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Page 1 of 103 Mercantile Law Bar Examination Q & A (1990-2006)

Version 1990-2006 U pdated by


Dondee
Version 1990-2003 Arranged by SULAW Class
2005
ANSWERS TO BAR
EXAMINATION QUESTIONS
IN
MERCANTILE LAW
ARRANGED BY TOPIC
(1990 2006)
E dited and Arranged by:
Silliman University
College o La! "at#$ 2005
U%&ate& 'y(
)on&ee
)* "AR+Reta,e 200-
From the ANSWERS TO BAR EXAMINATION QUESTIONS b
the U! "AW #OM!"EX $ !%I"I!!INE ASSO#IATION OF "AW
S#%OO"S 200&
June 27, 2007
F O R E W A R D
This work is no inen!e! "or s#$e or %o&&er%e' This work is "reew#re' I &#( )e
"ree$( %o*ie! #n! !isri)ue!' I is *ri&#ri$( inen!e! "or #$$ hose who !esire o h#+e
# !ee*er un!ers#n!in, o" he issues ou%he! )( he Phi$i**ine B#r E-#&in#ions #n!
is ren!' I is s*e%i#$$( inen!e! "or $#w su!ens "ro& he *ro+in%es who, +er( o"en,
#re re%i*iens o" !e$i)er#e$( !isore! noes "ro& oher uns%ru*u$ous $#w s%hoo$s #n!
su!ens' .h#re o ohers his work #n! (ou wi$$ )e ri%h$( rew#r!e! )( Go! in he#+en'
I is #$so +er( ,oo! k#r&#'
We wou$! $ike o seek he in!u$,en%e o" he re#!er "or so&e B#r /uesions whi%h #re
i&*ro*er$( %$#ssi"ie! un!er # o*i% #n! "or so&e o*i%s whi%h #re i&*ro*er$( or
i,nor#n$( *hr#se!, "or he #uhors #re 0us B#r Re+iewees who h#+e *re*#re! his
work whi$e re+iewin, "or he B#r E-#&s un!er i&e %onsr#ins #n! wihin heir
$i&ie! know$e!,e o" he $#w' We wou$! $ike o seek he re#!er1s in!u$,en%e "or # $o
o" (*o,r#*hi%#$ errors in his work'
The Auhors
Ju$( 22, 2003
4*!#e!5 June 27,
2007
TA"LE ./ C.NTENTS
0 General Principles of Mercantile Law''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''408H408H62
1H1HCommercial Transaction (2003) 409H409H62
2H2HJoint Account (2000) 410H410H62
3H3HJoint Account vs. Partnership (2000) 411H411H62
4H4HTheory of Cognition vs. Theory of Manifestation (!!") 412H412H62
5H5H"an,ing La!'''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''413H413H62
6H6HBanks: Applicability: Foreign Currency Deposit Act & Secrecy of Bank Deposits !""#$ 414H414H62
7H7HBanks: Collateral Security !""!$ 415H415H62
8H8HBanks: Secrecy of Bank Deposits% Garnis&'ent !""($ 416H416H67
9H9HBanks% Classifications of Banks !""!$ 417H417H67
10H10HBanks% Conser)ator )s* +ecei)er !"",$ 418H418H67
11H11HBanks% Diligence +e-uire. /00!$ 419H419H68
12H12HBanks% 1nsol)ency% Pro&ibite. 2ransactions !"""$ 420H420H68
13H13HBanks% 1nsol)ency% +e-uire'ents /003$ 421H421H68
14H14HBanks% +estrictions on Loan Acco''o.ations !""!$ 422H422H68
15H15HBanks% +estrictions on Loan Acco''o.ations !"",$ 423H423H63
16H16HBanks% Safety Deposit Bo4% Liability 424H424H63
17H17HBanks% Secrecy of Bank Deposit% AMLC !"",$ 425H425H63
18H18HBanks% Secrecy of Bank Deposit% 54ceptions !"",$ 426H426H62
19H19HBanks% Secrecy of Bank Deposits /00"$ 427H427H62
20H20HBanks% Secrecy of Bank Deposits /00/$ 428H428H62
21H21HBanks% Secrecy of Bank Deposits /00!$ 429H429H67
22H22HBanks% Secrecy of Bank Deposits /00($ 430H430H67
23H23HBanks% Secrecy of Bank Deposits /00#$ 431H431H67
24H24HBanks% Secrecy of Bank Deposits /006$ 432H432H67
25H25HBanks% Secrecy of Bank Deposits !"""$ 433H433H69
26H26HBanks% Secrecy of Bank Deposits% 54ceptions !""($ 434H434H69
27H27HBanks% Secrecy of Bank Deposits% Garnis&'ent !""/$ 435H435H69
28H28HBSP% +ecei)ers&ip% 7uris.iction /00!$ 436H436H69
29H29HLegal 2en.er !"""$ 437H437H6:
30H30HPD1C Law )s* Secrecy of Bank Deposits Act /003$ 438H438H6:
31H31H+esponsibilities & 8b9ecti)es of BSP /006$ 439H439H6:
32H32H2rut& in Len.ing Act /00/$ 440H440H6:
33H33H2rut& in Len.ing Act !"""$ 441H441H6:
34H34H"0l, Sales La! ''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''442H442H20
35H35HBulk Sales Law% Co)ere. 2ransactions /00($ 443H443H20
36H36HBulk Sales Law% Co)ere. 2ransactions !"""$ 444H444H20
37H37HBulk Sales Law% Co)ere. 2ransactions !"",$ 445H445H20
38H38HBulk Sales Law% 54clusions /00:$ 446H446H20
39H39HBulk Sales Law% 8bligation of t&e ;en.or /00#$ 447H447H26
40H40HBulk Sales Law% 8bligation of t&e ;en.or /003$ 448H448H26
41H41HBulk Sales Law% 8bligation of t&e ;en.or !""/$ 449H449H26
42H42HCons0mer 1rote#tion La! ''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''450H450H26
43H43HMetric Syste' Law /00($ 451H451H26
44H44HCor%oration La!''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''452H452H22
45H45HB8D: 5lection of Aliens as 'e'bers !""#$ 453H453H22
46H46HB8D% Capacity of Directors /00,$ 454H454H22
47H47HB8D% Co'pensation /00/$ 455H455H22
48H48HB8D% Conflict of 1nterest /00($ 456H456H22
49H49HB8D% 1nterlocking Directors /00#$ 457H457H22
50H50HB8D% 1nterlocking Directors /00,$ 458H458H27
51H51H#y$%a&s' (ali)ity' limiting *ualifications of #+, mem-ers (!!.) 459H459H27
52H52HBy<Laws% ;ali.ity% li'iting -ualifications of B8D 'e'bers !"""$ 460H460H27
53H53HBy<Laws% ;ali.ity% li'iting -ualifications of B8D 'e'bers !""/$ 461H461H27
54H54HBy<Laws% ;ali.ity% li'iting -ualifications of B8D 'e'bers !"":$ 462H462H28
55H55HClose Corporations% Dea.locks /00#$ 463H463H28
56H56HClose) Corporation' /estriction' Transfer of shares (!!0) 464H464H28
57H57HContro)ersy% 1ntra<Corporate /00($ 465H465H23
58H58HContro)ersy% 1ntra<Corporate /00,$ 466H466H23
59H59HContro)ersy% 1ntra<Corporate /00,$ 467H467H23
60H60HContro)ersy% 1ntra<Corporate !"",$ 468H468H23
61H61HContro)ersy% 1ntra<corporate% 7uris.iction /003$ 469H469H23
62H62HCorporation Sole% Definition !""($ 470H470H22
63H63HCorporation1 2ssuance of shares of stoc3 to pay for the services (2004) 471H471H22
64H64HCorporation: +ig&t of +epurc&ase of S&ares% 2rust Fun. Doctrine !""#$ 472H472H22
65H65HCorporation: Sole Proprietors&ip !""($ 473H473H22
66H66HCorporation% Articles of 1ncorporation /00"$ 474H474H22
67H67HCorporation% Bulk Sales Law !""#$ 475H475H27
68H68HCorporation% By<laws !""/$ 476H476H29
69H69HCorporation' Commencement' Corporate 56istence (2003) 477H477H29
70H70HCorporation% Con)ersion of Stock Corporation !""/$ 478H478H29
71H71HCorporation% De Facto Corporation /00($ 479H479H29
72H72HCorporation' ,issolution' Metho)s of %i*ui)ation (200) 480H480H29
73H73HCorporation% 1ncorporation% +e-uire'ents !"",$ 481H481H29
74H74HCorporation% 1ncorporation% +e-uisites !""!$ 482H482H2:
75H75HCorporation% Meetings% B8D & Stock&ol.ers /00:$ 483H483H2:
76H76HCorporation% =ationality of Corporation /006$ 484H484H2:
77H77HCorporation% =on<Stock Corporation /00:$ 485H485H2:
78H78HCorporation' Po&er to 2nvest Corporate 7un)s for other Purpose (!!4) 486H486H70
79H79HCorporation% Power to 1n)est Corporate Fun.s in anot&er Corporation /00,$ 487H487H70
80H80HCorporation% +eco)ery of Moral Da'ages /006$ 488H488H70
81H81HCorporation% Separate 7uri.ical Personality /00#$ 489H489H76
82H82HCorporation% Separate 7uri.ical Personality /00,$ 490H490H76
83H83HCorporation% Separate 7uri.ical Personality /00,$ 491H491H76
84H84HCorporation% Separate 7uri.ical Personality /000$ 492H492H76
85H85HCorporation% Separate 7uri.ical Personality !"""$ 493H493H72
86H86HCorporation% Separate 7uri.ical Personality !"""$ 494H494H72
87H87HCorporation% Set<8ff% >npai. Subscription /00($ 495H495H72
88H88HCorporation% Stock Corporation !""/$ 496H496H72
89H89HCorporation% ;ali.ity of Corporate Acts /006$ 497H497H77
90H90HCorporation% ;ali.ity of Corporate Acts !""!$ 498H498H77
91H91HCorporation% ;oluntary Dissolution !""!$ 499H499H77
92H92HCorporation% ;oting 2rust Agree'ent /00!$ 500H500H77
93H93HDeri)ati)e Suit: +e-uisites !""($ 501H501H78
94H94HDeri)ati)e Suit: ?atere. Stock /00:$ 502H502H78
95H95H,erivative 8uit' Close Corporation' Corporate +pportunity (2004) 503H503H78
96H96HDeri)ati)e Suit% Minority Stock&ol.er !"":$ 504H504H73
97H97H,istinction1 ,e facto Corporation vs. Corporation -y 5stoppel (2000) 505H505H73
98H98HDistinction: Di)i.en.s )s* Profit: Cas& Di)i.en. )s* Stock Di)i.en. !""#$ 506H506H73
99H99HDistinction% Pri)ate )s* Public Corporation !""($ 507H507H73
100H100HDistinction% Stock )s* =on<Stock Corporation !""($ 508H508H72
101H101HDi)i.en.s: Declaration of Di)i.en.s !""#$ 509H509H72
102H102HDi)i.en.s: Sources of Di)i.en.s% 2rust Fun. Doctrine !""#$ 510H510H72
103H103HDi)i.en.s% Declaration of Di)i.en.s /00"$ 511H511H72
104H104HDi)i.en.s% Declaration of Di)i.en.s /00/$ 512H512H72
105H105HDi)i.en.s% Declaration of Di)i.en.s !""/$ 513H513H72
106H106HDi)i.en.s% +ig&t% Managing Corporation /00/$ 514H514H77
107H107HDoctrine of Corporate 8pportunity !""#$ 515H515H77
108H108H5ffect: 54piration of Corporate 2er' !""($ 516H516H77
109H109H5ffects% Merger of Corporations /000$ 517H517H77
110H110H5ffects% ?in.ing >p Perio. of a Corporation /003$ 518H518H79
111H111H5ffects% ?in.ing >p Perio. of a Corporation !"""$ 519H519H79
112H112H7oreign Corporation' 9,oing #usiness: in the Philippines (!!.) 520H520H79
113H113HForeign Corporation% @Doing BusinessA in t&e P&ilippines% Acts or Acti)ities !""!$ 521H521H79
114H114HForeign Corporation% @Doing BusinessA in t&e P&ilippines% 2est !""!$ 522H522H7:
115H115H7oint ;enture% Corporation /00,$ 523H523H7:
116H116HLiabilities% B8D% Corporate Acts /00,$ 524H524H7:
117H117HLiabilities% Stock&ol.ersB DirectorsB 8fficers /003$ 525H525H7:
118H118HPiercing t&e Corporate ;eil /00($ 526H526H7:
119H119HPiercing t&e Corporate ;eil /00,$ 527H527H80
120H120HPiercing t&e Corporate ;eil !""/$ 528H528H80
121H121HPiercing t&e Corporate ;eil !""($ 529H529H80
122H122HPiercing t&e Corporate ;eil !"",$ 530H530H80
123H123HPre<e'pti)e +ig&t !""/$ 531H531H80
124H124HPre<5'pti)e +ig&t )s* Appraisal +ig&t /000$ 532H532H86
125H125HS5C% 7uris.iction% 2ransferre. 7uris.iction /00,$ 533H533H86
126H126HStock&ol.er% Delin-uent% >npai. Subscription /003$ 534H534H86
127H127HStock&ol.ers: Pree'pti)e +ig&t !""($ 535H535H82
128H128HStock&ol.ers% Appraisal +ig&t !"":$ 536H536H82
129H129HStock&ol.ers% +e'o)al of 8fficers & B8D !""/$ 537H537H82
130H130HStock&ol.ers% +e'o)al% Minority Director /00/$ 538H538H82
131H131HStock&ol.ers% +ig&ts /00,$ 539H539H82
132H132HStock&ol.ers% ;oting Power of Stock&ol.ers /00"$ 540H540H82
133H133HStocks% 1ncrease of Capital Stock !""/$ 541H541H82
134H134HStocks% SaleB 2ransfer of Certificates of Stock /00,$ 542H542H87
135H135HStocks% SaleB 2ransfer of Certificates of Stock !""/$ 543H543H87
136H136HStocks% SaleB 2ransfer of Certificates of Stock !""($ 544H544H87
137H137H2rust Fun. Doctrine /00!$ 545H545H87
138H138H2rust Fun. Doctrine% 1ntra<Corporate Contro)ersy /00/$ 546H546H87
139H139HCre&it Transa#tions ''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''547H547H88
140H140HC&attel Mortgage )s* After<1ncurre. 8bligations /00/$ 548H548H88
141H141HC&attel Mortgage )s* After<1ncurre. 8bligations /000$ 549H549H88
142H142HC&attel Mortgage% Foreclosure /003$ 550H550H88
143H143HC&attel Mortgage% 8wners&ip of 2&ing Mortgage. /00"$ 551H551H83
144H144HCre.it 2ransactions /000$ 552H552H83
145H145HMortgage /000$ 553H553H83
146H146HMortgage )s* Le)y !"":$ 554H554H82
147H147HMortgage% 54tra9u.icial Foreclose !"",$ 555H555H82
148H148HMortgage% Foreclosure !"":$ 556H556H82
149H149HMortgage% Foreclosure !"":$ 557H557H82
150H150HMortgage% Foreclosure of 1'pro)e'ents /000$ 558H558H82
151H151HMortgage' 7oreclosure' 5ffect of mere ta3ing -y cre)itor$mortgagor of property (!!2)
559H559H87 152H152HMortgage' /e)emption Perio)' 7oreclose) Property (2002)
560H560H87
153H153HMortgage% +e'e.ies !"":$ 561H561H89
154H154HPreference of Cre.its !""!$ 562H562H89
155H155HPro'issory =ote: Liability !""/$ 563H563H89
156H156H+e'e.ies% A)ailable to Mortgagee<Cre.itor /00,$ 564H564H89
157H157H+e'e.ies% A)ailable to Mortgagee<Cre.itor !""/$ 565H565H8:
158H158H+e'e.ies% Secure. Debt /00/$ 566H566H8:
159H159HIns0ran#e La!''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''567H567H8:
160H160HBeneficiary: 5ffects: 1rre)ocable Beneficiary !""#$ 568H568H8:
161H161HBeneficiary: +ig&ts% 1rre)ocable Beneficiary !""#$ 569H569H30
162H162HBeneficiary% Life 1nsurance% Pro&ibite. Beneficiaries /006$ 570H570H30
163H163HConceal'ent% Material Conceal'ent !""/$ 571H571H30
164H164HConcealment' Material Concealment1 2ncontesta-ility Clause (!!0) 572H572H30
165H165HConceal'ent% Material Conceal'ent: 1ncontestability Clause /00,$ 573H573H30
166H166HConceal'ent% Material Conceal'ent: 1ncontestability Clause /003$ 574H574H36
167H167HConceal'ent% Material Conceal'ent% 1ncontestability Clause /00/$ 575H575H36
168H168HConceal'ent% Material Conceal'ent% 1ncontestability Clause /006$ 576H576H36
169H169H1nsurable 1nterest: Bank Deposit !"""$ 577H577H36
170H170H1nsurable 1nterest: Public 5ne'y !"""$ 578H578H32
171H171H1nsurable 1nterest: Separate 1nsurable 1nterest /000$ 579H579H32
172H172H1nsurable 1nterest% 5-uitable 1nterest /00/$ 580H580H32
173H173H1nsurable 1nterest% Life )s* Property 1nsurance /003$ 581H581H32
174H174H1nsurable 1nterest% Life )s* Property 1nsurance !"""$ 582H582H32
175H175H1nsurable 1nterest% Life )s* Property 1nsurance !""!$ 583H583H37
176H176H1nsurable 1nterest% Property 1nsurance /00($ 584H584H37
177H177H1nsurable 1nterest% Property 1nsurance !""/$ 585H585H37
178H178H1nsurance% Cas& & Carry Basis !"":$ 586H586H37
179H179H1nsurance% Co<1nsurance )s* +e<1nsurance /00($ 587H587H37
180H180H1nsurance% Double 1nsurance !""#$ 588H588H38
181H181H1nsurance% Double 1nsurance% effect /00:$ 589H589H38
182H182H2nsurance' 5ffects' Payment of Premiums -y 2nstallment (200;) 590H590H38
183H183H1nsurance% Life 1nsurance% Assign'ent of Policy /00/$ 591H591H38
184H184H1nsurance% Perfection of 1nsurance Contracts !"":$ 592H592H38
185H185H1nsurance% Property 1nsurance% Prescription of Clai's /00,$ 593H593H38
186H186H1nsurance% +eturn of Pre'iu's !"""$ 594H594H33
187H187H1nsure.% Acci.ent Policy !""($ 595H595H33
188H188H1nsure.% Acci.ent )s* Suici.e /00"$ 596H596H33
189H189H1nsure.% Acci.ent )s* Suici.e /00:$ 597H597H32
190H190H1nsure.% Acci.ent )s* Suici.e /00#$ 598H598H32
191H191H1nsurer: 5ffects: Se)eral 1nsurers !""#$ 599H599H32
192H192H1nsurer% :r. Party Liability /00,$ 600H600H32
193H193H1nsurer% :r. Party Liability !"""$ 601H601H37
194H194H1nsurer% :r. Party Liability% =o Fault 1n.e'nity /00($ 602H602H37
195H195H1nsurer% :r. Party Liability% Cuitclai' /00($ 603H603H37
196H196H1nsurer% Aut&oriDe. Dri)er Clause /00/$ 604H604H37
197H197H1nsurer% Aut&oriDe. Dri)er Clause !"":$ 605H605H37
198H198H1nsurer% Aut&oriDe. Dri)er Clause% )e&icle is stolen /00:$ 606H606H39
199H199H1nsurer% Group 1nsurance% 5'ployer<Policy Eol.er !"""$ 607H607H39
200H200H1nsurer% Liability of t&e 1nsurers /00"$ 608H608H39
201H201HLoss: Actual 2otal Loss /00,$ 609H609H3:
202H202HLoss: Constructi)e 2otal Loss !""#$ 610H610H3:
203H203HLoss: 2otal Loss 8nly /00!$ 611H611H3:
204H204HMarine 1nsurance% 1'plie. ?arranties !"""$ 612H612H20
205H205HMarine 2nsurance' Peril of the 8hip vs. Peril of the 8ea (!!.) 613H613H20
206H206HMutual 1nsurance Co'pany% =ature & Definition !"",$ 614H614H20
207H207HIntelle#t0al 1ro%erty '''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''615H615H20
208H208HCopyrig&t /00#$ 616H616H20
209H209HCopyrig&t% Co''issione. Artist /00#$ 617H617H20
210H210HCopyrig&t% Co''issione. Artist !""($ 618H618H20
211H211HCopyrig&t% 1nfringe'ent /00($ 619H619H20
212H212HCopyrig&t% 1nfringe'ent /003$ 620H620H26
213H213HCopyrig&t% 1nfringe'ent /006$ 621H621H26
214H214HCopyrig&t% 1nfringe'ent !"",$ 622H622H26
215H215HCopyrig&t% P&otocopy% w&en allowe. /006$ 623H623H26
216H216H1nfringe'ent )s* >nfair Co'petition /00,$ 624H624H26
217H217H1nfringe'ent )s* >nfair Co'petition !"":$ 625H625H26
218H218H1nfringe'ent% 7uris.iction !"":$ 626H626H26
219H219HPatent% =on<Patentable 1n)entions !"",$ 627H627H26
220H220HPatents: Gas<Sa)ing De)ice: first to file rule !""#$ 628H628H22
221H221HPatents: 1nfringe'ent% +e'e.ies & Defenses /00:$ 629H629H22
222H222HPatents% 1nfringe'ent /00!$ 630H630H22
223H223HPatents% +ig&ts o)er t&e 1n)ention /00"$ 631H631H27
224H224H2ra.e'ark /00"$ 632H632H27
225H225H2ra.e'ark /00($ 633H633H27
226H226H2ra.e'arkB 2est of Do'inancy /00,$ 634H634H27
227H227H2ra.e'ark% 1nfringe'ent /00/$ 635H635H27
228H228H2ra.e'ark% 2est of Do'inancy /00,$ 636H636H28
229H229H2ra.ena'e: 1nternational Affiliation !""#$ 637H637H28
230H230HInsolven#y 2 Cor%orate Re#overy '''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''638H638H28
231H231H1nsol)ency )s* Suspension of Pay'ent /006$ 639H639H28
232H232H1nsol)ency: ;oluntary 1nsol)ency !""#$ 640H640H28
233H233H1nsol)ency% Assets )s* Liabilities /006$ 641H641H23
234H234H1nsol)ency% Assignees /00,$ 642H642H23
235H235H1nsol)ency% 5ffect% Declaration of 1nsol)ency /00/$ 643H643H23
236H236H1nsol)ency% Frau.ulent Pay'ent !""!$ 644H644H23
237H237H1nsol)ency% 7uris.iction% Sole Proprietors&ip /00"$ 645H645H22
238H238H1nsol)ency% obligations t&at sur)i)e /003$ 646H646H22
239H239H1nsol)ency% ;oluntary 1nsol)ency Procee.ing /00/$ 647H647H22
240H240H1nsol)ency% ;oluntary )s* 1n)oluntary Sol)ency /00#$ 648H648H22
241H241HLaw on Corporate +eco)ery !"":$ 649H649H27
242H242H+e&abilitation% Stay 8r.er !"",$ 650H650H27
243H243HSuspension of Pay'ent )s* 1nsol)ency /00#$ 651H651H27
244H244HSuspension of Pay'ents )s* Stay 8r.er !"":$ 652H652H27
245H245HSuspension of Pay'ents% +e&abilitation +ecei)er /000$ 653H653H27
246H246HSuspension of Pay'ents% +e'e.ies !"":$ 654H654H29
247H247HLetters o Cre&it ''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''655H655H29
248H248HLetter of Cre.it: Mortgage !""#$ 656H656H29
249H249HLetter of Cre.it% Certification fro' Consignee /00:$ 657H657H29
250H250H%etters of Cre)it' %ia-ility of a confirming an) notifying -an3 (!!0) 658H658H2:
251H251HLetters of Cre.it% Liability of a =otifying Bank !"":$ 659H659H2:
252H252HLetters of Cre.it% 2&ree Distinct Contract +elations&ips !""!$
660H660H2: 253H253HMaritime Commer#e
'''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''661H661H2:
254H254HA)erage% Particular A)erage )s* General A)erage !"":$ 662H662H2:
255H255HBotto'ry /00($ 663H663H70
256H256HCarriage of Goo.s: De)iation: Liability !""#$ 664H664H70
257H257HCarriage of Goo.s% De)iation% ?&en Proper !""#$ 665H665H70
258H258HCarriage of Goo.s% 54ercise 54traor.inary Diligence !""#$ 666H666H70
259H259HC&arter Party /00/$ 667H667H70
260H260HC&arter Party !""($ 668H668H76
261H261HC8GSA: Prescription of Clai'sFActions !""($ 669H669H76
262H262HC8GSA% Prescription of Clai's /00!$ 670H670H76
263H263HC8GSA% Prescription of Clai's !"""$ 671H671H72
264H264HC8GSA% Prescripti)e Perio. /00#$ 672H672H72
265H265HDoctrine of 1nscrutable Fault /00#$ 673H673H72
266H266HDoctrine of 1nscrutable Fault /003$ 674H674H72
267H267HDoctrine of 1nscrutable Fault /006$ 675H675H72
268H268HLi'ite. Liability +ule /00($ 676H676H72
269H269HLi'ite. Liability +ule /003$ 677H677H72
270H270HLi'ite. Liability +ule /000$ 678H678H72
271H271HLi'ite. Liability +ule !"""$ 679H679H77
272H272HLi'ite. Liability +ule% Doctrine of 1nscrutable Fault /00/$ 680H680H77
273H273HLi'ite. Liability +ule% General A)erage Loss !"""$ 681H681H77
274H274HLi'ite. Liability +ule% General A)erage Loss !"""$
682H682H77 275H275HNationali3e& A#tivities or Un&erta,ings
''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''683H683H78
276H276H=ationaliDe. Acti)ities or >n.ertakings /00:$ 684H684H78
277H277H=ationaliDe. Acti)ities or >n.ertakings /00($ 685H685H78
278H278H=ationaliDe. Acti)ities or >n.ertakings /00#$ 686H686H73
279H279H+etail 2ra.e Law /00"$ 687H687H73
280H280H+etail 2ra.e Law /00/$ 688H688H73
281H281H+etail 2ra.e Law /00!$ 689H689H73
282H282H/etail Tra)e %a& (!!3) 690H690H72
283H283H+etail 2ra.e Law /00,$
691H691H72
284H284H+etail 2ra.e Law /00,$
692H692H72
285H285H+etail 2ra.e Law% Consign'ent /00/$
693H693H72
286H286HNegotia'le Instr0ments La! ''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''694H694H72
287H287H#on)1 Cash #on) vs. 8urety #on) (2000) 695H695H72
288H288HC&ecks: Crosse. C&ecks !""#$
696H696H77
289H289HC&ecks: Crosse. C&ecks )s* Cancelle. C&ecks !""($
697H697H77
290H290HC&ecks% Crosse. C&eck /00/$
698H698H77
291H291HC&ecks% Crosse. C&eck /00($
699H699H77
292H292HC&ecks% Crosse. C&eck /00#$
700H700H79
293H293HC&ecks% Crosse. C&eck /00,$
701H701H79
294H294HC&ecks% Crosse. C&eck /00,$
702H702H79
295H295HC&ecks% 5ffect% Acceptance by t&e .rawee bank /006$
703H703H79
296H296HC&ecks% 5ffects% Alterations% Prescripti)e Perio. /00,$
704H704H79
297H297HC&ecks% Forge. C&eck% 5ffects !"",$
705H705H7:
298H298HC&ecks% Liability% Drawee Bank /00#$
706H706H90
299H299HC&ecks% Material Alterations% Liability /000$
707H707H90
300H300HC&ecks% Present'ent /00($
708H708H90
301H301HC&ecks% Present'ent !"":$
709H709H90
302H302HC&ecks% ;ali.ity% ?ai)er of BankGs liability for negligence /00/$
710H710H90
303H303HDefenses% Forgery !""($
711H711H96
304H304HForgery% Liabilities% Prior & Subse-uent Parties /00"$
712H712H96
305H305HForgery% Liabilities% Prior & Subse-uent Parties /00#$
713H713H96
306H306H1nco'plete & Deli)ere. !""($
714H714H92
307H307H1nco'plete an. Deli)ere. !""#$
715H715H92
308H308H1nco'plete 1nstru'ents% 1nco'plete Deli)ere. 1nstru'ents )s* 1nco'plete >n.eli)ere. 1nstru'ent
!"",$ 716H716H92 309H309H1n.orser: 1rregular 1n.orser )s* General 1n.orser !""#$
717H717H92
310H310H=egotiability /00:$
718H718H92
311H311H=egotiability !""!$
719H719H97
312H312H=egotiability% Eol.er in Due Course /00!$
720H720H97
313H313H=egotiability% +e-uisites !"""$
721H721H97
314H314H=egotiable 1nstru'ent: A'biguous 1nstru'ents /006$
722H722H98
315H315H=egotiable 1nstru'ent: Definition & C&aracteristics !""#$
723H723H98
316H316H=egotiable 1nstru'ent: 1.entification !""#$
724H724H98
317H317H=egotiable 1nstru'ent: =egotiable Docu'ent )s* =egotiable 1nstru'ent !""#$
725H725H93
318H318H=egotiable 1nstru'ent% =egotiability /003$
726H726H93
319H319H=egotiable 1nstru'ents% Bearer 1nstru'ent /006$
727H727H93
320H320H=egotiable 1nstru'ents% Bearer 1nstru'ents /003$
728H728H93
321H321H=egotiable 1nstru'ents% bearer instru'ents% liabilities of 'aker an. in.orsers !""/$ 729H729H93
322H322H=egotiable 1nstru'ents% inco'plete an. un.eli)ere. instru'ents% &ol.er in .ue course !"""$ 730H730H92
323H323H=egotiable 1nstru'ents% 1nco'plete Deli)ere. 1nstru'ents% Co'parati)e =egligence /003$ 731H731H92
324H324H=egotiable 1nstru'ents% kin.s of negotiable instru'ent% wor.s of negotiability !""!$ 732H732H92
325H325H=egotiable 1nstru'ents% +e-uisites /00,$
733H733H97
326H326H=otice Dis&onor /00,$
734H734H97
327H327HParties% Acco''o.ation Party /00"$
735H735H97
328H328HParties% Acco''o.ation Party /00/$
736H736H97
329H329HParties% Acco''o.ation Party /00,$
737H737H97
330H330HParties% Acco''o.ation Party /006$ 738H738H97
331H331HParties% Acco''o.ation Party !"":$ 739H739H99
332H332HParties% Acco''o.ation Party !"":$ 740H740H99
333H333HParties% Acco''o.ation Party !""#$ 741H741H99
334H334HParties% Eol.er in Due Course /00:$ 742H742H99
335H335HParties% Eol.er in Due Course /00,$ 743H743H99
336H336HParties% Eol.er in Due Course /00,$ 744H744H99
337H337HParties% Eol.er in Due Course /006$ 745H745H9:
338H338HParties% Eol.er in Due Course% 1n.orse'ent in blank !""!$ 746H746H9:
339H339HPlace of Pay'ent !"""$ 747H747H9:
340H340H10'li# Servi#e La! '''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''748H748H9:
341H341HCertificate of public Con)enience /006$ 749H749H9:
342H342HCertificate of Pu-lic Convenience' insepara-ility of certificate an) vessel (!!2) 750H750H:0
343H343HCertificate of Public Con)enience% +e-uire'ents /00#$ 751H751H:0
344H344HPowers of t&e Public Ser)ice Co''ission /00:$ 752H752H:0
345H345HPublic utilities !"""$ 753H753H:0
346H346H+e)ocation of Certificate /00:$ 754H754H:6
347H347H+e)ocation of Certificate /00:$ 755H755H:6
348H348HSe#0rities Reg0lation ''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''756H756H:6
349H349H1nsi.er !""($ 757H757H:6
350H350H1nsi.er 2ra.ing /00#$ 758H758H:6
351H351H1nsi.er 2ra.ing% Manipulati)e Practices /00($ 759H759H:2
352H352HManipulati)e Practices !""/$ 760H760H:2
353H353HSecurities +egulation Co.e% Purpose /006$ 761H761H:2
354H354HSecurities% Definition /00,$ 762H762H:2
355H355HSecurities% Selling of Securities% Meaning !""!$ 763H763H:2
356H356H2en.er 8ffer !""!$ 764H764H:7
357H357HTrans%ortation La! ''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''765H765H:7
358H358HBoun.ary Syste' !""#$ 766H766H:7
359H359HCarriage' #reach of Contract' Presumption of <egligence (!!0) 767H767H:7
360H360HCarriage% Breac& of Contract% Presu'ption of =egligence /003$ 768H768H:7
361H361HCarriage% Fortuitous 5)ent /00#$ 769H769H:7
362H362HCarriage' %ia-ility' %ost #aggage or Acts of Passengers (!!") 770H770H:8
363H363HCarriage% Pro&ibite. & ;ali. Stipulations !""!$ 771H771H:8
364H364HCarriage% ;aluation of Da'age. Cargo /00:$ 772H772H:8
365H365HCo''on Carrier /00,$ 773H773H:8
366H366HCo''on Carrier% Breac& of Contract% Da'ages !"":$ 774H774H:8
367H367HCo''on Carrier% Defenses !""!$ 775H775H:3
368H368HCo''on Carrier% Defenses% Fortuitous 5)ents /00($ 776H776H:3
369H369HCo''on Carrier% Defenses% Li'itation of Liability /006$ 777H777H:3
370H370HCo''on Carrier% Defenses% Li'itation of Liability !""/$ 778H778H:3
371H371HCo''on Carrier% Duration of Liability /00,$ 779H779H:3
372H372HCommon Carrier' ,uty to 56amine #aggages' /ail&ay an) Airline (!!2) 780H780H:2
373H373HCo''on Carrier% 2est /00,$ 781H781H:2
374H374HCo''on Carriers% Defenses /00,$ 782H782H:2
375H375HCo''on Carriers% Liability for Loss /00/$ 783H783H:2
376H376HCo''on )s* Pri)ate Carrier% Defenses !""!$ 784H784H:7
377H377HHabit Syste' !""#$ 785H785H:7
378H378HHabit Syste'% Agent of t&e +egistere. 8wner !""#$ 786H786H:7
379H379HMariti'e Co''erce% Bareboat !"":$ 787H787H:7
380H380HPrior 8perator +ule !"":$ 788H788H:7
381H381H+egistere. 8wner% Conclusi)e Presu'ption /00"$ 789H789H:9
382H382H2rans<S&ip'ent% Bill of La.ing% bin.ing contract /00:$ 790H790H:9
383H383HTr0st Re#ei%ts La!'''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''791H791H:9
384H384H2rust +eceipts Law% Acts & 8'issions% Co)ere. !"",$ 792H792H:9
385H385H2rust +eceipts Law% Liability for estafa /00/$ 793H793H::
386H386H2rust +eceipts Law% Liability for 5stafa /003$ 794H794H::
387H387H2rusts +eceipt Law !"":$ 795H795H::
388H388HUs0ry La! '''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''796H796H::
389H389H>sury Law /00$ 797H797H::
390H390HWare$o0se Re#ei%ts La! '''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''798H798H600
391H391HBill of La.ing /006$ 799H799H600
392H392HDeli)ery of Goo.s% +e-uisites /006$ 800H800H600
393H393HDeli)ery of t&e Goo.s /00/$ 801H801H600
394H394HGarnis&'ent or Attac&'ent of Goo.s /000$ 802H802H600
395H395H=egotiable Docu'ents of 2itle /00!$ 803H803H600
396H396H8wners&ip of Goo.s Store. /00!$ 804H804H606
397H397H+ig&t to t&e Goo.s !""#$ 805H805H606
398H398H>npai. Seller% =egotiation of t&e +eceipt /00:$ 806H806H606
399H399H(ali)ity of stipulations e6cusing &arehouseman from negligence (2000) 807H807H606
400H400HMis#ellaneo0s ''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''808H808H602
401H401H5nergy +egulatory Co''ission: 7uris.iction & Power !""($ 809H809H602
402H402HFour AC1D Proble's of P&ilippine 7u.iciary !"",$ 810H810H602
403H403H=overnment ,eregulation vs. Privati>ation of an 2n)ustry (2000) 811H811H602
404H404HPolitical Law% ?28 /000$ 812H812H602
405H405HPower of t&e State: +egulating of Do'estic 2ra.e !""($ 813H813H607
406H406H2ariff an. Custo's Co.e: ;iolation of Custo's Laws !""($ 814H814H607
4eneral 1rin#i%les o
Mer#antile La!
Commercial Transaction (2003)
What do you understand by the term
commercial transaction? Is it essential
that at least one party to a contract be a
merchant in order to consider such a
commercial transaction? (4%)
SUGGESTED ANSWER:
A Commercial transaction is defned as
...... It is not essential that at least one party
to the commercial transaction be a
merchant. What is essential is that the
transaction eince an intent to en!a!e in
commerce or trade.
Joint Account (2000)
What is a "oint account? (#%)
SUGGESTED ANSWER:
A "oint account is a transaction o$ merchants
%here other merchants a!ree to contribute
the amount o$ capital a!reed upon& and
participatin! in the $aorable or un$aorable
results thereo$ in the proportion they may
determine.
Joint Account s! "artners#i$ (2000)
'istin!uish "oint account $rom partnership.
((%)
SUGGESTED ANSWER:
)he $ollo%in! are the distinctions bet%een
"oint account and partnership*
/$ A partnership has a frm name %hile a
"oint account has none and is conducted
in the name o$ the ostensible partner.
!$ While a partnership has "uridical
personality and may sue or be sued
under its frm name& a "oint account has
no "uridical personality and can sue or
be sued only in the name o$ the
ostensible partner.
:$ While a partnership has a common $und&
a "oint account has none.
($ While in a partnership& all !eneral
partners hae the ri!ht o$ mana!ement&
in a "oint account& the ostensible partner
mana!es its business operations.
#$ While li+uidations o$ a partnership may&
by a!reement& be entrusted to a partner
or partners& in a "oint account li+uidation
thereo$ can only be done by the
ostensible partner.
T#eor% o& Co'nition s! T#eor% o& (ani&estation
()**+) 2&e Ci)il Co.e a.opts t&e t&eory of
cognitionB w&ile t&e Co.e of Co''erce
generally recogniDes t&e t&eory of
'anifestationB in t&e perfection of contracts*
Eow .o t&ese two t&eories .ifferI
SUGGESTED ANSWER:
,nder the theory o$ co!nition& the
acceptance is considered to e-ectiely bind
the o-eror only $rom the time it came to his
.no%led!e. ,nder the theory o$
mani$estation& the contract is per$ected at
the moment %hen the acceptance is
declared or made by the o-eree.
"an,ing La!
,an-s: A$$lica.ilit%: /orei'n Currenc% De$osit Act 0
Secrec% o& ,an- De$osits (2001)
/i 0ieldin! Corporation fled a complaint
a!ainst fe o$ its o-icers $or iolation o$
1ection (2 o$ the Corporation Code. )he
corporation claimed that the said o-icers
%ere !uilty o$ adancin! their personal
interests to the pre"udice o$ the
corporation& and that they %ere !rossly
ne!li!ent in handlin! its a-airs. Aside $rom
documents and contracts& the corporation
also submitted in eidence records o$ the
o-icers3 ,.1. 'ollar deposits in seeral
ban.s oerseas 4 5oston 5an.& 5an. o$
1%it6erland& and 5an. o$ 7e% 0or..
8or their part& the o-icers fled a criminal
complaint a!ainst the directors o$ /i
0ieldin! Corporation $or iolation o$
9epublic Act 7o. :4#:& other%ise .no%n as
the 8orei!n Currency 'eposit Act o$ the
;hilippines. )he o-icers alle!ed that their
ban. deposits %ere ille!ally disclosed $or
%ant o$ a court order& and that such
deposits %ere not een the sub"ect o$ the
case a!ainst them.
a$ Will the complaint fled a!ainst the
directors o$ /i 0ieldin! Corporation
prosper? <=plain.
SUGGESTED ANSWER:
7o& because the 8orei!n Currency 'eposit
Act (9.A. 7o. :4#:)& includin! its punitie
proisions& re$ers to $orei!n currency
deposits accounts constituted %ithin the
;hilippines. It has no application at all to
accounts& een thou!h they are ban.s&
opened and constituted abroad.
b$ Was there a iolation o$ the 1ecrecy o$
5an. 'eposits >a% (9epublic Act 7o.
24?@)? <=plain. (@%)
SU44ESTE) ANSWER(
=oB because t&e puniti)e pro)isions of t&e
Secrecy of Bank Deposits Law +*A* =o*
/("#$B inclu.ing t&e statutory e4e'ptions
pro)i.e. t&ereinB are not applicable to FCD>
accountsB e)en w&en constitute. locally*
Intengan v. Court of Appeals, G.R. No. 128996, February 15,
22$
,an-s: Collateral Securit% (2002)
Andre% is en!a!ed in the business o$
buildin! lo%4cost housin! units under
contracts %ith real estate deelopers. /e
applied $or a loan o$ ;( Aillion $rom
9eady Credit 5an. (the 5an.)& %hich
re+uired Andre% to proide collateral
security $or it. Andre% o-ered to assi!n to
the 5an. his receiables amountin! to ;4
million $rom /ome 5uilders 'eelopment
Corporation (the Bbli!or). )he 5an.
accepted the o-er. Accordin!ly& Andre%
obtained the loan and he e=ecuted a
promissory note underta.in! to pay the
loan in $ull in one lump sum on 1eptember
2& #??#& to!ether %ith interest thereon at
the rate o$ #?% per annum. At the same
time& Andre% e=ecuted a 'eed o$
Assi!nment in $aor o$ the 5an. assi!nin!
to the 5an. his receiables $rom the
Bbli!or. )he deed o$ assi!nment read*
I& Andre% >ee& hereby assi!n& trans$er and
coney& absolutely and unconditionally& to
9eady Credit 5an. (hereina$ter called the
5an.) all o$ my ri!ht& title and interest in
and to my accounts receiable $rom /ome
5uilders 'eelopment Corporation
(hereina$ter called the Bbli!or) arisin! $rom
deliery o$ housin! units %ith a total
contract price o$ ;4&???&???.??& the
description and contract alue o$ %hich are
attached hereto as Anne= A (hereina$ter
called the 9eceiables).
In the eent that I shall be unable to pay
my outstandin! indebtedness o%ned to the
5an.& the 5an. shall hae the ri!ht& %ithout
any $urther $ormality or act on its part& to
collect the 9eceiables $rom the Bbli!or
and to apply the proceeds thereo$ to%ard
payment o$ my said indebtedness.
Andre% $ailed to pay the loan on its due
date on 1eptember 2& #??#. When the 5an.
attempted to collect $rom the Bbli!or& the
5an. discoered that the latter had already
closed operations and li+uidated all its
assets. )he 5an. sued Andre% $or
collection& but Andre% moed to dismiss the
complaint on the !round that the debt had
already been paid by reason o$ his e=ecution
o$ the a$oresaid 'eed o$ Assi!nment %hich&
bein! absolute and unconditional& %as in
essence a dacion en pa!o. )he 5an.
opposed the motion& contendin! that the
'eed o$ Assi!nment %as only a security $or
a loan.
I$ you %ere the Cud!e& ho% %ould you
resole the motion to dismiss fled by
Andre%? <=plain (@%)
SU44ESTE) ANSWER(
(Since the question is outside the scope of the Bar
Examination, it is recommended that the candidate
be given full credit of 5%, whatever may be his
answer, and he be given a bonus if he made an answer
in the following manner!
)he motion to dismiss should be !ranted.
)he simple absolute and unconditional
coneyance embodied in the deed o$
assi!nment %ould be operatie& and the
assi!nment %ould constitute essentially a
mode o$ payment or dacion en pa!o.
,an-s: Secrec% o& ,an- De$osits2 Garnis#ment (2003)
C'C maintained a sain!s account %ith
C5an.. Bn orders o$ the AA 9e!ional
)rial Court& the 1heri- !arnished ;@?&???
o$ his account& to satis$y the "ud!ment in
$aor o$ his creditor& AB. C'C complained
that the !arnishment iolated the >a% on
the 1ecrecy o$ 5an. 'eposits because the
e=istence o$ his sain!s account %as
disclosed to the public. (@%)
Is C'CDs complaint meritorious or not? 9eason
brieEy.
SU44ESTE) ANSWER(
7o. C'CDs complaint is not meritorious. It
%as held in China Banking Corporation v.
Ortega, 49 SCRA 355 (1973) that peso
deposits may be !arnished and the
depositary ban. can comply %ith the order o$
!arnishment %ithout iolatin! the >a% on the
1ecrecy o$ 5an. 'eposits. <=ecution is the
!oal o$ liti!ation as it is its $ruit.
Farnishment is part o$ the e=ecution process.
,pon serice o$ the notice o$ !arnishment on
the ban. %here the de$endant deposited
$unds& such $unds become part o$ the sub"ect
matter o$ liti!ation.
,an-s2 Classi&ications o& ,an-s (2002)
)here are si= (:) classes o$ ban.s
identifed in the Feneral 5an.in! >a% o$
#???. 7ame at least $our (4) o$ them and
e=plain the distin!uishin! characteristic or
$unction o$ each one. (@%)
SU44ESTE) ANSWER(
Any $our (4) o$ the $ollo%in! si= (:)
classes o$ ban.s identifed in the Feneral
5an.in! >a% o$ #??#& to %it*
/* Universa Banks G )hese are those
%hich used to be called e=panded
commercial ban.s and the operations
o$ %hich are no% primarily !oerned by
the Feneral 5an.in! >a% o$ #??#. )hey
can e=ercise the po%ers o$ an
inestment house and inest in non4
allied enterprises. )hey hae the
hi!hest capitali6ation re+uirement.
!* Co!!er"ia Banks G )hese are
ordinary or re!ular commercial ban.s&
as distin!uished $rom a uniersal ban..
)hey hae a lo%er capitali6ation
re+uirement than uniersal ban.s and
cannot e=ercise the po%ers o$ an
inestment house and inest in non4
allied enterprises.
:* #hri$t Banks G )hese ban.s (such as
sain!s and mort!a!e ban.s& stoc.
sain!s and loan associations& and
priate deelopment ban.s) may
e=ercise most o$ the po%ers and
$unctions o$ a commercial ban. e=cept
that they cannot& amon! others& open
current or chec. accounts %ithout prior
Aonetary 5oard approal& and they
cannot issue letters o$ credit. )heir
operations are !oerned primarily by
the )hri$t 5an.s Act o$ 2HH@ (9A IH?:).
(* R%ra Banks G these are those %hich
are or!ani6ed primarily to e=tend loans
and other credit $acilities to $armers&
fshermen or $arm $amilies& as %ell as
cooperaties& merchants& and priate
and public employees and %hose
operations are primarily !oerned by the
9ural 5an.s Act o$ 2HH# (9A I(@().
#* Cooperative Banks G these are those
%hich are or!ani6ed primarily to
proide fnancial and credit serices to
cooperaties and %hose operations are
primarily !oerned by the Cooperatie
Code o$ the ;hilippines (9A :H(J).
,* &sa!i" Banks G these are those
%hich are or!ani6ed primarily to
proide fnancial and credit serices in
a manner or transaction consistent %ith
the Islamic 1hari3ah. At present& only the
Al Amanah Islamic Inestment 5an. o$
the ;hilippines has been or!ani6ed as an
Islamic 5an..
,an-s2 Conserator s! Receier (2004)
'istin!uish bet%een the role o$ a
conserator and that o$ a receier o$ a ban..
(#.@%)
SU44ESTE) ANSWER(
)he Conserator is appointed $or a period
not e=ceedin! one (2) year& to ta.e char!e
o$ the assets& liabilities& and the
mana!ement o$ a ban. or a +uasi4ban. in a
state o$ continuin! inability& or
un%illin!ness to maintain a condition o$
li+uidity deemed ade+uate to protect the
interest o$ depositors and creditors.
Bn the other hand& the 9eceier is
appointed to mana!e a ban. or +uasi4ban.
that is unable to pay its liabilities in
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Mercantile Law Bar Examination Q & A (1990-2006) Page 15 of 103
the ordinary course o$ business& or has
insu-icient reali6able assets to meet its
liabilities& or cannot continue in business
%ithout probable losses to its depositors
or creditorsK or has %ill$ully iolated a
fnal cease and desist order& inolin! acts
or transactions amountin! to $raud or a
dissipation o$ the assets o$ the institution.
)he main purpose o$ the 9eceier is to
recommend the rehabilitation or
li+uidation o$ the ban..
,an-s2 Dili'ence Re5uire6 ()**2)
;lacido& a ban. depositor& le$t his
chec.boo. on his des. at his house.
,n.no%n to him& a isitor at the time&
noticin! the same& too. a chec. there$rom&
flled it up in the amount o$ ;(&???.?? and
succeeded in encashin! the chec. on the
same day. ;lacido3s account %as thereby
debited in the same amount.
'iscoerin! the erroneous debit& ;lacido
demanded that the ban. credit him %ith a
li.e amount. )he ban. re$used on the
!round that ;lacido %as ne!li!ent in
leain! his chec.boo. on his des. so that
he could not put up the de$ense o$ $or!ery
or %ant o$ authority under the 7I>.
)he 8acts disclose that een to the na.ed
eye& there %ere mar.ed di-erences
bet%een ;lacido3s si!nature and the one
in the chec. $or!ed by the isitor. As
bet%een ;lacido and the ban.& %ho should
bear the loss? <=plain.
SU44ESTE) ANSWER(
)he ban. should bear the loss. A dra%ee
ban. must e=ercise the hi!hest dili!ence
in sa$e!uardin! the accounts o$ its client4
depositors. )he ban. is also char!ed %ith
!enuineness o$ the si!natures o$ its
current account holders. 5ut %hat can be
more stri.in! is that there %ere mar.ed
di-erences bet%een ;lacido3s si!nature
and the one in the chec. $or!ed by the
isitor. Certainly& ;lacido %as not
ne!li!ent in leain! his chec.boo. in his
o%n des. ('(B v )%i!po 15* SCRA 5*+)
,an-s2 7nsolenc%2 "ro#i.ite6 Transactions (2000)
)he Aonetary 5oard o$ the 51; closed
,rban 5an. a$ter it encountered cripplin!
fnancial di-iculties that resulted in a ban.
run. L& one o$ the members o$ the 5B' o$
the ban.& attended and stayed throu!hout
the entire meetin! o$ the 5oard that %as
held %ell in adance o$ the ban. run and
be$ore ne%s had be!un to tric.le to the
business community about the dire fnancial
pit the ban. had $allen into. Immediately
a$ter the meetin!& L caused the preparation
and issuance o$ a mana!er3s chec. payable
to himsel$ in the sum o$ @ million pesos
e+uialent to the amount placed or
inested in the ban. by a business
ac+uaintance. /e no% claims that he is
.eepin! the $unds in trust $or the o%ner
and that he had committed no iolation o$
the Feneral 5an.in! Act (9A ((I& as
amended) $or %hich he should be punished.
'o you a!ree that there has been no
iolation o$ the statute? ((%)
SU44ESTE) ANSWER(
7o. I do not a!ree that there is no iolation
o$ the statute (9A ((I& as amended). L
iolated 1ec J@ %hen he caused the
preparation and issuance o$ a
mana!er3s chec.
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payable to himsel$ in the sum o$ ;@
million. )his is payin! out or permittin!
to be paid out $unds o$ the ban. a$ter the
latter became insolent. )his act is
penali6ed by fne o$ not less than
;2&???.?? nor more than ;2?&???.?? and
by imprisonment $or not less than t%o
nor more than ten years.
,an-s2 7nsolenc%2 Re5uirements ()**+)
Fie the basic re+uirements to be
complied %ith by the 51; be$ore the
Aonetary 5oard can declare a ban.
insolent& order it closed and $orbid it
$rom doin! $urther business in the
;hilippines.
SU44ESTE) ANSWER(
5e$ore the Aonetary 5oard can declare a
ban. insolent& order it closed and $orbid
it $rom doin! $urther business in the
;hilippines& the $ollo%in! basic
re+uirements must be complied %ith by
the 51;& to %it*
/* )here must be an e=amination by the
head o$ the 'epartment o$
1uperision or his e=aminers or
a!ents into the condition o$ the ban..
!* )he e=amination discloses that the
condition o$ the ban. is one o$
insolency& or that its continuance in
business %ould inole probable loss
to creditors or depositors.
:* )he head o$ said 'epartment shall
in$orm in %ritin! the Aonetary 5oard
o$ such $acts.
(* ,pon fndin! said in$ormation or
statement to be true& the Aonetary
5oard shall appoint a receier to ta.e
char!e o$ the assets and liabilities o$
the ban..
#* Within :? days& the Aonetary 5oard
shall determine and confrm i$ the ban.
is insolent& and public interest
re+uires& to order the li+uidation o$ the
ban..
,an-s2 Restrictions on 8oan Accommo6ations (2002)
As part o$ the sa$e!uards a!ainst
imprudent ban.in!& the Feneral 5an.in!
>a% imposes limits or restrictions on
loans and credit accommodations %hich
may be e=tended by ban.s. Identi$y at least
t%o (#) o$ these limits or restrictions and
e=plain the rationale o$ each o$ them. (@%)
SU44ESTE) ANSWER(
Any t%o (#) o$ the $ollo%in! limits or
restrictions on loan and credit transactions
%hich may be e=tended by ban.s& as part
o$ the sa$e!uards a!ainst imprudent
ban.in!& to %it*
/* SBL Rules G (i.e.& 1in!le 5orro%er3s
>imit) rules are those promul!ated by
the 5an!.o 1entral n! ;ilipinas& upon
the authority o$ 1ection (@ o$ the
Feneral 5an.in! >a% o$ #???& %hich
re!ulate the total amount o$ loans&
credit accommodations and !uarantees
that may be e=tended by a ban. to
any person& partnership& association&
corporation or other entity. )he rules
see. to protect a ban. $rom ma.in!
e=cessie loans to a sin!le borro%er by
prohibitin! it $rom lendin! beyond a
specifed ceilin!.
!* DOSRI Rules G )hese rules
promul!ated by the 51;& upon
authority o$ 1ection @ o$ the Feneral
5an.in! >a% o$ #???& %hich re!ulate
the amount o$ credit accommodations
that a ban. may e=tend to its
Mercantile Law Bar Examination Q & A (1990-2006) Page 15 of 103
directors& o-icers& stoc.holders and
their related interests (thus& 'B19I).
Fenerally& a ban.3s credit
accommodations to its 'B19I must be
in the re!ular course o$ business and
on terms not less $aorable to the
ban. than those o-ered to non4
'B19I borro%ers.
:* 7o commercial ban. shall ma.e any
loan or discount on the security o$
shares o$ its o%n capital stoc..
,an-s2 Restrictions on 8oan Accommo6ations (2004)
;io is the president o$ Western 5an.. /is
%i$e applied $or a loan %ith the said ban.
to fnance an internet ca$e. )he loan
o-icer told her that her application %ill
not be approed because the !rant o$
loans to related interests o$ ban.
directors& o-icers& and stoc.holders is
prohibited by the Feneral 5an.in! >a%.
<=plain %hether the loan o-icer is correct.
(@%)
SU44ESTE) ANSWER(
1ection (: o$ the Feneral 5an.in! >a% o$
#??? does not entirely prohibit directors or
o-icers o$ the ban.& directly or indirectly&
$rom borro%in! $rom the ban.. In this case&
;io is the president o$ Western 5an.&
%hich ma.es him an o-icer& director and
stoc.holder o$ the said ban.. )he Feneral
5an.in! >a% proides $or additional
restrictions to the ban. be$ore it can lend
to its directors or o-icers. A %ritten
approal o$ the ma"ority ote o$ all the
directors o$ the ban.& e=cludin! the
director concerned& is re+uired.
8urthermore& such dealin!s must be
upon terms not less $aorable to the ban.
than those o-ered to others (Section 1326,
Central Bank's "Manual of Regulations for
Banks and Other Financial nter!ediaries,
cited in Ranioso "# C$, %#R# &o# 11'(16,
)ece!*er +, 2,,,). A iolation o$ this
proision %ill cause his or her position to
be declared acant and the errin! director
or o-icer sub"ected to the penal proisions
o$ the 7e% Central 5an. Act.
,an-s2 Sa&et% De$osit ,o92 8ia.ilit%
A7 and B; rented a sa$ety deposit bo= at
1I5A7M. )he parties si!ned a contract o$
lease %ith the conditions that* the ban. is
not a depository o$ the contents o$ the sa$e
and has neither the possession nor control
o$ the sameK the ban. assumed no interest
in said contents and assumes no liability in
connection there%ith. )he sa$ety deposit
bo= had t%o .eyholes* one $or the !uard
.ey %hich remained %ith the ban.K and
the other $or the rentersD .ey. )he bo= can
be opened only %ith the use o$ both .eys.
)he renters deposited certifcates o$ title in
the bo=. 5ut later& they discoered that the
certifcates %ere !one. A7 and B; no%
claim $or dama!es $rom 1I5A7M. Is the
ban. liable? <=plain brieEy. (@%)
SU44ESTE) ANSWER(
2&e bank is liableB base. on t&e .ecisions of
t&e Supre'e Court in "# #gro$%ndustrial &evelopment
"orp' v' "ourt of #ppeals, ()* S"+# ,(- ()**.! and Sia v'
"ourt of #ppeals, ((( S"+# (, ()**.!' 1n t&ose casesB
t&e Supre'e Court rule. t&at t&e renting out
of safety .eposit bo4es is a Jspecial /ind of
depositJ w&erein t&e bank is t&e .epositary* 1n
t&e absence of any stipulation prescribing t&e
.egree of .iligence re-uire.B t&at of a goo.
fat&er of a fa'ily is to be
obsered by the depositary. Any
stipulation e=emptin! the depositary
$rom any liability arisin! $rom the loss o$
the thin! deposited %ould be oid $or
bein! contrary to la% and public policy.
)he deposit bo= is located in the ban.
premises and is under the absolute
control o$ the ban..
,an-s2 Secrec% o& ,an- De$osit2 A(8C (2004)
9udy is "obless but is reputed to be a
"ueten! operator. /e has neer been
char!ed or conicted o$ any crime. /e
maintains seeral ban. accounts and has
purchased @ houses and lots $or his
children $rom the >uansin! 9ealty& Inc.
1ince he does not hae any isible "ob&
the company reported his purchases to
the Anti4Aoney >aunderin! Council
(AA>C). )herea$ter& AA>C char!ed him
%ith iolation o$ the Anti4Aoney
>aunderin! >a%. ,pon re+uest o$ the
AA>C& the ban. disclosed to it 9udyDs
ban. deposits amountin! to ;2?? Aillion.
1ubse+uently& he %as char!ed in court
$or iolation o$ the Anti4Aoney
>aunderin! >a%.
/* Can 9udy moe to dismiss the case on
the !round that he has no criminal
record? (#.@%)
SU44ESTE) ANSWER(
7o. ,nder the Anti4Aoney >aunderin!
>a%& 9udy %ould be !uilty o$ a Nmoney
launderin! crimeN committed %hen the
proceeds o$ an Nunla%$ul actiity&N li.e
"ueten! operations& are made to appear
as hain! ori!inated $rom le!itimate
sources. )he money launderin! crime is
separate $rom the unla%$ul actiity o$
bein! a "ueten! operator& and re+uires no
preious coniction $or the unla%$ul
actiity (1ee also 1ec. (& Anti4 Aoney
>aunderin! Act o$ #??2).
!* )o raise $unds $or his de$ense& 9udy
sold the houses and lots to a $riend. Can
>uansin! 9ealty& Inc. be compelled to
trans$er to the buyer o%nership o$ the
houses and lots? (#.@%)
SU44ESTE) ANSWER(
>uansin! 9ealty& Inc. is a real estate
company& hence it is not a coered
institution under 1ection ( o$ the Anti4
Aoney >aunderin! Act. Bnly ban.in!
institutions& insurance companies&
securities dealers and bro.ers& pre4 need
companies and other entities
administerin! or other%ise dealin! in
currency& commodities or fnancial
deriaties are coered institutions.
/ence& >uansin! 9ealty& Inc. may not use
the Anti4Aoney >aunderin! Act to re$use
to trans$er to the buyer o%nership o$ the
houses and lots.
:* In disclosin! 9udyDs ban. accounts to
the AA>C& did the ban. iolate any la%?
(#.@%)
SU44ESTE) ANSWER(
7o& the ban. did not iolate any la%. )he
ban. bein! specifed as a Ncoered
institutionN under the Anti4 Aoney
>aunderin! >a%& is obli!ed to report to
the AA>C coered and suspicious
transactions& %ithout thereby iolatin! any
la%. )his is one o$ the e=ceptions to the
1ecrecy o$ 5an. 'eposit Act.
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Mercantile Law Bar Examination Q & A (1990-2006) Page 16 of 103
(* 1upposin! the titles o$ the houses
and lots are in possession o$ the >uansin!
9ealty& Inc.& is it under obli!ation to
delier the titles to 9udy? (#.@%)
SU44ESTE) ANSWER(
0es& it has an obli!ation to delier titles
to 9udy. As >uansin! 9ealty& Inc. is not a
coered institution under 1ection ( o$ the
Anti4Aoney >aunderin! Act& it may not
ino.e this la% to re$use deliery o$ the
titles to 9udy.
,an-s2 Secrec% o& ,an- De$osit2 E9ce$tions (2004)
,nder 9epublic Act 7o.24?@ ()he 5an.
1ecrecy >a%)& ban. deposits are
considered absolutely confdential and
may not be e=amined& in+uired or loo.ed
into by any person& !oernment o-icial&
bureau or o-ice.
What are the e=ceptions? (@%)
SU44ESTE) ANSWER(
)he e=ceptions to the 5an. 1ecrecy >a%
are the $ollo%in!*
/* 1pecial or !eneral e=amination o$ a
ban.& authori6ed by the 5an!.o
1entral n! ;ilipinasD Aonetary 5oard&
in connection %ith a ban. $raud or
serious irre!ularity.
!* <=amination by an independent
Auditor& hired by the 5an. and $or the
5an.Ds e=clusie use.
:* 'isclosure %ith the 'epositorDs
%ritten permission.
a* In case o$ Impeachment.
b* In cases o$ 5ribery or dereliction
o$ duty by a ;ublic B-icer&
upon order o$ a competent
court.
c* In cases o$ money
depositedOinested %hich& in
turn& is the sub"ect o$ >iti!ation&
upon order o$ a competent Court.
(* 'B19I >oans* >oans %ith their
5an.s o$ 5an. 'irectors& B-icers&
1toc.holders and related interests.
a* >oans in e=cess o$ @% o$ the
5an.Ds Capital P 1urplus
b* )he 5orro%er %aied his ri!ht
as re!ards the 1ecrecy o$ 5an.
'eposits
#* Qiolation o$ the Anti4Fra$t and
Corrupt ;ractices Act.
,* Coup dD etat >a% (9A :H:J& Bct
#4&2HH?).
3* 5I9 CommissionerDs authority to eri$y
a decedentDs Fross <state and a
ta=payerDs re+uest $or a compromise
a!reement due to incapacity to pay his
ta= liability.
6* 8orei!n Currency 'eposits by $orei!n
lenders P inestors under ;'s 2?(4.
0* Qiolations o$ the Anti4Aoney
>aunderin! >a%.
/"* ?&en t&e State e4ercisesFin)okes its
Police Power* (012# BE0E %t is suggested
that any - of the above be given full credit!
,an-s2 Secrec% o& ,an- De$osits ()**0)
Aanosa& a ne%spaper columnist& %hile
ma.in! a deposit in a ban.& oerheard a
pretty ban. teller in$ormin! a co4 employee
that Fi!i& a %ell .no%n public o-icial& has
"ust a $e% hundred pesos in her ban.
account and that her ne=t chec. %ill in all
probability bounce. Aanosa %rote this
in$ormation in his ne%spaper column.
)hus& Fi!i
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fled a complaint %ith the City 8iscal o$
Aanila $or unla%$ully disclosin!
in$ormation about her ban. account.
a$ Will the said suit prosper? <=plain
your ans%er.
b$ 1upposin! that Fi!i is char!ed %ith
unla%$ully ac+uirin! %ealth under 9A
2(IH and that the fscal issued a
su*-oena duces tecu! $or the records o$
the ban. account o$ Fi!i. Aay Fi!i alidly
oppose the said issuance on the !round
that the same iolates the la% on secrecy
o$ ban. deposits? <=plain your ans%er.
SU44ESTE) ANSWER(
a) )he 1ecrecy o$ 5an. 'eposits Act
prohibits& sub"ect to its e=clusionary
clauses& any person $rom e=aminin!&
in+uirin! or loo.in! into all deposits o$
%hateer nature %ith ban.s or ban.in!
institutions in the ;hilippines %hich by
la% are declared absolutely
confdential in nature. Aanosa %ho
merely oerheard %hat appeared to be a
a!ue remar. o$ a 5an. employee to a co4
employee and %ritin! the same in his
ne%spaper column is neither the in+uiry
nor disclosure contemplated by la%.
ALTERNATI7E ANSWER(
a$ )he complaint a!ainst Aanosa %ill
not prosper because merely %ritin! a
a!ue remar. o$ a 5an. employee to a
co4employee is not the disclosure
contemplated by la%. I$ anyone should be
liable& it %ill be the ban. employee %ho
disclosed the in$ormation.
SU44ESTE) ANSWER(
b$ Amon! the instances e=cepted $rom
the coera!e o$ the 1ecrecy o$ 5an.
'eposits Act are Anti4!ra$t cases. /ence
Fi!i may not alidly oppose the
issuance o$ a su*-oena duces tecu! $or
the ban. records on her.
,an-s2 Secrec% o& ,an- De$osits ()**))
)he la% (9A :J(#) creatin! a Commission
to conduct a )horou!h 8act48indin!
Inesti!ation o$ the 8ailed Coup d3etat o$
'ec 2HJH& 9ecommend Aeasures to
;reent the Bccurrence o$ 1imilar
Attempts At a Qiolent 1ei6ure o$ ;o%er
and $or Bther ;urposes& proides that
the Commission may as. the Aonetary
5oard to disclose in$ormation on andOor to
!rant authority to e=amine any ban.
deposits& trust or inestment $unds& or
ban.in! transactions in the name o$
andOor utili6ed by a person& natural or
"uridical& under inesti!ation by the
Commission& in any ban. or ban.in!
institution in the ;hilippines& %hen the
Commission has reasonable !round to
beliee that said deposits& trust or
inestment $unds& or ban.in! transactions
hae been used in support or in
$urtherance o$ the ob"ecties o$ the said
coup d3etat. 'oes the aboe proision not
iolate the >a% on 1ecrecy o$ 5an.
'eposits (9A 24?@)?
SU44ESTE) ANSWER(
)he >a% on 1ecrecy o$ 5an. 'eposits is
itsel$ merely a statutory enactment& and it
may& there$ore& be modifed& or amended
(such as by proidin! $urther e=ceptions
there$rom)& or een repealed& e=pressly or
impliedly& by a subse+uent la%. )he
1ecrecy o$ 5an. 'eposits Act did not
amount to a contract bet%een the
depositors and depository ban.s %ithin
the meanin! o$ the non4 impairment
clause o$ the Constitution. <en i$ it did&
the police po%er o$ the 1tate is
superior to the non4
Mercantile Law Bar Examination Q & A (1990-2006) Page 1- of 103
impairment clause. 9A :J(#& creatin! a
commission to conduct an inesti!ation o$
the $ailed 2HJH coup d3etat and to
recommend measures to preent similar
attempts to sei6e po%er is a alid e=ercise
o$ police po%er.
,an-s2 Secrec% o& ,an- De$osits ()**2)
1ocorro receied R2?&??? $rom a $orei!n
ban. althou!h she %as entitled only to
R2&???.??. In an apparent plan to conceal
the erroneously sent amount& she opened a
dollar account %ith her local ban.&
deposited the R2?&??? and issued 4
chec.s in the amount o$ R#&??? and 2
chec. $or
R2&??? each payable to di-erent
indiiduals %ho deposited the same in
their respectie dollar accounts %ith
di-erent local ban.s.
)he sender ban. then brou!ht a ciil suit
be$ore the 9)C $or the recoery o$ the
erroneously sent amount. In the course o$
the trial& the sender presented testimonies
o$ ban. o-icials to sho% that the $unds
%ere& in $act& deposited in a ban. by
1ocorro and paid out to seeral persons&
%ho participated in the concealment and
dissipation o$ the amount that 1ocorro
had erroneously receied.
1ocorro moed to stri.e out said
testimonies $rom the record ino.in! the
la% on secrecy o$ ban. deposits. I$ you
%ere the Cud!e& %ould you issue an order
to stri.e them out? Why?
SU44ESTE) ANSWER(
I %ill not stri.e out the testimonies $rom
the record. )he testimonies o$ ban.
o-icials indicatin! %here the +uestioned
dollar accounts %ere opened in depositin!
misappropriated sums must be considered
as li.e%ise inoled in liti!ation G one
%hich is amon! the e=cepted cases under
the 1ecrecy o$ 5an. 'eposits Act (,eon
Bank v ,agsino 19- SCRA .33)
,an-s2 Secrec% o& ,an- De$osits ()**3)
Ai!uel& a special customs a!ent is
char!ed be$ore the Bmbudsman %ith
hain! ac+uired property out o$ proportion
to his salary& in iolation o$ the Anti4Fra$t
and Corrupt ;ractices Act. )he
Bmbudsman issued a su*-oena duces
tecu! to the 5anco de Cinco commandin!
its representatie to $urnish the
Bmbudsman records o$ transactions by or
in the name o$ Ai!uel& his %i$e and
children. A second subpoena %as issued
e=pandin! the frst by includin! the
production o$ records o$ $riends o$ Ai!uel
in said ban. and in all its branches and
e=tension o-ices& specifcally namin! them.
Ai!uel moed to +uash the subpoenas
ar!uin! that they iolate the 1ecrecy o$
5an. 'eposits >a%. In addition& he contends
that the subpoenas are in the nature o$
fshin! e=pedition or !eneral %arrants
and are constitutionally impermissible %ith
respect to priate indiiduals %ho are not
under inesti!ation.
Is Ai!uel3s contention tenable?
SU44ESTE) ANSWER(
7o. Ai!uel3s contention is not tenable. )he
in+uiry into ille!ally ac+uired property
e=tends to cases %here such property is
concealed by bein! held by or recorded in
the
name o$ other persons. )o sustain
Ai!uel3s theory and restrict the in+uiry
only to property held by or in the name
o$ the !oernment o-icial %ould ma.e
aailable to persons in !oernment %ho
ille!ally ac+uire property an easy means
o$ eadin! prosecution. All they hae to
do %ould be to simply place the
property in the name o$ persons other
than their spouses and children .Banco
Fili-ino Sa"ings "s# /urisi!a 161 scra 0'61
Sec + $nti2%raft 3a4 as a!ended *5 B/ 1607
,an-s2 Secrec% o& ,an- De$osits ()**1)
Aichael %ithdre% %ithout authority $unds
o$ the partnership in the amounts o$
;@??th and ,1R@?th $or serices he
claims he rendered $or the beneft o$
the partnership. /e deposited the ;@??th
in his personal peso current account
%ith ;rosperity 5an. and the ,1R@?th in
his personal $orei!n currency sain!s
account %ith <astern 5an..
)he partnership instituted an action in
court a!ainst Aichael& ;rosperity& and
<astern to compel Aichael to return the
sub"ect $unds to the partnership and
pendin! liti!ation to order both ban.s to
disallo% any %ithdra%al $rom his
accounts.
At the initial hearin! o$ the case the
court ordered ;rosperity to produce the
records o$ Aichael3s peso current
account& and <astern to produce the
records o$ his $orei!n currency sain!s
account.
Can the court compel ;rosperity and
<astern to disclose the ban. deposits o$
Aichael? 'iscuss $ully.
