Zarah Case Doctrines

LEX LEONUM FRATERNITAS
Case Doctrines Commercial Law Atty. Zara !illan"e#a$Castro
I Corporation Law
FELICIANO vs. Commission on Audit Congress cannot enact a law creating a private corporation with a special charter. Local water districs are not private corporations because they are not created under the Corporation Code. Local water districts exist by virtue of PD 198, which constitutes their special charter. ince under the Constitution only !"CCs #ay have special charters, Local water districts can validly exist only if they are govern#ent owned or controlled. $o clai# that local water districs are private corporations with a special charter is to ad#it that their existence is constitutionally infir#. Magsaysay-Labrador vs. CA hareholders are in no legal sense owners of corporate property, which is owned by the corporation as a distinct person. Sulo ng ayan vs. Aran!ta
%bsent any showing of interest, a corporation has no personality to bring an action to recover property belonging to its #e#bers or stoc&holders in their personal capacities. ataan S"ipyard and Engin!!ring Co.# In$. vs. %C&& $he right of self'incri#ination has no application to (uridical persons. )hile an individual #ay lawfully refuse to answer incri#inating *uestions unless protected by an i##unity statute, it does not follw that a corporation, vested with special privileges and franchises, #ay refuse to show its hand when charged with an abuse of such privileges. $here is a reserved right on the part of the legislature to in*uire if the corporation has abused its privileges. Lu'uria (om!s vs. CA
By NI%%O LA&MA' and AN&ELO FERNANDO San Se(astian Law

to disregard the separate (uridical personality of a corporation, the wrong doing #ust be clearly and convincingly established, and that it cannot be presu#ed Con$!pt uild!rs# in$. vs. NL)C
+o hard and fast rule can be accurately laid dwn, but certainly, there are so#e probative factors of identity that will (ustify the application of the doctrine of piecrcing the veil of corporate fiction, to wit, 1. .. /. 0. stoc& ownership by one or co##on ownership of both corporationsidentity of directors and officersthe #anner of &iiping the corporate boo&s and recordsthe #ethods of conducting the business.
$he following are the tests in deter#ining the applicatbility of the doctrine of piercing the veil of corporate fiction, a. $here #ust be control, not #ere #a(ority or co#plete stoc& control, but co#plete do#ination, not only of finances, but of policy, and business practice in respect to the transaction attac&ed so that the corporate entity as to this transaction had, at that ti#e, no separate #ind, will or existence of its ownb. uch control #ust have been used by the defendant to co##it fraud or wrong, to perpetrate the violation of a statutory or other positive duty, or dishonest and un(ust act in contravention of plaintiff1s legal rights- and uch control and breach of duty #ust proxi#ately cause the in(ury to the plaintiff.
c.
*illar!y +ransit vs. F!rr!r $he corporate veil #ay be pierced to enforce a non'co#petition clause entered into by the controlling stoc&holder in his personal capacity, if the sa#e is urged as a #eans of perpetrating a fraud or an illegal act or as a vehicle for the evasion of an existing obligation, the circu#vention of statutes, the cachiev#ent or perfection of a #onopoly or generally, the perpetration of &navery or a cri#e. $he veil with which the law covers and isolates the corporation fro# the #e#bers or stc&holders who co#pose it will be lifted to allow for its consideration #erely as an aggregation of individuals. Fransis$o Motors Corporation vs. CA obligations of the stoc&holders are not the obligations of the corporation.

%N
vs. Andrada El!$tri$ and Engin!!ring Co.# In$. $he corporate veil #ay be lifted obly if it has been used to shield
&ra$! C"ristian (ig"s$"ool vs. CA % provision in the 2y'laws granting a per#anent seat in the 2"D is contrary to the Corporation Code. &o,ongw!i# -r. vs. SEC % by'law provision that forbids a co#petitor to be elected as corporate director is valid. .!st!rn Institut! o/ +!$"nology vs. Salas 3e#bers of the board #ay receive co#pensation in addition to reasonable per die#s, when they render services to the corporation in a capacity other than as directors or trustees. Na$pil vs. I C $he 2"D #ay also be e#powered under the by'laws to create additional officers as #ay be necessary. %!opl!0s Air$argo and .ar!"ousing $o vs CA 4f a corporation &nowingly per#its one of its officers, or any other agent, to act within the scope of an apparent authority, it holds hi# ut to the pyblic as possessing the power to do those acts, and tus, the corporation will, as against any one who has in god faith dealt with it through such agent, be estopped for# denying the agent1s authority. %rim! ."it! C!m!nt vs. IAC % director of a corporation holds a position of trust and as such, he owes a duty of loyalty to his corporation. 4n case his interests conflict with those of the corporation, he cannot sacrifice the latter to his wn advantage or benefit. "n the other hand, a director1s contract with his corporation is not at all instances void or voidable. 4f the contract is fair and reasonable under the 3

