of the NIL applicable to a bill of exchange payable on demand apply to a check. [Sec. 185, NIL] Q8: W hat is the effect of an incom plete instrum ent which is undelivered? A8: Where an incomplete instrument has not been delivered, it will not, if completed and negotiated, without authority, be a valid contract in the hands of any holder, as against any person whose signature was placed thereon before delivery. [Sec. 15, NIL] In this case, a real defense exists and not even a holder in due course can recover on the instrument, for the law is specific that it is not a valid contract in the hands of any holder. [Campos]

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Q9: W hat are the om issions not affecting negotiability? A9: The validity and negotiable character of an instrument are not affected by the fact that – 1. It is not dated; or 2. Does not specify the value given, or that any value has been given therefore; or 3. Does not specify the place where it is drawn or the place where it is payable; or 4. Bears a seal; or 5. Designates particular kind of current money in which payment is to be made. But nothing in this section shall alter or repeal any statute requiring in certain cases the nature of the consideration to be stated in the instrument. [Sec. 6, NIL] Q10: W ho is deem ed a holder in due course? A10: 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. [Sec. 59, NIL] Q11: W hat is the liability of an accepto r? A11: The acceptor by accepting the instrument engages that he will pay it according to the tenor of his acceptance; and admits: 1. The existence of the drawer, the genuineness of his signature and his capacity and authority to draw the instrument, and 2. The existence of the payee and his then capacity to indorse. Q12: W hat constitutes negotiation? A12: An instrument is negotiated when it is transferred from one person to another in such a manner as to constitute the transferee the holder thereof. If payable to bearer it is negotiated by delivery; if payable to order, it is negotiated by the indorsement of the holder and completed by delivery. [Sec. 30, NIL] A check that is payable to a specified payee is an order instrument. However, under Section 9(c) of the NIL, a check payable to a specified payee may nevertheless be considered as a bearer instrument if it is payable to the order of a fictitious or non-existing person, and such fact is known to the person making it so payable. If the payee is not the intended recipient of the proceeds of the check, the payee is considered a fictitious payee and the check is a bearer instrument. [Philippine National Bank v. Rodriguez (2008)] Q13: W hat are the rights of a holder in due course? A13: A holder in due course holds the instrument free from any defect of title of prior parties, and free from defences available to prior parties among themselves, and may enforce payment of the instrument for the full amount thereof against all parties liable thereon. [Sec.57, NIL] In the hands of any holder other than a holder in due course, a negotiable instrument is subject to the same defences as if it were non-negotiable. [Sec.58, NIL]

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Q14: W hat are the liabilities of a m aker? A14: The maker of a negotiable instrument, by making it, engages that he will pay it according to its tenor, and admits the existence of a payee and his then capacity to indorse. [Sec. 60, NIL] The liability of the maker is primary and unconditional. One who has signed an instrument as a maker is presumed to have acted with care and to have signed the instrument with full knowledge of its contents, unless there is fraud. [Campos] Q15: W hat are the liabilities of a general indorser? A15: Every indorser who indorses without qualification warrants to all subsequent holders in due course: 1. That the instrument is genuine and in all respects what it purports to be; 2. That he has good title to it; 3. That all prior parties had capacity to contract; 4. That the instrument is, at the time of his indorsement, valid and subsisting. In addition, he engages that on due presentment it shall be accepted or paid, or both, as the case may be, according to its tenor, and that if it be dishonored and the necessary proceedings on dishonor be duly taken, he will pay the amount thereof to the holder, or to any subsequent indorser who may be compelled to pay it. The warranty that the instrument is genuine and in all respects what it purports to be covers all the defects in the instrument affecting the validity thereof, including a forged indorsement. Thus, the last indorser will be liable for the amount indicated in the negotiable instrument even if a previous indorsement was forged. [Allied Banking Corp. v. Lim Sio Wan, et al., (2008)] Q15: W hat are the effects of alteration of an instrument? A16: Where a negotiable instrument is materially altered without the assent of the parties liable thereon, it is avoided, except as against a party who has himself made, authorized, or assented to the alteration and subsequent indorsers. But when an instrument has been materially altered and is in the hands of a holder in due course not a party to the alteration, he may enforce payment thereof according to its tenor. [Sec. 124, NIL]

INSURANCE Q16: W hat is the Insurable interest in property insurance? A16: Generally, a person has an insurable interest in property when he sustains such a relation with respect to it that he has a reasonable expectation of benefit to be derived from its continued existence, or of loss or liability from its destruction. It is immaterial whether the insured has title to or possession of the property, so long as he would sustain a loss by its destruction. A mere naked expectation, which may be frustrated by the happening of some intervening event, is not an insurable interest. Insurable interest in property may consist in: 1. An existing interest 2. An inchoate interest founded on an existing interest 3. An expectancy coupled with an existing interest in that out of which the expectancy arises.

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Q17: W hat is casualty insurance? A17: Casualty insurance is insurance covering loss or liability arising from accident or mishap, excluding certain types of loss which by law or custom are considered as falling exclusively within the scope of other types of insurance such as fire or marine. It includes, but is not limited to, employer’s liability insurance, motor vehicle liability insurance, plate glass insurance, burglary and theft insurance, personal accident and health insurance as written by non-life insurance companies, and other substantially similar kinds of insurance [Sec. 176]. The world “casualty” is generally used in legal contexts to mean either an “accident” or an event that results from a sudden, unexpected or unusual cause. Since Sec. 176 deals with loss or liability arising from “accident or mishap,” it is not difficult to envision a coverage that runs the gamut of human activity or endeavor. Q18: W hat is the rule for payment of claims where there is overinsurance by double insurance? A18: Where over-insurance results from double insurance, the several policies are not necessarily void. The Code delineates the rights and liabilities both of the insured and the several insurers. The insured may not, of course, receive more than his loss. The insured, unless the policy otherwise provides, may claim payment from the insurers in such order as he may select, up to the amount for which the insurers are severally liable under their respective contracts (Sec. 96). Under Sec. 96, the principle of contribution is enunciated, which requires insurers to contribute ratably to the loss or damage in proportion to the amount for which they may be liable under the contract, unless there is a common provision referred to as “excess clause.” The insured is given the right to choose as to whom among the insurers he would go after first. However, if the policy is an unvalued one, then he can claim the amount of the loss from only one insurer and let all the other insurers settle their pro rata contributions among themselves. It must be noted that the insured who has been fully indemnified for his loss by one or more insurers cannot file subsequent claims against the others. He can only claim up to the full amount of his loss under the “principle of indemnity.” Q19: W hat is the right of the insurer to rescind a contract of life insurance; incontestability clause A19: The incontestability clause provides that after the policy has been in force for a given length of time (2 or 3 years), the insurer shall not be able to contest it as to statements contained in the application. Q20: W hat is the insurable interest of mortgagee and mortgagor? A20: Both the mortgagor and mortgagee have each separate and distinct insurable interest in the mortgaged property and that they may take out separate policies with the same or different insurance companies. Consequently, insurance taken by one on his own name only does not inure to the benefit of the other. Thus, a mortgagor has an insurable interest equal to the value of the mortgaged property and a mortgagee, only to the extent of the debt secured by the mortgage. Q21: Does the designated beneficiary in a life insurance policy need to have insurable interest in the life of the insured?

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A21: It depends. If the owner of the policy and the insured is one and the same, the designated beneficiary need not have an insurable interest in the life of such insured. However, if the owner of the policy took out an insurance on the life of another, the beneficiary needs to have insurable interest in the life of such insured. Q22: How is the beneficary designated? In life insurance, the insured indicated the beneficiary who will get the proceeds upon the death of the insured. Unless the insured expressly waives, in the policy, his right to change the beneficiary, the insured retains such right. Where there are several and only one of them was irrevocably designated, the others may be changed. The beneficiary need not have any insurable interest in the life of the insured. As such, the insured may designate even a stranger. Insurance, as a matter of fact, is considered no different from a civil donation, founded on the liberality of the insured in so far as the beneficiary is concerned. Q23: W hat is a warranty with respect to an insurance contract? A23: Warranty has been defined as a “statement or promise set forth in the policy, or by reference incorporated therein, the untruth or non-fulfillment of which in any respect, and without reference to whatever the insurer was in fact prejudiced by such untruth or nonfulfillment, renders the policy voidable by the insurer, wholly irrespective of the materiality of such statement or promise. The definition is inadequate, for it only defines warranty from the perspective of the insurer. Warranties may work in favor of both the insured and the insurer. Statements or promises agreed upon by both parties to the insurance contract which are contained in the contract itself or incorporated by proper reference constitute warranties. The subject matter of these warranties may differ— some may be material to the risk insured against, but some may be trivial. For as long as both parties agree that a particular fact or promise shall become part of the contract, such fact or promise shall constitute warranties. Q24: W hat are the implied warranties in marine insurance? A24: 1. Seaworthiness of the vessel 2. Improper deviation 3. Proper documentation 4. Not to engage in an illegal venture Q25: W hat is the significance of the payment of premium? A25: The payment of the premium, being the undertaking performed by the insured in return for the insurer’s assumption of the risk, is essential to the formation of the contract of insurance. Thus, payment of the premium is the foundation of a life insurance policy. The policy shall not take effect unless the first premium is paid. Q26: Is double insurance prohibited? A26: Double insurance is not prohibited under the law, unless the policy contains a stipulation to the contrary in which case other insurance voids the policy. If there is double insurance, and there is no other insurance clause, and loss occurs, each of the insurers will be liable only up to