SU44ESTE) ANSWER(
0es& as $ar as the peso account is
concerned. 1ec # o$ 9A 24?@ allo%s the
disclosure o$ ban. deposits in case %here
the money deposited is the sub"ect matter
o$ liti!ation. 1ince the case fled a!ainst
Aichael is aimed at recoerin! the amount
he %ithdre% $rom the $unds o$ the
partnership& %hich amount he alle!edly
deposited in his account& a disclosure o$
his ban. deposits %ould be proper.
7o& %ith respect to the $orei!n currency
account. ,nder the 8orei!n Currency >a%&
the e=emption to the prohibition a!ainst
disclosure o$ in$ormation concernin! ban.
deposits is the %ritten consent o$ the
depositor.
,an-s2 Secrec% o& ,an- De$osits ()**:)
2HHJ (#?) An insurance company is
deluded into releasin! a chec. to A $or
;(@th to pay $or )reasury 5ills ()4bills)
%hich A claims to be en route on board
an armored truc. $rom a !oernment
ban.. )he chec. is deliered to A %ho
deposits it to his account %ith L0S 5an.
be$ore the insurance company reali6es it is
a scam. ,pon such reali6ation& the
insurance company fles an action a!ainst
A $or recoery o$ the amount de$rauded
and obtains a %rit o$ preliminary
attachment. In addition to the %rit& the
5an. is also sered a subpoena to e=amine
the account records o$ A. )he 5an.
declines to proide any in$ormation in
response to the %rit and moes to +uash
the subpoena ino.in! secrecy o$ ban.
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Mercantile Law Bar Examination Q & A (1990-2006) Page 18 of 103
deposits under 9A 24?@& as amended. Can
the 5an. "ustifably ino.e 9A 24?@ and a)
not respond to the %rit and b) +uash the
subpoena $or e=amination? (@%)
SU44ESTE) ANSWER(
0es. Whether the transaction is considered
a sale or money placement does not ma.e
the money sub"ect matter o$ liti!ation
%ithin the meanin! o$ 1ec # o$ 9A 24?@
%hich prohibits the disclosure or in+uiry
into ban. deposit e=cept in cases %here
the money deposited or inested is the
sub"ect matter o$ liti!ation nor %ill it
matter %hether the money %as s%indled.
,an-s2 Secrec% o& ,an- De$osits (2000)
F; is a suspected "ueten! lord %ho is
rumored to be en"oyin! police and military
protection. )he eny o$ many dru! lords
%ho had not escaped the dra!net o$ the
la%& F; %as summoned to a hearin! o$
the Committee on 9ac.eteerin! and Bther
1yndicated Crimes o$ the /ouse o$
9epresentaties& %hich %as conductin! a
con!ressional inesti!ation in aid o$
le!islation on the inolement o$ police
and military personnel& and possibly een
o$ local !oernment o-icials& in the ille!al
actiities o$ suspected !amblin! and dru!
lords. 1ubpoenaed to attend the
inesti!ation %ere o-icers o$ certain
identifed ban.s %ith a directie to them to
brin! the records and documents o$ ban.
deposits o$ indiiduals mentioned in the
subpoenas& amon! them F;. F; and the
ban.s opposed the production o$ the
ban.s3 records o$ deposits on the !round
that no such in+uiry is allo%ed under the
>a% on 1ecrecy o$ 5an. 'eposits (9A
24?@ as amended). Is the opposition o$ F;
and the ban.s alid? <=plain.
SU44ESTE) ANSWER(
0es. )he opposition is alid. F; is not a
public o-icial. )he inesti!ation does not
inole one o$ the e=ceptions to the
prohibition a!ainst disclosure o$ any
in$ormation concernin! ban. deposits
under the >a% on 1ecrecy o$ 5an.
'eposits. )he Committee conductin! the
inesti!ation is not a competent court or
the Bmbudsman authori6ed under the la%
to issue a subpoena $or the production o$
the ban. record inolin! such disclosure.
,an-s2 Secrec% o& ,an- De$osits2 E9ce$tions (2003)
)he >a% on 1ecrecy o$ 5an. 'eposits
proides that all deposits o$ %hateer
nature %ith ban.s or ban.in! institutions
are absolutely confdential in nature and
may not be e=amined& in+uired or loo.ed
into by any person& !oernment o-icial&
bureau or o-ice. /o%eer& the la%
proides e=ceptions in certain instances.
Which o$ the $ollo%in! may not be amon!
the e=ceptions*
/* In cases o$ impeachment.
!* In cases inolin! bribery
:* In cases inolin! 5I9 in+uiry.
(* In cases o$ anti4!ra$t and corrupt
practices.
#* In cases %here the money inoled is
the sub"ect o$ liti!ation.
<=plain your ans%er or choice brieEy. (@%)
SU44ESTE) ANSWER(
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,nder 1ection :(8) o$ the 7ational
Internal 9eenue Code& the Commissioner
o$ Internal 9eenue can in+uire into the
deposits o$ a decedent $or the purpose o$
determinin! the !ross estate o$ such
decedent. Apart $rom this case& a 5I9
in+uiry into ban. deposits cannot be
made. )hus& e=ception ( may not al%ays
be applicable.
2urning to e4ception (B an in-uiry into
bank .eposits is possible only in
prosecutions for une4plaine. wealt& un.er
t&e Anti<Graft an. Corrupt Practices ActB
accor.ing to t&e Supre'e Court in t&e cases
of 3hilippine 0ational Ban/ v' 4ancayco, )5 S"+# *)
()*-5! and Banco 5ilipino Savings and 6ortgage Ban/
v' 3urisima, )-) S"+# 57- ()*88!' Eowe)erB all
ot&er cases of anti<graft an. corrupt
practices will not warrant an in-uiry into
bank .eposits* 2&usB e4ception ( 'ay not
always be applicable* Like any ot&er
e4ceptionB it 'ust be interprete. strictly*
<=ceptions 2& # and @& on the other
hand& are proided e=pressly in the >a%
on 1ecrecy o$ 5an. 'epositors. )hey are
aailable to depositors at all times.
,an-s2 Secrec% o& ,an- De$osits2 Garnis#ment (200))
)he >a% on 1ecrecy o$ 5an. 'eposits&
other%ise .no%n as 9A 24?@& is intended
to encoura!e people to deposit their
money in ban.in! institutions and
also to discoura!e priate hoardin! so
that the same may be properly utili6ed
by ban.s to assist in the economic
deelopment o$ the country. Is a notice o$
!arnishment sered on a ban. at the
instance o$ a creditor o$ a depositor
coered by the said la%? 1tate the
reason(s) $or your ans%er. (@%)
SU44ESTE) ANSWER(
7o. )he notice o$ !arnishment sered on a
ban. at the instance o$ a creditor is not
coered by the >a% on 1ecrecy o$ 5an.
'eposits. Farnishment is "ust a part o$ the
process o$ e=ecution. )he moment a
notice o$ !arnishment is sered on a ban.
and there e=ists a deposit by the "ud!ment
debtor& the ban. is directly accountable to
the sheri-& $or the beneft o$ the
"ud!ment creditor& $or the %hole amount o$
the deposit. In such eent& the amount o$
the deposit becomes& in e-ect& a sub"ect
o$ the liti!ation.
,S"2 Receiers#i$2 Juris6iction ()**2)
8amily 5an. %as placed under statutory
receiership and subse+uently ordered
li+uidated by the Central 5an. (C5) due
to $raud and irre!ularities in its lendin!
operations %hich rendered it insolent.
Cudicial proceedin!s $or li+uidation %ere
therea$ter commenced by the C5 be$ore
the 9)C. 8amily 5an. opposed the
petition.
1hortly therea$ter& 8amily 5an. fled in the
same court a special ciil action a!ainst
the C5 see.in! to en"oin and dismiss the
li+uidation proceedin! on the !round o$
!rae abuse o$ discretion by the C5. )he
court poised to*
2) restrain the C5 $rom closin! 8amily
5an.K and #) authori6e 8amily 5an. to
%ithdra% money $rom its deposits durin!
the pendency o$ the case. I$ you %ere the
Cud!e& %ould you issue such orders? Why?
SU44ESTE) ANSWER(
Mercantile Law Bar Examination Q & A (1990-2006) Page 19 of 103
7o. )he 9)C has no authority to restrain
the monetary board o$ the 51; $rom
statutory authority to underta.e
receiership and ultimate li+uidation o$ a
ban.. Any opposition to such an action
could be made to the court itsel$ %here
assistance is sou!ht. )he action o$ the
9)C %here the proceedin! is pendin!
appeal hae to be made in the Court o$
Appeals.
8e'al Ten6er (2000)
A$ter many years o$ shoppin! in the Aetro
Aanila area& house%i$e /W has deeloped
the sound habit o$ ma.in! cash purchases
only& none on credit. In one shoppin! trip to
Ae!a Aall& she !ot the shoc. o$ her
shoppin! li$e $or the frst time& a store3s
smart sales!irl re$used to accept her coins
in payment $or a purchase %orth not more
than one hundred pesos. /W %as payin!
seenty pesos in #@4 centao coins and
t%enty fe pesos in 2? centao coins.
1tran!e as it may seem& the sales!irl told
/W that her coins %ere not le!al
tender. 'o you a!ree %ith the sales!irl
in respect o$ her understandin! o$ le!al
tender? <=plain (#%)
SU44ESTE) ANSWER(
7o. )he sales!irl3s understandin! that
coins are not le!al tender is not correct.
Coins are le!al tender in amounts not
e=ceedin! f$ty pesos $or denominations
$rom t%enty fe centaos and aboe& and
in amounts not e=ceedin! t%enty pesos $or
denominations ten centaos and less.
"D7C 8a; s! Secrec% o& ,an- De$osits Act ()**+)
An employee o$ a lar!e manu$acturin! frm
earns a salary %hich is "ust a bit more
than %hat he needs $or a com$ortable
liin!. /e is thus able to still maintain a
;2?&??? sain!s account& a ;#?&???
chec.in! account& a ;(?&??? money
mar.et placement and a ;4?&??? trust
$und in a medium4si6e commercial ban..
a$ 1tate %hich o$ the $our accounts are
deemed insured by the ;'IC.
b$ 1tate %hich o$ the aboe accounts are
coered by the >a% on 1ecrecy o$ 5an.
'eposits.
SU44ESTE) ANSWER(
a$ )he ;2?th sain!s account and the
;#?th chec.in! account are deemed
insured by the ;'IC.
b$ )he ;2?th sain!s account and the
;#?th chec.in! account are coered by
the >a% on 1ecrecy o$ 5an. 'eposits.
Res$onsi.ilities 0 <.=ecties o& ,S" ()**:)
What are the responsibilities and primary
ob"ecties o$ the 51;? (@%)
SU44ESTE) ANSWER(
)he 51; shall proide policy directions in
the areas o$ money& ban.in! and credit. It
shall hae superision oer the operations
o$ ban.s and e=ercise such re!ulatory
po%ers as proided in the Central 5an.
Act and other pertinent la%s oer the
operations o$ fnance companies and non4
ban. fnancial institutions per$ormin! +uasi4
ban.in! $unctions& such as +uasi4ban.s and
institutions per$ormin! similar $unctions.
)he primary ob"ectie o$ the 51; is to
maintain price stability conducie to a
balanced and sustainable !ro%th
o$ the economy. It shall promote and
maintain monetary stability and
conertibility o$ the ;eso.
Trut# in 8en6in' Act ()**))
'ana Fianina purchased on a (: month
installment basis the latest model o$ the
7issan 1entra 1edan car $rom the Cobel
Cars Inc. In addition to the adertised
sellin! price& the latter imposed fnance
char!es consistin! o$ interests& $ees and
serice char!es. It did not& ho%eer&
submit to 'ana a %ritten statement
settin! $orth therein the in$ormation
re+uired by the )ruth in >endin! Act
(9A (I:@). 7eertheless& the conditional
deed o$ sale %hich the parties e=ecuted
mentioned that the total amount indicated
therein included such fnance char!es.
a* /as there been substantial compliance
o$ the a$oresaid Act?
b* I$ your ans%er to the $ore!oin!
+uestion is in the ne!atie& %hat is
the e-ect o$ the iolation on the
contract?
c* In the eent o$ a iolation o$ the Act&
%hat remedies may be aailed o$ by
'ana?
SU44ESTE) ANSWER(
a$ )here %as no substantial compliance
%ith the )ruth in >endin! Act. )he
la% proides that the creditor must
ma.e a $ull disclosure o$ the credit
lost. )he statement that the total
amount due includes the principal
and the fnancial char!es& %ithout
speci$yin! the amounts due on each
portion thereo$ %ould be insu-icient
and unacceptable.
b$ A iolation o$ the )ruth in >endin!
Act %ill not adersely a-ect the
alidity o$ the contract itsel$.
c$ It %ould allo% 'ana to re$use payment
o$ fnancial char!es or& i$ already paid&
to recoer the same. 'ana may also
initiate criminal char!es a!ainst the
creditor.
ALTERNATI7E ANSWER(
c) (;er Atty Comby ;aras i$ u read the
proisions closely) ,nder the )ruth in
>endin! Act& said fnancial char!es are
alid& and 'ana may not re$use payment
thereo$. Bnly criminal char!es may be
initiated a!ainst the creditor.
Trut# in 8en6in' Act (2000)
<mbassy Appliances sells home theater
components that are desi!ned and
customi6ed as entertainment centers $or
consumers %ithin the medium4to4hi!h
price brac.et. Aost& i$ not all& o$ these
pac.a!es are sold on installment basis&
usually by means o$ credit cards allo%in!
a ma=imum o$ (: e+ual monthly
payments. ;re$erred credit cards o$ this
type are those issued by ban.s& %hich
re!ularly hold mall %ide sales blit6es
participated in by appliance retailers li.e
<mbassy Appliances. 0ou are a buyer o$ a
home theater center at <mbassy
Appliances. )he salescler. %ho is
attendin! to you simply s%ipes your
credit card on the electronic approal
machine (%hich momentarily prints out
your char!e slip since you hae unlimited
credit)& tears the slip $rom the machine&
hands the same oer to you $or your
si!nature& and
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Mercantile Law Bar Examination Q & A (1990-2006) Page 20 of 103
%ithout more& proceeds to arran!e the
deliery and installation o$ your ne% home
theater system. 0ou .no% you %ill receie
a statement on your credit card purchases
$rom the ban. containin! an option to pay
only a minimum amount& %hich is usually
2O(: o$ the total price you %ere char!ed
$or your purchase. 'id <mbassy
Appliances comply %ith the proisions o$
the )ruth in >endin! Act (9A (I:@)?
SU44ESTE) ANSWER(
)here is no need $or <mbassy Appliances to
comply %ith the )ruth in >endin! Act. )he
transaction is not a sale on installment
basis. <mbassy Appliances is a seller on
cash basis. It is the credit card company
%hich allo%s the buyer to en"oy the
priile!e o$ payin! the price on installment
basis.
"0l, Sales La!
,ul- Sales 8a;2 Coere6 Transactions ()**3)
1tanrus Inc a department store %ith
outlets in Aa.ati& Aandaluyon!& and
Tue6on City& is contemplatin! to re$urbish
and renoate its Aa.ati store in order to
introduce the most modern and state o$ the
art e+uipment in merchandise display. )o
carry out its plan& it intends to sell A>> o$
the e=istin! f=tures and e+uipment
(display cases& %all decorations& $urniture&
counters& etc.) to Crossroads 'epartment
1tore. )herea$ter& it %ill buy and install
ne% f=tures and e+uipment and continue
operations. Crossroads %ants to .no% $rom
you as counsel*
/$ Whether the intended sale is bul.
sale.
!$ /o% can it protect itsel$ $rom
$uture claims o$ creditors o$ 1tanrus.
SU44ESTE) ANSWER(
/$ 0es. )he sale inoles all f=tures and
e+uipment& not in the ordinary course o$
trade and the re!ular prosecution o$
business o$ 1tanrus& Inc. (1ec # Act (H@#&
as amended)
!$ Crossroads should re+uire $rom
1tanrus Inc. submission o$ a %ritten
%aier o$ the 5ul. 1ales >a% by the
creditors as sho%n by erifed
statements or to comply %ith the
re+uirements o$ the 5ul. 1ales >a%&
that is& the seller must noti$y his
creditors o$ the terms and conditions
o$ the sale& and also& be$ore receiin!
$rom the endee any part o$ the
purchase price& delier to such
endee a %ritten s%orn statement o$
the names and addresses o$ all his
creditors to!ether %ith the amount o$
indebtedness due to each (1ec # Act
(H@#& amended)
,ul- Sales 8a;2 Coere6 Transactions (2000)
Company L& en!a!ed in the business o$
manu$acturin! car parts and accessories&
operates a $actory %ith e+uipment&
machinery and tools $or this purpose. )he
manu$actured !oods are sold %holesale to
distributors and dealers throu!hout the
;hilippines. Company L %as amon! the
business entities adersely hit by the
2HHI Asian business crisis. Its sales dropped
%ith the decline in car sales and its
operatin! costs escalated& %hile its creditor
ban.s and other fnancial institutions
ti!htened
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their loan port$olios. Company L %as
$aced %ith the dismal choice o$ either
suspendin! its operations or sellin! its
business. It chose the latter. /ain!
struc. a deal %ith Company S& a more
iable entity en!a!ed in the same
business& Company L sold its entire
business to the $ormer %ithout much
$an$are or any $orm o$ publicity. In $act&
eidence e=ists that the transaction %as
$urtiely entered into to aoid the
pryin! eyes o$ Company L3s creditors.
)he creditor ban.s and other fnancial
institutions sued Company L $or
iolation o$ the 5ul. 1ales >a%. 'ecide.
(@%)
SU44ESTE) ANSWER(
Company L iolated the 5ul. 1ales >a%
%hen it sold its entire business to
Company S $urtiely to aoid the pryin!
eyes o$ its creditors. Its manu$actured
!oods are sold %holesale to distributors
and dealers. )he sale o$ all or
substantially all o$ its stoc.s& not in the
ordinary course o$ business& constitutes
bul. sale. )he transaction bein! a bul.
sale& enterin! into such transaction
%ithout complyin! %ith the re+uirements
o$ the 5ul. 1ales >a%& Company L
iolated said la%.
,ul- Sales 8a;2 Coere6 Transactions (2004)
;ursuant to a %rit o$ e=ecution issued
by the 9e!ional )rial Court in N<=press
5an. . 'on 9ubio&N the sheri- leied and
sold at public auction J photocopyin!
machines o$ 'on 9ubio. Is the sheri-Ds
sale coered by the 5ul. 1ales >a%? (@%)
SU44ESTE) ANSWER(
7o. )he sale by sheri- at public sale is
not a sale by a merchant. 1ection J o$ the
5ul. 1ales >a% itsel$ proides that it has
no application to e=ecutors&
administrators& receiers& assi!nees in
insolency& or public o-icers& actin! under
process. )he 5ul. 1ales >a% only applies
to the sale or encumbrance o$ a
merchant o$ !oods& merchandise or
commodity done Nin bul.N as defned by
the >a% itsel$.
,ul- Sales 8a;2 E9clusions ()**3)
In the annual meetin! o$ L0S Corporation&
the stoc.holders unanimously adopted a
resolution proposed by the 5B' to sell
substantially all the f=tures and e+uipment
used in and about its business. )he
;resident o$ the Corporation approached
you and as.ed $or le!al assistance to
e-ect the sale.
/$ What steps should you ta.e so that the
sale may be alid?
!$ What are the t%o instances %hen the
sale& trans$er& mort!a!e or assi!nment
o$ stoc. o$ !oods& %ares& merchandise&
proision& or materials other%ise than
in the ordinary course o$ trade and the
re!ular prosecution o$ the business o$
the endor are not deemed to be a sale
or trans$er in bul.?
SU44ESTE) ANSWER(
/$ )he re+uirements o$ the 5ul. 1ales >a%
must be complied %ith. )he seller deliers
to the purchaser a list o$ his creditors and
the purchaser in turn notifes such
creditors o$ the proposed sale at a
stipulated time in adance.
Mercantile Law Bar Examination Q & A (1990-2006) Page 21 of 103
!$ I$ the sale and trans$er is made a) by
the endor& mort!a!or& trans$eror or
assi!nor %ho produces and deliers a
%ritten %aier o$ the proisions o$ the
5ul. 1ales >a% $rom his creditors as sho%n
by erifed statementK and b) by a endor&
mort!a!or& trans$eror or assi!nor %ho is an
e=ecutor& administrator& receier& assi!nee
in insolency& or public o-icer actin! under
"udicial process& the sale or trans$er is not
coered by the 5ul. 1ales >a%.
,ul- Sales 8a;2 <.li'ation o& t#e >en6or ()**1)
/ouse o$ ;i66a (;i66a) is the o%ner and
operator o$ a nation%ide chain o$ pi66a
outlets. /ouse o$ >i+uor (>i+uor) is a
retailer o$ all .inds o$ li+uor.
/ouse o$ 8oods (8oods) has o-ered to
purchase all o$ the outlets& e+uipment&
f=tures and $urniture o$ ;i66a. 8oods also
o-ered to purchase $rom >i+uor all o$ its
moderately priced stoc. constitutin! @?% o$
its total inentory.
5oth ;i66a and >i+uor hae creditors.
What le!al re+uirements must ;i66a and
>i+uor comply %ith in order $or 8oods to
consummate the transactions? 'iscuss $ully.
SU44ESTE) ANSWER(
;i66a and >i+uor must prepare an a-idait
statin! the names o$ all their creditors&
their addresses& the amounts o$ their credits
and their respectie maturities. ;i66a and
>i+uor must submit said a-idait to 8oods
%hich& in turn& should noti$y the creditors
about the transaction %hich is about to be
concluded %ith ;i66a and >i+uor.
ALTERNATI7E ANSWER(
As $ar as >i+uor is concerned& it must
prepare an a-idait statin! the names o$ all
its creditors& their addresses& the amounts
o$ their credits and their respectie
maturities. It must submit said a-idait to
its buyer& %ho in turn& should noti$y the
creditors about the transaction %hich is
about to be concluded %ith his seller.
5ut as $ar as ;i66a is concerned& it is not
coered by the 5ul. 1ales >a%. 1o 8oods
can consummate the transaction %ithout
doin! anythin!.
,ul- Sales 8a;2 <.li'ation o& t#e >en6or ()**+)
)he sole proprietor o$ a medium4si6e !rocery
shop& en!a!ed in both %holesale and retail
transactions& sells the entire business loc.&
stoc. and barrel because o$ his plan to
emi!rate abroad %ith his $amily. Is he
coered by the proisions o$ the 5ul. 1ales
>a%? In the a-irmatie& %hat must be done
by the parties so as to comply %ith the la%?
SU44ESTE) ANSWER(
0es. )his is a sale o$ the stoc. o$ !oods&
f=tures and entire business& not in the
ordinary course o$ business or trade o$ the
endor. 5e$ore receiin! $rom the endee
any part o$ the purchase price& the endor
must delier to such endee a %ritten
statement& duly s%orn& o$ the names and
addresses o$ all creditors to %hom said
endor may be indebted& to!ether %ith the
amount o$
indebtedness due or o%in!& on account o$
the !oods& f=tures or business sub"ect
matter o$ the bul. sale.
,ul- Sales 8a;2 <.li'ation o& t#e >en6or (200))
A is a merchant en!a!ed in the sale o$ a
ariety o$ !oods and merchandise. 5ecause
o$ the economic crisis& he incurred
indebtedness to L& 0 and S. )herea$ter& A
sold to 5 all the stoc. o$ !oods and
merchandise.
a$ What steps should A underta.e to e-ect
a alid sale in bul. o$ his !oods to 5.
(#%).
SU44ESTE) ANSWER(
A must prepare an a-idait statin! the
names o$ all his creditors& in this case& L&
0& and S& their addresses& the amount o$
their credits and their maturity. A should
!ie the a-idait to 5 %ho& in turn& should
$urnish a copy to each creditor and noti$y
the creditors that there is a proposed bul.
sale in order to enable the latter to protect
their interests.
b$ 1uppose A submitted a $alse statement
on the schedule o$ his creditors. What
is the e-ect o$ such $alse statement as
to Qendee 5. (#%)
SU44ESTE) ANSWER(
I$ the endee does not hae .no%led!e o$
the $alsity o$ the schedule& the sale is alid.
/o%eer& i$ the endee has .no%led!e o$
such $alsity& the sale is oid because he is in
bad $aith.
c$ What is the ri!ht o$ creditors L& 0& and S
i$ A $ailed to comply %ith the
procedureOsteps re+uired by la% under
+uestion letter (a) hereo$? (2%)
SU44ESTE) ANSWER(
)he recourse o$ L& 0& and S is to +uestion the
alidity o$ the sale $rom A to 5 so as to
recoer the !oods and merchandise to
satis$y their credits.
Cons0mer 1rote#tion La!
(etric S%stem 8a; ()**3)
An!elene is a customer o$ Aeralco
<lectric Company (A<CB). 5ecause o$ the
abrupt rise in electricity rates& An!elene
complained %ith A<CB insistin! that she
should be char!ed the $ormer rates.
/o%eer& An!elene did not tender any
payment.
When A<CB3s employees sered the frst
4J4hour notice o$ disconnection& An!elene
protested. A<CB& ho%eer& did not
implement the 4J4hour notice o$
disconnection. Instead& its employees
e=amined An!elene3s electric meter&
chan!ed the same& and installed another.
1till& An!elene& made no tender o$ payment.
A<CB sered a second 4J4hour notice o$
disconnection on Cune ##& 2HJ4. It !ae
An!elene until @ pm o$ Cune #@& 2HJ4 %ithin
%hich to pay. As no payment had been
made& A<CB cut An!elene3s electric serice
on Cune #J& 2HJ4. An!elene contends that
the 4J4hour %ritten notice o$ disconnection
rule cannot be ino.ed by A<CB
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%hen there is a bona fde and "ust
dispute as to the amount due as her
electric consumption rate.
Is An!elene3s contention alid?
SU44ESTE) ANSWER(
7o. An!elene3s only le!al recourse in this
case %as to pay the electric bill under
protest. /er $ailure to do so "ustifed
A<CB to cut the electric serice .Ceni8a "
C$ 21+ S 26,7
Cor%oration La!
,<D: Election o& Aliens as mem.ers (2001)
A Morean national "oined a corporation
%hich is en!a!ed in the $urniture
manu$acturin! business. /e %as elected to
the 5oard o$ 'irectors. )o complement its
$urniture manu$acturin! business& the
corporation also en!a!ed in the lo!!in!
business. With the additional lo!!in!
actiity& can the Morean national still be a
member o$ the 5oard o$ 'irectors?
<=plain. ((%)
SU44ESTE) ANSWER(
0es& "ust as lon! as si=ty percent (:?%) o$
the 5oard o$ 'irectors are 8ilipinos.
Corporations that are si=ty percent (:?%)
o%ned by 8ilipinos can en!a!e in the
business o$ e=ploration& deelopment and
utili6ation o$ natural resources. (Art. LII&
1ec. #& 2HJI Constitution) )he election o$
aliens as members o$ the 5oard B$
'irectors en!a!in! in partially4nationali6ed
actiities is allo%ed in proportion to their
allo%able participation or share in the
capital o$ such entities. (1ec. #4A& Anti4
'ummy >a%) 7othin! in the $acts sho%s
that more than $orty percent (4?%) o$ the
5oard o$ 'irectors are $orei!ners.
,<D2 Ca$acit% o& Directors ()**4)
9odman& the ;resident o$ )8 Co& %rote a
letter to Fre!orio& o-erin! to sell to the
latter @&??? ba!s o$ $ertili6er at ;2?? per
ba!. Fre!orio si!ned his con$ormity to the
letter4o-er& and paid a do%n4payment o$
;@?th. A $e% days later& the Corporate
1ecretary o$ )8 in$ormed Fre!orio o$ the
decision o$ their 5B' not to rati$y the
letter o-er. /o%eer& since Fre!orio had
already paid the do%n4payment& )8
deliered @?? ba!s o$ $ertili6er %hich
Fre!orio accepted. )8 made it clear that
the deliery should be considered an
entirely ne% transaction. )herea$ter&
Fre!orio sou!ht en$orcement o$ the letter4
o-er.
Is there a bindin! contract $or the @&???
ba!s o$ $ertili6er? <=plain.
SU44ESTE) ANSWER(
7o& there is no bindin! contract $or the
@&??? ba!s o$ $ertili6er. 8irst& the $acts do
not indicate that 9odman& the ;resident o$
)8 Co& %as authori6ed by the 5B' to enter
into the said contract or that he %as
empo%ered to do so under some proision
o$ the by4la%s o$ )8 Co. )he $acts do not
also indicate that 9odman has been clothed
%ith the apparent po%er to e=ecute the
contract or a!reements similar to it.
1econd& )8 Co has specifcally in$ormed
Fre!orio that it has not ratifed the contract
$or the sale o$ @&??? ba!s o$ $ertili6er and
that the deliery to
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Gregorio of #"" bagsB w&ic& Gregorio
accepte.B is an entirely new transaction* (9ao
:a Sin 2rading v "# 4+ 5.8(; <une )5, )**( (;*s7-.!
,<D2 Com$ensation ()**))
A$ter many di-icult years& %hich called
$or sacrifces on the part o$ the
company3s directors& A5C Aanu$acturin!
Inc %as fnally earnin! substantial profts.
)hus& the ;resident proposed to the
5B' that the directors be paid a bonus
e+uialent to 2@% o$ the company3s net
income be$ore ta= durin! the precedin!
year. )he ;resident3s proposal %as
unanimously approed by the 5B'. A
stoc.holder o$ A5C +uestioned the bonus.
'oes he hae !rounds to ob"ect?
SU44ESTE) ANSWER(
0es& the stoc.holder as a alid and le!al
!round to ob"ect to the payment to the
directors o$ a bonus e+uialent to 2@% o$
the company3s net income. )he la%
proides that the total annual
compensation o$ the directors& in the
precedin! year& cannot e=ceed 2?% o$ the
company3s net income be$ore income ta=
(1ec (? Corp Code).
,<D2 Con&lict o& 7nterest ()**3)
A5C ;i!!er Inc is en!a!ed in raisin! and
sellin! ho!s in the local mar.et. Ar. 'e
'ios& one o$ its directors %hile traelin!
abroad& met a leather !oods
manu$acturer %ho %as interested in
buyin! pi! s.ins $rom the ;hilippines. Ar
'e 'ios set up a separate company and
started e=portin! pi! s.ins to his
$orei!n contact but the pi! s.ins
e=ported %ere not sourced $rom A5C. /is
$ello% directors in A5C complained that
he should hae !ien this business to
A5C. /o% %ould you decide on this
matter?
SU44ESTE) ANSWER(
I %ould decide in $aor o$ Ar 'e 'ios. A5C
is en!a!ed in raisin! and sellin! ho!s in
the local mar.et. )he company that Ar 'e
'ios had set up %as to en!a!e& as it did& in
the e=port o$ pi!s s.ins. )here is thus no
conEict o$ interest bet%een Ar. 'e 'ios
and A5C ;i!!er Inc so as to ma.e the
case $all %ithin the conEict o$ interest
situation under the la% (1ec (4 Corp Code)
1bservation 2he term =conflict of interest> is
susceptible to varied views and interpretations'
,<D2 7nterloc-in' Directors ()**1)
Chito 1antos is a director o$ both ;latinum
Corporation and M%i. 1iler Corporation.
/e o%ns 2% o$ the outstandin! capital
stoc. o$ ;latinum and 4?) o$ M%i..
;latinum plans to enter into a contract
%ith M%i. that %ill ma.e both companies
earn ery substantial profts. )he contract
is presented at the respectie board
meetin!s o$ ;latinum and M%i..
/* In order that the contract %ill not be
oidable& %hat conditions %ill hae to be
complied %ith? <=plain.
!* I$ these conditions are not met& ho% may
this contract be ratifed? <=plain.
SU44ESTE) ANSWER(
/* At the meetin! o$ the 5B' o$ ;latinum
to approe the contract& Chito %ould hae
to ma.e sure that
Mercantile Law Bar Examination Q & A (1990-2006) Page 23 of 103
a$ his presence as director at the
meetin! is not necessary to
constitute a +uorum $or such
meetin!K
b$ his ote is not necessary $or the
approal o$ the contractK and
c$ the contract is $air and reasonable
under the circumstances.
At the meetin! o$ the 5B' o$ M%i. to
approe the contract& Chito %ould hae to
ma.e sure that 4
a$ there is no $raud inoledK and
b$ the contract is $air and reasonable
under the circumstances.
SU44ESTE) ANSWER(
!* I$ the conditions relatin! to the +uorum
and re+uired number o$ otes are not met&
the contract must be ratifed by the ote
o$ stoc.holders representin! at least #O(
o$ the outstandin! capital stoc. in a
meetin! called $or the purpose.
8urthermore& the aderse interest o$ Chito
in the contract must be disclosed and the
contract is $air and reasonable. (1ecs. (#
and ((& 5; :J)
,<D2 7nterloc-in' Directors ()**4)
>eonardo is the Chairman and ;resident&
%hile 9aphael is a 'irector o$ 7)
Corporation. Bn one occasion& 7) Co&
represented by >eonardo and A <nt& a
sin!le proprietorship o%ned by 9aphael&
entered into a dealership a!reement
%hereby 7) Co appointed A <nt as
e=clusie distributor o$ its products in
7orthern >u6on. Is the dealership
a!reement alid? <=plain.
SU44ESTE) ANSWER(
)he dealership a!reement is oidable at the
option o$ 7) Co inasmuch as the $acts do
not indicate that the same %as approed
by the 5B' o$ 7) Co be$ore it %as si!ned
or& assumin! such approal& that it %as
approed under the $ollo%in! conditions*
/$ )hat the presence o$ 9aphael& the
o%ner o$ A <nt& in the meetin! o$ the
5B' at %hich the a!reement %as
approed %as not necessary to
constitute a +uorum $or such meetin!K
!$ )hat the ote o$ 9aphael %as not
necessary $or the approal o$ the
a!reementK
:$ )hat the a!reement is $air and
reasonable under the circumstances
(1ec (# Corp Code)
ALTERNATI7E ANSWER(
)he dealership a!reement is alid upon the
assumption that the same %as approed
by the 5B' o$ 7) Co be$ore it %as
si!ned and that such approal %as made
under the $ollo%in! conditions*
/$ )hat the presence o$ 9aphael& the
o%ner o$ A <nt& in the meetin! o$ the
5B' at %hich the a!reement %as
approed %as not necessary to
constitute a +uorum $or such meetin!K
!$ )hat the ote o$ 9aphael %as not
necessary $or the approal o$ the
a!reementK
:$ )hat the a!reement is $air and
reasonable under the circumstances
(1ec (# Corp Code)
,%?8a;s2 >ali6it%2 limitin' 5uali&ications o& ,<D
mem.ers ()**:)
)he 5B' o$ L Co& actin! on a standin!
authority o$ the stoc.holders to amend
the by4la%s& amended its by4la%s so as to
dis+uali$y any o$ its stoc.holders %ho is
also a stoc.holder and director o$ a
competitor $rom bein! elected to its 5B'.
0& a stoc.holder holdin! su-icient assets
to assure him o$ a seat in the 5B'& fled
a petition %ith the 1<C $or a declaration
o$ nullity o$ the amended by4la%s. /e
alle!ed amon! other thin!s that as a
stoc.holder& he had ac+uired ri!hts
inherent in stoc. o%nership such as the
ri!ht to ote and be oted upon in the
election o$ directors. Is the stoc.holder3s
petition tenable? (@%)
SU44ESTE) ANSWER(
7o. )here is no ested ri!ht o$ a
stoc.holder to be elected as director.
When a person buys stoc. in a
corporation he does so %ith the
.no%led!e that its a-airs are dominated
by a ma"ority o$ the stoc.holders. )o this
e=tent& the stoc.holder parted %ith his
personal ri!ht to re!ulate the disposition
o$ his property %hich he inested in the
capital stoc. o$ the corporation and
surrendered it to the %ill o$ the ma"ority
o$ his $ello% incorporators or
stoc.holders.
Corporations hae the po%er to ma.e by4
la%s declarin! a person employed in the
serice o$ a rial company to be ineli!ible
$or the Corporation3s 5B'. An
amendment %hich renders a director
ineli!ible& or i$ elected& sub"ects him to
remoal& i$ he is also a director in a
corporation %hose business is in
competition %ith or is anta!onistic to the
other corporation is alid.
,%?8a;s2 >ali6it%2 limitin' 5uali&ications o& ,<D
mem.ers (2000)
At the annual stoc.holders3 meetin! o$
A1 Corporation& the stoc.holders
unanimously passed a resolution
authori6in! the 5oard o$ 'irectors to
amend the corporate by4la%s so as to
dis+uali$y any stoc.holder %ho is also a
director or stoc.holder o$ a competin!
business $rom bein! elected to the 5oard
o$ 'irectors o$ A1 Corporation. )he by4
la%s %ere accordin!ly amended. FM& a
stoc.holder o$ A1 Corporation and a
ma"ority stoc.holder o$ a competitor&
sou!ht election to the 5oard o$ 'irectors
o$ A1 Corporation. /is nomination %as
denied on the !round that he %as ineli!ible
to run $or the position. 1ee.in! a
nullifcation o$ the o-endin!
dis+ualifcation proision& FM consults you
about its alidity under the Corporation
Code o$ the ;hils. What %ould your le!al
adice be? ((%)
SU44ESTE) ANSWER(
)he proision in the amended by4la%s
dis+uali$yin! any stoc.holder %ho is also
a director or stoc.holder o$ a competin!
business $rom bein! elected to the 5oard
o$ 'irectors o$ A1 Corp is alid. )he
corporation is empo%ered to adopt a code
o$ by4la%s $or its !oernment not
inconsistent %ith the Corp Code. 1uch
dis+uali$yin! proision is not inconsistent
%ith the Corp Code.
,%?8a;s2 >ali6it%2 limitin' 5uali&ications o& ,<D mem.ers (200))
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Is a by4la% proision o$ L Corporation
renderin! ineli!ible or i$ elected& sub"ect
to remoal& a director i$ he is also a
director in a corporation %hose business
is in competition %ith or is anta!onistic to
said corporation alid and le!al? 1tate
your reasons. (@%).
SU44ESTE) ANSWER(
0es& the by4la% proision is alid. It is
the ri!ht o$ a corporation to protect itsel$
a!ainst possible harm and pre"udice that
may be caused by its competitors. )he
position o$ director is hi!hly sensitie and
confdential. )o say the least& to allo% a
person& %ho is a director in a corporation
%hose business is in competition %ith or
is anta!onistic to L Corporation& to become
also a director in L Corporation %ould be
harborin! a conEict o$ interest %hich is
harm$ul to the latter .%okong4ei 9r " S:C
+6 S 336 .16'671 6' S '+ .16+,77#
,%?8a;s2 >ali6it%2 limitin' 5uali&ications o& ,<D
mem.ers (2003)
)o preent the entry o$ Aarlo <nri+ue6&
%hom it considered as one anta!onistic
to its interests& into its 5oard o$
'irectors& 5ayan Corporation amended its
articles o$ incorporation and by4la%s to
add certain +ualifcations o$ stoc.holders
to be elected as members o$ its 5oard o$
'irectors. When presented $or approal at
a meetin! o$ its stoc.holders duly called
$or the purpose& the amendments %ere
oer%helmin!ly ratifed. Aarlo <nri+ue6
brou!ht suits a!ainst 5ayan Corporation to
+uestion the amendments. Would the
action prosper? Why? (4%)
SU44ESTE) ANSWER(
.-er )ondee7 )he 1C reiterated in the case
o$ SMC "s# S:C decided in $-ril 11, 16'6,
that it is reco!ni6ed by all authorities that
Deery corporation has the inherent po%er
to adopt by4la%s D$or its internal
!oernment& and to re!ulate the conduct
and prescribe the ri!hts and duties o$ its
members to%ards itsel$ and amon!
themseles in re$erence to the
mana!ement o$ its a-airs.DN At common
la%& the rule %as Nthat the po%er to ma.e
and adopt by4 la%s %as inherent in eery
corporation as one o$ its necessary and
inseparable le!al incidents. And it is settled
throu!hout the ,nited 1tates that in the
absence o$ positie le!islatie proisions
limitin! it& eery priate corporation has
this inherent po%er as one o$ its
necessary and inseparable le!al incidents&
independent o$ any specifc enablin!
proision in its charter or in !eneral la%&
such po%er o$ sel$4!oernment bein!
essential to enable the corporation to
accomplish the purposes o$ its creation.N
Close Cor$orations2 Dea6loc-s ()**1)
9obert& 9ey and 5en e=ecuted a "oint
enture a!reement to $orm a close
corporation under the Corp Code the
outstandin! capital stoc. o$ %hich the three
o$ them %ould e+ually o%n. )hey also
proided therein that any corporate act
%ould need the ote o$ I?% o$ the
outstandin! capital stoc.. )he terms o$
the a!reement %ere accordin!ly
implemented and the correspondin! close
corporation %as incorporated. A$ter ( years&
9obert& 9ey and 5en could not a!ree on the
business in
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%hich to inest the $unds o$ the
corporation. 9obert %ants the deadloc.
bro.en.
/* What are the remedies aailable to
9obert under the Corp code to brea. the
deadloc.? <=plain.
!* Are there any remedies to preent the
paraly6ation o$ the business aailable to
9obert under ;' H?#4A %hile the
petition to brea. the deadloc. is pendin!
liti!ation? <=plain.
SU44ESTE) ANSWER(
/* 9obert can petition the 1<C to
arbitrate the dispute& %ith such po%ers
as proided in 1ec 2?4 o$ the Corp
Code.
!* )he 1<C can appoint a rehabilitation
receier or a mana!ement committee.
Close6 Cor$oration2 Restriction2 Trans&er o& s#ares
()**3)
9a$ael inherited $rom his uncle 2?&???
shares o$ 1ta. Ana Corporation& a close
corporation. )he shares hae a par alue
o$ ;2?.?? per share. 9a$ael notifed 1ta.
Ana that he %as sellin! his shares at
;I?.?? per share. )here bein! no ta.ers
amon! the stoc.holders& 9a$ael sold the
same to his cousin Qicente (%ho is not a
stoc.holder) $or ;I??&???.
)he Corporate 1ecretary re$used to
trans$er the shares in Qicente3s name in
the corporate boo.s because Alberto& one
o$ the stoc.holders& opposed the
trans$er on the !round that the same
iolated the by4la%s. Alberto o-ered to
buy the shares at ;2#.@? per share& as
f=ed by the by4la%s or a total price o$
;2#@&??? only.
While the by4la%s o$ 1ta. Ana proides
that the ri!ht o$ frst re$usal can be
e=ercised at a price not e=ceedin! #@%
more than the par alue o$ such shares& the
Articles o$ Incorporation simply proides
that the stoc.holders o$ record shall
hae pre$erential ri!ht to purchase said
shares. It is silent as to pricin!.
Is 9a$ael bound by the pricin! proiso
under the by4la%s o$ 1ta. Ana Corporation?
SU44ESTE) ANSWER(
0es. In a close corporation& the restriction
as to the trans$er o$ shares has to be
statedO annotated in the Articles o$
Incorporation& the 5y4>a%s and the
certifcate o$ stoc.. )his seres as notice
to the person dealin! %ith such shares li.e
9a$ael in this case. With such notice& he is
bound by the pricin! stated in the 5y4la%s.
ALTERNATI7E ANSWER(
7o& 9a$ael is not bound by the pricin!
proiso under the 5y4la%s o$ 1ta Ana
Corporation. ,nder the corporation la%&
the restrictions on the ri!ht to trans$er
shares must appear in the articles o$
incorporation and in the by4la%s as %ell as
in the certifcate o$ stoc.& other%ise& the
same shall not be bindin! on any
purchaser thereo$ in !ood $aith. Aoreoer
the restriction shall not be more onerous
than !rantin! the e=istin! stoc.holders or
the corporation the option to purchase the
shares o$ the trans$errin! stoc.holder
%ith such reasonable term or period stated
therein.
Mercantile Law Bar Examination Q & A (1990-2006) Page 25 of 103
/ere& limitin! the price to be paid& %hen
the ri!ht o$ frst re$usal is e=ercised& to
not more than #@% par alue& %ithout
any +ualifcation %hatsoeer& is not in the
articles. It is merely stated in the 5y4la%s.
)here$ore such limitation shall not be
bindin! on the purchaser. .%oSock
? Sons ? Sy 4ui @uat %nc v %#" )* 5eb 87 6in +es!
Controers%2 7ntra?Cor$orate ()**3)
5ecause o$ disa!reement %ith the 5B'
and a threat by the 5B' to e=pel her $or
misconduct and ine-iciency& Carissa
o-ered in %ritin! to resi!n as ;resident
and member o$ the 5B'& and to sell to the
company all her shares therein $or
;(??&???.?? /er o-er to resi!n %as
e-ectie as soon as my shares are $ully
paid. At its meetin!& the 5B' accepted
Carissa3s resi!nation& approed her o-er
to sell bac. her shares o$ stoc. to the
company& and promised to buy the stoc.s
on a sta!!ered basis. Carissa %as
in$ormed o$ the 5B' 9esolution in a letter4
a!reement to %hich she a-i=ed her
consent. )he Company3s ne% ;resident
sin!ed the promissory note. A$ter
payment ;2??&??? the company de$aulted
in payin! the balance o$ ;#??&???.
Carissa %ants to sue the Company to
collect the balance. I$ you %ere retained
by Carissa as her la%yer& %here %ill you
fle the suit? A) >abor ArbiterK b) 9)CK or c)
1<C?
SU44ESTE) ANSWER(
)he 9)C has "urisdiction oer this case
%hich inoles intra4corporate controersy.
As o$ #??:& the applicable rule is that
there is a )9A718<99<' C,9I1'IC)IB7
under 1ec. @.# o$ the 19C& the
Commission3s "urisdiction oer all cases
enumerated under ;' H?#4A sec. @ has
been trans$erred to the Courts o$ !eneral
"urisdiction or the appropriate 9e!ional
)rial Court.
Controers%2 7ntra?Cor$orate ()**4)
In 2HI?& Aa!no "oined AA' Co as a Cunior
Accountant. /e steadily rose $rom the ran.s
until he became AA'3s <=ecutie Q;.
1ubse+uently& ho%eer because o$ his
inolement in certain anomalies& the
AA' 5B' considered him resi!ned $rom
the company due to loss o$ confdence.
A!!rieed& Aa!no fled a complaint in the
1<C +uestionin! the alidity o$ his
termination& and see.in! reinstatement to
his $ormer position& %ith bac.%a!es&
acation and sic. leae benefts& 2(th
month pay and Christmas bonus& plus
moral and e=emplary dama!es& attorney3s
$ees and costs. AA' fled a motion to
dismiss& ar!uin! that the 1<C has no
"urisdiction oer cases o$ ille!al dismissal&
and has no po%er to a%ard dama!es.
1hould the motion to dismiss be !ranted?
<=plain.
SU44ESTE) ANSWER(
As o$ #??:& the applicable rule is that
there is a )9A718<99<' C,9I1'IC)IB7
under 1ec. @.# o$
the 19C& the Commission3s "urisdiction oer
all cases enumerated under ;' H?#4A sec. @
has been trans$erred to the Courts o$
!eneral "urisdiction or the appropriate
9<FIB7A> )9IA> CB,9).
Controers%2 7ntra?Cor$orate ()**4)
Cenni$er and Fabriel o%ned the controllin!
stoc.s in A88 Co and C>B Inc& both
$amily corporations. 'ue to serious
disa!reements& Cenni$er assi!ned all her
shares in A88 to Fabriel& %hile Fabriel
assi!ned all his shares in C>B to Cenni$er.
1ubse+uently& Cenni$er and C>B fled a
complaint a!ainst Fabriel and A88 in
the 1<C see.in! to recoer the corporate
records and $unds o$ C>B %hich Fabriel
alle!edly re$used to turn oer& and %hich
remained in the o-ices o$ A88.
Is there an intra4corporate controersy in
this case?
SU44ESTE) ANSWER(
0es& there is an intra4corporate
controersy in this case. )he $act that&
%hen the complaint a!ainst Fabriel and
A88 %as fled %ith the 1<C (per #??:&
9)C3s Curisdiction)& Cenni$er and C>B
%ere no lon!er stoc.holders o$ A88 did
not diest the 1<C (per #??:& 9)C3s
Curisdiction) o$ its "urisdiction oer the
case inasmuch as Cenni$er %as a $ormer
stoc.holder o$ A88 and the controersy
arose out o$ this relation. .S:C " C$ %R
63+32 $ug 23 611 2,1s12(7
Controers%2 7ntra?Cor$orate (2004)
;hat is an intra2cor-orate contro"ers5<
.+=7
SU##ES$E% A&SWE':
An intra4corporate controersy is a
conEict bet%een stoc.holders&
members or partners and the
corporation& association or
partnership re!ardin! the
re!ulation o$ the corporation. )he
controersy must arise out o$ intra4
corporate or partnership relations
o$ the partiesK or bet%een such
corporation& partnership or
association and the 1tate inso$ar as
it concerns their indiidual
$ranchises. It is $urther re+uired
that the dispute be intrinsically
connected %ith the re!ulation o$
the corporation .S-eed )istri*uting
Cor-#, et al# "# Court of $--eals, et al, %#R# &o#
1(6301, March 1', 2,,(1 ntestate :state of
$le>ander ?#?5"# Court of $--eals, %#R# &o#
112+'2, $-ril 16, 2,,17#
s the Securities and :>change
Co!!ission the "enue for actions
in"ol"ing intra2cor-orate contro"ersies<
.2=7
SU##ES$E% A&SWE':
7o& pursuant to 1ubsection @.# o$ the
1ecurities 9e!u4 lation Code& the +uasi4
"udicial "urisdiction o$ the 1ecurities and
<=chan!e Commission to hear corporate
cases& includin! intra4corporate
controersies& under 1ection @ o$ ;res.
'ecree 7o. H?#4A& has been e=pressly
trans$erred to the desi!nated 9e!ional
)rial Court. ;ursuant to a memorandum
circular issued by the 1upreme Court&
only particularly desi!nated 9)C special
commercial courts in each "udicial re!ion
hae ori!inal and e=clusie "urisdiction
oer such cases .See ntestate :state of
$le>ander ?# ?5 "# Court of $--eals, %#R# &o#
112+'2, $-ril 16, 2,,17#
Controers%2 7ntra?cor$orate2 Juris6iction ()**+)
Cuan %as a stoc.holder o$ L Co. /e o%ned
a total o$ @?? shares eidenced by Cert o$
1toc. 7o 2??2. /e sold the shares to
;edro. A$ter !ettin! paid& Cuan indorsed
and deliered said Certifcate o$ 1toc. 7o
2??2 to ;edro. )he $ollo%in! day& Cuan
%ent to the o-ices o$ the corporation and
claimed that his Certifcate o$ 1toc. 7o
2??2 %as lost and that& despite dili!ent
e-orts& the certifcate could
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Mercantile Law Bar Examination Q & A (1990-2006) Page 26 of 103
not be located. )he $ormalities prescribed
by la% $or the replacement o$ the lost
certifcate %ere complied %ith. <entually
L Co issued in substitution o$ the lost
certifcate& Cert o$ 1toc. 7o #??#. Cuan
$orth%ith trans$erred $or aluable
consideration the ne% certifcate to Cose
%ho .ne% nothin! o$ the preious sale to
;edro. In time& the corporation %as
con$ronted %ith the conEictin! claims o$
Cose and ;edro. )he 5B' o$ L Co inited
you to enli!hten them on these +uestionsK
i6*
a$ I$ a suit %ere to be initiated in order
to resole the controersy bet%een
;edro and Cose& should the matter be
submitted to the 1<C or to the
re!ular courts?
b$ 5et%een Cose and ;edro& %hom
should the corporation so reco!ni6e
as the ri!ht$ul stoc.holder?
/o% %ould you respond to the aboe
+ueries?
SU44ESTE) ANSWER(
a$ )he matter should be submitted to the
re!ular courts G specifcally in the
9e!ional )rial Court %here the principal
o-ice o$ the corporation is located. )he
controersy bet%een ;edro and Cose is not
an intra4 corporate controersy.
b$ I$ there is no oer4issuance o$ shares
resultin! $rom the t%o4transactions o$
Cuan& the corporation should reco!ni6e
both ;edro and Cose as ri!ht$ul
stoc.holders. )his is %ithout pre"udice to
the ri!ht o$ the corporation to claim
a!ainst Cuan $or the alue o$ the shares
%hich Cuan sold to Cose.
Cor$oration Sole2 De&inition (2003)
What is a corporation sole?
SU44ESTE) ANSWER(
1ection 22? o$ the Corporation Code
defnes a Ncorporation soleN as one $ormed
$or the purpose o$ administerin! and
mana!in!& as trustee& the a-airs&
property and temporalities o$ any reli!ious
denomination& sect or church. It is
$ormed by the chie$ archbishop& bishop&
priest& minister& rabbi or other presidin!
elder o$ such reli!ious denomination& sect or
church.
Cor$oration: 7ssuance o& s#ares o& stoc- to $a% &or t#e
serices (2001)
Canice rendered some consultancy %or. $or
L0S Corporation. /er compensation
included shares o$ stoc. therein. Can L0S
Corporation issue shares o$ stoc. to pay
$or the serices o$ Canice as its consultant?
'iscuss your ans%er. (#%)
SU44ESTE) ANSWER(
0es& proided the approal o$ stoc.holders
representin! t%o4thirds (#O() o$ the
outstandin! capital stoc. is obtained.
Althou!h the $acts indicate that the
consultancy %or. has already been
NrenderedN constitutin! Npreiously
contracted debt&N under 1ection (H o$ the
Corporation Code& the pre4emptie ri!hts o$
e=istin! stoc.holders need not be
respected Nin payment o$ a preiously
contracted debt&N but only %ith the
indicated stoc.holdersD approal. ,nder
1ection :# o$ the Corporation Code&
consideration $or the issuance o$
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stoc. may include labor per$ormed $or
or serices actually rendered to the
corporation.
Cor$oration: Ri'#t o& Re$urc#ase o& S#ares2 Trust
/un6 Doctrine (2001)
,nder %hat conditions may a stoc.
corporation ac+uire its o%n shares? (#%)
SU44ESTE) ANSWER(
1n line wit& t&e trust fun. .octrine t&at
generally ren.ers it unlawful for t&e
corporation to return assets to t&e
stock&ol.ers representing capitalB a
corporation 'ay ac-uire its own s&ares
only when there exists in the boo/s
unrestricted retained earnings to cover the
repurchase of shares' 2&e purpose of t&e
repurc&ase of s&ares 'ust be a legiti'ate
business purpose of t&e corporationB suc& as
to:
/* <>IAI7A)< $ractional shares arisin!
out o$ stoc. diidendsK
!* CB>><C) or CBA;9BAI1< an
indebtedness to the corporation
arisin! out o$ unpaid subscription in a
delin+uency saleK
:* to ;,9C/A1< delin+uent shares sold
durin! the saleK and
(* to ;A0 dissentin! or %ithdra%in!
stoc.holders entitled to such payment
under the Corporation Code. (1ees. 42
and J#& Corporation Code)
Cor$oration: Sole "ro$rietors#i$ (2003)
0M1 )radin! fled a complaint $or specifc
per$ormance %ith dama!es a!ainst ;WC
Corporation $or $ailure to delier cement
ordered by plainti-. In its ans%er& ;WC
denied liability on the !round& inter alia&
that 0M1 has no personality to sue& not
bein! incorporated& and that the ;resident
o$ ;WC %as not authori6ed to enter into
a contract %ith plainti- by the ;WC
5oard o$ 'irectors& hence the contract is
ultra ires. 0M1 )radin! replied that it is
a sole proprietorship o%ned by 0M1& and
that the ;resident o$ ;WC had made it
appear in seeral letters presented in
eidence that he had authority to si!n
contracts on behal$ o$ the 5oard o$
'irectors o$ ;WC. Will the suit prosper or
not? 9eason brieEy. (@%)
SU44ESTE) ANSWER(
0es the suit %ill prosper. As a sole
proprietorship& the proprietor o$ 0M1
)radin! has the capacity to act and the
personality to sue ;WC. It is not necessary
$or 0M1 )radin! to be incorporated be$ore
it can sue. Bn the other hand& ;WC is
estopped $rom assertin! that its ;resident
had no authority to enter into the
contract& considerin! that& in seeral o$
;WCDs letters& it had clothed its ;resident
%ith apparent authority to deal %ith 0M1
)radin!.
Cor$oration2 Articles o& 7ncor$oration ()**0)
)he articles o$ incorporation to be
re!istered in the 1<C contained the
$ollo%in! proisions 44
a$ 8irst Article. )he name o$ the
corporation shall be )oho Aar.etin!
Company.
b$ )hird Article. )he principal o-ice o$
such corporation shall be located in
9e!ion III& in such municipality therein as
its 5oard o$ 'irectors may desi!nate.
Mercantile Law Bar Examination Q & A (1990-2006) Page 2- of 103
stoc.holders representin! at least t%o4
thirds (#O() o$ the
c$ 1eenth Article. )he capital stoc. o$ the
corporation is Bne Aillion ;esos
(;2&???&???) ;hilippine Currency.
What are your comments and su!!ested
chan!es to the proposed articles?
SU44ESTE) ANSWER(
a$ Bn the 8irst Article& I %ould su!!est
that the corporate name indicate the
$act o$ incorporation by usin! either
)oho Aar.etin! Corporation or )oh
Aar.etin! Company& Incorporated.
b$ )he )hird Article should indicate the
City or the Aunicipality and the
;roince in the ;hilippines& and not
merely the re!ion or as its 5B' may
later desi!nate& to be its place o$
principal o-ice.
c$ )he 1eenth Article must additionally
point out the number o$ shares into
%hich the capital stoc. is diided& as
%ell as the par alue thereo$ or a
statement that said stoc. or a portion
thereo$ are %ithout par alue. (1ec 24
P 2@ Corp Code)
Cor$oration2 ,ul- Sales 8a; (2001)
'iine Corporation is en!a!ed in the
manu$acture o$ !arments $or e=port. In the
course o$ its business& it %as able to
obtain loans $rom indiiduals and
fnancin! institutions. /o%eer& due to the
drop in the demand $or !arments in the
international mar.et& 'iine Corporation
could not meet its obli!ations. It decided
to sell all its e+uipment such as se%in!
machines& perma4press machines& hi!h
speed se%ers& cuttin! tables& ironin!
tables& etc.& as %ell as its supplies and
materials to )op Frade 8ashion
Corporation& its competitor. (@%)
/$ /o% %ould you classi$y the transaction?
SU44ESTE) ANSWER(
)he transactions %ould constitute a sale o$
Nsubstantially all o$ the assets o$ 'iine
Corporation complyin! %ith the test under
1ec. 4? o$ the Corporation Code& the
transactions not bein! Nin the ordinary
course o$ business&N and one Nthereby the
corporation %ould be rendered incapable
o$ continuin! the business or accomplishin!
the purpose $or %hich it %as
incorporated.N
ALTERNATI7E ANSWER(
It is a sale and trans$er in bul. in
contemplation o$ the 5ul. 1ales >a%.
,nder 1ec. # o$ the 5ul. 1ales >a%& a bul.
sale includes any sale& trans$er& mort!a!e&
or assi!nment o$ all& or substantially all& o$
the business or trade thereto$ore
conducted by the endor& mort!a!or&
trans$eror& or assi!nor. )his is e=actly %hat
happened in the case at bar.
!$ Can 'iine Corporation sell the
a$oresaid items to its competitor& )op
Frade 8ashion Corporation? What are
the re+uirements to alidly sell the
items? <=plain.
SU44ESTE) ANSWER(
8or such a transaction to be alid& it
re+uires not only the $aorable resolution o$
the 5oard o$ 'irectors o$ 'iine
Corporation& but also the ratifcatory
ote o$
outstan.ing capital stockB as 'an.ate.
un.er Sec* (" of t&e Corporation Co.e* 2&e
sale woul. be )oi. in case of failure to 'eet
t&e twin appro)als* (%slamic &irectorate of the
3hilippines v' "ourt of #ppeals, 4'+' 0o' ))78*7, 6ay ),,
)**7! ALTERNATI7E ANSWER(
'iine Corporation can sell the items to
its competitor& )op Frade 8ashion
Corporation. /o%eer& 'iine Corporation
must comply %ith 1ections (& 4 and @ o$
the 5ul. 1ales >a%& namely* (2) delier
s%orn statement o$ the names and
addresses o$ all the creditors to %hom the
endor or mort!a!or may be indebted
to!ether %ith the amount o$ indebtedness
due or o%in! to each o$ the said creditorsK
(#) apply the purchase or mort!a!e
money to the pro4rata payment o$ bona
fde claims o$ the creditorsK and (() ma.e
a $ull detailed inentory o$ the stoc. o$
!oods& %ares& merchandise& proisions or
materials& in bul.& and noti$y eery
creditor at least ten (2?) days be$ore
trans$errin! possession.
:$ /o% %ould you protect the interests o$
the creditors o$ 'iine Corporation?
SU44ESTE) ANSWER(
Considerin! that 'iine Corporation has
entered a de $acto sta!e o$ dissolution
%ith the ceasin! o$ its operations& I
%ould ino.e on behal$ o$ the creditors
the protection under 1ec. 2## o$ the
Corporation Code& that the proceeds o$
the sale should frst be applied to%ards
the settlement o$ the obli!ations o$ the
corporation& be$ore any amount can be
paid to the stoc.holders.
ALTERNATI7E ANSWER(
,nder the 5ul. 1ales >a%& i$ the proceeds
are notK applied proportionately to%ards
the settlement o$ the accounts o$ the
corporate debts& to hae the sale o$ the
sub"ect matters to )op Frade 8ashion
Corp.& as bein! N$raudulent and oidN and
obtain satis$action $rom the properties
%hich are deemed to still be o%ned by
'iine Corporation in spite o$ deliery to
the buyer. )he creditors can collect on the
credit a!ainst 'iine Corporation& and i$ it
cannot pay& the creditors can apply $or
attachment on the property $raudulently
sold. (See 'eope v. ,apo/, 0.R. (o.
4**3., Septe!1er +1, 194+)
($ In case 'iine Corporation iolated
the la%& %hat remedies are aailable to
)op Frade 8ashion Corporation a!ainst
'iine Corporation?
SU44ESTE) ANSWER(
1f t&e sale by Di)ine Corporation .i. not
obtain t&e re-uire. two<t&ir.s !F:$ )ote of
t&e outstan.ing capital stockB t&en t&e
transaction is )oi.' (%slamic &irectorate of the
3hilippines v' "ourt of #ppeals, 4'+' 0o, ))78*7, 6ay ),,
)**7! 2op Gra.e Fas&ion Corporation can
&a)e t&e purc&ase .eclare. )oi. an. reco)er
t&e purc&ase price pai.B as well as .a'ages
against t&e .irectors an. officers w&o
un.ertook t&e transaction in )iolation of t&e
law*
ALTERNATI7E ANSWER(
8or iolation o$ the 5ul. 1ales >a%& the
principal o-icers o$ the 'iine Corporation
can be held criminally liable. In addition&
)op Frade can sue 'iine Corporation $or
dama!es. Qiolation o$ the 5ul. 1ales >a%
%ould render such a sale $raudulent and
oid. 1ince )op Frade %ould be compelled
to return the !oods to 'iine Corporation&
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)op Frade can compel 'iine Corporation to return the
purchase price and pay dama!es.
Cor$oration2 ,%?la;s (200))
1uppose that the by4la%s o$ L Corp& a
minin! frm proides that )he directors
shall be relieed $rom all liability $or any
contract entered into by the corporation
%ith any frm in %hich the directors may
be interested. )hus& director A ac+uired
claims %hich oerlapped %ith L3s claims
and %ere necessary $or the deelopment
and operation o$ L3s minin! properties.
a$ Is the by4la% proision alid? Why? ((%)
b$ What happens i$ director A is able to
consummate his minin! claims oer
and aboe that o$ the corporation3s
claims? (#%)
SU44ESTE) ANSWER(
a$ 7o. It is in iolation o$ 1ection (# o$
the Corp Code.
b$ A should account to the corporation $or
the profts %hich he reali6ed $rom the
transaction. /e !rabbed the business
opportunity $rom the corporation. (1ection
(4& Corp Code)
Cor$oration2 Commencement2 Cor$orate E9istence
(2003)
/* When does a corporation ac+uire
corporate e=istence?
SU44ESTE) ANSWER(
!* C50 P Co.& Inc.& re!istered %ith the
1ecurities and <=chan!e Commission
its articles o$ incorporation. It $ailed&
ho%eer& $or one reason or another& to
hae its by4la%s fled %ith& and
re!istered by& the Commission. It
neertheless transacted and did
business as a corporation $or
sometime. A suit %as commenced by
its minority stoc.holders assailin! the
continued e=istence o$ C50 P Co.& Inc.&
because o$ the non4adoption and
re!istration o$ its by4la%s. Would the
action prosper? Why? (:%)
SU44ESTE) ANSWER(
Cor$oration2 Conersion o& Stoc- Cor$oration (200))
L company is a stoc. corporation composed
o$ the 9eyes $amily en!a!ed in the real
estate business. 5ecause o$ the re!ional
crisis& the stoc.holders decided to conert
their stoc. corporation into a charitable
non4stoc. and non4proft association by
amendin! the articles o$ incorporation.
a$ Could this be le!ally done? Why? ((%)
b$ Would your ans%er be the same i$ at
the inception& L Company is a non4stoc.
corporation? Why? (#%)
SU44ESTE) ANSWER(
a$ 0es& it can be le!ally done. In
conertin! the stoc. corporation to a non4
stoc. corporation by a mere amendment o$
the articles o$ incorporation& the stoc.
corporation is not distributin! any o$ its
assets to the stoc.holders. Bn the
contrary& the stoc.holders are deemed to
hae %aied their ri!ht to share in the
profts o$ the corporation %hich is a !ain not
a loss to the corporation.
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b$ 7o& my ans%er %ill not be the same.
In a non4stoc. corporation& the members
are not entitled to share in the profts o$
the corporation because all present and
$uture profts belon! to the corporation.
In conertin! the non4 stoc. corporation
to a stoc. corporation by a mere
amendment o$ the Articles o$
Incorporation& the non4 stoc. corporation
is deemed to hae distributed an asset o$
the corporation G i.e. its profts& amon!
its members& %ithout a prior dissolution
o$ the corporation. ,nder 1ec 2##& the
non4stoc. corporation must be dissoled
frst.
(1bservation 2he question is rather vague more
particularly question )b' 2he question does not specify
that the conversion is from a non$ stoc/ corporation
to a stoc/ corporation' 2he candidate is li/ely to be
confused because of the words =if at the inception, A
"o is a nonstoc/ corporation'> @ence, any answer
along the same line should be treated with liberality!
Cor$oration2 De /acto Cor$oration ()**3)
A corporation %as created by a special
la%. >ater& the la% creatin! it %as
declared inalid. Aay such corporation
claim to be a de $acto corporation?
SU44ESTE) ANSWER(
7o. A priate corporation may be created
only under the Corporation Code. Bnly
public corporations may be created under
special la%.
Where a priate corporation is created
under a special la%& there is no attempt
at a alid incorporation. 1uch
corporation cannot claim a de $acto status.
Cor$oration2 Dissolution2 (et#o6s o& 8i5ui6ation (200))
L Corporation shortened its corporate li$e
by amendin! its Articles o$ Incorporation.
It has no debts but o%ns a prime property
located in Tue6on City. /o% %ould the
said property be li+uidated amon! the fe
stoc.holders o$ said corporation? 'iscuss
t%o methods o$ li+uidation. (@%)
SU44ESTE) ANSWER(
)he prime property o$ L Corporation can
be li+uidated amon! the fe stoc.holders
a$ter the property has been coneyed by
the corporation to the fe stoc.holders& by
diidin! or partitionin! it amon!
themseles in any t%o o$ the $ollo%in!
%ays*
/$ by ;/01ICA> 'IQI1IB7 or ;A9)I)IB7
based on the proportion o$ the alues o$
their stoc.holdin!sK or
!$ 1<>>I7F )/< ;9B;<9)0 to a third
person and diidin! the proceeds amon!
the fe stoc.holders in proportion to their
stoc.holdin!sK or
:$ a$ter the determination o$ the alue o$
the property& by A11IF7I7F or
)9A718<99I7F )/< ;9B;<9)0 to one
stoc.holder %ith the obli!ation on the part
o$ said stoc.holder to pay the other $our
stoc.holders the amountOs in proportion to
the alue o$ the stoc.holdin! o$ each.
Cor$oration2 7ncor$oration2 Re5uirements (2004)
What is the minimum and ma=imum
number o$ in4 corporators re+uired to
incorporate a stoc. corporation?
Mercantile Law Bar Examination Q & A (1990-2006) Page 29 of 103
Is this also the same minimum and
ma=imum number o$ directors re+uired in
a stoc. corporation? (#.@%)
SU44ESTE) ANSWER(
,nder 1ection 2? o$ the Corporation Code&
any number o$ natural persons not less
than fe (@) but not more than f$teen
(2@)& all o$ le!al a!e and a ma"ority o$
%hom are residents o$ the ;hilippines&
may $orm a priate corporation $or any
la%$ul purpose.
)his is the same minimum and ma=imum
number o$ directors re+uired in a stoc.
corporation under 1ection 24(:) o$ the
Corporation Code.
Cor$oration2 7ncor$oration2 Resi6enc% Re5uirements
(2004)
Aust all incorporators and directors be
residents o$ the ;hilippines? (#.@%)
SU44ESTE) ANSWER(
7ot all directors and incorporators need
to be residents o$ the ;hilippines. ,nder
1ection 2? o$ the Corporation Code& only a
ma"ority o$ the incorporators need to be
residents o$ the ;hilippines. As proided in
1ection #( o$ the same Code& only a
ma"ority o$ the members o$ the 5oard o$
'irectors need to be residents o$ the
;hilippines.
Cor$oration2 7ncor$oration2 Re5uisites (2002)
0ou hae been as.ed to incorporate a ne%
company to be called 815 1ain!s P
Aort!a!e 5an.& Inc. >ist the documents
that you must submit to the 1ecurities
and <=chan!e Commission (1<C) to
obtain a certifcate o$ incorporation $or
815 1ain!s P Aort!a!e 5an.& Inc. (@%)
SU44ESTE) ANSWER(
)he documents to be submitted to the
1ecurities and <=chan!e Commission
(1<C) to incorporate a ne% company to
be called 815 1ain!s P Aort!a!e 5an.&
Inc.& to obtain the certifcate o$
incorporation $or said company& are*
/$ Articles o$ Incorporation
!$ )reasurer3s A-idaitK
:$ Certifcate o$ Authority $rom the
Aonetary 5oard o$ the 51;K
($ Qerifcation slip $rom the records o$ the
1<C %hether or not the proposed name
has already been adopted by another
corporation& partnership or associationK
#$ >etter underta.in! to chan!e the
proposed name i$ already adopted by
another corporation& partnership or
associationK
,$ 5an. certifcate o$ deposit concernin!
the paid4up capitalK
3$ >etter authori6in! the 1<C or Aonetary
5oard or its duly authori6ed
representatie to e=amine the ban.
records re!ardin! the deposit o$ the
paid4up capitalK
6$ 9e!istration 1heetK
Cor$oration2 (eetin's2 ,<D 0 Stoc-#ol6ers
()**3) >n.er t&e Articles of 1ncorporation of
Manila 1n.ustrial CorpB its principal place of
business s&all be in PasigB MM* 2&e
principal corporate offices are at t&e 8rtigas
Center& ;asi!& AA %hile its $actory
processin! leather products& is in Aanila.
)he corporation holds its annual
stoc.holders3 meetin! at the Aanila /otel
in Aanila and its 5B' meetin! at a hotel
in Aa.ati AA. )he by4la%s are silent as
to the place o$ meetin!s o$ the
stoc.holders and directors.
/$ Who shall preside at the meetin! o$ the
directors?
!$ Can )in!& a stoc.holder& %ho did not
attend the stoc.holders3 annual
meetin! in Aanila& +uestion the
alidity o$ the corporate resolutions
passed at such meetin!?
:$ Can the same stoc.holder +uestion
the alidity o$ the resolutions adopted
by the 5B' at the meetin! held in
Aa.ati?