circu#stances, it #ay be ratified by the stoc&holders provided a full discolosure of his adverse interest is #ade. Santos vs. NL)C 4n $ra#at 3erchantile vs. C%, the Court has collated the settled instances when, without necessarily piercing the veil of corporate fiction, personal civil liability can also be said to lawfully attach to a corporate director, trustee or officer, to wit, 1. he assents 5a6 to patently unlawful acts of the corporation or, 5b6 for bad faith or gross negligence in directing its affairs, or 5c6 for conflict of interest, resulting in da#ages to the corporation, its stoc&holders or other persons.. he consents to the issuance of watered stoc&s or who, having &nowledge thereof, does not fortwith file with the corporate secretary his written ob(ection therto/. he agrees to hold hi#self personally and solidarily liable with the corporation- or 0. he is #ade, by a specific provision of law, to personally answer for his corporate action. 3ere ownership by a single stoc&holder or by another corporation of all or nearly all of the capital stoc& of a corporation is not of itself sufficient groung for disregarding the separate corporate personality. S%S 1avid vs. Constru$tion Industry and Arbitration Committ!! 2ad faith exists when a #aterial deviation fro# the structural plan was #ade without the clients being consulted first especially where it appears that the act was done to lower the cost of contruction. 7ence, personal liability for da#ages could attch to the officer of the construction co#pany. Malayang Sma"an ng mga Manggagawa sa M. &r!!n/i!ld vs. )amos 4n labor cases, corporate directors and fficers are solidarily liable with the corporation for the ter#ination of e#ploy#ent of corporate e#ployees done with #alice or in bad faith. Atrium Manag!m!nt Corporation vs. CA $he act of issuing chec&s for the purpose of securing a loan to finance the activities of the corporation is well within the a#bit of a valid corporate act, hence, not an ultra vires act. % treasure of a corporation whose negligence in signin a cnfir#anion letter for rediscounting of crssed chec&s, &nowing fully will that the chec&s ere strictly 4 By NI%%O LA&MA' and AN&ELO FERNANDO San Se(astian Law

enforsed for deposit only to the payee1s account and not to be further negotiated, resulting in da#age to the corporatin #ay be personally liable therefore. A Savings an, vs. SIA
$he certificate of non'foru# shopping re*uired by .C. Circular .8'91 #ay be signed, by a specifically authori8ed lawyer who has personal &nowledge of the facts to be disclosed in such docu#ent. 9nli&e natural persons, corporations #ay perfor# physical actions only through properly delegated individuals, na#ely, its officers and:or agents. Int!r-Asia Inv!stm!nt Industri!s# in$. vs. CA %n officer of a corporation who is authori8ed to purchase the stoc& of another corporation has the i#plied power to perfor# all other obligations areising therefro# such as pay#ent of shares of stoc&. Lapu-Lapu Foundation# in$. vs. CA 4f a corporation &onowingly per#its one of its officers to act within the scope of an apparent authority, it holds hi# out to the public as possessing the power to do those acts- and thus, the corporation will, as against anyone who has in good faith dealt with it through such agent, be estopped for# denying the agent1s authority. (ydro )!sour$!s Contra$tors Corporation vs. NIA 4t would be preposterous for the +4% ad#inistrator to have the power of granting clai#s without the authority to verify the co#putation of such clai#s. % corporation #ay be estopped fro# denying as against a third person the authority of its officers or agents who have been clothed by it with ostensible or apparent authority. %lthough an officer or agent acts without or in excess of his actual authority but acts within the scope of an apparent authorit with which the corporation has clothed hi# by holding out or per#itteing hi# to appear as having such authority, the corporation is bound thereby in foavor of a person who deals with hi# in good faith in reliance on such apparent authority. Mon/ort (!rmanos Agri$ultural 1!v!lopm!nt Corporation vs. Mon/ort III $o correct the alleged error in the !eneral 4nfor#ation heet, the retained accountant of the Corporation infor#ed the ;C the non'inclusison of the lawfully elected directors was attributable to the oversight and not the fault of the By NI%%O LA&MA' and AN&ELO FERNANDO San Se(astian Law 5