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the face value of their respective policies and the insured has the option of choosing the order by which he will claim from the insurers. Q27: W hat is a proper deviation? A27: A deviation is proper under the following circumstances: 1. When caused by circumstances over which neither the master nor the owner of the ship has any control 2. When necessary to comply with a warranty, or to avoid a peril, whether or not the peril is insured against 3. When made in good faith, and upon reasonable grounds of belief in its necessity to avoid a peril 4. When made in good faith, for the purpose of saving human life or relieving another vessel in distress. Q28: W hat is the duty of insured to disclose? A28: Each party to a contract of insurance must communicate to the other, in good faith, all facts within his knowledge which are material to the contract, and as to which he makes no warranty, and which the other has no means of ascertaining. There is, however, no obligation to disclose everything. Sec. 30 provides that there is no need to disclose, except in answer to inquiries, the following: 1. Those which the other knows; 2. Those which, in the exercise of ordinary care, the other ought to know, and of which the former has no reason to suppose him ignorant; 3. Those of which the other waives communication; 4. Those which prove or tend to disprove the existence of a risk excluded by a warranty, and which are not otherwise material; and 5. Those which relate to a risk excepted from the policy and which are not otherwise material.

TRANSPORTATION Q29: W hat is the Doctrine of Lim ited Liability? A29: Also called the “no vessel, no liability doctrine,” it provides that the liability of ship owner is limited to ship owner’s interest over the vessel. Consequently, in case of loss, the ship owner’s liability is also extinguished. [Monarch Insurance v. CA (2000)]. This is also referred to as the real and hypothecary nature of maritime law. However, the application of this rule admits the following exceptions: 1. When the sinking of the vessel is attributable to the actual fault or negligence of the shipowner or its failure to ensure the seaworthiness of the vessel [Aboitiz Shipping Corp. v. Court of Appeals (2008)]; 2. Repairs and provisioning of the vessel before the loss of the vessel; [Art. 586, Code of Commerce]; 3. Insurance proceeds. If the vessel is insured, the proceeds will go to the persons entitled to claim from the shipowner; [Vasquez v. CA (1985)]; 4. Workmen’s Compensation cases (now Employees’ Compensation under the Labor Code); [Oching v. San Diego (1946)]; 5. There is no total loss; and 6. In cases of private carriers.

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Q30: W hat is a bill of lading? A30: A written acknowledgement, signed by the master of a vessel or other authorized agent of the carrier, that he has received the described goods from the shipper, to be transported on the expressed terms to the described place of destination, and to be delivered there to the designated consignee or parties [70 Am. Jur. 2d 924]. It is not, however, indispensable for the creation of a contract of carriage. [Cia. Maritima v. Ins. Co. of North America (1964)]. In the absence of a bill of lading, disputes shall be determined by the legal proofs which the parties may present in support of their respective claims, according to the general provisions established in the Code of Commerce for commercial contracts [Art. 354, Code of Commerce]. Q31: W hat is the difference between an On Board Bill of Lading and Received for Shipment Bill of Lading? A31: An on board bill of lading is one in which it is stated that the goods have been received on board the vessel which is to carry the goods, whereas a received for shipment bill of lading is one in which it is stated that the goods have been received for shipment with or without specifying the vessel by which the goods are to be shipped. Received for shipment bills of lading are issued whenever conditions are not normal and there is insufficiency of shipping space. An on board bill of lading is issued when the goods have been actually placed aboard the ship with every reasonable expectation that the shipment is as good as on its way. It is, therefore, understandable that a party to a maritime contract would require an on board bill of lading because of its apparent guaranty of certainty of shipping as well as the seaworthiness of the vessel which is to carry the goods. [Magellan Manufacturing Marketing Corp. v. CA (1991)] Q32: W hat is the legal consequence that arises when a ship per receives the bill of lading without objection? A32:It has been held that a shipper who receives a bill of lading without objection after an opportunity to inspect it, and permits the carrier to act on it by proceeding with the shipment is presumed to have accepted it as correctly stating the contract and to have assented it its term. This rule applies with particular force where a shipper accepts a bill of lading with full knowledge of its contents and acceptance under such circumstances makes it a binding contract. [Magellan Manufacturing Marketing Corp. v. CA (1991)] Q33: Can a bill of lading be considered a contract, and hence subject to the Parol Evidence Rule? A33: Yes, a bill of lading operates both as a receipt and as a contract. It is a receipt for the goods shipped and a contract to transport and deliver the same as therein stipulated. As a contract, it names the parties, which includes the consignee, fixes the route, destination, and freight rates or charges, and stipulates the rights and obligations assumed by the parties. Being a contract, it is the law between the parties who are bound by its terms and conditions provided that these are not contrary to law, morals, good customs, public order and public policy. [Magellan Manufacturing Marketing Corp. v. CA (1991)] Q34: W hat is a com m on carrier?

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A34: Article 1732 of the New Civil Code defines common carriers as persons, corporations, firm or associations engaged in the business of carrying, transporting passengers or goods or both, by land, water, or air, for compensation, offering their services to the public. The concept of common carriers contemplated under Article 1732 of the Civil Code and the fact that the said concept corresponds to the concept of “public service” under the Public Service Act results in the application of the following rules or principles: 1. 2. 3. 4. 5. 6. 7. 8.

The provision makes no distinction between one whose principal business activity is the carrying of persons or goods or both, and one who does such carrying only as an ancillary activity (in local Idiom as “a sideline”). Article 1732 also carefully avoids making any distinction between a person or enterprise offering transportation service on a regular or scheduled basis and one offering such service on an occasional, episodic or unscheduled basis. Neither does Article 1732 distinguish between a carrier offering its services to the “general public”, i.e., the general community or population, and one who offers services or solicits business only from a narrow segment of the general population. A person or entity is a common carrier and has the obligations of the common carrier under the Civil Code even if he did not secure a Certificate of Public Convenience [De Guzman vs. Court of Appeals (1988)]. The Civil Code does not provide that the transportation should be by motor vehicle [First Philippine Industrial Corporation vs. Court of Appeals (1998)] A person or entity may be a common carrier even if he has no fixed and publicly known route, maintains no terminals, and issues no tickets [Asia Lighterage and Shipping Inc. vs. Court of Appeals (2003)] A person need not be engaged in the business of public transportation for the provision of the Civil Code on common carriers to apply to them [Fabre Jr. vs. Court of Appeals (1996)]. The carrier can also be a common carrier even if the operator does not own the vehicle or vessel that he or she operates [Cebu Salvage Corporation vs. Philippine Home Assurance Corporation (2007)].

The true test for a common carrier is not the quantity or extent of the business actually transacted, or the number and character of the conveyances used in the activity, but whether the undertaking is a part of the activity engaged in by the carrier that he has held out to the general public as his business or occupation. If the undertaking is a single transaction, not a part of the general business or occupation engaged in, as advertised and held out to the general public, the individual or the entity rendering such service is a private, not a common, carrier. The question must be determined by the character of the business actually carried on by the carrier, not by any secret intention or mental reservation it may entertain or assert when charged with the duties and obligations that the law imposes [Spouses Perena vs. Spouses Nicolas (2012)].” Q35: How is liability apportioned when both vessels are at fault for a collision? A35: Article 827 provides that if the collision is imputable to both vessels, each one shall suffer its own damages, and both shall be solidarily responsible for the losses and damages occasioned to their cargoes. In other words, when it comes to the damages to their respective vessels, the losses rest where they falls. With respect to damages to the cargoes, the shipowners and ship agents of the vessels involved in the collision are liable to the shippers. The liability is joint and several; there will be no apportionment of liability and each shipowner or ship agent is liable for the whole damage or injury [Aquino and Hernandez (2016)].