SU44ESTE) ANSWER(
/$ )he ;resident presides oer the
meetin! o$ the directors& i$ there is no
position o$ Chairman proided in the 5y4
>a%s. I$ there is the position o$
Chairman proided in the 5y4>a%s& the
Chairman presides oer the meetin! o$
the 'irectors (1ec @4 Corp Code)
!$ 7o. )he la% proides that the annual
stoc.holders3 meetin! shall be held in
the city or municipality %here the
principal o-ice o$ the Corporation is
located. 8or this purpose& the la% also
proides that Aetro Aanila is considered
a city or municipality. 1ince the principal
place o$ business o$ AIC is ;asi!& AA&
the holdin! o$ the annual stoc.holders
meetin! in Aanila is proper. (1ec @2
Corp)
:$ 7o. )he la% allo%s the 5B' to hold
its meetin! any%here in the ;hilippines.
)he holdin! o$ the 5B' meetin! in
Aa.ati %as proper and the alidity o$
the resolutions adopted by the 5oard in
that meetin! cannot be +uestioned. (1ec
@( Corp code)
Cor$oration2 Nationalit% o& Cor$oration ()**:)
What is the nationality o$ a corporation
or!ani6ed and incorporated under the
la%s o$ a $orei!n country& but o%ned
2??% by 8ilipinos? (#%)
SU44ESTE) ANSWER(
,nder the control test o$ corporate
nationality& this $orei!n corporation is o$
8ilipino 7ationality. Where there are
!rounds $or piercin! the eil o$ corporate
entity& that is& disre!ardin! the fction& the
corporation %ill $ollo% the nationality o$
the controllin! members or stoc.holders&
since the corporation %ill then be
considered as one and the same.
Cor$oration2 Non?Stoc- Cor$oration ()**3)
)he A5 Aemorial 8oundation %as
incorporated as a non4proft& non4stoc.
corporation in order to establish and
maintain a library and museum in honor o$
the deceased parents o$ the incorporators.
Its Articles o$ Incorporation proided $or a
board o$ trustees composed o$ @
incorporators& %hich authori6ed to admit
ne% members. )he Articles o$
Incorporation also allo% the $oundation to
receie donations $rom members. As o$
Can (?& 2HH(& :? members had been
admitted by the 5B).
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Mercantile Law Bar Examination Q & A (1990-2006) Page 30 of 103
/$ Can the 8oundation use the $unds
donated to it by its members $or purchase
o$ $ood and medicine $or distribution to the
ictims o$ the ;inatubo eruption?
!$ Can the 8oundation operate a specialty
restaurant that caters to the !eneral public
in order to au!ment its $unds?
:$ Bne o$ the ori!inal trustees died
and the other t%o resi!ned because
they immi!rated to the ,1. /o%
%ill the acancies in the 5B) be
flled?
SU44ESTE) ANSWER(
/$ 0es& (1ec (:(H) o$ the Corp Code) as
lon! as the amount o$ donation is
reasonable.
!$ I$ the purposes o$ the corporation are
limited to the establishment and
maintenance o$ the library and museum as
stated in the problem& the $oundation
cannot operate a specialty restaurant that
caters to the !eneral public. In such case&
the action o$ the $oundation %ill be ultra
ires.
ALTERNATI7E ANSWER(
!$ I$ the act o$ the corporation is "ustifed
by the secondary purpose o$ the
corporation %hich includes the act o$
operatin! a restaurant& the $oundation %ill
be %ithin its po%er to do so.
:$ 1ince there are only # o$ the members
o$ the 5B) remainin! and there is no
+uorum& the acancies %ill hae to be
flled up in a special meetin! o$ the
members (sec #H Corp)
Cor$oration2 "o;er to 7nest Cor$orate /un6s &or ot#er
"ur$ose ()**1)
1ti..i Cement Co %as or!ani6ed
primarily $or cement manu$acturin!.
Anticipatin! substantial profts& its
;resident proposed that 1ti..i inest in a)
a po%er plant pro"ect& b) a concrete road
pro"ect& and c) +uarry operations $or
limestone in the manu$acture o$ cement.
/$ What corporate approals or otes are
needed $or the proposed inestments?
<=plain.
!$ 'escribe the procedure in securin! these
approals.
SU44ESTE) ANSWER(
2. ,nless the po%er plant and the concrete
road pro"ect are reasonable necessary to
the manu$acture o$ cement by 1ti..i (and
they do not appear to be so)& then the
approal o$ said pro"ects by a ma"ority o$
the 5B' and the ratifcation o$ such
approal by the stoc.holders representin!
at least #O( o$ the outstandin! capital stoc.
%ould be necessary.
As $or the +uarry operations $or limestone&
the same is an indispensable in!redient in
the manu$acture o$ cement and may&
there$ore& be considered reasonably
necessary to accomplish the primary
purpose o$ 1ti..i. In such case& only the
approal o$ the 5B' %ould be necessary
(1ec 4# 5; :J)
ALTERNATI7E ANSWER(
2. )he ma"ority ote o$ the 5B' is
necessary. )he inestment in a) a po%er
plant pro"ect& b) a concrete road pro"ect&
and c) +uarry operations o$ limestone used
in the manu$acture o$ cement& is %ithin the
e=press or implied po%er o$ the
corporation& or at least the same is
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2005
incidental to& or necessary $or the
e=istence o$ the corporation.
SU44ESTE) ANSWER(
#.a) )he procedure in securin! the
approal o$ the 5B' is as $ollo%s*
a* a notice o$ the 5B' should be sent to
all the directors. )he notice should
state the purpose o$ the meetin!.
b* At the meetin!& each o$ the pro"ect
should be approed by a ma"ority o$
the 5B' (not merely a ma"ority o$
those present at the meetin!)
#.b) )he procedure in securin! the
approal o$ the stoc.holders is as
$ollo%s*
a* Written notice o$ the proposed
inestment and the time and place o$
the stoc.holders3 meetin! should be
sent to each stoc.holder at his place
o$ residence as sho%n on the boo.s o$
the corporation and deposited to the
addressee in the post o-ice %ith
posta!e prepaid& or sered personally.
b* At the meetin!& each o$ the pro"ects
should be approed by the
stoc.holders representin! at least #O(
o$ the outstandin! capital stoc.. (1ec
4# 5; :J)
Cor$oration2 "o;er to 7nest Cor$orate /un6s in
anot#er Cor$oration ()**4)
When may a corporation inest its $unds
in another corporation or business or $or
any other purposes?
SU44ESTE) ANSWER(
A corporation may inest its $unds in
another corporation or business or $or any
other purpose other than the primary
purpose $or %hich it %as or!ani6ed %hen
the said inestment is approed by a
ma"ority o$ the 5B' and such approal is
ratifed by the stoc.holders representin!
at least #O( o$ the outstandin! capital
stoc.. Written notice o$ the proposed
inestment and the date& time and place o$
the stoc.holders3 meetin! at %hich such
proposal %ill be ta.en up must be sent to
each stoc.holder. (1ec 4# Corp Code)
Cor$oration2 Recoer% o& (oral Dama'es ()**:)
In a complaint fled a!ainst L0S
Corporation& >u6on )radin! Corporation
alle!ed that its ;resident P Feneral
Aana!er& %ho is also a stoc.holder&
su-ered mental an!uish& $ri!ht& social
humiliation and serious an=iety as a result
o$ the tortuous acts o$ L0S Corporation.
In its counterclaim& L0S Co claimed to
hae su-ered moral dama!es due to
besmirched reputation or !ood%ill as a
result o$ >u6on )radin! Co3s complaint.
/$ Aay >u6on )radin! Co recoer
dama!es based on the alle!ations o$
the complaint? (#%)
!$ Aay L0S Co recoer moral dama!es?
((%)
SU44ESTE) ANSWER(
7o. A corporation& bein! an artifcial
person %hich has no $eelin!s& emotions or
senses& and %hich cannot e=perience
physical su-erin! or mental an!uish& is
not entitled to moral dama!es.
ALTERNATI7E ANSWER(
Mercantile Law Bar Examination Q & A (1990-2006) Page 31 of 103
0es. When a "uridical person has a !ood
reputation that is debased& resultin! in
social humiliation& moral dama!es may be
a%arded. Aoreoer& !ood%ill can be
considered an asset o$ the corporation.
!A"# N$!#% 1n t&e case of F&N In'. vs A(#C,
)anuary 1*, 25B t&e SC rule. t&at%
857I contends that AA<C is not entitled
to moral dama!es because it is a
corporation.
A "uridical person is !enerally not entitled
to moral dama!es because& unli.e a
natural person& it cannot e=perience
physical su-erin! or such sentiments as
%ounded $eelin!s& serious an=iety& mental
an!uish or moral shoc.. )he Court o$
Appeals cites Aambulao >umber Co. .
;75& et al. to "usti$y the a%ard o$ moral
dama!es. /o%eer& the CourtDs statement
in Aambulao that Na corporation may hae
a !ood reputation %hich& i$ besmirched&
may also be a !round $or the a%ard o$
moral dama!esN is an obiter dictum.
7eertheless& AA<CDs claim $or moral
dama!es $alls under item I o$ Article
##2H o$ the Ciil Code. )his proision
e=pressly authori6es the recoery o$ moral
dama!es in cases o$ libel& slander or any
other $orm o$ de$amation. Article ##2H(I)
does not +uali$y %hether the plainti- is a
natural or "uridical person. )here$ore& a
"uridical person such as a corporation can
alidly complain $or libel or any other
$orm o$ de$amation and claim $or moral
dama!es.
Aoreoer& %here the broadcast is libelous
per se& the la% implies dama!es. In such a
case& eidence o$ an honest mista.e or
the %ant o$ character or reputation o$
the party libeled !oes only in miti!ation o$
dama!es. 7either in such a case is the
plainti- re+uired to introduce eidence o$
actual dama!es as a condition precedent
to the recoery o$ some dama!es. In this
case& the broadcasts are libelous per se.
)hus& AA<C is entitled to moral dama!es.
Cor$oration2 Se$arate Juri6ical "ersonalit% ()**1)
9onald 1ham doin! business under
the name o$ 1/AA9B7 Aachineries
(1hamron) sold to )urtle Aercantile
()urtle) a diesel $arm tractor. In
payment& )urtle3s ;resident and Aana!er
'ic. 1eldon issued a chec. $or ;@?th in
$aor o$ 1hamron. A %ee. later& )urtle
sold the tractor to 5riccio Industries
(5riccio) $or ;:?th. 5riccio discoered that
the en!ine o$ the tractor %as
reconditioned so he re$used to pay
)urtle. As a result& 'ic. 1eldon ordered
1top ;ayment o$ the chec. issued to
1hamron.
1hamron sued )urtle and 'ic. 1eldon.
1hamron obtained a $aorable "ud!ment
holdin! co4de$endants )urtle and 'ic.
1eldon "ointly and seerally liable.
Comment on the decision o$ the trial court.
'iscuss $ully.
SU44ESTE) ANSWER(
)he trial court erred in holdin! 'ic.
1eldon& ;resident and FA o$ )urtle& "ointly
and seerally liable %ith )urtle. In issuin!
the chec. issued to 1hamron and&
therea$ter&
stoppin! payment thereo$& 1eldon %as
actin! in his capacity as an o-icer o$
)urtle. /e %as not actin! in his personal
capacity. 8urthermore& no $acts hae
been proided %hich %ould indicate that
the action o$ 1eldon %as dictated by an
intent to de$raud 1hamron by himsel$ or
in collusion %ith )urtle. /ain! acted in
%hat he considered as his duty as an
o-icer o$ the corporation& 1eldon should
not be held personally liable.
Cor$oration2 Se$arate Juri6ical "ersonalit% ()**4)
;9 Co o%ns a beach resort %ith seeral
cotta!es. Caime& the ;resident o$ ;9&
occupied one o$ the cotta!es $or
residential purposes. A$ter Caime3s term
e=pired& ;9 %anted to recoer possession
o$ the cotta!e. Caime re$used to
surrender the cotta!e& contendin! that
as a stoc.holder and $ormer ;resident&
he has a ri!ht to possess and en"oy the
properties o$ the corporation.
Is Caime3s contention correct? <=plain.
SU44ESTE) ANSWER(
Caime3s contention is not correct. Caime
may o%n shares o$ stoc. in ;9 Corp but
such o%nership does not entitle him to
the possession o$ any specifc property
o$ the corporation or a defnite portion
thereo$. 7either is he a co4o%ner o$
corporate property. ;roperties re!istered
in the name o$ the corporation are o%ned
by it as an entity separate and distinct
$rom its stoc.holders.
Stock&ol.ers like 7ai'e only own s&ares of
stock in t&e corporation* Suc& s&ares of
stock .o not represent specific corporate
property* (+ebecca Boyer$+oxas v "# 4+ );;8-- <ul
),, *( ())s,7;!
Cor$oration2 Se$arate Juri6ical "ersonalit% ()**4)
9ichard o%ns H?% o$ the shares o$ the
capital stoc. o$ FBA Co. Bn one
occasion& FBA represented by 9ichard
as ;resident and Feneral Aana!er
e=ecuted a contract to sell a subdiision
lot in $aor o$ )omas. 8or $ailure o$ FBA
to deelop the subdiision& )omas fled an
action $or rescission and dama!es a!ainst
FBA and 9ichard. Will the action prosper?
<=plain.
SU44ESTE) ANSWER(
)he action may prosper a!ainst FBA but
defnitely not a!ainst 9ichard. 9ichard has
a le!al personality separate and distinct
$rom that o$ FBA. I$ he sin!ed the contract
to sell& he did so as the ;resident and
Feneral Aana!er o$ FBA and not in his
personal capacity. Aere o%nership by
9ichard o$ H?% o$ the capital stoc. o$
FBA is not o$ itsel$ su-icient !round to
disre!ard his separate le!al personality
absent a sho%in!& $or e=ample that he
acted maliciously or in bad $aith .:/%
Const Co " C$ %R 1,33'2 9n 22,62 21,s23,7
Cor$oration2 Se$arate Juri6ical "ersonalit% ()***)
As a result o$ perennial business losses& a
corporation3s net %orth has been %iped
out. In $act& it is no% in ne!atie territory.
7onetheless& the stoc.holders did not li.e
to !ie up. Creditor4ban.s& ho%eer& do
not share the confdence o$ the
stoc.holders and re$use to !rant more
loans.
a$ What tools are aailable to the
stoc.holders to replenish capital? ((%)
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2005
Mercantile Law Bar Examination Q & A (1990-2006) Page 32 of 103
b$ Assumin! that the corporation
continues to operate een %ith
depleted capital& %ould the
stoc.holders or the mana!ers be
solidarily liable $or the obli!ations
incurred by the corporation? <=plain.
((%)
SU44ESTE) ANSWER(
a$ In the $ace o$ the re$usal o$ the creditor4
ban.s to !rant more loans& the $ollo%in!
are tools aailable to the stoc.holders to
replenish capital& to %it*
/$ additional subscription to shares o$
stoc. o$ the corporation by
stoc.holders or by inestorsK
!$ adancesby the stoc.holders to
the corporationK
:$ payment o$ unpaid
subscription by the stoc.holders.
SU44ESTE) ANSWER(
b$ 7o. As a !eneral rule& the
stoc.holders or the mana!ers
cannot be held solidarily liable $or
the obli!ations incurred by the
corporation. )he corporation has a
separate and distinct personality
$rom that o$ the stoc.holders or
mana!ers. )he latter are presumed
to be actin! in !ood $aith in
continuin! the operation o$ the
corporation. )he obli!ations incurred
by the corporation are those o$ the
corporation %hich alone is liable
there$or. /o%eer& %hen the
corporation is already insolent& the
directors and o-icers become
trustees o$ the business and assets
o$ the corporation $or the beneft o$
the creditors and are liable $or
ne!li!ence or mismana!ement.
Cor$oration2 Se$arate Juri6ical "ersonalit% (2000)
Aarulas Creatie )echnolo!y Inc.&
an e4business enterprise en!a!ed in
the manu$acture o$ computer media
accessoriesK rents an o-ice and store
space at a commercial buildin! o%ned
by L. 5ein! a start4up company&
Aarulas en"oyed some leniency in its
rent paymentsK but a$ter three years& L
put a stop to it and as.ed Aarulas
president and !eneral mana!er& 0& %ho is a
stoc.holder& to pay the bac. rentals
amountin! to a hundred thousand pesos or
to acate the premises at the end o$ the
month. Aarulas neither paid its debt nor
acated the premises. L sued Aarulas
and 0 $or collection o$ the unpaid rentals&
plus interest and costs o$ liti!ation. Will the
suit prosper a!ainst L? A!ainst 0? (@%)
SU44ESTE) ANSWER(
0es& the suit %ill prosper a!ainst Aarulas.
It is the one rentin! the o-ice and store
space& as lessee& $rom the o%ner o$ the
buildin!& L& as lessor.
5ut the suit a!ainst 0 %ill not prosper. 0&
as president and !eneral mana!er& and
also stoc.holder o$ Aarulas Creatie
)echnolo!y& Inc.& has a le!al personality
separate and distinct $rom that o$ the
corporation. )he liability o$ the corporation
is that o$ the corporation and not that o$ its
o-icers and stoc.holders %ho are not liable
$or corporate liabilities.
Cor$oration2 Se$arate Juri6ical "ersonalit% (2000)
7ine indiiduals $ormed a priate
corporation pursuant to the proisions o$
the Corporation Code o$ the
Version 1990-2006 U pdated by
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2005
;hilippines (5; :J). Incorporator 1 %as
elected director and president G !eneral
mana!er. ;art o$ his emolument is a 8ord
<=pedition& %hich the corporation o%ns.
A$ter a $e% years& 1 lost his corporate
positions but he re$used to return the
motor ehicle claimin! that as a
stoc.holder %ith a substantial e+uity
share& he o%ns that portion o$ the
corporate assets no% in his possession.
Is the contention o$ 1 alid? <=plain (@%)
SU44ESTE) ANSWER(
7o. )he contention o$ 1 is not alid.
)he 8ord <=pedition is o%ned by the
corporation. )he corporation has a le!al
personality separate and distinct $rom
that o$ its stoc.holder. What the
corporation o%ns is its o%n property
and not the property o$ any stoc.holder
een ho% substantial the e+uity share that
stoc.holder o%ns.
Cor$oration2 Set?<&&2 Un$ai6 Su.scri$tion ()**3)
Qictor %as employed in AAIA
Corporation. /e subscribed to 2&@??
shares o$ the corporation at ;2?? per
share or a total o$ ;2@?&???. /e made
an initial do%n payment o$ ;(I&@??.??.
/e %as appointed ;resident and Feneral
Aana!er. 5ecause o$ his disa!reement
%ith the 5B'& he resi!ned and demanded
payment o$ his unpaid salaries& his cost o$
liin! allo%ance& his bonus& and
reimbursement o$ his !asoline and
representation e=penses.
AAIA Corporation admits that it o%ed
Qictor ;4?&???. but told him that this %ill
be applied to the unpaid balance o$ his
subscription in the amount o$ ;2??&???.??
)here %as no call or notice $or the
payment o$ the unpaid subscription. Qictor
+uestioned the set4o-.
/$ Aay AAIA set4o- the unpaid
subscription %ith ictor3s claim $or
salaries?
!$ Would your ans%er be the same i$
indeed there had been a call $or the unpaid
subscription?
SU44ESTE) ANSWER(
/$ 7o. AAIA cannot seto- the unpaid
subscription %ith Qictor3s claim $or
salaries. )he unpaid subscription is not yet
due as there is no call.
!$ 0es. )he reason is that Qictor is entitled
to the payment o$ his salaries %hich AAIA
has no ri!ht to %ithhold in payment o$
unpaid subscription. )o do so %ould
iolate >abor >a%s .$-odaco " &3RC 1'2 S
((27
Cor$oration2 Stoc- Cor$oration (200))
L0 is a recreational club %hich %as
or!ani6ed to operate a !ol$ course $or its
members %ith an ori!inal authori6ed
capital stoc. o$ ;2??A. )he articles o$
incorporation nor the by4la%s did not
proide $or distribution o$ diidends
althou!h there is a proision that a$ter
its dissolution& the assets shall be !ien
to a charitable corporation. Is L0 a
stoc. corporation? Fie reasons $or your
ans%er? (@%)
SU44ESTE) ANSWER(
L0 is a stoc. corporation because it is
or!ani6ed as a stoc. corporation and
there is no prohibition in its Articles o$
Incorporation or its by4la%s $or it to
declare diidends. When a corporation is
or!ani6ed as a stoc. corporation and its
articles o$ Incorporation or 5y4>a%s
Mercantile Law Bar Examination Q & A (1990-2006) Page 33 of 103
are silent& the corporation is deemed to
hae the po%er to declare diidends under
1ec 4(. 1ince it has the po%er to declare
diidends& L0 is a stoc. corporation.
)he proision o$ the Articles o$
Incorporation that at dissolution the
assets o$ the corporation shall be !ien to
a charitable corporation does not prohibit
the corporation $rom declarin! diidends
be$ore dissolution.
Cor$oration2 >ali6it% o& Cor$orate Acts ()**:)
)he stoc.holders o$ ;eople ;o%er Inc
(;;I) approed t%o resolutions in a special
stoc.holders3 meetin!*
a$ 9esolution increasin! the authori6ed
capital stoc. o$ ;;IK and
b$ 9esolution authori6in! the 5B' to
issue& $or cash payment& the ne% shares
$rom the proposed capital stoc.
increase in $aor o$ outside inestors
%ho are non4stoc.holders.
)he $ore!oin! resolutions %ere approed
by stoc.holders representin! HH% o$ the
total outstandin! capital stoc.. )he sole
dissenter %as Cimmy Aorato %ho o%ned
2% o$ the stoc..
/* Are the resolutions bindin! on the
corporation and its stoc.holders includin!
Cimmy Aorato& the dissentin!
stoc.holder? ((%)
!* What remedies& i$ any& are aailable to
Aorato? (#%)
SU44ESTE) ANSWER(
/* 7o. )he resolutions are not bindin! on
the corporation and its stoc.holders
includin! Cimmy Aorato. While these
resolutions %ere approed by the
stoc.holders& the directors3 approal&
%hich is re+uired by la% in such case&
does not e=ist.
!* Cimmy Aorato can petition the 1<C
(7o% 9)C) to declare the # resolutions&
as %ell as any and all actions ta.en by
the 5B' thereunder& null and oid.
Cor$oration2 >ali6it% o& Cor$orate Acts (2002)
Which o$ the $ollo%in! corporate acts are
alid& oid& or oidable? Indicate your
ans%er by %ritin! the para!raph number
o$ the +uery& $ollo%ed by your
correspondin! ans%er as Qalid& Qoid&
or Qoidable& as the case may be. I$ your
ans%er is Qoid& e=plain your ans%er. In
case o$ a Qoidable ans%er& speci$y %hat
conditions must be present or complied
%ith to ma.e the corporate act alid. (@%)
/$ L> 8oods Corporation& %hich is en!a!ed
in the $ast4 $ood business& entered into
a contract %ith its ;resident Cose Cru6&
%hereby the latter %ould supply the
corporation %ith its meat and poultry
re+uirements.
SU44ESTE) ANSWER(
Qoidable G A contract o$ the corporation
%ith one or more o$ its directors or trustees
or o-icers is oidable& at the option o$ such
corporation (1ec (#& Corporation Code).
!$ )he 5oard o$ 'irectors o$ L> 8oods
Corporation declared and paid cash
diidends %ithout approal o$ the
stoc.holders.
SU44ESTE) ANSWER(
Qalid
:$ L> 8oods Corporation !uaranteed the
loan o$ its sister company L> Aeat
;roducts& Inc.
SU44ESTE) ANSWER(
Qoid G )his is an ultra ires act on part
o$ L> 8oods Corporation& and is not one
o$ the po%ers proided $or in 1ec. (: o$
the Corporation Code.
Cor$oration2 >oluntar% Dissolution (2002)
7ame three (() methods by %hich a
stoc. corporation may be oluntarily
dissoled. <=plain each method. (@%)
SU44ESTE) ANSWER(
)he three (() methods by %hich a stoc.
corporation may be oluntarily dissoled
are*
/$ Qoluntary 'issolution %here no
creditors are a-ected. )his is done by
a ma"ority ote o$ the directors& and
resolution o$ at least #O( ote o$
stoc.holders& submitted to the
1ecurities and <=chan!e Commission.
!$ Qoluntary dissolution %here creditors
are a-ected. )his is done by a petition
$or dissolution %hich must be fled
%ith the 1ecurities and <=chan!e
Commission& si!ned by a ma"ority o$
the members o$ the board o$ directors&
erifed by the president or secretary&
and upon a-irmatie ote o$
stoc.holders representin! at least #O(
o$ the outstandin! capital stoc..
:$ 'issolution by shortenin! o$ the
corporate term. )his is done by
amendment o$ the articles o$
incorporation.
Cor$oration2 >otin' Trust A'reement ()**2)
A distressed company e=ecuted a otin!
trust a!reement $or a period o$ three
years oer :?% o$ its outstandin! paid up
shares in $aor o$ a ban. to %hom it %as
indebted& %ith the 5an. named as trustee.
Additionally& the Company mort!a!ed all
its properties to the 5an.. 5ecause o$ the
insolency o$ the Company& the 5an.
$oreclosed the mort!a!ed properties& and
as the hi!hest bidder& ac+uired said
properties and assets o$ the Company.
)he three4year period prescribed in the
Qotin! )rust A!reement hain! e=pired&
the company demanded the turn4oer and
trans$er o$ all its assets and properties&
includin! the mana!ement and operation
o$ the Company& claimin! that under the
Qotin! )rust A!reement& the 5an. %as
constituted as trustee o$ the mana!ement
and operations o$ the Company.
'oes the demand o$ the Company tally
%ith the concept o$ a Qotin! )rust
A!reement? <=plain brieEy.
SU44ESTE) ANSWER(
)he demand o$ the company does not
tally %ith the concept o$ a Qotin! )rust
A!reement. )he Qotin! )rust A!reement
merely coneys to the trustee the ri!ht
to ote the shares o$ !rantorOs. )he
conse+uence o$ $oreclosure o$ the
mort!a!ed properties %ould be alien to
the Qotin! )rust A!reement and its e-ects.
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committed the breach o$ trust a!ainst the
interests o$ the
N.TE( (per % ondee) $*e a+ si, py pro-ides t*at a
-oting tr.st agree, ent is an agree, ent in +riting
+*ereby one or , ore sto/0*oders o1 a /orporation
/onsentto trans1er *is or t*eirs*ares to a tr.stee in
orderto -estin t*e atter-oting or ot*er rig*ts
pertaining to said s*ares 1or a period not
e2/eeding 1i-e years .pon t*e 1.1i, ento1stat.tory
/onditions and s./* ot*er ter,s and /onditions
spe/i1ied in t*e agree, ent3 $*e 1i-e year-period , ay
be e2tended in /ases +*ere t*e -oting tr.st is
e2e/.ted p.rs.ant to a oan agree, ent +*ereby
t*e period is , ade /ontingent .pon 1. pay,
ento1t*e oan3
U nderse/tion !9 o1t*e C orporation C ode4 s.pra4 a
-oting tr.st agree, ent , ay /on1er .pon a
tr.stee not ony t*e sto/0*oder5s -oting rig*ts
b.taso ot*errig*ts pertaining to *is s*ares as ong
as t*e -oting tr.stagree, entis notentered 61or t*e
p.rpose o1 /ir/., -enting t*e a+ against,
onopoies and iega/o, binations in restrainto1
trade or .sed 1or p.rposes o11ra.d36 (se/tion !94 !t*
paragrap* o1t*e C orporation C ode)3 $*.s4 t*e
traditiona /on/ept o1 a -oting tr.st agree, ent
pri, ariy intended to singe o.t a sto/0*oder5s
rig*t to -ote 1ro, *is ot*er rig*ts as s./* and ,
ade irre-o/abe 1or a i, ited d.ration , ay in
pra/ti/e be/o, e a ega de-i/e +*ereby a trans1er
o1 t*e sto/0*oders s*ares is e11e/ted s.b7e/tto t*e
spe/i1i/ pro-ision o1t*e -oting tr.stagree, ent3
$*e e2e/.tion o1 a -oting tr.st agree, ent4 t*ere1ore4
, ay /reate a di/*oto, y bet+een t*e e8.itabe or
bene1i/ia o+ners*ip o1t*e /orporate s*ares o1a
sto/0*oder4 on t*e one *and4 and t*e ega tite
t*ereto on t*e ot*er *and3 (Lee vs !A" #e$ %" 1992)
Deriatie Suit: Re5uisites (2003)
AA& a minority stoc.holder& fled a suit
a!ainst 55& CC& ''& and <<& the holders
o$ ma"ority shares o$ AB; Corporation&
$or alle!ed misappropriation o$ corporate
$unds. )he complaint aerred& inter alia&
that AB; Corporation is the corporation
in %hose behal$ and $or %hose beneft the
deriatie suit is brou!ht. In their capacity
as members o$ the 5oard o$ 'irectors& the
ma"ority stoc.holders adopted a
resolution authori6in! AB; Corporation to
%ithdra% the suit. ;ursuant to said
resolution& the corporate counsel fled a
Aotion to 'ismiss in the name o$ the
AB; Corporation. 1hould the motion be
!ranted or denied? 9eason brieEy. (@%)
SU44ESTE) ANSWER(
7o. All the re+uisites $or a alid
deriatie suit e=ist in this case.
8irst& AA %as e=empt $rom e=haustin! his
remedies %ithin the corporation& and did
not hae to ma.e a demand on the 5oard
o$ 'irectors $or the latter to sue. /ere&
such a demand %ould be $utile& since the
directors %ho comprise the ma"ority
(namely& 55& CC& '' and <<) are the ones
!uilty o$ the %ron! complained o$.
1econd& AA appears to be stoc.holder at
the time the alle!ed misappropriation o$
corporate $unds.
2&ir.B t&e suit is broug&t on be&alf an. for t&e
benefit of M8P Corporation* 1n t&is
connectionB it was &el. in "onmart (3hils'! %nc' v'
Securities and Exchange "ommission, )*8 S"+# 7. ()**)!
t&at to grant to t&e corporation concerne. t&e
rig&t of wit&.rawing or .is'issing t&e suitB at
t&e instance of t&e 'a9ority stock&ol.ers an.
.irectors w&o t&e'sel)es are t&e persons
allege. to &a)e
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corporation %ould be to emasculate the
ri!ht o$ minority stoc.holders to see.
redress $or the corporation. 8ilin! such
action as a deriatie suit een by a lone
stoc.holder is one o$ the protections
e=tended by la% to minority stoc.holders
a!ainst abuses o$ the ma"ority.
Deriatie Suit: Watere6 Stoc- ()**3)
A became a stoc.holder o$ ;rime 9eal
<state Corporation (;9<C) on Culy 2?&
2HH2& %hen he %as !ien one share by
another stoc.holder to +uali$y him as a
director. A %as not re4elected director in
the Culy 2& 2HH# annual meetin! but he
continued to be a re!istered shareholder
o$ ;9<C.
When he %as still a director& A discoered
that on Can @& 2HH2& ;9<C issued $ree o$
char!e 2?&??? shares to L a la%yer %ho
assisted in a court case inolin! ;9<C.
/$ Can A no% brin! an action in the name
o$ the corporation to +uestion the
issuance o$ the shares to L %ithout
receiin! any payment?
!$ Can L +uestion the ri!ht o$ A to sue
him in behal$ o$ the corporation on
the !round that A has only one share
in his name?
:$ Cannot the shares issued to L be
considered as %atered stoc.?
SU44ESTE) ANSWER(
/$ As a !eneral rule& A cannot brin! a
deriatie suit in the name o$ the
corporation concernin! an act that too.
place be$ore he became a stoc.holder.
/o%eer& i$ the act complained o$ is a
continuin! one& A may do so.
!$ 7o. In a deriatie suit& the action is
institutedO brou!ht in the name o$ a
corporation and relie$s are prayed $or
therein $or the corporation& by a minority
stoc.holder. )he la% does not +uali$y the
term minority in terms o$ the number o$
shares o%ned by a stoc.holder brin!in!
the action in behal$ o$ the corporation.
.SMC " @han 1'6 SCR$ ((+7
:$ 7o. WA)<9<' 1/A9<1 are those sold
by the corporation $or less than the
parOboo. alue. In the instant case& it %ill
depend upon the alue o$ serices
rendered in relation to the total par alue
o$ the shares.
Deriatie Suit2 Close Cor$oration2 Cor$orate
<$$ortunit% (2001)
Aalyn& 1chiera and Ca6 are the directors
o$ ;atio Inestments& a close corporation
$ormed to run the ;atio Ca$e& an al $resco
co-ee shop in Aa.ati City. In #???& ;atio
Ca$e be!an e=periencin! fnancial
reerses& conse+uently& some o$ the chec.s
it issued to its beera!e distributors and
employees bounced.
In Bctober #??(& 1chiera in$ormed Aalyn
that she $ound a location $or a second ca$e
in )a!ui! City. Aalyn ob"ected because o$
the dire fnancial condition o$ the
corporation.
Mercantile Law Bar Examination Q & A (1990-2006) Page 35 of 103
nulli$y the +uestioned inestments. Would
her action
1ometime in April #??4& Aalyn learned
about 8ort ;atio Ca$e located in )a!ui!
City and that its deelopment %as
underta.en by a ne% corporation .no%n
as 8ort ;atio& Inc.& %here both 1chiera and
Ca6 are directors. Aalyn also $ound that
1chiera and Ca6& on behal$ o$ ;atio
Inestments& had obtained a loan o$
;@??&???.?? $rom ;5Com 5an.& $or the
purpose o$ openin! 8ort ;atio Ca$e. )his
loan %as secured by the assets o$ ;atio
Inestments and personally !uaranteed
by 1chiera and Ca6.
Aalyn then fled a corporate deriatie
action be$ore the 9e!ional )rial Court o$
Aa.ati City a!ainst 1chiera and Ca6&
alle!in! that the t%o directors had
breached their fduciary duties by
misappropriatin! money and assets o$
;atio Inestments in the operation o$ 8ort
;atio Ca$e. (@%)
/$ 'id 1chiera and Ca6 iolate the
principle o$ corporate opportunity?
<=plain.
SU44ESTE) ANSWER(
0es. Althou!h Aalyn re$used the business
be$ore& neertheless& usin! the resources
and credit standin! o$ the company&
1chiera and Ca6 clearly demonstrated that
the business could hae been success$ully
pursued in the name o$ the close
corporation. Aore importantly& 1chiera and
Ca6 are !uilty o$ diertin! the resources o$
the close corporation to another entity&
e+uialent to $raud and bad $aith.
!$ Was it proper $or Aalyn to fle a
deriatie suit %ith a prayer $or
in"unctie relie$? <=plain.
SU44ESTE) ANSWER(
Althou!h it is a close corporation&
neertheless the principles o$ separate
"uridical personality still apply. )he
business o$ the corporation is still
separate and distinct $rom the proprietary
interests o$ its stoc.holders and directors.
Conse+uently& since the business
opportunity and the resourceDs used
pertain to the close corporation& the
standin! to sue and to recoer remains %ith
the close corporation and not %ith Aalyn.
)here$ore& it is still necessary to fle a
deriatie suit on behal$ o$ the close
corporation& althou!h the proceedin!s
%ould be !oerned under the Interim 9ules
o$ ;rocedure $or Intra4 Corporate 'isputes.
:$ Assumin! that a deriatie suit is
properK may the action continue i$ the
corporation is dissoled durin! the
pendency o$ the suit? <=plain.
SU44ESTE) ANSWER(
0es& $or in spite o$ the dissolution o$ any
corporation& it remains a "uridical person
$or purpose o$ dissolution $or three years
$rom the date o$ dissolution& precisely one
o$ the purposes is to allo% the %indin!4up
o$ its a-airs& includin! the termination o$
pendin! suits.
Deriatie Suit2 (inorit% Stoc-#ol6er (2003)
Fina 1eilla& a minority stoc.holder o$
5ayan Corporation& $elt that arious
inestments o$ the company3s capital %ere
ultra "ires i$ not& indeed& made in iolation
o$ la%. 1he fled a deriatie suit see.in!
to
prosper? Why?
SU44ESTE) ANSWER(
0es& she is already a stoc.holder at the
time the alle!ed misappropriation o$
corporate $unds. And that flin! such
action as a deriatie suit een by a lone
stoc.holder is one o$ the protections
e=tended by la% to minority stoc.holders
a!ainst abuses o$ the ma"ority.
7eertheless& Fina must frst e=haust
any administratie remedies be$ore her
suit be consider in court.
Distinction: De &acto Cor$oration s! Cor$oration .%
Esto$$el (2003)
Is there a di-erence bet%een a de $acto
corporation and a corporation by
estoppel? <=plain brieEy. (#%)
SU44ESTE) ANSWER(
A '< 8AC)B CB9;B9A)IB7 is one
%hich actually e=ists $or all practical
purposes as a corporation but %hich has
no le!al ri!ht to corporate e=istence as
a!ainst the 1tate. It is essential to the
e=istence o$ a de $acto corporation that
there be (2) a alid la% under %hich a
corporation mi!ht be incorporated& (#) a
bona fde attempt to or!ani6e as a
corporation under such la%& and
(() actual use or e=ercise in !ood $aith o$
corporate po%ers con$erred upon it by
la%.
A CB9;B9A)IB7 50 <1)B;;<> e=ists
%hen persons assume to act as a
corporation .no%in! it to be %ithout
authority to do so. In this case& those
persons %ill be liable as !eneral
partners $or all debts& liabilities and
dama!es incurred or arisin! as a result o$
their actions.
Distinction: Dii6en6s s! "ro&it: Cas# Dii6en6 s!
Stoc- Dii6en6 (2001)
'istin!uish diidend $rom proftK cash
diidend $rom stoc. diidend. (#%)
SU44ESTE) ANSWER(
;9B8I)1 are residual amounts
representin! return o$ capital a$ter
deductin! all corporate costs and
e=penses $rom reenues. )he
accumulated profts& $rom year to year&
represent the corporate retained earnin!s
$rom %hich the diidends can be declared.
CA1/ 'IQI'<7'1 represent an actual
distribution o$ accumulated profts to the
stoc.holders as a return on their
inestments. 'eclaration o$ cash diidends
re+uires only the approal o$ the ma"ority
o$ the 5oard o$ 'irectors in a proper
resolution.
1)BCM 'IQI'<7'1 are simply trans$ers
o$ retained earnin!s to capital stoc.&
thereby increasin! the number o$ shares
o$ stoc.s o$ each stoc.holder %ith no
re+uired cash contribution. A t%o4thirds
ote o$ the stoc.holders& coupled %ith a
ma"ority ote o$ the 5oard o$ 'irectors& is
needed to declare stoc. diidends.
Distinction2 "riate s! "u.lic Cor$oration
(2003) Distinguis& clearly a pri)ate
corporation fro' a public corporation
SU44ESTE) ANSWER(
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A ;9IQA)< CB9;B9A)IB7 is one $ormed $or some
priate purpose& beneft or end& %hile a
;,5>IC CB9;B9A)IB7 is $ormed $or the
!oernment o$ a portion o$ the 1tate $or
the !eneral !ood or %el$are. )he true test
is the purpose o$ the corporation. I$ the
corporation is created $or political or
public purpose connected %ith the
administration o$ !oernment& then it is a
public corporation. I$ not& it is a priate
corporation althou!h the %hole or
substantially the %hole interest in the
corporation belon!s to the 1tate. A public
corporation is created by special le!islation
or act o$ Con!ress. A priate corporation
must be or!ani6ed under the Corporation
Code.
Distinction2 Stoc- s! Non?Stoc- Cor$oration
(2003) Distinguis& clearly a stock corporation
fro' a non<stock corporation*
SU44ESTE) ANSWER(
A stoc. corporation is one that has capital
stoc. diided into shares and is authori6ed
to distribute to the holders o$ such shares
diidends or allotments o$ the surplus
profts on the basis o$ the shares held.
All other corporations are non4stoc.
corporations.
Dii6en6s: Declaration o& Dii6en6s (2001)
,nder %hat circumstances may a
corporation declare diidends? (#%)D
SU44ESTE) ANSWER(
7o $orm o$ diidends can be declared and
paid by the corporation e=cept $rom
unrestricted retained earnin!s appearin!
on its boo.s. 'iidends must be paid in
amounts proportional to all stoc.holders
on the basis o$ outstandin! stoc. held by
them. Cash or property diidends& can be
declared $rom such unrestricted retained
earnin!s by a proper resolution o$ the
5oard o$ 'irectors. 1toc. diidends&
ho%eer& must be declared by a proper
resolution o$ the 5oard o$ 'irectors $rom
e=istin! unrestricted retained earnin!s and
ratifed by stoc.holders representin! at
least t%o4thirds (#OJ) o$ the outstandin!
capital stoc. o$ the corporation& obtained
in a meetin! duly called $or the purpose.
(1ec. 4(& Corporation Code)
Dii6en6s: Sources o& Dii6en6s2 Trust /un6 Doctrine
(2001)
8rom %hat $unds are cash and stoc.
diidends sourced? <=plain %hy. (#%)
SU44ESTE) ANSWER(
All cas& an. stock .i)i.en.s are always pai.
out of t&e unrestricte. retaine. earnings also
calle. surplus profit$ of t&e corporation* 1f t&e
corporation &as no unrestricte. retaine.
earningsB t&e .i)i.en.s woul. &a)e to be
source. fro' t&e capital stock* 2&is is illegal*
1t )iolates t&e J2+>S2 F>=D D8C2+1=5J
t&at pro)i.es t&at t&e capital stock of t&e
corporation is a trust fun. to be kept intact
.uring t&e life of t&e corporation for t&e benefit
of t&e cre.itors of t&e corporation* ("ommissioner
of %nternal$ +evenue v' "ourt of #ppealB, 4'+' 0o' );857-,
<anuary (;, )***C Boman Environmental &evelopment "orp'
v' "ourt of #ppeals,
4'+' 0o' 778-;, 0ovember ((, )*88C and Steinberg v' Delasco,
4'+' 0o' .;,-;, 6arch )(,)*(*!
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Dii6en6s2 Declaration o& Dii6en6s ()**0)
At least #O( o$ the stoc.holders o$ 1olar
Corporation& meetin! upon the
recommendation o$ the 5B'& declared a
@?% stoc. diidend durin! their annual
meetin!. )he notice o$ the annual
stoc.holders3 meetin! did not mention
anythin! about a stoc. diidend
declaration. )he matter %as ta.en up
only under the item other business in
the a!enda o$ the meetin!. C.M. 1en%a&
a stoc.holder& %ho receied his copy o$
the notice but did not attend the
meetin!& subse+uently learned about the
@?% stoc. diidend declaration. /e
desires to hae the stoc. diidend
declaration cancelled and set aside& and
%ishes to retain your serices as a la%yer
$or the purpose. Will you accept the case?
'iscuss %ith reasons.
SU44ESTE) ANSWER(
I %ill not accept the case. 1ec 4( o$ the
Corp Code states that no stoc. diidend
shall be issued %ithout the approal o$
the stoc.holders representin! not less
than #O( o$ the outstandin! capital stoc.
at a re!ular or special meetin! duly
called $or that purpose. Con$ormably %ith
1ec @? o$ the Corp Code& a %ritten notice
o$ the holdin! o$ the re!ular meetin!
sent to the shareholders %ill su-ice. )he
notice itsel$ specifed the said sub"ect
matter.
ALTERNATI7E ANSWER(
0es& I %ill accept the case. )he problem
does not indicate that there is action by
the 5B' %hich is also necessary $or the
declaration o$ @?% stoc. diidend.
Dii6en6s2 Declaration o& Dii6en6s ()**))
'urin! the annual stoc.holders meetin!&
9i6a& a stoc.holder proposed to the body
that a part o$ the corporation3s unresered
earned surplus be capitali6ed and stoc.
diidends be distributed to the
stoc.holders& ar!uin! that as o%ners o$
the company& the stoc.holders& by a
ma"ority ote& can do anythin!. As
chairman o$ the meetin!& ho% %ould you
rule on the motion to declare stoc.
diidends?
SU44ESTE) ANSWER(
As the chairman o$ the meetin!& I %ould
rule a!ainst the motion considerin! that a
declaration o$ stoc. diidends should
initially be ta.en by the 5B' and
therea$ter to be concurred in by a #O(
ote o$ the stoc.holders (1ec 4( Corp
Code). )here is no prohibition& ho%eer&
a!ainst the stoc.holders3 resolin! to
recommend to the 5B' that it consider a
declaration o$ stoc. diidends $or
concurrence therea$ter by the stoc.holders.
Dii6en6s2 Declaration o& Dii6en6s (200))
8or the past three years o$ its commercial
operation& L& an oil company& has been
earnin! tremendously in e=cess o$ 2??% o$
the corporation3s paid4in capital. All o$ the
stoc.holders hae been claimin! that they
share in the profts o$ the corporation by
%ay o$ diidends but the 5oard o$
'irectors $ailed to li$t its fn!er.
a$ Is Corporation L !uilty o$ iolatin! a
la%? I$ in the a-irmatie& state the basis
(#%)
SU44ESTE) ANSWER(
Corporation L is !uilty o$ iolatin!
1ection 4( o$ the Corp Code. )his
proision prohibits stoc. corporations
Mercantile Law Bar Examination Q & A (1990-2006) Page 3- of 103
$rom retainin! surplus profts in e=cess o$
2??% o$ their paid4in capital.
b$ Are there instances %hen a corporation
shall not be held liable $or not declarin!
diidends? ((%)
SU44ESTE) ANSWER(
)he instances %hen a corporation shall not
be held liable $or not declarin! diidends
are*
/$ %hen "ustifed by defnite corporate
e=pansion pro"ects or pro!rams
approed by the 5B'K or
!$ %hen the corporation is prohibited
under any loan a!reement %ith any
fnancial institution or creditor&
%hether local or $orei!n& $rom
declarin! diidends %ithout its or his
consent& and such consent has not yet
been securedK or
:$ %hen it can be clearly sho%n that such
retention is necessary under special
circumstances obtainin! in the
corporation& such as %hen there is need
$or special resere $or probable
contin!encies.
Dii6en6s2 Ri'#t2 (ana'in' Cor$oration ()**))
A5C Aana!ement Inc. presented to the
'<8 Ainin! Co& the dra$t o$ its proposed
Aana!ement Contract. As an incentie&
A5C included in the terms o$ compensation
that A5C %ould be entitled to 2?% o$ any
stoc. diidend %hich '<8 may declare
durin! the li$etime o$ the Aana!ement
Contract. Would you approe o$ such
proision? I$ not& %hat %ould you su!!est
as an alternatie?
SU44ESTE) ANSWER(
I %ould not approe a proposed
stipulation in the mana!ement contract
that the mana!in! corporation& as an
additional compensation to it& should be
entitled to 2?% o$ any stoc. diidend
that may be declared. 1toc.holders are
the only ones entitled to receie stoc.
diidends .&ielsen A Co " 3e-anto Mining 26
s 0667 I %ould add that the unsubscribed
capital stoc. o$ a corporation may only be
issued $or cash or property or $or serices
already rendered constitutin! a demandable
debt (1ec :# Corp Code). As an alternatie&
I %ould su!!est that the mana!in!
corporation should instead be !ien a net
proft participation and& i$ it later so desires&
to then conert the amount that may be due
thereby to e+uity or shares o$ stoc. at no
less than the par alue thereo$.
Doctrine o& Cor$orate <$$ortunit% (2001)
5rieEy discuss the doctrine o$ corporate
opportunity. (#%)
SU44ESTE) ANSWER(
In brie$& the doctrine dis+ualifes a
director& trustee or o-icer $rom
appropriatin! $or his personal beneft a
transaction or opportunity that pertains to
the corporation& and %hich under the duty
o$ loyalty he should frst brin! to the
corporation $or its use or e=ploitation.
)he doctrine o$ corporate opportunity is an
en$orcement o$ the duty o$ loyalty o$
corporate directors and o-icers. When a
director& trustee or o-icer attempts to
ac+uire or
ac+uires& in iolation o$ his duty& an
interest aderse to the corporation in
respect o$ any matter %hich has been
reposed in him in confdence& he shall be
liable as a trustee $or the corporation
and must account $or the profts %hich
other%ise %ould hae accrued to the
corporation. <+uity imposes liability
upon him not to deal $or his o%n beneft.
(1ec. (2& Corporation Code)
,nder 1ec. (4 o$ the Corporation Code
%here a director& by irtue o$ his o-ice&
ac+uires $or himsel$ a business
opportunity %hich should belon! to the
corporation& thereby obtainin! profts to
the pre"udice o$ such corporation& he
must account to the latter $or all such
profts by re$undin! the same& unless his
act has been ratifed by a ote o$ the
stoc.holders o%nin! or representin! at
least t%o4thirds (#OJ) o$ the outstandin!
capital stoc..
E&&ect: E9$iration o& Cor$orate Term (2003)
L0S Corporation entered into a contract
o$ lease %ith A5C& Inc.& oer a piece o$
real estate $or a term o$ #? years&
rene%able $or another #? years& proided
that L0SDs corporate term is e=tended
in accordance %ith la%. 8our years a$ter
the term o$ L0S Corporation e=pired& but
still %ithin the period allo%ed by the
lease contract $or the e=tension o$ the
lease period& L0S Corp. notifed A5C&
Inc.& that it is e=ercisin! the option to
e=tend the lease. A5C& Inc.& ob"ected to
the proposed e=tension& ar!uin! that
since the corporate li$e o$ L0S Corp. had
e=pired& it could no lon!er opt to rene%
the lease. L0S Corp. countered that
%ithstandin! the lapse o$ its corporate
term it still has the ri!ht to rene% the
lease because no +uo %arranto
proceedin!s $or inoluntary dissolution o$
L0S Corp. has been instituted by the B-ice
o$ the 1olicitor Feneral.
Is the contention o$ L0S Corp.
meritorious? <=plain brieEy. (@%)
SU44ESTE) ANSWER(
L0S CorporationDs contention is not
meritorious. 5ased on the rulin! o$ the
1upreme Court in /hili--ine &ational Bank
"s# CF of Ri8al, 2,6 SCR$ .16627# L0S
Corp. %as dissoled ipso $acto upon the
e=piration o$ its ori!inal term. It ceased to
be a body corporate $or the purpose o$
continuin! the business $or %hich it %as
or!ani6ed& e=cept only $or purposes
connected %ith its %indin! up or
li+uidation. <=tendin! the lease is not an
act to %ind up or li+uidate L0S Corp.Ds
a-airs. It is contrary to the idea o$ %indin!
up the a-airs o$ the corporation.
E&&ects2 (er'er o& Cor$orations ()***)
)%o corporations a!reed to mer!e. )hey
then e=ecuted an a!reement speci$yin!
the suriin! corporation and the
absorbed corporation. ,nder the
a!reement o$ mer!er dated 7oember @&
2HHJ& the suriin! corporation ac+uired
all the ri!hts& properties and liabilities o$
the absorbed corporation.
/$ What %ould happen to the absorbed
corporation? Aust the absorbed
corporation underta.e dissolution and
the %indin! up procedures? <=plain
your ans%er. ((%)
SU44ESTE) ANSWER(
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Mercantile Law Bar Examination Q & A (1990-2006) Page 38 of 103
7o. )here is no need $or the absorbed
corporation to underta.e dissolution and
%indin! up procedure. As a result o$ the
mer!er& the absorbed corporation is
automatically dissoled and its assets and
liabilities are ac+uired and assumed by the
suriin! corporation.
!$ ;endin! approal o$ the mer!er by the
1<C& may the suriin! corporation
already institute suits to collect all
receiables due to the absorbed
corporation $rom its customers?
<=plain your ans%er. ((%)
SU44ESTE) ANSWER(
7o. )he mer!er does not become
e-ectie until and unless approed by the
1<C. 5e$ore approal by the 1<C o$ the
mer!er& the suriin! corporation has no
le!al personality %ith respect to
receiables due to the absorbed
corporation.
:$ A case %as fled a!ainst a customer to
collect on the promissory note issued
by him a$ter the date o$ the mer!er
a!reement. )he customer raised the
de$ense that %hile the receiables as
o$ the date o$ the mer!er a!reement
%as trans$erred to the suriin!
corporation& those receiables %hich
%ere created a$ter the mer!er
a!reement remained to be o%ned by
the absorbed corporation. )hese
receiables %ould be distributed
to the stoc.holders con$ormably %ith
the dissolution and li+uidation
procedures under the 7e%
Corporation Code? 'iscuss the merits
o$ this ar!ument. ((%)
SU44ESTE) ANSWER(
Whether the receiable %as incurred by
the absorbed corporation be$ore or a$ter
the mer!er a!reement& or be$ore or a$ter
the approal thereo$ by the 1<C& the said
receiable %ould still belon! to the
suriin! corporation under 1ec J? o$ the
Corp. Code %hich does not ma.e any
distinction as to the assets and liabilities o$
the absorbed corporation that the
suriin! corporation %ould inherit.
E&&ects2 Win6in' U$ "erio6 o& a Cor$oration ()**+)
)he corporation& once dissoled& therea$ter
continues to be a body corporate $or three
years $or purposes o$ prosecutin! and
de$endin! suits by and a!ainst it and o$
enablin! it to settle and close its a-airs&
culminatin! in the fnal disposition and
distribution o$ its remainin! assets. I$ the (
year e=tended li$e e=pires %ithout a trustee
or receier bein! desi!nated by the
corporation %ithin that period and by that
time (e=piry o$ the ( year e=tended term)&
the corporate li+uidation is not yet oer&
ho%& i$ at all& can a fnal settlement o$
the corporate a-airs be made?
SU44ESTE) ANSWER(
)he li+uidation can continue %ith the
%indin! up. )he members o$ the 5B' can
continue %ith the %indin! o$ the corporate
a-airs until fnal li+uidation. )hey can act
as trustees or receiers $or this purpose.
E&&ects2 Win6in' U$ "erio6 o& a Cor$oration (2000)
)he 1<C approed the amendment o$ the
Articles o$ Incorporation o$ F/T Corp
shortenin! its corporate li$e to only #@ years
in accordance %ith 1ec 2#? o$ the Corp
Version 1990-2006 U pdated by
Dondee
Version 1990-2003 Arranged by SULAW Class
2005
Code. As shortened& the corporation
continued its business operations until
Aay (?& 2HHI& the last day o$ its
corporate e=istence. ;rior to said date&
there %ere a number o$ pendin! ciil
actions& o$ aryin! nature but mostly
money claims fled by creditors& none o$
%hich %as e=pected to be completed or
resoled %ithin fe years $rom Aay (?&
2HHI.
I$ the creditors had sou!ht your
pro$essional help at that time about
%hether or not their cases could be
pursued beyond Aay (?& 2HHI& %hat
%ould hae been your adice? (#%)
SU44ESTE) ANSWER(
)he cases can be pursued een beyond
Aay (?& 2HHI& the last day o$ the
corporate e=istence o$ F/T Corp. )he
Corporation is not actually dissoled upon
the e=piration o$ its corporate term.
)here is still the period $or li+uidation or
%indin! up.
N.TE( U nder Se/tion 122 o1 t*e C orporation C
ode4 a /orporation +*ose /orporate e2isten/e is
ter, inated in any , anner /ontin.es to be a body
/orporate 1or t*ree (3) years a1terits disso.tion
1orp.rposes o1 prose/.ting and de1ending s.its by
and againstitand to enabe itto sette and /ose its
a11airs4 /., inating in t*e disposition and
distrib.tion o1 its re, aining assets3 9t, ay4 d.ring
t*e t*ree-yearter, 4 appointa tr.stee ora
re/ei-er+*o , ay a/tbeyond t*atperiod3
$*e ter, ination o1 t*e i1e o1 a /orporate entity
does notby itse1 /a.se t*e e2tin/tion or di, in.tion
o1 t*e rig*ts and iabiities o1 s./* entity3 2: 91 t*e
t*ree-yeare2tended i1e *as e2pired +it*o.t a
tr.stee or re/ei-er *a-ing been e2pressy designated
by t*e /orporation4 +it*in t*atperiod4 t*e board o1
dire/tors (or tr.stees) itse14 , ay be per, itted to so
/ontin.e as 6tr.stees6 by ega i, pi/ation to /o,
pete t*e /orporate i8.idation3 (&E&'(-!)LA
&*(L(&&(+E'" (+!" vs ,*E !)-., )# A&&EAL'"
/0. +o 1%1211 +ovem$er 2%" 200%3)
/orei'n Cor$oration2 @Doin' ,usinessA in t#e
"#ili$$ines ()**:)
When is a $orei!n corporation deemed to
be doin! business in the ;hilippines?
((%)
SU44ESTE) ANSWER(
A $orei!n corporation is deemed to be
doin! business in the ;hilippines i$ it is
continuin! the body or substance o$ the
business or enterprise $or %hich it %as
or!ani6ed. It is the intention o$ an entity to
continue the body o$ its business in the
country. )he !rant and e=tension o$ H?4
day credit terms o$ a $orei!n corporation
to a domestic corporation $or eery
purchase sho%s an intention to continue
transactin! %ith the latter.
/orei'n Cor$oration2 @Doin' ,usinessA in t#e
"#ili$$ines2 Acts or Actiities (2002)
Fie at least three (() e=amples o$ the
acts or actiities that are specifcally
identifed under our $orei!n inestment
la%s as constitutin! doin! business in
the ;hilippines ((%)
SU44ESTE) ANSWER(
Any three (() o$ the $ollo%in! acts or
actiities constitute doin! business in
the ;hilippines under our $orei!n
inestment la%s*
/* 1olicitin! orders
Mercantile Law Bar Examination Q & A (1990-2006) Page 39 of 103
!* Bpenin! o-ices by %hateer name
:* ;articipatin! in the mana!ement&
superision or control o$ any domestic
entity
(* <nterin! into serice contracts
#* Appointin! representaties or
distributors& operatin! under the
control o$ the $orei!n entity& %ho is
domiciled in the ;hilippines or %ho
stays in the country $or a period or
periods totalin! at least 2J? days in
any calendar year.
/orei'n Cor$oration2 @Doin' ,usinessA in t#e
"#ili$$ines2 Test (2002)
What is the le!al test $or determinin! i$
an unlicensed $orei!n corporation is doin!
business in the ;hilippines? (#%)
SU44ESTE) ANSWER(
)he test is %hether or not the unlicensed
$orei!n corporation has per$ormed an act
or acts that imply a continuity o$
commercial dealin!s or arran!ements& and
contemplate to that e=tent the
per$ormance o$ acts or %or.s& or the
e=ercise o$ some o$ the $unctions normally
incident to& and in pro!ressie prosecution
o$& commercial !ain or o$ the purpose
and ob"ect o$ the business corporation.
Joint >enture2 Cor$oration ()**4)
Aay a corporation enter into a "oint
enture?
SU44ESTE) ANSWER(
A corporation may enter into a "oint
enture. /o%eer& inasmuch as the term
U"oint enture3 has no precise le!al
defnition& it may ta.e arious $orms. It
could ta.e the $orm o$ a simple poolin!
o$ resources (not inolin! incorporation)
bet%een t%o or more corporations $or a
specifc pro"ect& purpose or underta.in!& or
$or a limited time. It may inole the
creation o$ a more $ormal structure and&
hence& the $ormation o$ a corporation. I$
the "oint enture %ould inole the
creation o$ a partnership& as the term is
understood under the Ciil Code& then a
corporation cannot be a party to it.
8ia.ilities2 ,<D2 Cor$orate Acts ()**4)
When may a corporate director& trustee&
or o-icer be held personally liable %ith the
corporation?
SU44ESTE) ANSWER(
A corporate director& trustee or o-icer may
be held personally liable %ith the
corporation under the $ollo%in!
circumstances*
/$ When he assents to a patently unla%$ul
act o$ the corporationK
!$ When he acts in bad $aith or %ith !ross
ne!li!ence in directin! the a-airs o$ the
corporation& or in conEict %ith the
interest o$ the corporation resultin! in
dama!es to the corporation& its
stoc.holders or other personsK
:$ When he consents to the issuance o$
%atered stoc.s or %ho& hain!
.no%led!e thereo$& does not $orth%ith
fle %ith the corporate secretary his
%ritten ob"ection theretoK
($ When he a!rees to hold himsel$
personally and solidarily liable %ith the
corporationK or
#$ ?&en &e is 'a.eB by a specific
pro)ision of lawB to personally answer
for t&e corporate action* (2ramat 6ercantile
%nc v "# 4+ )));;8, 0ov 7, *, (.8s),!
8ia.ilities2 Stoc-#ol6ersB DirectorsB <&&icers ()**+)
A& 5& and C are shareholders o$ L0S
Co. A has an unpaid subscription o$
;2??th& 53s shares are $ully paid up&
%hile C o%ns only nominal but $ully paid
up shares and is a director and o-icer.
L0S becomes insolent& and it is
established that the insolency is the
result o$ $raudulent practices %ithin the
company. I$ you %ere counsel $or a
creditor o$ L0S& %ould you adise le!al
action a!ainst A& 5& and C?
SU44ESTE) ANSWER(
a$ As to AVan action can be brou!ht
a!ainst A $or ;2??th %hich is the amount
o$ unpaid subscription. 1ince the
corporation is insolent& the limit o$ the
stoc.holder3s liability to the creditor is
only up to the e=tent o$ his unpaid
subscription.
b$ As to 5Vthere is no cause o$ action
a!ainst 5 because he has already $ully
paid $or his subscription. As stated
earlier& the limit o$ the stoc.holder3s
liability to the creditor o$ the corporation&
%hen the latter becomes insolent& is the
e=tent o$ his subscription.
c$ As to CVan action can be fled
a!ainst C& not as stoc.holder because he
has already paid up the shares& but in
his capacity as director and o-icer
because o$ the corporation3s insolency
bein! the result o$ $raudulent practices
%ithin the company. 'irectors are liable
"ointly and seerally $or dama!es
sustained by the corporation& stoc.holders
or other persons resultin! $rom !ross
ne!li!ence or bad $aith in directin! the
a-airs o$ the corporation. (1ec (2 Corp
Code)
"iercin' t#e Cor$orate >eil ()**3)
Ar. ;ablo& a rich merchant in his early
$orties& %as a de$endant in a la%suit
%hich could sub"ect him to substantial
dama!es. A year be$ore the court
rendered "ud!ment& ;ablo sou!ht his
la%yer3s adice on ho% to plan his estate
to aoid ta=es. /is la%yer su!!ested that
he should $orm a corporation %ith himsel$&
his %i$e and his children (all students
and still unemployed) as stoc.holders and
then trans$er all his assets and liabilities to
this corporation. Ar ;ablo $ollo%ed the
recommendation o$ his la%yer. 2 year
later& the court rendered "ud!ment a!ainst
;ablo and the plainti- sou!ht to en$orce
this "ud!ment. )he sheri-& ho%eer& could
not locate any property in the name o$
;ablo and there$ore returned the %rit o$
e=ecution unsatisfed. What remedy& i$ any&
is aailable to the plainti-?
SU44ESTE) ANSWER(
)he plainti- can aail himsel$ o$ the
doctrine o$ piercin! the eil o$ corporate
fction %hich can be ino.ed %hen a
corporation is $ormed or used in aoidin!
a "ust obli!ation. While it is true that a
$amily corporation may be or!ani6ed to
pursue an estate ta=K plannin!& %hich is
not per se ille!al or unla%$ul .)el-her
?rades Cor- " $C 10' SCR$ 3(67 the $actual
settin!s& ho%eer& indicate the e=istence
o$ a la%suit that could sub"ect ;ablo
to a
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Mercantile Law Bar Examination Q & A (1990-2006) Page 50 of 103
substantial amount o$ dama!es. It %ould
thus be di-icult $or ;ablo to conincin!ly
assert that the incorporation o$ the $amily
corporation %as intended merely as a case
o$ estate ta= plannin!. .?an Boon Bee "
9arencio (133' 3,9une++7
"iercin' t#e Cor$orate >eil ()**4)
< Co sold its assets to A Inc a$ter
complyin! %ith the re+uirements o$ the
5ul. 1ales >a%. 1ubse+uently& one o$ the
creditors o$ < Co tried to collect the
amount due it& but $ound out that < Co
had no more assets le$t. )he creditor then
sued A Inc on the theory that A Inc is a
mere alter e!o o$ < Co.
Will the suit prosper? <=plain.
SU44ESTE) ANSWER(
)he suit %ill not prosper. )he sale by < Co
o$ its assets to A Inc does not result in
the trans$er o$ the liabilities o$ the latter
to& nor in the assumption thereo$ by& the
$ormer. )he $acts !ien do not indicate that
such trans$er or assumption too. place or
%as stipulated upon by the parties in their
a!reement. 8urthermore& the sale by < Co
o$ its assets is a sale o$ its property. It
does not inole the sale o$ the shares o$
stoc. o$ the corporation belon!in! to its
stoc.holders. )here is there$ore no mer!er
or consolidation that too. place. < Co
continues to e=ist and remains liable to the
creditor.
"iercin' t#e Cor$orate >eil (200))
;lainti-s fled a collection action a!ainst L
Corporation. ,pon e=ecution o$ the
court3s decision& L Corporation %as $ound
to be %ithout assets. )herea$ter plainti-s
fled an action a!ainst its present and past
stoc.holder 0 Corporation %hich o%ned
substantially all o$ the stoc.s o$ L
Corporation. )he t%o corporations hae
the same board o$ directors and 0
Corporation fnanced the operations o$ L
Corporation. Aay 0 Corporation be held
liable $or the debts o$ L Corporation? Why?
(@%)
SU44ESTE) ANSWER(
0es& 0 Corporation may be held liable $or
the debts o$ L Corporation. )he doctrine o$
piercin! the eil o$ corporation fction
applies to this case. )he t%o corporations
hae the same board o$ directors and 0
Corporation o%ned substantially all o$ the
stoc.s o$ L Corporation& %hich $acts "usti$y
the conclusion that the latter is merely an
e=tension o$ the personality o$ the $ormer&
and that the $ormer controls the policies o$
the latter. Added to this is the $act that 0
Corporation controls the fnances o$ L
Corporation %hich is merely an ad"unct&
business conduit or alter e!o o$ 0
Corporation .CR " &orton A Barrison Co 11 S
'1( .166(77
"iercin' t#e Cor$orate >eil (2003)
/o% does one pierce the eil o$ corporate
fction?
SU44ESTE) ANSWER(
)he eil o$ corporate fction may be pierced
by proin! in court that the notion o$ le!al
entity is bein! used to de$eat public
conenience& "usti$y %ron!& protect $raud&
or de$end crime or the entity is "ust an
instrument or alter e!o or ad"unct o$
another entity or person.
407H407H"iercin' t#e Cor$orate >eil (2004)
Version 1990-2006 U pdated by
Dondee
Version 1990-2003 Arranged by SULAW Class
2005
What is the doctrine o$ Npiercin! the eil
o$ corporate entity?N <=plain.
SU44ESTE) ANSWER(
)he doctrine o$ Npiercin! the eil o$
corporate entity&N is the doctrine that
allo%s the courts to loo. behind the
separate "uridical personality o$ a
corporation and treat the corporation as
an association o$ persons and thereby
ma.e the indiidual actors personally
liable $or corporate liabilities. )he fction
o$ corporate identity is disre!arded and
the indiiduals comprisin! it can be
treated identically. )he stoc.holders can
be held directly liable $or corporate
obli!ations& een to the e=tent o$ their
personal assets .Conce-t Builders "#
&3RC, Mara*e, et al, %#R# &o# 1,+'3(,
Ma5 26, 16667.
#o 2hat "ir"%!stan"es 2i the
3o"trine app/4 (+.55)
)he doctrine is applicable %hen the
notion o$ le!al entity is used to V
/$ 'e$eat public conenience.
!$ Custi$y %ron!.
:$ ;rotect $raud.
($ Defen. cri'e (30B v' #ndrada Electric, 4'+'
0o' ),(*.-, #pril )7, (;;(!*
#$ S&iel. a )iolation of t&e proscription
against foru' s&opping (5irst 3hilippine
%nternational Ban/ v' "ourt of #ppeals, 4'+' 0o'
).75.7, <anuary (,, )**-!'
,$ ?ork ine-uities a'ong 'e'bers of
t&e corporation internallyB in)ol)ing
no rig&ts of t&e public or t&ir.
persons (Secosa v' @eirs ofErwin SuareE
5rancisco, 4'+' 0o' )5-);,, <une (*, (;;,!'
3$ 5)a.e t&e lawful obligations of t&e
corporation like a 9u.g'ent cre.it
(Sibagat 2imber "orp' v' 4arcia, 4'+' 0o' ))(5,-,
&ecember )), )**(!'
6$ 5scape liability arising fro' a .ebt
(#rcilla v' "ourt of #ppeals, 4'+' 0o' 88))., 1ctober
(., )**(!'
0$ A)oi. inclusion of corporate assets as
part of t&e estate of t&e .ece.ent ("ease
v' "ourt of #ppeals, 4'+' 0o' F$.58-), 1ctober )8,
)*7*!'
2?) )o promote or to shield un$air
ob"ecties
(Dillanueva v' #dre, 4'+' 0o' 8;8-., #pril (7,
)*8*!'
"re?em$tie Ri'#t (200))
1uppose that L Corporation has already
issued the 2??? ori!inally authori6ed
shares o$ the corporation so that its 5B'
and stoc.holders %ish to increase L3s
authori6ed capital stoc.. A$ter complyin!
%ith the re+uirements o$ the la% on
increase o$ capital stoc.& L issued an
additional 2??? shares o$ the same alue.
a$ Assume that the stoc.holder A presently
holds #?? out o$ the 2??? ori!inal shares.
Would A hae a pre4emptie ri!ht to #?? o$
the ne% issue o$ 2??? shares? Why? ((%)
b$ When should stoc.holder A e=ercise the
pre4emptie ri!ht? (#%)
SU44ESTE) ANSWER(
a$ 0es& A %ould hae a pre4emptie ri!ht to
#?? o$ the ne% issue o$ 2??? shares. A is
a stoc.holder o$ record holdin! #??
shares in L Corpo. Accordin! to the Corp
Code& each stoc.holder has the pre4
emptie ri!ht to all issues o$ shares made
by the corporation in proportion to
Mercantile Law Bar Examination Q & A (1990-2006) Page 51 of 103
the number o$ shares he holds on record
in the corporation.
b$ ;re4emptie ri!ht must be e=ercised in
accordance %ith the Articles o$
Incorporation or the 5y4>a%s. When the
Articles o$ Incorporation and the 5y4>a%s
are silent& the 5B' may f= a reasonable
time %ithin %hich the stoc.holders may
e=ercise the ri!ht.
"re?Em$tie Ri'#t s! A$$raisal Ri'#t ()***)
A5C Corporation has an authori6ed capital
stoc. o$ ;2A diided into @?&??? common
shares and @?&??? pre$erred shares. At its
inception& the Corporation o-ered $or
subscription all the common shares.
/o%eer& only 4?&??? shares %ere
subscribed. 9ecently& the directors thou!ht
o$ raisin! additional capital and decided to
o-er to the public all the authori6ed shares
o$ the Corporation at their mar.et alue.
a$ Would Ar. L& a stoc.holder holdin!
4&??? shares& hae pre4emptie ri!hts
to the remainin! 2?&??? shares? (#%)
b$ Would Ar. L hae pre4emptie ri!hts to
the @?&??? pre$erred shares? (#%)
c$ Assumin! that the e=istin!
stoc.holders are entitled to pre4
emptie ri!hts& at %hat price %ill the
shares be o-ered? (#%)
.$ Assumin! a stoc.holder disa!rees %ith
the issuance o$ ne% shares and the
pricin! $or the shares& may the
stoc.holder ino.e his appraisal ri!hts
and demand payment $or his
shareholdin!s? (#%)
SU44ESTE) ANSWER(
a. 0es. Ar. L& a stoc.holder holdin! 4&???
shares& has pre4emptie ri!ht to the
remainin! 2?&??? shares. All stoc.holders
o$ a stoc. corporation shall en"oy pre4
emptie ri!ht to subscribe to all issues or
disposition o$ shares o$ any class& in
proportion to their respectie
shareholdin!s.