Corporation. $his belated atte#pt, however, did not erase the doubt as to whether an election was indeed held. 2y the express #andate of the Corporation Code, ec. .<, all corporations duly organi8ed pursuant thereto are re*uired to sub#it within the period stated therein 5/= days6 to the ;C the na#es, nationalities, and residences of the directors, trustees and officers elected. Ly$!um o/ t"! %"ilippin!s vs. CA $he fact that other schools use >Lyceu#? as part of their school1s na#e is not a deceptive use thereof relative to Lyceu# of the Philippines. 9nder the doctrine of secondary #eaning, a word or phrase originally incapable of exclusive appropriation with reference to an article appropriation with relevance to an article on the #ar&et, because geographically or otherwise descriptive, #ight nevertheless have been used so long and so exclusive by one producer with reference to his article that, in that trade and to that brance to the purchasing public, the wor& or phrase has co#e to #ean that the article was his product. Ang Mga 2aanib sa Igl!sia ng 1ios 2ay 2risto (!sus# (S2 vs. Igl!sia ng 1ios Parties organi8ing a corporation #ust choose a na#e at their peril- and the use of a na#e si#ilar adopted by another corporation, whether a business or a nonprofit organi8ation, if #isleading or li&ely to in(ure in the exercise of its corporate functions, regardless of intent, #ay be prevented by the corporation having prior right, by a suit for in(unction against the new corporation to prevent the use of na#e. "rdering a religious society or corporation to change its corporate na#e is not a violation of its constitutionally guaranteed right to religious freedo#. 4n so doing, the ;C #erely co#pelled petitioner to abide by one of the ;C guifelines in the approval of corporate na#es, na#ely its underta&ing to #anifest its willingness to change its corporate na#e in the event another person, fir#, or entity has ac*uired a prir right to use the said fir# na#e or one deceptively or confusingly si#ilar to it. Industrial )!/ra$tori!s Corporation o/ t"! %"ilippin!s vs. CA Confusing and deceptive si#ilarity of corporate na#es prohibited under section 18 of the Corporation Code. I& Summit (oldings vs. CA

% public utility is a business or service engaged in regularly supplying the public with so#e co##odity or service of public conse*uence such as electricity, gas, water, transportation, telephone or telegraph service. 2y nature, a shipyard is not a public utility. % shipyard is a place or enclosure where ships are built or repaired. 4ts nature dictates that it serves but a clientele who# it #ay wish or choose to serve at its discretion. )hile it offers its facilities to whoever #ay wish to avail of its services, a shipyard is not legally obliged to vender its services indiscri#inately to the public. 3oung Auto Supply Co vs. CA % corporation is in a #etaphysical sense a resident of the place where its principal office is located as stated in the articles of incorporation. )!publi$ %lant!rs an, vs. Agana
Preferences granted to preferred stoc&holders do not give the# a lien upon the property of the corporation not #a&e the# creditors of the corporation, the right of the for#er being always subordinate to the latter. hareholders, both co##on and preferred, are considered ris& ta&ers who invest capital in the business and who can loo& only to what is left after corporate debt and liabilities are fully paid. Castillo vs. aling"sasay
ection < of the Corporation Code explicitly provides that no share #ay be deprived of voting rights except those classified and issued as preferred or redee#able shares, unless otherwise provided in this Code, and that there shall always be a class or series of class which have co#plete voting rights. $here is nothing in the articles of incorporation or an iota of evidence on record that shows class >2? shares were categori8ed as either preferred or redee#able shares. Ni!lson and Company# in$. vs. L!panto Consolidat!d Mining Company % share of stoc& co#ing fro# stc& dividends declared cannot be issued to one who is not a stoc&holder of a corporation. Islami$ 1ir!$torat! o/ t"! %"ilippin!s vs. CA

% (uridical person cannot be considered essentially a for#al party to a case where it was not duly represented by its legiti#ate governing board. 1!! vs. S!$ $he pre'e#ptive right of stoc&holders is recogni8ed only with respect to new issue of shares, and not with respect to additional issues of originally authori8ed shares. Firm! vs. u,al Ent!rpris!s and 1!v!lopm!nt Corp.
% corporation can only exercise its powers and transact its business through its board of directors and through its officers and agents when authori8ed by a board resolution or its by'laws. Loyola &rand *illas (om! own!rs 4sout"5 Asso$iation vs. CA % corporation would not ipso facto lose its powers for failure to file the re*uired by'laws. C"ina an,ing Corporation vs. CA
4n order to be bound, a third party #ust have ac*uired &nowledge of the pertinent by'laws at the ti#e the transaction or agree#ent between said third person and the shareholder was entered into. L!! vs. CA 4n order to be eligible as a director, what is #aterial is the legal title to, not beneficial ownership of, the stoc& as appearing on the boo&s of the corporation. % voting trust agree#ent results in the separation of the voting rihts of a stoc&holder fro# his other riths such as the right to receive dividends and other rights to which a stoc&holder #ay be entitled until the li*uidation of the corporation. )!publi$ vs. Sandiganbayan 678 SC)A 96 PC!! cannot vote se*uestered shares except when there are >de#onstrably weighty and defensible grounds? or >when essential to prevent disappearance or wastage of corporate property?. )!publi$ vs. COCOFE1