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In The Government of the Philippine Islands vs. Philippine Steamship Co. (1923), the Supreme Court ruled that although the negligence on the part of the mate of an incoming vessel preceded the negligence on the part of the mate of the outgoing vessel by an appreciable length of time, the first vessel cannot on that account be absolved of responsibility. It is also in the same case that the Court held that only the owner of one vessel was made liable for the loss of the cargoes belonging to the government. Although Article 827 provides for solidary liability for the loss of the cargoes, one vessel was totally lost and was therefore subject to the doctrine of limited liability. Hence, the burden of responding to the loss fell on the owner of the other ship. Q36: Is the defense of due diligence available to a common carrier? A36: No. The liability of the common carriers for the death of or injuries to passengers through the negligence or willful acts of the former's employees, although such employees may have acted beyond the scope of their authority or in violation of the orders of the common carriers, does not cease upon proof that they exercised all the diligence of a good father of a family in the selection and supervision of their employees [Article 1759, Civil Code]. The reasons for this rule are: (1) the special undertaking of the carrier requires that it furnish its passenger that full measure of protection afforded by the exercise of the high degree of care prescribed by the law, inter alia from violence and insults at the hands of strangers and other passengers, but above all, from the acts of the carrier's own servants charged with the passenger's safety; (2) said liability of the carrier for the servant's violation of duty to passengers, is the result of the formers confiding in the servant's hands the performance of his contract to safely transport the passenger, delegating therewith the duty of protecting the passenger with the utmost care prescribed by law; and (3) as between the carrier and the passenger, the former must bear the risk of wrongful acts or negligence of the carrier's employees against passengers, since it, and not the passengers, has power to select and remove them [Maranan vs. Perez (1967)]. Q37: W hat is the liability of a com m on carrier for loss? A37: (1) If the baggage are in the custody of the common carriers Common carriers are bound to observe extraordinary diligence. The extraordinary responsibility of the common carrier lasts from the time the goods are unconditionally placed in the possession of, and received by the carrier for transportation until the same are delivered, actually or constructively, by the carrier to the consignee, or to the person who has a right to receive them [Article 1736, Civil Code]. It remains in full force and effect even when they are temporarily unloaded or stored in transit, unless the shipper or owner has made use of the right of stoppage in transit [Article 1737, Civil Code]. If the shipper or owner merely contributed to the loss, destruction or deterioration of the goods, the proximate cause thereof being the negligence of the common carrier, the latter shall be liable in damages, which however, shall be equitably reduced [Article 1741, Civil Code]. A stipulation between the common carrier and the shipper or owner limiting the liability of the former for the loss, destruction, or deterioration of the goods to a degree less than extraordinary diligence shall be valid, provided it be: (a) in writing, signed by the shipper or

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owner; (b) supported by a valuable consideration other than the service rendered by the common carrier; and (c) reasonable, just and not contrary to public policy [Article 1744, Civil Code]. Any of the following or similar stipulations shall be considered unreasonable, unjust and contrary to public policy: (a) that the goods are transported at the risk of the owner or shipper; (b) that the common carrier will not be liable for any loss, destruction, or deterioration of the goods; (c) that the common carrier need not observe any diligence in the custody of the goods; (d) that the common carrier shall exercise a degree of diligence less than that of a good father of a family, or of a man of ordinary prudence in the vigilance over the movables transported; (e) that the common carrier shall not be responsible for the acts or omission of his or its employees; (f) that the common carrier's liability for acts committed by thieves, or of robbers who do not act with grave or irresistible threat, violence or force, is dispensed with or diminished; (g) that the common carrier is not responsible for the loss, destruction, or deterioration of goods on account of the defective condition of the car, vehicle, ship, airplane or other equipment used in the contract of carriage [Article 1745, Civil Code]. A stipulation that the common carrier's liability is limited to the value of the goods appearing in the bill of lading, unless the shipper or owner declares a greater value, is binding [Article 1749, Civil Code]. Likewise, a contract fixing the sum that may be recovered by the owner or shipper for the loss, destruction, or deterioration of the goods is also valid, provided it is reasonable and just under the circumstances, and has been fairly and freely agreed upon [Article 1750, Civil Code]. The law of the country to which the goods are to be transported shall govern the liability of the common carrier for their loss, destruction or deterioration [Article 1753, Civil Code]. (2) If the baggage are in the personal custody of the passengers Common carriers are bound to observe ordinary diligence. The baggage are regarded as necessary and the common carriers shall be responsible for them as depositaries, provided that notice was given to them, or to their employees, of the baggage brought by the passengers and that, on the part of the latter, they take the precautions which said common carriers advised relative to the care and vigilance of their baggage [Article 1998, Civil Code]. The responsibility of the common carriers shall include the loss of, or injury to the baggage of the passengers caused by the servants or employees of common carriers as well as strangers. The fact that passengers are constrained to rely on the vigilance of the common carriers shall be considered in determining the degree of care required of him [Article 2000, Civil Code]. However, the common carrier is not liable for compensation if the loss is due to the acts of the passenger, his family, servants or visitors, or if the loss arises from the character of the things brought into the common carrier [Article 2002]. The act of a thief or robber, who has entered the common carrier is not deemed force majeure, unless it is done with the use of arms or through an irresistible force [Article 2001, Civil Code]. The common carrier cannot free himself from responsibility by posting notices to the effect that he is not liable for the baggage brought by the passenger. Any stipulation between the common carrier and the passenger whereby the responsibility of the former as set forth by law is suppressed or diminished shall be void [Article 2003]. Q38: W hen is a common carrier presumed to be negligent? A38:

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(1) As to goods If the goods are lost, destroyed or deteriorated, common carriers are presumed to have been at fault or to have acted negligently, unless they prove that they observed extraordinary diligence required by law [Article 1735, Civil Code]. However, the presumption of negligence does not attach when the loss, destruction, or deterioration of the goods, is due to any of the following causes only: (a) flood, storm, earthquake, lightning, or other natural disaster or calamity; (b) act of the public enemy in war, whether international or civil; (c) act of omission of the shipper or owner of the goods; (d) the character of the goods or defects in the packing or in the containers; or (e) order or act of competent public authority, [Article 1734, Civil Code]. (2) As to passengers If a passenger dies or is injured, common carriers are presumed to have been at fault or to have acted negligently, unless they prove that they observed extraordinary diligence [Article 1756, Civil Code]. Q39: W hen is a com m on carrier liable for injuries inflicted by strangers or copassengers? A39: A common carrier is responsible for injuries suffered by a passenger on account of the willful acts or negligence of other passengers or of strangers, if the common carrier's employees through the exercise of the diligence of a good father of a family could have prevented or stopped the act or omission [Article 1763, Civil Code]. Q40: W hat is the prescriptive period for filing an action in court against a carrier on account of loss or damage? A40: The general rules under the Civil Code on extinctive prescription apply. Thus, action for damages must be filed in court: 1. Within 6 years, if a bill of lading was not issued [Art. 1145, Civil Code]. 2. Within 10 years, if a bill of lading was issued [Art. 1146, Civil Code]. For filing claims by the consignee against the carrier on account of damage found upon opening the packages, a claim, on account of damage found upon opening the packages, must be made against the carrier: 1. Within 24 hours, if the indications of the damage cannot be ascertained from the exterior of the packages (i.e., latent damage); or 2. At the time of receipt, if the indications damage can be so ascertained (i.e., patent damage) [Article 366, Code of Commerce]. Note that Art. 366 is limited to cases of claims for damage to goods actually turned over by the carrier and received by the consignee. It does not apply to misdelivery of goods. Failure to file a claim bars recovery [Aquino (2011)]. Q41: W hat are convenience?

the

requirem ents

for

granting

a

certificate

of

public

A41: 1. The applicant must be a citizen of the Philippines, or a corporation or co-partnership, association or joint-stock company constituted and organized under the laws of the Philippines, at least 60 per centum of its stock or paid-up capital must belong entirely to citizens of the Philippines;

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2. The applicant must be financially capable of undertaking the proposed service and meeting the responsibilities incident to its operation; and 3. The applicant must prove that the operation of the public service proposed and the authorization to do business will promote the public interest in a proper and suitable manner. It is understood that there must be proper notice and hearing before the PSC can exercise its power to issue a CPC. [KMU vs. Garcia (1994)] Q42: W hat is the kabit system ? A42: It is an arrangement whereby a person who has been granted a certificate of convenience allows another person who owns motor vehicles to operate under such franchise for a fee [Lita Enterprises, Inc. v. IAC (1984)]. It is invariably recognized as being contrary to public policy and therefore void and inexistent under Art. 1409. Thus, for the safety of passengers and the public, the registered owner of the vehicle is not allowed to prove that another person has become the owner so that he may be thereby relieved of responsibility [Lim v. CA (2002)]. However, one who has availed of the kabit system is not precluded from filing for damages against another who caused the injury, as the policy against the kabit system will not be defeated by giving such person standing to sue. [Lim v CA (2002)]

CORPORATION LAW Q43: How is the nationality of a corporation determined? A43: Two tests are applicable—the Control Test and the Grandfather Rule. Control Test: Gamboa v. Teves instructs that all voting shares outstanding must satisfy the 60/40 ratio. (Note: it’s not a question of “common” vs. “preferred” because voting rights may be accorded to preferred. The test is whether it is voting or non-voting so it depends upon the rights the share is entitled to.) This test basically requires that a corporation, when observant of the 60/40 ratio, will be treated as a complete Philippine national. In other words, a legal fiction is created whereby the corporation is considered as completely Filipino. So from an analysis which takes into account the relative ratio of shares, it is converted into one that is binary (either Filipino or not Filipino). Grandfather Rule: This test applies only when (i) the nationality requirement requires more than 60% Filipino ownership, and (ii) even when the nationality requirement is 60% Filipino ownership, when the equity ownership is in doubt. Under this rule, the courts determine the actual mix of foreign-national ownership and even if complicit with the nationality restrictions, no legal fiction is created whereby the entity is treated as completely Filipino. Q44: W hat are the elements of a corporation? A44: 1. It is an artificial being; 2. It is created by operation of law; 3. There is a right of succession; and 4. It possesses powers expressly conferred by law or incidental to its existence.