ALTERNATI7E ANSWER:
a* 7o& Ar L does not hae pre4emptie
ri!ht oer the remainin! 2?&??? shares
because these shares hae already been
o-ered at incorporation and he chose not to
subscribe to them. /e& there$ore& has
%aied his ri!ht thereto and the
corporation may o-er them to anyone.
SU44ESTE) ANSWER(
b* 0es. Ar. L %ould hae pre4emptie ri!hts
to the @?&??? pre$erred shares. All
stoc.holders o$ a stoc. corporation shall
en"oy pre4emptie ri!ht to subscribe to all
issues or disposition o$ shares o$ any class&
in proportion to their respectie
shareholdin!s.
ALTERNATI7E ANSWER(
b* 0es& Ar. L has preemptie ri!ht oer the
@?&??? pre$erred shares because they %ere
not o-ered be$ore by the corporation $or
subscription.
SU44ESTE) ANSWER(
c* )he shares %ill be o-ered to e=istin!
stoc.holders& %ho are entitled to
preemptie ri!ht& at a price f=ed by the
5B'& %hich shall not be less than the par
alue o$ such shares.
SU44ESTE) ANSWER(
.* 7o& the stoc.holder may not e=ercise
appraisal ri!ht because the matter that
he dissented $rom is not one o$ those
%here ri!ht o$ appraisal is aailable
under the corporation code.
SEC2 Juris6iction2 Trans&erre6 Juris6iction ()**4)
What is the ori!inal and e=clusie
"urisdiction o$ the 1<C?
SU44ESTE) ANSWER(
)he 1<C has ori!inal and e=clusie
"urisdiction oer cases inolin!*
a$ 'eices or schemes amountin! to
$raud and misrepresentationK
b$ Controersies arisin! out o$ intra4
corporate or partnership relationsK
c$ Controersies in the election or
appointment o$ directors& o-icers& etcK
.$ ;etitions to be declared in a state o$
suspension o$ payments (1ec @ ;'
H?#4A)
TA;E N.TE( )he RTC has "urisdiction oer
the cases %hich inoles intra4corporate
controersy. As o$ #??:& the applicable
rule is that there is a )9A718<99<'
C,9I1'IC)IB7 under 1ec. @.# o$ the 19C&
the Commission3s "urisdiction oer all
cases enumerated under ;' H?#4A sec. @
has been trans$erred to the Courts o$
!eneral "urisdiction or the appropriate
9e!ional )rial Court.
Stoc-#ol6er2 Delin5uent2 Un$ai6 Su.scri$tion ()**+)
)he 5B' o$ a corporation& by a ote o$ ten
in $aor o$ one a!ainst& declared due
and payable all unpaid subscription to
the capital stoc.. )he lone dissentin!
director $ailed to pay on due date& i.e.& 2H
1ept 2HHI& his unpaid subscription. Bther
than the shares %herein he %as unable
to complete payment& he did not o%n
any share in the corporation. Bn #(
1ept 2HHI& he %as in$ormed by the
5B' that& unless due payment is
mean%hile receied& he*
a$ could no lon!er sere as a
director o$ the corporation $orth%ith*
b$ %ould not be entitled to the cash and
stoc. diidends %hich %ere declared
and payable on #4 1ep 2HHIK and
c$ could not ote in the
stoc.holders meetin! scheduled to
ta.e place on #: 1ept 2HHI.
Was the action o$ the 5B' on each o$
the $ore!oin! matters alid?
SU44ESTE) ANSWER(
a$ 7o. )he period o$ (? days %ithin
%hich the stoc.holder can pay the unpaid
subscription had not yet e=pired.
b$ 7o. )he delin+uency did not deprie the
stoc.holder o$ his ri!ht to receie
diidends declared. /o%eer& the cash
diidend declared may be applied by the
corporation to the unpaid subscription.
(1ec I2 Corp Code)
Version 1990-2006 U pdated by
Dondee
Version 1990-2003 Arranged by SULAW Class
2005
Mercantile Law Bar Examination Q & A (1990-2006) Page 52 of 103
c$ 7o. )he period o$ (? days %ithin
%hich the stoc.holder can pay the unpaid
subscription had not yet e=pired.
Stoc-#ol6ers: "reem$tie Ri'#t (2003)
)he 5oard o$ 'irectors o$ A5C& Inc.& a
domestic corporation& passed a resolution
authori6in! additional issuance o$ shares
o$ stoc.s %ithout notice nor approal o$
the stoc.holders. 'L& a stoc.holder&
ob"ected to the issuance& contendin! that it
iolated his ri!ht o$ pre4 emption to the
unissued shares. Is his contention
tenable? <=plain brieEy. (@%)
SU44ESTE) ANSWER(
0es. 'LDs contention is tenable. ,nder
1ection (H o$ the Corporation Code& all
stoc.holders o$ A5C& Inc. en"oy
preemptie ri!ht to subscribe to all issues
o$ shares o$ any class& includin! the
reissuance o$ treasury shares in
proportion to their respectie
shareholdin!s.
Stoc-#ol6ers2 A$$raisal Ri'#t (2003)
In %hat instances may the ri!ht o$
appraisal be aailed o$ under the
Corporation Code?
SU44ESTE) ANSWER(
1<C)IB7 J2. Instances o$ Appraisal
9i!ht. V Any stoc.holder o$ a corporation
shall hae the ri!ht to dissent and demand
payment o$ the $air alue o$ his shares in
the $ollo%in! instances*
/* In case any amendment to the articles
o$ incorporation has the e-ect o$
chan!in! or restrictin! the ri!hts o$
any stoc.holders or class o$ shares& or
o$ authori6in! pre$erences in any
respect superior to those o$
outstandin! shares o$ any class& or o$
e=tendin! or shortenin! the term o$
corporate e=istenceK
!* In case o$ sale& lease& e=chan!e&
trans$er& mort!a!e& pled!e or other
disposition o$ all or substantially all o$
the corporate property and assets as
proided in the CodeK and
:* In case o$ mer!er or consolidation. (n)
Stoc-#ol6ers2 Remoal o& <&&icers 0 ,<D (200))
In 2HHH& Corporation A passed a board
resolution remoin! L $rom his position as
mana!er o$ said corporation. )he by4la%s
o$ A corporation proides that the o-icers
are the president& ice4president& treasurer
and secretary. ,pon complaint fled %ith the
1<C& it held that a mana!er could be
remoed by mere resolution o$ the board o$
directors. Bn motion $or reconsideration& L
alle!ed that he could only be remoed by
the a-irmatie ote o$ the stoc.holders
representin! #O( o$ the outstandin! capital
stoc.. Is L3s contention le!ally tenable.
Why? (@%)
SU44ESTE) ANSWER(
7o. 1toc.holders3 approal is necessary only
$or the remoal o$ the members o$ the 5B'.
8or the remoal o$ a corporate o-icer or
employee& the ote o$ the 5B' is su-icient
$or the purpose.
Stoc-#ol6ers2 Remoal2 (inorit% Director ()**))
Assu'ing t&at t&e 'inority block of
t&e KLM Corporation is able to elect only /
.irector an. t&ereforeB
Version 1990-2006 U pdated by
Dondee
Version 1990-2003 Arranged by SULAW Class
2005
the ma"ority stoc.holders can al%ays
muster a #O( ote& %ould you allo% the
ma"ority stoc.holders to remoe the one
director representin! the minority?
SU44ESTE) ANSWER(
7o. I %ill not allo% the ma"ority
stoc.holders to remoe the director.
While the stoc.holders may& by a #O(
ote& remoe a director& the la% also
proides& ho%eer& that his ri!ht may
not& %ithout "ust cause& be e=ercised so
as to deprie the minority o$
representation in the 5B' .Sec 2+ Cor-
code1 %o"Ct "s $goncillo 0,-3(+7
Stoc-#ol6ers2 Ri'#ts ()**4)
What are the ri!hts o$ a stoc.holder?
SU44ESTE) ANSWER(
)he ri!hts o$ a stoc.holder are as $ollo%s*
/$ )he ri!ht to ote& includin! the ri!ht
to appoint a pro=yK
!$ )he ri!ht to share in the profts o$ the
corporation& includin! the ri!ht to
declare stoc. diidendsK
:$ )he ri!ht to a proportionate share o$
the assets o$ the corporation upon
li+uidationK
($ )he ri!ht o$ appraisalK
#$ )he pre4emptie ri!ht to sharesK
,$ )he ri!ht to inspect corporate boo.s
and recordsK
3$ )he ri!ht to elect directorsK
6$ 1uch other ri!hts as may contractually
be !ranted to the stoc.holders by
the corporation or by special la%.
Stoc-#ol6ers2 >otin' "o;er o& Stoc-#ol6ers
()**0) Mercy subscribe. to /B""" s&ares
of stock of +osario Corporation* S&e pai.
!#N of sai. subscription* During t&e
stock&ol.ersG 'eetingB can Mercy )ote
all &er subscribe. s&aresI 54plain*
SU44ESTE) ANSWER(
0es& Aercy can ote all her subscribed
shares. 1ection I# o$ the Corporation
Code states that holders o$ subscribed
shares not $ully paid %hich are not
delin+uent shall hae all the ri!hts o$ a
stoc.holder.
Stoc-s2 7ncrease o& Ca$ital Stoc- (200))
1uppose L Corporation has an authori6ed
capital stoc. o$ ;2A diided into 2??&???
shares o$ stoc. %ith par alue o$ ;2?
each.
a$ Fie t%o %ays %hereby said authori6ed
capital stoc. may be increased to about
;2.@A. ((%)
b$ Fie three practical reasons $or a
corporation to increase its capital stoc.
(#%)
SU44ESTE) ANSWER(
a$ )%o %ays o$ increasin! the Authori6ed
Capital 1toc. o$ L corporation to ;2.@A
are*
/$ Increase the number o$ shares $rom
2??&??? to 2@?&??? shares %ith the
same par alue o$ ;2?.?? each.
!$ Increase par alue o$ 2??&???
shares to ;2@.?? each.
b$ )hree practical reasons $or a
corporation to increase its capital stoc.
are*
/$ to !enerate more %or.in! capitalK
Mercantile Law Bar Examination Q & A (1990-2006) Page 53 of 103
!$ to hae more shares %ith %hich to
pay $or the ac+uisition o$ more
assets li.e ac+uisition o$ company
car& stoc.s& house& machinery or
businessK and
:$ to hae e=tra share %ith %hich to
coer or meet the re+uirement $or
declaration o$ stoc. diidend.
Stoc-s2 SaleB Trans&er o& Certi&icates o& Stoc- ()**4)
Arnold has in his name 2&??? shares o$ the
capital stoc. o$ A5C Co as eidenced by a
stoc. certifcate. Arnold deliered the
stoc. certifcate to 1teen %ho no% claims
to be the real o%ner o$ the shares&
hain! paid $or Arnold3s subscription.
A5C re$used to reco!ni6e and re!ister
1teen3s o%nership.
Is the re$usal "ustifed? <=plain.
SU44ESTE) ANSWER(
A5C3s re$usal to reco!ni6e and re!ister
1teen3s o%nership is "ustifed. )he $acts
indicate that the stoc. certifcate $or the
2&??? shares in +uestion is in the name o$
Arnold. Althou!h the certifcate %as
deliered by Arnold to 1teen& the $acts do
not indicate that the certifcate %as duly
endorsed by Arnold at the time it %as
deliered to 1teen or that the procedure
$or the e-ectie trans$er o$ shares o$ stoc.
set out in the by4la%s o$ A5C Co& i$ any&
%as obsered. 1ince the certifcate %as
not endorsed in $aor o$ 1teen (or
anybody else $or that matter)& the only
conclusion could be no other than that the
shares in +uestion still belon! to Arnold.
.Ra8on " $C %R '(3,6 Mar 16,62 2,'s23(7
Stoc-s2 SaleB Trans&er o& Certi&icates o& Stoc- (200))
A is the re!istered o%ner o$ 1toc.
Certifcate 7o. ????22. /e entrusted the
possession o$ said certifcate to his best
$riend 5 %ho borro%ed the said endorsed
certifcate to support 53s application $or
passport (or $or a purpose other than
trans$er). 5ut 5 sold the certifcate to L& a
bona fde purchaser %ho relied on the
endorsed certifcates and belieed him to
be the o%ner thereo$.
a$ Can A claim the shares o$ stoc. $rom L?
<=plain ((%)
b$ Would your ans%er be the same i$ A lost
the stoc. certifcate in +uestion or i$ it %as
stolen $rom him? (#%)
SU44ESTE) ANSWER(
a$ 7o. Assumin! that the shares %ere
already trans$erred to 5& A cannot claim
the shares o$ stoc. $rom L. )he certifcate
o$ stoc. coerin! said shares hae been
duly endorsed by A and entrusted by him
to 5. 5y his said acts& A is no% estopped
$rom claimin! said shares $rom L& a bona
fde purchaser %ho relied on the
endorsement by A o$ the certifcate o$ stoc..
b$ 0es. In the case %here the certifcate o$
stoc. %as lost or stole $rom A& A has a
ri!ht to claim the certifcate o$ stoc. $rom
the thie$ %ho has no ri!ht or title to the
same. Bne %ho has lost any moable or
has been unla%$ully depried thereo$& may
recoer it $rom the person in possession o$
the same. (Art @@H 7CC)
Stoc-s2 SaleB Trans&er o& Certi&icates o& Stoc-
(2003) Four 'ont&s before &is .eat&B PK
assigne. /"" s&ares of stock registere. in &is
na'e in fa)or of &is wife an. &is
children. )hey then brou!ht the deed o$
assi!nment to the proper corporate
o-icers $or re!istration %ith the re+uest
$or the trans$er in the corporationDs
stoc. and trans$er boo.s o$ the assi!ned
shares& the cancellation o$ the stoc.
certifcates in ;LDs name& and the
issuance o$ ne% stoc. certifcates in the
names o$ his %i$e and his children as
the ne% o%ners. )he o-icers o$ the
Corporation denied the re+uest on the
!round that another heir is contestin!
the alidity o$ the deed o$ assi!nment.
Aay the Corporation be compelled by
mandamus to re!ister the shares o$ stoc.
in the names o$ the assi!nees? <=plain
brieEy. (@%)
SU44ESTE) ANSWER(
0es. )he corporation may be compelled by
mandamus to re!ister the shares o$ stoc.
in the name o$ the assi!nee. )he only
le!al limitation imposed by 1ection :( o$
the Corporation Code is %hen the
Corporation holds any unpaid claim
a!ainst the shares intended to be
trans$erred. )he alle!ed claim o$ another
heir o$ ;L is not su-icient to deny the
issuance o$ ne% certifcates o$ stoc. to
his %i$e and children. It %ould be
other%ise i$ the trans$ereeDs title to the
shares has no prima $acie alidity or is
uncertain.
Trust /un6 Doctrine ()**2)
A Corporation e=ecuted a promissory note
bindin! itsel$ to pay its
;residentO'irector& %ho had tendered his
resi!nation& a certain sum in payment o$
the latter3s shares and interests in the
company. )he corporation de$aulted in
payin! the $ull amount so that said $ormer
;resident fled suit $or collection o$ the
balance be$ore the 1<C.
a$ ,nder %hat conditions is a stoc.
corporation empo%ered to ac+uire its o%n
shares?
b$ Is the arran!ement bet%een the
corporation and its ;resident coered by
the trust $und doctrine? <=plain your
ans%ers brieEy.
SU44ESTE) ANSWER(
a) A stoc. corporation may only ac+uire
its o%n shares o$ stoc. i$ the trust $und
doctrine is not impaired. )his is to say& $or
instance& that it may purchase its o%n
shares o$ stoc. by utili6in! merely its
surplus profts oer and aboe the
subscribed capital o$ the corporation.
ALTERNATI7E ANSWER(
a$ (an ans%er enumeratin! the instances
or cases under the Corporation Code
%here the Corp allo%s the ac+uisition o$
shares such as in the stoc.holder3s
e=ercise o$ appraisal ri!ht& $ailure o$ bids
in the sale o$ delin+uent shares& etc.)
SU44ESTE) ANSWER(
b$ )he arran!ement bet%een the
corporation and its ;resident to the e=tent
that it calls $or the payment o$ the latter3s
shares is coered by the trust $und
doctrine. )he only e=ceptions $rom the
trust $und doctrine are the redemption o$
redeemable shares and& in the case o$
close corporation& %hen there should be a
deadloc. and the 1<C orders the payment
o$ the appraised alue o$ a stoc.holder3s
share.
Trust /un6 Doctrine2 7ntra?Cor$orate Controers% ()**))
7ersion 1990+2006 U %&ate& 'y
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7ersion 1990+2003 Arrange& 'y SULAW Cass
200!
Mercantile Law Bar Examination Q & A (1990-2006) Page "" of 103
Bn 'ecember :& 2HJJ& A& an incorporator and the
Feneral Aana!er o$ the ;a"e Aulti 8arms
Co& resi!ned as FA and sold to the
corporation his shares o$ stoc.s in the
corporation $or ;(??th& the boo. alue
thereo$& payable as $ollo%s* a) ;2??th as
do%n paymentK b) ;2??th on or be$ore (2
Culy2HJHK and c) the remainin! balance o$
;2??th on or be$ore (? 1ep 2HJH. A
promissory note& %ith an acceleration
clause& %as e=ecuted by the corporation $or
the unpaid balance.
)he corporation $ailed to pay the frst
installment on due date. A then sued ;a"e
on the promissory note in the 9)C.
a$ 'oes the court hae "urisdiction oer
the case?
b$ Would your ans%er be the same i$ A
instead sold his shares to his $riend
Aabel and the latter fled a case
%ith the 9)C a!ainst the corporation
to compel it to re!ister the sale and
to issue ne% certifcates o$ stoc. in
her name?
SU44ESTE) ANSWER(
a$ )he 9)C has "urisdiction oer the case.
)he 1C said that a corporation may only
buy its o%n shares o$ stoc. i$ it has enou!h
surplus profts there$ore.
b$ Ay ans%er %ould be the same. An action
to compel a corporation to re!ister a sale
and to issue ne% certifcates o$ stoc. is
itsel$ an intra4corporate matter that
e=clusiely lies %ith the 9)C.
TA;E N.TE( )he 9)C has "urisdiction oer
the cases %hich inoles intra4corporate
controersy. As o$ #??:& the applicable
rule is that there is a )9A718<99<'
C,9I1'IC)IB7 under 1ec. @.# o$ the 19C&
the Commission3s "urisdiction oer all
cases enumerated under ;' H?#4A sec. @
has been trans$erred to the Courts o$
!eneral "urisdiction or the appropriate
9e!ional )rial Court.
Cre&it Transa#tions
Chattel Mortgage vs. After$2ncurre) +-ligations (!!) )o
secure the payment o$ an earlier loan o$
;#?&??? as %ell as subse+uent loans %hich
her $riend 7oreen& %ould e=tend to her&
Maren e=ecuted in $aor o$ 7oreen a
chattel mort!a!e oer her (Maren) car.
Is the mort!a!e alid?
SU44ESTE) ANSWER(
A chattel mort!a!e cannot e-ectiely
secure a$ter4 incurred obli!ations. While a
stipulation to include a$ter4 incurred
obli!ations in a chattel mort!a!e is itsel$
not inalid& the obli!ation cannot& ho%eer&
be deemed automatically secured by that
mort!a!e until a$ter a ne% chattel
mort!a!e or an addendum to the ori!inal
chattel mort!a!e is e=ecuted to coer the
obli!ation a$ter it has been actually
incurred. Accordin!ly& unless such
supplements are made& the chattel
mort!a!e in the problem !ien %ould be
deemed to secure only the loan o$ ;#?&???
.Sec 0 $ct 10,01 Belgian Catholic Missionaries "
Magallanes /ress (6-6('7
7ersion 1990+2006 U %&ate& 'y
Dondee
7ersion 1990+2003 Arrange& 'y SULAW Cass
200!
C#attel (ort'a'e s! A&ter?7ncurre6 <.li'ations
()***) 8n Dece'ber /B /00,B Borrower
e4ecute. a c&attel 'ortgage in fa)or of t&e
Bank to secure a loan of P:M* 1n .ue ti'e
t&e loan was pai.*
Bn 'ecember 2& 2HHI& 5orro%er obtained
another loan $or ;#A %hich the 5an.
!ranted under the same security as that
%hich secured the frst loan.
8or the second loan& 5orro%er merely
deliered a promissory noteK no ne%
chattel mort!a!e a!reement %as
e=ecuted as the parties relied on a
proision in the 2HH: chattel mort!a!e
a!reement %hich included $uture debts
as amon! the obli!ations secured by the
mort!a!e. )he proision reads*
In case the Aort!a!or e=ecutes
subse+uent promissory note or notes
either as a rene%al& as an e=tension&
or as a ne% loan& this mort!a!e shall
also stand as security $or the payment
o$ said promissory note or notes
%ithout necessity o$ e=ecutin! a ne%
contract and this mort!a!e shall hae
the same $orce and e-ect as i$ the said
promissory note or notes %ere e=istin!
on date hereo$.
As 5orro%er $ailed to pay the second
loan& the 5an. proceeded to $oreclose
the Chattel Aort!a!e.5orro%er sued the
5an. claimin! that the mort!a!e %as no
lon!er in $orce. 5orro%er claimed that a
$resh chattel mort!a!e should hae been
e=ecuted %hen the second loan %as
!ranted.
a$ 'ecide the case and ratiocinate. (4%)
b$ 1uppose the chattel mort!a!e %as not
re!istered& %ould its alidity and
e-ectieness be impaired? <=plain.
(4%)
SU44ESTE) ANSWER(
a* )he $oreclosure o$ the chattel mort!a!e
re!ardin! the second loan is not alid. A
chattel mort!a!e cannot alidly secure
a$ter incurred obli!ations. )he a-idait o$
!ood $aith re+uired under the chattel
mort!a!e la% e=pressly proides that the
$ore!oin! mort!a!e is made $or securin!
the obli!ation specifed in the conditions
hereo$& and $or no other purpose. )he
a$ter4incurred obli!ation not bein!
specifed in the a-idait& is not secured by
mort!a!e.
b* 0es. )he chattel mort!a!e is not alid
as a!ainst any person& e=cept the
mort!a!or& his e=ecutors and
administrators.
C#attel (ort'a'e2 /oreclosure ()**+)
9it6 bou!ht a ne% car on installments
%hich proided $or an acceleration clause
in the eent o$ de$ault. )o secure
payment o$ the unpaid installments& as and
%hen due& he constituted t%o chattel
mort!a!es& i.e.& one oer his ery old car
and the other coerin! the ne% car that
he had "ust bou!ht as a$oresaid& on
installments. A$ter 9it6 de$aulted on three
installments& the seller4mort!a!ee
$oreclosed on the old car. )he proceeds o$
the $oreclosure %ere not enou!h to satis$y
the due obli!ationK hence& he similarly
sou!ht to $oreclose on the ne% car.
Mercantile Law Bar Examination Q & A (1990-2006) Page 55 of 103
Would the seller4mort!a!ee be le!ally
"ustifed in $oreclosin! on this second
chattel mort!a!e?
SU44ESTE) ANSWER(
7o. )he t%o mort!a!es %ere e=ecuted to
secure the payment o$ the unpaid
installments $or the purchase o$ a ne% car.
When the mort!a!e on the old car %as
$oreclosed& the seller4mort!a!ee is
deemed to hae renounced all other
ri!hts. A $oreclosure o$ additional
property& that is& the ne% car coered by
the second mort!a!e %ould be a nullity.
C#attel (ort'a'e2 <;ners#i$ o& T#in' (ort'a'e6 ()**0)
Sonee& %ho lies in 5ulacan& bou!ht a
2HJJ model )oyota Corolla sedan on Culy
2& 2HJH $rom Anadelaida& %ho lies in
Tue6on City& $or ;(??th& payin! ;2@?th as
do%npayment and promisin! to pay the
balance in ( e+ual +uarterly installments
be!innin! Bctober 2& 2HJH. Anadelaida
e=ecuted a deed o$ sale o$ the ehicle in
$aor o$ Sonee and& to secure the
unpaid balance o$ the purchase price&
had Sonee e=ecute a deed o$ chattel
mort!a!e on the ehicle in Anadelaida3s
$aor.
)en days a$ter the e=ecution o$ the
aboementioned documents& Sonee had the
car trans$erred and re!istered in her
name. Contemporaneously& Anadelaida had
the chattel mort!a!e on the car re!istered
in the Chattel Aort!a!e 9e!istry o$ the
B-ice o$ the 9e!ister o$ 'eeds o$ Tue6on
City.
In 1ep 2HJH& Sonee sold the sedan to
Cimbo %ithout tellin! the latter that the
car %as mort!a!ed to Anadelaida. When
Sonee $ailed to pay the frst installment
on Bctober 2& 2HJH& Anadelaida %ent to
see Sonee and discoered that the latter
had sold the car to Cimbo.
a$ Cimbo re$used to !ie up the car on the
!round that the chattel mort!a!e e=ecuted
by Sonee in $aor o$ Anadelaida is not
alid because it %as e=ecuted be$ore the
car %as re!istered in Sonee3s name& i.e.&
be$ore Sonee became the re!istered o%ner
o$ the car. Is the said ar!ument
meritorious? <=plain your ans%er.
b$ Cimbo also ar!ued that een i$ the chattel
mort!a!e is alid& it cannot a-ect him
because it %as not properly re!istered
%ith the !oernment o-ices %here it should
be re!istered. What !oernment o-ice is
Cimbo re$errin! to?
SU44ESTE) ANSWER(
a$ Cimbo3s ar!ument is not meritorious.
Sonee became the o%ner o$ the property
upon delieryK re!istration is not essential
to est that o%nership in the buyer. )he
e=ecution o$ the chattel mort!a!e by the
buyer in $aor o$ the seller& in $act& can
demonstrate the estin! o$ such o%nership
to the mort!a!or.
b$ Cimbo %as re$errin! to the 9e!ister o$
'eeds o$ 5ulacan %here Sonee %as a
resident. )he Chattel Aort!a!e >a%
re+uires the re!istration to be made in the
B-ice o$ the 9e!ister o$ 'eeds o$ the
proince %here the mort!a!or resides and
also in %hich the property is
situated as %ell as the >)B %here the
ehicle is re!istered. (1ec 4 Chattel
Aort!a!e >a%)
Cre6it Transactions ()***)
Qarious buyers o$ lots in a subdiision
brou!ht actions to compel either or both
the deeloper and the ban. to lease and
delier $ree and clear the titles to their
respectie lots.
)he problem arose because
not%ithstandin! prior sales mostly on
installments G made by the deeloper to
buyers& deeloper had mort!a!ed the
%hole subdiision to a commercial ban..
)he mort!a!e %as duly e=ecuted and
re!istered %ith the appropriate
!oernmental a!encies. /o%eer& as the
lot buyers %ere completely una%are o$
the mort!a!e lien o$ the ban.& they
reli!iously paid the installments due
under their sale contracts.
As the deeloper $ailed to pay its loan& the
mort!a!e %as $oreclosed and the %hole
subdiision %as ac+uired by the ban. as
the hi!hest bidder.
a$ Aay the ban. dispossess prior
purchasers o$ indiidual lots or&
alternatiely& re+uire them to pay
a!ain $or the paid lots? 'iscuss ((%)
b$ What are the ri!hts o$ the ban. is4W4
is those buyers %ith remainin!
unpaid installments? 'iscuss. ((%)
9ecommendation* 1ince the sub"ect
matter o$ these t%o (#) +uestions is
not included %ithin the scope o$ the
5ar Tuestions in Aercantile >a%& as it
is %ithin Ciil >a%& it is su!!ested
that %hateer ans%er is !ien by the
e=aminee& or the lac. o$ ans%er should
be !ien $ull credit. I$ the e=aminee
!ies a !ood ans%er& he should be
!ien additional credit.
SU44ESTE) ANSWER(
a* 7o. )he ban. may not dispossess the
prior purchasers o$ the indiidual lots&
much less re+uire them to pay $or the said
lots. )he ban. has to respect the ri!hts o$
the prior purchasers o$ the indiidual
lots. )he purchasers hae the option to
pay the installments o$ the mort!a!ee.
b* )he ban. has to respect the ri!hts o$
the buyers %ith remainin! unpaid
installments. )he purchaser has the option
to pay the installments to the mort!a!ee
%ho should apply the payments to the
mort!a!e indebtedness.
(ort'a'e ()***)
'ebtor purchased a parcel o$ land $rom a
realty company payable in fe yearly
installments. ,nder the contract o$ sale&
title to the lot %ould be trans$erred upon
$ull payment o$ the purchase price.
5ut een be$ore $ull payment& debtor
constructed a house on the lot. 1ometime
therea$ter& debtor mort!a!ed the house to
secure his obli!ation arisin! $rom the
issuance o$ a bond needed in the conduct
o$ his business. )he mort!a!e %as duly
re!istered %ith the proper chattel
mort!a!e re!istry.
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2005
Mercantile Law Bar Examination Q & A (1990-2006) Page 56 of 103
8ie years later a$ter completin! payment
o$ the purchase price& debtor obtained
title to the lot. And een as the chattel
mort!a!e on the house %as still subsistin!&
debtor mort!a!ed to a ban. the lot and
improement thereon to secure a loan.
)his real estate mort!a!e %as duly
re!istered and annotated at the bac. o$ the
title.
'ue to business reerses& debtor $ailed to
pay his creditors. )he chattel mort!a!e
%as $oreclosed %hen the debtor $ailed to
reimburse the surety company $or
payments made on the bond. In the
$oreclosure sale& the surety company %as
a%arded the house as the hi!hest bidder.
Bnly a$ter the $oreclosure sale did the
surety company learn o$ the real estate
mort!a!e in $aor o$ the lendin! inestor
on the lot and the improement thereon.
Immediately& it fled a complaint prayin!
$or the e=clusion o$ the house $rom the
real estate mort!a!e. It %as submitted
that as the chattel mort!a!e %as e=ecuted
and re!istered ahead& it %as superior to
the real estate mort!a!e.
Bn the su!!estion that a chattel mort!a!e
on a house4 a real property4 %as a nullity&
the surety company countered that %hen
the chattel mort!a!e %as e=ecuted& debtor
%as not yet the o%ner o$ the lot on
%hich the house %as built. Accordin!ly&
the house %as a personal property and a
proper sub"ect o$ a chattel mort!a!e.
a* 'iscuss the alidity o$ the position ta.en
by the surety company. ((%)
b* Who has a better claim to the house& the
surety company or the lendin! inestor?
<=plain ((%)
c* Would the position o$ the surety
company be bolstered by the $act
that it ac+uired title in a $oreclosure
sale conducted by the ;roincial
1heri-. <=plain ((%)
SU44ESTE) ANSWER(
a$ )he house is al%ays a real property een
thou!h it %as constructed on a land not
belon!in! to the builder. /o%eer& the
parties may treat it as a personal property
and constitute a chattel mort!a!e thereon.
1uch mort!a!e shall be alid and bindin!
but only on the parties. It %ill not bind or
a-ect third parties.
b$ )he lendin! inestor has a better claim
to the house. )he real estate mort!a!e
coerin! the house and lot %as duly
re!istered and binds the parties and third
persons. Bn the other hand& the chattel
mort!a!e on the house securin! the credit
o$ the surety company did not a-ect the
ri!hts o$ third parties such as the lendin!
inestor despite re!istration o$ the chattel
mort!a!e.
c$ 7o. )he chattel mort!a!e oer the house
%hich %as $oreclosed did not a-ect the
ri!hts o$ third parties li.e the lendin!
inestor. 1ince the third parties are not
bound by the chattel mort!a!e& they are
not also bound by any en$orcement o$ its
proisions. )he $oreclosure o$ such chattel
mort!a!e did not bolster or add anythin! to
the position o$ the surety company.
(ort'a'e s! 8e% (2003)
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2005
)o pay $or her loan obtained $rom 1tela&
>i6a constituted in 1tela3s $aor a chattel
mort!a!e oer an electric !enerator.
Cecil& a creditor o$ >i6a& leied on
attachment the !enerator. 1tela fled a
third party claim. Cecil opposed the
claim. 9ule on their conEictin! claims.
SU44ESTE) ANSWER(
(ort'a'e2 E9tra=u6icial /oreclose (2004)
A real estate mort!a!e may be
$oreclosed "udicially or e=tra"udicially. In
%hat instance may a mort!a!ee
e=tra"udicially $oreclose a real estate
mort!a!e? (@%)
SU44ESTE) ANSWER(
When a sale is made under a special
po%er inserted or attached to any real4
estate mort!a!e& therea$ter !ien as
security $or the payment o$ money or the
$ulfllment o$ any other obli!ation& then
the mort!a!ee may e=tra"udicially
$oreclose the real estate mort!a!e (1ec.
2& Act 7o. (2(@& as amended).
(ort'a'e2 /oreclosure (2003)
Aay the sale at public auction by a ban.
o$ a property mort!a!ed to it be nullifed
because the price %as e=tremely lo%?
Why?
SU44ESTE) ANSWER(
(ort'a'e2 /oreclosure (2003)
5ecause o$ $ailure o$ Canette and Ceanne
to pay their loan to L 5an.& the latter
$oreclosed on the mort!a!e constituted
on their property %hich %as put up by
them as security $or the payment o$ the
loan. )he price paid $or the property at
the $oreclosure sale %as not enou!h to
li+uidate the obli!ation. )he ban. sued $or
defciency. In their ans%er& Canette and
Ceanne did not deny the e=istence o$ the
loan nor the $act o$ their de$ault. )hey&
ho%eer& interposed the de$enses that the
price at the auction %as e=tremely lo%
and that their loan& despite the loan
documents& %as a lon!4term loan %hich
had not yet matured. I$ you %ere the
"ud!e& ho% %ould you rule on the case?
Why? (:%)
SU44ESTE) ANSWER(
(ort'a'e2 /oreclosure o& 7m$roements ()***)
5orro%er obtained a loan a!ainst the
security o$ a mort!a!e on a parcel o$
land. While the mort!a!e %as subsistin!&
borro%er leased $or f$ty years the
mort!a!ed property to >and 'eelopment
Company (>'C). )he mort!a!ee %as duly
adised o$ the lease. )herea$ter& >'C
constructed on the mort!a!ed property
an o-ice condominium.
5orro%er de$aulted on his loan and
mort!a!ee $oreclosed the mort!a!e. At the
$oreclosure sale& the mort!a!ee %as
a%arded the property as the hi!hest
bidder. )he correspondin! Certifcate o$
1ale %as e=ecuted and a$ter the lapse o$
one year& title %as consolidated in the
name o$ mort!a!ee.
Aort!a!ee then applied %ith the 9)C $or
the issuance o$ a %rit o$ possession not
only oer the land but also the
condominium buildin!. )he mort!a!ee
contended that the mort!a!e included all
accessions& improements and accessories
$ound on the mort!a!ed property.
Mercantile Law Bar Examination Q & A (1990-2006) Page 5- of 103
b. )he lease rentals belon! to the
mort!a!or. /o%eer&
>'C countered that it had built on the
mort!a!ed property %ith the prior
.no%led!e o$ mort!a!ee %hich had
receied $ormal notice o$ the lease.
a$ /o% %ould you resole the dispute
bet%een the mort!a!ee and >'C? ((%)
b$ Is the mort!a!ee entitled to the lease
rentals due $rom >'C under the lease
a!reement? ((%)
Re'o++en,at-on% Since the subGect matter of
these two
((! questions is not included within the scope of
the Bar Huestions in 6ercantile Faw, as it is
within "ivil Faw, it is suggested that whatever
answer is given by the examinee, or the lac/ of
answer should be given full credit' %f the examinee
gives a good answer, he should be given additional
credit'
SU44ESTE) ANSWER(
a. )he mort!a!ee has a better ri!ht than
>'C. )he mort!a!e e=tends to the
improements introduced on the land&
%ith the declarations& amplifcations& and
limitations established by la%& %hether the
estate remains in the possession o$ the
mort!a!or or passes into the hands o$ a
third person (Art #2#I 7CC). )he notice
!ien by >'C to the mort!a!ee %as not
enou!h to remoe the buildin! $rom
coera!e o$ the mort!a!e considerin! that
the buildin! %as built a$ter the mort!a!e
%as constituted and the notice %as only
as re!ards the lease and not as to the
construction o$ the buildin!. 1ince the
mort!a!ee %as in$ormed o$ the lease and
did not ob"ect to it& the mort!a!ee became
bound by the terms o$ the lease %hen it
ac+uired the property as the hi!hest
bidder. /ence& the mort!a!ee steps into
the shoes o$ the mort!a!or and ac+uires
the ri!hts o$ the lessor under Art 2I:J o$
the 7CC. )his proision !ies the lessor
the ri!ht to appropriate the condominium
buildin! but a$ter payin! the lessee hal$ o$
the alue o$ the buildin! at that time.
1hould the lessor re$use to reimburse said
amount& the lessee may remoe the
improement een thou!h the land %ill
su-er dama!e thereby.
1st Alternative Ans!er(
a. )he mort!a!ee has a better ri!ht to the
buildin!. ,nder Art #2#I o$ the 7CC& the
mort!a!e e=tends to all improements on
the mort!a!ed property re!ardless o$ %ho
and %hen the improements %ere
introduced. >'C cannot complain
other%ise& because it .ne% that the
property it %as leasin! %as mort!a!ed
%hen it built the condominium.
2n& alternative Ans!er(
a. Assumin! that the o-ice condominium
%as duly constituted under the
Condominium >a%& be$ore >'C could
alidly constitute the same as a
condominium& it should cause to be
recorded in the re!ister o$ deeds o$ the
proince or city %here the land is situated
an enablin! or master deed sho%in!&
amon! others& a certifcate o$ the
re!istered o%ner and o$ all re!istered
holders o$ any lien or encumbrance on the
property that they consent to the
re!istration o$ the deed. (1ec 4. 9A
4I#:). I$ the mort!a!ee !ae its consent
thereto& then >'C should preail. I$ no
consent %as !ien& the condominium %as
included in the mort!a!e.
SU44ESTE) ANSWER(
the mort!a!e e=tends to rentals not yet
receied %hen the obli!ation becomes
due and the mort!a!ee may ran a$ter the
said rentals $or the payment o$ the
mort!a!e debt.
(ort'a'e2 /oreclosure2 E&&ect o& mere ta-in' .%
cre6itor? mort'a'or o& $ro$ert% ()**2)
L P Co obtained a loan $rom a local ban.
in the amount o$ ;@??th& mort!a!in! as
security there$ore its real property.
1ubse+uently& the company applied %ith
the same ban. $or a >etter o$ Credit (>C)
$or R#??th in $aor o$ a $orei!n ban. to
coer the importation o$ machinery. )o
!uarantee payment o$ the obli!ation
under the >C& the company and its
;resident and )reasurer e=ecuted a
surety a!reement in the local ban.3s $aor.
)he machinery arried and %as released
to the company under a trust receipt
a!reement. As the company de$aulted in
the payment o$ its obli!ations& the ban.
too. possession o$ the imported
machinery. At the same time& it sou!ht to
$oreclose the mort!a!ed property and to
hold the company as %ell as its ;resident
and )reasurer& liable under the 1urety
A!reement.
'id the ta.in! o$ possession o$ the
machinery by the ban. result in the 2)
$ull payment o$ the obli!ations o$ the
company and its o-icers& and #)
$oreclosure o$ the mort!a!e?
SU44ESTE) ANSWER(
/$ )he ta.in! o$ possession o$ the
machinery by the ban. did not result in
$ull payment o$ the obli!ations o%in!
$rom the company and its o-icers. )he
ta.in! o$ such possession must be
considered merely as a measure in order
to protect or $urther sa$e!uard the ban.3s
security interest. )acion en -ago can only
be considered as hain! ta.en place %hen
a creditor accepts and appropriates the
o%nership o$ the !oods in payment o$ a
due obli!ation. ./&B " /ineda 16' s 17
!$ )he mere ta.in! o$ possession o$
mort!a!ed assets does not amount to
$oreclosure. 8oreclosure re+uires a sale at
public auction. )he $oreclosure& there$ore&
has not as yet been e-ected.
(ort'a'e2 Re6em$tion "erio62 /oreclose6 "ro$ert%
(2002)
;rimetime Corporation (the 5orro%er)
obtained a ;2? Aillion& fe4year term
loan $rom ,niersal 5an. (the 5an.) in
2HH:. As security $or the loan and as
re+uired by the 5an.& the 5orro%er !ae
the $ollo%in! collateral security in $aor o$
the 5an.*
/$ a real estate mort!a!e oer the land
and buildin! o%ned by the 5orro%er
and located in Tue6on CityK
!$ the "oint and seeral promissory note
o$ ;r. ;rimo )imbol& the ;resident o$
the 5orro%erK and
:$ a real estate mort!a!e oer the
residential house and lot o%ned by Ar.
)imbol& also located in Tue6on City.
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Mercantile Law Bar Examination Q & A (1990-2006) Page 58 of 103
5ecause o$ business reerses& neither the
5orro%er nor Ar. )imbol %as able to pay
the loan. In Cune #??2& the 5an.
e=tra"udicially $oreclosed the t%o real
estate mort!a!es& %ith the 5an. as the
only bidder in the $oreclosure sale. Bn
1eptember 2:& #??2& the certifcates o$
sale o$ the t%o properties in $aor o$ the
5an. %ere re!istered %ith the 9e!ister o$
'eeds o$ Tue6on City.
)en months later& both the 5orro%er and
Ar. )imbol %ere able to raise su-icient
$unds to redeem their respectie
properties $rom the 5an.& but the 5an.
re$used to permit redemption on the
!round that the period $or redemption
had already e=pired& so that the 5an.
no% has absolute o%nership o$ both
properties. )he 5orro%er and Ar. )imbol
came to you today& 1eptember 2@& #??#&
to fnd out i$ the position o$ the 5an. is
correct. What %ould be your ans%er?
1tate your reasons (@%).
SU44ESTE) ANSWER(
/* With respect to the real estate
mort!a!e oer the land and buildin!
o%ned by the 5orro%er& ;rimetime
Corporation& a "uridical body& the
period o$ redemption is only three (()
months& %hich period already e=pired.
!* As to the real estate mort!a!e oer
the residential house and lot o%ned by
Ar. )imbol& the period o$ redemption
is one (2) year $rom the date o$
re!istration o$ the certifcate o$ sale&
%hich period has not yet e=pired in this
case.
(ort'a'e2 Reme6ies (2003)
Carma.ers& Inc.& sold a motor ehicle on
installment basis to Chari ;aredes. )he
transaction %as reEected on a promissory
note e=ecuted by Chari in $aor o$
Carma.ers. )he note %as secured by a
mort!a!e oer the car. Contemporaneous
%ith the e=ecution o$ the note and the
mort!a!e deed& Carma.ers& Inc.& assi!ned
the instruments sans recourse to
Adelantado 8inance Corporation. Chari
de$aulted in her obli!ations. Could
Adelantado 8inance corporation ta.e action
a!ainst both Carma.ers Inc.& and Chari?
Why? (:%)
SU44ESTE) ANSWER(
"re&erence o& Cre6its (2002)
As o$ Cune 2& #??#& <d6o 1ystems
Corporation (<d6o) %as indebted to the
$ollo%in! creditors*
/$ Ace <+uipment 1upplies G $or arious
personal computers and accessories
sold to <d6o on credit amountin! to
;(??&???.
!$ /andyman Fara!e G $or mechanical
repairs (parts and serice) per$ormed
on <d6o3s company car amountin! to
;2?&???.
:$ Coselyn 9eyes G $ormer employee o$ <d6o
%ho sued <d6o $or unla%$ul termination
o$ employment and %as able to obtain a
fnal "ud!ment a!ainst <d6o $or
;2??&???.
($ 5ureau o$ Internal 9eenue G $or unpaid
alue4 added ta=es amountin! to
;(?&???.
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2005
#$ Inte!rity 5an. G %hich !ranted <d6o a
loan in #??2 in the amount o$
;@??&???. )he loan %as not secured
by any asset o$ <d6o& but it %as
!uaranteed unconditionally and
solidarily by <d6o3s ;resident and
controllin! stoc.holder& <duardo S.
Bn!& as accommodation surety.
)he loan due to Inte!rity 5an. $ell due on
Cune 2@& #??#. 'espite pleas $or
e=tension o$ payment by <d6o& the ban.
demanded immediate payment. 5ecause
the ban. threatened to proceed a!ainst
the surety& <duardo S. Bn!& <d6o
decided to pay up all its obli!ations to
Inte!rity 5an.. Bn Cune #?& #??#& <d6o
paid to Inte!rity 5an. the $ull principal
amount o$ ;@??&???& plus accrued
interests amountin! to ;@@&???. As a
result& <d6o had hardly any cash le$t $or
operations and decided to close its
business. A$ter payin! the unpaid
salaries o$ its employees& <d6o fled a
petition $or insolency on Culy 2& #??#.
/o% %ould you& as "ud!e in the
insolency proceedin!s& ran. the
respectie credits or claims o$ the fe (@)
creditors mentioned aboe in terms o$
pre$erence or priority a!ainst each other?
(@%)
SU44ESTE) ANSWER(
)he claim o$ /andyman Fara!e $or
;2?&??? has a specifc lien on the car
repaired.
)he remainin! $our (4) claims hae
pre$erence or priority a!ainst each other
in the $ollo%in! order*
/$ 7o. 4 G claim o$ the 5I9 $or unpaid
alue added ta=es
!$ 7o. ( G claim o$ Coselyn 9eyes $or
,nla%$ul termination
:$ 7o. 2 G claim o$ Ace e+uipment
1upplies as an unpaid sellerK and
($ 7o. @ G claim o$ Inte!rity 5an..
"romissor% Note: 8ia.ilit% (200))
L& 0 and S si!ned a promissory note in
$aor o$ A statin!* We promise to pay A
on 'ecember (2& #??2 the sum o$
;@&???.?? When the note $ell due& A sued
L and 0 %ho put up the de$ense that A
should hae impleaded
S. Is the de$ense alid? Why? (@%)
SU44ESTE) ANSWER(
)he de$ense is not alid. )he liability o$
L& 0& and S under the promissory note is
"oint. 1uch bein! the case& S is not an
indispensable party. )he $act that A did
not implead S %ill not preent A $rom
collectin! the proportionate share o$ L
and 0 in the payment o$ the loan.
(1bservation Even if the liability of
A, 9, and I is solidary, the defense
would still not be valid!
Reme6ies2 Aaila.le to (ort'a'ee?Cre6itor ()**4)
8indin! a #44month payment plan
attractie& An"o purchased a )amara% 8L
$rom )oyota TC. /e paid a do%n4payment
o$ ;2??th and obtained fnancin! $or the
balance $rom IB, Co. /e e=ecuted a
chattel mort!a!e
Mercantile Law Bar Examination Q & A (1990-2006) Page 59 of 103
oer the ehicle in $aor o$ IB,. When
An"o de$aulted& IB, $oreclosed the chattel
mort!a!e& and sou!ht to recoer the
defciency.
Aay IB, still recoer the defciency?
<=plain.
SU44ESTE) ANSWER(
IB, may no lon!er recoer the
defciency. ,nder Art 24J4 o$ the 7CC& in
a contract o$ sale o$ personal property the
price o$ %hich is payable in installments&
the endor may& amon! seeral options&
$oreclose the chattel mort!a!e on the
thin! sold& i$ one has been constituted&
should the endee3s $ailure to pay coer
t%o or more installments. In such case&
ho%eer& the endor shall hae no $urther
action a!ainst the purchaser to recoer
any unpaid balance o$ the price and any
a!reement to the contrary is oid. While
the !ien $acts did not e=plicitly state that
An"o3s $ailure to pay coered # or more
installments& this may sa$ely be
presumed because the ri!ht o$ IB, Co to
$oreclose the chattel mort!a!e under the
circumstances is premised on An"o3s
$ailure to pay # or more installments. )he
$oreclosure %ould not hae been alid i$ it
%ere not so. ()he !ien $acts did not also
state e=plicitly %hether An"o3s de$ault %as
a payment de$ault or a de$ault arisin!
$rom a breach o$ a ne!atie pled!e or
breach o$ a %arranty. In such case&
ho%eer& IB, Company %ould not hae
been able to $oreclose the chattel
mort!a!e alidly as such $oreclosure&
under the circumstances contemplated by
the la%& could only be e-ected $or a
payment de$ault coerin! t%o or more
installments) .3uis Ridad " Fili-inas
n"est!ent and Finance Co %R 3236+,6
9an2',+3 12,s2(67
Reme6ies2 Aaila.le to (ort'a'ee?Cre6itor (200))
'ebtor A issued a promissory note in the
amount o$ ;2?A in $aor o$ commercial
ban. 0 secured by mort!a!e o$ his
properties %orth ;(?A. When A $ailed to
pay his indebtedness& despite demands
made by ban. 0& the latter instituted a
collection suit to en$orce payment o$
the ;2?A account. 1ubse+uently& ban. 0
also fled $oreclosure proceedin!s a!ainst A
$or security !ien $or the account. I$ you
%ere the "ud!e& ho% %ould you resole the
t%o cases? (@%)
SU44ESTE) ANSWER(
)he case $or collection %ill be allo%ed to
proceed. 5ut the $oreclosure proceedin!s
hae to be dismissed. In institutin!
$oreclosure proceedin!s& a$ter flin! a
collection case inolin! the same account
or transaction& ban. 0 is !uilty o$ splittin! a
cause o$ action. )he loan o$ ;2?A is the
principal obli!ation %hile the mort!a!e
securin! the same is merely an accessory
to said loan obli!ation. )he collection o$
the loan and the $oreclosure o$ the
mort!a!e securin! said loan constitute one
and the same cause o$ action. )he flin! o$
the collection case bars the subse+uent
flin! o$ the $oreclosure proceedin!s.
Reme6ies2 Secure6 De.t ()**))
)o secure the payment o$ his loan o$ ;#??th&
A e=ecuted in $aor o$ the An!eles 5an.in!
Co in 2 document& a real estate mort!a!e
oer ( lots re!istered in his name and a
chattel mort!a!e oer his ( cars and 2 Isu6u
car!o truc..
,pon his $ailure to pay the loan on due
date& the ban. $oreclosed the mort!a!e
on the ( lots& %hich %ere subse+uently
sold $or only ;HHth at the $oreclosure
sale. )herea$ter& the ban. fled an
ordinary action $or the collection o$ the
defciency. A contended that the
mort!a!e contract he e=ecuted %as
indiisible and conse+uently& the ban.
had no le!al ri!ht to $oreclose only the
real estate mort!a!e and leae out the
chattel mort!a!e& and then sue him $or
a supposed defciency "ud!ment.
I$ you %ere the Cud!e& %ould you sustain
the contention o$ A?
SU44ESTE) ANSWER(
I$ I %ere the Cud!e& I %ould dismiss the
action as bein! premature since the
proper remedy %ould be to complete the
$oreclosure o$ the mort!a!es and only
therea$ter can there by an action $or
collection o$ any defciency. In Calte> "
$C .%R '('3,, 20 $ug +67& the remedies
on a secured debt& said the court& are
either an action to collect or to $oreclose a
contract o$ real security. )hese remedies
are alternatie remedies& althou!h an
action $or any defciency is not
precluded& sub"ect to certain e=ceptions
such as those stated in Art 24J4 o$ the
Ciil Code& by a $oreclosure on the
mort!a!es. While the $actual settin!s in
the case o$ Suria " $C .3, 9une +'7 are not
similar to the $acts !ien in the problem&
the 1C implied that $oreclosure as a
remedy in secured obli!ations must frst
be aailed o$ by a creditor in pre$erence
to other remedies that mi!ht also be
ino.ed by him.
ALTERNATI7E ANSWER(
)he indiisibility o$ a contract o$ real
security& such as a real estate mort!a!e
or a chattel mort!a!e& only means that a
diision or a partial payment o$ a
secured obli!ation does not %arrant a
correspondin! diision or proportionate
reduction o$ the security !ien. A creditor
in such secured debts may pursue the
remedy o$ $oreclosure& in part or in $ull&
or fle an ordinary action $or collection on
any amount due. A $aorable "ud!ment can
%arrant an issuance o$ a %rit o$
e=ecution on any property& not e=empt
$rom e=ecution& belon!in! to the
"ud!ment debtor. )here should be no le!al
obstacle $or a creditor to %aie& in $ull or
in part& his ri!ht to $oreclosure on
contracts o$ real security.
Ins0ran#e La!
,ene&iciar%: E&&ects: 7rreoca.le ,ene&iciar% (2001)
What are the e-ects o$ an irreocable
desi!nation o$ a benefciary under the
Insurance Code? <=plain. (#%)
SUGGESTED ANSWER:
)he irreocable desi!nation !ies the
benefciary a ested ri!ht oer >i$e
Insurance. )he Insured cannot act to diest
the irreocable benefciary& in %hole or in
part& %ithout the benefciaryDs consent.
)o be specifc*
/$ 2&e beneficiary .esignate. in a life
insurance contract cannot be c&ange.
wit&out t&e consent of t&e beneficiary
because &e &as a )este. interest in t&e
policy (3hilamlife v' 3ineda, 4'+' 0o' 5,()-, <uly
)*,
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Mercantile Law Bar Examination Q & A (1990-2006) Page 50 of 103
)*8*, citing 4crcio v' Sun Fife, 4'+' 0o' (.7;.,
September (8, )*(5C and 4o v' +edfern, 4'+' 0o'
,77;5, #pril (5, )8,)!C
!$ =eit&er can t&e 1nsure. take t&e cas&
surren.er )alueB assign or e)en borrow
on sai. policy wit&out t&e beneficiaryOs
consent (0ario v' 3hilamlife, 4'+' 0o' ((7*-, <une
(-, )*-7!C
:$ 2&e 1nsure. cannot a.. anot&er
beneficiary because t&at woul. re.uce
t&e a'ount w&ic& t&e first beneficiary
'ay reco)er an. t&erefore a.)ersely
affect &is )este. rig&t (4o v' +edfem, 4'+'
0o' ,77;5, #pril (5, )*,)!C
($ ,nless the policy allo%s& the Insured
cannot een desi!nate another
benefciary should the ori!inal
benefciary predecease him. /is estate
ac+uires the benefciaryDs ested ri!ht
upon his deathK and
#$ 2&e 1nsure. cannot allow &is cre.itors to
attac& or e4ecute on t&e policy* (3hilamlife v'
3ineda, 4'+' 0o' 5,()-, <uly )*, )*8*!
,ene&iciar%: Ri'#ts2 7rreoca.le ,ene&iciar% (2001)
Cacob obtained a li$e insurance policy $or
;2 Aillion desi!natin! irreocably 'i%ata&
a $riend& as his benefciary. Cacob&
ho%eer& chan!ed his mind and %ants 0ob
and Co"o& his other $riends& to be included
as benefciaries considerin! that the
proceeds o$ the policy are su-icient $or
the three $riends. Can Cacob still add 0ob
and Co"o as his benefciaries? <=plain. (#%)
SUGGESTED ANSWER:
7o& Cacob can no lon!er add 0ob and Co"o
as his benefciaries in addition to 'i%ata.
As the irreocable benefciary& 'i%ata has
ac+uired a4ested ri!ht oer CacobDs li$e
insurance policy. Any additional
benefciaries %ill reduce the amount
%hich 'i%ata& as the frst benefciary&
may recoer& %hich %ill adersely a-ect
her ested ri!ht. .%o "# Redfern, %#R#
&o# ('',0, $-ril 20, 16(17
,ene&iciar%2 8i&e 7nsurance2 "ro#i.ite6 ,ene&iciaries
()**:)
Cuan de la Cru6 %as issued ;olicy 7o. JJJJ
o$ the Aidland >i$e Insurance Co on a %hole
li$e plan $or ;#?&??? on Au!ust 2H& 2HJH.
Cuan is married to Cynthia %ith %hom he
has three le!itimate children. /e& ho%eer&
desi!nated ;urita& his common4la% %i$e& as
the reocable benefciary. Cuan re$erred to
;urita in his application and policy as the
le!al %i$e.
( years later& Cuan died. ;urita fled her
claim $or the proceeds o$ the policy as the
desi!nated benefciary therein. )he %ido%&
Cynthia& also fled a claim as the le!al
%i$e. )o %hom should the proceeds o$ the
insurance policy be a%arded? (@%)
SUGGESTED ANSWER:
)he proceeds o$ the insurance policy shall
be a%arded to the <1)A)< o$ Cuan de la
Cru6. ;urita& the common4 la%4%i$e& is
dis+ualifed as the benefciary o$ the
deceased because o$ illicit relation bet%een
the deceased and ;urita& the desi!nated
benefciary. 'ue to such illicit
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2005
relation& ;urita cannot be a donee o$ the
deceased. /ence& she cannot also be his
benefciary.
Concealment2 (aterial Concealment (200))
A applied $or a non4medical li$e
insurance. )he insured did not in$orm
the insurer that one %ee. prior to his
application $or insurance& he %as
e=amined and confned at 1t. >u.e3s
/ospital %here he %as dia!nosed $or
lun! cancer. )he insured soon therea$ter
died in a plane crash. Is the insurer
liable considerin! that the $act concealed
had no bearin! %ith the cause o$ death
o$ the insured? Why? (@%)
SUGGESTED ANSWER:
7o. )he concealed $act is material to the
approal and issuance o$ the insurance
policy. It is %ell settled that the insured
need not die o$ the disease he $ailed to
disclose to the insurer. It is su-icient
that his nondisclosure misled the insurer
in $ormin! his estimate o$ the ris.s o$
the proposed insurance policy or in
ma.in! in+uiries.
Concealment2 (aterial Concealment: 7ncontesta.ilit%
Clause ()**3)
Bn 1eptember #(& 2HH?& )an too. a li$e
insurance policy $rom ;hilam. )he policy
%as issued on 7oember :& 2HH?. /e
died on April #:& 2HH# o$ hepatoma. )he
insurance company denied the
benefciaries3 claim and rescinded the
policy by reason o$ alle!ed
misrepresentation and concealment o$
material $acts made by )an in his
application. It returned the premiums
paid.
)he benefciaries contend that the
company had no ri!ht to rescind the
contract as rescission must be done
durin! the li$etime o$ the insured %ithin
t%o years and prior to the commencement
o$ the action.
Is the contention o$ the benefciaries
tenable?
SUGGESTED ANSWER:
7o. )he incontestability clause does not
apply. )he insured dies %ithin less than
t%o years $rom the issuance o$ the policy
on 1eptember #(& 2HH?. )he insured died
on April #:& 2HH#& or less than # years
$rom 1eptember #(& 2HH?.
)he ri!ht o$ the insurer to rescind is
only lost i$ the benefciary has
commenced an action on the policy. )here
is no such action in this case. .?an " C$ 1'( s
1(37
Concealment2 (aterial Concealment: 7ncontesta.ilit%
Clause ()**4)
Cuan procured a non4medical li$e
insurance $rom Food >i$e Insurance. /e
desi!nated his %i$e& ;etra& as the
benefciary. <arlier& in his application in
response to the +uestion as to %hether or
not he had eer been hospitali6ed& he
ans%ered in the ne!atie. /e $or!ot to
mention his confnement at the Midney
/ospital.
A$ter Cuan died in a plane crash& ;etra
fled a claim %ith Food >i$e. 'iscoerin!
Cuan3s preious hospitali6ation& Food >i$e
re"ected ;etra3s claim on the !round o$
concealment and misrepresentation. ;etra
sued Food >i$e& ino.in! !ood $aith on part
o$ Cuan.
Mercantile Law Bar Examination Q & A (1990-2006) Page 51 of 103
Will ;etra3s suit prosper? <=plain.
SUGGESTED ANSWER:
7o& ;etra3s suit %ill not prosper (assumin!
that the policy o$ li$e insurance has been
in $orce $or a period o$ less than # years
$rom the date o$ its issue). )he matters
%hich Cuan $ailed to disclose %as material
and releant to the approal and issuance
o$ the insurance policy. )hey %ould hae
a-ected Food >i$e3s action on his
application& either by approin! it %ith the
correspondin! ad"ustment $or a hi!her
premium or re"ectin! the same. Aoreoer&
a disclosure may hae %arranted a
medical e=amination o$ Cuan by Food >i$e
in order $or it to reasonably assess the
ris. inoled in acceptin! the application.
In any case& !ood $aith is no de$ense in
concealment. )he %aier o$ a medical
e=amination in the Unon4medical3 li$e
insurance $rom Food >i$e ma.es it een
more necessary that Cuan supply complete
in$ormation about his preious
hospitali6ation $or such in$ormation
constitutes an important $actor %hich Food
>i$e ta.es into consideration in decidin!
%hether to issue the policy or not. .See
Sunlife $ssurance Co of Canada " C$ %R
1,0130, 9une 22, 1660 2(0 s 26+7
I$ the policy o$ li$e insurance has been in
$orce $or a period o$ # years or more $rom
the date o$ its issue (on %hich point the
!ien $acts are a!ue) then Food >i$e can
no lon!er proe that the policy is oid ab
initio or is rescindible by reason o$ the
$raudulent concealment or
misrepresentation o$ Cuan ( 1ec 4J Ins
Code)
Concealment2 (aterial Concealment: 7ncontesta.ilit%
Clause ()**+)
)he assured ans%ers 7o to the
+uestion in the application $or a li$e
policy* Are you su-erin! $rom any $orm o$
heart illness? In $act& the assured has
been a heart patient $or many years. Bn I
1ep 2HH2& the assured is .illed in a plane
crash. )he insurance company denies the
claim $or insurance proceeds and returns
the premiums paid.
Is the decision o$ the insurance company
"ustifed?
SUGGESTED ANSWER:
Assumin! that the incontestability clause
does not apply because the policy has not
been in $orce $or # years& $rom the date o$
issue& durin! the li$etime o$ the insured&
the decision o$ the insurance company not
to pay is "ustifed. )here %as $raudulent
concealment. It is not material that the
insured died o$ a di-erent cause than the
$act concealed. )he $act concealed& that is
heart ailment& is material to the
determination by the insurance company
%hether or not to accept the application
$or insurance and to re+uire the medical
e=amination o$ the insured.
/o%eer& i$ the incontestability clause
%hich applies to the insurance policy
coerin! the li$e o$ the insured had been in
$orce $or # years $rom issuance thereo$& the
insurance company %ould not be "ustifed in
denyin! the claim $or proceeds o$ the
insurance and in returnin! the premium
paid. In that case& the insurer cannot proe
the policy oid ab initio or rescindible by
reason o$ $raudulent concealment or
misrepresentation o$ the insured.
Concealment2 (aterial Concealment2 7ncontesta.ilit%
Clause ()**))
Atty 9oberto too. out a li$e insurance
policy $rom the 'ana Ins Co ('IC) on 2
1ep 2HJH. Bn (2 Au! 2HH?& 9oberto
died. 'IC re$used to pay his
benefciaries because it discoered that
9obert had misrepresented certain
material $acts in his application. )he
benefciaries sued on the basis that 'IC
can contest the alidity o$ the insurance
policy only %ithin # years $rom the date
o$ issue and durin! the li$etime o$ the
insured. 'ecide the case.
SUGGESTED ANSWER:
I %ould rule in $aor o$ the insurance
company. )he incontestability clause&
applies only i$ the policy had been in
e-ect $or at least # years. )he # year
period is counted $rom the time the
insurance becomes e-ectie until the
death o$ the insured and not therea$ter
.?an " C$ %R (+,(( 269un16+67
A8TERNAT7>E ANSWER:
I %ould rule in $aor o$ the insurance
company. Althou!h an insurer may not
rescind the contract on !round o$
misrepresentation a$ter an action is
commenced $or recoery under the policy&
the insurer is not precluded $rom
ino.in! the !round o$ misrepresentation
as a de$ense in the action $or recoery.
)his is alri!ht since the bar problem is not
coered yet by the incontestability clause.
Concealment2 (aterial Concealment2 7ncontesta.ilit%
Clause ()**:)
9enato %as issued a li$e insurance policy
on Canuary #& 2HH?. /e concealed the
$act that ( years prior to the issuance o$
his li$e insurance policy& he had been
seein! a doctor about his heart ailment.
Bn Aarch 2& 2HH#& 9enato died o$ heart
$ailure. Aay the heirs fle a claim on the
proceeds o$ the li$e insurance policy o$
9enato? (@%)
SUGGESTED ANSWER:
0es. )he li$e insurance policy in +uestion
%as issued on Canuary H& 2HH?. Aore
than # years had elapsed %hen 9enato&
the insured& died on Aarch 2& 2HH#. )he
incontestability clause applies.
INC$N!#.!A&I/I!0 C/A1.#
)he insurer has t%o years $rom the date
o$ issuance o$ the insurance contract or o$
its last reinstatement %ithin %hich to
contest the policy& %hether or not& the
insured still lies %ithin such period.
A$ter t%o years& the de$enses o$
concealment or misrepresentation& no
matter ho% patent or %ell $ounded& no
lon!er lie.
7nsura.le 7nterest: ,an- De$osit (2000)
5' has a ban. deposit o$ hal$ a million
pesos. 1ince the limit o$ the insurance
coera!e o$ the ;hilippine 'eposit
Insurance Corp (;'IC) (9A (@H2) is only
one tenth o$ 5'3s deposit& he %ould li.e
some protection $or the e=cess by ta.in!
out an insurance a!ainst all ris.s or
contin!encies o$ loss arisin! $rom any
unsound or unsa$e ban.in! practices
includin! un$oreseen aderse e-ects o$
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the continuin! crisis inolin! the ban.in!
and fnancial sector in the Asian re!ion.
'oes 5' hae an insurable interest %ithin
the meanin! o$ the Insurance Code o$ the
;hilippines (;'24:?)? (#%)
SUGGESTED ANSWER:
0es. 5' has insurable interest in his
ban. deposit. In case o$ loss o$ said
deposit& more particularly to the e=tent o$
the amount in e=cess o$ the limit coered
by the ;'IC Act& ;5' %ill be damnifed.
/e %ill su-er pecuniary loss o$
;(??&???.??& that is& his ban. deposit o$
hal$ a million pesos minus ;#??&???.??
%hich is the ma=imum amount recoerable
$rom the ;'IC.
7nsura.le 7nterest: "u.lic Enem% (2000)
Aay a member o$ the AI>8 or its
brea.a%ay !roup& the Abu 1ayya$& be
insured %ith a company licensed to do
business under the Insurance Code o$ the
;hils (;' 24:?)? <=plain. ((%)
SUGGESTED ANSWER:
A member o$ the AI>8 or the Abu 1ayya$
may be insured %ith a company licensed
to do business under the Insurance Code
o$ the ;hils. What is prohibited to be
insured is a public enemy. A public enemy
is a citi6en or national o$ a country %ith
%hich the ;hilippines is at %ar. 1uch
member o$ the AI>8 or the Abu 1ayya$ is
not a citi6en or national o$ another
country& but o$ the ;hilippines.
7nsura.le 7nterest: Se$arate 7nsura.le 7nterest ()***)
A businessman in the !rocery business
obtained $rom 8irst Insurance an
insurance policy $or ;@A to $ully coer his
stoc.s4in4trade $rom the ris. o$ fre.
)hree months therea$ter& a fre o$
accidental ori!in bro.e out and completely
destroyed the !rocery includin! his
stoc.s4in4trade. )his prompted the
businessman to fle %ith 8irst Insurance a
claim $or fe million pesos representin!
the $ull alue o$ his !oods.
8irst Insurance denied the claim because
it discoered that at the time o$ the loss&
the stoc.s4in4trade %ere mort!a!ed to a
creditor %ho li.e%ise obtained $rom 1econd
Insurance Company fre insurance coera!e
$or the stoc.s at their $ull alue o$ ;@A.
a$ Aay the businessman and the creditor
obtain separate insurance coera!es
oer the same stoc.s4 in4trade? <=plain
((%)
b$ 8irst Insurance re$used to pay claimin!
that double insurance is contrary to
la%. Is this contention tenable? ((%)
c$ 1uppose you are the Cud!e& ho% much
%ould you allo% the businessman and
the creditor to recoer $rom their
respectie insurers. <=plain ((%)
SUGGESTED ANSWER:
a$ 0es. )he businessman& as o%ner& and the
creditor& as mort!a!ee& hae separate
insurable interests in the same stoc.s4in4
trade. <ach may insure such interest to
protect his o%n separate interest.
b$ )he contention o$ 8irst Insurance that
double insurance is contrary to la% is
untenable. )here is no la% proidin! that
double insurance is ille!al per se.
Version 1990-2006 U pdated by
Dondee
Version 1990-2003 Arranged by SULAW Class
2005
Aoreoer& in the problem at hand& there
is no double insurance because the
insured %ith the 8irst Insurance is
di-erent $rom the insured %ith the
1econd Insurance Company. )he same is
true %ith respect to the interests insured
in the t%o policies.
c$ As Cud!e& I %ould allo% the
businessman to recoer his total loss o$
;@A representin! the $ull alue o$ his
!oods %hich %ere lost throu!h fre. As to
the creditor& I %ould allo% him to recoer
the amount to the e=tent o$ or e+uialent
to the alue o$ the credit he e=tended to
the businessman $or the stoc.s4in4trade
%hich %ere mort!a!ed by the
businessman.
7nsura.le 7nterest2 E5uita.le 7nterest ()**))
A piece o$ machinery %as shipped to Ar
;ablo on the basis o$ CP8 Aanila. ;ablo
insured said machinery %ith the )ala!a
Aerchants Ins Co ()amic) $or loss or
dama!e durin! the oya!e. )he essel
san. en route to Aanila. ;ablo then fled
a claim %ith )amic %hich %as denied $or
the reason that prior to delier& ;ablo
had no insurable interest. 'ecide the
case.
SUGGESTED ANSWER:
;ablo had an e=istin! insurable interest
on the piece o$ machinery he bou!ht.
)he purchase o$ !oods under a
per$ected contract o$ sale already ests
e+uitable interest on the property in
$aor o$ the buyer een %hile it is
pendin! deliery .Fili-ino Merchants ns
Co " C$ %R +01(( 2+&o"16+67
7nsura.le 7nterest2 8i&e s! "ro$ert% 7nsurance ()**+)
a$ A obtains a fre insurance on his
house and as a !enerous !esture
names his nei!hbor as the benefciary.
I$ A3s house is destroyed by fre& can 5
success$ully claim a!ainst the policy?
b$ A obtains insurance oer his li$e and
names his nei!hbor 5 the benefciary
because o$ A3s secret loe $or 5. I$ A
dies& can 5 success$ully claim a!ainst
the policy?
SUGGESTED ANSWER:
a$ 7o. In property insurance& the
benefciary must hae insurable interest
in the property insured. (1ec 2J Ins
Code). 5 does not hae insurable interest
in the house insured.
b$ 0es. In li$e insurance& it is not re+uired
that the benefciary must hae insurable
interest in the li$e o$ the insured. It %as
the insured himsel$ %ho too. the policy on
his o%n li$e.
7nsura.le 7nterest2 8i&e s! "ro$ert% 7nsurance (2000)
I1& an elderly bachelor %ith no .no%n
relaties& obtained li$e insurance coera!e
$or ;#@?&???.?? $rom 1tarbrite Insurance
Corporation& an entity licensed to en!a!e
in the insurable business under the
Insurance Code o$ the ;hilippines
(;'24:?). /e also insured his residential
house $or t%ice that amount %ithin the
same corporation. /e immediately
assi!ned all his ri!hts to the insurance
proceeds to 5L& a $riend4companion liin!
%ith him. )hree years later& I1 died in a
fre that !utted his insured house t%o
days a$ter he had sold it. )here is
Mercantile Law Bar Examination Q & A (1990-2006) Page 53 of 103
no eidence o$ suicide or arson or
inolement o$ 5L in these eents. 5L
demanded payment o$ the insurance
proceeds $rom the t%o policies& the
premiums $or %hich I1 had been $aith$ully
payin! durin! all the time he %as alie.
1tarbrite re$used payment& contendin! that
5L had no insurable interest and
there$ore %as not entitled to receie the
proceeds $rom I13s insurance coera!e on
his li$e and also on his property. Is
1tarbrite3s contention alid? <=plain? (@%)
SUGGESTED ANSWER:
1tarbrite is correct %ith respect to the
insurance coera!e on the property o$ I1.
)he benefciary in the property insurance
policy or the assi!nee thereo$ must hae
insurable interest in the property
insured. 5L& a mere $riend4companion o$
I1& has no insurable interest in the
residential house o$ I1. 5L is not entitled
to receie the proceeds $rom I13s
insurance on his property.