$he govern#ent should be allowed to continue voting se*uestered 9CP2 shares inas#uch as they were purchased with cconut levy funds @ funds that are pri#a facie public in character or, at the very least, are clearly affected with public interest. Evang!lista vs. Santos 4n a derivative suit, it is the corporation itself and not the plaintiff stoc&holder that is the real party in interest, so that such da#ages as #ay be recovered shall pertain to the corporation. &o$"an vs. 3oung Personal in(ury siffered by stoc&holders cannot dis*ualify the# fro# filing a derivative suit. 4t #erely gives rise to an additional cause of action for da#ages against the erring directors. C"ua vs. CA +ot every suit filed in behalf of the corporation is a derivative suit. Aor a derivative suit to prosper, it is re*uired that the #inority stoc&holder suing for and on behalf of the corppration #ust allege that he is suing on a derivative cause of action on behalf of the corporation and all owther stoc&holder si#ilarly situated who #ay which to (oin hi# in the suit. 4t is a condition sine *ua non that the corporation be i#pleaded as a party because not only is the corporation an indispensable party, but it is also the present rule that it #ust be served with process. E'p!rtrav!l and +ours# in$. vs. CA 4n this age of #odern technology, the courts #ay ta&e (udicial notice that business transations #ay be #ade by individuals through teleconferencig. 4n the Philippines, teleconferencing and video conferencing of #e#bers of board of directors of private corporations is a reality, in light of B% +o. 8C9.. $he ;C issued ;C 3e#orandu# Circular +o 1D, on +ove#ber /=, .==1, providing the guidelines to be co#nplied with related to such conferences. Nava v. %!!rs Mar,!ting Corporation 9

)here no stoc& certificate was issued to original subscriber representing that portion of hi subscription which he paid for, the assign#ent of said subscriber1s corporate share is effective only between the parties to the transaction and the transferee cannot de#and fro# the corporation the issuance of certificate of stoc& representing the paid subscribed shares. Lim +ay v. CA % #ere pledgee is not entitled to ownership of shares. )ural an, o/ Lipa City v. CA
Delivery of the stoc& certificate duly endorsed by the owner is the operative act of transfer of shares fro# the lawful owner to the transferee. %on$! v. Alsons C!m!nt Corporation % transfer of shares of stoc& not recorded in the stoc& and transfer boo& of the corporation is non' existent as far as the corporation is concerned. 7ence, a corporate secretary #ay not be co#pelled to issue stoc& certificates without such registration. Ong 3ong v. +iu % subscription contract necessarily involves the corporation as one of the contracting parties since the sub(ect #atter of the transaction is property owned by the corporationEits shares of stoc&. Considering therefore that the real contracting parties to the subscription agree#ent were AL%D 5the corporation6 and the "ngs 5subscribers6 alone, a civil case for rescission on the ground of breach of contract filed by the $49s 5stoc&holders6 in their personal capacities will not prosper. Aurther#ore, to allow rescission disregards the separate (uridical personality of AL%D 5the corporation6. &on:al!s v. %N % stoc&holder has the duty of showing good #otive or purpose for de#anding an exa#ination of corporate boo&s. "ne who ac*uired one share of stoc& of a ban& to be able to exa#ine its boo&s can hardly be said to have been #otivates with good faith or proper purpose in de#anding inspection of the ban&1s transactions before he beca#e a stoc&holder.
Asso$iat!d
an, v. CA
$he #erger does not beco#e effective upon the #ere agree#ent of the constituent corporations' the #erger shall be effective only upon the issuance by the ;C of a certificate of #erger. 10 By NI%%O LA&MA' and AN&ELO FERNANDO San Se(astian Law