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Q45: Distinguish stock from non-stock corporations. Stock 1.

Have capital stock divided into shares; and 2. Are authorized to distribute to the holders of such shares dividends or allotments of surplus profits on the basis of the shares held, 3. Implied: For profit Capital stock divided into shares with authority to distribute dividends Stockholders and directors must act in meetings in person or by proxy Cumulative voting required by law

Non-Stock 1.

No part of income is distributable as dividends to its members or trustees; 2. Any profit may obtain as an incident to its operations shall, when necessary or proper, be used for the furtherance of the purpose or purposes; and 3. Has a purpose as per Sec. 88 that is not for profit No such characteristic May act by mail or other similar means, if provided in by-laws. Cumulative voting only available if provided in AOI or BL.

15 director max except in merger or consolidated banks

May be more than 15

Term of director 1 year

Term is 3 years, 1/3 of the directors must be elected annually

Meetings must be in city or municipality of principal office, preferably in principal office. One class must always have complete voting rights Free transfer of shares. Therefore, membership is not personal to the stockholder. May always vote by proxy Upon transfer of share, seller no longer part of corporation. Transfer may only be subject to restrictions noted down in AOI, BL, and stock certificate, not more onerous than right of first refusal.

May be wherever within the Philippines Right to vote of all shares may be denied. Nope, unless Articles or by-laws allow it. This is because membership is personal. Transfer cannot be made without consent of the corporation. Proxy can be denied. Membership may be terminated according to causes provided in by-laws. 1.

1.

Residual Assets to be distributed to stockholder. 2. Dissolution in accordance with the Code.

Distributive rights must be spelled out in AOI or approved by 2/3 members. Generally, not allowed to participate in properties. 2. Procedure is different. Properties to be transferred to other charitable corporations. Donations to non-stock conditioned on return upon dissolution shall be returned….upon dissolution.

Q46: Distinguish stock from close corporations.

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Stock Has an AOI with a general template

No limit to number of corporators allowed by authorized shares. May list in Philippine Stock Exchange (PSE) In general, all businesses may be carried out by corporation Powers exercised by board, elected by stockholders Pre-emptive right subject to Sec. 39 limitations Appraisal right must be for reasons listed in the code Dissolution must comply with all the requirements SEC may not regulate if purpose not illegal No classification of directors BOD elects directors Must have unrestricted retained earning (URE) to buy own shares No arbitration in case of intra-corporate deadlock

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Close Must provide 1. Not to be held by more than a certain number of Stockholders, not to exceed 20 2. Transfer restrictions allowed 3. Shall not be listed, and shall not publicly offer Further, a corporation which is not a close corp. cannot own more than 75% of the outstanding capital stock Not more than 20, according to AOI May not list on PSE Mining, Oil, Stock Exchange, Banks Insurance, Public Utility, Educational, Public Interest cannot be organized as close corp. Stockholders may manage affairs directly, subject to the same rights and liabilities of directors. No limit to pre-emptive rights. Thus, includes sale of treasury shares and for acquisition of properties. Appraisal right can be for any cause. And no need for URE, so long as the corporation would not thereby become insolvent. Any stockholder may petition for dissolution for stated grounds. SEC may intervene in management of corp. in case of deadlocks. May classify directors Sholders, as directors, directly elect officers, if provided by AOI No need for URE to acquire shares if ordered by SEC in intra-corporate deadlock Arbitration allowed.

Q47: W hen is it proper to pierce the veil of corporate fiction? A47: 1. Where the liability belongs to the corp but plaintiff seeks to hold individual stockholder accountable. Mere controlling interest is not enough. The most potent test is to prove that the entity is being used to commit fraud. Note the following badges of fraud: a) used as a shield to further an end subversive of justice; b) or for purposes that could not have been intended by the law that created it; c) or to defeat public convenience; d) justify wrong; e) protect fraud; f) or defend crime; g) or to perpetuate fraud or confuse legitimate issues; h) or to circumvent the law or perpetuate deception. In this connection, jurisprudence seems to point to another aspect whereby the directors are held liable in piercing the veil. In such cases, the courts use a two-step analysis whereby they

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justify the piercing of the veil but also invoke Sec. 31 of the Corp. Code to impute individual liability on the directors. 2. Where the liability is personal to the individual and he seeks to evade it by hiding behind a corporate vehicle. This was the scenario exhibited in Palacio v. Fely. Calingasan’s driver here was held criminally and civilly liable for reckless imprudence. Sensing that his driver would be unable to pay up and hence his subsidiary liability would be triggered, he organized a corporation and transferred ownership of the vehicle to it. However, the Court saw through the veil and ultimately held Calingasan liable. 3. The instrumentality or alter ego rule. This particular analysis has its own set of rules, namely: (i) Control, not mere majority or complete stock control, but complete domination, not only of 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; (ii) Such control must have been used by the defendant to commit fraud or wrong, to perpetuate the violation of a statutory or other positive legal duty, or dishonest and unjust act in contravention of plaintiffs legal rights; and (iii) 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. in applying the instrumentality or alter ego doctrine, the courts are concerned with reality and not form, with how the corporation operated and the individual defendants relationship to that operation.” [Concept Builders v. NLRC (1996)] The same case laid down some badges or telltale signs indicative of fraud: (i) Stock ownership by one or common ownership of both corporations; (ii) Identity of directors and officers; (iii) The manner of keeping corporate books and records; and (iv) Methods of conducting the business. 4. Successor corporation rule. This applies in instances where a corporation feigns dissolution or cessation but really continues in existence organized under another name. This application of the rule figures prominently in labor cases where the prior entity seeks to evade its obligations to its laborers. Some tell tale signs exhibited in Claparols v. CIR include: (i) consecutive date of cessation and commencement of subsequent entity; (ii) ownership and control by former controlling stockholder; and (iii) turnover of assets. On the other hand, in Livesey v Binswanger, the court pointed to the following: (i) same officers; (ii) same office; (iii) continuation of the business, etc. Note however the case of SME Bank v. De Guzman which reversed the ruling in Manlimos v. NLRC. “In asset sales, the rule is that the seller in good faith is authorized to dismiss the affected employees, but is liable for the payment of separation pay under the law. The buyer in good faith, on the other hand, is not obliged to absorb the employees affected by the sale, nor is it liable for the payment of their claims. The most that it may do, for reasons of public policy and social justice, is to give preference to the qualified separated personnel of the selling firm.

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In contrast with asset sales, in which the assets of the selling corporation are transferred to another entity, the transaction in stock sales takes place at the shareholder level. Because the corporation possesses a personality separate and distinct from that of its shareholders, a shift in the composition of its shareholders will not affect its existence and continuity. Thus, notwithstanding the stock sale, the corporation continues to be the employer of its people and continues to be liable for the payment of their just claims. Furthermore, the corporation or its new majority shareholders are not entitled to lawfully dismiss corporate employees absent a just or authorized cause.” In sum, good faith as a defense in labor disputes applies only for asset sales. Q48: Can a corporation be entitled to m oral dam ages? A48: In Filipinas Broadcasting v. AGO the Court enunciated: “The Court of Appeals cites Mambulao Lumber Co. v. PNB, et al. to justify the award of moral damages. However, the Courts statement in Mambulao that a corporation may have a good reputation which, if besmirched, may also be a ground for the award of moral damages is an obiter dictum. Nevertheless, AMECs claim for moral damages falls under item 7 of Article 2219 of the Civil Code. This provision expressly authorizes the recovery of moral damages in cases of libel, slander or any other form of defamation. Article 2219(7) does not qualify whether the plaintiff is a natural or juridical person. Therefore, a juridical person such as a corporation can validly complain for libel or any other form of defamation and claim for moral damages. Moreover, where the broadcast is libelous per se, the law implies damages. In such a case, evidence of an honest mistake or the want of character or reputation of the party libeled goes only in mitigation of damages. Neither in such a case is the plaintiff required to introduce evidence of actual damages as a condition precedent to the recovery of some damages. In this case, the broadcasts are libelous per se. Thus, AMEC is entitled to moral damages.” From this ruling, it can be gleaned that the question of w/n a corporation is entitled to moral damages is not answerable by a hard and fast rule. The analysis varies from case to case with special attention that must be focused on the legal basis relied upon. Q49: W hat is a de facto corporation? A49: For all intents and purposes, a de facto corporation is treated as a de jure corporation save for the feature that its existence may be challenged by the State under a Quo Warranto proceeding. In such a proceeding, the entity’s best defense is to prove it is de jure. If it is able to prove such, then the QW action is dismissed. If the defense is without merit, then it is treated as de facto and may be dissolved after due proceedings. There are three elements of a de facto corporation: 1) a law upon which a corporation may be validly incorporated; 2) colorable compliance with the legal requirements; and 3) user of corporate powers in good faith. [Malabang v. Benito (1969)] Q50: W hat is a corporation by estoppel? A50: Under the codal provision, there are two elements involved: a) there is an assumption to act as a corporation; and b) knowledge that it is without authority to do so. A third implied requirement is that there must be a third party involved. [Lim Tong v. Phil. Fishing Gear (1999)] The estopped entity is thus precluded from raising as a defense that it lacked corporate