As to the insurance coera!e on the li$e
o$ I1& 5L is entitled to receie the
proceeds. )here is no re+uirement that 5L
should hae insurable interest in the li$e o$
I1. It %as I1 himsel$ %ho too. the
insurance on his o%n li$e.
7nsura.le 7nterest2 8i&e s! "ro$ert% 7nsurance
(2002) Distinguis& insurable interest in
property insurance fro' insurable interest in
life insurance* #N$
SUGGESTED ANSWER:
a$ In property insurance& the e=pectation
o$ beneft must hae a le!al basis. In
li$e insurance& the e=pectation o$
beneft to be deried $rom the
continued e=istence o$ a li$e need not
hae any le!al basis.
b$ In property insurance& the actual alue
o$ the interest therein is the limit o$
the insurance that can alidly be
placed thereon. In li$e insurance& there
is no limit to the amount o$ insurance
that may be ta.en upon li$e.
c$ In property insurance& an interest
insured must e=ist %hen the insurance
ta.es e-ect and %hen the loss occurs
but need not e=ist in the meantime. In
li$e insurance& it is enou!h that
insurable interest e=ists at the time
%hen the contract is made but it need
not e=ist at the time o$ loss.
7nsura.le 7nterest2 "ro$ert% 7nsurance ()**3)
In a ciil suit& the Court ordered 5en"ie to
pay 7at ;@??&???.??. )o e=ecute the
"ud!ment& the sheri- leied upon 5en"ie3s
re!istered property (a parcel o$ land and
the buildin! thereon)&and sold the same at
public auction to 7at& the hi!hest bidder.
)he latter& on Aarch 2J& 2HH#& re!istered
%ith the 9e!ister o$ 'eeds the certifcate
o$ sale issued to him by the sheri-.
Aean%hile& on Canuary #I& 2HH(& 5en"ie
insured %ith Farapal Insurance $or
;2&???&???.?? the same buildin! that %as
sold at public auction to 7at. 5en"ie $ailed
to redeem the property by Aarch 2J& 2HH(.
Bn Aarch 2H& 2HH(& a fre ra6ed the
buildin! to the !round. Farapal Insurance
re$used to ma.e !ood its obli!ation to
5en"ie under the insurance contract.
/$ Is Farapal Insurance le!ally "ustifed
in re$usin! payment to 5en"ie?
!$ Is 7at entitled to collect on the insurance
policy?
SUGGESTED ANSWER:
/$ 0es. At the time o$ the loss& 5en"ie
%as no lon!er the o%ner o$ the property
insured as he $ailed to redeem the
property. )he la% re+uires in property
insurance that a person can recoer the
proceeds o$ the policy i$ he has insurable
interest at the time o$ the issuance o$ the
policy and also at the time %hen the loss
occurs. At the time o$ fre& 5en"ie no
lon!er had insurable interest in the
property insured.
!$ 7o. While at the time o$ the loss he
had insurable interest in the buildin!& as
he %as the o%ner thereo$& 7at did not
hae any interest in the policy. )here
%as no automatic trans$er clause in the
policy that %ould !ie him such interest
in the policy.
7nsura.le 7nterest2 "ro$ert% 7nsurance (200))
CT& o%ner o$ a condominium unit& insured
the same a!ainst fre %ith the L0S
Insurance Co.& and made the loss payable
to his brother& A>T. In case o$ loss by
fre o$ the said condominium unit& %ho
may recoer on the fre insurance policy?
1tate the reason(s) $or your ans%er. (@%)
SUGGESTED ANSWER:
CT can recoer on the fre insurance policy
$or the loss o$ said condominium unit. /e
has the insurable interest as o%ner4
insured. As benefciary in the fre insurance
policy& A>T cannot recoer on the fre
insurance policy. 8or the benefciary to
recoer on the fre or property insurance
policy& it is re+uired that he must hae
insurable interest in the property insured.
In this case& A>T does not hae
insurable interest in the condominium
unit.
7nsurance2 Cas# 0 Carr% ,asis (2003)
What is meant by cash and carry in the
business o$ insurance?
SUGGESTED ANSWER:
7nsurance2 Co?7nsurance s! Re?7nsurance ()**3)
'istin!uish co4insurance $rom re4insurance.
SUGGESTED ANSWER:
CB4I71,9A7C< is the percenta!e in the
alue o$ the insured property %hich the
insured himsel$ assumes or underta.es to
act as insurer to the e=tent o$ the
defciency in the insurance o$ the insured
property. In case o$ loss or dama!e& the
insurer %ill be liable only $or such
proportion o$ the loss or dama!e as the
amount o$ insurance bears to the
desi!nated percenta!e o$ the $ull alue o$
the property insured.
9<I71,9A7C< is %here the insurer
procures a third party& called the
reinsurer& to insure him a!ainst liability by
reason o$ such ori!inal insurance.
5asically& a
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2005
Mercantile Law Bar Examination Q & A (1990-2006) Page 55 of 103
reinsurance is an insurance a!ainst liability
%hich the ori!inal insurer may incur in
$aor o$ the ori!inal insured.
7nsurance2 Dou.le 7nsurance (2001)
When does double insurance e=ist? (#%)
SUGGESTED ANSWER:
,nder 1ection H( o$ the Insurance Code&
there is double insurance %hen there is
oer4insurance %ith t%o or more
companies& coerin! the same property& the
same insurable interest and the same
ris.. 'ouble insurance e=ists %here the
same person is insured by seeral
insurers separately in respect o$ the same
sub"ect matter and interests. .%eagonia "#
Court of $--eals, %#R# &o# 11((2', Fe*ruar5
6, 16607
7nsurance2 Dou.le 7nsurance2 e&&ect ()**3)
Culie and Alma $ormed a business
partnership. ,nder the business name
;ino 1hop& the partnership en!a!ed in a
sale o$ construction materials. Culie
insured the stoc.s in trade o$ ;ino 1hop
%ith WFC Insurance Co $or ;(@?th.
1ubse+uently& she a!ain !ot an insurance
contract %ith 91I $or ;2m and then $rom
<IC $or ;#??th. A fre o$ un.no%n ori!in
!utted the store o$ the partnership. Culie
fled her claims %ith the three insurance
companies. /o%eer& her claims %ere
denied separately $or breach o$ policy
condition %hich re+uired the insured to
!ie notice o$ any insurance e-ected
coerin! the stoc.s in trade. Culie %ent to
court and contended that she should not
be blamed $or the omission& alle!in! that
the insurance a!ents $or WFC& 91I and
<IC .ne% o$ the e=istence o$ the
additional insurance coera!es and that
she %as not in$ormed about the
re+uirement that such other or additional
insurance should be stated in the policy.
Is the contention o$ Culie tenable? <=plain.
Aay she recoer on her fre insurance
policies? <=plain.
SUGGESTED ANSWER:
/$ 7o. An insured is re+uired to disclose
the other insurances coerin! the sub"ect
matter o$ the insurance bein! applied $or.
.&e4 3ife :nt " C$ 2,' s 6667
!$ 7o& because she is !uilty o$ iolation o$ a
%arrantyO condition.
7nsurance2 E&&ects2 "a%ment o& "remiums .% 7nstallment
(2004)
)he ;eninsula Insurance Company o-ered
to insure 8rancisD brand ne% car a!ainst all
ris.s in the sum o$ ;I Aillion $or 2 year.
)he policy %as issued %ith the premium
f=ed at 2:?&???.?? payable in : months.
8rancis only paid the frst t%o months
installments. 'espite demands& he $ailed to
pay the subse+uent installments. 8ie
months a$ter the issuance o$ the policy& the
ehicle %as carnapped. 8rancis fled %ith
the insurance company a claim $or its
alue. /o%eer& the company denied his
claim on the !round that he $ailed to pay
the premium resultin! in the cancellation o$
the policy.
Can 8rancis recoer $rom the ;eninsula
Insurance Company? (@%)
SU44ESTE) ANSWER(
Version 1990-2006 U pdated by
Dondee
Version 1990-2003 Arranged by SULAW Class
2005
0es& %hen insured and insurer hae
a!reed to the payment o$ premium by
installments and partial payment has been
made at the time o$ loss& then the insurer
becomes liable. When the car loss
happened on the @th month& the si=
months a!reed period o$ payment had not
yet elapsed .DC/B %eneral nsurance "#
Masagana ?ela!art, %#R# &o# 13'1'2, $-ril
(, 2,,17. 8rancis can recoer $rom
;eninsula Insurance Company& but the
latter has the ri!ht to deduct the amount
o$ unpaid premium $rom the insurance
proceeds.
7nsurance2 8i&e 7nsurance2 Assi'nment o& "olic% ()**))
)he policy o$ insurance upon his li$e& %ith
a $ace alue o$ ;2??th %as assi!ned by
Cose& a married man %ith # le!itimate
children& to his nephe% 0 as security $or a
loan o$ ;@?th. /e did not !ie the insurer
any %ritten notice o$ such assi!nment
despite the e=plicit proision to that
e-ect in the policy. Cose died. ,pon the
claim on the policy by the assi!nee& the
insurer re$used to pay on the !round that
it %as not notifed o$ the assi!nment.
,pon the other hand& the heirs o$ Cose
contended that 0 is not entitled to any
amount under the policy because the
assi!nment %ithout due notice to the
insurer %as oid. 9esole the issues.
SUGGESTED ANSWER:
A li$e insurance is assi!nable. A
proision& ho%eer& in the policy statin!
that %ritten notice o$ such an assi!nment
should be !ien to the insurer is alid
(1ecs 2J242J# Ins Code). )he $ailure o$
the notice o$ assi!nment %ould thus
preclude the assi!nee $rom claimin!
ri!hts under the policy. )he $ailure o$
notice did not& ho%eer& aoid the policyK
hence& upon the death o$ Cose& the
proceeds %ould& in the absence o$ a
desi!nated benefciary& !o to the estate o$
the insured. )he estate& in turn& %ould be
liable $or the loan o$ ;@?&??? o%in! in
$aor o$ 0.
7nsurance2 "er&ection o& 7nsurance Contracts (2003)
Cosie Fatbonton obtained $rom Warranty
Insurance Corporation a comprehensie
motor ehicle insurance to coer her brand
ne% automobile. 1he paid& and the insurer
accepted payment in chec.. 5e$ore the
chec. could be encashed& Cosie %as
inoled in a motor ehicle accident %here
her car became a total %rec.. 1he sou!ht
payment $rom the insurer. Could the
insurer be made liable under the
insurance coera!e? (:%)
SUGGESTED ANSWER:
(per 'ondee) 0es& because there %as a
per$ected contract o$ insurance the
moment there is a meetin! o$ the minds
%ith respect to the ob"ect and the cause o$
payment. )he payment o$ chec. is a alid
payment unless upon encashment the
chec. bounced.
7nsurance2 "ro$ert% 7nsurance2 "rescri$tion o& Claims
()**4)
9obin insured his buildin! a!ainst fre
%ith <8F Assurance. )he insurance policy
contained the usual stipulation that any
action or suit must be fled %ithin one
year a$ter the re"ection o$ the claim.
Mercantile Law Bar Examination Q & A (1990-2006) Page 55 of 103
A$ter his buildin! burned do%n& 9obin fled
his claim $or fre loss %ith <8F. Bn 8eb #J&
2HH4& <8F denied 9obin3s claim. Bn April
(& 2HH4& 9obin sou!ht reconsideration o$
the denial& but <8F reiterated its position.
Bn Aarch #?& 2HH@& 9obin commenced
"udicial action a!ainst <8F.
1hould 9obin3s action be !ien due course?
<=plain.
SUGGESTED ANSWER:
7o& 9obin3s action should not be !ien
due course. Is flin! o$ the re+uest $or
reconsideration did not suspend the
runnin! o$ the prescriptie period o$ one
year stipulated in the insurance policy.
)hus& %hen robin commenced "udicial
action a!ainst <8F Assurance on Aarch
#?& 2HH@& his ability to do so had already
prescribed. )he one4year period is counted
$rom 8eb #J& 2HH4 %hen <8F denied
9obin3s claim& not $rom the date
(presumably a$ter April (& 2HH4) %hen <8F
reiterated its position denyin! 9obin3s
claim. )he reason $or this rule is to insure
that claims a!ainst insurance companies
are promptly settled and that insurance
suits are brou!ht by the insured %hile the
eidence as to the ori!in and cause o$ the
destruction has not yet disappeared. .See
Sun ns OEice 3td " C$ gr +6'(1, Mar 13 61
160s1637
7nsurance2 Return o& "remiums (2000)
7ame at least three instances %hen an
insured is entitled to a return o$ the
premium paid.
SUGGESTED ANSWER:
)hree instances %hen an insured is entitled
to a return o$ premium paid are*
/* )o the W/B>< ;9<AI,A& i$ no part o$
his interest in the thin! insured be
e=posed to any o$ the perils insured
a!ainst.
!* Where the insurance is made $or a
defnite period o$ time and the insured
surrenders his policy& to such portion
o$ the premium as corresponds %ith the
une=pired time at a pro rata rate&
unless a short period rate has been
a!reed upon and appears on the $ace o$
the policy& a$ter deductin! $rom the
%hole premium any claim $or loss or
dama!e under the policy %hich has
preiously accrued.
:* When the contract is oidable on
account o$ the $raud or
misrepresentation o$ the insurer or o$
his a!ent or on account o$ $acts the
e=istence o$ %hich the insured %as
i!norant %ithout his $aultK or %hen& by
any de$ault o$ the insured other than
actual $raud& the insurer neer incurred
any liability under the policy.
A8TERNAT7>E 7NSTANCE:
In case o$ an oer insurance by seeral
insurers& the insured is entitled to a
ratable return o$ the premium&
proportioned to the amount by %hich the
a!!re!ate sum insured in all the policies
e=ceeds the insurable alue o$ the thin! at
ris..
7nsure62 Acci6ent "olic% (2003)
C7I insure 1AA under a homeo%nerDs
policy a!ainst claims $or accidental in"uries
by nei!hbors. 1AADs minor
son& 5B0& in"ured ( children o$ ;B1& a
nei!hbor& %ho sued 1AA $or dama!es.
1AADs la%yer %as A))& %ho %as paid
$or his serices by the insurer $or
reportin! periodically on the case to
C7I. In one report& A)) disclosed to
C7I that a$ter his inesti!ations& he
$ound the in"uries to the ( children not
accidental but intentional.
1AA lost the case in court& and ;B1 %as
a%arded one million pesos in dama!es
%hich he sou!ht to collect $rom the
insurer. 5ut C7I used A))s report to deny
the claim on the !round that the in"uries
to ;B1Ds ( children %ere intentional&
hence e=cluded $rom the policyDs
coera!e. ;B1 countered that C7I %as
estopped $rom usin! A))s report because
it %as unethical $or A)) to proide
pre"udicial in$ormation a!ainst his client
to the insurer& C7I.
Who should preail* the claimant& ;B1K
or the insurer& C7I? 'ecide %ith reasons
brieEy. (@%)
SUGGESTED ANSWER:
C7I is not estopped $rom usin! A))Ds
report& because C7I& in the frst place&
commissioned it and paid A)) $or it. Bn
the other hand& A)) has no conEict o$
interest because 1AA and C7I are on
the same side V their interests bein!
con!ruent %ith each other& namely& to
oppose ;B1Ds claim. It cannot be said that
A)) has used the in$ormation to the
disadanta!e or pre"udice o$ 1AA.
/o%eer& in Fin!an %eneral $ssurance
Cor-# "# Court of $--eals, 213 SCR$ (63
.16627, it %as e=plained that there is no
NaccidentN in the conte=t o$ an accident
policy& i$ it is the natural result o$ the
insuredDs oluntary act& unaccompanied by
anythin! un$oreseen e=cept the in"ury.
)here is no accident %hen a deliberate act
is per$ormed& unless some additional and
un$oreseen happenin! occurs that brin!s
about the in"ury. )his element o$
deliberateness is not clearly sho%n $rom
the $acts o$ the case& especially
considerin! the $act that 5B0 is a minor&
and the in"ured parties are also children.
Accordin!ly& it is possible that C7I may
not prosper. A))Ds report is not conclusie
on ;B1 or the court.
7nsure62 Acci6ent s! Suici6e ()**0)
>uis %as the holder o$ an accident
insurance policy e-ectie 7o 2& 2HJJ to
Bct (2& 2HJH. At a bo=in! contest held on
Can 2& 2HJH and sponsored by his
employer& he slipped and %as hit on the
$act by his opponent so he $ell and his
head hit one o$ the posts o$ the bo=in!
rin!. /e %as rendered unconscious and
%as dead on arrial at the hospital due to
intra4cranial hemorrha!e.
Can his $ather %ho is a benefciary under
said insurance policy success$ully claim
indemnity $rom the insurance company?
<=plain.
SUGGESTED ANSWER:
0es& the $ather %ho is a benefciary under
the accidental insurance can success$ully
claim indemnity $or the death o$ the
insured. Clearly& the pro=imate cause o$
death %as the bo=in! contest. 'eath
sustained in a bo=in! contest is an
accident# .)e la Cru8 " Ca-ital ns A Suret5 Co
1's0067
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2005
Mercantile Law Bar Examination Q & A (1990-2006) Page 56 of 103
or %ill$ul e=posure to needless peril %hich
are e=cepted
7nsure62 Acci6ent s! Suici6e ()**3)
1 Insurance Co issued a personal accident
policy to 5ob )an %ith a $ace alue o$
;@??th. In the eenin! o$ 1ep @& 2HH#&
a$ter his birthday party& )an %as in a
happy mood but not drun.. /e %as
playin! %ith his hand !un& $rom %hich he
preiously remoed the ma!a6ine. As his
secretary %as %atchin! teleision& he
stood in $ront o$ her and pointed the !un
at her. 1he pushed it aside and said that it
may be loaded. /e assured her that it %as
not and then pointed it at his temple.
)he ne=t moment& there %as an e=plosion
and )an slumped to the Eoor li$eless.
)he %i$e o$ the deceased sou!ht payment
on the policy but her claim %as re"ected.
)he insurance company a!reed that there
%as no suicide. /o%eer& it %as the
submission o$ the insurance company that
there %as no accident. In support thereo$&
it contended a) that there %as no
accident %hen a deliberate act %as
per$ormed unless some additional&
une=pected& independent and un$oreseen
happenin! occur %hich produces or
brin!s about the in"ury or deathK and b)
that the insured %ill$ully e=posed himsel$
to needless peril and thus remoed himsel$
$rom the coera!e o$ the insurance policy.
Are the t%o contentions o$ the insurance
company tenable? <=plain.
SUGGESTED ANSWER:
7o. )hese t%o contentions are not tenable.
)he insurer is liable $or in"ury or death
een due to the insured3s !ross
ne!li!ence. )he $act that the insured
remoed the ma!a6ine $rom the hand !un
means that the insured did not %ill$ully
e=pose himsel$ to needless peril. At most&
the insured is only !uilty o$ ne!li!ence
.Sun ns " C$ 211 s 00(7
7nsure62 Acci6ent s! Suici6e ()**1)
1un4Aoon Insurance issued a ;ersonal
Accident ;olicy to /enry 'y %ith a $ace
alue o$ ;@??th. A proision in the policy
states that the company shall not be liable
in respect o$ bodily in"ury3 conse+uent
upon the insured person attemptin! to
commit suicide or %ill$ully e=posin! himsel$
to needless peril e=cept in an attempt to
sae human li$e. 1i= months later /enry
'y died o$ a bullet %ound in his head.
Inesti!ation sho%ed that one eenin!
/enry %as in a happy mood althou!h he %as
not drun.. /e %as playin! %ith his
hand!un $rom %hich he had preiously
remoed its ma!a6ine. /e pointed the !un
at his sister %ho !ot scared. /e assured
her it %as not loaded. /e then pointed the
!un at his temple and pulled the tri!!er.
)he !un fred and /enry slumped on the
Eoor.
/enry3s %i$e 5eerly& as the desi!nated
benefciary& sou!ht to collect under the
policy. 1un4Aoon Insurance re"ected her
claim on the !round that the death o$ /enry
%as not accidental. 5eerly sued the insurer.
'ecide and 'iscuss $ully.
SUGGESTED ANSWER:
5eerly can recoer the proceeds o$ the
policy $rom the insurer. )he death o$ the
insured %as not due to suicide
Version 1990-2006 U pdated by
Dondee
Version 1990-2003 Arranged by SULAW Class
2005
ris.s. )he insured3s act %as purely an
act o$ ne!li!ence %hich is coered by the
policy and $or %hich the insured !ot the
insurance $or his protection. In $act& he
remoed the ma!a6ine $rom the !un and
%hen he pointed the !un to his temple he
did so because he thou!ht that it %as
sa$e $or him to do so. /e did so to assure
his sister that the !un %as harmless.
)here is none in the policy that %ould
reliee the insurer o$ liability $or the
death o$ the insured since the death %as
an accident.
7nsurer: E&&ects: Seeral 7nsurers (2001)
What is the nature o$ the liability o$ the
seeral insurers in double insurance?
<=plain. (#%)
SUGGESTED ANSWER:
)he nature o$ the liability o$ the seeral
insurers in double insurance is that
each insurer is bound to the contribute
ratably to the loss in proportion to the
amount $or %hich he is liable under his
contract as proided $or by 1ec H4 o$ IC;
par. )he ratable contribution o$ each o$
each insurer %ill be determined based
on the $ollo%in! $ormula* AAB,7) B8
;B>IC0 diided by )B)A> I71,9A7C<
)AM<7 multiplied by >B11 X >IA5I>I)0
B8 )/< I71,9<9.
A8TERNAT7>E ANSWER:
<ach insurer is bound& as bet%een
himsel$ and other insurers& to contribute
ratably to the loss in proportion to the
amount $or %hich he is liable under his
contract. (1ec. H4& Insurance Code)
7nsurer2 3r6 "art% 8ia.ilit% ()**4)
While driin! his car alon! <'1A& Cesar
sides%iped 9oberto& causin! in"uries to
the latter& 9oberto sued Cesar and the
third party liability insurer $or dama!es
andOor insurance proceeds. )he insurance
company moed to dismiss the complaint&
contendin! that the liability o$ Cesar has
not yet been determined %ith fnality.
a$ Is the contention o$ the insurer correct?
<=plain.
b$ Aay the insurer be held liable %ith
Cesar?
SUGGESTED ANSWER:
7o& the contention o$ the insurer is not
correct. )here is no need to %ait $or the
decision o$ the court determinin! Cesar3s
liability %ith fnality be$ore the third party
liability insurer could be sued. )he
occurrence o$ the in"ury to 9oberto
immediately !ae rise to the liability o$ the
insurer under its policy. In other %ords&
%here an insurance policy insures directly
a!ainst liability& the insurer3s liability
accrues immediately upon the occurrence
o$ the in"ury or eent upon %hich the
liability depends .Sher!an Shafer " 9udge
R?C Olonga-o Cit5 Branch '0 %R l2'++(+, &o"
1( ++ 16's3+67
)he insurer cannot be held solidarily
liable %ith Cesar. )he liability o$ the
insurer is based on contract %hile that o$
Cesar is based on tort. I$ the insurer
%ere solidarily liable %ith Cesar& it could
be made to pay more than the amount
stated in the policy. )his %ould& ho%eer&
be contrary to the principles underlyin!
insurance contracts. Bn the other hand& i$
the insurer %ere solidarily liable %ith
Cesar and it is made to pay only up to the
amount
Mercantile Law Bar Examination Q & A (1990-2006) Page 5- of 103
state. in t&e insurance policyB t&e principles
un.erlying soli.ary obligations woul. be
)iolate.' (6alayan %ns "o v "# 4+ F$.-,). Sep (-, 88
)-5s5.-C 5iguracion vda de 6aglana v "onsolacion 4+
-;5;- #ug -, *( ()(s(-8!
7nsurer2 3r6 "art% 8ia.ilit% (2000)
L %as ridin! a suburban utility ehicle
(1,Q) coered by a comprehensie motor
ehicle liability insurance (CAQ>I)
under%ritten by 8ast;ay Insurance
Company %hen it collided %ith a speedin!
bus o%ned by 9A )rael Inc. )he collision
resulted in serious in"uries to LK 0& a
passen!er o$ the busK and S& a pedestrian
%aitin! $or a ride at the scene o$ the
collision. )he police report established
that the bus %as the o-endin! ehicle.
)he bus had CAQ>I policy issued by
'ra!on Ins Co. L& 0& and S "ointly sued
9A )rael and 'ra!on Ins $or indemnity
under the Insurance Code o$ the ;hils
(;'24:?). )he lo%er court applied the
no $ault indemnity policy o$ the statute&
dismissed the suit a!ainst 9A )rael& and
ordered 'ra!on Ins to pay indemnity to all
three plainti-s. 'o you a!ree %ith the
court3s "ud!ment? <=plain (#%)
SUGGESTED ANSWER:
7o. )he cause o$ action o$ 0 is based on
the contract o$ carria!e& %hile that o$ L
and S is based on torts. )he court should
not hae dismissed the suit a!ainst 9A
)rael. )he court should hae ordered
'ra!on Ins to pay each o$ L& 0 & and S to
the e=tent o$ the insurance coera!e& but
%hateer amount is a!reed upon in the
policy should be ans%ered frst by 9A
)rael and the succeedin! amount should
be paid by 'ra!on Insurance up to the
amount o$ the insurance coera!e. )he
e=cess o$ the claims o$ L& 0& and S& oer
and aboe such insurance coera!e& i$ any&
should be ans%ered or paid by 9A )rael.
7nsurer2 3r6 "art% 8ia.ilit%2 No /ault 7n6emnit%
()**3) ?&at is your un.erstan.ing of a @no
fault in.e'nityA clause foun. in an insurance
policyI
SUGGESTED ANSWER:
,nder the 7B 8A,>) I7'<A7I)0
clause& any claim $or death or in"ury o$ any
passen!er or third party shall be paid
%ithout the necessity o$ proin! $ault or
ne!li!ence o$ any .ind. )he indemnity in
respect o$ any one person shall not e=ceed
;@&???.??& proided they are under oath&
the $ollo%in! proo$s shall be su-icient*
/* police report o$ the accidentK and
!* death certifcate and eidence su-icient
to establish the proper payeeK or
:* medical report and eidence o$ medical
or hospital disbursement in respect o$
%hich re$und is claimed.
(* Claim may be made a!ainst one motor
ehicle only.
7nsurer2 3r6 "art% 8ia.ilit%2 Cuitclaim ()**3)
9aul3s truc. bumped the car o%ned by >u6.
)he car %as insured by Cala Insurance. 8or
the dama!e caused& Cala paid >u6
;@&???.?? in amicable settlement. >u6
e=ecuted a release o$ claim& subro!atin!
Cala to all her ri!hts a!ainst 9aul. When
Cala demanded reimbursement $rom 9aul&
the latter re$used sayin! that he had
already paid
>u6 ;4&@?? $or the dama!e to the car as
eidenced by a release o$ claim e=ecuted
by >u6 dischar!in! 9aul.
1o Cala demanded reimbursement $rom
>u6& %ho re$used to pay& sayin! that the
total dama!e to the car %as ;H&@??.??
1ince Cala paid ;@&??? only& >u6 contends
that she %as entitled to !o a$ter 9aul to
claim the additional ;4&@??.??
/$ Is Cala& as subro!ee o$ >u6& entitled to
reimbursement $rom 9aul?
!$ Aay Cala recoer %hat it has paid >u6?
SUGGESTED ANSWER:
/$ =o* LuD e4ecute. a release in fa)or of
+aul (6anila 6ahogany 6fg "orp v "# 4+ 5(75-, )(
1ct )*87!
!$ Les* Cala lost its rig&t against +aul
because of t&e release e4ecute. by LuD*
Since t&e release was 'a.e wit&out t&e
consent of CalaB Cala 'ay reco)er t&e
a'ount of P#B""" for' LuD (6anila 6ahogany
6fg "orp v "# 4+ 5(75-, )( 1ct )*87!'
7nsurer2 Aut#oriDe6 Drier Clause ()**))
1heryl insured her ne%ly ac+uired car& a
7issan Aa=ima a!ainst any loss or
dama!e $or ;@?th and a!ainst (rd party
liability $or ;#?th %ith the L0S Ins Co.
,nder the policy& the car must be drien
only by an authori6ed drier %ho is
either* 2) the insured& or #) any person
driin! on the insured3s order or %ith
his permission* proided that the person
driin! is permitted in accordance %ith
the licensin! or other la%s or re!ulations
to drie the motor ehicle and is not
dis+ualifed $rom driin! such motor
ehicle by order o$ a court.
'urin! the e-ectiity o$ the policy& the car&
then drien by 1heryl hersel$& %ho had
no drier3s license& met an accident and
%as e=tensiely dama!ed. )he estimated
cost o$ repair %as ;4?th. 1heryl
immediately notifed L0S& but the latter
re$used to pay on the policy alle!in! that
1heryl iolated the terms thereo$ %hen
she droe it %ithout a drier3s license. Is
the insurer correct?
SUGGESTED ANSWER:
)he insurer %as not correct in denyin!
the claim since the proiso that the
person driin! is permitted in accordance
%ith the licensin!& etc. +ualifed only a
person driin! the ehicle other than the
insured at the time o$ the accident
./aler!o " /5ra!id ns Co %R 36(+, 31 Ma5
++7
A8TERNAT7>E ANSWER:
)he insurer is correct. )he clause
authori6ed drier in the policy eidently
applies to both the insured and any other
person driin! the ehicle at the time o$
the accident. )he term authori6ed drier
should be construed as a person %ho is
authori6ed by la% to drier the ehicle
./e8a " $lik-ala 16,s317
7nsurer2 Aut#oriDe6 Drier Clause (2003)
9ic. de la Cru6 insured his passen!er
"eepney %ith Asiatic Insurers& Inc. )he
policy proided that the authori6ed drier
o$ the ehicle should hae a alid and
e=istin! drier3s license. )he passen!er
"eepney o$ 9ic. de la Cru6 %hich %as at
the time drien by Cay Cru6&
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2005
Mercantile Law Bar Examination Q & A (1990-2006) Page 58 of 103
f!ured in an accident resultin! in the
death o$ a passen!er. At the time o$ the
accident& Cay Cru6 %as licensed to drie
but it %as confscated by an >)B a!ent
%ho issued him a )ra-ic Qiolation 9eport
()Q9) "ust minutes be$ore the accident.
Could Asiatic Insurers& Inc.& be made liable
under its policy? Why? (:%)
SUGGESTED ANSWER:
Asiatic Insurers& Inc.& should be made
liable under the policy. )he $act that the
drier %as merely holdin! a )Q9 does not
iolate the condition that the drier should
hae a alid and e=istin! drier3s license.
5esides& such a condition should be
disre!arded because %hat is inoled is a
passen!er "eepney& and %hat is inoled
here is not o%n dama!e insurance but
third party liability %here the in"ured
party is a third party not priy to the
contract o$ insurance.
7nsurer2 Aut#oriDe6 Drier Clause2 e#icle is stolen
()**3)
/> insured his brand ne% car %ith ; Ins
Co $or comprehensie coera!e %herein
the insurance company undertoo. to
indemni$y him a!ainst loss or dama!e to
the car a) by accidental collision ... b) by
fre& e=ternal e=plosion& bur!lary& or the$t&
and c) malicious act.
A$ter a month& the car %as carnapped %hile
par.ed in the par.in! space in $ront o$
the Intercontinental /otel in Aa.ati. />3s
%i$e %ho %as driin! said car be$ore it %as
carnapped reported immediately the
incident to arious !oernment a!encies
in compliance %ith the insurance
re+uirements.
5ecause the car could not be recoered&
/> fled a claim $or the loss o$ the car
%ith the insurance company but it %as
denied on the !round that his %i$e %ho
%as driin! the car %hen it %as
carnapped %as in the possession o$ an
e=pired drier3s license& a iolation o$ the
authori6ed drier clause o$ the insurance
company.
/$ Aay the insurance company be held
liable to indemni$y /> $or the loss o$
the insured ehicle? <=plain.
!$ 1upposin! that the car %as brou!ht by
/> on installment basis and there %ere
installments due and payable be$ore
the loss o$ the car as %ell as
installments not yet payable. 5ecause o$
the loss o$ the car& the endor
demanded $rom /> the unpaid balance
o$ the promissory note. /> resisted the
demand and claimed that he %as only
liable $or the installments due and
payable be$ore the loss o$ the car but
no lon!er liable $or other installments
not yet due at the time o$ the loss o$ the
car. 'ecide.
SUGGESTED ANSWER:
/$ 0es. )he car %as lost due to the$t. What
applies in this case is the the$t clause& and
not the authori6ed drier clause. It is
immaterial that />3s %i$e %as driin! the
car %ith an e=pired drier3s license at the
time it %as carnapped# ./erla Co!-ania de
Seguros " C$ 2,+ s (+'7
!$ )he promissory note is not a-ected by
%hateer be$alls the sub"ect matter o$ the
accessory contract. )he
Version 1990-2006 U pdated by
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Version 1990-2003 Arranged by SULAW Class
2005
unpaid balance on the promissory note
should be paid and not only the
installments due and payable be$ore the
loss o$ the car.
7nsurer2 Grou$ 7nsurance2 Em$lo%er?"olic% Eol6er
(2000) L company procured a !roup
accident insurance policy $or its
construction employees ariously
assi!ned to its proincial in$rastructure
pro"ects. 0 Insurance Company
under%rote the coera!e& the premiums
o$ %hich %ere paid $or entirely by L
Company %ithout any employee
contributions. While the policy %as in
e-ect& fe o$ the coered employees
perished at sea on their %ay to their
proincial assi!nments. )heir %ies sued
0 Insurance Company $or payment o$
death benefts under the policy. While the
suit %as pendin!& the %ies si!ned a
po%er o$ attorney desi!natin! L
Company e=ecutie& ;C& as their
authori6ed representatie to enter into a
settlement %ith the insurance company.
When a settlement %as reached& ;C
instructed the insurance company to
issue the settlement chec. to the order o$
L Company& %hich %ill underta.e the
payment to the indiidual claimants o$
their respectie shares. ;C
misappropriated the settlement amount
and the %ies pursued their case a!ainst
0 Insurance Co. Will the suit prosper?
<=plain ((%)
SUGGESTED ANSWER:
0es. )he suit %ill prosper. 0 Ins Co is
liable. L Co& throu!h its e=ecutie& ;C&
acted as a!ent o$ 0 Ins Co. )he latter is
thus bound by the misconduct o$ its
a!ent. It is the usual practice in the
!roup insurance business that the
employer4policy holder is the a!ent o$ the
insurer.
7nsurer2 8ia.ilit% o& t#e 7nsurers ()**0)
a$ 1uppose that 8ortune o%ns a house
alued at ;:??th and insured the same
a!ainst fre %ith ( insurance companies
as $ollo%s*
L G
;4??th
0 G
;#??th
S G
;:??th
In the absence o$ any stipulation in the
policies $rom %hich insurance company or
companies may 8ortune recoer in case
fre should destroy his house completely?
SUGGESTED ANSWER:
8ortune may recoer $rom the insurers in
such order as he may select up to their
concurrent liability (1ec H4 Ins Code)
Valued Policy
b$ I$ each o$ the fre insurance policies
obtained by 8ortune in the problem (a) is
a alued policy and the alue o$ his
house %as f=ed in each o$ the policies at
;2m& ho% much %ould 8ortune recoer
$rom L i$ he has already obtained $ull
payment on the insurance policies issued
by 0 and S?
SUGGESTED ANSWER:
8ortune may still recoer only the balance
o$ ;#??&??? $rom L insurance company
since the insured may only recoer up to
the e=tent o$ his loss.
A8TERNAT7>E:
Mercantile Law Bar Examination Q & A (1990-2006) Page 59 of 103
/ain! already obtained $ull payment on
the insurance policies issued by 0 and S&
8ortune may no lon!er recoer $rom L
insurance policy.
Open Policy
c$ I$ each o$ the policies obtained by
8ortune in the problem (a) aboe is an
open policy and it %as immediately
determined a$ter the fre that the alue
o$ 8ortune3s house %as ;#.4m& ho% much
may he collect $rom L&0 and S?
SUGGESTED ANSWER:
In an open policy& the insured may recoer
his total loss up to the amount o$ the
insurance coer. )hus& the e=tent o$
recoery %ould be ;4??th $rom L& ;#??th
$rom 0& and ;:??th $rom S.
.$ In problem (a)& %hat is the e=tent o$ the
liability o$ the insurance companies amon!
themseles?
SUGGESTED ANSWER:
In problem (a)& the insurance companies
amon! themseles %ould be liable& i6*
L G 4O2# o$ ;:??th X
;#??th 0 G #O2# o$
;:??th X ;2??th S G
:O2# o$ ;:??th X
;(??th
e$ 1upposin! in problem (a) aboe& 8ortune
%as able to collect $rom both 0 and S& may
he .eep the entire amount he %as able to
collect $rom the said # insurance
companies?
SUGGESTED ANSWER:
7o& he can only be indemnifed $or his
loss& not proft therebyK hence he must
return ;#??th o$ the ;J??th he %as able
to collect.
8oss: Actual Total 8oss ()**4)
9C Corporation purchased rice $rom
)hailand& %hich it intended to sell locally.
'ue to stormy %eather& the ship carryin!
the rice became submer!ed in sea %ater&
and %ith it the rice car!o. When the car!o
arried in Aanila& 9C fled a claim $or
total loss %ith the insurer& because the
rice %as no lon!er ft $or human
consumption. Admittedly& the rice could still
be used as animal $eed. Is 9C3s claim $or
total loss "ustifed? <=plain.
SUGGESTED ANSWER:
0es& 9C3s claim $or total loss is "ustifed. )he
rice& %hich %as imported $rom )hailand $or
sale locally& is obiously intended $or
consumption by the public. )he complete
physical destruction o$ the rice is not
essential to constitute an actual total loss.
1uch a loss e=ists in this case since the
rice& hain! been soa.ed in sea %ater and
thereby rendered unft $or human
consumption& has become totally useless
$or the purpose $or %hich it %as imported
./an Mala5an ns Co " C$ gr 60,', Se- 0, 16617
8oss: Constructie Total 8oss (2001)
AOQ ;early 1hells& a passen!er and car!o
essel& %as insured $or ;4?&???&???.??
a!ainst constructie total loss. 'ue to a
typhoon& it san. near ;ala%an. >uc.ily&
there %ere no casualties& only in"ured
passen!ers. )he ship o%ner sent a notice
o$ abandonment o$ his interest oer the
essel to the insurance company %hich
then
hired pro$essionals to aEoat the essel
$or ;H??&???.??. When re4Eoated& the
essel needed repairs estimated at
;#&???&???.??. )he insurance company
re$used to pay the claim o$ the ship
o%ner& statin! that there %as no
constructie total loss.
a$ Was there constructie total loss to
entitle the ship o%ner to recoer $rom
the insurance company? <=plain.
b$ Was it proper $or the ship o%ner to
send a notice o$ abandonment to the
insurance company? <=plain. (@%)
SUGGESTED ANSWER:
7o& there %as no Nconstructie total
lossN because the essel %as reEoated
and the costs o$ reEoatin! plus the
needed repairs (; #.H Aillion) %ill not be
more than three4$ourths o$ the alue o$
the essel. A constructie total loss is
one %hich !ies to a person insured a
ri!ht to abandon. (1ec& 2(2& Insurance
Code) )here %ould hae been a
constructie total loss had the essel A7
;early 1hells su-er loss or needed
reEoatin! and repairs o$ more than the
re+uired three4$ourths o$ its alue& i.e.&
more than ;(?.? Aillion .Sec# 136,
nsurance Code, cited in Oriental $ssurance "#
Court of $--eals and /ana!a Sa4 Mill, %#R#
&o# 6(,02, $ugust 6, 16617
/o%eer& the insurance company shall
pay $or the total costs o$ reEoatin! and
needed repairs (;#.H Aillion).
c$ Was it proper $or the ship o%ner to
send a notice o$ abandonment to the
insurance company? <=plain.
SUGGESTED ANSWER:
7o& it %as not proper $or the ship o%ner to
send a notice o$ abandonment to the
insurance company because abandonment
can only be aailed o$ %hen& in a marine
insurance contract& the amount to be
e=pended to recoer the essel %ould
hae been more than three4 $ourths o$ its
alue. Qessel A7 ;early 1hells needed only
;#.H Aillion& %hich does not meet the
re+uired three4 $ourths o$ its alue to
merit abandonment. (1ection 2(H&
Insurance Code& cited in Oriental $ssurance
"# Court of $--eals and /ana!a Sai" Mill, %#R#
&o# 6(,02, $ugust 6, 16617
8oss: Total 8oss <nl% ()**2)
An insurance company issued a marine
insurance policy coerin! a shipment by
sea $rom Aindoro to 5atan!as o$ 2&???
pieces o$ Aindoro !arden stones a!ainst
total loss only. )he stones %ere loaded
in t%o li!hters& the frst %ith :?? pieces
and the second %ith 4?? pieces. 5ecause
o$ rou!h seas& dama!e %as caused the
second li!hter resultin! in the loss o$ (#@
out o$ the 4?? pieces. )he o%ner o$ the
shipment fled claims a!ainst the
insurance company on the !round o$
constructie total loss inasmuch as more
than Y o$ the alue o$ the stones had been
lost in one o$ the li!hters.
Is the insurance company liable under its
policy? Why?
SUGGESTED ANSWER:
)he insurance company is not liable under
its policy coerin! a!ainst total loss only
the shipment o$ 2&??? pieces o$ Aindoro
!arden stones. )here is no constructie
total loss that can claimed since the Y rule
is to be computed on the total 2&???
pieces o$ Aindoro
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2005
Mercantile Law Bar Examination Q & A (1990-2006) Page 60 of 103
gar.en stones co)ere. by t&e single policy
co)erage (see 1riental #ssurance "o v "# (;; s ,5*!
(arine 7nsurance2 7m$lie6 Warranties (2000)
What %arranties are implied in marine
insurance?
SUGGESTED ANSWER:
)he $ollo%in! %arranties are implied in
marine insurance*
/$ )hat the ship is sea%orthy to ma.e
the oya!e andOor to ta.e in certain
car!oes
!$ )hat the ship shall not deiate $rom
the oya!e insuredK
:$ )hat the ship shall carry the necessary
documents to sho% nationality or
neutrality and that it %ill not carry
any document %hich %ill cast
reasonable suspicion thereonK
($ )hat the ship shall not carry
contraband& especially i$ it is ma.in! a
oya!e throu!h belli!erent %aters.
(arine 7nsurance2 "eril o& t#e S#i$ s! "eril o& t#e Sea
()**:)
A marine insurance policy on a car!o
states that the insurer shall be liable $or
losses incident to perils o$ the sea.
'urin! the oya!e& sea%ater entered the
compartment %here the car!o %as stored
due to the de$ectie drainpipe o$ the ship.
)he insured fled an action on the policy
$or recoery o$ the dama!es caused to the
car!o. Aay the insured recoer dama!es?
(@%)
SUGGESTED ANSWER:
7o. )he pro=imate cause o$ the dama!e
to the car!o insured %as the de$ectie
drainpipe o$ the ship. )his is peril o$ the
ship& and not peril o$ the sea. )he de$ect
in the drainpipe %as the result o$ the
ordinary use o$ the ship. )o recoer
under a marine insurance policy& the
pro=imate cause o$ the loss or dama!e
must be peril o$ the sea.
(utual 7nsurance Com$an%2 Nature 0 De&inition (2004)
What is a mutual insurance company or
association?
SU44ESTE) ANSWER(
A mutual li$e insurance corporation is a
cooperatie that promotes the %el$are o$ its
o%n members& %ith the money collected
$rom amon! themseles and solely $or their
o%n protection and not $or proft.
Aembers are both the insurer and
insured. A mutual li$e insurance company
has no capital stoc. and relies solely upon
its contributions or premiums to meet
une=pected losses& contin!encies and
e=penses .Re-u*lic "# Sunlife, %#R# &o
10+,+0, Octo*er 1(, 2,,07#
Intelle#t0al 1ro%erty
Co$%ri'#t ()**1)
What intellectual property ri!hts are
protected by copyri!ht?
SUGGESTED ANSWER:
1ec @ o$ ;' 4H proides that Copyri!ht
shall consist in the e=clusie ri!ht*
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a* to print& reprint& publish& copy&
distribute& multiply& sell and ma.e
photo!raphs& photo en!rain!s& and
pictorial illustrations o$ the %or.sK
b* to ma.e any translation or other
ersion or e=tracts or arran!ements
or adaptation thereo$K to dramati6e i$
it be a non4dramatic %or.K to
conert it into a non4dramatic %or. i$
it be a dramaK to complete or e=ecute
it i$ it be a model or desi!nK
c* to e=hibit& per$orm& represent& produce
or reproduce the %or. in any manner
or by any method %hateer $or proft
or other%iseK i$ not reproduced in
copies $or sale& to sell any
manuscripts or any record
%hatsoeer thereo$K
.* to ma.e any other use or disposition
o$ the %or. consistent %ith the la%s
o$ the land
Co$%ri'#t2 Commissione6 Artist ()**1)
1olid Inestment /ouse commissioned
Aon 5lanco and his son 1tee& both noted
artists& to paint a mural $or the Aain
>obby o$ the ne% buildin! o$ 1olid $or a
contract price o$ ;#m.
a$ %ho o%ns the mural? <=plain
b$ Who o%ns the copyri!ht o$ the mural?
<=plain.
SUGGESTED ANSWER:
a$ 1olid o%ns the mural. 1olid %as the
one %ho commissioned the artists to do
the %or. and paid $or the %or. in the sum
o$ ;#m
b$ ,nless there is a stipulation to the
contrary in the contract& the copyri!ht
shall belon! in "oint o%nership to 1olid and
Aon and 1tee.
Co$%ri'#t2 Commissione6 Artist (2003)
59 and C) are noted artists %hose
paintin!s are hi!hly pri6ed by collectors.
'r. '> commissioned them to paint a mural
at the main lobby o$ his ne% hospital $or
children. 5oth a!reed to collaborate on the
pro"ect $or a total $ee o$ t%o million pesos
to be e+ually diided bet%een them. It
%as also a!reed that 'r. '> had to
proide all the materials $or the paintin!
and pay $or the %a!es o$ technicians and
laborers needed $or the %or. on the
pro"ect.
Assume that the pro"ect is completed and
both 59 and C) are $ully paid the amount
o$ ;#A as artistsD $ee by '>. ,nder the
la% on intellectual property& %ho %ill o%n
the mural? Who %ill o%n the copyri!ht
in the mural? Why? <=plain. (@%)
SUGGESTED ANSWER:
,nder 1ection 2IJ.4 o$ the Intellectual
;roperty Code& in case o$ commissioned
%or.& the creator (in the absence o$ a
%ritten stipulation to the contrary) o%ns
the copyri!ht& but the %or. itsel$ belon!s
to the person %ho commissioned its
creation. Accordin!ly& the mural belon!s to
'>. /o%eer& 59 and C) o%n the
copyri!ht& since there is no stipulation to
the contrary.
Co$%ri'#t2 7n&rin'ement ()**3)
Mercantile Law Bar Examination Q & A (1990-2006) Page 61 of 103
)he Qictoria /otel chain reproduces
ideotapes& distributes the copies thereo$
to its hotels and ma.es them aailable to
hotel !uests $or ie%in! in the hotel
!uest rooms. It char!es a separate nominal
$ee $or the use o$ the ideotape player.
/$ Can the Qictoria /otel be en"oined $or
in$rin!in! copyri!hts and held liable $or
dama!es?
!$ Would it ma.e any di-erence i$ Qictoria
/otel does not char!e any $ee $or the use
o$ the ideotape?
SUGGESTED ANSWER:
/$ 0es. Qictoria /otel has no ri!ht to use
such ideo tapes in its hotel business
%ithout the consent o$ the creatorO o%ner
o$ the copyri!ht.
!$=o* 2&e use of t&e )i.eotapes is for
business an. not 'erely for &o'e
consu'ption* (5ilipino Society of "omposers, #uthors
3ublishers v 2an ),8 s ,-)C pd )*88!
Co$%ri'#t2 7n&rin'ement ()**+)
In an action $or dama!es on account o$ an
in$rin!ement o$ a copyri!ht& the
de$endant (the alle!ed pirate) raised the
de$ense that he %as una%are that %hat he
had copied %as a copyri!ht material. Would
this de$ense be alid?
SUGGESTED ANSWER:
7o. An intention to pirate is not an
element o$ in$rin!ement. /ence& an
honest intention is no de$ense to an action
$or in$rin!ement.
A8TERNAT7>E ANSWER:
0es. )he o%ner o$ the copyri!ht must ma.e
others a%are that the material in +uestion
is under or coered by a copyri!ht. )his
is done by the !iin! o$ such notice at a
prominent portion o$ the copyri!ht
material. When the alle!ed pirate is thus
made a%are thereo$& his act o$ piratin! the
copy material %ill constitute in$rin!ement.
Co$%ri'#t2 7n&rin'ement ()**:)
Cuan Laier %rote and published a story
similar to an unpublished copyri!hted
story o$ Aanolin! 1antia!o. It %as&
ho%eer& conclusiely proen that Cuan
Laier %as not a%are that the story o$
Aanolin! 1antia!o %as protected by
copyri!ht. Aanolin! 1antia!o sued Cuan
Laier $or in$rin!ement o$ copyri!ht. Is Cuan
Laier liable? (#%)
SUGGESTED ANSWER:
0es. Cuan Laier is liable $or in$rin!ement
o$ copyri!ht. It is not necessary that Cuan
Laier is a%are that the story o$ Aanolin!
1antia!o %as protected by copyri!ht. )he
%or. o$ Aanolin! 1antia!o is protected at
the time o$ its creation.
Co$%ri'#t2 7n&rin'ement (2004)
In a %ritten le!al opinion $or a client on
the di-erence bet%een apprenticeship and
learnership& >i6a +uoted %ithout permission
a labor la% e=pertDs comment appearin! in
his boo. entitled NAnnotations on the >abor
Code.N
Can the labor la% e=pert hold >i6a liable $or
in$rin!ement o$ copyri!ht $or +uotin! a
portion o$ his boo. %ithout his permission?
(@%)
SU44ESTE) ANSWER(
>i6a cannot be held liable $or
in$rin!ement o$ copyri!ht since under
the Intellectual ;roperty Code& one o$
the limitations to the copyri!ht is the
ma.in! o$ +uotations $rom a published
%or. $or purpose o$ any "udicial
proceedin!s or $or !iin! o$ pro$essorial
adice by le!al practitioner& proided
that the source and name o$ the author
are identifed (1ee 1ection 2J4.2Z.[ o$ the
Intellectual ;roperty Code o$ the
;hilippines).
Co$%ri'#t2 "#otoco$%2 ;#en allo;e6 ()**:)
Aay a person hae photocopies o$ some
pa!es o$ the boo. o$ ;ro$essor 9osario
made %ithout iolatin! the copyri!ht
la%? ((%)
SUGGESTED ANSWER:
0es. )he priate reproduction o$ a
published %or. in a sin!le copy& %here
the reproduction is made by a natural
person e=clusiely $or research and
priate study& is permitted& %ithout the
authori6ation o$ the o%ner o$ the
copyri!ht in the %or..
7n&rin'ement s! Un&air Com$etition ()**4)
What is the distinction bet%een
in$rin!ement and un$air competition?
SUGGESTED ANSWER:
)he distinction bet%een in$rin!ement
(presumably trademar.) and un$air
competition are as $ollo%s*
/$ In$rin!ement o$ trademar. is the
unauthori6ed use o$ a trademar.&
%hereas un$air competition is the
passin! o- o$ one3s !oods as those o$
anotherK
!$ 8raudulent intent is unnecessary in
in$rin!ement o$ trademar.& %hereas
$raudulent intent is essential in un$air
competitionK
.! 2&e prior registration of t&e tra.e'ark is
a prere-uisite to an action for
infringe'ent of tra.e'arkB w&ereas
registration of t&e tra.e'ark is not
necessary in unfair co'petition* (&el 6onte
"orp v "# 78.(5 <an (5,*; )8)s,);!
7n&rin'ement s! Un&air Com$etition (2003)
In %hat %ay is an in$rin!ement o$ a
trademar. similar to that %hich pertains to
un$air competition?
SUGGESTED ANSWER:
7n&rin'ement2 Juris6iction (2003)
M4H Corporation& a $orei!n corporation
alle!in! itsel$ to be the re!istered o%ner
o$ trademar. M4H and lo!o M& fled an
Inter ;artes case %ith the Intellectual
;roperty B-ice a!ainst Manin Corporation
$or the cancellation o$ the latter3s mar.
M4H and lo!o M. 'urin! the pendency
o$ the case be$ore the I;B& Manin
Corporation brou!ht suit a!ainst M4H
Corporation be$ore the 9)C $or
in$rin!ement and dama!es. Could the
action be$ore the 9)C prosper? Why?
SUGGESTED ANSWER:
"atent2 Non?"atenta.le 7nentions (2004)
1upposin! Albert <instein %ere alie
today and he fled %ith the Intellectual
;roperty B-ice (I;B) an application $or
patent $or his theory o$ relatiity
e=pressed in the
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$ormula <Xmc#. )he I;B disapproed
<insteinDs application on the !round that
his theory o$ relatiity is not patentable.
Is the I;BDs action correct? (@%)
SU44ESTE) ANSWER(
0es& the I;B is correct because under
the Intellectual ;roperty Code&
discoeries& scientifc theories and
mathematical methods& are classifed to be
as Nnon4 patentable inentions.N <inteinDs
theory o$ relatiity $alls %ithin the
cate!ory o$ bein! a non4patentable
Nscientifc theory.N
"atents: Gas?Sain' Deice: &irst to &ile rule (2001)
Ce6ar %or.s in a car manu$acturin!
company o%ned by Coab. Ce6ar is +uite
innoatie and loes to tin.er %ith thin!s.
With the materials and parts o$ the car&
he %as able to inent a !as4sain! deice
that %ill enable cars to consume less !as.
8rancis& a co4%or.er& sa% ho% Ce6ar
created the deice and li.e%ise& came up
%ith a similar !ad!et& also usin! scrap
materials and spare parts o$ the company.
)herea$ter& 8rancis fled an application $or
re!istration o$ his deice %ith the 5ureau
o$ ;atents. <i!hteen months later& Ce6ar
fled his application $or the re!istration o$
his deice %ith the 5ureau o$ ;atents.
/$ Is the !as4sain! deice patentable?
<=plain.
SUGGESTED ANSWER:
0es& the !as4sain! deice is patentable
because it proides a technical solution to
a problem in a feld o$ human actiity. It
is ne% and inoles an inentie step& and
certainly industrially applicable. It
there$ore $ulflls the re+uisites mandated
by the intellectual ;roperty Code $or %hat
is patentable.
!$ Assumin! that it is patentable& %ho is
entitled to the patent? What& i$ any& is
the remedy o$ the losin! party?
SUGGESTED ANSWER:
Ce6ar is entitled to the patent because he
%as the real inentor. 8rancis& copyin!
$rom the %or. o$ Ce6ar& cannot claim the
essential criteria o$ an inentor& %ho
must possess essential elements o$ noelty&
ori!inality and precedence to be entitled to
protection. 7eertheless& under the Nfrst
to fle rule&N 8rancis application %ould
hae to be !ien priority. Ce6ar& ho%eer&
has %ithin three months $rom the decision&
to hae it cancelled as the ri!ht$ul
inentorK or %ithin one year $rom
publication& to fle an action to proe his
priority to the inention& %hich has been
ta.en $rom him and $raudulently re!istered
by 8rancis.
:$ 1upposin! Coab !ot %ind o$ the
inentions o$ his employees and also
laid claim to the patents& assertin! that
Ce6ar and 8rancis %ere usin! his
materials and company time in ma.in!
the deices& %ill his claim preail oer
those o$ his employees? <=plain.
SUGGESTED ANSWER:
7o& CoabDs claim cannot preail oer those
o$ his employees. In the frst place& Coab
did not commission any o$ the t%o
employees to inent the deice& and its
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inention did not $all %ithin their
re!ular duties. What preails is the
proision o$ the Intellectual ;roperty Code
that holds that the inention belon!s to
the employee& i$ the inentie actiity is
not a part o$ his re!ular duties& een i$
he uses the time& $acilities and materials
o$ the employer.
"atents: 7n&rin'ement2 Reme6ies 0 De&enses
()**3) Fer.ie is a patent owner of a
certain in)ention* Ee .isco)ere. t&at &is
in)ention is being infringe. by 7o&ann*
/$ What are the remedies aailable to
8erdie a!ainst Cohann?
!$ I$ you %ere the la%yer o$ Cohann in the
in$rin!ement suit& %hat are the de$enses
that your client can assert?
SUGGESTED ANSWER:
/$ )he $ollo%in! remedies are aailable to
8erdie a!ainst Cohann.
a* sei6e and destroy
b* in"unction
c* dama!es in such amount may hae
been obtained $rom the use o$ the
inention i$ properly transacted
%hich can be more than %hat the
in$rin!er (Cohann ) receied.
.* Attorney3s $ees and cost
!$ )hese are the de$enses that can be
asserted in an in$rin!ement suit*
a* ;atent is inalid (1ec 4@ 9A 2:@& as
amended)
b* ;atent is not ne% or patentable
c* 1pecifcation o$ the inention does
not comply %ith 1ec 24
.* ;atent %as issued not to the true
and actual inentor& desi!ner or
author o$ the utility model or the
plainti- did not derie his ri!hts
$rom the true and actual inentor&
desi!ner or author o$ the utility
model (1ec #J 9A 2:@ as amended)
"atents2 7n&rin'ement ()**2)
In an action $or in$rin!ement o$ patent& the
alle!ed in$rin!er de$ended himsel$ by
statin! 2) that the patent issued by the
;atent B-ice %as not really an inention
%hich %as patentableK #) that he had no
intent to in$rin!e so that there %as no
actionable case $or in$rin!ementK and ()
that there %as no e=act duplication o$ the
patentee3s e=istin! patent but only a minor
improement. With those de$enses& %ould
you e=empt the alle!ed iolator $rom
liability? Why?
SUGGESTED ANSWER:
I %ould not e=empt the alle!ed iolator
$rom liability $or the $ollo%in! reasons*
/$ A patent once issued by the ;atent
B-ice raises a presumption that the
article is patentableK it can& ho%eer be
sho%n other%ise (1ec 4@ 9A 2:@). A
mere statement or alle!ation is not
enou!h to destroy that presumption.
($Fuas " de 3eon 3, 9an +2 32 3216,)
!$ An intention to in$rin!e is not necessary
nor an element in a case $or
in$rin!ement o$ a patent.
Mercantile Law Bar Examination Q & A (1990-2006) Page 63 of 103
:$ )here is no need o$ e=act duplication
o$ the patentee3s e=istin! patent such
as %hen the improement made by
another is merely minor .Frank "
Benito, 01-'137. )o be independently
patentable& an improement o$ an
e=istin! patented inention must be a
ma"or improement .$Fuas " de 3eon 32
3216, 3,9an+27
"atents2 Ri'#ts oer t#e 7nention ()**0)
Cheche inented a deice that can conert
rain%ater into automobile $uel. 1he as.ed
Aacon& a la%yer& to assist in !ettin! her
inention patented. Aacon su!!ested that
they $orm a corporation %ith other $riends
and hae the corporation apply $or the
patent& J?% o$ the shares o$ stoc. thereo$
to be subscribed by Cheche and @% by
Aacon. )he corporation %as $ormed and
the patent application %as fled. /o%eer&
Cheche died ( months later o$ a heart
attac..
8ranco& the estran!ed husband o$ Cheche&
contested the application o$ the
corporation and fled his o%n patent
application as the sole suriin! heir o$
Cheche. 'ecide the issue %ith reasons.
SUGGESTED ANSWER:
)he estran!ed husband o$ Chec.e cannot
success$ully contest the application. )he
ri!ht oer inentions accrue $rom the
moment o$ creation and as a ri!ht it can
la%$ully be assi!ned. Bnce the title
thereto is ested in the trans$eree& the
latter has the ri!ht to apply $or its
re!istration. )he estran!ed husband o$
Cheche& i$ not dis+ualifed to inherit&
merely %ould succeed to the interest o$
Cheche.
0ote #n examinee who answers on the basis of
the issue of validity of the transfer of patent as a
valid consideration for subscription of the shares
of stoc/s should be given due credit'
Tra6emar- ()**0)
In 2HJJ& the 8ood and 'ru!
Administration approed the labels
submitted by )urbo Corporation $or its
ne% dru! brand name& A=ilon. )urbo is
no% applyin! %ith the 5ureau o$ ;atents&
)rademar.s and )echnolo!y )rans$er $or
the re!istration o$ said brand name. It %as
subse+uently confrmed that Accilonne is
a !eneric term $or a class o$ anti4$un!al
dru!s and is used as such by the medical
pro$ession and the pharmaceutical industry&
and that it is used as a !eneric chemical
name in arious scientifc and pro$essional
publications. A competin! dru!
manu$acturer as.s you to contest the
re!istration o$ the brand name A=ilon by
)urbo.
What %ill you adice be?
SUGGESTED ANSWER:
)he application $or re!istration by )urbo
Corporation may be contested. )he
)rademar. >a% %ould not allo% the
re!istration o$ a trademar. %hich& %hen
applied to or used in connection %ith his
products& is merely descriptie or
deceptiely misdescriptie o$ them.
Con$usion can result $rom the use o$
A=ilon as the !eneric product itsel$.
A8TERNAT7>E ANSWER:
Aedical dru!s may be procured only upon
prescription made by a duly licensed
physician. )he possibility o$
deception could be rather remote. 1ince
it cannot really be said that physicians
can be so easily deceied by such
trademar. as A=ilon& it may be hard to
e=pect an opposition thereto to succeed.
AN<TEER ANSWER:
)he application $or re!istration o$ )urbo
Corporation may be contested. )he
$actual settin!s do not indicate that
there had been prior use $or at least #
months o$ the trademar. A=ilon.
Tra6emar- ()**3)
>aber!e& Inc.& manu$actures and mar.ets
a$ter4shae lotion& shain! cream&
deodorant& talcum po%der and toilet
soap& usin! the trademar. ;9,)&
%hich is re!istered %ith the ;hil ;atent
B-ice. >aber!e does not manu$acture
brie$s and under%ear and these items
are not specifed in the certifcate o$
re!istration.
CF %ho manu$actures brie$s and
under%ear& %ants to .no% %hether&
under our la%s& he can use and re!ister
the trademar. ;9,)< $or his
merchandise. What is your adice?
SUGGESTED ANSWER:
0es. )he trademar. re!istered in the
name o$ >aber!e Inc coers only a$ter4
shae lotion& shain! cream& deodorant&
talcum po%der and toilet soap. It does
not coer brie$s and under%ear.
)he limit o$ the trademar. is stated in
the certifcate issued to >aber!e Inc. It
does not include brie$s and under%ear
%hich are di-erent products protected by
>arber!e3s trademar..
7G can register t&e tra.e'ark @P+>25A to
co)er its briefs an. un.erwear (5aberge %nc v %#"
()5 s .)-!
Tra6emar-B Test o& Dominanc% ()**4)
What is the test o$ dominancy?
SUGGESTED ANSWER:
)he test o$ dominancy re+uires that i$
the competin! trademar. contains the
main or essential $eatures o$ another and
con$usion and deception is li.ely to result&
in$rin!ement ta.es place. 'uplication or
imitation is not necessaryK not is it
necessary that the in$rin!in! label should
su!!est an e-ort to imitate. 1imilarity in
si6e& $orm and color& %hile releant& is
not conclusie. .$sia Bre4er5 " C$ %R
1,30(3 9ul0,63 22(s(3'7
Tra6emar-2 7n&rin'ement ()**))
1ony is a re!istered trademar. $or )Q&
stereo& radio& cameras& betama= and other
electronic products. A local company& 5est
Aanu$acturin! Inc produced electric $ans
%hich it sold under the trademar. 1ony
%ithout the consent o$ 1ony. 1ony sued
5est Aanu$acturin! $or in$rin!ement.
'ecide the case.
SUGGESTED ANSWER:
)here is no in$rin!ement. In order that a
case $or in$rin!ement o$ trademar. can
prosper& the products on %hich the
trademar. is used must be o$ the same
.ind. )he electric $ans produced by 5est
Aanu$acturin! cannot
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Mercantile Law Bar Examination Q & A (1990-2006) Page 65 of 103
be said to be similar to such products as
)Q& stereo and radio sets or cameras or
betama= products o$ 1ony.
A8TERNAT7>E ANSWER:
)here is in$rin!ement. I$ the o%ner o$ a
trademar. %hich manu$actures certain
types o$ !oods could reasonably be
e=pected to en!a!e in the manu$acture o$
another product usin! the same
trademar.& another party %ho uses the
trademar. $or that product can be held
liable $or usin! that trademar.. ,sin! this
standard& in$rin!ement e=ists because
1ony can be reasonably e=pected to use
such trademar. on electric $ans.
Tra6emar-2 Test o& Dominanc% ()**4)
7 Corporation manu$actures rubber shoes
under the trademar. Cordann %hich hit
the ;hil mar.et in 2HJ@& and re!istered its
trademar. %ith the 5ureau o$ ;atents&
)rademar.s and )echnolo!y (5;)))) in
2HH?. ;M Company also manu$actures
rubber shoes %ith the trademar.
Caors.i %hich it re!istered %ith 5;)))
in 2HIJ.
In 2HH#& ;M Co adopted and copied the
desi!n o$ 7 Corporation3s Cordann
rubber shoes& both as to shape and color&
but retained the trademar. Caors.i on
its products.
Aay ;M Company be held liable to 7 Co?
<=plain.
SUGGESTED ANSWER:
;M Co may be liable $or un$airly
competin! a!ainst 7 Co. 5y copyin! the
desi!n& shape and color o$ 7
Corporation3s Cordann rubber shoes and
usin! the same in its rubber shoes
trademar.ed Caors.i& ;M is obiously
tryin! to pass o- its shoes $or those o$ 7. It
is o$ no moment that he trademar.
Caors.i %as re!istered ahead o$ the
trademar. Cordann. ;riority in
re!istration is not material in an action
$or un$air competition as distin!uished
$rom an action $or in$rin!ement o$
trademar.. )he basis o$ an action $or
un$air competition is con$usin! and
misleadin! similarity in !eneral
appearance& not similarity o$ trademar.s
.Con"erse Ru**er Co " 9acinto Ru**er A
/lastics Co %R 2'(20 and 3,0,0, $-r2+,+,
6's10+7
Tra6ename: 7nternational A&&iliation (2001)
1 'eelopment Corporation sued 1han!rila
Corporation $or usin! the 1 lo!o and the
tradename 1han!rila. )he $ormer claims
that it %as the frst to re!ister the lo!o and
the tradename in the ;hilippines and that it
had been usin! the same in its restaurant
business. 1han!rila Corporation counters
that it is an a-iliate o$ an international
or!ani6ation %hich has been usin! such
lo!o and tradename 1han!rila $or oer
#? years. /o%eer& 1han!rila Corporation
re!istered the tradename and lo!o in the
;hilippines only a$ter the suit %as fled.
Which o$ the t%o corporations has a better
ri!ht to use the lo!o and the tradename?
<=plain.
SUGGESTED ANSWER:
1 'eelopment Corporation has a better
ri!ht to use the lo!o and the tradename&
since the protectie benefts o$
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2005
the la% are con$erred by the $act o$
re!istration and not by use. Althou!h
1han!rila CorporationDs parent had used
the tradename and lo!o lon! be$ore& the
protection o$ the la%s %ill be $or 1
'eelopment Corporation because it %as
the frst entity to re!ister the intellectual
properties.
2o3 ,oes t4e -nternat-onal aff-l-at-on of
.4angr-la Corporat-on affe't t4e out'o+e of t4e
,-spute5 #6pla-n. 7589
SUGGESTED ANSWER:
)he international a-iliation o$ 1han!rila
Corporation may be critical in the eent
that its a-iliates or parent company
abroad had re!istered in a $orei!n
"urisdiction the tradename and the lo!o.
A %ell4.no%n mar. and tradename is
sub"ect to protection under )reaty o$
;aris $or the ;rotection o$ Intellectual
;roperty to %hich the ;hilippines is a
member.
Insolven#y 2 Cor%orate
Re#overy
2nsolvency vs. 8uspension of Payment (!!.)
'istin!uish insolency $rom suspension
o$ payments. ((%)
8?==58T5, A<8@5/1
a$ In insolency& the liabilities o$ the
debtor are more than his assets&
%hile in suspension o$ payments&
assets o$ the debtor are more than his
liabilities.
b$ In insolency& the assets o$ the debtor
are to be conerted into cash $or
distribution amon! his creditors& %hile
in suspension o$ payments& the debtor
is only as.in! $or time %ithin %hich to
conert his $ro6en assets into li+uid
cash %ith %hich to pay his obli!ations
%hen the latter $all due.
7nsolenc%: >oluntar% 7nsolenc% (2001)
Aaron& a %ell4.no%n architect& is su-erin!
$rom fnancial reerses. /e has $our
creditors %ith a total claim o$ ;#: Aillion.
'espite his intention to pay these
obli!ations& his current assets are
insu-icient to coer all o$ them. /is
creditors are about to sue him.
Conse+uently& he %as constrained to fle a
petition $or insolency. (@%)
a$ 1ince Aaron %as merely $orced by
circumstances to petition the court to
declare him insolent& can the "ud!e
properly treat the petition as one $or
inoluntary insolency? <=plain.
SUGGESTED ANSWER:
7o. )his is a case $or oluntary insolency
because this %as fled by an insolent
debtor o%in! debts e=ceedin! the amount
o$ ;2&???.?? under 1ection 24 o$ the
Insolency >a%. ,nder 1ection #? o$ the
Insolency >a%& the petition must be fled
by three or more creditors. In the case at
bar& it is Aaron& the debtor& %ho fled the
insolency proceedin!s.
Mercantile Law Bar Examination Q & A (1990-2006) Page 65 of 103
b$ I$ Aaron is declared an insolent by the
court& %hat %ould be the e-ect& i$ any&
o$ such declaration on his creditors?
<=plain.
SUGGESTED ANSWER:
A declaration by the court that the
petitioner is insolent %ill hae the
$ollo%in! e-ects*
/$ )he sheri- shall ta.e possession o$
all assets o$ the debtor until the
appointment o$ a receier or
assi!neeK
!$ ;ayment to the debtor o$ any debts
due to him and the deliery to the
debtor o$ any property belon!in!
to him& and the trans$er o$ any
property by him are $orbiddenK
:$ All ciil proceedin!s pendin!
a!ainst the insolent shall be
stayedK and
($ Aort!a!es and pled!es are not
a-ected by the order declarin! a
person insolent. (1ec. @H&
Insolency >a%)
c$ Assumin! that& Aaron has !uarantors
$or his debts& are the !uarantors
released $rom their obli!ations once
Aaron is dischar!ed $rom his debts?
<=plain.
SUGGESTED ANSWER:
7o& precisely under the principle o$
e=cussion& the liability o$ the !uarantors
arises only a$ter the e=haustion o$ the
assets o$ the principal obli!or. )he e-ect o$
dischar!e merely confrms e=haustion o$
the assets o$ the obli!or aailable to his
creditors.
A8TERNAT7>E ANSWER:
0es. Article #?I: o$ the Ciil Code
proides* )he obli!ation o$ the !uarantor
is e=tin!uished at the same time as that
o$ the debtor& and $or the same causes as
all other obli!ations.
.$ What remedies are aailable to the
!uarantors in case they are made to pay
the creditors? <=plain.
SUGGESTED ANSWER:
,nder Article #?J2& the !uarantor may set
up a!ainst the creditor all the de$enses
that pertain to the principal debtor. )he
dischar!e obtained by Aaron on the
principal obli!ation can no% be used as a
de$ense by the !uarantors a!ainst the
creditors. )he !uarantors are also entitled
to indemnity under Article #?:: o$ the Ciil
Code.
7nsolenc%2 Assets s! 8ia.ilities ()**:)
/oracio opened a co-ee shop usin!
money borro%ed $rom fnancial institutions.