abst v. CA 4t is settled that in the #erger of two existing corporations, one of the corporations survives and continues the business, while the other is dissolved and all its rights, properties and liabilities are ac*uired by the surviving corporation. Long v. asa
ection 91 of the Corporation Code provides that #e#bership shall be ter#inated in the #anner and for the causes provided in the articles of incorporation or the by' laws. 4n the case at bar, the petitioners really have no reason to bewail the lac& of prior notice in the 2y' laws. $hey have waived such notice by adhering to those 2y' laws. $hey beca#e #e#bers of the Church voluntarily. $hey entered into its covenant and subscribed to its rules. 2y doing so, they are bound by their consent. Conse*uently, the expulsion was not tained with any arbitrary treat#ent fro# the #e#bers of the 2oard of Directors who, since 1988 up to %ugust /=, 199/, or approxi#ately D years, have patiently exhorted and warned the dissident #e#bers. $his long period of ti#e is #ore than ade*uate an opportunity for the erring #e#bers and their followers to conte#plate upon their covenant with the Church on their duty to protect and pro#ote its Principled of Aaith and not to violate the#. 4t is a well settled principle in law that what due process conte#plates is freedo# fro# arbitrariness, what it re *uires is fairness and (ustice, substance rather than for#, being para#ount. )hat it prohibits is not the absence of previous notice but the absolute absence thereof. % for#al or trial type hearing is not at all ti#es and in all instances essential. Sta. Clara (om!own!rs0 Asso$iation v. &aston 7o#eowners cannot be co#pelled to beco#e #e#bers of a ho#eowners1 association by the si#ple expedient of including the# in its %rticle of 4ncorporation and 2y' laws without their express or i#plied consent, without violating the constitutionally guaranteed freedo# of association. %A1COM Condominium Corporation v. Ortigas C!nt!r Asso$iation# In$. 4f a#ong the ter#s and conditions in a deed of sale, there is a re*uire#ent that the transferee #ust beco#e #e#ber of as association, the sa#e binds the holder of the title and the whole world. 4t cannot be argued that there is a violation of freedo# of association because the transferee was never forced to beco#e a #e#ber of the association. 3anuel B. Dulay ;nterprises, 4nc. v. C% Petitioner corporation is classified as a close corporation and conse*uently a board resolution authori8ing the sale or #ortgage of the sub(ect property is not necessary to bind the corporation for the action of its president. %t any rate, a corporate action ta&en at a board #eeting without proper call or notice in a close corporation is dee#ed ratified by the absent director unless the latter pro#ptly files 11 By NI%%O LA&MA' and AN&ELO FERNANDO San Se(astian Law

his written ob(ection with the secretary of the corporation after having &nowledge of the #eeting which, in this case, petitioner Firgilio Dulay failed to do. San -uan Stru$tural and St!!l Fabri$ators# In$. v. CA % corporation does not beco#e a close corporation (ust because a #an and his wife owns 99.8<<G of its subscribed capital stoc&. o, too, a narrow distribution of ownership does not, by itself, #a&e a close corporation. Fa$iliti!s Manag!m!nt Corporation v. 1! La )osa % foreign corporation not doing business in the Philippines #ay be sued here for acts done against persons in the Philippines. (om! Insuran$! Company v. East!rn S"ipping Lin!s 4nsofar as litigation is concerned, the foreign corporation or its assignee #ay not #aintain any suit for the recovery of any debt, clai# or de#and whatever. % contract entered into by a foreign insurance corporation not licensed to do business in the Philippines is not void. $he statute does not fix any ti#e within which foreign corporations shall co#ply with the %ct. 4f such contracts were void, no suits could be prosecuted on the# in any court. $he pri#ary purpose of our statute is to co#pel a foreign corporation desiring to do business within the state to sub#it itself to the (urisdiction of the courts of their state. M!nt"olatum Co.# In$. v. Mangiliman $he true test to deter#ine whether a foreign co#pany is >doing business in the Philippines? is whether the foreign corporation is continuing the body or substance of the business or enterprise for which it was organi8ed or whether it has substantially retired fro# it and turned it over to another. Eri,s %t!.# Ltd. v. CA $he grant and extension of 9=' day credit ter#s by a foreign corporation to do a do#estic corporation for every purchase #ade unarguably shows an intention to continue transacting with the latter since in the usual course of co##ercial transactions, credit extended only to custo#ers in good standing or to those on who# there is an intension to #aintain long' ter# relationship. 3B 7oldings, 4nc. v. 2a(ar )hile petitioner #ay (ust be an assignee to the Deed of %ssign#ent, it #ay still fall within the #eaning of >doing business? based on the ruling of the upre#e Court that >where a single act or transaction however is not #erely incidental or casual but indicates the foreign corporation1s intention to do other business in the Philippines, said single act or transaction constitutes doing or engaging in or transacting business in the Philippines. (ut$"ison %orts %"ilippin!s Limit!d v. S MA 12