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personality and the parties involved are liable as general partners for all debts, liabilities, and damages as a result of the transaction. The application of this remedial vehicle turns upon a consideration of the factual milieu which may vary from case to case. Note that the rule on corporation by estoppel cuts both ways—when the corporation is estopped from denying its corporate existence to evade liability; and when the third party is estopped from denying corporate existence after having dealt with it, knowing full well its defect, in order to evade liability. Q51: W hat are the instances when even non-voting shares may vote? A51: 1. Amendment of AOI; 2. Adoption and amendment of by-laws; 3. Sale, lease, exchange, mortgage, pledge or other disposition of all or substantially all corporate property; 4. Incurring, creating or increasing bonded indebtedness; 5. Increase or decrease of capital stock; 6. Merger or consolidation of the corporation with another corporation of other corporations; 7. Investment of corporate funds in a corporation or business in accordance with the Corp. Code 8. Corporate dissolution Q52: In what instances m ay a stock corporation acquire its own shares? A52: 1. To eliminate fractional shares arising out of stock dividends; 2. To collect or compromise an indebtedness to the corporation, arising out of unpaid subscription, in a delinquency sale, and to purchase delinquent shares sold during said sale; 3. To pay dissenting or withdrawing stockholders entitled to payment for their shares under the provisions of the Corp. Code 4. In case of redeemable shares, regardless of the existence of unrestricted retained earnings; 5. To effect a decrease of capital stock; 6. In close corporations, in case of a deadlock in the management of the business, regardless of the existence of unrestricted retained earnings. Q53: W hen is the appraisal right available? A53: 1. An amendment in the AOI that has the effect of changing or restricting shareholders’ rights; or changing the corporate term 2. Sale, encumbrance or other dispositions of all or substantially all of the corporate property or assets 3. Investment of corporate funds in another corporation or in a purpose other than the primary purpose. 4. Merger or consolidations

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5. In a close corporation, a stockholder may, for any reason, compel the corporation to purchase his shares when the corporation has sufficient assets in its books to cover its debts and liabilities exclusive of capital stock (Sec. 105) Q54: Distinguish the different scenarios where the corporation may invest in another business. A54: 1. The investment is in pursuit of the primary purpose of the corporation. In such a case, only board approval is necessary; 2. Investment in another business beyond scope of its primary or ancillary purposes (no general grant of power to invest in other corps). Essentially, this would be an ultra vires act. For the transaction to push through, there must first be an amendment to the AOI in either of the following tenors: (i) a general grant of power to the corporation to invest in other corps; or (ii) a secondary purpose which relates to the prospective transaction. Thereafter, SH/member approval will be required in accordance with Sec. 42; and 3. Investment in another business in pursuit of a secondary purpose. It would fall squarely under Sec. 42. Note the bright line between secondary purpose and one totally unrelated. The first would trigger Sec. 42 while the second would first require amendment of the AOI. Q55: W hat is an ultra vires act? How does it differ from an illegal act? A55: In determining whether an corporate act is ultra vires or intra vires, the Code provides that no corporation under this Code shall possess or exercise any corporate powers except those conferred by this Code or by its articles of incorporation and except such as are necessary or incidental to the exercise of the powers so conferred. Some jurisprudential tests/doctrines that lay the parameters of intra vires/ultra vires acts: (i) “whether or not a logical and necessary relation exists between the act questioned and the corporate purpose expressed in the charter” [NPC v. Vera], (ii) “ there are however certain corporate acts that may be performed outside of the scope of the powers expressly conferred if they are necessary to promote the interest or welfare of the corporation” [RP v. Acoje Mining] The term ultra vires should be distinguished from an illegal act for the former is merely voidable which may be enforced by performance, ratification, or estoppel, while the latter is void and cannot be validated. It being merely voidable, an ultra vires act can be enforced or validated if there are equitable grounds for taking such action. Here it is fair that the resolution be upheld at least on the ground of estoppel. [RP v. Acoje Mining] Q56: Discuss the rem edies that m ay be availed of when a corporation com m its ultra vires acts. A56: 1. State a. Obtain judgment of forfeiture b. Quo warranto proceedings c. SEC may suspend or revoke certificate of registration

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2. Stockholders a. Injunction b. Derivative suit 3. Creditors a. Nullification of contract in fraud of creditor Q57: W hat is the trust fund doctrine and the exceptions thereto? A57: The doctrine states that the subscribed capital stock of the corporation is a trust fund for the payment of debts of the corporation which the creditors have the right to look up to satisfy their credits, and which the corporation may not dissipate. The creditors may sue the stockholders directly for the latter’s unpaid subscription. Exceptions: (i) Amendment of the AOI to reduce authorized capital stock; (ii) Purchase of redeemable shares by the corporation regardless of existence of unrestricted retained earnings; and (iii) Dissolution and eventual liquidation of the corporation Q58: What is the status of contracts entered into by the corporation with one or more of its directors, trustees, or officers? A58: The contracts are voidable at the option of the corporation unless: 1. The presence of such director or trustee in the board meeting in which the contract was approved was not necessary to constitute a quorum for such meeting; 2. The vote of such director or trustee was not necessary for the approval of the contract; 3. The contract is fair and reasonable under the circumstances; and 4. In case of an officer, the contract has been previously authorized by the board of directors If any of the first two requisites are not present, the contract may still be valid if: 1. Stockholders representing 2/3 of the outstanding capital stock or 2/3 of the members ratify the contract in a meeting called for that purpose; 2. Full disclosure of the adverse interest of the director or trustee is made during such meeting; and 3. Contract is fair and reasonable under the circumstances Q59: W hat is a derivative suit? W hat is its legal basis? A59: Derivative suits are actions filed in court by a stockholder or group of stockholders irrespective of number of shares held in cases where “directors are guilty of breach of trust, not of mere error of judgment or abuse of discretion and intra-corporate remedy is futile or useless, done for the benefit of the corporation, to bring about redress of the wrong inflicted directly upon the corporation and indirectly upon the stockholders.” There is no express provision in the Corporation Code on derivative suits but the right of a stockholder to initiate it has long been recognized by courts of common law, founded on equity. However, the requirements for derivative suits are enumerated in the Interim Rules of Procedure. Q60: W hat are the requisites for derivative suits? A60:

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1.

He was a stockholder or member at the time the acts or transactions subject of the action occurred and at the time the action was filed; 2. He exerted all reasonable efforts, and alleges the same with particularity in the complaint, to exhaust all remedies available under the articles of incorporation, by-laws, laws or rules governing the corporation or partnership to obtain the relief he desires; 3. No appraisal rights are available for the act or acts complained of; and 4. The suit is not a nuisance or harassment suit. The fifth requisite for filing derivative suits, while not included in the enumeration, is implied in the first paragraph of Rule 8, Section 1 of the Interim Rules: The action brought by the stockholder or member must be "in the name of [the] corporation or association. . . ." Q61: W hat are the rules governing suits by foreign corporations? A61: 1. If a foreign corporation is doing business in the Philippines without a license, it may not sue before Philippine courts; 2. If it is not doing business in the Philippines, a license is not a prerequisite for a suit based on an isolated transaction or on a cause of action independent of any business transaction; 3. If a foreign corporation does business in the Philippine without a license, a Philippine citizen or entity which has contracted with said corporation may be estopped from challenging the foreign corporation’s corporate personality in a suit brought before Philippine courts; 4. If a foreign corporation does business in the Philippine with the required license, it can sue before the Philippine courts on any transaction. Q62: W hat constitutes “doing business”? W hat does not? A62: The phrase "doing business" shall include soliciting orders, service contracts, opening offices, whether called "liaison" offices or branches; appointing representatives or distributors domiciled in the Philippines or who in any calendar year stay in the country for a period or periods totalling one hundred eighty (180) days or more; participating in the management, supervision or control of any domestic business, firm, entity or corporation in the Philippines; and any other act or acts that imply a continuity of commercial dealings or arrangements, and contemplate to that extent the performance of acts or works, or the exercise of some of the functions normally incident to, and in progressive prosecution of, commercial gain or of the purpose and object of the business organization: Provided, however, That the phrase "doing business: shall not be deemed to include mere investment as a shareholder by a foreign entity in domestic corporations duly registered to do business, and/or the exercise of rights as such investor; nor having a nominee director or officer to represent its interests in such corporation; nor appointing a representative or distributor domiciled in the Philippines which transacts business in its own name and for its own account [Sec. 3(d), Foreign Investments Act of 1991] Q63: W hat are the different kinds of interest rates imposed in delinquent shares? A63: The law contemplates 2 kinds of interest. 1. Interest on the subscription (moratory interest); and

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2. Interest by reason of default (compensatory interest) Section 66 covers interest on the subscription. This is due only if specified in contract of subscription at the rate provided in the by-laws. If the rate is silent, it is legal the rate. In other words, the unpaid subscription shall earn interest from the date of the subscription until full payment. You can collect another kind of interest that is compensatory interest. Interest imposed by reason default. But, compensatory interest is computed only from the delinquency date (the date it becomes payable), not from the date of subscription.