A$ter ( months& /oracio le$t $or the ,1
%ith the intent o$ de$raudin! his creditors.
While his liabilities are %orth ;2.#m& his
assets& ho%eer are %orth ;2.@m. Aay
/oracio be declared insolent? (#%)
SUGGESTED ANSWER:
7o. /oracio may not be declared
insolent. /is assets %orth ;2.@m are more
than his liabilities %orth ;2.#m.
7nsolenc%2 Assi'nees ()**4)
Bn Cune 2:& 2HH@& Qicente obtained a %rit o$
preliminary attachment a!ainst Carlito. )he
ley on Carlito3s property occurred on Cune
#@& 2HH@. Bn Culy #H& 2HH@& another
creditor fled a petition $or inoluntary
insolency a!ainst Carlito. )he insolency
court !ae due course to the
petition. In the meantime& the case fled
by Qicente proceeded and resulted in a
"ud!ment a%ard in $aor o$ Qicente.
Aay the "ud!ment obtained by Qicente be
en$orced independently o$ the insolency
proceedin!s? <=plain.
SUGGESTED ANSWER:
)he "ud!ment obtained by Qicente can be
en$orced independently o$ the insolency
proceedin!s. ,nder 1ec (# o$ the
Insolency >a%& the assi!nment to the
assi!nee o$ all the real and personal
property& estate and e-ects o$ the debtor
made by the cler. o$ the court shall acate
and set aside any "ud!ment entered in
any action commenced %ith (? days
immediately prior to the commencement
o$ insolency proceedin!s. In this case&
ho%eer& the action fled by Qicente
a!ainst Carlito %as commenced by
Qicente not later than Cune 2:& 2HH@
(the $acts on this point are not clear)
%hen Qicente obtained a %rit o$
preliminary attachment a!ainst Carlito or
more than (? days be$ore the petition
$or inoluntary insolency %as fled
a!ainst Carlito by his other creditors. (i.e.
on Culy #H& 2HH@) .Radiola2?oshi*a /hil " $C
%R '0222 9ul51+,61 166s3'37
7nsolenc%2 E&&ect2 Declaration o& 7nsolenc%
()**)) ?&at are t&e effects of a
9u.g'ent in insol)ency in ;oluntary
1nsol)ency casesI
SUGGESTED ANSWER:
)he ad"udication or declaration o$
insolency by the court& a$ter hearin! or
de$ault& shall hae the $ollo%in! e-ects*
a$ 8orbid the payment to the debtor o$
any debt due to him and the deliery
to him o$ any property belon!in! to
himK
b$ 8orbid the trans$er o$ any property by
himK and
c$ 1tay o$ all ciil proceedin!s a!ainst the
insolent but $oreclosure may be
allo%ed (1ecs 2J P #4 Insolency >a%)
7nsolenc%2 /rau6ulent "a%ment (2002)
As o$ Cune 2& #??#& <d6o 1ystems
Corporation (<d6o) %as indebted to the
$ollo%in! creditors*
a$ Ace <+uipment 1upplies G $or arious
personal computers and accessories
sold to <d6o on credit amountin! to
;(??&???.
b$ /andyman Fara!e G $or mechanical
repairs (parts and serice) per$ormed
on <d6o3s company car amountin! to
;2?&???.
c$ Coselyn 9eyes G $ormer employee o$
<d6o %ho sued <d6o $or unla%$ul
termination o$ employment and %as
able to obtain a fnal "ud!ment a!ainst
<d6o $or ;2??&???.
.$ 5ureau o$ Internal 9eenue G $or
unpaid alue4 added ta=es amountin! to
;(?&???.
e$ Inte!rity 5an. G %hich !ranted <d6o a
loan in #??2 in the amount o$
;@??&???. )he loan %as not secured by
any asset o$ <d6o& but it %as
!uaranteed unconditionally and
solidarily by <d6o3s ;resident and
controllin! stoc.holder& <duardo S.
Bn!& as accommodation surety.
)he loan due to Inte!rity 5an. $ell due on
Cune 2@& #??#. 'espite pleas $or e=tension
o$ payment by <d6o& the
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ban. demanded immediate payment.
5ecause the ban. threatened to proceed
a!ainst the surety& <duardo S. Bn!& <d6o
decided to pay up all its obli!ations to
Inte!rity 5an.. Bn Cune #?& #??#& <d6o
paid to Inte!rity 5an. the $ull principal
amount o$ ;@??&???& plus accrued interests
amountin! to ;@@&???. As a result& <d6o
had hardly any cash le$t $or operations
and decided to close its business. A$ter
payin! the unpaid salaries o$ its
employees& <d6o fled a petition $or
insolency on Culy 2& #??#.
In the insolency proceedin!s in court&
the assi!nee in insolency sou!ht to
inalidate the payment made by <d6o to
Inte!rity 5an. $or bein! a $raudulent
trans$er because it %as made %ithin (?
days be$ore the flin! o$ the insolency
petition. In de$ense& Inte!rity 5an.
asserted that the payment to it %as $or a
le!itimate debt that %as not coered by
the prohibition because it %as a aluable
pecuniary consideration made in !ood
$aith& thus $allin! %ithin the e=ception
specifed in the Insolency >a%.
As "ud!e in the pendin! insolency case&
ho% %ould you decide the respectie
contentions o$ the assi!nee in insolency
and o$ Inte!rity 5an.? <=plain (@%)
SUGGESTED ANSWER:
)he contention o$ the assi!nee in
insolency is correct. )he payment made
by <d6o to Inte!rity 5an. %as a
$raudulent pre$erence or payment& bein!
made %ithin thirty ((?) days be$ore the
flin! o$ the insolency petition.
7nsolenc%2 Juris6iction2 Sole "ro$rietors#i$ ()**0)
Bne day Cerry /a%& doin! business under
the name 1tarli!ht <nterprise& a sole
proprietorship& fnds himsel$ short on cash
and unable to pay his debts as they $all due
althou!h he has su-icient property to
coer such debts. /e as.s you& as his
retained counsel& $or adice on the
$ollo%in! +ueries*
a$ 1hould he fle a petition %ith the 1<C to
be declared in a state o$ suspension o$
payments in ie% o$ the said fnancial
condition he $aces? <=plain your ans%er.
b$ 1hould he sell proft participation
certifcates to his 2? brothers and sisters in
order to raise cash $or his business?
<=plain.
SUGGESTED ANSWER:
a$ I %ould counsel Cerry to fle the
;etition $or 1uspension o$ ;ayment %ith
the ordinary courts& rather than the 1<C.
1<C3s "urisdiction oer such cases is
confned only to petitions fled by
corporations and partnerships under its
re!ulatory po%ers.
b$ Instead o$ sellin! proft participation
certifcates& I %ould ur!e Cerry to enter into
a partnership or to incorporate in order to
raise cash $or his business.
A8TERNAT7>E ANSWER:
b) Cerry may sell proft participation
certifcates to his brothers and sisters
%ithout re!isterin! the same %ith the 1<C
because his sale is an e=empted
transaction bein! isolated and not a sale to
the public.
7nsolenc%2 o.li'ations t#at surie ()**+)
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An insolent debtor& a$ter la%$ul
dischar!e $ollo%in! an ad"udication o$
insolency& is released $rom& !enerally& all
debts& claims& liabilities and demands
%hich are or hae been proed a!ainst
his estate. Fie @ obli!ations o$ the
insolent debtor to surie.
SUGGESTED ANSWER:
)he @ obli!ations o$ the insolent debtor
that surie are as $ollo%s*
/* )a=es and assessments due the
!oernment& national or localK
!* Bbli!ations arisin! $rom embe66lement
or $raudK
:* Bbli!ation o$ any person liable %ith
the insolent debtor $or the same
debt& either as a solidary co4 debtor&
surety& !uarantor& partner& indorser or
other%ise.
(* Alimony or claim $or supportK and
#* 'ebts not proable a!ainst the estate
(such as a$ter4 incurred obli!ations)
o$& or not included in the schedule
submitted by& the insolent debtor.
7nsolenc%2 >oluntar% 7nsolenc% "rocee6in' ()**))
Is the issuance o$ an order& declarin! a
petition in a Qoluntary Insolency
proceedin! insolent& mandatory upon the
court?
SUGGESTED ANSWER:
Assumin! that the petition %as in due
$orm and substance and that the assets
o$ the petitioner are less than his
liabilities& the court must ad"udicate the
insolency (1ec 2J Insolency >a%)
7nsolenc%2 >oluntar% s! 7noluntar% Solenc%
()**1) Distinguis& between )oluntary
insol)ency an.
in)oluntary insol)ency*
SUGGESTED ANSWER:
In oluntary insolency& it is the debtor
himsel$ %ho fles the petition $or
insolency& %hile in inoluntary insolency&
at least ( creditors are the ones %ho fle
the petition $or insolency a!ainst the
insolent debtor.
A8TERNAT7>E ANSWER:
)he $ollo%in! are the distinctions*
/* In inoluntary insolency& ( or more
creditors are re+uired& %hereas in
oluntary insolency& one creditor may
be su-icientK
!* In inoluntary insolency& the creditors
must be residents o$ the ;hilippines&
%hose credits or demand accrued in
the ;hilippines& and none o$ the
creditors has become a creditor by
assi!nment %ithin (? days prior to
the flin! o$ the petition& %hereas in
oluntary insolency& these are not
re+uired.
:* In inoluntary insolency& the debtor
must hae done any o$ the acts o$
insolency as enumerated by 1ec #?&
%hereas in oluntary insolency& the
debtor must not hae done any o$ said
acts.
(* In inoluntary insolency& the amount
o$ indebtedness must not be less than
;2&??? %hereas in oluntary insolency&
it must e=ceed ;2&???.
#* In inoluntary insolency& the petition
must be accompanied by a bond&
%hereas such is not re+uired in
oluntary insolency.
Mercantile Law Bar Examination Q & A (1990-2006) Page 6- of 103
8a; on Cor$orate Recoer% (2003)
L Corporation applied $or its rehabilitation
and submitted a rehabilitation plan %hich
called $or the entry by it into a "oint enture
a!reement %ith 0 Corporation. ,nder the
a!reement& 0 Corporation %as to lend to L
Corporation its credit $acilities %ith certain
ban.s to obtain $unds not only to operate L
Corporation but also $or a part thereo$ in
the amount o$ ;2 million as initial deposit
in a sin.in! $und to be au!mented
annually in amounts e+uialent to 2?% o$
the yearly income $rom its operation o$ the
business o$ L Corporation. 8rom this $und
the creditors o$ L Corporation %ere to be
paid annually& startin! $rom the second
year o$ operations& %ith the entire
indebtedness to be li+uidated in 2@ years.
)he creditors o$ L Corporation ob"ected to
the plan because 0 Corporation %ould be
ta.in! oer the business and assets o$ L
Corporation. Could the court approe the
plan despite the ob"ections o$ the creditors
o$ L Corporation and could the creditors be
compelled to $ollo% the plan? Could 0
Corporation& in mana!in! the business o$ L
Corporation in the meantime& be deemed to
hae ta.en4oer L Corporation itsel$? (:%)
SUGGESTED ANSWER:
Re#a.ilitation2 Sta% <r6er (2004)
)he 5lue 1tar Corporation fled %ith the
9e!ional )rial Court a petition $or
rehabilitation on the !round that it $oresa%
the impossibility o$ payin! its obli!ations as
they $all due. 8indin! the petition su-icient
in $orm and substance& the court issued an
Brder appointin! a rehabilitation receier
and stayin! the en$orcement o$ all claims
a!ainst the corporation.
:4at -s t4e rat-onale for t4e .tay $r,er5 7589
SU44ESTE) ANSWER(
2&e purpose of t&e stay or.er is inten.e. to
gi)e t&e 'anage'ent co''ittee or
re&abilitation recei)er t&e leeway to 'ake t&e
business )iable againB wit&out &a)ing to .i)ert
attention an. resources to litigation in )arious
fora (3hilippine #irlines v' Spouses :urang/ing, et al, 4'+'
0o' ),--*8, September (,, (;;(C B5 @omes, %nc' v' "ourt
of #ppeals,
4'+' 0os' 7-87* ? 77),., 1ctober ., )**;C +ubberworld
J3hils'K %nc' v' 0F+", 4'+' 0o' )(-77., #pril ),, )***C
SobreGuanite v' #SB &ev' "orp', 4'+' 0o' )-5-75, September
.;, (;;5!' 1t also pre)ents a cre.itor fro'
obtaining an a.)antage or preference o)er
anot&er wit& respect to actions against t&e
corporation (5inasia %nvestments and 5inance "orp v'
"ourt of #ppeals, 4' +' 0o' );7;;(, 1ctober 7,)**,!*
Sus$ension o& "a%ment s! 7nsolenc% ()**1)
Distinguis& between suspension of
pay'ents an. insol)ency*
SUGGESTED ANSWER:
In suspension o$ payments& the debtor is not
insolent. /e only needs time %ithin %hich
to conert his assetOs into cash %ith %hich to
pay his obli!ations %hen they $all due. In the
case o$ insolency& the debtor is insolent&
that is& his assets are less than his liabilities.
A8TERNAT7>E ANSWER:
)he $ollo%in! are the distinctions*
/* In suspension o$ payments& the debtor
has su-icient property to coer all his
debts but $oresees the impossibility o$
meetin! them %hen they respectiely
$all due& %hereas& in insolency& the
debtor does not hae su-icient
property to pay all his debts in $ullK
!* In suspension o$ payments& the
purpose is to suspend or delay
payment o$ debts %hich remain
una-ected althou!h a postponement o$
payment is declared& %hereas& in
insolency& the ob"ect is to obtain
dischar!e $rom all debts and liabilityK
:* In suspension o$ payments& no limit $or
the amount o$ indebtedness is
re+uired& %hereas& in insolency& the
debts must e=ceed ;2&??? in case o$
oluntary insolency& or must not be
less than ;2&??? in case o$ inoluntary
insolency.
Sus$ension o& "a%ments s! Sta% <r6er (2003)
Distinguis& t&e stay or.er in corporate
re&abilitation fro' a .eclaration in a state of
suspension of pay'entsI (N$
SUGGESTED ANSWER:
Sus$ension o& "a%ments2 Re#a.ilitation Receier ()***)
'ebtor Corporation and its principal
stoc.holders fled %ith the 1ecurities and
<=chan!e Commission (1<C) a petition $or
rehabilitation and declaration o$ a state o$
suspension o$ payments under ;' H?#4A.
)he ob"ectie %as $or 1<C to ta.e control
o$ the corporation and all its assets and
liabilities& earnin!s and operations& and
to determine the $easibility o$ continuin!
operations and rehabilitatin! the company
$or the beneft o$ inestors and creditors.
Fenerally& the unsecured creditors had
mani$ested %illin!ness to cooperate %ith
'ebtor Corporation. )he secured creditors&
ho%eer& e=pressed serious ob"ections and
reserations.
8irst 5an. had already initiated "udicial
$oreclosure proceedin!s on the mort!a!e
constituted on the $actory o$ 'ebtor
Corporation.
1econd 5an. had already initiated
$oreclosure proceedin!s on a third4party
mort!a!e constituted on certain assets o$
the principal stoc.holders.
)hird 5an. had already fled a suit a!ainst
the principal stoc.holders %ho had held
themseles liable "ointly and seerally $or
the loans o$ 'ebtor Corporation %ith said
5an..
A$ter hearin!& the 1<C directed the
appointment o$ a rehabilitation receier
and ordered the suspension o$ all actions
and claims a!ainst the 'ebtor corporation as
%ell as a!ainst the principal stoc.holders.
a$ 'iscuss the alidity o$ the 1<C order or
suspension? (#%)
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b$ 'iscuss the e-ects o$ the 1<C order o$
suspension on the "udicial $oreclosure
proceedin!s initiated by 8irst 5an..
(#%)
c$ Would the order o$ suspension hae
any e-ect on the $oreclosure
proceedin!s initiated by 1econd 5an.?
<=plain (#%)
.$ Would the order o$ suspension hae
any e-ect on the suit fled by )hird
5an.? <=plain. (#%)
e$ What are the le!al conse+uences o$ a
rehabilitation receiership? (#%)
f$ What measures may the receier ta.e
to presere the assets o$ 'ebtor
Corporation? (#%)
SUGGESTED ANSWER:
a* )he 1<C order o$ suspension o$ payment
is alid %ith respect to the debtor
corporation& but not %ith respect to the
principal stoc.holders. )he 1<C has
"urisdiction to declare suspension o$
payments %ith respect to corporations&
partnership or associations& but not %ith
respect to indiiduals.
SUGGESTED ANSWER:
b* )he 1<C order o$ suspension o$
payment suspended the "udicial
proceedin!s initiated by the 8irst
5an.. Accordin! to the 1upreme
Court in a line o$ cases& the
suspension order applies to secured
creditors and to the action to
en$orce the security a!ainst the
corporation re!ardless o$ the sta!e
thereo$.
SUGGESTED ANSWER:
c* )he order o$ suspension o$ payments
suspended the $oreclosure proceedin!s
initiated by the 1econd 5an.. While the
$oreclosure is a!ainst the property o$ a
third party& it is in reality an action to
collect the principal obli!ation o%ned by
the corporation. 'urin! the time that the
payment o$ the principal obli!ation is
suspended& the debtor corporation is
considered to be not in de$ault and&
there$ore& een the ri!ht to en$orce the
security& %hether o%ned by the debtor4
corporation or o$ a third party& has not yet
arisen.
A8TERNAT7>E ANSWER:
c* )he suspension order does not apply to a
third party mort!a!e because in such a
case& the credit is not yet bein! en$orced
a!ainst the corporation but a!ainst the
third party mort!a!or3s property.
SUGGESTED ANSWER:
.* 8or the same reason as in (c)& the order o$
suspension o$ payments suspended the suit
fled by )hird 5an. a!ainst the principal
stoc.holders.
A8TERNAT7>E ANSWER:
.* )he action a!ainst the principal
stoc.holders3 surety in $aor o$ the
corporation is not suspended as it is not an
action a!ainst the corporation but a!ainst
the stoc.holders %hose personality is
separate $rom that o$ the corporation.
SUGGESTED ANSWER:
e* ,nder ;' H?#A& the appointment o$ a
rehabilitation receier %ill suspend all
actions $or claims a!ainst the corporation
and the corporation %ill be placed under
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rehabilitation in accordance %ith a
rehabilitation plan approed by the 1<C.
SUGGESTED ANSWER:
f* )o presere the assets o$ the 'ebtor
Corporation& the receier may ta.e
custody o$& and control oer& all the
e=istin! assets and property o$ the
corporationK ealuate e=istin! assets and
liabilities& earnin!s and operations o$ the
corporationK and determine the best %ay
to sala!e and protect the interest o$ the
inestors and creditors.
Sus$ension o& "a%ments2 Reme6ies (2003)
When is the remedy o$ declaration in a
state o$ suspension o$ payments aailable
to a corporation?
SUGGESTED ANSWER:
(per dondee) )his remedy is aailable to
a corporation %hen it e=periences
inability to pay oneDs debts and liabilities&
and %here the petitionin! corporation
either*
/* has su-icient property to coer all its
debts but $oresees the impossibility o$
meetin! them %hen they $all due
(solent but illi+uid) or
!* has no su-icient property (insolent)
but is under the mana!ement o$ a
rehabilitation receier or a
mana!ement committee& the
applicable la% is ;.'. 7o. H?#4A
pursuant to 1ec. @ par.
Letters o Cre&it
8etter o& Cre6it: (ort'a'e (2001)
9icardo mort!a!ed his fshpond to AC
5an. to secure a ;2 Aillion loan. In a
separate transaction& he opened a letter
o$ credit %ith the same ban. $or
R@??&???.?? in $aor o$ /1 5an.& a
$orei!n ban.& to purchase outboard
motors. >i.e%ise& 9icardo e=ecuted a
1urety A!reement in $aor o$ AC 5an..
)he outboard motors arried and %ere
deliered to 9icardo& but he %as not able
to pay the purchase price thereo$.
a$ Can AC 5an. ta.e possession o$ the
outboard motors? Why?
b$ Can AC 5an. also $oreclose the
mort!a!e oer the fshpond? <=plain. (@%)
SUGGESTED ANSWER:
a$ 7o& $or AC 5an. has no le!al standin!&
much less a lien& on the outboard
motors. Inso$ar as AC 5an. is
concerned& it has priity %ith the
person o$ 9icardo under the 1urety
A!reement& and a lien on the fshpond
based on the real estate mort!a!e
constituted therein.
b$ 0es& but only to en$orce payment o$
the principal loan o$ ;2million secured
by the real estate mort!a!e on the
fshpond
8etter o& Cre6it2 Certi&ication &rom Consi'nee ()**3)
Mercantile Law Bar Examination Q & A (1990-2006) Page 69 of 103
5Q a!reed to sell to AC& a 1hip and
Aerchandise 5ro.er& #&@?? cubic meters o$
lo!s at R#I per cubic meter 8B5. A$ter
inspectin! the lo!s& C' issued a purchase
order.
Bn the arran!ements made upon
instruction o$ the consi!nee& /P)
Corporation o$ >A& Cali$ornia& the 1;
5an. o$ >A issued an irreocable letter o$
credit aailable at si!ht in $aor o$ 5Q $or
the total purchase price o$ the lo!s. )he
letter o$ credit %as mailed to 8< 5an. %ith
the instruction to $or%ard it to the
benefciary. )he letter o$ credit proided
that the dra$t to be dra%n is on 1; 5an.
and that it be accompanied by& amon!
other thin!s& a certifcation $rom AC&
statin! that the lo!s hae been approed
prior shipment in accordance %ith the
terms and conditions o$ the purchase order.
5e$ore loadin! on the essel chartered by
AC& the lo!s %ere inspected by custom
inspectors and representaties o$ the
5ureau o$ 8orestry& %ho certifed to the
!ood condition and e=portability o$ the
lo!s. A$ter the loadin! %as completed& the
Chie$ Aate o$ the essel issued a mate
receipt o$ the car!o %hich stated that the
lo!s are in !ood condition. /o%eer& AC
re$used to issue the re+uired certifcation
in the letter o$ credit. 5ecause o$ the
absence o$ certifcation& 8< 5an. re$used
to adance payment on the letter o$ credit.
/$ Aay 8e 5an. be held liable under the
letter o$ credit? <=plain.
!$ ,nder the $acts aboe& the seller& 5Q&
ar!ued that 8< 5an.& by acceptin! the
obli!ation to noti$y him that the
irreocable letter o$ credit has been
transmitted to it on his behal$& has
confrmed the letter o$ credit.
Conse+uently& 8< 5an. is liable under the
letter o$ credit. Is the ar!ument tenable?
<=plain.
SUGGESTED ANSWER:
/$ 7o. )he letter o$ credit proides as a
condition a certifcation o$ AC. Without
such certifcation& there is no obli!ation
on the part o$ 8< 5an. to adance
payment o$ the letter o$ credit. .Feati Bank "
C$ 166 S 0'67
!$ 7o. 8< 5an. may hae confrmed the
letter o$ credit %hen it notifed 5Q& that an
irreocable letter o$ credit has been
transmitted to it on its behal$. 5ut the
conditions in the letter o$ credit must frst
be complied %ith& namely that the dra$t
be accompanied by a certifcation $rom AC.
8urther& confrmation o$ a letter o$ credit
must be e=pressed. .Feati Bank " C$ 166 s
0'67
8etters o& Cre6it2 8ia.ilit% o& a con&irmin' an6 noti&%in'
.an- ()**3)
In letters o$ credit in ban.in! transactions&
distin!uish the liability o$ a confrmin! ban.
$rom a noti$yin! ban..
SUGGESTED ANSWER:
In case anythin! %ron! happens to the
letter o$ credit& a confrmin! ban. incurs
liability $or the amount o$ the letter o$
credit& %hile a noti$yin! ban. does not incur
any liability.
8etters o& Cre6it2 8ia.ilit% o& a Noti&%in' ,an- (2003)
a$ What liability& i$ any is incurred by an
adisin! or noti$yin! ban. in a letter o$
credit transaction?
SUGGESTED ANSWER:
It incurs no liability unless it is also the
ne!otiatin! ban.
b$ 5rao 5an. receied $rom Cisco 5an.
by re!istered mail an irreocable
letter o$ credit issued by 'elta 5an.
$or the account o$ 0 Company in the
amount o$ ,1R2?&???&??? to coer
the sale o$ canned $ruit "uices. )he
benefciary o$ the letter o$ credit %as
L Corporation %hich later on partially
aailed itsel$ o$ the letter o$ credit by
submittin! to 5rao 5an. all
documents relatie to the shipment o$
the cans o$ $ruit "uices. 5rao 5an.
paid L Corporation $or its partial
aailment. >ater& ho%eer& it re$used
$urther aailment because o$
suspicions o$ $raud bein! practiced
upon it and& instead & sued L
Corporation to recoer %hat it had
paid the latter. /o% %ould you rule i$
you %ere the "ud!e to decide the
controersy? (:%)
SUGGESTED ANSWER:
8etters o& Cre6it2 T#ree Distinct Contract Relations#i$s
(2002)
<=plain the three (() distinct but
intert%ined contract relationships that
are indispensable in a letter o$ credit
transaction.
SUGGESTED ANSWER:
)he three (() distinct but intert%ined
contract relationships that are
indispensable in a letter o$ credit
transaction are*
/$ 5et%een the applicantObuyerOimporter
and the benefciaryOsellerOe=porter G
)he applicantObuyerOimporter is the
one %ho procures the letter o$ credit
and obli!es himsel$ to reimburse the
issuin! ban. upon receipt o$ the
documents o$ title& %hile the
benefciaryOsellerOe=porter is the one
%ho in compliance %ith the contract
o$ sale ships the !oods to the buyer
and deliers the documents o$ title and
dra$t to the issuin! ban. to recoer
payment $or the !oods. )heir
relationship is !oerned by the contract
o$ sale.
!$ 5et%een the issuin! ban. and the
benefciaryOsellerOe=porter G )he issuin!
ban. is the one that issues the letter o$
credit and underta.es to pay the seller
upon receipt o$ the dra$t and proper
documents o$ title and to surrender
the documents to the buyer upon
reimbursement. )heir relationship is
!oerned by the terms o$ the letter o$
credit issued by the ban..
:$ 5et%een the issuin! ban. and the
applicantObuyerOimporter G )heir
relationship is !oerned by the terms
o$ the application and a!reement $or
the issuance o$ the letter o$ credit by
the ban..
Maritime Commer#e
Aera'e2 "articular Aera'e s! General Aera'e (2003)
7ersion 1990+2006 U %&ate& 'y
Dondee
7ersion 1990+2003 Arrange& 'y SULAW Cass
200!
Mercantile Law Bar Examination Q & A (1990-2006) Page :0 of 103
AOQ Ilo! de Aanila %ith a car!o o$ @??
tons o$ iron ore le$t the ;ort o$ Samboan!a
City bound $or Aanila. 8or one reason or
another& AOQ Ilo! de Aanila hit a
submer!ed obstacle causin! it to sin.
alon! %ith its car!o. A salor& 1alador&
Inc.& %as contracted to reEoat the essel
$or ;2 Aillion. What .ind o$ aera!e %as
the reEoatin! $ee o$ ;2 million& and $or
%hose account should it be? Why? (4%)
SUGGESTED ANSWER:
;articular Aera!e. )he o%ner o$ the
essel shall shoulder the aera!e.
Fenerally spea.in!& simple or particular
aera!es include all e=penses and
dama!es caused to the essel or car!o
%hich hae not inured to the common
beneft (Art. J?H& and are& there$ore& to be
borne only by the o%ner o$ the property
%hich !ae rise to the same (Art. J2?)
%hile !eneral or !ross aera!es include
Nall the dama!es and e=penses %hich are
deliberately caused in order to sae the
essel& its car!o& or both at the same
time& $rom a real and .no%n ris.N (Art.
J22). 5ein! $or the common beneft& !ross
aera!es are to be borne by the o%ners o$
the articles saed (Art. J2#). In the
present case there is no proo$ that the
essel had to be put aEoat to sae it $rom
an imminent dan!er.
,ottomr% ()**3)
Fi!i obtained a loan $rom Co"o
Corporation& payable in installments. Fi!i
e=ecuted a chattel mort!a!e in $aor o$
Co"o %hereby she trans$erred in $aor o$
Co"o& its successors and assi!ns& all her
title& ri!hts ... to a essel o$ %hich Fi!i is
the absolute o%ner. )he chattel mort!a!e
%as re!istered %ith the ;hilippine Coast
Fuard pursuant to ;' 2@#2. Fi!i de$aulted
and had a total accountability o$ ;(A. 5ut
Co"o could not $oreclose the mort!a!e on
the essel because it san. durin! a
typhoon.
Aean%hile& >utan! Corporation %hich
rendered sala!e serices $or reEoatin! the
essel sued Fi!i.
Whose lien should be !ien pre$erence&
that o$ Co"o or >utan!?
SUGGESTED ANSWER:
>utan! Corporation3s lien should be !ien
pre$erence. )he lien o$ Co"o by irtue o$ a
loan o$ bottomry %as e=tin!uished %hen
the essel san.. ,nder such loan on
bottomry Co"o acted not only as creditor but
also as insurer. Co"o3s ri!ht to recoer the
amount o$ the loan is predicated on the
sa$e arrial o$ the essel at the port o$
destination. )he ri!ht %as lost %hen the
essel san. (1ec 2I ;' 2@#2)
Carria'e o& Goo6s: Deiation: 8ia.ilit% (2001)
Bn a clear %eather& AOQ 1undo& carryin!
insured car!o& le$t the port o$ Aanila bound
$or Cebu. While at sea& the essel
encountered a stron! typhoon $orcin! the
captain to steer the essel to the nearest
island %here it stayed $or seen days. )he
essel ran out o$ proisions $or its
passen!ers. Conse+uently& the essel
proceeded to >eyte to replenish its
supplies.
Assumin! that the car!o %as dama!ed
because o$ such deiation& %ho bet%een
the insurance company and the o%ner o$
the car!o bears the loss? <=plain.
SUGGESTED ANSWER:
7ersion 1990+2006 U %&ate& 'y
Dondee
7ersion 1990+2003 Arrange& 'y SULAW Cass
200!
)he insurance company should bear the
loss to the car!o because the deiation o$
the essel %as proper in order to aoid a
peril& %hich %as the stron! typhoon. )he
runnin! out o$ proisions %as a direct
conse+uence o$ the proper deiation in
order to aoid the peril o$ the typhoon.
A8TERNAT7>E ANSWER:
)he o%ner o$ the car!o bears the loss
because in the case at bar& they stayed
too lon! at the island& ma.in! it an
improper deiation. <ery deiation not
specifed in 1ec. 2#4 is improper. (1ec.
2#@& Insurance Code)
Carria'e o& Goo6s2 Deiation2 W#en "ro$er (2001)
,nder %hat circumstances can a essel
properly proceed to a port other than its
port o$ destination? <=plain. (4%)
SUGGESTED ANSWER:
'eiation is proper*
a$ %hen caused by circumstances oer
%hich neither the master nor the
o%ner o$ the ship has any controlK
b$ %hen necessary to comply %ith a
%arranty or aoid a peril& %hether or
not the peril is insured a!ainstK
c$ %hen made in !ood $aith& and upon
reasonable !rounds o$ belie$ in its
necessity to aoid a perilK or
.$ %hen in !ood $aith& $or the purpose o$
sain! human li$e& or reliein!
another essel in distress. (1ec. 2#4&
Insurance Code)
Carria'e o& Goo6s2 E9ercise E9traor6inar% Dili'ence
(2001)
1tar 1hippin! >ines accepted 2?? cartons
o$ sardines $rom Aaster to be deliered to
@@@ Company in Aanila. Bnly JJ cartons
%ere deliered& ho%eer& these %ere in
bad condition. @@@ Company claimed $rom
1tar 1hippin! >ines the alue o$ the
missin! !oods& as %ell as the dama!ed
!oods. 1tar 1hippin! >ines re$used
because the $ormer $ailed to present a bill
o$ ladin!. 9esole %ith reasons the claim
o$ @@@ Company. (4%)
SUGGESTED ANSWER:
)he claim o$ @@@ Company is meritorious&
een i$ it $ails to present a bill o$ ladin!.
Althou!h a bill o$ ladin! is the best
eidence o$ the contract o$ carria!e $or
car!o& neertheless such contract can e=ist
een %ithout a bill o$ ladin!. >i.e any
other contract& a contract o$ carria!e is a
meetin! o$ minds that !ies rise to an
obli!ation on the part o$ the carrier to
transport the !oods. Curisprudence has
held that the moment the carrier receies
the car!o $or transport& then its duty to
e=ercise e=traordinary dili!ence arises#
.Cia# Mariti!a "# nsurance Co# of &orth
$!erica,
4'+' 0o' F$)8*-5, 1ctober .;, )*-,C 0egre v' "abahug
Shipping ? "o', 4'+' 0o' F$)*-;*, #pril (*, )*--!
A8TERNAT7>E ANSWER:
Star S&ipping Lines can refuse to &onor ###
Co'panyOs clai' for t&e 'issing an.
.a'age. goo.s* 2&e Bill of La.ing is t&e
.ocu'ent of title t&at legally establis&es t&e
owners&ip of ### Co'pany o)er sai. goo.s*
### nee.s to present t&e Bill of La.ing to
legally clai' sai. goo.s* (0ational Lnion 5ire
%nsurance of 3ittsburg v' Stolt$0ielaen, 4'+' 0o' 87*58, #pril
(-, )**;!
C#arter "art% ()**))
Mercantile Law Bar Examination Q & A (1990-2006) Page :1 of 103
)he 1aad 'e Co enters into a oya!e
charter %ith L0S oer the latter3s essel&
the AQ >ady>oe. 5e$ore the 1aad could
load it& L0S sold >ady >oe to Bslob
Aaritime Co %hich decided to load it $or
its o%n account.
a$ Aay L0S 1hippin! Co alidly as. $or the
rescission o$ the charter party? I$ so& can
1aad recoer dama!es? )o %hat e=tent?
b$ I$ Bslob did not load it $or its o%n
account& is it bound by the charter party?
c$ <=plain the meanin! o$ o%ner pro hac
ice o$ the essel. In %hat .ind o$ charter
party does this obtain?
SUGGESTED ANSWER:
a$ L0S may as. $or the rescission o$ the
charter party i$& as in this case& it sold the
essel be$ore the charterer has be!un to
load the essel and the purchaser loads it
$or his o%n account. 1aad may recoer
dama!es to the e=tent o$ its losses (Art :JH
Code o$ Commerce)
b$ I$ Bslob did not load >ady >oe $or its
o%n account& it %ould be bound by the
charter party& but L0S %ould hae to
indemni$y Bslob i$ it %as not in$ormed o$
the Charter ;arty at the time o$ sale. (Art
:JH Code o$ Commerce)
c$ 2&e ter' @8wner Pro Eac ;ice of t&e
;esselBA is generally un.erstoo. to be t&e
c&arterer of t&e )essel in t&e case of bareboat
or .e'ise c&arter (FitonGua Shipping "o v 0ational
SeamenMs Board 4+ 5)*); );#ug)*8*!
C#arter "art% (2003)
,nder a charter party& LLB )radin!
Company shipped su!ar to Coca4Cola
Company throu!h 11 7e!ros 1hippin!
Corp.& insured by Capitol Insurance
Company. )he car!o arried but %ith
shorta!es. Coca4Cola demanded $rom
Capitol Insurance Co. ;@??.??? in
settlement $or LLB )radin!. )he AA
9e!ional )rial Court& %here the ciil suit
%as fled& Nabsoled the insurance
company& declarin! that under the Code o$
Commerce& the shippin! a!ent is ciilly
liable $or dama!es in $aor o$ third persons
due to the conduct o$ the carrierDs captain&
and the stipulation in the charter party
e=emptin! the o%ner $rom liability is not
a!ainst public policy. Coca4Cola appealed.
Will its appeal prosper? 9eason brieEy. (@%)
SUGGESTED ANSWER:
7o. )he appeal o$ Coca4Cola %ill not
prosper. ,nder Article @JI o$ the Code o$
Commerce& the shippin! a!ent is ciilly
liable $or dama!es in $aor o$ third persons
due to the conduct o$ the carrierDs captain&
and the shippin! a!ent can e=empt himsel$
there$rom only by abandonin! the essel
%ith all his e+uipment and the $rei!ht he
may hae earned durin! the oya!e. Bn the
other hand& assumin! there is bareboat
charter& the stipulation in the charter party
e=emptin! the o%ner $rom liability is not
a!ainst public policy because the public at
lar!e is not inoled .Bo!e nsurance Co# "#
$!erican Stea!shi- $gencies, nc#, 23 SCR$20
.166+7#
C<GSA: "rescri$tion o& ClaimsFActions (2003)
AA entered into a contract %ith 55 thru
CC to transport ladiesD %ear $rom Aanila
to 8rance %ith transhipment at )ai%an.
1omeho% the !oods %ere not loaded at
)ai%an on time. /ence& %hen the !oods
arried in 8rance& they arried No-4
seasonN and AA %as paid only $or one4
hal$ the alue by the buyer. AA claimed
dama!es $rom the shippin! company and
its a!ent. )he de$ense o$ the respondents
%as prescription. Considerin! that the
ladiesD %ear su-ered Nloss o$ alue&N as
claimed by AA& should the prescriptie
period be one year under the Carria!e o$
Foods by 1ea Act& or ten years under
the Ciil Code? <=plain brieEy. (@%)
SUGGESTED ANSWER:
)he applicable prescriptie period is ten
years under the Ciil Code. )he one4year
prescriptie period under the Carria!e o$
Foods by 1ea Act applies in cases o$ loss
or dama!es to the car!o. )he term NlossN
as interpreted by the 1upreme Court in
Mitsui O#S#@# 3ines 3td# "# Court of $--eals,
2+' SCR$ 366 .166+7& contemplates a
situation %here no deliery at all %as
made by the carrier o$ the !oods
because the same had perished or !one
out o$ commerce deteriorated or decayed
%hile in transit. In the present case& the
shipment o$ ladiesD %ear %as actually
deliered. )he Nloss o$ alueN is not the
total loss contemplated by the Carria!e o$
Foods by 1ea Act.
C<GSA2 "rescri$tion o& Claims ()**2)
A local consi!nee sou!ht to en$orce
"udicially a claim a!ainst the carrier $or
loss o$ a shipment o$ drums o$
lubricatin! oil $rom Capan under the
Carria!e o$ Foods by 1ea Act (CBF1A)
a$ter the carrier had re"ected its demand.
)he carrier pleaded in its Ans%er the
a-irmatie de$ense o$ prescription under
the proisions o$ said Act inasmuch as
the suit %as brou!ht by the consi!nee
a$ter one (2) year $rom the deliery o$
the !oods. In turn& the consi!nee
contended that the period o$ prescription
%as suspended by the %ritten e=tra"udicial
demand it had made a!ainst the carrier
%ithin the one4 year period& pursuant to
Article 22@@ o$ the Ciil Code proidin!
that the prescription o$ actions is
interrupted %hen there is a %ritten
e=tra"udicial demand by the creditors.
a$ /as the action in $act prescribed? Why?
b$ I$ the consi!nee3s action %ere
predicated on misdeliery or conersion o$
the !oods& %ould your ans%er be the
same? <=plain brieEy.
SUGGESTED ANSWER:
a$ )he action ta.en by the local consi!nee
has& in $act& prescribed. )he period o$ one
year under the Carria!e o$ Foods by 1ea
Act (CBF1A) is not interrupted by a
%ritten e=tra"udicial demand. )he
proisions o$ Art 22@@ o$ the 7CC merely
apply to prescriptie periods proided $or
in said Code and not to special la%s such
as CBF1A e=cept %hen other%ise
proided. .)ole " Mariti!e Co 1(+ s 11+7#
b$ I$ the consi!nee3s action %ere
predicated on misdeliery or conersion o$
!oods& the proisions o$ the CBF1A %ould
be inapplicable. In these cases& the 7CC
prescriptie periods& includin! Art 22@@ o$
the 7CC %ill apply .$ng " Co!-ania
Marita!a 133 s 6,,7
Version 1990-2006 U pdated by
Dondee
Version 1990-2003 Arranged by SULAW Class
2005
Mercantile Law Bar Examination Q & A (1990-2006) Page -2 of 103
SUGGESTED ANSWER:
C<GSA2 "rescri$tion o& Claims (2000)
9C imported computer motherboards $rom
the ,nited 1tates and had them shipped
to Aanila aboard an ocean4 !oin! car!o
ship o%ned by 5C 1hippin! Company.
When the car!o arried at Aanila seaport
and deliered to 9C& the crate appeared
intactK but upon inspection o$ the contents&
9C discoered that the items inside had all
been badly dama!ed. /e did not fle any
notice o$ dama!e or anythin! %ith
anyone& least o$ all %ith 5C 1hippin!
Company. What he did %as to proceed
directly to your o-ice to consult you
about %hether he should hae !ien a
notice o$ dama!e and ho% lon! a time he
had to initiate a suit under the proisions
o$ the Carria!e o$ Foods by 1ea Act (CA
:@). What %ould your adice be? (#%)
SUGGESTED ANSWER:
Ay adice %ould be that 9C should !ie
notice o$ the dama!e sustained by the
car!o %ithin ( days and that he has to fle
the suit to recoer the dama!e sustained by
the car!o %ithin one year $rom the date o$
the deliery o$ the car!o to him.
C<GSA2 "rescri$tie "erio6 ()**1)
What is the prescriptie period $or actions
inolin! lost or dama!ed car!o under the
Carria!e o$ Foods by 1ea Act?
SUGGESTED ANSWER:
B7< 0<A9 a$ter the deliery o$ the !oods
or the date %hen the !oods should hae
been deliered (1ec ((:)& CBF1A)
Doctrine o& 7nscruta.le /ault ()**1)
/* # essels comin! $rom the opposite
directions collided %ith each other
due to $ault imputable to both. What
are the liabilities o$ the t%o essels
%ith respect to the dama!e caused
to them and their car!oes? <=plain.
!* I$ it cannot be determined %hich o$
the t%o essels %as at $ault
resultin! in the collision& %hich party
should bear the dama!e caused to
the essels and the car!oes? <=plain.
:* Which party should bear the dama!e to
the essels and the car!oes i$ the cause o$
the collision %as a $ortuitous eent?
<=plain.
SUGGESTED ANSWER:
/* <ach essel must bear its o%n dama!e.
5oth o$ them %ere at $ault. (Art J#I& Code
o$ Commerce)
!* <ach o$ them should bear their
respectie dama!es. 1ince it cannot be
determined as to %hich essel is at $ault.
)his is the doctrine o$ inscrutable $ault.
:* 7o party shall be held liable since the
cause o$ the collision is $ortuitous eent.
)he carrier is not an insurer.
Doctrine o& 7nscruta.le /ault ()**+)
<=plain the doctrine in Aaritime accidents G
'octrine o$ Inscrutable 8ault
Version 1990-2006 U pdated by
Dondee
Version 1990-2003 Arranged by SULAW Class
2005
,nder the doctrine o$ inscrutable $ault&
%here $ault is established but it cannot
be determined %hich o$ the t%o essels
%ere at $ault& both shall be deemed to
hae been at $ault.
Doctrine o& 7nscruta.le /ault ()**:)
A seere typhoon %as ra!in! %hen the
essel 11 Aasdaam collided %ith AQ
;rinces. It is conceded that the typhoon
%as the ma"or cause o$ the collision&
althou!h there %as a ery stron!
possibility that it could hae been aoided
i$ the captain o$ 11 Aasdaam %as not
drun. and the captain o$ the AQ ;rinces
%as not asleep at the time o$ collisions.
Who should bear the dama!es to the
essels and their car!oes? (@%)
SUGGESTED ANSWER:
)he shipo%ners o$ 11 Aasdaam and AQ
;rincess shall each bear their respectie
loss o$ essels. 8or the losses and
dama!es su-ered by their car!oes both
shipo%ners are solidarily liable.
8imite6 8ia.ilit% Rule ()**3)
)oni& a copra dealer& loaded 2??? sac.s o$
copra on board the essel AQ )onichi (a
common carrier en!a!ed in coast%ise
trade o%ned by Ichi) $or shipment $rom
;uerto Falera to Aanila. )he car!o did
not reach Aanila because the essel
capsi6ed and san. %ith all its car!o.
When )oni sued Ichi $or dama!es based
on breach o$ contract& the latter ino.ed
the limited liability rule.
/$ What do you understand o$ the rule
ino.ed by Ichi?
!$ Are there e=ceptions to the limited
liability rule?
SUGGESTED ANSWER:
/$ 5y limited liability rule is meant that
the liability o$ a shipo%ner $or dama!es in
case o$ loss is limited to the alue o$ the
essel inoled. /is other properties
cannot be reached by the parties entitled to
dama!es.
!$ 0es. When the ship o%ner o$ the essel
inoled is !uilty o$ ne!li!ence& the
limited liability rule does not apply. In
such case& the ship o%ner is liable to the
$ull e=tent o$ the dama!es sustained by
the a!!rieed parties .Mecenas " C$ 1+, s
+37
8imite6 8ia.ilit% Rule ()**+)
<=plain the doctrine in Aaritime
accidents G )he 'octrine o$ >imited
>iability
SUGGESTED ANSWER:
,nder the doctrine o$ limited liability
the e=clusiely real and hypothecary
nature o$ maritime la% operates to limit
the liability o$ the shipo%ner to the alue
o$ the essel& earned $rei!hta!e and
proceeds o$ the insurance. /o%eer& such
doctrine does not apply i$ the shipo%ner
and the captain are !uilty o$ ne!li!ence.
8imite6 8ia.ilit% Rule ()***)
)hin.in! that the impendin! typhoon %as
still #4 hours a%ay& AQ ;ioneer le$t port
to sail $or >eyte. )hat %as a miscalculation
o$ the typhoon si!nals by both the ship4
Mercantile Law Bar Examination Q & A (1990-2006) Page -3 of 103
o%ner and the captain as the typhoon
came earlier and oertoo. the essel. )he
essel san. and a number o$ passen!ers
disappeared %ith it.
9elaties o$ the missin! passen!ers
claimed dama!es a!ainst the shipo%ner.
)he shipo%ner set up the de$ense that
under the doctrine o$ limited liability& his
liability %as co4e=tensie %ith his interest
in the essel. As the essel %as totally
lost& his liability had also been
e=tin!uished.
a* /o% %ill you adice the claimants?
'iscuss the doctrine o$ limited liability in
maritime la%. ((%)
b* Assumin! that the essel %as insured&
may the claimants !o a$ter the insurance
proceeds? ((%)
SUGGESTED ANSWER:
a* ,nder the doctrine o$ limited liability in
maritime la%& the liability o$ the
shipo%ner arisin! $rom the operation o$ a
ship is confned to the essel& e+uipment&
and $rei!ht& or insurance& i$ any& so that i$
the shipo%ner abandoned the ship&
e+uipment& and $rei!ht& his liability is
e=tin!uished. /o%eer& the doctrine o$
limited liability does not apply %hen the
shipo%ner or captain is !uilty o$
ne!li!ence.
b* 0es. In case o$ a lost essel& the claimants
may !o a$ter the proceeds o$ the insurance
coerin! the essel.
8imite6 8ia.ilit% Rule (2000)
AQ Aariposa& one o$ fe passen!er ships
o%ned by Aarina 7ai!ation Co& san. o-
the coast o$ Aindoro %hile en route to
Iloilo City. Aore than #?? passen!ers
perished in the disaster. <idence sho%ed
that the ship captain i!nored typhoon
bulletins issued by ;a!4asa durin! the #44
hour period immediately prior to the
essel3s departure $rom Aanila. )he
bulletins %arned all types o$ sea cra$ts to
aoid the typhoon3s e=pected path near
Aindoro. )o ma.e matters %orse& he
too. more load than %as allo%ed $or the
ship3s rated capacity. 1ued $or dama!es by
the ictim3s suriin! relaties& Aarina
7a Co contended 2) that its liability& i$
any& had been e=tin!uished %ith the
sin.in! o$ AQ AariposaK and #) that
assumin! it had not been so e=tin!uished&
such liability should be limited to the loss
o$ the car!o. Are these contentions
meritorious in the conte=t o$ applicable
proisions o$ the Code o$ Commerce? ((%)
SUGGESTED ANSWER:
0es. )he contentions o$ Aarina 7a Co are
meritorious. )he captain o$ AQ Aariposa
is !uilty o$ ne!li!ence in i!norin! the
typhoon bulletins issued by ;AFA1A and in
oerloadin! the essel. 5ut only the captain
o$ the essel AQ Aariposa is !uilty o$
ne!li!ence. )he ship o%ner is not.
)here$ore& the ship o%ner can ino.e the
doctrine o$ limited liability.
8imite6 8ia.ilit% Rule2 Doctrine o& 7nscruta.le /ault
()**))
In a collision bet%een AO) Aanila& a
tan.er& and AOQ 'on Claro& an inter4island
essel& 'on Claro san. and many o$ its
passen!ers dro%ned and died. All its
car!oes %ere lost. )he collision occurred at
ni!httime but the sea %as calm& the
%eather $air and isibility %as !ood. ;rior
to the collision and %hile still 4 nautical
miles apart& 'on
Claro already si!hted Aanila on its radar
screen. Aanila had no radar e+uipment.
As $or speed& 'on Claro %as t%ice as
$ast as Aanila.
At the time o$ the collision& Aanila $ailed
to $ollo% 9ule 2H o$ the International
9ules o$ the 9oad %hich re+uires #
essels meetin! head on to chan!e their
course by each essel steerin! to
starboard (ri!ht) so that each essel
may pass on the port side (le$t) o$ the
other. Aanila si!naled that it %ould turn
to the port side and steered accordin!ly&
thus resultin! in the collision. 'on
Claro3s captain %as o-4duty and %as
hain! a drin. at the ship3s bar at the
time o$ the collision.
a$ Who %ould you hold liable $or the
collision?
b$ I$ 'on Claro %as at $ault& may the
heirs o$ the passen!ers %ho died and
the o%ners o$ the car!oes recoer
dama!es $rom the o%ner o$ said
essel?
SUGGESTED ANSWER:
I can hold the # essels liable. In the
problem !ien& %hether on the basis o$
the $actual settin!s or under the doctrine
o$ inscrutable $ault& both essels can be
said to hae been !uilty o$ ne!li!ence.
)he liability o$ the # carriers $or the death
or in"ury o$ passen!ers and $or the loss o$
or dama!e to the !oods arisin! $rom the
collision is solidary. 7either carrier may
ino.e the doctrine o$ last clear chance
%hich can only be releant& i$ at all&
bet%een the t%o essels but not on the
claims made by passen!ers or shippers
.3itonGua Shi--ing " &ational Sea!en Board
%R 0161, 1,$ug16+67
SUGGESTED ANSWER:
0es& but sub"ect to the doctrine o$ limited
liability. )he doctrine is to the e-ect that
the liability o$ the shipo%ners %ould only
be to the e=tent o$ any remainin! alue o$
the essel& proceeds o$ insurance& i$ any&
and earned $rei!hta!e. Fien the $actual
settin!s& the shipo%ner himsel$ %as not
!uilty o$ ne!li!ence and& there$ore& the
doctrine can %ell apply .$!-aro de los
Santos " C$ 1+6 s 667
8imite6 8ia.ilit% Rule2 General Aera'e 8oss (2000)
L 1hippin! Company spent almost a
$ortune in refttin! and repairin! its lu=ury
passen!er essel& the AQ Aarina& %hich
plied the inter4island routes o$ the
company $rom >a ,nion in the north to
'aao City in the south. )he AQ Aarina
met an untimely $ate durin! its post4
repair oya!e. It san. o- the coast o$
Sambales %hile en route to >a ,nion $rom
Aanila. )he inesti!ation sho%ed that the
captain alone %as ne!li!ent. )here %ere
no casualties in that disaster. 8aced %ith
a claim $or the payment o$ the refttin!
and repair& L 1hippin! company asserted
e=emption $rom liability on the basis o$ the
hypothecary or limited liability rule under
Article @JI o$ the Code o$ Commerce. Is L
1hippin! Company3s assertion alid?
<=plain ((%).
SUGGESTED ANSWER:
7o. )he assertion o$ L 1hippin! Company
is not alid. )he total destruction o$ the
essel does not a-ect the liability o$ the
ship o%ner $or repairs on the essel
completed be$ore its loss.
8imite6 8ia.ilit% Rule2 General Aera'e 8oss (2000)
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AQ 1uper8ast& a passen!er4car!o essel
o%ned by 18 1hippin! Company plyin!
the inter4island routes& %as on its %ay to
Samboan!a City $rom the Aanila port
%hen it accidentally& and %ithout $ault or
ne!li!ence o$ anyone on the ship& hit a
hu!e Eoatin! ob"ect. )he accident caused
dama!e to the essel and loss o$ an
accompanyin! crated car!o o$ passen!er
;9. In order to li!hten the essel and
sae it $rom sin.in! and in order to aoid
ris. o$ dama!e to or loss o$ the rest o$
the shipped items (none o$ %hich %as
located on the dec.)& some had to be
"ettisoned. 18 1hippin! had the essel
repaired at its port o$ destination. 18
1hippin! therea$ter fled a complaint
demandin! all the other car!o o%ners to
share in the total repair costs incurred
by the company and in the alue o$ the
lost and "ettisoned car!oes. In ans%er to
the complaint& the shippers3 sole
contention %as that& under the Code o$
Commerce& each dama!ed party should
bear its or his o%n dama!e and those that
did not su-er any loss or dama!e %ere not
obli!ated to ma.e any contribution in $aor
o$ those %ho did. Is the shippers3
contention alid? <=plain (#%)
SUGGESTED ANSWER:
7o. )he shippers3 contention is not alid.
)he o%ners o$ the car!o "ettisoned& to sae
the essel $rom sin.in! and to sae the
rest o$ the car!oes& are entitled to
contribution. )he "ettisonin! o$ said
car!oes constitute !eneral aera!e loss
%hich entitles the o%ners thereo$ to
contribution $rom the o%ner o$ the essel
and also $rom the o%ners o$ the car!oes
saed.
18 1hippin! is not entitled to
contributionO reimbursement $or the costs
o$ repairs on the essel $rom the shippers.
Nationali3e& A#tivities or
Un&erta,ings
NationaliDe6 Actiities or Un6erta-in's ()**3)
/$ A inested ;@??th in a security a!ency on
Bctober (?& 2HH?. /e %as char!ed %ith
bein! a dummy o$ his $riend& a $orei!ner. I$
you %ere the prosecutor& %hat eidence
can you present to proe iolation o$ the
Anti4'ummy >a%?
!$ Cuana de la Cru6& a common la% %i$e o$
a $orei!ner %rested the control o$ a
teleision frm. At the instance o$ the
minority !roup o$ the frm& she %as
char!ed %ith iolation o$ the Anti4'ummy
>a%. Aay she be conicted by the mere
$act that she is a common la% %i$e o$ a
$orei!ner? <=plain.
SUGGESTED ANSWER:
2) A allo%s or permits the use or
e=ploitation or en"oyment o$ a ri!ht&
priile!e or business& the e=ercise or
en"oyment o$ %hich is e=pressly resered by
the Constitution or the la%s to citi6ens o$
the ;hilippines& by the $orei!ner not
possessin! the re+uisites prescribed by the
Constitution or the la%s o$ the ;hilippines.
)he prosecutor should proe the aboe
elements o$ the crime
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and also the $act that A does not hae
the means and resources to inest ;@??th
in the security a!ency.
A8TERNAT7>E ANSWER:
/$ )he prosecutor may establish the $act
that the ;@??th %ould constitute a ma"or
inestment and yet A is not een elected
member o$ the 5B' or one o$ the o-icers.
8urthermore& it may also be sho%n that A
does not een hae the means to raise
the amount o$ ;@??th and that the
o-icers or ma"ority o$ the directors are
$orei!ners.
SUGGESTED ANSWER:
!$ 7o. )he mere $act o$ bein! a common
la% %i$e o$ a $orei!ner does not brin!
her %ithin the ambit o$ the Anti4'ummy
>a%.
A8TERNAT7>E ANSWER:
#) 0es. 5ein! a common la% %i$e& it can
be presumed that she is the one runnin!
the business& %hich raises a prima $acie
presumption o$ iolation o$ the Anti4
dummy >a%& (9A :?J4).
NationaliDe6 Actiities or Un6erta-in's ()**3)
Celeste& a domestic corporation %holly
o%ned by 8ilipino citi6ens& is en!a!ed in
tradin! and operates as !eneral
contractor. It buys and resells the
products o$ Aatilde& a domestic
corporation& H?% o$ %hose capital stoc. is
o%ned by aliens. All o$ Aatilde3s !oods
are made in the ;hilippines $rom
materials $ound or produced in the
;hilippines.
Bn the other hand& <CT Inte!rated is a
2??% 8ilipino o%ned corporation and
manu$acturer o$ asbestos products.
Celeste and <CT too. part in a public
biddin! conducted by AW11 $or its
asbestos pipe re+uirements. Celeste %on
the bid& hain! o-ered 2(% lo%er than
that o-ered by <CTK and AW11 a%arded
the contract to supply its asbestos pipes
to Celeste. <CT sou!ht to nulli$y the a%ard
in $aor o$ Celeste.
/$ Is Celeste barred under the 8la! >a%
$rom ta.in! part in biddin!s to supply the
!oernment?
!$ 'id Celeste and Aatilde iolate the Anti4
'ummy >a%?
:$ 'id Celeste and Aatilde iolate the
9etail )rade 7ationali6ation >a%? <=plain.
SUGGESTED ANSWER:
/$ 7o. )he materials o-ered in the bids
submitted are made in the ;hilippines
$rom articles produced or !ro%n in the
;hilippines& and the bidder& Celeste& is a
domestic entity. )he 8la! >a% does not
apply. It can be ino.ed only a!ainst a
bidder %ho is not a domestic entity& or
a!ainst a domestic entity %ho o-ers
imported materials.
!$ 7o& since Celeste is merely a dealer o$
Aatilde and not an alter e!o o$ the latter.
Celeste buys and sells on its o%n account
the products o$ Aatilde.
:$ Aatilde did not iolate the 9etail )rade
>a% since it does not sell its products to
consumers& but to dealers %ho resell
them. 7either did Celeste iolate the
9etail )rade >a% since& in the frst place&
it is not prohibited to
Mercantile Law Bar Examination Q & A (1990-2006) Page -5 of 103
engage in retail tra.e* Besi.esB Matil.eGs sale
of t&e asbestos pro.ucts to CelesteB being
w&olesaleB t&e transaction is not co)ere. by
t&e +etail 2ra.e Law (#sbestos %ntegrated v 3eralta
)55 S ().!
NationaliDe6 Actiities or Un6erta-in's ()**1)
Flobal M> Aalaysia& a 2??% Aalaysian
o%ned corporation& desires to build a hotel
beach resort in 1amal Island& 'aao City&
to ta.e adanta!e o$ the increased tra-ic
o$ tourists and boost the tourism industry
o$ the ;hilippines.
/* Assumin! that Flobal has ,1R2??A to
inest in a hotel beach resort in the
;hilippines& may it be allo%ed to ac+uire
the land on %hich to build the resort? I$
so& under %hat terms and conditions may
Flobal ac+uire the land? 'iscuss $ully.
!* Aay Flobal be allo%ed to mana!e the
hotel beach resort? <=plain.
:* Aay Flobal be allo%ed to operate
restaurants %ithin the hotel beach resort?
<=plain.
SUGGESTED ANSWER:
/* Flobal can secure a lease on the land. As
a corporation %ith a Aalaysian nationality&
Flobal cannot o%n the land.
!* 0es& Flobal can mana!e the hotel beach
resort. )here is no la% prohibitin! it $rom
mana!in! the resort.
:* Flobal may be allo%ed to operate
restaurants %ithin the beach resort. )his
is part o$ the operation o$ the resort.
Retail Tra6e 8a; ()**0)
Acme )radin! Co Inc& a tradin! company
%holly o%ned by $orei!n stoc.holders& %as
persuaded by ;aulo Ala& a 8ilipino& to
inest in #?% o$ the outstandin! shares
o$ stoc. o$ a corporation he is $ormin!
%hich %ill en!a!e in the department store
business (the department store
corporation). ;aulo also ur!ed Acme to
inest in 4?% o$ the outstandin! shares o$
stoc. o$ the realty corporation he is
puttin! up to o%n the land on %hich the
department store %ill be built (the
realty corporation).
a$ Aay Acme inest in the said
department store corporation? <=plain
your ans%er.
b$ Aay Acme inest in the realty
corporation? 'iscuss.
c$ Aay the ;resident o$ Acme& a $orei!ner&
sit in the 5B' o$ the said department
store corporation? Aay he be a director
o$ the realty corporation? 'iscuss.
.$ Aay the )reasurer o$ Acme& another
$orei!ner& occupy the same position in
the said department store corporation?
Aay he be the treasurer o$ the said
realty corporation? <=plain.
SUGGESTED ANSWER:
a$ Acme may not inest in the department
store corporation since the 9etail )rade Act
allo%s& in the case o$ corporations& only
2??% 8ilipino o%ned companies to en!a!e
in retail trade.
b$ Acme may inest in the realty
corporation& on the assumption that the
balance o$ :?% o$ o%nership o$ the latter
corporation& is 8ilipino o%ned since the la%
merely
re+uires :?% 8ilipino holdin! in land
corporate o%nership.
c$ )he Anti4dummy >a% allo%s board
representation to the e=tent o$ actual and
permissible $orei!n inestments in
corporations. Accordin!ly& the ;resident o$
Acme may no sit in the 5B' o$ the
department store corporation but can do
so in the realty corporation.
.$ )he )reasurer o$ Acme may not hold
that position either in the department
store corporation or in the realty
corporation since the Anti4'ummy >a%
prohibits the employment o$ aliens in
such nationali6ed areas o$ business
e=cept those that call $or hi!hly
technical +ualifcations.
Retail Tra6e 8a; ()**))
Is the 8ilipino common4la% %i$e o$ a
$orei!ner barred $rom en!a!in! in the
retail business?
SUGGESTED ANSWER:
A 8ilipino common4la% %i$e o$ a $orei!ner
is not barred $rom en!a!in! in retail
business. Bn the assumption that she acts
$or and in her o%n behal$& and absent a
iolation o$ the Anti4'ummy >a% %hich
prohibits a $orei!ner $rom bein! either
the real proprietor or an employee o$ a
person en!a!ed in the retail trade& she
%ould be iolatin! the 9etail )rade Act.
A8TERNAT7>E ANSWER:
An en!a!ement by a %i$e (includin!
common4la% relationships) o$ a $orei!ner
in the retail trade business& raises the
presumption that she has iolated the
Anti4 'ummy >a%. /ence& the %i$e is
barred $rom en!a!in! in the retail trade
business.
Retail Tra6e 8a; ()**2)
A Cooperatie purchased $rom 0 Co on
installments a rice mill and made a do%n
payment there$ore. As security $or the
payment o$ the balance& the Cooperatie
e=ecuted a chattel mort!a!e in $aor o$ 0
Corporation. 0 Co in turn assi!ned its
ri!hts to the chattel mort!a!e to S Co a
@% $orei!n o%ned company doin!
business in the ;hilippines. )he
cooperatie therea$ter made installment
payments to S Co.
5ecause the Cooperatie %as unable to
meet its obli!ations in $ull& S Co fled
a!ainst it a court suit $or collection. )he
Coop resisted contendin! that S Co %as
ille!ally en!a!ed in the retail trade
business $or hain! sold a consumer !ood
as opposed to a producer item. )he Coop
also alle!ed that S had iolated the Anti4
'ummy >a%.
Is S !uilty o$ iolatin! the 9etail )rade
>a% and the Anti4'ummy >a%? Why?
SUGGESTED ANSWER:
S Co is not !uilty o$ iolatin! the 9etail
)rade >a% and the Anti4'ummy >a%. )he
term 9<)AI> under the 9etail )rade Act
re+uires that the seller must be
habitually en!a!ed in sellin! to the
!eneral public consumption !oods. 5y
consumption !oods are meant personal&
$amily and household purposes. A 9ice
Aill
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does not $all under the cate!ory. 7either
does it appear that S is habitually en!a!ed
in sellin! to the !eneral public that
commodity. 1ince there is no iolation o$
the 9etail )rade >a%& there %ould li.e%ise
by no iolation o$ the Anti4'ummy >a%.
Retail Tra6e 8a; ()**3)
A $orei!n frm is en!a!ed in the business
o$ manu$acturin! and sellin! rubber
products to dealers %ho in turn sell them
to others. It also sells directly to
a!ricultural enterprises& automotie
assembly plants& public utilities %hich buy
them in lar!e bul.& and to its o-icers and
employees.
/$ Is there iolation o$ the 9etail )rade
>a%? <=plain.
!$ Aay said frm operate a canteen inside
the premises o$ its plant e=clusiely $or its
o-icials and employees %ithout iolatin!
the 9etail )rade Act? <=plain.
SUGGESTED ANSWER:
/$ Bn the assumption that the $orei!n frm
is doin! business in the ;hilippines& the
sale to the dealers o$ a!ricultural
enterprises& automotie assembly plants&
and public utilities is %holesale and&
there$ore& not in iolation o$ the 9etail
)rade Act .BF %oodrich " Re5es 121 s 3637
!$ 0es. )he operation o$ the canteen inside
the premises e=clusiely $or its o-icers and
employees& %ould amount to an input in
the manu$acturin! process and& there$ore&
does not iolate the 9etail )rade Act.
Retail Tra6e 8a; ()**4)
With a capital o$ ;#th Aaria operates a
stall at a public mar.et. 1he manu$actures
soap that she sells to the !eneral public.
/er common la% husband& Aa>ee& %ho
has a pendin! petition $or naturali6ation&
occasionally fnances the purchase o$
!oods $or resale& and assists in the
mana!ement o$ the business.
Is there a iolation o$ the 9etail )rade >a%?
<=plain.
SUGGESTED ANSWER:
7o& there is no iolation o$ the 9etail
)rade >a%. Aaria is a manu$acturer %ho
sells to the !eneral public& throu!h her stall
in the public mar.et& the soap %hich she
manu$actures. Inasmuch as her capital
does not e=ceed ;@th (it is only ;#th) then
she is considered under 1ec 4a o$ the
9etail )rade >a% as not en!a!ed in the
retail business. Inasmuch as Aaria3s
business is not a retail business& then
the re+uirement in 1ec 2 o$ the 9etail
)rade >a% that only ;hilippine nationals
shall en!a!e& directly& or indirectly& in the
retail business is inapplicable. 8or this
reason& the participation o$ Aa >ee& Aaria3s
common >a% husband& in the mana!ement
o$ the business %ould not be a iolation o$
the 9etail )rade >a% in relation to the Anti4
'ummy >a%.
Retail Tra6e 8a; ()**4)
<> Inc& a domestic corporation %ith $orei!n
e+uity& manu$actures electric !enerators&
and sells them to the $ollo%in! customers*
a) !oernment o-ices %hich use the
!enerators durin! bro%nouts to render
public serice&
b) a!ricultural enterprises %hich utili6e the
!enerators as
Version 1990-2006 U pdated by
Dondee
Version 1990-2003 Arranged by SULAW Class
2005
bac.up in the processin! o$ !oods& c)
$actories& and d) its o%n employees.
Is <> en!a!ed in retail trade? <=plain.
SUGGESTED ANSWER:
)he sale by <> o$ !enerators to
!oernment o-ices& a!ricultural
enterprises and $actories are outside the
scope o$ the term retail business and
may& there$ore& be made by the said
corporation. /o%eer& sales o$ !enerators
by <> to its o%n employees constitute
retail sales and are proscribed. ,nder
the amendment to the 9etail )rade >a%
introduced by ;' I24& the term retail
business shall not include a
manu$acturer (such as <>) sellin! to
industrial and commercial users or
consumers %ho use the products bou!ht
by them to render serice to the !eneral
public (e! !oernment o-ices) andOor to
produce or manu$acture !oods %hich are
in turn sold by them (e! a!ricultural
enterprises and $actories). .%ood5ear ?ires
" Re5es Sr %r 3,,63, 9l5 2, +3 123s2'37#
Retail Tra6e 8a;2 Consi'nment ()**))
A5C Aanu$acturin! Inc& a company
%holly o%ned by $orei!n nationals&
manu$actures type%riters %hich A5C
distributes to the !eneral public in # %ays*
/* A5C consi!ns its type%riters to
independent dealers %ho in turn sell
them to the publicK and&
!* )hrou!h indiiduals& %ho are not
employees o$ A5C& and %ho are paid
strictly on a commission basis $or
each sale.
'o these arran!ements iolate the 9etail
)rade >a%?
SUGGESTED ANSWER:
a) )he frst arran!ement %ould not be in
iolation o$ the 9etail )rade >a%. )he la%
applies only %hen the sale is direct to the
!eneral public. A dealer buys and sells $or
and in his o%n behal$ and& there$ore& the
sale to the !eneral public is made by the
dealer and not by the manu$acturer
.Mars!an A Co " First Coconut Control Co
%R36+(1 2,9une16++7
A8TERNAT7>E ANSWER:
a$ )he frst arran!ement iolates the
9etail )rade >a% because %hen A5C
consi!ned the type%riters& the
transaction %as one o$ consi!nment sale.
In consi!nment sale& an a!ency
relationship is created so it is as i$ A5C
sells directly to the public throu!h its
a!ents.
SUGGESTED ANSWER:
b$ )he second arran!ement %ould be
iolatie o$ the 9etail )rade >a%& since
the sale is done throu!h indiiduals bein!
paid strictly on a commission basis. )he
said indiiduals %ould then be actin!
merely as a!ents o$ the manu$acturer.
1ales& there$ore& made by such a!ents are
deemed direct sales by the manu$acturer.
A8TERNAT7>E ANSWER:
b) )he #nd arran!ement is not iolatie
o$ the 9etail )rade >a% because
type%riters are not consumption !oods or
!oods $or personal& household and $amily
use.
Negotia'le Instr0ments La!
,on6: Cas# ,on6 s! Suret% ,on6 (2003)
'istin!uish clearly cash bond $rom surety
bond.
Mercantile Law Bar Examination Q & A (1990-2006) Page -- of 103
SUGGESTED ANSWER:
A 1,9<)0 5B7' is issued by a surety
or insurance company in $aor o$ a
desi!nated benefciary& pursuant to %hich
such company acts as a surety to the
debtor or obli!or o$ such benefciary. A
CA1/ 5B7' is a security in the $orm o$
cash established by a !uarantor or surety
to secure the obli!ation o$ another.
C#ec-s: Crosse6 C#ec-s (2001)
What is a crossed chec.? What are the
e-ects o$ crossin! a chec.? <=plain.
SUGGESTED ANSWER:
A Crossed Chec. under accepted ban.in!
practice& crossin! a chec. is done by
%ritin! t%o parallel lines dia!onally on
the le$t top portion o$ the chec.s. )he
crossin! is special %here the name o$ the
ban. or a business institution is %ritten
bet%een the t%o parallel lines& %hich
means that the dra%ee should pay only
%ith the interention o$ that company.
#ffe'ts of Crosse, C4e';s
/$ )he chec. may not be encashed but
only deposited in the ban..
!$ )he chec. may be ne!otiated only
onceVto one %ho has an account %ith
a ban..
:$ )he act o$ crossin! the chec. seres as
a %arnin! to the holder that the chec.
has been issued $or a defnite purpose&
so that he must in+uire i$ he has
receied the chec. pursuant to that
purposeK other%ise& he is not a holder
in due course.
C#ec-s: Crosse6 C#ec-s s! Cancelle6 C#ec-s
(2003) Distinguis& clearly /$ crosse.
c&ecks fro' cancelle. c&ecks%
SUGGESTED ANSWER:
A crossed chec. is one %ith t%o parallel
lines dra%n dia!onally across its $ace or
across a corner thereo$. Bn the other
hand& a cancelled chec. is one mar.ed or
stamped NpaidN andOor NcancelledN by or on
behal$ o$ a dra%ee ban. to indicate
payment thereo$.