Participating in the bidding process constitutes >doing business? because it shows the foreign corporation1s intention to engage in the business here. $he bidding for the concession contract is but an exercise of the corporation1s reason for its existence. 4t is the perfor#ance by a foreign corporation of the acts for which it was created, regardless of the volu#es of business, that deter#ines whether a foreign corporation needs license or not. Ant"am Cosolidat!d v. CA )here the three transactions indicate no intent by foreign corporation to engage in a continuity of transactions, they do not constitute doing business- Aoreign corporation not doing business in the Philippines is not re*uired to obtain a license to do business to have the capacity to sue. M!rrill Lyn$" Futur!s# In$. v. CA % foreign corporation doing business in the Philippines #ay sue in the Philippine courts although not authori8ed to do business here against a Philippine citi8en who had contracted with and been benefited by said corporation. Agil!nt +!$"nologi!s Singapor! 4%t!5 Ltd. v. Int!grat!d Sili$on +!$"nology %"ilippin!s Corporation 4n the %gree#ent, the foreign co#pany1s activities in the Philippines were confined to 516 #aintaining a stoc& of goods solely for the purpose of having the sa#e processed by another co#pany- and 5.6 consign#ent of e*uip#ent with such co#pany to be used in the processing of products for export. uch foreign corporation cannot be considered doing business in the Philippines. 2y and large, to constitute >doing business?, the activity to be underta&en in the Philippines is one that is for profit' #a&ing. 9nder ection 1 of the 4#ple#enting Bules and Begulations of the Aoreign 4nvest#ent %ct, the foregoing activities do not constitute doing business in the Philippines. $he general tests to deter#ine whether a foreign corporation id doing business in the Philippines are, 1. ubstance $est' whether the foreign corporation is continuing the body of the business or enterprise for which it was organi8ed or whether it has substantially retired fro# it and turned it over to another.
.. continuity test @ continuity of co##ercial dealings and arrange#ents, and conte#plates, to that extent, the perfor#ance of acts or wor&s or the exercise of so#e of the functions nor#ally incident to, and in the progressive prosecution of the purpose and ob(ect of its organi8ation.
13

E'p!rt +rav!l and +ours In$. vs. CA 2eing a residential agent of a foreign corporation does not #ean that he is authori8ed to execute the re*uirste certificate against foru# shopping because hwne a resident agent #a be aware of actions against hie principal 5a foreign corporation doing business in the Philippines6, he #ay not be aware of actions initiated by its principal, whether in the Philippines against a do#estic corporation or private individual, or in the coutry where such corporation is organi8ed and registered , against a Philippine registered corporation or a Ailipino citi8en.
II - NE&O+IA LE INS+);MEN+S
Fir!ston! +ir! and )ubb!r Company vs. CA $he essence of negotiability which characteri8es a negotiable paper as a credit instru#ent lies in its freedo# to circulate freely as a substitute for #oney. Calt!' vs. CA 4n deter#ining the negotiability of an instru#ent, the instru#ent in its entirety and what appears on its fact #ust be considered. 4t #ust co#ply with the re*uire#ents of sec. 1, %ct. +o. .=/1 %"ilippin! Edu$ation Company vs. CA Postal #oney orders are not negotiable intru#ents. 4t does not contain ac unconditional pro#ise or order to pay re*uired in 1 of the +4L. ec.
Begulations and restrictions i#posedc on postal #oney orders are inconsisten with the character of negotiable instru#ents. +iba<ia# -r. vs. CA % chec&, whther #anager1s chec& or ordinary chec&, is not legal ender, and an oofer of a chec& in pay#ent of a debt is not a valid tender of pay#ent and #ay be refused recept by the creditor. %AL vs. CA
14

% chec&, whether #anager1s chec& or ordinary chec&, is not legal tender, and an offer of a chec& in pay#ent of a debt is not a valid tender of pa#ent and #ay be refused receipt by the creditor. S!sbr!no vs. CA %n instru#ent thaough #ar&ed non'negotiable, #ay nevertheless be assigned or transferred. M!trban, vs. CA $reasury warrants are non'negotiable instru#ent because there is an indication of the fund as the source of pa#ent of the disburse#ent. Ang +!, Lian vs. CA % chec& payable to the order of >cash? is a chec& payable to bearer, and the ban& #ay pay it to the person presenting it for pay#ent without the drawer1s indorse#ent. %N vs Manila Oil )!/ining And y produ$ts Company In$
Provisions in notes authori8ing attorbeys to appear and confess (udg#ents against #a&ers should not be recogni8ed in this (urisdiction because the sa#e is considered void for being against public policy. 7owever, sec. D of the +4L provides that the negotiable character of an instru#ent therwise negotiable is not affected by a provision which authori8es confession of (udg#ent if the instru#ent be not paid at #aturity. 4n other words, only the stipulation is avoided. )!publi$ %lant!rs an, vs. CA
)here an instru#ent containing the words >4 pro#ise to pay? is isgned by two or #ore persons, they are dee#ed to be (ointly and severally liable thereon. $he phrase >and in his personal capacity? below the signatures of the #a&ers in the note will not affect the liability of the #a&ers. &SIS vs. CA %n instru#ent that is payable to a specified person or entity is not negotiable because the +4L re*uires that the instru#ent #ust be payable to order or the bearer. 15 By NI%%O LA&MA' and AN&ELO FERNANDO San Se(astian Law