SECURITIES REGULATION CODE Q64: A and B putting up a partnership, the partnership becam e profitable. They needed more capital but unfortunately they have already exhausted their money, so they decided to issue certificates of participation. The holders of certificate of participation are considered partners, they have the right to participate in the profit of the partnership. Can A and B issue the certificate of participation to 10 select friends? A64: Yes, but only if they comply with the registration requirement imposed by the SEC. Any instrument that entitles the holder to participate in a profit of any enterprise is considered a security, therefore cannot be sold or offered to be sold in the Philippines unless it complies with the registration requirements required by the SEC. Q65: Are checks securities? A65: Generally no, but checks which were rolled over to augment the creditor’s existing investment with another corporation is considered as a security. Q66: Gabionza placed a monetary investment with ASBHI. Instead of stocks or securities, ASBHI issued postdated checks. After a while, the drawee bank started refusing to pay for checks by virtue of a stop payment order from ASBHI. Thus, Gabionza et al filed carim inal com plaints for estafa against the presidents and treasurer of ASBHI. Decide the case. A66: Yes, there was estafa. Through various misrepresentations, ASBHI held itself out to be of sufficient capital to be trustworthy with investments. Thus, there was estafa. Especially of note is the fact that ASBHI issued postdated checks. These are evidences of indebtedness, which are among the securities required to be registered under the old Revised Securities Acts, despite what ASBHI thought. While generally checks are merely negotiable instruments, and their issuance to satisfy isolated transactions is well within the ambit of a valid corporate act, their issuance to execute an elaborate scheme to compart to the public to be a pseudoinvestment house instead of stocks or traditional securities is a clear circumvention of the RSA. Q67: W hat are examples of manipulation of security prices?

A67:

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7. 8. 9. 10.

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Short Swing Transaction – The buying and selling or selling and buying of securities within the period of 6 months; Over the Counter Transaction – The buying and selling outside the Stock Exchange or creating your own market place. Short Selling – buying and selling or selling and buying securities that you do not know or have within 6 months. Wash Sale – selling of securities without change of beneficial ownership Match Order – placing an order to buy knowing that there is a simultaneous order to sell securities for the same price, terms and conditions. Active Trading through Manipulative Devices and Schemes – transactions or series of transactions to induce buying or selling of securities either by one person or in conspiracy with others in increasing or decreasing the price of securities just to induce the buying or selling of securities. Painting the Tape – painting a rosy picture of the issuer Marking the Close – buying or selling at the end of trading Hype and Dump – hype the shares so that price will increase and then dump it Squeezing the Float – limits the supply of shares

Q68: W ho is an insider? W hat is meant by “material” information? Q68: Insiders are: 1. Issuer; 2. Director, officer (or any person performing similar functions), or a person controlling the issuer; 3. Person whose relationship or former relationship to the issuer gives or gave him access to material information not available to the public; 4. Government employee, director, or officer of an exchange with access to material information; 5. Person who learns such information by a communication from any foregoing insiders. The latter is also known as a “constructive insider” “Material” if it will affect the price of the securities or influence a decision of a reasonable person to buy or sell securities. Any information that will affect the price of securities like (merger, cash dividends, appointment of new president, resignation of the incumbent president).

BANKING LAW Q69: W hat are considered absolutely confidential by the Secrecy of Bank Deposits Law? A69: Philippine peso deposits of whatever nature with banks or banking institutions in the Philippines; and investment bonds issued by the Philippine Government, its political subdivisions and instrumentalities. [Sec. 2 of R.A. No. 1405] “Deposits of whatever nature” includes trust accounts as held in the case of Ejercito v. Sandiganbayan (2006).

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Q70: W hat are the prohibited acts under R.A. 1405? A70: The following acts are prohibited: 1. The deposits and investments may not be examined, inquired or looked into by any person, government official, bureau, or office; and 2. Any official or employee of a banking institution may not disclose to any person other than those mentioned in Section 2 any information concerning said deposits or investments. Q71: Under what circumstances may a bank deposit be inquired into? A71: 1. When there is written permission of the depositor or investor; 2. Impeachment cases; 3. Upon the order of a competent court in cases of bribery or dereliction of duty of public officials; 4. Upon the order of a competent court in cases where the money deposited or invested is the subject of litigation; 5. Upon order of a competent court or tribunal in cases involving unexplained wealth under R.A. 3019; 6. Upon inquiry by the Commissioner of Internal Revenue for the purpose of determining the net estate of a deceased depositor; 7. Upon the order of a competent court, by the AMLC where there is probable cause for money laundering under Sec. 11 of the AMLC; 8. Examination by the AMLC without court order in the following cases: (a) Kidnapping, (b) Violation of the Dangerous Drugs Act, (3) Terrorism and conspiracy to commit terrorism, (4) Hijacking, destructive arson, and murder; 9. Disclosure to the Treasurer of the Philippines for dormant deposits under the Unclaimed Deposits Act; 10. Upon order by the CA, by law enforcement officers in terrorism cases under the Human Security Act; 11. Investigation where the AMLC is authorized to examine deposits and investments with any banking institutions or non-bank financial institution and their subsidiaries and affiliates without a court order (Sec. 10, R.A. No. 10169); 12. PDIC’s inquiry into and examination of deposit accounts and all information related thereto in case there is a finding of unsound banking practice under Sec. 8(8) of R.A. No. 3591, as amended; 13. Examination by the PDIC in case there is a failure of prompt corrective action as declared by the Monetary Board due to capital deficiency; 14. When there is waiver in case of DOSRI loans; 15. Disclosure to the BSP to ensure compliance with the AMLA. Q72: Danny was appointed as the conservator of Diliman Bank. Upon reviewing the records of Dilim an Bank, he came across an exchange of letters between Michael, an officer of the bank, and Alfredo regarding the sale of a parcel of land owned by the Bank. The last letter sent by Michael was with respect to the final purchase price, and the last reply received from Alfredo was one setting a date for the payment thereof. The date came but Danny ordered the officers not to accept the payment and told Alfredo that the offer would be reviewed by him as conservator. Assum ing there was a perfected contract, may Danny disregard the contract?

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A72: No. While admittedly, the Central Bank law gives vast and far- reaching powers to the conservator of a bank, it must be pointed out that such powers must be related to the "(management of) the assets and liabilities of the bank, (the reorganization of) the management thereof and (the restoration of) its viability." Such powers, enormous and extensive as they are, cannot extend to the post-facto repudiation of perfected transactions, otherwise they would infringe against the non-impairment clause of the Constitution [First Philippine International Bank v. CA (1996)]. Q73: Danny was appointed as the conservator of Diliman Bank. Upon reviewing the records of Dilim an Bank, he came across an exchange of letters between Michael, an officer of the bank, and Alfredo regarding the sale of a parcel of land owned by the Bank. The last letter sent by Michael was with respect to the final purchase price, and the last reply received from Alfredo was one setting a date for the payment thereof. The date came but Danny ordered the officers not to accept the payment and told Alfredo that the offer would be reviewed by him as conservator. Assum ing there was a perfected contract, may Danny disregard the contract? A73: No. While admittedly, the Central Bank law gives vast and far- reaching powers to the conservator of a bank, it must be pointed out that such powers must be related to the "(management of) the assets and liabilities of the bank, (the reorganization of) the management thereof and (the restoration of) its viability." Such powers, enormous and extensive as they are, cannot extend to the post-facto repudiation of perfected transactions, otherwise they would infringe against the non-impairment clause of the Constitution [First Philippine International Bank v. CA (1996)]. Q74: ABC Corporation is a commercial bank. DEF Incorporated is a corporation engaged in the manufacture of cars. May ABC Corporation acquire shares in DEF Incorporated? Explain the limitations imposed on the equity investments of commercial banks, if any. A74: No. Under Section 30 of the GBL, a commercial bank may only invest in the equities of allied enterprises as determined by the Monetary Board. A commercial bank may invest in allied enterprises under the following conditions: (1) the total investment in equities of allied enterprises shall not exceed 35% of the net worth of the bank; (2) the equity investment in any one enterprise shall not exceed 25% of the net worth of the bank; and (3) the acquisition of these equities is subject to the prior approval of the Monetary Board. Q75: ABC Corporation is a commercial bank. DEF Incorporated is a corporation engaged in the manufacture of cars. May ABC Corporation acquire shares in DEF Incorporated? Explain the limitations imposed on the equity investments of commercial banks, if any. A75: No. Under Section 30 of the GBL, a commercial bank may only invest in the equities of allied enterprises as determined by the Monetary Board. A commercial bank may invest in allied enterprises under the following conditions: (1) the total investment in equities of allied enterprises shall not exceed 35% of the net worth of the bank; (2) the equity investment in any one enterprise shall not exceed 25% of the net worth of the bank; and (3) the acquisition of these equities is subject to the prior approval of the Monetary Board. Q76: W hat is the redemption price to be paid to a mortgagee bank?