C#ec-s2 Crosse6 C#ec- ()**))
Ar ;ablo sou!ht to borro% ;#??th $rom Ar
Carlos. Carlos a!reed to loan the amount in
the $orm o$ a post4 dated chec. %hich %as
crossed (i.e. # parallel lines dia!onally
dra%n on the top le$t portion o$ the
chec.). 5e$ore the due date o$ the chec.&
;ablo discounted it %ith 7oble Bn due
date& 7oble deposited the chec. %ith his
ban.. )he chec. %as dishonored. 7oble
sued ;ablo. )he court dismissed 7oble3s
complaint. Was the court3s decision
correct?
SUGGESTED ANSWER:
)he court3s decision %as incorrect. ;ablo
and Carlos& bein! immediate parties to the
instrument& are !oerned by the rules o$
priity. Fien the $actual circumstances o$
the problem& ;ablo has no alid e=cuse
$rom denyin! liability& .State in"est!ent
Bouse " $C %R '2'6( 139ul516+67# ;ablo
undoubtedly had benefted in the
transaction. )o hold other%ise %ould also
contraene the basic rules o$ un"ust
enrichment. <en in ne!otiable
instruments& the
Ciil Code and other la%s o$ !eneral
application can still apply suppletorily.
A8TERNAT7>E ANSWER:
)he dismissal by the court %as correct. A
chec. %hether or not post4dated or
crossed& is still a ne!otiable instrument
and unless ;ablo is a !eneral indorser&
%hich is not e=pressed in the $actual
settin!s& he cannot be held liable $or the
dishonor o$ the instrument. In State
n"est!ent Bouse " $C .%R '2'6(
139ul16+67& the court did not !o so $ar as
to hold that the $act o$ crossin! %ould
render the instrument non4ne!otiable.
A8TERNAT7>E ANSWER:
In State n"est!ent Bouse " $C .%R '2'6(
139ul16+67, the 1C considered a crossed
chec. as sub"ectin! a subse+uent holder
thereo$ to the contractual coenants o$
the payor and the payee. I$ such %ere the
case& then the instrument is not one
%hich can still be said to contain an
unconditional promise to pay or order a
sum certain in money. In the trans$er o$
non4ne!otiable credits by assi!nment& the
trans$eror does not assume liability $or
the $ault o$ the debtor or obli!or.
Accordin!ly the court3s decision %as
correct.
A8TERNAT7>E ANSWER:
0es. )he chec. is crossed. It should hae
$ore%arned Ar. 7oble that it %as issued
$or a specifc purpose. /ence& Ar 7oble
could not be a holder in due course. /e
is sub"ect to the personal de$ense o$
breach o$ trustO a!reement by Ar. ;ablo.
1uch de$ense is aailable in $aor o$ Ar
Carlos a!ainst Ar 7oble.
C#ec-s2 Crosse6 C#ec- ()**3)
;o ;ress issued in $aor o$ Cose a
postdated crossed chec.& in payment o$
ne%sprint %hich Cose promised to delier.
Cose sold and ne!otiated the chec. to
<=cel Inc. at a discount. <=cel did not
as. Cose the purpose o$ crossin! the
chec.. 1ince Cose $ailed to delier the
ne%sprint& ;o ordered the dra%ee ban. to
stop payment on the chec..
<-orts o$ <=cel to collect $rom ;o $ailed.
<=cel %ants to .no% $rom you as counsel*
/$ What are the e-ects o$ crossin! a chec.?
!$ Whether as second indorser and
holder o$ the crossed chec.& is it a
holder in due course?
:$ Whether ;o3s de$ense o$ lac. o$
consideration as a!ainst Cose is also
aailable as a!ainst <=cel?
SUGGESTED ANSWER:
/$ )he e-ects o$ crossin! a chec. are*
a* )he chec. is $or deposit only in the
account o$ the payee
b* )he chec. may be indorsed only
once in $aor o$ a person %ho has
an account %ith a ban.
c* )he chec. is issued $or a specifc
purpose and the person %ho ta.es
it not in accordance %ith said
purpose does not become a holder
in due course and is not entitled
to payment thereunder.
!$ 7o. It is a crossed chec. and <=cel did
not ta.e it in accordance %ith the
purpose $or %hich the chec. %as issued.
8ailure on its part to in+uire as to said
purpose&
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2005
Mercantile Law Bar Examination Q & A (1990-2006) Page -8 of 103
preented <=cel $rom becomin! a holder in due course&
as such $ailure or re$usal constituted bad
$aith.
:$ Les* =ot being a &ol.er in .ue courseB
54cel is sub9ect to t&e personal .efense w&ic&
Po Press can set up against 7ose (State %nvestment
@ouse v %#" )75 S .);!
C#ec-s2 Crosse6 C#ec- ()**1)
Bn Bct 2#& 2HH(& Chelsea 1trai!hts& a
corp en!a!ed in the manu$acture o$
ci!arettes& ordered $rom Aoises #&???
bales o$ tobacco. Chelsea issued to Aoises
t%o crossed chec.s postdated 2@ Aar H4
and 2@ Apr H4 in $ull payment there$or. Bn
2H Can H4 Aoises sold to 'ra!on
Inestment /ouse at a discount the t%o
chec.s dra%n by Chelsea in his $aor.
Aoises $ailed to delier the bales o$
tobacco as a!reed despite Chelsea3s
demand. Conse+uently& on 2 Aar H4
Chelsea issued a stop payment order on
the # chec.s issued to Aoises. 'ra!on&
claimin! to be a holder in due course& fled
a complaint $or collection a!ainst Chelsea
$or the alue o$ the chec.s.
9ule on the complaint o$ 'ra!on. Fie your
le!al basis.
SUGGESTED ANSWER:
'ra!on cannot collect $rom Chelsea. )he
instruments are crossed chec.s %hich
%ere intended to pay $or the #&??? bales
o$ tobacco to be deliered to Aoises. It
%as there$ore the obli!ation o$ 'ra!on to
in+uire as to the purpose o$ the issuance
o$ the # crossed chec.s be$ore causin!
them to be discounted. 8ailure on its
part to ma.e such in+uiry& %hich resulted
in its bad $aith& 'ra!on cannot claim to be
a holder in due course. Aoreoer& the
chec.s %ere sold& not endorsed& by him to
'ra!on %hich did not become a holder in
due course. 7ot bein! a holder in due
course& 'ra!on is sub"ect to the personal
de$ense on the part o$ Chelsea concernin!
the breach o$ trust on the part o$ Aoises
>im in not complyin! %ith his obli!ation to
delier the #??? bales o$ tobacco.
C#ec-s2 Crosse6 C#ec- ()**4)
What are the e-ects o$ crossin! a chec.?
SUGGESTED ANSWER:
)he e-ects o$ crossin! a chec. are as
$ollo%s*
a* )he chec. may not be encashed but
only deposited in a ban.K
b* )he chec. may be ne!otiated only once
to one %ho has an account %ith a ban.K
c' 2&e act of crossing a c&eck ser)es as a
warning to t&e &ol.er t&ereof t&at t&e
c&eck &as been issue. for a .efinite
purpose so t&at t&e &ol.er 'ust in-uire if
&e &as recei)e. t&e c&eck pursuant to t&at
purposeB ot&erwise &e is not a &ol.er in
.ue course (See Bataan "igar and "igarette 5actory,
%nc' v "# 4+ *.;,8, 6ar ., )**,C (.; s -,.!
C#ec-s2 Crosse6 C#ec- ()**4)
Bn Aarch 2& 2HH:& ;entium Company
ordered a computer $rom C' 5ytes& and
issued a crossed chec. in the amount o$
;(?&??? post4dated Aar (2& 2HH:. ,pon
receipt o$ the chec.& C' 5ytes discounted
the chec. %ith 8und /ouse.
Version 1990-2006 U pdated by
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Version 1990-2003 Arranged by SULAW Class
2005
Bn April 2& 2HH:& ;entium stopped
payment o$ the chec. $or $ailure o$ C'
5ytes to delier the computer. )hus&
%hen 8und /ouse deposited the chec.&
the dra%ee ban. dishonored it.
I$ 8und /ouse fles a complaint a!ainst
;entium and C' 5ytes $or the payment o$
the dishonored chec.& %ill the complaint
prosper? <=plain.
SUGGESTED ANSWER::
)he complaint fled by 8und /ouse
a!ainst ;entium %ill not prosper but the
one a!ainst C' 5ytes %ill. 8und /ouse
is not a holder in due course and&
there$ore& ;entium can raise the de$ense
o$ $ailure o$ consideration a!ainst it. )he
chec. in +uestion %as issued by ;entium
to pay $or a computer that it ordered
$rom C' 5ytes. )he computer not
hain! been deliered& there %as a
$ailure o$ consideration. )he chec.
discounted %ith 8und /ouse by C' 5ytes
is a crossed chec. and this should hae
put 8und /ouse on in+uiry. It should
hae ascertained the title o$ C' 5ytes
to the chec. or the nature o$ the
latter3s possession. 8ailin! in this
respect& 8und /ouse is deemed !uilty o$
!ross ne!li!ence amountin! to le!al
absence o$ !ood $aith and& thus& not a
holder in due course. 8und /ouse can
collect $rom C' 5ytes as the latter %as
the immediate indorser o$ the chec..
.See Bataan Cigar and Cigarette Factor5 " C$
et al 23, s 6(3 %R 63,(+ Mar 3, 6(7
C#ec-s2 E&&ect2 Acce$tance .% t#e 6ra;ee .an- ()**:)
L dra%s a chec. a!ainst his current
account %ith the Brti!as branch o$
5oni$acio 5an. in $aor o$ 5. Althou!h L
does not hae su-icient $unds& the ban.
honors the chec. %hen it is presented $or
payment. Apparently& L has conspired %ith
the ban.3s boo..eeper so that his led!er
card %ould sho% that he still has su-icient
$unds.
)he ban. fles an action $or recoery o$ the
amount paid to 5 because the chec.
presented has no su-icient $unds. 'ecide
the case (@%)
SUGGESTED ANSWER:
)he ban. cannot recoer the amount paid
to 5 $or the chec.. When the ban.
honored the chec.& it became an acceptor.
As acceptor& the ban. became primarily
and directly liable to the payeeOholder 5.
)he recourse o$ the ban. should be
a!ainst L and its boo..eeper %ho
conspired to ma.e L3s led!er sho% that he
has su-icient $unds.
A8TERNAT7>E ANSWER:
)he ban. can recoer $rom 5. )his is
solutio inde*iti because there is payment
by the ban. to 5 %hen such payment is
not due. )he chec. issued by L to 5 as
payee had no su-icient $unds.
C#ec-s2 E&&ects2 Alterations2 "rescri$tie "erio6
()**4) ?illia' issue. to Albert a c&eck for
P/"B""" .rawn on KM Bank* Albert altere.
t&e a'ount of t&e c&eck to P!/"B""" an.
.eposite. t&e c&eck to &is account wit& =D
Bank* ?&en =D Bank presente. t&e c&eck
for
Mercantile Law Bar Examination Q & A (1990-2006) Page -9 of 103
payment throu!h the Clearin! /ouse& LA
5an. honored it. )herea$ter& Albert
%ithdre% the ;#2?&??? and closed his
account.
When the chec. %as returned to him a$ter
a month& William discoered the alteration.
LA 5an. recredited ;#2?&??? to William3s
current account& and sou!ht
reimbursement $rom 7' 5an.. 7' 5an.
re$used& claimin! that LA 5an. $ailed to
return the altered chec. to it %ithin #4 hour
clearin! period.
Who& as bet%een& LA 5an. and 7' 5an.&
should bear the loss? <=plain.
SUGGESTED ANSWER:
7' 5an. should bear the loss i$ LA 5an.
returned the altered chec. to 7' 5an.
%ithin t%enty $our hours a$ter its discoery
o$ the alteration. ,nder the !ien $acts&
William discoered the alteration %hen the
altered chec. %as returned to him a$ter a
month. It may sa$ely be assumed that
William immediately adised LA 5an. o$
such $act and that the latter promptly
notifed 7' 5an. therea$ter. Central 5an.
Circular 7o. H& as amended& on %hich the
decisions o$ the 1upreme Court in Bongkong
A Shanghai Banking Cor- " /eo-leCs Bank
A ?rust Co and Re-u*lic Bank "s C$ %ere
based %as e=pressly cancelled and
superseded by C5 7o (2I dated 'ec #(
2HI?. )he latter %as in turn amended by C5
Circular 7o @J?& dated 1ept 2H& 2HII. As to
altered chec.s& the ne% rules proide that
the dra%ee ban. can still return them een
a$ter 4*?? pm o$ the ne=t day proided it
does so %ithin #4 hours $rom discoery o$
the alteration but in no eent beyond the
period f=ed or proided by la% $or flin! o$
a le!al action by the returnin! ban. a!ainst
the ban. sendin! the same. Assumin! that
the relationship bet%een the dra%ee ban.
and the collectin! ban. is eidenced by
some %ritten document& the prescriptie
period %ould be 2? years. .Ca!-os, &3
0th ed (0(2(007
A8TERNAT7>E ANSWER:
KM Bank s&oul. bear t&e loss* ?&en t&e
.rawee bank KM Bank$ faile. to return t&e
altere. c&eck to t&e collecting bank =D Bank$
wit&in t&e !( &our clearing perio. pro)i.e. in
Sec (c of CB Circular 0B .ate. Feb /3B /0(0B
t&e latter is absol)e. fro' liability* (See @SB" v
3B?2 "o 4+ F$(8((- Sep .; )*7;C .5 s ),;C also +ep Ban/
v "# 4+ ,(7(5 #pr ((, )**) )*- s );;!
C#ec-s2 /or'e6 C#ec-2 E&&ects (2004)
'iscuss the le!al conse+uences %hen a
ban. honors a $or!ed chec.. (@%)
SU44ESTE) ANSWER(
)he le!al conse+uences %hen a ban.
honors a $or!ed chec. are as $ollo%s*
a$ When Drawer's Signature is Forged:
Drawee<bank by accepting t&e c&eck cannot set
up t&e .efense of forgeryB because by accepting
t&e instru'entB t&e .rawee bank a.'its t&e
genuineness of signature of .rawer (B3% 5amily
Ban/ vs' Buenaventura 4'+' 0o' ),8)*-, September .;, (;;5C
Section (., 0egotiable %nstruments Faw!'
,nless a $or!ery is attributable to the $ault
or ne!li!ence o$ the dra%er himsel$& the
remedy o$ the dra%ee4ban. is a!ainst the
party responsible $or the $or!ery. Bther%ise&
.rawee<bank bears t&e loss (B3% 5amily Ban/ v'
Buenaventura,
4'+' 0o' ),8)*-, September .;, (;;5!' A .rawee<bank
paying on a forge. c&eck 'ust be consi.ere.
as paying out of its fun.s an. cannot c&arge
t&e a'ount to t&e .rawer (Samsung "onstruction
"o' 3hils, v' 5ar East Ban/, 4'+' 0o' )(*;)5, #ugust ).,
(;;,!' 1f t&e .rawee<bank &as c&arge. .rawerOs
accountB t&e latter can reco)er suc& a'ount
fro' t&e .rawee<bank (#ssociated Ban/ v' "ourt
of #ppeals,
4'+' 0o' );7.8(, <anuary .), )**-C Ban/ of 3' %' v' "ase
6ontessori %nternationale, 4'+' 0o' ),*,5,, 6ay (8, (;;,!'
Eowe)erB t&e .rawer 'ay be preclu.e. or
estoppe. fro' setting up t&e .efense of
forgery as against t&e .rawee< bankB w&en it
is s&own t&at t&e .rawer &i'self &a. been
guilty of gross negligence as to &a)e
facilitate. t&e forgery 6etropolitan Naterwor/s v'
"ourt of #ppeals, 4'+' 0o' F$ -(*,., ),. S"+# (;, <uly ),,
)*8-$*
(012# BE0E 2he question does not qualify the
term Oforged chec/O' #n answer addressing the
liabilities of a drawer should be deemed
sufficient' #nswers addressing liabilities of parties
should li/ewise be given full credit!
Drawee Bank versus Collecting Bank P
?&en t&e signature of t&e .rawer is forge.B as
between t&e .rawee< bank an. collecting
bankB t&e .rawee<bank sustains t&e lossB
since t&e collecting bank .oes not guarantee
t&e signature of t&e .rawer* 2&e pay'ent of
t&e c&eck by t&e .rawee bank constitutes t&e
pro4i'ate negligence since it &as t&e .uty to
know t&e signature of its client<.rawer*
(3hilippine 0ational Ban/ v' "ourt of #ppeals, 4'+' 0o' F$
(-;;), 1ctober (*, )*-8!'
b$ Forged Payee's Signature: ?&en
.rawee<bank pays t&e forge. c&eckB it 'ust be
consi.ere. as paying out of its fun.s an.
cannot c&arge t&e a'ount so pai. to t&e
account of t&e .epositor* 1n suc& caseB t&e bank
beco'es liable since its pri'ary .uty is to
)erify t&e aut&enticity of t&e payeeOs signature
(2raders +oyal Ban/ v' +adio 3hilippines 0etwor/, 4'+' 0o'
).85);, 1ctober );, (;;(C Nestmont Ban/ v' 1ng, 4'+' 0o'
).(5-;, <anuary .;, (;;(!'
A Forged Indorsement*
'ra%erDs account cannot be
char!ed& and i$ char!ed& he
can recoer $rom the dra%ee4
ban. .$ssociated Bank "# Court of
$--eals, %#R# &o# 1,'3+2 9anuar5
31,16667#
'ra%er has no cause o$ action a!ainst
collectin! ban.& since the duty o$
collectin! ban. is only to the payee.
A collectin! ban. is not !uilty o$
ne!li!ence oer a $or!ed indorsement
on chec.s $or it has no %ay o$
ascertainin! the authority o$ the
endorsement and %hen it caused the
chec.s to pass throu!h the clearin!
house be$ore allo%in! %ithdra%al o$
the proceeds thereo$ .Manila 3ighter
?rans-ortation, nc# "# Court of $--eals,
%#R# &o# 0,3'3, Fe*ruar5 10, 166,7# Bn
the other hand& a collectin! ban.
%hich endorses a chec. bearin! a
$or!ed endorsement and presents it
to the dra%ee ban.
!uarantees all prior endorsements
includin! the $or!ed endorsement
itsel$ and should be held liable
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Mercantile Law Bar Examination Q & A (1990-2006) Page 80 of 103
t&erefor (2raders +oyal Ban/ v' +30, 4'+'
0o' ).85);, 1ctober );, (;;(!'
Drawee<bank can reco)er fro' t&e
collecting bank (4reat Eastern Fife %ns' "o'
v' @ong/ong ? Shanghai Ban/, 4'+' 0o' )8-57,
#ugust (.,)*((! because e)en if t&e
in.orse'ent on t&e c&eck .eposite.
by t&e bankOs client is forge.B
collecting bank is boun. by its
warranties as an in.orser an. cannot
set up .efense of forgery as against
.rawee bank (#ssociated Ban/ v' "ourt of
#ppeals, 4'+' 0o' );7.8(, <anuary .), )**-!'
C#ec-s2 8ia.ilit%2 Dra;ee ,an- ()**1)
Aario Fu6man issued to /onesto 1antos
a chec. $or ;@?th as payment $or a #nd
hand car. Without the .no%led!e o$
Aario& /onesto chan!ed the amount to
;2@?th %hich alteration could not be
detected by the na.ed eye. /onesto
deposited the altered chec. %ith 1hure
5an. %hich $or%arded the same to
;ro!ressie 5an. $or payment. ;ro!ressie
5an. %ithout noticin! the alteration paid
the chec.& debitin! ;2@?th $rom the
account o$ Aario. /onesto %ithdre% the
amount o$ ;2@th $rom 1hure 5an. and
disappeared. A$ter receiin! his ban.
statement& Aario discoered the alteration
and demanded restitution $rom ;ro!ressie
5an..
'iscuss $ully the ri!hts and the liabilities
o$ the parties concerned.
SUGGESTED ANSWER:
)he demand o$ Aario $or restitution o$
the amount o$ ;2@?&??? to his account is
tenable. ;ro!ressie 5an. has no ri!ht to
deduct said amount $rom Aario3s account
since the order o$ Aario is di-erent.
Aoreoer& ;ro!ressie 5an. is liable $or
the ne!li!ence o$ its employees in not
noticin! the alteration %hich& thou!h it
cannot be detected by the na.ed eye&
could be detected by a ma!ni$yin!
instrument used by tellers.
As bet%een ;ro!ressie 5an. and 1hure
5an.& it is the $ormer that should bear the
loss. ;ro!ressie 5an. $ailed to noti$y
1hure 5an. that there %as somethin!
%ron! %ith the chec. %ithin the clearin!
hour rule o$ #4 hours.
C#ec-s2 (aterial Alterations2 8ia.ilit% ()***)
A chec. $or ;@?&???.?? %as dra%n a!ainst
dra%ee ban. and made payable to L0S
Aar.etin! or order. )he chec. %as
deposited %ith payee3s account at A5C
5an. %hich then sent the chec. $or clearin!
to dra%ee ban..
'ra%ee ban. re$used to honor the chec. on
!round that the serial number thereo$ had
been altered.
L0S mar.etin! sued dra%ee ban..
a* Is it proper $or the dra%ee ban. to
dishonor the chec. $or the reason that
it had been altered? <=plain (#%)
b* In instant suit& dra%ee ban. contended
that L0S Aar.etin! as payee could not
sue the dra%ee ban. as there %as no
priity bet%een then. 'ra%ee theori6ed
that there %as no basis to ma.e it
liable $or the chec.. Is this contention
correct? <=plain. ((%)
SUGGESTED ANSWER:
a* 7o. )he serial number is not a
material particular o$ the chec.. Its
alteration does not constitute
material
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2005
alteration o$ the instrument. )he serial
number is not material to the
ne!otiability o$ the instrument.
b* 0es. As a !eneral rule& the dra%ee is
not liable under the chec. because there
is no priity o$ contract bet%een L0S
Aar.etin!& as payee& and A5C 5an. as
the dra%ee ban.. /o%eer& i$ the action
ta.en by the ban. is an abuse o$ ri!ht
%hich caused dama!e not only to the
issuer o$ the chec. but also to the payee&
the payee has a cause o$ action under
+uasi4delict.
C#ec-s2 "resentment ()**3)
Femma dre% a chec. on 1eptember 2(&
2HH?. )he holder presented the chec. to
the dra%ee ban. only on Aarch @& 2HH4.
)he ban. dishonored the chec. on the
same date. A$ter dishonor by the dra%ee
ban.& the holder !ae a $ormal notice o$
dishonor to Femma throu!h a letter
dated April #I& 2HH4.
/$ What is meant by unreasonable time
as applied to presentment?
!$ Is Femma liable to the holder?
SUGGESTED ANSWER:
/$ As applied to presentment $or
payment& reasonable time* is meant not
more than : months $rom the date o$
issue. 5eyond said period& it is
unreasonable time and the chec.
becomes stale.
!$ 7o. Aside $orm the chec. bein! already
stale& Femma is also dischar!ed $orm
liability under the chec.& bein! a dra%er
and a person %hose liability is secondary&
this is due to the !iin! o$ the notice o$
dishonor beyond the period allo%ed by
la%. )he !iin! o$ notice o$ dishonor on
April #I& 2HH4 is more than one (2)
month $rom Aarch @& 2HH4 %hen the chec.
%as dishonored. 1ince it is not sho%n that
Femma and the holder resided in the
same place& the period %ithin %hich to
!ie notice o$ dishonor must be the same
time that the notice %ould reach Femma
i$ sent by mail. (7I> 1ec 2?( P 2?4K 8ar
<ast 9ealty Inestment Inc CA 2:: 1 #@:)
A8TERNAT7>E ANSWER:
!$ Femma can still be liable under the
ori!inal contract $or the consideration o$
%hich the chec. %as issued.
C#ec-s2 "resentment (2003)
A ban. issues its o%n chec.. Aay the
holder hold the ban. liable thereunder i$
he $ails to G
proe presentment $or payment& or
present the bill to the dra%ee $or
acceptance? <=plain your ans%ers.
(4%)
SUGGESTED ANSWER:
C#ec-s2 >ali6it%2 Waier o& ,an-Gs lia.ilit% &or
ne'li'ence ()**))
Ar. >im issued a chec. dra%n a!ainst 5;I
5an. in $aor o$ Ar 0u as payment o$
certain shares o$ stoc. %hich he
purchased. Bn the same day that he
issued the chec. to 0u& >im ordered 5;I to
stop payment. ;er standard ban.in!
practice& >im %as made to si!n a %aier o$
5;I3s
Mercantile Law Bar Examination Q & A (1990-2006) Page 81 of 103
liability in the eent that it should pay 0u
throu!h oersi!ht or inadertence. 'espite
the stop order by >im& 5;I neertheless
paid 0u upon presentation o$ the chec..
>im sued 5;I $or payin! a!ainst his order.
'ecide the case.
SUGGESTED ANSWER:
In the eent that Ar. >im& in $act& had
su-icient le!al reasons to issue the stop
payment order& he may sue 5;I $or payin!
a!ainst his order. )he %aier e=ecuted by
Ar >im did not mean that it need not
e=ercise due dili!ence to protect the
interest o$ its account holder. It is not
amiss to state that the dra%ee& unless the
instrument has earlier been accepted by
it& is not bound to honor payment to the
holder o$ the chec. that thereby e=cludes
it $rom any liability i$ it %ere to comply
%ith its stop payment order (1ec :2 7I>)
A8TERNAT7>E ANSWER:
2HH2 :b) 5;I %ould not be liable to Ar
>im. Ar >im and 5;I are !oerned by
their o%n a!reement. )he %aier
e=ecuted by Ar >im& neither bein! one o$
$uture $raud or !ross ne!li!ence& %ould be
alid. )he problem does not indicate the
e=istence o$ $raud or !ross ne!li!ence on
the part o$ 5;I so as to %arrant liability on
its part.
De&enses2 /or'er% (2003)
CL maintained a chec.in! account %ith
,5A7M& Aa.ati 5ranch. Bne o$ his chec.s
in a stub o$ f$ty %as missin!. >ater& he
discoered that As. '0 $or!ed his
si!nature and succeeded to encash
;2@&??? $rom another branch o$ the ban..
'0 %as able to encash the chec. %hen <)&
a $riend& !uaranteed due e=ecution& sayin!
that she %as a holder in due course.
Can CL recoer the money $rom the ban.?
9eason brieEy. (@%)
SUGGESTED ANSWER:
0es& CL can recoer $rom the ban.. ,nder
1ection #( o$ the 7e!otiable Instruments
>a%& $or!ery is a real de$ense. )he
$or!ed chec. is %holly inoperatie in
relation to CL. CL cannot be held liable
thereon by anyone& not een by a holder
in due course. ,nder a $or!ed si!nature
o$ the dra%er& there is no alid
instrument that %ould !ie rise to a
contract %hich can be the basis or source
o$ liability on the part o$ the dra%er. )he
dra%ee ban. has no ri!ht or authority to
touch the dra%erDs $unds deposited %ith the
dra%ee ban..
/or'er%2 8ia.ilities2 "rior 0 Su.se5uent "arties
()**0) 7ose loane. Mario so'e 'oney an.B
to e)i.ence &is in.ebte.nessB Mario
e4ecute. an. .eli)ere. to 7ose a pro'issory
note payable to &is or.er*
Cose endorsed the note to ;ablo. 5ert
$raudulently obtained the note $rom ;ablo
and endorsed it to Culian by $or!in! ;ablo3s
si!nature. Culian endorsed the note to
Camilo.
a$ Aay Camilo en$orce the said promissory
note a!ainst Aario and Cose?
b$ Aay Camilo !o a!ainst ;ablo?
c$ Aay Camilo en$orce said note a!ainst
Culian?
.$ A!ainst %hom can Culian hae the ri!ht o$
recourse?
e$ Aay ;ablo recoer $rom either Aario or
Cose?
SUGGESTED ANSWER:
a$ Camilo may not en$orce said
promissory note a!ainst Aario and Cose.
)he promissory note at the time o$ $or!ery
bein! payable to order& the si!nature o$
;ablo %as essential $or the instrument to
pass title to subse+uent parties. A $or!ed
si!nature %as inoperatie (1ec #( 7I>).
Accordin!ly& the parties be$ore the $or!ery
are not "uridically related to parties a$ter
the $or!ery to allo% such en$orcement.
b$ Camilo may not !o a!ainst ;ablo& the
latter not hain! indorsed the instrument.
c$ Camilo may en$orce the instrument
a!ainst Culian because o$ his special
indorsement to Camilo& thereby ma.in!
him secondarily liable& both bein!
parties a$ter the $or!ery.
.$ Culian& in turn& may en$orce the
instrument a!ainst 5ert %ho& by his
$or!ery& has rendered himsel$ primarily
liable.
e$ ;ablo preseres his ri!ht to recoer
$rom either Aario or Cose %ho remain
parties "uridically related to him. Aario is
still considered primarily liable to ;ablo.
;ablo may& in case o$ dishonor& !o a$ter
Cose %ho& by his special indorsement& is
secondarily liable.
0ote %t is possible that an answer
might distinguish between blan/ and
special indorsements of prior parties
which can thereby materially alter
the above suggested answers' 2he
problem did not clearly indicate the
/ind of indorsements made'
/or'er%2 8ia.ilities2 "rior 0 Su.se5uent "arties ()**1)
Ale= issued a ne!otiable ;7 (promissory
note) payable to 5enito or order in
payment o$ certain !oods. 5enito
indorsed the ;7 to Celso in payment o$
an e=istin! obli!ation. >ater Ale= $ound
the !oods to be de$ectie. While in Celso3s
possession the ;7 %as stolen by 'ennis
%ho $or!ed Celso3s si!nature and
discounted it %ith <d!ar& a money lender
%ho did not ma.e in+uiries about the ;7.
<d!ar indorsed the ;7 to 8eli=& a holder in
due course. When 8eli= demanded
payment o$ the ;7 $rom Ale= the latter
re$used to pay. 'ennis could no lon!er be
located.
/* What are the ri!hts o$ 8eli=& i$ any&
a!ainst Ale=& 5enito& Celso and <d!ar?
<=plain
!* 'oes Celso hae any ri!ht a!ainst Ale=&
5enito and 8eli=? <=plain.
SUGGESTED ANSWER:
/* 8eli= has no ri!ht to claim a!ainst Ale=&
5enito and Celso %ho are parties prior
to the $or!ery o$ Celso3s si!nature by
'ennis. ;arties to an instrument %ho are
such prior to the $or!ery cannot be held
liable by any party %ho became such at
or subse+uent to the $or!ery. /o%eer&
<d!ar& %ho became a party to the
instrument subse+uent to the $or!ery and
%ho indorsed the same to 8eli=& can be
held liable by the latter.
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Mercantile Law Bar Examination Q & A (1990-2006) Page 82 of 103
!* Celso has the ri!ht to collect $rom Ale=
and 5enito. Celso is a party subse+uent to
the t%o. /o%eer& Celso has no ri!ht to
claim a!ainst 8eli= %ho is a party
subse+uent to Celso (1ec :? and :: 7I>)
7ncom$lete 0 Deliere6 (2003)
AL& a businessman& %as preparin! $or a
business trip abroad. As he usually did in
the past& he si!ned seeral chec.s in
blan. and entrusted them to his secretary
%ith instruction to sa$e!uard them and fll
them out only %hen re+uired to pay
accounts durin! his absence. B5& his
secretary& flled out one o$ the chec.s by
placin! her name as the payee. 1he flled
out the amount& endorsed and deliered
the chec. to MC& %ho accepted it in !ood
$aith $or payment o$ !ems that MC sold to
B5. >ater& B5 told AL o$ %hat she did
%ith re!rets. AL timely directed the ban.
to dishonor the chec.. Could AL be held
liable to MC? Ans%er and reason brieEy.
(@%)
SUGGESTED ANSWER:
0es. AL could be held liable to MC. )his is
a case o$ an incomplete chec.& %hich has
been deliered. ,nder 1ection 24 o$ the
7e!otiable Instruments >a%& MC& as a
holder in due course& can en$orce payment
o$ the chec. as i$ it had been flled up
strictly in accordance %ith the authority
!ien by AL to B5 and %ithin a
reasonable time.
7ncom$lete an6 Deliere6 (2001)
5rad %as in desperate need o$ money to
pay his debt to ;ete& a loan shar.. ;ete
threatened to ta.e 5rad3s li$e i$ he $ailed to
pay. 5rad and ;ete %ent to see 1e\orita
Isobel& 5rad3s rich cousin& and as.ed her
i$ she could si!n a promissory note in his
$aor in the amount o$ ;2?&???.?? to pay
;ete. 8earin! that ;ete %ould .ill 5rad&
1e\orita Isobel acceded to the re+uest.
1he a-i=ed her si!nature on a piece o$
paper %ith the assurance o$ 5rad that he
%ill "ust fll it up later. 5rad then flled
up the blan. paper& ma.in! a promissory
note $or the amount o$ ;2??&???.??. /e
then indorsed and deliered the same to
;ete& %ho accepted the note as payment o$
the debt.
What de$ense or de$enses can 1e\orita
Isobel set up a!ainst ;ete? <=plain. ((%)
SUGGESTED ANSWER:
)he de$ense (personal de$ense) %hich
1e\orita Isobel can set up a!ainst ;ete is
that the amount o$ ;2??&???.?? is not in
accordance %ith the authority !ien to her
to 5rad (in the presence o$ ;ete) and that
;ete %as not a holder in due course $or
actin! in bad $aith %hen accepted the note
as payment despite his .no%led!e that it
%as only 2?&???.?? that %as allo%ed by
1e\orita Isobel durin! their meetin! %ith
5rad.
7ncom$lete 7nstruments2 7ncom$lete Deliere6
7nstruments s! 7ncom$lete Un6eliere6 7nstrument (2004)
Cun %as about to leae $or a business trip.
As his usual practice& he si!ned seeral
blan. chec.s. /e instructed 9uth& his
secretary& to fll them as payment $or his
obli!ations. 9uth flled one chec. %ith her
name as payee& placed ;(?&???.??
thereon& endorsed and
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2005
deliered it to Aarie. 1he accepted the
chec. in !ood $aith as payment $or
!oods she deliered to 9uth. <entually&
9uth re!retted %hat she did and
apolo!i6ed to Cun. Immediately he
directed the dra%ee ban. to dishonor the
chec.. When Aarie encashed the chec.&
it %as dishonored.
/* Is Cun liable to Aarie? (@%)
SU44ESTE) ANSWER(
0es. )his coers the deliery o$ an
incomplete instru4 ment& under 1ection
24 o$ the 7e!otiable Instruments >a%&
%hich proides that there %as prima $acie
authority on the part o$ 9uth to fll4up
any o$ the material particulars thereo$.
/ain! done so& and %hen it is frst
completed be$ore it is ne!otiated to a
holder in due course li.e Aarie& it is
alid $or all purposes& and Aarie may
en$orce it %ithin a reasonable time& as i$
it had been flled up strictly in accordance
%ith the authority !ien.
!* 1upposin! the chec. %as stolen %hile
in 9uthDs pos4 session and a thie$ flled
the blan. chec.& endorsed and deliered
it to Aarie in payment $or the !oods he
purchased $rom her& is Cun liable to Aarie
i$ the chec. is dishonored? (@%)
SU44ESTE) ANSWER(
7o. <en thou!h Aarie is a holder in due
course& this is an incomplete and
undeliered instrument& coered by
1ection 2@ o$ the 7e!otiable Instruments
>a%. Where an incomplete instrument has
not been deliered& it %ill not& i$
completed and ne!otiated %ithout
authority& be a alid contract in the hands
o$ any holder& as a!ainst any person&
includin! Cun& %hose si!nature %as
placed thereon be$ore deliery. 1uch
de$ense is a real de$ense een a!ainst a
holder in due course& aailable to a party
li.e Cun %hose si!nature appeared prior to
deliery.
7n6orser: 7rre'ular 7n6orser s! General 7n6orser
(2001) Distinguis& an irregular in.orser fro' a
general in.orser* :N$
SUGGESTED ANSWER:
Irre!ular Indorser is not a party to the
instrument but he places his si!nature in
blan. be$ore deliery. /e is not a party but
he becomes one because o$ his si!nature in
the instrument. 5ecause his si!nature he is
considered an indorser and he is liable to
the parties in the instrument.
While& a Feneral Indorser %arrants that the
instrument is !enuine& that he has a !ood
title to it& that all prior parties had capacity
to contractK that the instrument at the
time o$ the indorsement is alid and
subsistin!K and that on due presentment&
the instrument %ill be accepted or paid or
both accepted and paid accordin! to its
tenor& and that i$ it is dishonored& he %ill
pay i$ the necessary proceedin!s $or
dishonor are made.
Ne'otia.ilit% ()**3)
'iscuss the ne!otiability or non4
ne!otiability o$ the $ollo%in! notes
/$ Aanila& 1eptember 2& 2HH(
Mercantile Law Bar Examination Q & A (1990-2006) Page 83 of 103
;#&@??.??
I promise to pay ;edro 1an Cuan or order
the sum o$ ;#&@??.
(1!d.) 7oel Castro
!$ Aanila& Cune (&
2HH( ;2?&???.??
8or alue receied& I promise to pay 1er!io
'ee or order the sum o$ ;2?&???.?? in fe
(@) installments& %ith the frst installment
payable on Bctober @& 2HH( and the other
installments on or be$ore the f$th day o$ the
succeedin! month or therea$ter.
(1!d.) >ito Qilla
SUGGESTED ANSWER:
)he promissory note is ne!otiable as it
complies %ith 1ec 2& 7I>.
8irstly& it is in %ritin! and si!ned by the
ma.er& 7oel Castro.
1econdly& the promise is unconditional to
pay a sum certain in money& that is&
;#&@??.??
)hirdly& it is payable on demand as no
date o$ maturity is specifed.
8ourth& it is payable to order.
)he promissory note is ne!otiable. All the
re+uirements o$ 1ec 2 7I> are complied
%ith. )he sum to be paid is still certain
despite that the sum is to be paid by
installments (1ec #b 7I>)
Ne'otia.ilit% (2002)
Which o$ the $ollo%in! stipulations or
$eatures o$ a promissory note (;7) a-ect
or do not a-ect its ne!otiability& assumin!
that the ;7 is other%ise ne!otiable?
Indicate your ans%er by %ritin! the
para!raph number o$ the stipulation or
$eature o$ the ;7 as sho%n belo% and your
correspondin! ans%er& either A-ected or
7ot a-ected. <=plain (@%).
a$ )he date o$ the ;7 is 8ebruary (?&
#??#.
b$ )he ;7 bears interest payable on the
last day o$ each calendar +uarter at a
rate e+ual to fe percent (@%) aboe
the then preailin! H24day )reasury 5ill
rate as published at the be!innin! o$
such calendar +uarter.
c$ )he ;7 !ies the ma.er the option to
ma.e payment either in money or in
+uantity o$ palay or e+uialent alue.
.$ )he ;7 !ies the holder the option either
to re+uire payment in money or to
re+uire the ma.er to sere as the
body!uard or escort o$ the holder $or (?
days.
SUGGESTED ANSWER:
a$ ;ara!raph 2 G ne!otiability is 7B)
A88<C)<'. )he date is not one o$ the
re+uirements $or ne!otiability.
b$ ;ara!raph # G ne!otiability is 7B)
A88<C)<' )he interest is to be
computed at a particular time and is
determinable. It does not ma.e the sum
uncertain or the promise conditional.
c$ ;ara!raph ( G ne!otiability is
A88<C)<'. Fiin! the ma.er the
option renders the promise conditional
.$ ;ara!raph 4 G ne!otiability is 7B)
A88<C)<'. Fiin! the option to the
holder does not ma.e the promise
conditional.
Ne'otia.ilit%2 Eol6er in Due Course ()**2)
;erla brou!ht a motor car payable on
installments $rom Automotie Company $or
;#@?th. 1he made a do%n payment o$
;@?th and e=ecuted a promissory note $or
the balance. )he company subse+uently
indorsed the note to 9eliable 8inance
Corporation %hich fnanced the purchase.
)he promissory note read*
8or alue receied& I promised to pay
Automotie Company or order at its o-ice
in >e!aspi City& the sum o$ ;#??&???.??
%ith interest at t%ele (2#%) percent per
annum& payable in e+ual installments o$
;#?&???.?? monthly $or ten (2?) months
startin! Bctober #2& 2HH2.
Aanila 1eptember #2& 2HH2.
(s!d) ;erla
;ay to the order o$ 9eliable 8inance
Corporation.
Automotie
Company 5y* (1!d) Aana!er
5ecause ;erla de$aulted in the payment o$
her installments& 9eliable 8inance
Corporation initiated a case a!ainst her $or
a sum o$ money. ;erla ar!ued that the
promissory note is merely an assi!nment o$
credit& a non4ne!otiable instrument open to
all de$enses aailable to the assi!nor and&
there$ore& 9eliable 8inance Corporation is
not a holder in due course.
a$ Is the promissory note a mere assi!nment
o$ credit or a ne!otiable instrument? Why?
b$ Is 9eliable 8inance Corp a holder in due
course? <=plain brieEy.
SUGGESTED ANSWER:
a$ )he promissory note in the problem is a
ne!otiable instrument& bein! in compliance
%ith the proisions o$ 1ec 2 7I>. 7either
the $act that the payable sum is to be paid
%ith interest nor that the maturities are in
stated installments renders uncertain the
amount payable (1ec # 7I>)
b$ 0es& 9eliable 8inance Corporation is a
holder in due course !ien the $actual
settin!s. 1aid corporation apparently too.
the promissory note $or alue& and there are
no indications that it ac+uired it in bad
$aith .Sec 02 &3 see Salas " C$ 1+1 s 2667
Ne'otia.ilit%2 Re5uisites (2000)
7ersion 1990+2006 U %&ate& 'y
Dondee
7ersion 1990+2003 Arrange& 'y SULAW Cass
200!
Mercantile Law Bar Examination Q & A (1990-2006) Page ;" of 103
a$ A; bou!ht a used cell phone $rom C9.
C9 pre$erred cash but A; is a $riend so C9
accepted A93s promissory note $or
;2?&???. C9 thou!ht o$ conertin! the note
into cash by endorsin! it to his brother
M9. )he promissory note is a piece o$
paper %ith the $ollo%in! hand4printed
notation* A; WI>> ;A0 C9 )<7
)/B,1A7' ;<1B1 I7 ;A0A<7) 8B9
/I1 C<>>;/B7< 2 W<<M 89BA )B'A0.
5elo% this notation A;3s si!nature %ith
JO2O?? ne=t to it& indicatin! the date o$
the promissory note. When C9 presented
A;3s note to M9& the latter said it %as
not a ne!otiable instrument under the la%
and so could not be a alid substitute $or
cash. C9 too. the opposite ie%& insistin!
on the note3s ne!otiability. 0ou are as.ed
to re$eree. Which o$ the opposin! ie%s is
correct?
b$ )/ is an indorsee o$ a promissory
note that simply states* ;A0 )B
C,A7 )A7 B9 B9'<9 4?? ;<1B1.
)he note has no date& no place o$
payment and no consideration
mentioned. It %as si!ned by AM
and %ritten under his letterhead
speci$yin! the address& %hich
happens to be his residence. )/
accepted the promissory note as
payment $or serices rendered to 1/&
%ho in turn receied the note $rom
Cuan )an as payment $or a prepaid
cell phone card %orth 4@? pesos. )he
payee ac.no%led!ed hain! receied
the note on Au!ust 2& #???. A 5ar
reie%ee had told )/& %ho happens
to be your $riend& that )/ is not a
holder in due course under Article
@# o$ the 7e!otiable Instruments
>a% (Act #?(2) and there$ore does
not en"oy the ri!hts and protection
under the statute. )/ as.s $or our
adice specifcally in connection
%ith the note bein! undated and not
mentionin! a place o$ payment and
any consideration. What %ould your
adice be? (#%).
SUGGESTED ANSWER:
a$ M9 is ri!ht. )he promissory note is not
ne!otiable. It is not issued to order or
bearer. )here is no %ord o$ ne!otiability
containin! therein. It is not issued in
accordance %ith 1ection 2 o$ the 7e!otiable
Instruments >a%
b$ )he $act that the instrument is undated
and does not mention the place o$ payment
does not militate a!ainst its bein!
ne!otiable. )he date and place o$ payment
are not material particulars re+uired to
ma.e an instrument ne!otiable.
)he $act that no mention is made o$ any
consideration is not material. Consideration
is presumed.
Ne'otia.le 7nstrument: Am.i'uous 7nstruments
()**:) Eow .o you treat a negotiable
instru'ent t&at is so a'biguous t&at t&ere is
.oubt w&et&er it is a bill or a noteI #N$
SUGGESTED ANSWER:
2. Where a ne!otiable instrument is so
ambi!uous that there is doubt %hether it
is a bill or a note& the holder may treat it
either as a bill o$ e=chan!e or a promissory
note at his election.
7ersion 1990+2006 U %&ate& 'y
Dondee
7ersion 1990+2003 Arrange& 'y SULAW Cass
200!
Ne'otia.le 7nstrument: De&inition 0 C#aracteristics
(2001)
What is a ne!otiable instrument? Fie the
characteristics o$ a ne!otiable instrument.
(#%)
SUGGESTED ANSWER:
7e!otiable Instrument is a %ritten
contract $or the payment o$ money %hich
is intended as a substitute $or money and
passes $rom one person to another as
money& in such a manner as to !ie a
holder in due course the ri!ht to hold the
instrument $ree $rom de$enses aailable
to prior parties. 1uch instrument must
comply %ith 1ec. 2 o$ the 7e!otiable
Instrument >a% to be considered
ne!otiable.
)he characteristics o$ a ne!otiable
instrument areK
/$ 7e!otiability 4 )hat +uality or
attribute %hereby a bill& note or
chec. passes or may pass $rom hand
to hand& similar to money& so as to
!ie the holder in due course the
ri!ht to hold the instrument and
collect the sum payable $or himsel$
$ree $rom de$enses.
!$ Accumulation o$ 1econdary Contracts
as they are trans$erred $rom one
person to another.
Ne'otia.le 7nstrument: 76enti&ication (2001)
1tate and e=plain %hether the $ollo%in!
are ne!otiable instruments under the
7e!otiable Instruments >a%* (@%)
/$ ;ostal Aoney BrderK
!$ A certifcate o$ time deposit %hich
states )his is to certi$y that bearer has
deposited in this ban. the sum o$
8B,9 )/B,1A7' ;<1B1 (;4&???.??)
only& repayable to the depositor #??
days a$ter date.
:$ >etters o$ creditK
($ Warehouse receiptsK
#$ )reasury %arrants payable $rom a
specifc $und.
SUGGESTED ANSWER:
/$ ;ostal Aoney Brder G 7on47e!otiable
as it is !oerned by postal rules and
re!ulation %hich may be inconsistent
%ith the 7I> and it can only be
ne!otiated once.
!$ A certifcate o$ time deposit %hich
states )his is to certi$y that bearer has
deposited in this ban. the sum o$
8B,9 )/B,1A7' ;<1B1 (;4&???.??)
only& repayable to the depositor #??
days a$ter date. G 7on47e!otiable as
it does not comply %ith the re+uisites
o$ 1ec. 2 o$ 7I>
:$ >etters o$ credit 4 7on47e!otiable
($ Warehouse receipts 4 7on47e!otiable
$or the same as 5ill o$ >adin! it merely
represents !ood& not money.
#$ )reasury %arrants payable $rom a
specifc $und 4 7on47e!otiable bein!
payable out o$ a particular $und.
Mercantile Law Bar Examination Q & A (1990-2006) Page 85 of 103
Ne'otia.le 7nstrument: Ne'otia.le Document s!
Ne'otia.le 7nstrument (2001)
'istin!uish a ne!otiable document $rom a
ne!otiable instrument. (#%)
SUGGESTED ANSWER:
7e!otiable Instrument hae re+uisites o$
1ec. 2 o$ the 7I>& a holder o$ this
instrument hae ri!ht o$ recourse a!ainst
intermediate parties %ho are secondarily
liable& /older in due course may hae
ri!hts better than trans$eror& its sub"ect is
money and the Instrument itsel$ is property
o$ alue.
Bn the other hand& ne!otiable document
does not contain re+uisites o$ 1ec. 2 o$
7I>& it has no secondary liability o$
intermediate parties& trans$eree merely
steps into the shoes o$ the trans$eror& its
sub"ect are !oods and the instrument is
merely eidence o$ titleK thin! o$ alue are
the !oods mentioned in the document.
Ne'otia.le 7nstrument2 Ne'otia.ilit% ()**+)
Can a bill o$ e=chan!e or a promissory note
+uali$y as a ne!otiable instrument i$ G
a* it is not datedK or
b* the day and the month& but not the
year o$ its maturity& is !ienK or
c* it is payable to cash3 or
.* it names t%o alternatie dra%ees
SUGGESTED ANSWER:
a$ 0es. 'ate is not a material particular
re+uired by 1ec 2 7I> $or the ne!otiability
o$ an instrument.
b$ 7o. )he time $or payment is not
determinable in this case. )he year is not
stated.
c$ 0es. 1ec Hd 7I> ma.es the instrument
payable to bearer because the name o$ the
payee does not purport to be the name o$
any person.
.$ A bill may not be addressed to t%o or more
dra%ees in the alternatie or in succession&
to be ne!otiable (1ec 2#J 7I>). )o do so
ma.es the order conditional.
Ne'otia.le 7nstruments2 ,earer 7nstrument ()**:)
+ic&ar. Clinton 'akes a pro'issory note
payable to bearer an. .eli)ers t&e sa'e to
Aurora Page* Aurora PageB &owe)erB en.orses
it to K in t&is 'anner:
;ayable to L. 1i!ned* Aurora ;a!e.
>ater& L& %ithout endorsin! the promissory
note& trans$ers and deliers the same to
7apoleon. )he note is subse+uently
dishonored by 9ichard Clinton. Aay
7apoleon proceed a!ainst 9ichard Clinton $or
the note? (@%)
SUGGESTED ANSWER:
0es. 9ichard Clinton is liable to 7apoleon
under the promissory note. )he note made
by 9ichard Clinton is a bearer instrument.
'espite special indorsement made by Aurora
;a!e thereon& the note remained a bearer
instrument and can be ne!otiated by mere
deliery. When L deliered and trans$erred
the note to 7apoleon& the
latter became a holder thereo$. As such
holder& 7apoleon can proceed a!ainst
9ichard Clinton.
Ne'otia.le 7nstruments2 ,earer 7nstruments ()**+)
A deliers a bearer instrument to 5. 5
then specially indorses it to C and C later
indorses it in blan. to '. < steals the
instrument $rom ' and& $or!in! the
si!nature o$ '& succeeds in ne!otiatin! it
to 8 %ho ac+uires the instrument in !ood
$aith and $or alue.
a$ I$& $or any reason& the dra%ee ban.
re$uses to honor the chec.& can 8 en$orce
the instrument a!ainst the dra%er?
b$ In case o$ the dishonor o$ the chec.
by both the dra%ee and the dra%er& can 8
hold any o$ 5& C and ' liable secondarily
on the instrument?
SUGGESTED ANSWER:
a$ 0es. )he instrument %as payable to
bearer as it %as a bearer instrument. It
could be ne!otiated by mere deliery
despite the presence o$ special
indorsements. )he $or!ed si!nature is
unnecessary to presume the "uridical
relation bet%een or amon! the parties
prior to the $or!ery and the parties a$ter
the $or!ery. )he only party %ho can raise
the de$ense o$ $or!ery a!ainst a holder in
due course is the person %hose si!nature
is $or!ed.
b$ Bnly 5 and C can be held liable by 8. )he
instrument at the time o$ the $or!ery %as
payable to bearer& bein! a bearer
instrument. Aoreoer& the instrument %as
indorsed in blan. by C to '. '& %hose
si!nature %as $or!ed by < cannot be held
liable by 8.
Ne'otia.le 7nstruments2 .earer instruments2 lia.ilities o&
ma-er an6 in6orsers (200))
A issued a promissory note payable to 5
or bearer. A deliered the note to 5. 5
indorsed the note to C. C placed the note
in his dra%er& %hich %as stolen by the
"anitor L. L indorsed the note to ' by
$or!in! C3s si!nature. ' indorsed the note to
< %ho in turn deliered the note to 8& a
holder in due course& %ithout indorsement.
'iscuss the indiidual liabilities to 8 o$ A& 5
and C. (@%)
SUGGESTED ANSWER:
A is liable to 8. As the ma.er o$ the
promissory note& A is directly or primarily
liable to 8& %ho is a holder in due course.
'espite the presence o$ the special
indorsements on the note& these do not
detract $rom the $act that a bearer
instrument& li.e the promissory note in
+uestion& is al%ays ne!otiable by mere
deliery& until it is indorsed restrictiely
8or 'eposit Bnly.
5& as a !eneral indorser& is liable to 8
secondarily& and %arrants that the
instrument is !enuine and in all respects
%hat it purports to beK that he has !ood title
to itK that all prior parties had capacity to
contractK that he has no .no%led!e o$ any
$act %hich %ould impair the alidity o$ the
instrument or render it aluelessK that at
the time o$ his indorsement& the instrument
is alid and subsistin!K and that on due
presentment& it shall be accepted or paid& or
both& accordin! to its tenor& and that i$ it
be dishonored and the necessary
proceedin!s on dishonor
Version 1990-2006 U pdated by
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Version 1990-2003 Arranged by SULAW Class
2005
Mercantile Law Bar Examination Q & A (1990-2006) Page 86 of 103
be duly ta.en& he %ill pay the amount
thereo$ to the holder& or to any
subse+uent indorser %ho may be
compelled to pay.
C is not liable to 8 since the latter cannot
trace his title to the $ormer. )he si!nature
o$ C in the supposed indorsement by him
to ' %as $or!ed by L. C can raise the
de$ense o$ $or!ery since it %as his
si!nature that %as $or!ed.
A8TERNAT7>E ANSWER:
As a !eneral endorser& 5 is secondarily
liable to 8. C is liable to 8 since it is due to
the ne!li!ence o$ C in placin! the note in
his dra%er that enabled L to steal the
same and $or!e the si!nature o$ C relatie
to the indorsement in $aor o$ '. As
bet%een C and 8 %ho are both innocent
parties& it is C %hose ne!li!ence is the
pro=imate cause o$ the loss. /ence C
should su-er the loss.
Ne'otia.le 7nstruments2 incom$lete an6 un6eliere6
instruments2 #ol6er in 6ue course (2000)
;7 ma.es a promissory note $or
;@&???.??& but leaes the name o$ the
payee in blan. because he %anted to
eri$y its correct spellin! frst. /e
mindlessly le$t the note on top o$ his des.
at the end o$ the %or.day. When he
returned the $ollo%in! mornin!& the note
%as missin!. It turned up later %hen L
presented it to ;7 $or payment. 5e$ore L&
)& %ho turned out to hae flched the
note $rom ;73s o-ice& had endorsed the
note a$ter insertin! his o%n name in the
blan. space as the payee. ;7 dishonored
the note& contendin! that he did not
authori6e its completion and deliery. 5ut
L said he had no participation in& or
.no%led!e about& the pil$era!e and
alteration o$ the note and there$ore he
en"oys the ri!hts o$ a holder in due course
under the 7e!otiable Instruments >a%.
Who is correct and %hy? ((%)
b) Can the payee in a promissory note be
a holder in due course %ithin the
meanin! o$ the 7e!otiable Instruments
>a% (Act #?(2)? <=plain your ans%er. (#%)
SUGGESTED ANSWER:
a$ ;7 is ri!ht. )he instrument is
incomplete and undeliered. It did not
create any contract that %ould bind ;7 to
an obli!ation to pay the amount thereo$.
b$ A payee in a promissory note cannot
be a holder in due course %ithin
the meanin! o$ the 7e!otiable
Instruments >a%& because a payee is
an immediate party in relation to the
ma.er. )he payee is sub"ect to
%hateer de$enses& real o$ personal&
aailable to the ma.er o$ the
promissory note.
A8TERNAT7>E ANSWER:
b) A payee can be a holder in due course.
A holder is defned as the payee or indorsee
o$ the instrument %ho is in possession o$ it.
<ery holder is deemed prima $acie to be a
holder in due course.
Ne'otia.le 7nstruments2 7ncom$lete Deliere6 7nstruments2
Com$aratie Ne'li'ence ()**+)
Version 1990-2006 U pdated by
Dondee
Version 1990-2003 Arranged by SULAW Class
2005
A& sin!le proprietor o$ a business
concern& is about to leae $or a business
trip and& as he so o$ten does on these
occasions& si!ns seeral chec.s in blan..
/e instructs 5& his secretary& to sa$e.eep
the chec.s and fll them out %hen and
as re+uired to pay accounts durin! his
absence. 5 flls out one o$ the chec.s
by placin! her name as payee& flls in
the amount& endorses and deliers the
chec. to C %ho accepts it in !ood $aith
as payment $or !oods sold to 5. 5 re!rets
her action and tells A %hat she did. A
directs the 5an. in time to dishonor the
chec.. When C encashes the chec.& it is
dishonored.
Can A be held liable to C?
SUGGESTED ANSWER:
0es& A can be held liable to C& assumin!
that the latter !ae notice o$ dishonor to
A. )his is a case o$ an incomplete
instrument but deliered as it %as
entrusted to 5& the secretary o$ A.
Aoreoer& under the doctrine o$
comparatie ne!li!ence& as bet%een A
and C& both innocent parties& it %as the
ne!li!ence o$ A in entrustin! the chec. to
5 %hich is the pro=imate cause o$ the loss.
Ne'otia.le 7nstruments2 -in6s o& ne'otia.le instrument2
;or6s o& ne'otia.ilit% (2002)
A* 'efne the $ollo%in!* (2) a ne!otiable
promissory note& (#) a bill o$ e=chan!e and
(() a chec.. ((%)
B* 0ou are ;edro Cru6. 'ra$t the
appropriate contract lan!ua!e $or (2)
your ne!otiable promissory note and (#)
your chec.& each containin! the essential
elements o$ a ne!otiable instrument (#%)
SUGGESTED ANSWER:
A* (2) A ne!otiable promissory note is an
unconditional promise in %ritin! made by
one person to another& si!ned by the
ma.er& en!a!in! to pay on demand or at a
f=ed or determinable $uture time& a sum
certain in money to order or bearer.
!$ A bill o$ e=chan!e is an unconditional
order in %ritin! addressed by one person
to another& si!ned by the person !iin! it&
re+uirin! the person to %hom it is
addressed to pay on demand or at a f=ed
or determinable $uture time a sum certain
in money to order or to bearer.
:$ A chec. is a bill o$ e=chan!e dra%n on a
ban. payable on demand.
B* (2) 7e!otiable promissory note 4
1eptember 2@& #??#
8or alue receied& I hereby promise to
pay Cuan 1antos or order the sum o$ )<7
)/B,1A7' ;<1B1 (;2?&???) thirty ((?)
days $rom date hereo$.
(1i!ned) ;edro
Cru6 to* ;hilippine
7ational 5an.
<scolta& Aanila 5ranch
Mercantile Law Bar Examination Q & A (1990-2006) Page 8- of 103
Commercial 5an.in! Co. )he 5y4la%s o$ 1aad
re+uires
Ne'otia.le 7nstruments2 Re5uisites ()**4)
What are the re+uisites o$ a ne!otiable
instrument?
SUGGESTED ANSWER:
)he re+uisites o$ a ne!otiable instrument are
as $ollo%s*
a$ It must be in %ritin! and si!ned by the
ma.er or dra%erK
b$ It must contain an unconditional
promise or order to pay a sum certain in
moneyK
c$ It must be payable to order or to bearerK
and
.$ Where the instrument is addressed to a
dra%ee& he must be named or other%ise
indicated therein %ith reasonable
certainty. (1ec 2 7I>)
Notice Dis#onor ()**4)
When is notice o$ dishonor not re+uired to
be !ien to the dra%er?
SUGGESTED ANSWER:
7otice o$ dishonor is not re+uired to be
!ien to the dra%er in any o$ the $ollo%in!
cases*
a$ Where the dra%er and dra%ee are the
same personK
b$ When the dra%ee is a fctitious person
or a person not hain! capacity to
contractK
c$ When the dra%er is the person to
%hom the instrument is presented $or
paymentK
.$ Where the dra%er has no ri!ht to e=pect
or re+uire that the dra%ee or acceptor
%ill honor the instrumentK
e$ Where the dra%er has countermanded
payment (1ec 224 7I>)
"arties2 Accommo6ation "art% ()**0)
)o accommodate Carmen& ma.er o$ a
promissory note& Cor!e si!ned as indorser
thereon& and the instrument %as ne!otiated
to 9a-y& a holder $or alue. At the time 9a-y
too. the instrument& he .ne% Cor!e to be
an accomodation party only. When the
promissory note %as not paid& and 9a-y
discoered that Carmen had no $unds& he
sued Cor!e. Cor!e pleads in de$ense the $act
that he had endorsed the instrument %ithout
receiin! alue there$or& and the $urther $act
that 9a-y .ne% that at the time he too. the
instrument Cor!e had not receied any alue
or consideration o$ any .ind $or his
indorsement.
Is Cor!e liable? 'iscuss.
SUGGESTED ANSWER:
0es. Cor!e is liable. 1ec #H o$ the 7I>
proides that an accommodation party is
liable on the instrument to a holder $or
alue& not%ithstandin! the holder at the time
o$ ta.in! said instrument .ne% him to be
only an accommodation party. )his is the
nature or the essence o$ accommodation.
"arties2 Accommo6ation "art% ()**))
Bn Cune 2& 2HH?& A obtained a loan o$
;2??th $rom 5& payable not later than
#?'ec2HH?. 5 re+uired A to issue him a
chec. $or that amount to be dated
#?'ec2HH?. 1ince he does not hae any
chec.in! account& A& %ith the .no%led!e o$
5& re+uested his $riend& C& ;resident o$
1aad 5an.in! Corp (1aad) to accommodate
him. C a!reed& he si!ned a chec. $or the
a$oresaid amount dated #?'ec 2HH?& dra%n
a!ainst 1aad3s account %ith the A5C
that chec.s issued by it must be si!ned by
the ;resident and the )reasurer or the
Qice4;resident. 1ince the )reasurer %as
absent& C re+uested the Qice4;resident to
co4si!n the chec.& %hich the latter
reluctantly did. )he chec. %as deliered
to 5. )he chec. %as dishonored upon
presentment on due date $or insu-iciency o$
$unds.
a$ Is 1aad liable on the chec. as an
accommodation party?
b$ I$ it is not& %ho then& under the aboe
$acts& isOare the accommodation party?
SUGGESTED ANSWER:
a.) 1aad is not liable on the chec. as an
accommodation party. )he act o$ the
corporation in accommodatin! a $riend o$
the ;resident& is ultra ires .Crisologo29ose "
C$ %R +,066, 10Se-16+67# While it may be
le!ally possible $or the corporation& %hose
business is to proide fnancial
accommodations in the ordinary course o$
business& such as one !ien by a fnancin!
company to be an accommodation party&
this situation& ho%eer& is not the case in
the bar problem.
b) Considerin! that both the ;resident
and Qice4 ;resident %ere si!natories to
the accommodation& they themseles can
be sub"ect to the liabilities o$
accommodation parties to the instrument in
their personal capacity .Crisologo29ose " C$
10Se-16+67
"arties2 Accommo6ation "art% ()**4)
7ora applied $or a loan o$ ;2??th %ith
5,9 5an.. 5y %ay o$ accommodation&
7ora3s sister& Qilma& e=ecuted a promissory
note in $aor o$ 5,9 5an.. When 7ora
de$aulted& 5,9 5an. sued Qilma& despite its
.no%led!e that Qilma receied no part o$
the loan.
Aay Qilma be held liable? <=plain.
SUGGESTED ANSWER:
0es& Qilma may be held liable. Qilma is an
accommodation party. As such& she is liable
on the instrument to a holder $or alue such
as 5,9 5an.. )his is true een i$ 5,9 5an.
%as a%are at the time it too. the
instrument that Qilma is merely an
accommodation party and receied no part
o$ the loan .See Sec 26, &31 :ulalio
/rudencio " C$ %R 323(036, 9ul 1(, +6 1(3 s '7
"arties2 Accommo6ation "art% ()**:)
8or the purpose o$ lendin! his name
%ithout receiin! alue there$ore& ;edro
ma.es a note $or ;#?&??? payable to the
order o$ L %ho in turn ne!otiates it to 0& the
latter .no%in! that ;edro is not a party $or
alue.
/* Aay 0 recoer $rom ;edro i$ the latter
interposes the absence o$ consideration?
((%)
!* 1upposin! under the same $acts& ;edro
pays the said ;#?&??? may he recoer the
same amount $rom L? (#%)
SUGGESTED ANSWER:
/* 0es. 0 can recoer $rom ;edro. ;edro is
an accommodation party. Absence o$
consideration is in the nature o$ an
accommodation. 'e$ense o$ absence o$
consideration cannot be alidly interposed
by accommodation party a!ainst a holder in
due course.
Version 1990-2006 U pdated by
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2005
Mercantile Law Bar Examination Q & A (1990-2006) Page 88 of 103
!* I$ ;edro pays the said ;#?&??? to 0&
;edro can recoer the amount $rom
L. L is the accommodated party or
the party ultimately liable $or the
instrument. ;edro is only an
accommodation party. Bther%ise& it
%ould be un"ust enrichment on the
part o$ L i$ he is not to pay ;edro.
"arties2 Accommo6ation "art% (2003)
1usan Ma%ada borro%ed ;@??&??? $rom
L0S 5an. %hich re+uired her& to!ether
%ith 9ose 9eyes %ho did not receie any
amount $rom the ban.& to e=ecute a
promissory note payable to the ban.& or
its order on stated maturities. )he note
%as e=ecuted as so a!reed. What .ind o$
liability %as incurred by 9ose& that o$ an
accommodation party or that o$ a solidary
debtor? <=plain. (4%)
SUGGESTED ANSWER:
(per 'ondee) 9ose may be held liable.
9ose is an accommodation party. Absence
o$ consideration is in the nature o$ an
accommodation. 'e$ense o$ absence o$
consideration cannot be alidly
interposed by accommodation party
a!ainst a holder in due course.
"arties2 Accommo6ation "art% (2003)
Cuan 1y purchased $rom A Appliance
Center one !enerator set on installment
%ith chattel mort!a!e in $aor o$ the
endor. A$ter !ettin! hold o$ the !enerator
set& Cuan 1y immediately sold it %ithout
consent o$ the endor. Cuan 1y %as
criminally char!ed %ith esta$a.
)o settle the case e=tra "udicially& Cuan 1y
paid the sum o$ ;#?&??? and $or the
balance o$ ;@&???.?? he e=ecuted a
promissory note $or said amount %ith 5en
>ope6 as an accommodation party. Cuan 1y
$ailed to pay the balance.
/$ What is the liability o$ 5en >ope6 as
an accommodation party? <=plain.
!$ What is the liability o$ Cuan 1y?
SUGGESTED ANSWER:
/$ 5en >ope6& as an accommodation party&
is liable as ma.er to the holder up to the
sum o$ ;@&??? een i$ he did not receie
any consideration $or the promissory note.
)his is the nature o$ accommodation. 5ut
5en >ope6 can as. $or reimbursement $rom
Cuan 1y& the accommodation party.
!$ Cuan 1y is liable to the e=tent o$ ;@&??? in
the hands o$ a holder in due course (1ec 24
7I>). I$ 5en >ope6 paid the promissory
note& Cuan 1y has the obli!ation to
reimburse 5en >ope6 $or the amount paid.
I$ Cuan 1y pays directly to the holder o$ the
promissory note& or he pays 5en >ope6 $or
the reimbursement o$ the payment by the
latter to the holder& the instrument is
dischar!ed.
"arties2 Accommo6ation "art% (2001)
'a!ul has a business arran!ement %ith
8acundo. )he latter %ould lend money to
another& throu!h 'a!ul& %hose name %ould
appear in the promissory note as the lender.
'a!ul %ould then immediately indorse the
note to 8acundo. Is 'a!ul an
accommodation party? <=plain. (#%)
SUGGESTED ANSWER:
Version 1990-2006 U pdated by
Dondee
Version 1990-2003 Arranged by SULAW Class
2005
0<1] 'a!ul is an accommodation party
because in the case at bar& he is
essentially& a person %ho si!ns as ma.er
%ithout receiin! any consideration&
si!ns as an accommodation party merely
$or the purpose o$ lendin! the credit o$
his name. And as an accommodation
party he cannot set up lac. o$
consideration a!ainst any holder& een as
to one %ho is not a holder in due course.
"arties2 Eol6er in Due Course ()**3)
>arry issued a ne!otiable promissory note
to <elyn and authori6ed the latter to fll
up the amount in blan. %ith his loan
account in the sum o$ ;2&???. /o%eer&
<elyn inserted ;@&??? in iolation o$
the instruction. 1he ne!otiated the note
to Culie %ho had .no%led!e o$ the
infrmity. Culie in turn ne!otiated said
note to 'ei $or alue and %ho had no
.no%led!e o$ the infrmity.
/$ Can 'ei en$orce the note a!ainst
>arry and i$ she can& $or ho% much?
<=plain.
!$ 1upposin! 'ei endorses the note to
5aby $or alue but %ho has .no%led!e
o$ the infrmity& can the latter en$orce
the note a!ainst >arry?
SUGGESTED ANSWER:
/$ 0es& 'ei can en$orce the ne!otiable
promissory note a!ainst >arry in the
amount o$ ;@&???. 'ei is a holder in due
course and the breach o$ trust committed
by <elyn cannot be set up by >arry
a!ainst 'ei because it is a personal
de$ense. As a holder in due course& 'ei
is not sub"ect to such personal de$ense.
!$ 0es. 5aby is not a holder in due course
because she has .no%led!e o$ the breach
o$ trust committed by <elyn a!ainst >arry
%hich is "ust a personal de$ense. 5ut
hain! ta.en the instrument $rom 'ei& a
holder in due course& 5aby has all the
ri!hts o$ a holder in due course. 5aby did
not participate in the breach o$ trust
committed by <elyn %ho flled the blan.
but flled up the instrument %ith ;@&???
instead o$ ;2&??? as instructed by >arry
(1ec @J 7I>)
"arties2 Eol6er in Due Course ()**4)
What constitutes a holder in due course?
SUGGESTED ANSWER:
A holder in due course is one %ho has
ta.en the instrument under the $ollo%in!
conditions*
/* )hat it is complete and re!ular upon its
$aceK
!* )hat he became holder o$ it be$ore it
%as oerdue and %ithout notice that it
had been preiously dishonored& i$
such %as the $actK
:* )hat he too. it in !ood $aith and $or
alueK
(* )hat at the time it %as ne!otiated to
him& he had no notice o$ any infrmity
in the instrument or de$ect in the title
o$ the person ne!otiatin! it. (1ec @#&
7I>)
"arties2 Eol6er in Due Course ()**4)
2HH: #.#) <a issued to Imelda a chec. in
the amount o$ ;@?th post4dated 1ep (?&
2HH@& as security $or a diamond rin! to be
sold on commission. Bn 1ep 2@& 2HH@&
Imelda ne!otiated the chec. to A)
inestment %hich paid the amount o$
;4?th to her.
<a $ailed to sell the rin!& so she returned
it to Imelda on 1ep 2H& 2HH@. ,nable to
retriee her chec.& <a %ithdre%
Mercantile Law Bar Examination Q & A (1990-2006) Page 89 of 103
her $unds $rom the dra%ee ban.. )hus&
%hen A) Inestment presented the chec.
$or payment& the dra%ee ban. dishonored it.
>ater on& %hen A) Inestment sued her&
<a raised the de$ense o$ absence o$
consideration& the chec. hain! been
issued merely as security $or the rin! that
she could not sell.
'oes <a hae a alid de$ense? <=plain.
SUGGESTED ANSWER:
7o. <a does not hae a alid de$ense.