%n acco##odation party applies only to negotiable instru#ents. Consolidat!d %lywood In$.# vs. IFC L!asing 4f an instru#ent is not negotiable, it can still be transferred but only throught assign#ent. $he transferee is an assignee who #erely steps into the shoes of the transferor. 1! la *i$toria vs. urgos
Delivery is defined as the transfer of the possession of the instru#ent by the #a&er or draer with intent to transfer title to the payee and recogni8e hi# as the holder therof. )here chec&s due a govern#ent e#ployee have not yet been delivered to hi#, they do not belong to hi# and still have the character of public funds. Chec&s due a govern#ent e#ployee #ay not be garnsihed to satisfy (udg#ent. 1!v!lopm!nt an, o/ )i:al vs. Sima .!i
$he delivery of chec&s in pay#ent of an obligation does not constitute pay#ent unless they are cashed or their value is i#paired through the fault of the creditor. M!tropol 4 a$olod5 Finan$ing vs. Sambo, Motors >Becourse? #eans resort to a peson who is secondary liable after the default of the person who is pri#ary liable. 4ndorsing the note >with recourse? #a&es a party a general indorser. $he effect is that the note was indorsed withut *ualification. &!mp!saw vs. CA % drawee ban& who has paid a chec& on which an indorse#ent has been forged cannot charge the drawer1s account for the a#ount of said chec&. %n exception to this rule is where the drawer is guilty of such negligence which causes the ban& to honor such chec&.
16

%lthough a depositor owes a duty to his drawee ban& to exa#ine his cancelled chec&s for forgery of his own signature, he has no si#ilar duty to forged instru#ents. $he negligence of a depositor which will prevent recovery of an unauthori8ed pay#ent is based on failure of the depositor to act as a prudent business#an would under the circu#stances. 1! O$ampo vs. &at$"alian !ross negligence #ay a#ount to legal absence of good faith. )here a holder1s title is defective or suspicius, it cannot be stated that the payee ac*uired the chec& without the &nowledge of said defect in holder1s title, and for this reason the presu#ption that it is a hlder in due cours or that it ac*uired the instru#ent in good faith does not exist. St!l$o Mar,!ting Corporation vs. CA Lac& of notice of any infir#ity in the instru#ent r defect in the title of the person negotiating it does not apply to an acco##odation party. ataan Cigar and Cigarr!tt! Fa$tory vs. CA % person who ta&es a crssed chec& without #a&ing further in*uiries is not a holder in due course. $he act of crossing a chec& produces the following effects, a. the chec& #ay not be encashed but only deposited in the ban&, b. the chec& #ay be negotiated only once @ to on e who has an account with the ban&- and c. the act of crossing the chec& serves as warning to the hlder that the chec& has been issued for a definite purpose so that he #ust in*uire if he has received the chec& pursuant to that purpose, otherwise, he is not a holder in due course. Stat! Inv!stm!nt (ous! vs. CA $he fact that a chec& is #erely issued as security is not a ground for the discharge of the instru#ent against a holder in due course. %N vs. %i$orn!ll
$he drawee by accepting beco#es liable to the payee or his indorsee, and also to the drawer hi#self. 2ut the drawer and acceptor are i##ediate parties to the 17 By NI%%O LA&MA' and AN&ELO FERNANDO San Se(astian Law

consideration, and if the acceptance be without consideration, the drawer cannot recover fro# the acceptor. $he payee holds a different relation- he is a stranger to the transaction between the drawer and the acceptor, and is therefore in a legal sense a re#ote party. 4n a suit by hi# against the acceptor, the *uestion as to the consideration between the drawer and the acceptor cannot be in*uired into. $he payee or holder gives value to the drawer and if he is ignorant of the e*uities between the drawer and acceptor, he is in the position of a bonafide indorsee. 7ence, it is no defense to a suit against the acceptor draft which has been discounted, and upon which #oney has been advanced by the plaintiff, that the draft was accepted for the acco##odation of the drawer. %!opl! o/ t"! %"ilippin!s vs. Mani!go %c*uittal on reasonable doubt of the accused does nt operate to absolve the sa#e fro# civil liability. appelant1s cnetntion that as #ere indorser, she #ay not be #ade liable on account of the dishonor of the chec&s indorsed by her is untenable. 9nder the law, the holder or last indorsee of a negotiable instru#ent has the right to >enforce pay#ent of the instru#ent for the full a#ount thereof against all parties liable thereonf.? Crisologo--os! vs. CA % corporation cannot act as an acco##odation party. $he issuance or indorse#ent of a negotiable intrue#nt by a corporation without consideration and for acco##odation is ultra vires. Salas vs. CA Petitioner alleged that she issued the pro#issory note in *uestion based on the alleged bad faith, fraud and #isrepresentation of the payee 5fraud in induce#ent6. 9nfortunately, the note was later negotiated to a holder in due course. 7ence, such holder holds the instru#ent free fro# personal defenses available to prior parties a#ong the#selves and #ay enforce pay#ent of the instru#ent for the full a#ount thereof. 18