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A76: Redemption may be exercised by paying the amount due under the mortgage deed, with interest thereon at the rate specified by the mortgage, and all the costs and expenses incurred by the bank or institution from the sale and custody of said property less the income derived therefrom. [Sec. 47, GBL] Q77: W hat are required to be disclosed under the Truth in Lending Act? A77: The law assures full disclosure by requiring the lender to give the borrower all the details regarding the transaction in writing, prior to the consummation of the transaction – 1. The cash price or delivered price of the property or service to be acquired; 2. The amounts, if any to be credited as downpayment and/or trade-in; 3. The difference between the amounts set forth in (1) and (2); 4. The charges, individually itemized, which are paid or to be paid by such person in connection with the transaction but which are not incident to the extension of credit; 5. The total amount to be financed; 6. The finance charge expressed in terms of pesos and centavos; and 7. The percentage that the finance bears to the total amount to be financed expressed as a simple annual rate on the outstanding unpaid balance of the obligation. Q78: Spouses Beluso obtained a loan from University Bank. The loan agreem ent contained a clause stating that finance charges would be collected but did not specify the amount that would be due. W hen University Bank tried to collect on the loan, the spouses paid only the principal and the interest alleging that the imposition of finance charges was void for violating the Truth in Lending Act. Is the contention of the spouses Beluso correct? A78: Yes. Subsequent compliance with the disclosure requirement cannot be deemed substantial compliance with the Truth in Lending Act [UCPB v. Spouses Beluso (2017)]. Q79: Is the written consent of the depositor the only exception to the confidentiality of foreign currency deposits? A79: No. Other exceptions are: 1. When it has been established that there is probable cause that the deposits or investments involved are in any way related to a money laundering offense [Sec. 11, AMLA]; 2. In cases of terrorism or conspiracy to commit terrorism [Sec. 27 and 28, Human Security Act]; 3. To investigate financing of terrorism [Sec. 10, R.A. No. 10168]; 4. The bank deposits of a decedent to determine gross estate, and a taxpayer who has filed an application for compromise of tax liability under Sec. 6(F) of the NIRC; and 5. By the PDIC [Sec. 8, R.A. No. 3591 as amended by R.A. No. 9576].

INTELLECTUAL PROPERTY LAW Q80: W hat is copyright? A80: Copyright is a right granted by statute to the author or originator of literary, scholarly, scientific or artistic productions, including computer programs. A copyright gives the owner the legal right to determine how the work is used and to obtain economic benefits from the owner. [Rule 2, Copyright Safeguards and Regulations]

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Q81: W hen is copyright vested? A81: Copyright is vested from the moment of creation, irrespective of their mode or form of expression, as well as of their content, quality and purpose. Q82: XX Productions is the grantee of Certificate of Copyright for Marley and Me, a dating game show. W hile watching television, the president of XX Productions saw an episode of It’s A Date, a dating game show. Before the court, XX Productions contends that it has copyright over the mechanics for dating game shows. Is this accurate? A82: No. The format and mechanics of a show are not copyrightable. Copyright does not extend to ideas, procedures, processes, systems, methods of operation, concepts, principles, or discoveries. The copyright that XX Productions possesses only involves the audio-visual recordings of each episode of Marley and Me. [Joaquin v Drilon (1999)] Q83: W hat is the Doctrine of Fair Use? A83: The fair use of copyrighted work for criticism, news reporting, teaching (including multiple copies for classroom use), research and similar purposes is not an infringement of copyright. A privilege, in persons other than the owner of the copyright, to use the copyrighted material in a reasonable manner without his consent, notwithstanding the monopoly granted to the owner by the copyright. It is meant to balance the monopolies enjoyed by the copyright owner with the interests of the public and of society. The following must be considered: 1. The purpose and character of the use, including whether such use is of a commercial nature or is for non-profit educational purposes; 2. The nature of the copyrighted work; 3. The amount and substantiality of the portion used in relation to the copyrighted work as a whole; and 4. The effect of the use upon the potential market for or value of the copyrighted work. Q84: W hat is a tradem ark? A84: A trademark is any visible sign that distinguishes a good or service from others. Q85: W hat are the functions of a tradem ark? Q85: A trademark has the following functions: 1. Economic function – allows for the use of the mark in trade or business, making it easier for companies to interact with other businesses and engage the purchasing public; 2. Advertising function – the representation of the mark to the public; the mark itself establishes the existence of the good or service for consumption; 3. Source-indicating function – this refers to the establishment or the origin of a mark; 4. Guarantee function – guarantee of quality, which is associated with the mark; that a person who would avail of the service or good will get the same experience and quality every time the service or good is availed of.

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Q86: W hat are the kinds or m arks? A86: The kinds of marks, based on a spectrum of distinctiveness are the following: 1. Fanciful or “Coined” Marks – These are invented or “coined” words that do not have any meaning and are made solely for the purpose of the mark. They are considered “strong” marks for purposes of registration and protection for being inherently distinctive. Ex. “KODAK” 2. Arbitrary Marks – Common words used as marks, but are unrelated to the good or service they represent. They neither describe nor suggest the characteristic of the goods or service, though they are considered highly distinctive for purposes of registration. Ex. “APPLE” 3. Suggestive Marks – Marks that hint or suggest the nature or quality of the good or service without directly describing it. They are “subtly descriptive” and are entitled to protection despite lack of distinctiveness. Ex. “JAGUAR” 4. Descriptive Marks – Consists exclusively of signs or of indications that may serve in trade to designate the kind, quality, quantity, intended purpose, value, geographical origin, time or production of the goods or rendering of the services, or other characteristics of the goods or services; (Sec. 123.j) – These are words that merely describe the product or service or refer to their quality or characteristic. “Ex. ANG TIBAY” 5. Generic Marks - Words that directly tell what the product or service is. These must remain in the public domain and can never be registered as a trademark. Ex. “SUGAR” As a general rule, descriptive marks are not entitled to protection and are too weak to function as a trademark. Q87: W hat is the Doctrine of Fair Use? A87: The fair use of copyrighted work for criticism, news reporting, teaching (including multiple copies for classroom use), research and similar purposes is not an infringement of copyright. A privilege, in persons other than the owner of the copyright, to use the copyrighted material in a reasonable manner without his consent, notwithstanding the monopoly granted to the owner by the copyright. It is meant to balance the monopolies enjoyed by the copyright owner with the interests of the public and of society. The following must be considered: 1. The purpose and character of the use, including whether such use is of a commercial nature or is for non-profit educational purposes; 2. The nature of the copyrighted work; 3. The amount and substantiality of the portion used in relation to the copyrighted work as a whole; and 4. The effect of the use upon the potential market for or value of the copyrighted work. Q88: W hat is the Doctrine of Secondary Meaning? A88: When the descriptive marks have become distinctive, because of its long, continuous and exclusive use for 5 years, as used in connection with the applicant’s goods or services in

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commerce and in the mind of the public indicates a single source to consumers, it may be registered. The Office may accept as prima facie evidence that the mark has become distinctive, as used in connection with the applicant's goods or services in commerce, proof of substantially exclusive and continuous use thereof by the applicant in commerce in the Philippines for five (5) years before the date on which the claim of distinctiveness is made. Q89: W hat is a Declaration of Actual Use and what is its function? A89: The applicant or the registrant shall file a Declaration of Actual Use of the mark with evidence to that effect, as prescribed by the Regulations within three (3) years from the filing date of the application. Otherwise, the application shall be refused or the mark shall be removed from the Register by the Director. Failure to file Declaration of Actual Use automatically cancels mark registration by operation of law. While a Declaration of Actual Use is a notarized document, hence, a public document, it is not conclusive as to the fact of first use of a mark. The declaration must be accompanied by proof of actual use as of the date claimed. In a declaration of actual use, the applicant must, therefore, present evidence of such actual use. Q90: W hat is a disclaimer? A90: The IP Office may allow or require the applicant to disclaim an unregistrable component of an otherwise registrable mark but such disclaimer shall not prejudice or affect the applicant’s or owner’s rights then existing or thereafter arising in the disclaimed matter, nor such shall disclaimer prejudice or affect the applicant’s or owner’s right on another application of later date if the disclaimed matter became distinctive of the applicant’s or owner’s goods, business or services. Q91: W hat is the Doctrine of Natural Expansion? A91: Under the doctrine of natural expansion, the trademark owner also has a right to claim protection over goods and services that were not part of its trademark registration since such goods and services only came into existence/effect after the registration, but are related to the actual goods and services protected by the trademark. Example would be when a gas station started to sell other goods aside from fuel, such as engine oil. Q91: W hat is a patent? W hat are the elem ents of a patent? A91: A patent is a grant issued by the government through the Intellectual Property Office of the Philippines. It is an exclusive right granted for a product, process or an improvement of a product or process which is new, inventive and useful. This exclusive right gives the inventor the right to exclude others from making, using, or selling the product of his invention during the life of the patent. Patentable inventions offer a technical solution to a problem in any field of human activity. However, theories, mathematical methods, methods of treatment and artistic creations are Non-Patentable inventions. Its elements are the following: 1. Novelty — An invention shall not be considered new if it forms part of a prior art;