%N
vs. CA
%n alteration of the serial nu#ber of a chec& does not constitute #aterial alteration because it does not alter the effect of the instur#etn, nor des it #odify in any respect the obligation of a party thereto. 4t does not change the ite#s which aree re*uired to be stated under sec. 1 of the +4L. Asso$iat!d an, vs. CA
4n bearer instru#ents, the signature of the payee or holder is unnecessary to pass title to the instru#ent. 7ence, the #a&er #ay still be liable to a holder in due cours even if an indorse#ent was forged after the issuance of the note. $he liability chain ends with the drawee ban& whose responsibility is to &now the drawer1s signature since the latter is its custo#er. &r!at East!rn Li/! Insuran$! $o. vs. (S C 4t is the obligation of the collecting ban& to rei#burse the drawee ban& the value of the chec&s subse*uently found to contain forged indorse#ent of the payee. $he reason is that the ban& with which the chec& was deposited has no right to pay the su# stated therein to the forger or any one else upon a forged signature. 4t is the collecting ban&1s duty to &now that the indorse#ent is genuine before cashing the chec&. )!publi$ vs. Ebrada $he indorser is liable on the insrue#tn although the signature of the payee is forged because the indorser by his indore#ent guaranteed that the instru#ent is genuine, therefore, i#pliedly, that the instru#ent is valid, otherwise, there wuld be nothing for the indorser to guarantee. %"ilippin! Comm!r$ial Int!rnational an, vs. CA
$he prescriptive period for the filing of a clai# based on negotiable instru#ents is ten years fro# the ti#e the cause of action accrued. 4n case of chec&s, the action of the depositor against his drawee ban& co##ences to run fro# the ti#e he is given notice of pay#ent.
19

%apa vs. Au *al!n$ia Aailure of the pay to encash a chec& for #ore than 1= years >undoubtedly resulted in the i#pair#ent of the chec& through his unreasonable and unexplained delay. % lapse of 1= years will bar any action base on the chec&. Far East )!ality Inv!tm!nt in$ vs. CA 4f the instru#ent is not presented for pay#ent within a reasonable ti#e after issue, or last negotiation as the case #ay be, the persons secondarily liable are discharged. .ong vs. CA )ith respect to chec&s, the C had ta&en cogni8ance of the current ban&ing practice that a chec& beco#es stale after #ore than #onths or 18= days. Int!rnational Corproat! an, vs. Sps. &u!$o
;ven assu#ing that present#ent is needed, failure to present for pay#ent within a reasonable ti#e will resoult to the discharge of the drawer only to the extent of the loss caused by the delay. Aailure to present on ti#e, thus, does not totally wipe out all liability. deifinitely, the original obligation to pay has not been erased. Asia an,ing Corporation vs. -avi!r
)hen a negotiable instru#ent has been dishonored by non'acceptance or nor'pay#net, notice of dishonor #ust be given to the drawer or indorser to who# such notice is not given is discharged. Ny$o Sal!s Corporation vs. A Finan$! Corporation
$he dishonor of an assigned chec& si#ply stresses its liability and the failure to give a notice of dishonor will not discharge it fro# such liability. N!w %a$i/i$ +imb!r vs. S!n!ris Certification of chec& by drawee ban& is e*uivalent to acceptance.
20

aid certification i#plies that the chec& is drawn upon sufficient funds un the hands of the drawee, that they have been set apart for its satisfaction, and that they shell be so applied whenever the chec& is presented for pay#ent. %N vs. National City an, o/ N!w 3or,
$he certification of chec&s is a #eans in constant and extneseve use in the business of ban&ing, and its effects and conse*ences are regulated by the law of #erchant. Sps. Moran vs. CA Aailure of a ban& to pay the chec& of a #erchant or a trader, when deposit is sufficient, entitles the drawer to substantial da#ages without any proof of actual da#ages.
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LEX LEONUM FRATERNITAS

Case Doctrines Commercial Law Atty. Zara !illan"e#a$Castro

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