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2. Inventive Step — An invention involves an inventive step if, having regard to prior art, it is not obvious to a person skilled in the art at the time of the filing date or priority date of the application claiming the invention; 3. Industrial Applicability — An invention that can be produced and used in any industry shall be industrially applicable. Q92: W hat are the two ways to infringe a patent? A92: 1. Literal Infringement – In using literal infringement as a test, resort must be had in the first instance to the words of the claim. To determine whether the particular item falls within the literal meaning of the patent claims, the court must juxtapose the claims of the patent and the accused product within the overall context of the claims and specifications, to determine whether there is exact identity of all material elements. 2. Doctrine of Equivalents - Under the Doctrine of Equivalents, an infringement also occurs when a device appropriates a prior invention by incorporating its innovative concept and, albeit with some modification and change, performs substantially the same function in substantially the same way to achieve substantially the same result. [Godinez v. CA (1993)] In order to infringe a patent, a machine or device must perform the same function, or accomplish the same result by identical or substantially identical means and the principle or mode of operation must be substantially the same. [Del Rosario v. CA (1996)] The Doctrine of Equivalents provides that an infringement also takes place when a device appropriates a prior invention by incorporating its innovative concept and, although with some modification and change, performs substantially the same function in substantially the same way to achieve substantially the same result. The principle or mode of operation must be the same or substantially the same. The doctrine requires satisfaction of the function-means-and-result test, the patentee having the burden to show that all three components of such equivalency test are met. [Smith Klein Beckman Corp. v. CA (2003)]

SPECIAL LAWS Q93: W hat is the crim e of m oney laundering? How is it com m itted? A93: Money laundering is a crime whereby the proceeds of an unlawful activity are transacted, thereby making them appear to have originated from legitimate sources. It is committed by the following: 1.

Any person knowing that any monetary instrument or property represents, involves, or relates to the proceeds of any unlawful activity, transacts or attempts to transact said monetary instrument or property.

2. Any person knowing that any monetary instrument or property involves the proceeds of any unlawful activity, performs or fails to perform any act as a result of which he facilitates the offense of money laundering referred to in paragraph (a) above.

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3. Any person knowing that any monetary instrument or property is required under this Act to be disclosed and filed with the Anti-Money Laundering Council (AMLC), fails to do so. [Sec. 4, RA 9610] Q94: The AMLC filed an application for the is suance of a freeze order against the properties of Mr. L and his family. Mr L. contests the application on the grounds that he has not yet been convicted of any predicate crime. Is Mr. L correct? A94: No, Mr. L is not correct. A conviction is not required for the issuance of a freeze order. Sec. 10 of RA 9610 only requires probable cause as determined by the Court of Appeals. Probable cause only requires the sufficiency of the relation between an unlawful activity and the property or monetary instrument. Q95: W hat is the nature of a proceeding under the FRIA? A95: The proceedings under the FRIA are in rem. Hence, jurisdiction is acquired upon publication of the notice of the commencement of the proceedings in any newspaper of general circulation in the Philippines. Q96: Mr. X is a private individual who does not own a sole proprietorship. His assets total Php 1 m illion, while his liabilities amount to Php 1.5 m illion. Can he apply for suspension of payments under the FRIA? If not, what proceeding can he initiate under the FRIA? A96: No, Mr. X may not apply for suspension of payments. To be declared in a state of suspension of payments, an individual debtor must possess sufficient property to cover all his debts but foresees the impossibility of meeting them when they respectively fall due. In this case, Mr. X does not possess sufficient property, his liabilities being greater than his assets. [Sec. 94, RA 10142] Mr. X’s remedy under the FRIA is liquidation. Mr. X may voluntarily initiate liquidation provided that (1) his properties are not sufficient to cover liabilities, and (2) his debts exceed Php 500,000. Both requisites are present in this case. [Sec. 103, RA 10142] Q97: Mr. X is a private individual who does not own a sole proprietorship. Can he initiate proceedings for rehabilitation? A97: No, he may not. Voluntary rehabilitation can only be initiated by: 1. Sole Proprietorship: When approved by the owner; 2. Partnership: When approved by a majority of the partners; 3. Stock Corporation: When approved by a majority vote of the BOD or trustees, and authorized by the stockholders 4. Non – Stock Corporation: When approved by 2/3 of the members in a meeting called for the purpose. An individual debtor who does not own a sole proprietorship may not apply for rehabilitation. His remedies are either suspension of payments or liquidation. [Sec. 12, RA 10142] Q98: Mr. X is a private individual who does not own a sole proprietorship. Can he initiate proceedings for rehabilitation?

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A98: No, he may not. Voluntary rehabilitation can only be initiated by: 1. Sole Proprietorship: When approved by the owner; 2. Partnership: When approved by a majority of the partners; 3. Stock Corporation: When approved by a majority vote of the BOD or trustees, and authorized by the stockholders; and 4. Non – Stock Corporation: When approved by 2/3 of the members in a meeting called for the purpose. An individual debtor who does not own a sole proprietorship may not apply for rehabilitation. His remedies are either suspension of payments or liquidation. [Sec. 12, RA 10142] Q99: HK Corp. is incorporated under the laws of Hong Kong. On several occasions, PH Corp., a Filipino corporation, would purchase products from HK Corp. According to their arrangement, HK Corp would deliver the products purchased by PH Corp to Y Corp., another Hong Kong corporation. The goods are considered sold as upon receipt by Y Corp., which would then have the obligation to deliver the goods to PH Corp. For PH Corp.’s failure to pay for several transactions, HK Corp. filed a complaint before the Philippine courts. PH Corp. alleges that HK Corp. has no capacity to sue, as it is doing business without the necessary license. Is the contention of PH Corp. correct? A99: No, PH Corp. is incorrect. The series of transactions between petitioner and respondent cannot be classified as "doing business" in the Philippines under Section 3(d) of RA 7042. An essential condition to be considered as "doing business" in the Philippines is the actual performance of specific commercial acts within the territory of the Philippines for the plain reason that the Philippines has no jurisdiction over commercial acts performed in foreign territories. Here, there is no showing that petitioner performed within the Philippine territory the specific acts of doing business mentioned in Section 3(d) of RA 7042. Petitioner did not also open an office here in the Philippines, appoint a representative or distributor, or manage, supervise or control a local business. While petitioner and respondent entered into a series of transactions implying a continuity of commercial dealings, the perfection and consummation of these transactions were done outside the Philippines.

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TRUST RECEIPTS Q100: W hat is a trust receipt? W hat are the two features of a trust receipt? A100: A trust receipt is a document of security pursuant to which a bank acquires a security interest in the goods under trust receipt. Under a letter of credit-trust receipt arrangement, a bank extends a loan covered by a letter of credit, with the trust receipt as a security for the loan. The transaction involves a loan feature represented by a letter of credit, and a security feature which is in the covering trust receipt which secures an indebtedness. Q101: W hat criminal liability attaches for failure of the entrustee to turn over either the proceeds of the sale of the goods covered by a trust receipt or the goods unsold? A101: The crime of estafa under Article 315, par. 1(b) of the Revised Penal Code. If the violation or offense is committed by a corporation, the penalty shall be imposed upon the directors, officers, employees or other officials or persons therein responsible for the offense, without prejudice to the civil liabilities arising from the criminal offense. [Pilipinas Bank v Alfredo Ong, G.R. No. 133176, Aug 8 2002] Q102: X was granted a loan by Y Bank, secured by goods under a trust receipt. The said goods were destroyed by a fortuitous event. X now claims that his obligations under the loan have now been extinguished. Is he correct? A102: No, X is not correct. The loss of the property not extinguish the obligation of the entrustee. The principal obligation (the loan) subsists, the goods under the trust recipt merely serving as security. [Sps. Dela Cruz v Planters Products, G.R. No. 158649, Feb 18 2013]