8irst& A) Inestment is a holder in due
course and& as such& holds the postdated
chec. $ree $rom any de$ect o$ title o$ prior
parties and $rom de$enses aailable to prior
parties amon! themseles. <a can ino.e
the de$ense o$ absence o$ consideration
a!ainst A) Inestment only i$ the latter
%as priy to the purpose $or %hich the
chec.s %ere issued and& there$ore& not a
holder in due course. 1econd& it is not a
!round $or the dischar!e o$ the post4 dated
chec. as a!ainst a holder in due course that
it %as issued merely as security. )he only
!rounds $or the dischar!e o$ ne!otiable
instruments are those set $orth in 1ec 22H o$
the 7I> and none o$ those !rounds are
aailable to <a. )he latter may not
unilaterally dischar!e hersel$ $rom her
liability by the mere e=pediency o$
%ithdra%in! her $unds $rom the dra%ee
ban.. .State n"est!ents " C$ %R 1,1163,
9an 11, 63 21's327#
"arties2 Eol6er in Due Course ()**:)
L ma.es a promissory note $or ;2?&???
payable to A& a minor& to help him buy
school boo.s. A endorses the note to 5 $or
alue& %ho in turn endorses the note to C. C
.no%s A is a minor. I$ C sues L on the note&
can L set up the de$enses o$ minority and
lac. o$ consideration? ((%)
SUGGESTED ANSWER:
0es. C is not a holder in due course. )he
promissory note is not a ne!otiable
instrument as it does not contain any %ord
o$ ne!otiability& that is& order or bear& or
%ords o$ similar meanin! or import. 7ot
bein! a holder in due course& C is to sub"ect
such personal de$enses o$ minority and lac.
o$ consideration. C is a mere assi!nee %ho
is sub"ect to all de$enses.
A8TERNAT7>E ANSWER:
L cannot set up the de$ense o$ the minority
o$ A. 'e$ense o$ minority is aailable to the
minor only. 1uch de$ense is not aailable to L.
L cannot set up the de$ense a!ainst C.
>ac. o$ consideration is a personal de$ense
%hich is only aailable bet%een immediate
parties or a!ainst parties %ho are not
holders in due course. C3s .no%led!e that A
is a minor does not preent C $rom bein! a
holder in due course. C too. the promissory
note $rom a holder $or alue& 5.
"arties2 Eol6er in Due Course2 7n6orsement in .lan- (2002)
A* A5 issued a promissory note $or ;2&???
payable to C' or his order on 1eptember
2@& #??#. C' indorsed the note in blan. and
deliered the same to <8. F/ stole the note
$rom <8 and on 1eptember 24& #??#
presented it to A5 $or payment. When as.ed
by A5& F/ said C'
!ae him the note in payment $or t%o
caans o$ rice. A5 there$ore paid F/ ;2&??
on the same date. Bn 1eptember 2@& #??#&
<8 discoered that the note o$ A5 %as not
in his possession and he %ent to A5. It %as
then that <8 $ound out that A5 had already
made payment on the note. Can <8 still
claim payment $rom A5? Why? ((%)
B* As a se+uel to the same $acts narrated
aboe& <8& out o$ pity $or A5 %ho had
already paid ;2&???.?? to F/& decided to
$or!ie A5 and instead !o a$ter C' %ho
indorsed the note in blan. to him. Is C' still
liable to <8 by irtue o$ the indorsement in
blan.? Why? (#%)
SUGGESTED ANSWER:
A* 7o. <8 cannot claim payment $rom A5.
<8 is not a holder o$ the promissory note.
)o ma.e the presentment $or payment& it
is necessary to e=hibit the instrument&
%hich <8 cannot do because he is not in
possession thereo$.
B* 7o& because C' ne!otiated the
instrument by deliery.
"lace o& "a%ment (2000)
;7 is the holder o$ a ne!otiable promissory
note %ithin the meanin! o$ the 7e!otiable
Instruments >a% (Act #?(2). )he note
%as ori!inally issued by 9; to L> as
payee. L> indorsed the note to ;7 $or
!oods bou!ht by L>. )he note mentions
the place o$ payment on the specifed
maturity date as the o-ice o$ the corporate
secretary o$ ;L 5an. durin! ban.in! hours.
B7 maturity date& 9; %as at the a$oresaid
o-ice ready to pay the note but ;7 did not
sho% up. What ;7 later did %as to sue L>
$or the $ace alue o$ the note& plus interest
and costs. Will the suit prosper? <=plain.
(@%)
SUGGESTED ANSWER:
0es. )he suit %ill prosper as $ar as the $ace
alue o$ the note is concerned& but not
%ith respect to the interest due subse+uent
to the maturity o$ the note and the costs o$
collection. 9; %as ready and %illin! to pay
the note at the specifed place o$ payment
on the specifed maturity date& but ;7 did
not sho% up. ;7 lost his ri!ht to recoer the
interest due subse+uent to the maturity o$
the note and the costs o$ collection.
10'li# Servi#e La!
Certi&icate o& $u.lic Conenience ()**:)
)he 5aton! 5a.al Corporation fled %ith
the 5oard o$ <ner!y an application $or a
Certifcate o$ ;ublic Conenience $or the
purpose o$ supplyin! electric po%er and
li!hts to the $actory and its employees
liin! %ithin the compound. )he application
%as opposed by the 5ulacan <lectric
Corporation contendin! that the 5aton!
5a.al Corporation has not secured a
$ranchise to operate and maintain an electric
plant.
Is the opposition3s contention correct? (@%)
SUGGESTED ANSWER:
7o. A certifcate o$ public conenience may
be !ranted to 5aton! 5a.al Corporation&
thou!h not possessin! a
Version 1990-2006 U pdated by
Dondee
Version 1990-2003 Arranged by SULAW Class
2005
Mercantile Law Bar Examination Q & A (1990-2006) Page 90 of 103
le!islatie $ranchise& i$ it meets all the
other re+uirements. )here is nothin! in
the la% nor the Constitution& %hich
indicates that a le!islatie $ranchise is
necessary or re+uired $or an entity to
operate as supplier o$ electric po%er and
li!ht to its $actory and its employees
liin! %ithin the compound.
Certi&icate o& "u.lic Conenience2 inse$ara.ilit% o&
certi&icate an6 essel ()**2)
Antonio %as !ranted a Certifcate o$ ;ublic
Conenience (C;C) in 2HJ: to operate a
$erry bet%een Aindoro and 5atan!as
usin! the motor essel AQ >otus. /e
stopped operations in 2HJJ due to
unsericeability o$ the essel.
In 2HJH& 5asilio %as !ranted a C;C $or
the same route. A$ter a $e% months& he
discoered that Carlos %as operatin! on
his route under Antonio3s C;C. 5ecause
5asilio fled a complaint $or ille!al
operations %ith the Aaritime Industry
Authority& Antonio and Carlos "ointly fled
an application $or sale and trans$er o$
Antonio3s C;C and substitution o$ the
essel AQ >otus %ith another o%ned by
Carlos.
1hould Antonio3s and Carlos3 "oint
application be approed? Fier your
reasons.
SUGGESTED ANSWER:
)he "oint application o$ Antonio and Carlos
$or the sale and trans$er o$ Antonio3s C;C
and substitution o$ the essel AQ >otus
%ith another essel o%ned by the
trans$eree should not be approed. )he
certifcate o$ public conenience and AQ
>otus are inseparable. )he
unsericeability o$ the essel coered by
the certifcate had li.e%ise rendered
ine-ectie the certifcate itsel$& and the
holder thereo$ may not le!ally trans$er
the same to another. .Cohon " C$ 1++ s
'167#
Certi&icate o& "u.lic Conenience2
Re5uirements ()**1) ?&at re-uire'ents 'ust
be 'et before a certificate of public
con)enience 'ay be grante. un.er t&e
Public Ser)ice ActI
SUGGESTED ANSWER:
)he $ollo%in! are the re+uirements $or the
!rantin! o$ a certifcate o$ public
conenience& to %it*
a$ )he applicant must be a citi6en o$ the
;hilippines& or acorporation& co4
partnership or association or!ani6ed
under the la%s o$ the ;hilippines and
at least :?% o$ the stoc. o$ paid4up
capital o$ %hich must belon! to citi6ens
o$ the ;hilippines. (1ec 2:a& CA 24:& as
amended)
b$ )he applicant must proe public
necessity.
c$ )he applicant must proe that the
operation o$ the public serice proposed
and the authori6ation to do business %ill
promote the public interest in a proper
and suitable manner. (1ec 2:a CA 24: as
amended)
.$ )he applicant must be fnancially
capable o$ underta.in! the proposed
serice and meetin! the responsibilities
incident to its operation.
"o;ers o& t#e "u.lic Serice Commission ()**3)
)he City o$ Aanila passed an ordinance
bannin! proincial buses $rom the city. )he
ordinance %as challen!ed as inalid under
the ;ublic 1erice Act by L
Version 1990-2006 U pdated by
Dondee
Version 1990-2003 Arranged by SULAW Class
2005
%ho had a certifcate o$ public
conenience to operate auto4truc.s %ith
f=ed routes $rom certain to%ns in
5ulacan and 9i6al to Aanila and %ithin
Aanila. 8irstly& he claimed that the
ordinance %as null and oid because&
amon! other thin!s& it in e-ect amends
his certifcate o$ public conenience& a
thin! %hich only the ;ublic 1erice
Commission can do under 1ec 2: (m) o$
the ;ublic 1erice Act. ,nder said
section& the Commission is empo%ered to
amend& modi$y& or reo.e a certifcate o$
public conenience a$ter notice and
hearin!. 1econdly& he contended that een
i$ the ordinance %as alid& it is only the
Commission %hich can re+uire
compliance %ith its proisions under 1ec
2I (") o$ said Act and since the
implementation o$ the ordinance %as
%ithout sanction or approal o$ the
Commission& its en$orcement %as
unauthori6ed and ille!al.
/$ Aay the reliance o$ L on 1ection 2: (m)
o$ the ;ublic 1erice Act be sustained?
<=plain.
!$ Was L correct in his contention that
under 1ection 2I
(") o$ the ;ublic 1erice Act it is only the
Commissioner %hich can re+uire
compliance %ith the proisions o$ the
ordinance? <=plain.
SUGGESTED ANSWER:
/$ 7o. )he po%er ested in the ;ublic
1erice Commission under 1ec 2:m is
subordinate to the authority o$ the City
o$ Aanila under 1ec 2J (hh) o$ its
reised charter to superintend& re!ulate
or control the streets o$ the city o$
Aanila. (>a!man City o$ Aanila 2I s
@IH)
!$ 7o. )he po%ers con$erred by la%
upon the ;ublic 1erice Commission %ere
not desi!ned to deny or supersede the
re!ulatory po%er o$ local !oernments
oer motor tra-ic in the streets sub"ect to
their control. .3ag!an " Cit5 of Manila 1'
s 0'67
"u.lic utilities (2000)
WWW Communications Inc. is an e4
commerce company %hose present
business actiity is limited to proidin! its
clients %ith all types o$ in$ormation
technolo!y hard%are. It plans to re4$ocus
its corporate direction o$ !radually
conertin! itsel$ into a $ull coner!ence
or!ani6ation. )o%ards this ob"ectie& the
company has been a!!ressiely ac+uirin!
telecommunications businesses and
broadcast media enterprises& and
consolidatin! their corporate structures.
)he ultimate plan is to hae only t%o
or!ani6ations* one to o%n the $acilities o$
the combined businesses and to deelop
and produce content materials& and
another to operate the $acilities and
proide mass media and commercial
telecommunications serices. WWW
Communications %ill be the Ea!ship entity
%hich %ill o%n the $acilities o$ the
con!lomerate and proide content to the
other ne% corporation %hich& in turn& %ill
operate those $acilities and proide the
serices. WWW Communications see.s
your pro$essional adice on %hether or
not its reor!ani6ed business actiity %ould
be considered a public utility re+uirin! a
$ranchise or certifcate or any other $orm
o$ authori6ation $rom the !oernment.
What %ill be your adice? <=plain (@%)
SUGGESTED ANSWER:
Mercantile Law Bar Examination Q & A (1990-2006) Page 91 of 103
)he reor!ani6ed business actiity o$ WWW
Communications Inc. %ould not be
considered a public utility re+uirin! a
$ranchise or certifcate or any other $orm
o$ authori6ation $rom the !oernment. It
o%ns the $acilities& but does not operate
them.
Reocation o& Certi&icate ()**3)
/$ 9obert is a holder o$ a certifcate o$
public conenience to operate a ta=icab
serice in Aanila and suburbs. Bne
eenin!& one o$ his ta=icab units %as
boarded by three robbers as they escaped
a$ter sta!in! a hold4up. 5ecause o$ said
incident& the >)895 reo.ed the certifcate
o$ public conenience o$ 9obert on the
!round that said operator $ailed to render
sa$e& proper and ade+uate serice as
re+uired under 1ec 2Ha o$ the ;ublic
1erice Act.
a$ Was the reocation o$ the certifcate o$
public conenience o$ 9obert "ustifed?
<=plain.
b$ When can the Commission (5oard)
e=ercise its po%er to suspend or reo.e
certifcate o$ public conenience?
SUGGESTED ANSWER:
2a) 7o. A sin!le hold4up incident %hich
does not lin. 9obert3s ta=icab cannot be
construed that he rendered a serice that is
unsa$e& inade+uate and improper .Man8anal
" $useGo 16( s 367
2b) ,nder 1ec 2Ha o$ the ;ublic 1erice
Act& the Commission (5oard) can suspend
or reo.e a certifcate o$ public conenience
%hen the operator $ails to proide a serice
that is sa$e& proper or ade+uate& and
re$uses to render any serice %hich can be
reasonably demanded and $urnished.
Reocation o& Certi&icate ()**3)
;epay& a holder o$ a certifcate o$ public
conenience& $ailed to re!ister to the
complete number o$ units re+uired by her
certifcate. /o%eer& she tried to "usti$y
such $ailure by the accidents that alle!edly
be$ell her& claimin! that she %as so
shoc.ed and burdened by the successie
accidents and mis$ortunes that she did not
.no% %hat she %as doin!& she %as con$used
and thro%n o- tan!ent momentarily&
althou!h she al%ays had the money and
fnancial ability to buy ne% truc.s and repair
the destroyed one. Are the reasons !ien by
;epay su-icient !rounds to e=cuse her $rom
completin! units? <=plain.
SUGGESTED ANSWER:
7o. )he reasons !ien by ;epay are not
su-icient !rounds to e=cuse her $rom
completin! her units. )he same could be
underta.en by her children or by other
authori6ed representaties (1ec 2:n ;ub
1er ActK /alili /erras 2? s I:H)
Se#0rities Reg0lation
7nsi6er (2003)
As. B5 %as employed in AA1 Inestment
5an.. WIC& a medical dru! company&
retained the 5an. to assess %hether it is
desirable to ma.e a tender o-er $or 'B;
company& a dru! manu$acturer. B5
oerheard in the
course o$ her %or. the plans o$ WIC. 5y
hersel$ and thru associates& she purchased
'B; stoc.s aailable at the stoc.
e=chan!e priced at ;#? per share. When
WICDs tender o-er %as announced& 'B;
stoc.s "umped to ;(? per share. )hus B5
earned a si6able proft. Is B5 liable $or
breach and misuse o$ confdential or
insider in$ormation !ained $rom her
employment? Is she also liable $or
dama!es to sellers or buyers %ith %hom
she traded? I$ so& %hat is the measure o$
such dama!es? <=plain brieEy. (@%)
SUGGESTED ANSWER:
B5 is an insider (as defned in 1ubsection
(.J(() o$ the 1ecurities 9e!ulation Code)
since she is an employee o$ the 5an.& the
fnancial adiser o$ 'B;& and this
relationship !ies her access to material
in$ormation about the issuer ('B;) and the
latterDs securities (shares)& %hich
in$ormation is not !enerally aailable to the
public. Accordin!ly& B5 is !uilty o$ insider
tradin! under 1ection
#I o$ the 1ecurities 9e!ulation Code& %hich
re+uires disclosure %hen tradin! in
securities.
B5 is also liable $or dama!es to sellers or
buyers %ith %hom she traded. ,nder
1ubsection :(.2 o$ the 1ecurities
9e!ulation Code& the dama!es a%arded
could be an amount not e=ceedin! triple
the amount o$ the transaction plus actual
dama!es. <=emplary dama!es may also be
a%arded in case o$ bad $aith& $raud&
maleolence or %antonness in the iolation
o$ the 1ecurities 9e!ulation Code or its
implementin! rules. )he court is also
authori6ed to a%ard attorneyDs $ees not
e=ceedin! (?% o$ the a%ard.
7nsi6er Tra6in' ()**1)
,nder the 9eised 1ecurities Act& it is
unla%$ul $or an insider to sell or buy a
security o$ the issuer i$ he .no%s a $act o$
special si!nifcance %ith respect to the
issuer or the security that is not !enerally
aailable& %ithout disclosin! such $act to the
other party.
:*a$ What does the term insider mean as
used in the 9eised 1ecurities act?
:*b$ When is a $act considered to be o$
special si!nifcance under the same Act?
:*c$ What are the liabilities o$ a person %ho
iolates the pertinent proisions o$ the
9eised 1ecurities Act re!ardin! the un$air
use o$ inside in$ormation?
SUGGESTED ANSWER:
(a. Insider means 2) the issuer& #) a
director or o-icer o$& or a person
controllin!& controlled by& or under common
control %ith& the issuer& () a person %hose
relationship or $ormer relationship to the
issuer !ies or !ae him access to a $act o$
special si!nifcance about the issuer or the
security that is not !enerally aailable& or 4)
a person %ho learns such a $act $rom any o$
the $ore!oin! insiders %ith .no%led!e that
the person $rom %hom he learns the $act is
such an insider (1ec (?b& 91A)
(b. It is one %hich& in addition to bein!
material& %ould be li.ely to a-ect the
mar.et price o$ a security to a si!nifcant
e=tent on bein! made !enerally aailable&
or one %hich a reasonable person %ould
consider especially
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important under the circumstances in
determinin! his course o$ action in the
li!ht o$ such $actors as the de!ree o$ its
specifcity& the e=tent o$ its di-erence
$rom in$ormation !enerally aailable
preiously& and its nature and reliability.
(1ec. (?c& 91A)
(c. )he person may be liable to 2) a fne o$
not less than ;@th nor more than ;@??th
or #) imprisonment o$ not less than I
years nor more than #2 years& () or both
such fne and imprisonment in the
discretion o$ the court.
I$ the person is a corporation& partnership&
association or other "uridical entity& the
penalty shall be imposed upon the o-icers
o$ the corporation& etc. responsible $or the
iolation. And i$ such an o-icer is an
alien& he shall& in addition to the penalties
prescribed& be deported %ithout $urther
proceedin!s a$ter serice o$ sentence. (1ec
@: 91A)
7nsi6er Tra6in'2 (ani$ulatie "ractices ()**3)
/$ Fie a case %here a person %ho is
not an issuin! corporation& director
or o-icer thereo$& or a person
controllin!& controlled by or under
common control %ith the issuin!
corporation& is also considered an
insider.
!$ In 1ecurities >a%& %hat is a shorts%in!
transaction.
:$ In insider tradin!& %hat is a $act o$
special si!nifcance?
SUGGESTED ANSWER:
/$ It may be a case %here a person& %hose
relationship or $ormer relationship to the
issuer !ies or !ae him access to a $act
o$ special si!nifcance about the issuer or
the security that is not !enerally aailable&
or a person& %ho learns such a $act $rom
any o$ the insiders& %ith .no%led!e that
the person $rom %hom he learns the $act& is
such an insider (1ec (?& par (b) 9e
1ecurities Act)
!$ A shorts%in! is a transaction %here a
person buys securities and sells or disposes
o$ the same %ithin a period o$ si= (:)
months.
A8TERNAT7>E ANSWER:
!$ It is a purchase by any person $or the
issuer or any person controllin!& controlled
by& or under common control %ith the
issuer& or a purchase sub"ect to the
control o$ the issuer or any such person&
resultin! in benefcial o%nership o$ more
than 2?% o$ any class o$ shares (1ec (# 9
1ec Act)
:$ In insider tradin!& a $act o$ special
si!nifcance is& in addition to bein!
material& such $act as %ould li.ely& on bein!
made !enerally aailable& to a-ect the
mar.et price o$ a security to a si!nifcant
e=tent& or %hich a reasonable person %ould
consider as especially important under the
circumstances in determinin! his course o$
action in the li!ht o$ such $actors as the
de!ree o$ its specifcity& the e=tent o$ its
di-erence $rom in$ormation !enerally
aailable preiously& and its nature and
reliability (1ec (? par c 91ecAct)
(ani$ulatie "ractices (200))
1uppose A is the o%ner o$ seeral inactie
securities. )o create an appearance o$
actie tradin! $or such securities&
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A connies %ith 5 by %hich A %ill o-er $or
sale some o$ his securities and 5 %ill buy
them at a certain f=ed price& %ith the
understandin! that althou!h there %ould
be an apparent sale& A %ill retain the
benefcial o%nership thereo$.
a$ Is the arran!ement la%$ul? ((%)
b$ I$ the sale materiali6es& %hat is it called?
(#%)
SUGGESTED ANSWER:
a$ 7o. )he arran!ement is not la%$ul. It
is an artifcial manipulation o$ the price
o$ securities. )his is prohibited by the
1ecurities 9e!ulation Code.
b$ I$ the sale materiali6es& it is called a
%ash sale or simulated sale.
Securities Re'ulation Co6e2 "ur$ose ()**:)
What is the principal purpose o$ la%s
and re!ulations !oernin! securities in
the ;hilippines? (#%)
SUGGESTED ANSWER:
)he principal purpose o$ la%s and
re!ulations !oernin! securities in the
;hilippines is to protect the public
a!ainst the ne$arious practices o$
unscrupulous bro.ers and salesmen in
sellin! securities.
Securities2 De&inition ()**4)
'efne securities
SUGGESTED ANSWER:
1toc.s& bonds notes& conertible
debentures& %arrants or other documents
that represent a share in a company or a
debt o%ned by a company or !oernment
entity. <idences o$ obli!ations to pay
money or o$ ri!hts to participate in
earnin!s and distribution o$ corporate
assets. Instruments !iin! to their le!al
holders ri!hts to money or other propertyK
they are there$ore instruments %hich hae
intrinsic alue and are reco!ni6ed and
used as such in the re!ular channels o$
commerce.
(0ote Sec (a of the +evised Securities #ct does
not really define the term Psecurities'M!
Securities2 Sellin' o& Securities2 (eanin' (2002)
#??# (2J) <+uity Bnline Corporation (<B>)&
a 7e% 0or. corporation& has a securities
bro.era!e serice on the Internet a$ter
obtainin! all re+uisite ,.1. licenses and
permits to do so. <B>3s %ebsite
(%%%.eonline..com)& %hich is hosted by a
serer in 8lorida& enables Internet users
to trade on4line in securities listed in the
arious stoc. e=chan!es in the ,.1. <B>
buys and sells ,.1. listed securities $or
the accounts o$ its clients all oer the
%orld& %ho coney their buy and sell
instructions to <B> throu!h the Internet.
<B> has no o-ices& employees or
representaties outside the ,.1. )he
%ebsite has icons $or many countries&
includin! an icon 8or 8ilipino )raders
containin! the day3s prices o$ ,.1. listed
securities e=pressed in ,.1. dollars and
their ;hilippine peso e+uialent. Frace
Fon6ales& a resident o$ Aa.ati& is a re!ular
customer o$ the %ebsite and has been
purchasin! and sellin! securities throu!h
<B> %ith the use o$ her American <=press
credit card. Frace has neer traeled
outside the ;hilippines. A$ter a series o$
erroneous stoc. pic.s& she had incurred a
net indebtedness o$ ,1R(?&???. %ith <B>&
at %hich time she cancelled her American
<=press credit card. A$ter a
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number o$ demand letters sent to Frace&
all o$ them unans%ered& <B>& throu!h a
Aa.ati la% frm& fled a complaint $or
collection a!ainst Frace %ith the 9e!ional
)rial Court o$ Aa.ati. Frace& throu!h her
la%yer& fled a motion to dismiss on the
!round that <B> (a) %as doin! business in
the ;hilippines %ithout a license and %as
there$ore barred $rom brin!in! suit and (b)
iolated the 1ecurities 9e!ulation Code by
sellin! or o-erin! to sell securities %ithin
the ;hilippines %ithout re!isterin! the
securities %ith the ;hilippine 1<C and thus
came to court %ith unclean hands. <B>
opposed the motion to dismiss& contendin!
that it had neer established a physical
presence in the ;hilippines& and that all o$
the actiities related to plainti-s tradin! in
,.1. securities all transpired outside the
;hilippines. I$ you are the "ud!e& decide the
motion to dismiss by rulin! on the
respectie contentions o$ the parties on the
basis o$ the $acts presented aboe. (2?%)
SUGGESTED ANSWER:
)he !rounds o$ the motion to dismiss are
both untenable. <B> is not doin! business
in the ;hilippines& and it did not iolate the
1ecurites Act& because it %as not sellin!
securities in the country.
)he contention o$ <B> is correct& because
it neer did any business in the
;hilippines. All its transactions in +uestion
%ere consummated outside the ;hilippines.
Ten6er <&&er (2002)
#??# (:)
A* What is a tender o-er?
B* In %hat instances is a tender o-er
re+uired to be made?
SUGGESTED ANSWER:
A* )ender o-er is a publicly announced
intention o$ a person actin! alone or in
concert %ith other persons to ac+uire
e+uity securities o$ a public company. It may
also be defned as a method o$ ta.in! oer
a company by as.in! stoc.holders to sell
their shares at a price hi!her than the
current mar.et price and on a particular
date.
B* Instances %here tender o-er is re+uired to
be made*
a$ )he person intends to ac+uire 2@% or
more o$ the e+uity share o$ a public
company pursuant to an a!reement
made bet%een or amon! the person
and one or more sellers.
b$ )he person intends to ac+uire (?% or
more o$ the e+uity shares o$ a public
company %ithin a period o$ 2#
months.
c$ )he person intends to ac+uire e+uity
shares o$ a public company that %ould
result in o%nership o$ more than @?%
o$ the said shares.
Trans%ortation La!
,oun6ar% S%stem (2001)
5aldo is a drier o$ 0ello% Cab Company
under the boundary system. While cruisin!
alon! the 1outh <=press%ay& 5aldo3s cab
f!ured in a collision& .illin! his
passen!er& ;ietro. )he heirs o$ ;ietro sued
0ello% Cab Company $or dama!es& but the
latter re$used to pay the heirs& insistin!
that it is not liable because 5aldo is not its
employee. 9esole %ith reasons. (#%)
SUGGESTED ANSWER:
0ello% Cab Company shall be liable %ith
5aldo& on a solidary basis& $or the death o$
passen!er ;ietro. 5aldo is an employee o$
0ello% Cab under the boundary system. As
such& the death o$ passen!er ;ietro is
breach o$ contract o$ carria!e& ma.in!
both the common carrier 0ello% Cab and
its employee& 5aldo& solidarily liable.
.Bernande8 "# )olor, %#R, &o# 16,2+6, 9ul5 3,,
2,,(7
Carria'e2 ,reac# o& Contract2 "resum$tion o&
Ne'li'ence ()**0)
;eter so hailed a ta=icab o%ned and
operated by Cimmy Chen! and drien by
/ermie Corte6. ;eter as.ed Corte6 to ta.e
him to his o-ice in Aalate. Bn the %ay to
Aalate& the ta=icab collided %ith a
passen!er "eepney& as a result o$ %hich
;eter %as in"ured& i.e.& he $ractured his le$t
le!. ;eter sued Cimmy $or dama!es& based
upon a contract o$ carria!e& and ;eter
%on. Cimmy %anted to challen!e the
decision be$ore the 1C on the !round that
the trial court erred in not ma.in! an
e=press fndin! as to %hether or not Cimmy
%as responsible $or the collision and&
hence& ciilly liable to ;eter. /e %ent to
see you $or adice. What %ill you tell him?
<=plain.
SUGGESTED ANSWER:
I %ill counsel Cimmy to desist $rom
challen!in! the decision. )he action o$
;eter bein! based on culpa contractual& the
carrier3s ne!li!ence is presumed upon the
breach o$ contract. )he burden o$ proo$
instead %ould lie on Cimmy to establish that
despite an e=ercise o$ utmost dili!ence the
collision could not hae been aoided.
Carria'e2 ,reac# o& Contract2 "resum$tion o&
Ne'li'ence ()**+)
In a court case inolin! claims $or dama!es
arisin! $rom death and in"ury o$ bus
passen!ers& counsel $or the bus operator
fles a demurrer to eidence ar!uin! that
the complaint should be dismissed because
the plainti-s did not submit any eidence
that the operator or its employees %ere
ne!li!ent. I$ you %ere the "ud!e& %ould you
dismiss the complaint?
SUGGESTED ANSWER:
7o. In the carria!e o$ passen!ers& the $ailure
o$ the common carrier to brin! the
passen!ers sa$ely to their destination
immediately raises the presumption that
such $ailure is attributable to the carrier3s
$ault or ne!li!ence. In the case at bar& the
$act o$ death and in"ury o$ the bus
passen!ers raises the presumption o$ $ault
or ne!li!ence on the part o$ the carrier.
)he carrier must rebut such presumption.
Bther%ise& the conclusion can be properly
made that the carrier $ailed to e=ercise
e=traordinary dili!ence as re+uired by la%.
Carria'e2 /ortuitous Eent ()**1)
A. 'i6on )ruc.in! entered into a haulin!
contract %ith 8air!oods Co %hereby the
$ormer bound itsel$ to haul the latter3s
#??? sac.s o$ 1oya bean meal $rom Aanila
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;ort Area to Calamba& >a!una. )o carry
out $aith$ully its obli!ation 'i6on
subcontracted %ith <nrico 9eyes the
deliery o$ 4?? sac.s o$ the 1oya bean
meal. Aside $rom the drier& three male
employees o$ 9eyes rode on the truc.
%ith the car!o. While the truc. %as on its
%ay to >a!una t%o stran!ers suddenly
stopped the truc. and hi"ac.ed the car!o.
Inesti!ation by the police disclosed that
one o$ the hi"ac.ers %as armed %ith a
bladed %eapon %hile the other %as
unarmed. 8or $ailure to delier the 4??
sac.s& 8air!oods sued 'i6on $or dama!es.
'i6on in turn set up a (rd party complaint
a!ainst 9eyes %hich the latter re!istered
on the !round that the loss %as due to
$orce ma"eure.
'id the hi"ac.in! constitute $orce ma"eure
to e=culpate 9eyes $rom any liability to
'i6on? 'iscuss $ully.
SUGGESTED ANSWER:
7o. )he hi"ac.in! in this case cannot be
considered $orce ma"eure. Bnly one o$ the
t%o hi"ac.ers %as armed %ith a bladed
%eapon. As a!ainst the 4 male employees
o$ 9eyes& # hi"ac.ers& %ith only one o$
them bein! armed %ith a bladed %eapon&
cannot be considered $orce ma"eure. )he
hi"ac.ers did not act %ith !rae or
irresistible threat& iolence or $orce.
Carria'e2 8ia.ilit%2 8ost ,a''a'e or Acts o& "assen'ers
()**+)
2HHI (2@) Antonio& a payin! passen!er&
boarded a bus bound $or 5atan!as City.
/e chose a seat at the $ront ro%& near
the bus drier& and told the bus drier that
he had aluable items in his hand carried
ba! %hich he then placed beside the
drier3s seat. 7ot hain! slept $or #4
hours& he re+uested the drier to .eep an
eye on the ba! should he do6e o- durin!
the trip. While Antonio %as asleep&
another passen!er too. the ba! a%ay and
ali!hted at Calamba& >a!una. Could the
common carrier be held liable by Antonio
$or the loss?
SUGGESTED ANSWER:
0es. Brdinarily& the common carrier is not
liable $or acts o$ other passen!ers. 5ut the
common carrier cannot reliee itsel$ $rom
liability i$ the common carrier3s employees
could hae preented the act or omission
by e=ercisin! due dili!ence. In this case& the
passen!er as.ed the drier to .eep an eye
on the ba! %hich %as placed beside the
drier3s seat. I$ the drier e=ercised due
dili!ence& he could hae preented the loss
o$ the ba!.
Carria'e2 "ro#i.ite6 0 >ali6 Sti$ulations (2002)
'iscuss %hether or not the $ollo%in!
stipulations in a contract o$ carria!e o$ a
common carrier are alid*
/* a stipulation limitin! the sum that may
be recoered by the shipper or o%ner to
H?% o$ the alue o$ the !oods in case o$
loss due to the$t.
!* a stipulation that in the eent o$ loss&
destruction or deterioration o$ !oods on
account o$ the de$ectie condition o$ the
ehicle used in the contract o$ carria!e&
the carrier3s liability is limited to the
alue o$ the !oods appearin! in the bill
o$ ladin! unless the shipper or o%ner
declares a hi!her alue (@%)
SUGGESTED ANSWER:
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/* )he stipulation is considered
unreasonable& un"ust and contrary to
public policy under Article 2I4@ o$
the Ciil Code.
!* )he stipulation limitin! the carrier3s
liability to the alue o$ the !oods
appearin! in the bill o$ ladin! unless
the shipper or o%ner declares a
hi!her alue& is e=pressly reco!ni6ed
in Article 2I4H o$ the Ciil Code.
Carria'e2 >aluation o& Dama'e6 Car'o ()**3)
A shipped thirteen pieces o$ lu!!a!e
throu!h >F Airlines $rom )eheran to
Aanila as eidenced by >F Air Waybill
%hich disclosed that the actual !ross
%ei!ht o$ the lu!!a!e %as 2J? .!. S did
not declare an inentory o$ the contents
or the alue o$ the 2( pieces o$ lu!!a!e.
A$ter the said pieces o$ lu!!a!e arried in
Aanila& the consi!nee %as able to claim
$rom the car!o bro.er only 2# pieces&
%ith a total %ei!ht o$ 2I4 .!. L adised
the airline o$ the loss o$ one o$ the 2(
pieces o$ lu!!a!e and o$ the contents
thereo$. <-orts o$ the airline to trace the
missin! lu!!a!e %ere $ruitless. 1ince the
airline $ailed to comply %ith the demand
o$ L to produce the missin! lu!!a!e& L
fled an action $or breach o$ contract
%ith dama!es a!ainst >F Airlines. In its
ans%er& >F Airlines alle!ed that the
Warsa% Conention %hich limits the
liability o$ the carrier& i$ any& %ith
respect to car!o to a sum o$ R#? per .ilo
or RH.?I per pound& unless a hi!her alue
is declared in adance and additional
char!es are paid by the passen!er and
the conditions o$ the contract as set $orth
in the air %aybill& e=pressly sub"ect the
contract o$ the carria!e o$ car!o to the
Warsa% Conention. Aay the alle!ation o$
>F Airlines be sustained? <=plain.
SUGGESTED ANSWER:
0es. ,nless the contents o$ a car!o are
declared or the contents o$ a lost lu!!a!e
are proed by the satis$actory eidence
other than the sel$4serin! declaration o$
one party& the contract should be
en$orced as it is the only reasonable basis
to arrie at a "ust a%ard. )he passen!er
or shipper is bound by the terms o$ the
passen!er tic.et or the %aybill. ./ana!a "
Ra-adas 2,6 s 6'7
Common Carrier ()**4)
'efne a common carrier?
SUGGESTED ANSWER:
A common carrier is a person& corporation&
frm or association en!a!ed in the
business o$ carryin! or transportin!
passen!ers or !oods or both& by land&
%ater or air $or compensation& o-erin! its
serices to the public (Art 2I(#& Ciil
Code)
Common Carrier2 ,reac# o& Contract2 Dama'es (2003)
Qiian Aartin %as boo.ed by ;A>& %hich
acted as a tic.etin! a!ent o$ 8ar <ast
Airlines& $or a round trip Ei!ht on the
latter3s aircra$t& $rom Aanila4/on!.on!4
Aanila. )he tic.et %as cut by an
employee o$ ;A>. )he tic.et sho%ed that
Qiian %as scheduled to leae Aanila at
@*(?
p.m. on ?@ Canuary #??# aboard 8ar <ast3s
8li!ht 8??I. Qiian arried at the 7inoy
A+uino International Airport an hour
be$ore the time scheduled in her tic.et&
but %as told that 8ar <ast3s 8li!ht 8??I
had le$t at 2#*2? p.m. It
Mercantile Law Bar Examination Q & A (1990-2006) Page 95 of 103
turned out that the tic.et %as inadertently
cut and %ron!ly %orded. ;A> employees
mannin! the airport3s !round serices
neertheless scheduled her to Ey t%o
hours later aboard their plane. 1he a!reed
and arried in /on!.on! sa$ely. )he aircra$t
used by 8ar <ast Airlines deeloped en!ine
trouble& and did not ma.e it to /on!.on!
but returned to Aanila. Qiian sued both
airlines& ;A> and 8ar <ast& $or dama!es
because o$ her hain! unable to ta.e the
8ar <ast Ei!ht. Could either or both airlines
be held liable to Qiian? Why? (:%)
SUGGESTED ANSWER:
(per dondee) 7o& there %as breach o$
contract and that she %as accommodated
%ell %ith the assistance o$ ;A> employees
to ta.e the Ei!ht %ithout undue delay.
Common Carrier2 De&enses (2002)
Why is the de$ense o$ due dili!ence in the
selection and superision o$ an employee
not aailable to a common carrier? (#%)
SUGGESTED ANSWER:
)he de$ense o$ due dili!ence in the
selection and superision o$ an employee is
not aailable to a common carrier because
the de!ree o$ dili!ence re+uired o$ a
common carrier is not the dili!ence o$ a
!ood $ather o$ a $amily but e=traordinary
dili!ence& i.e.& dili!ence o$ the !reatest
s.ill and utmost $oresi!ht.
Common Carrier2 De&enses2 /ortuitous Eents ()**3)
Aarites& a payin! bus passen!er& %as hit
aboe her le$t eye by a stone hurled at
the bus by an unidentifed bystander as
the bus %as speedin! throu!h the 7ational
/i!h%ay. )he bus o%ner3s personnel lost
no time in brin!in! Aarites to the
proincial hospital %here she %as confned
and treated.
Aarites %ants to sue the bus company $or
dama!es and see.s your adice %hether
she can le!ally hold the bus company
liable. What %ill you adise her?
SUGGESTED ANSWER:
Aarites can not le!ally hold the bus
company liable. )here is no sho%in! that
any such incident preiously happened so
as to impose an obli!ation on part o$ the
personnel o$ the bus company to %arn the
passen!ers and to ta.e the necessary
precaution. 1uch hurlin! o$ a stone
constitutes $ortuitous eent in this case. )he
bus company is not an insurer. ./ila-il " C$
1+, s 3(67
Common Carrier2 De&enses2 8imitation o& 8ia.ilit% ()**:) L
too. a plane $rom Aanila bound $or 'aao
ia Cebu %here there %as a chan!e o$
planes. L arried in 'aao sa$ely but to his
dismay& his t%o suitcases %ere le$t behind
in Cebu. )he airline company assured L that
the suitcases %ould come in the ne=t Ei!ht
but they neer did.
L claimed ;#&??? $or the loss o$ both
suitcases& but the airline %as %illin! to pay
only ;@?? because the airline tic.et
stipulated that unless a hi!her alue %as
declared& any claim $or loss cannot e=ceed
;#@? $or each piece o$ lu!!a!e. L reasoned
out that he did not si!n the stipulation and
in $act had not een read it.
L did not declare a !reater alue despite
the $act that the cler. had called his
attention to the stipulation in the tic.et.
'ecide the case (@%)
SUGGESTED ANSWER:
<en i$ he did not si!n the tic.et& L is
bound by the stipulation that any claim $or
loss cannot e=ceed ;#@? $or each lu!!a!e.
/e did not declare a hi!her alue. L is
entitled to ;@?? $or the t%o lu!!a!es lost.
Common Carrier2 De&enses2 8imitation o&
8ia.ilit% (200)) Suppose A was ri.ing on an
airplane of a co''on carrier w&en t&e
acci.ent &appene. an. A suffere. serious
in9uries* 1n an action by A against t&e
co''on carrierB t&e latter clai'e. t&at
/$ there %as a stipulation in the tic.et
issued to A absolutely e=emptin! the
carrier $rom liability $rom the passen!er3s
death or in"uries ad notices %ere posted
by the common carrier dispensin! %ith
the e=traordinary dili!ence o$ the carrier&
and
!$ A %as !ien a discount on his plane $are
thereby reducin! the liability o$ the
common carrier %ith respect to A in
particular.
a$ Are those alid de$enses? (2%)
b$ What are the de$enses aailable to any
common carrier to limit or e=empt it $rom
liability? (4%)
SUGGESTED ANSWER:
a$ 7o. )hese are not alid de$enses
because they are contrary to la% as they
are in iolation o$ the e=traordinary
dili!ence re+uired o$ common carriers.
(Article 2I@I& 2I@J 7e% Ciil Code)
b$ )he de$enses aailable to any common
carrier to limit or e=empt it $rom liability
are*
/* obserance o$ e=traordinary dili!ence&
!* or the pro=imate cause o$ the
incident is a $ortuitous eent or $orce
ma"eure&
:* act or omission o$ the shipper or
o%ner o$ the !oods&
(* the character o$ the !oods or de$ects
in the pac.in! or in the containers&
and
#* order or act o$ competent public
authority& %ithout the common
carrier bein! !uilty o$ een simple
ne!li!ence (Article 2I(4& 7CC).
Common Carrier2 Duration o& 8ia.ilit% ()**4)
A bus o$ F> )ransit on its %ay to 'aao
stopped to enable a passen!er to ali!ht. At
that moment& 1antia!o& %ho had been
%aitin! $or a ride& boarded the bus.
/o%eer& the bus drier $ailed to notice
1antia!o %ho %as still standin! on the bus
plat$orm& and stepped on the accelerator.
5ecause o$ the sudden motion& 1antia!o
slipped and $ell do%n su-erin! serious
in"uries.
Aay 1antia!o hold F> )ransit liable $or
breach o$ contract o$ carria!e? <=plain.
SUGGESTED ANSWER:
1antia!o may hold F> )ransit liable $or
breach o$ contract o$ carria!e. It %as the
duty o$ the drier& %hen he stopped the
bus& to do no act that %ould hae the
e-ect o$ increasin! the peril to a passen!er
such as 1antia!o %hile he %as attemptin!
to board the same. When a bus is not in
motion there is no necessity $or a
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person %ho %ants to ride the same to
si!nal his intention to board. A public
utility bus& once it stops& is in e-ect
ma.in! a continuous o-er to bus riders. It
is the duty o$ common carriers o$
passen!ers to stop their coneyances $or a
reasonable len!th o$ time in order to
a-ord passen!ers an opportunity to board
and enter& and they are liable $or in"uries
su-ered by boardin! passen!ers resultin!
$rom the sudden startin! up or "er.in! o$
their coneyances %hile they are doin!
so. 1antia!o& by steppin! and standin! on
the plat$orm o$ the bus& is already
considered a passen!er and is entitled to
all the ri!hts and protection pertainin! to
a contract o$ carria!e. .)ang4a ?rans Co "
C$ 600+2 Oct ',61 2,2s0'(7
Common Carrier2 Dut% to E9amine ,a''a'es2 Rail;a%
an6 Airline ()**2)
Aarino %as a passen!er on a train.
Another passen!er& Cuancho& had ta.en a
!allon o$ !asoline placed in a plastic ba!
into the same coach %here Aarino %as
ridin!. )he !asoline i!nited and e=ploded
causin! in"ury to Aarino %ho fled a ciil
suit $or dama!es a!ainst the rail%ay
company claimin! that Cuancho should
hae been sub"ected to inspection by its
conductor.
)he rail%ay company disclaimed liability
resultin! $rom the e=plosion contendin!
that it %as una%are o$ the contents o$ the
plastic ba! and ino.in! the ri!ht o$
Cuancho to priacy.
a$ 1hould the rail%ay company be held
liable $or dama!es?
b$ I$ it %ere an airline company inoled&
%ould your ans%er be the same? <=plain
brieEy.
SUGGESTED ANSWER:
a$ 7o. )he rail%ay company is not liable $or
dama!es. In oerland transportation& the
common carrier is not bound nor
empo%ered to ma.e an e=amination on
the contents o$ pac.a!es or ba!s&
particularly those handcarried by
passen!ers.
b$ I$ it %ere an airline company& the
common carrier should be made liable. In
case o$ air carriers& it is not la%$ul to
carry Eammable materials in passen!er
aircra$ts& and airline companies may open
and inesti!ate suspicious pac.a!es and
car!oes (9A :#(@)
Common Carrier2 Test ()**4)
What is the test $or determinin! %hether or
not one is a common carrier?
SUGGESTED ANSWER:
)he test $or determinin! %hether or not
one is a common carrier is %hether the
person or entity& $or some business purpose
and %ith !eneral or limited clientele&
o-ers the serice o$ carryin! or
transportin! passen!ers or !oods or both
$or compensation.
Common Carriers2 De&enses ()**4)
/$ AA )ruc.in!& a small company& operates
t%o truc.s $or hire on selectie basis. It
caters only to a $e% customers& and its
truc.s do not ma.e re!ular or scheduled
trips. It does not een hae a certifcate
o$ public conenience.
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Bn one occasion& 9eynaldo contracted
AA to transport $or a $ee& 2?? sac.s o$
rice $rom Aanila to )arlac. /o%eer& AA
$ailed to delier the car!o& because its
truc. %as hi"ac.ed %hen the drier
stopped in 5ulacan to isit his !irl$riend.
a$ Aay 9eynaldo hold AA liable as
a common carrier?
b$ Aay AA set up the hi"ac.in! as
a de$ense to de$eat 9eynaldo3s
claim?
SUGGESTED ANSWER:
a$ 9eynaldo may hold AA )ruc.in! liable
as a common carrier. )he $acts that AA
)ruc.in! operates only t%o truc.s $or
hire on a selectie basis& caters only to a
$e% customers& does not ma.e re!ular or
scheduled trips& and does not hae a
certifcate o$ public conenience are o$
no moment as
the la% does not distin!uish bet%een
one %hose principal business actiity
is the carryin! o$ persons or !oods or
both and anyone %ho does such
carryin! only as an ancillary actiity&
the la% aoids ma.in! any distinction
bet%een a person or enterprise
o-erin! transportation serice on a
re!ular or scheduled basis and one
o-erin! such serice on an
occasional& episodic or unscheduled
basis& and
the la% re$rains $rom ma.in! a
distinction bet%een a carrier o-erin!
its serices to the !eneral public and
one %ho o-ers serices or solicits
business only $rom a narro%
se!ment o$ the !eneral population
./edro de %u8!an " C$ 32('+22 )ec 22,++
16+s6127
SUGGESTED ANSWER:
b$ AA )ruc.in! may not set up the
hi"ac.in! as a de$ense to de$eat
9eynaldo3s claim as the $acts !ien do not
indicate that the same %as attended by
the use o$ !rae or irresistible threat&
iolence& or $orce. It %ould appear that
the truc. %as le$t unattended by its
drier and %as ta.en %hile he %as isitin!
his !irl$riend. (/edro de %u8!an " C$ 32('+22
)ec 22,++ 16+ scra 612).
Common Carriers2 8ia.ilit% &or 8oss ()**))
Ale"andor Camalin! o$ Ale!ria& Cebu& is
en!a!ed in buyin! copra& charcoal&
fre%ood& and used bottles and in resellin!
them in Cebu City. /e uses # bi! Isu6u
truc.s $or the purposeK ho%eer& he has no
certifcate o$ public conenience or
$ranchise to do business as a common
carrier. Bn the return trips to Ale!ria& he
loads his truc.s %ith arious merchandise
o$ other merchants in Ale!ria and the
nei!hborin! municipalities o$ 5adian and
Finatilan. /e char!es them $rei!ht rates
much lo%er than the re!ular rates. In one
o$ the return trips& %hich le$t Cebu City
at J*(? p.m. 2 car!o truc. %as loaded
%ith seeral bo=es o$ sardines& alued at
;2??th& belon!in! to one o$ his
customers& ;edro 9abor. While passin!
the 6i!6a! road bet%een Carcar and
5arili& Cebu& %hich is mid%ay bet%een
Cebu City and Ale!ria& the truc. %as
hi"ac.ed by ( armed men %ho too. all
the bo=es o$
Mercantile Law Bar Examination Q & A (1990-2006) Page 9- of 103
sardines and .idnapped the drier and
his helper& releasin! them in Cebu City
only # days later.
;edro 9abor sou!ht to recoer $rom
Ale"andro the alue o$ the sardines. )he
latter contends that he is not liable
there$ore because he is not a common
carrier under the Ciil Code and& een
!rantin! $or the sa.e o$ ar!ument that he
is& he is not liable $or the occurrence o$ the
loss as it %as due to a cause beyond his
control.
I$ you %ere the "ud!e& %ould you sustain
the contention o$ Ale"andro?
SUGGESTED ANSWER:
I$ I %ere the Cud!e& I %ould hold
Ale"andro as hain! en!a!ed as a
common carrier. A person %ho o-ers his
serices to carry passen!ers or !oods $or a
$ee is a common carrier re!ardless o$
%hether he has a certifcate o$ public
conenience or not& %hether it is his main
business or incidental to such business&
%hether it is scheduled or unscheduled
serice& and %hether he o-ers his serices
to the !eneral public or to a limited $e%
.)e %u8!an " C$ %R ('+22 2')ec16++7
I %ill ho%eer& sustain the contention o$
Ale"andro that he is not liable $or the
loss o$ the !oods. A common carrier is
not an insurer o$ the car!o. I$ it can be
established that the loss& despite the
e=ercise o$ e=traordinary dili!ence& could
not hae been aoided& liability does not
ensue a!ainst the carrier. )he hi"ac.in! by
( armed men o$ the truc. used by
Ale"andro is one o$ such cases .)e %u8!an "
C$ %R ('+22 2')ec16++7#
Common s! "riate Carrier2 De&enses (2002)
7ame t%o (#) characteristics %hich
di-erentiate a common carrier $rom a
priate carrier. ((%).
SUGGESTED ANSWER:
)%o (#) characteristics that di-erentiate a
common carrier $rom a priate carrier are*
/* A common carrier o-ers its serice to
the publicK a priate carrier does not.
!* A common carrier is re+uired to obsere
e=traordinary dili!enceK a priate
carrier is not so re+uired.
Ha.it S%stem (2001)
'iscuss the .abit system in land
transportation and its le!al conse+uences.
(#%)
SUGGESTED ANSWER:
2&e kabit syste' is an arrange'ent w&ere a
person grante. a certificate of public
con)enience allows ot&er persons to operate
t&eir 'otor )e&icles un.er &is licenseB for a
fee or percentage of t&eir earnings (Fim v' "ourt
of #ppeals and 4onEaleE, 4'+, 0o' )(58)7, <anuary )-,
(;;(, citing Baliwag 2rannit v' "ourt of #ppeals, 4'+' 0o'
57,*., <anuary 7, )*87! 2&e law en9oining t&e
kabit syste' ai's to i.entify t&e person
responsible for an acci.ent in or.er to protect
t&e ri.ing public* 2&e policy &as no force w&en
t&e public at large is neit&er .ecei)e. nor
in)ol)e.*
)he la% does not penali6e the parties to a
.abit a!reement. 5ut the .abit system is
contrary to public
policy and there$ore oid and ine=istent.
(Art. 24?HZ2[& Ciil Code)
Ha.it S%stem2 A'ent o& t#e Re'istere6 <;ner (2001)
;rocopio purchased an Isu6u passen!er
"eepney $rom <nten!& a holder o$ a
certifcate o$ public conenience $or the
operation o$ public utility ehicle
plyin! the Calamba4>os 5a\os route.
While ;rocopio continued o-erin! the
"eepney $or public transport serices& he
did not hae the re!istration o$ the
ehicle trans$erred in his name. 7either
did he secure $or himsel$ a certifcate o$
public conenience $or its operation.
)hus& per the records o$ the >and
)ransportation 8ranchisin! and
9e!ulatory 5oard& <nten! remained its
re!istered o%ner and operator. Bne day&
%hile the "eepney %as traelin!
southbound& it collided %ith a ten4
%heeler truc. o%ned by <mmanuel.
)he drier o$ the truc. admitted
responsibility $or the accident& e=plainin!
that the truc. lost its bra.es.
;rocopio sued <mmanuel $or dama!es&
but the latter moed to dismiss the case
on the !round that ;rocopio is not the
real party in interest since he is not the
re!istered o%ner o$ the "eepney.
9esole the motion %ith reasons. ((%)
SUGGESTED ANSWER:
2&e 'otion to .is'iss s&oul. be .enie.
because ProcopioB as t&e real owner of t&e
9eepneyB is t&e real party in interest*
Procopio falls un.er t&e Habit syste'*
Eowe)erB t&e legal restriction as regar.s t&e
Habit syste' .oes not apply in t&is case
because t&e public at large is not .ecei)e.
nor in)ol)e.* (Fim v' "ourt of #ppeals, 4'+'
0o' )(58)7, <anuary )-, (;;(, citing
Baliwag 2ransit v' "ourt of #ppeals, 4'+' 0o'
57,*., <anuary 7, )*87!
1n any e)entB Procoprio is .ee'e. to be Jt&e
agentJ of t&e registere. owner* (5irst
6alayan Feasing v' "ourt of #ppeals, 4'+'
0o' *).78, <une *,)**(C and O5O 2ransit
"o', %nc' v' 0F+", 4'+' 0os, 88)*5$*-,
<anuary (7, )**,!
(aritime Commerce2 ,are.oat (2003)
8or the transportation o$ its car!o $rom the
;ort o$ Aanila to the ;ort o$ Mobe& Capan&
Bsa%a P Co.& chartered bareboat AOQ
Ilo! o$ Mara!atan Corporation. AOQ Ilo!
met a sea accident resultin! in the loss o$
the car!o and the death o$ some o$ the
seamen mannin! the essel. Who should
bear the loss o$ the car!o and the death o$
the seamen? Why? (4%)
SUGGESTED ANSWER:
(per 'ondee) Bsa%a and Co. shall bear the
loss because under a demise or bareboat
charter& the charterer (Bsa%a
P Co.) mans the essel %ith his o%n
people and becomes& in e-ect& the o%ner
$or the oya!e or serice stipulated&
sub"ect to liability $or dama!es caused by
ne!li!ence.
"rior <$erator Rule (2003)
5ayan 5us >ines had been operatin!
satis$actorily a bus serice oer the route
Aanila to )arlac and ice ersa ia the
AcArthur /i!h%ay. With the up!radin! o$
the ne% 7orth <=press%ay& 5ayan 5us
>ines serice became
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seemin!ly inade+uate despite its e-orts o$
improin! the same. ;aso.
)ransportation& Inc.& no% applies $or the
issuance to it by the >and )ransportation
8ranchisin! and 9e!ulatory 5oard o$ a
certifcate o$ public conenience $or the
same Aanila4)arlac4Aanila route. Could
5ayan 5us >ines& Inc.& ino.e the prior
operator rules a!ainst ;aso.
)ransportation& Inc.? Why? (:%)
SUGGESTED ANSWER:
(per 'ondee) 7o& 5ayan 5us >ines& Inc.&
cannot ino.e the prior operator rules
a!ainst ;aso. )ransportation& Inc. because
such ;rior or Bld Bperator 9ule under
the ;ublic 1erice Act only applies as a
policy o$ the la% o$ the ;ublic 1erice
Commission to issue a certifcate o$ public
conenience to a second operator %hen
prior operator is renderin! su-icient&
ade+uate and satis$actory serice& and
%ho in all thin!s and respects is
complyin! %ith the rule and re!ulation o$
the Commission. In the $acts o$ the case
at bar& 5ayan 5us >ines serice became
seemin!ly inade+uate despite its e-orts o$
improin! the same. /ence& in the interest
o$ proidin! e-icient public transport
serices& the use o$ the Dprior operatorD and
the Dpriority o$ flin!D rules shall is
untenable n this case.
Re'istere6 <;ner2 Conclusie "resum$tion ()**0)
Cohnny o%ns a 1arao "eepney. /e as.ed his
nei!hbor Qan i$ he could operate the
said "eepney under Qan3s certifcate o$
public conenience. Qan a!reed and&
accordin!ly& Cohnny re!istered his
"eepney under Qan name.
Bn Cune 2?& 2HH?& one o$ the passen!er
"eepneys operated by Qan bumped )omas.
)omas %as in"ured and in due time& he fled
a complaint $or dama!es a!ainst Qan and
his drier $or the in"uries he su-ered.
)he court rendered "ud!ment in $aor o$
)omas and ordered Qan and his drier&
"ointly and seerally& to pay )omas actual
and moral dama!es& attorney3s $ees& and
costs.
)he 1heri- leied on the "eepney
belon!in! to Cohnny but re!istered in the
name o$ Qan. Cohnny fled a (rd party
claim %ith the 1heri- alle!in! o%nership
o$ the "eepney leied upon and statin! that
the "eepney %as re!istered in the name o$
Qan merely to enable Cohnny to ma.e use o$
Qan3s certifcate o$ public conenience.
Aay the 1heri- proceed %ith the public
auction o$ Cohnny3s "eepney. 'iscuss %ith
reasons.
SUGGESTED ANSWER:
0es& the 1heri- may proceed %ith the
auction sale o$ Cohnny3s "eepney. In
contemplation o$ la% as re!ards the public
and third persons& the ehicle is
considered the property o$ the re!istered
operator .Santos " Si*ug 1,( S 02,7
Trans?S#i$ment2 ,ill o& 8a6in'2 .in6in' contract ()**3)
C9) Inc entered into a contract %ith C Co
o$ Capan to e=port anaha% $ans alued at
R#(&???. As payment thereo$& a letter o$
credit %as issued to C9) by the buyer. )he
letter o$ credit re+uired the issuance o$ an
on4board bill o$ ladin! and prohibited
the transshipment. )he ;resident o$ C9)
then contracted a shippin! a!ent to ship the
anaha% $ans throu!h B Containers >ines&
speci$yin! the re+uirements o$ the letter o$
credit. /o%eer& the bill o$ ladin! issued by
the shippin! lines bore the notation
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receied $or shipment and contained
an entry indicatin! transshipment in
/on!.on!. )he ;resident o$ C9)
personally receied and si!ned the bill o$
ladin! and despite the entries& he
deliered the correspondin! chec. in
payment o$ the $rei!ht.
)he shipment %as deliered at the port o$
dischar!e but the buyer re$used to accept
the anaha% $ans because there %as no
on4board bill o$ ladin!& and there %as
transshipment since the !oods %ere
trans$erred in /on!.on! $rom AQ
;acifc& the $eeder essel& to AQ
Briental& a mother essel. C9) ar!ued that
the same cannot be considered
transshipment because both essels
belon! to the same shippin! company.
/$ Was there transshipment? <=plain
!$ C9) $urther ar!ued that assumin! that
there %as transshipment& it cannot be
deemed to hae a!reed thereto een i$ it
si!ned the bill o$ ladin! containin! such
entry because it %as made .no%n to the
shippin! lines $rom the start that
transshipment %as prohibited under the
letter o$ credit and that& there$ore& it had
no intention to allo% transshipment o$
the sub"ect car!o. Is the ar!ument
tenable? 9eason.
SUGGESTED ANSWER:
/$ 0es. )ransshipment is the act o$ ta.in!
car!o out o$ one ship and loadin! it in
another. It is immaterial %hether or not
the same person& frm& or entity o%ns the
t%o essels. (Aa!ellan CA #?2 s 2?#)
!$ 7o. C9) is bound by the terms o$ the
bill o$ ladin! %hen it accepted the bill o$
ladin! %ith $ull .no%led!e o$ its contents
%hich included transshipment in
/on!.on!. Acceptance under such
circumstances ma.es the bill o$ ladin! a
bindin! contract. (Aa!ellan Ca #?2 s 2?#)
Tr0st Re#ei%ts La!
Trust /eceipts %a&' Acts B +missions' Covere) (200;)
;hat acts or o!issions are -enali8ed
under the ?rust Recei-ts 3a4< .2#0=7
S>GG5S25D A=S?5+:
)he )rust 9eceipts >a% (;.'. 7o. 22@)
declares the $ail4 ure to turn oer !oods
or proceeds reali6ed $rom sale thereo$& as
a criminal o-ense under Art. (2@(l)(b) o$
9eised ;enal Code. )he la% is iolated
%heneer the entrustee or person to
%hom trust receipts %ere issued $ails to*
(a) return the !oods coered by the trust
receiptsK or (b) return the proceeds o$ the
sale o$ said !oods .Metro-olitan Bank "#
?onda, %#R# &o# 13((36, $ugust 16, 2,,,7#
&s a"k o$ intent to 3e$ra%3 a 1ar to
the prose"%tion o$ these a"ts or
o!issions4 (+.55)
SU##ES$E% A&SWE':
=o* 2&e 2rust +eceipts Law is )iolate. w&ene)er
t&e entrustee fails to: /$ turn o)er t&e procee.s of t&e
sale of t&e goo.sB or !$ return t&e goo.s co)ere. by
t&e trust receipts if t&e goo.s are not sol.* 2&e 'ere
failure to account or return gi)es rise to t&e cri'e
w&ic& is 'alu' pro&ibitu'* 2&ere is no re-uire'ent
to pro)e intent to .efrau. C&ing )* Secretary of 7usticeB
G*+* =o* /,(:/3B February ,B !"",% Colinares )* Court of
AppealsB G*+* =o* 0"6!6B Septe'ber #B !"""% 8ng )* Court
of AppealsB G*+* =o* //06#6B April !0B !"":$*
<er/antie La+ =ar E2a,ination > ? A (1990-2006) Page 99 o1 103
Trusts Recei$t 8a; (2003)
2rust +eceipts Law% Liability for estafa /00/$
Ar. 7oble& as the ;resident o$ A5C
)radin! Inc e=ecuted a trust receipt in
$aor o$ 5;I 5an. to secure the
importation by his company o$ certain
!oods. A$ter release and sale o$ the
imported !oods& the proceeds $rom the
sale %ere not turned oer to 5;I. Would
5;I be "ustifed in flin! a case $or esta$a
a!ainst 7oble?
SUGGESTED ANSWER:
5;I %ould be "ustifed in flin! a case $or
esta$a under ;' 22@ a!ainst 7oble. )he
$act that the trust receipt %as issued in
$aor o$ a ban.& instead o$ a seller& to
secure the importation o$ the !oods did not
preclude the application o$ the )rust
9eceipt >a%. (;' 22@) ,nder the la%& any
o-icer or employee o$ a corporation
responsible $or the iolation o$ a trust
receipt is sub"ect to the penal liability
thereunder .Sia " /eo-le 166s6007
A8TERNAT7>E ANSWER:
)he flin! o$ a case $or esta$a under the
penal proisions o$ the 9;C %ould not be
"ustifed. It has been held in Sia " /eo-le
.161 s 6007 that corporate o-icers and
directors are not criminally liable $or a
iolation o$ said Code. # conditions are
re+uired be$ore a corporate o-icer may be
criminally liable $or an o-ense committed
by the corporationK i6*
/* )here must be a specifc proision
o$ la% mandatin! a corporation to
act or not to actK and
!* )here must be an e=plicit
statement in the la% itsel$ that& in
case o$ such iolation by a
corporation& the o-icers and
directors thereo$ are to be
personally and criminally liable
there$ore.
)hese conditions are not met in the penal
proisions o$ the 9;C on trust receipts.
Trust Recei$ts 8a;2 8ia.ilit% &or Esta&a ()**+)
A buys !oods $rom a $orei!n supplier usin!
his credit line %ith a ban. to pay $or the
!oods. ,pon arrial o$ the !oods at the
pier& the ban. re+uires A to si!n a trust
receipt be$ore A is allo%ed to ta.e deliery
o$ the !oods. )he trust receipt contains the
usual lan!ua!e. A disposes o$ the !oods
and receies payment but does not pay the
ban.. )he ban. fles a criminal action
a!ainst A $or iolation o$ the )rust
9eceipts >a%. A asserts that the trust
receipt is only to secure his debt and that a
criminal action cannot lie a!ainst him
because that %ould be iolatie o$ his
constitutional ri!ht a!ainst imprisonment
$or nonpayment o$ a debt. Is he correct?
SUGGESTED ANSWER:
7o. Qiolation o$ a trust receipt is criminal
as it is punished as esta$a under Art (2@ o$
the 9;C. )here is a public policy inoled
%hich is to assure the entruster the
reimbursement o$ the amount adanced or
the balance thereo$ $or the !oods sub"ect
o$ the trust receipt. )he e=ecution o$ the
trust receipt or the use thereo$ promotes
the smooth Eo% o$ commerce as it helps the
importer or buyer o$ the !oods coered
thereby.
;5 P Co.& Inc.& a manu$acturer o$ steel
and steel products& imported certain ra%
materials $or use by it in the
manu$acture o$ its products. )he
importation %as e-ected throu!h a trust
receipt arran!ement %ith A5 5an.in!
corporation. When it applied $or the
issuance by A5 5an.in! Corporation o$ a
letter o$ credit& ;5 P Co.& Inc.& did not
ma.e any representation to the ban. that
it %ould be sellin! %hat it had imported.
It $ailed to pay the ban.. When demand
%as made upon it to account $or the
importation& to return the articles& or to
turn4oer the proceeds o$ the sale thereo$
to the ban.& ;5 P Co.& Inc.& also $ailed.
)he ban. sued ;5 P Co.3s ;resident %ho
%as the si!natory o$ the trust receipt $or
esta$a. )he ;resident put up the de$ense
that he could not be made liable
because there %as no deceit resultin! in
the iolation o$ the trust receipt. /e also
submitted that there %as no iolation o$
the trust receipt because the ra%
materials %ere not sold but used by the
corporation in the manu$acture o$ its
products. Would those de$enses be
sustainable? Why? (:%)
SUGGESTED ANSWER:
7o& the de$enses are not sustainable. )he
lac. o$ deceit should not be sustained
because the mere $ailure to account $or
the importation& or return the articles
constitutes the abuse o$ confdence in the
crime o$ esta$a. )he $act that the !oods
aren3t sold but are used in the
manu$acture o$ its products is immaterial
because a iolation o$ the trust receipts
la% happened %hen it $ailed to account $or
the !oods or return them to the 5an.
upon demand.
Us0ry La!
Usur% 8a; ()**)
5orro%er obtained a loan $rom a money
lendin! enterprise $or %hich he issued a
promissory note underta.in! to pay at the
end o$ a period o$ (? days the principal
plus interest at the rate @.@% per month
plus #% per annum as serice char!e.
Bn maturity o$ the loan& borro%er $ailed to
pay the principal debt as %ell as the
stipulated interest and serice char!e.
/ence& he %as sued.
/* /o% %ould you dispose o$ the
issues raised by the borro%er?
!* )hat the stipulated interest rate is
e=cessie and unconscionable? ((%)
:* Is the interest rate usurious? ((%)
+ecommendation Since the subGect matter of these two
((! questions is not included within the scope of the
Bar Huestions in 6ercantile Faw, it is suggested that
whatever answer is given by the examinee, or the lac/
of answer should be given full credit' %f the examinee
gives a good answer, he should be given additional
credit'
SUGGESTED ANSWER:
a* )he rate o$ interest o$ @.@% per month is
e=cessie and unconscionable.
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Mercantile Law Bar Examination Q & A (1990-2006) Page 100 of 103
b* )he interest cannot be considered
usurious. )he ,sury >a% has been
suspended in its application& and the
interest rates are made Eoatin!.
Ware$o0se Re#ei%ts La!
,ill o& 8a6in' ()**:)
/* What do you understand by a bill
o$ ladin!? (#%)
!* <=plain the t%o4$old character o$ a bill
o$ ladin!. ((%)
SUGGESTED ANSWER:
/* A bill o$ ladin! may be defned as
a %ritten ac.no%led!ement o$ the
receipt o$ !oods and an a!reement
to transport and to delier them at a
specifed place to a person named
therein or on his order.
!* A bill o$ ladin! has a t%o4$old
character& namely& a) it is a receipt o$
the !oods to be transportedK and b)
it constitutes a contract o$ carria!e
o$ the !oods.
Delier% o& Goo6s2 Re5uisites ()**:)
>u6on Warehousin! Co receied $rom
;edro #?? caans o$ rice $or deposit in
its %arehouse $or %hich a ne!otiable
receipt %as issued. While the !oods %ere
stored in said %arehouse& Cicero
obtained a "ud!ment a!ainst ;edro $or
the recoer o$ a sum o$ money. )he
sheri- proceeded to ley upon the !oods
on a %rit o$ e=ecution and directed the
%arehouseman to delier the !oods. Is the
%arehouseman under obli!ation to comply
%ith the sheri-s order? (@%)
SUGGESTED ANSWER:
7o. )here %as a alid ne!otiable receipt
as there %as a alid deliery o$ #??
caans o$ rice $or deposit. In such case&
the %arehouseman (>WC) is not obli!ed to
delier the #?? caans o$ rice deposited to
any person& e=cept to the one %ho can
comply %ith sec J o$ the Warehouse
9eceipts >a%& namely*
/* surrender the receipt o$ %hich he is a
holderK
!* %illin! to si!n a receipt $or the
deliery o$ the !oodsK and
:* pays the %arehouseman3s liens that
is& his $ees and adances& i$ any.
)he sheri- cannot comply %ith these
re+uisites especially the frst& as he is not
the holder o$ the receipt.
Delier% o& t#e Goo6s ()**))
When is a %arehouseman bound to delier
the !oods& upon a demand made either by
the holder o$ a receipt $or the !oods or by
the depositor?
SUGGESTED ANSWER:
)he %arehouseman is bound to delier the
!oods upon demand made either by the
holder o$ the receipt $or the !oods or by
the depositor i$ the demand is accompanied
by
/* an o-er to satis$y the %arehouseman3s
lien&
!* an o-er to surrender the receipt& i$
ne!otiable& %ith such indorsements as
%ould be necessary $or the ne!otiation
thereo$&
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:* and readiness and %illin!ness to si!n
%hen the !oods are deliered i$ so
re+uested by the %arehouseman (1ec
J Warehouse 9eceipts >a%).
Garnis#ment or Attac#ment o& Goo6s ()***)
A Warehouse Company receied $or
sa$e.eepin! 2??? ba!s o$ rice $rom a
merchant. )o eidence the transaction&
the Warehouse Company issued a receipt
e=pressly proidin! that the !oods be
deliered to the order o$ said merchant.
A month a$ter& a creditor obtained
"ud!ment a!ainst the said merchant $or a
sum o$ money. )he sheri- proceeded to
ley on the rice and directed the
Warehouse Company to delier to him the
deposited rice.
a* What adice %ill you !ie the
Warehouse Company? <=plain (#%)
b* Assumin! that a %ee. prior to the ley&
the receipt %as sold to a rice mill on the
basis o$ %hich it fled a claim %ith the
sheri-. Would the rice mill hae better
ri!hts to the rice than the creditor?
<=plain your ans%er. (#%)
SUGGESTED ANSWER:
a* )he 2??? ba!s o$ rice %ere deliered to
the Warehouse Company by a merchant&
and a ne!otiable receipt %as issued
there$or. )he rice cannot therea$ter&
%hile in the possession o$ the Warehouse
Company& be attached by !arnishment or
other%ise& or be leied upon under an
e=ecution unless the receipt be frst
surrendered to the %arehouseman& or its
ne!otiation en"oined. )he Warehouse
Company cannot be compelled to delier
the actual possession o$ the rice until the
receipt is surrendered to it or impounded
by the court.
b* 0es. )he rice mill& as a holder $or alue
o$ the receipt& has a better ri!ht to the
rice than the creditor. It is the rice mill
that can surrender the receipt %hich is
in its possession and can comply %ith the
other re+uirements %hich %ill obli!e the
%arehouseman to delier the rice& namely&
to si!n a receipt $or the deliery o$ the
rice& and to pay the %arehouseman3s liens
and $ees and other char!es.
Ne'otia.le Documents o& Title ()**2)
8or a car!o o$ machinery shipped $rom
abroad to a su!ar central in 'uma!uete&
7e!ros Briental& the 5ill o$ >adin! (5O>)
stipulated to shipper3s order& %ith notice
o$ arrial to be addressed to the Central.
)he car!o arried at its destination and
%as released to the Central %ithout
surrender o$ the 5O> on the basis o$ the
latter3s underta.in! to hold the carrier
$ree and harmless $rom any liability.
1ubse+uently& a 5an. to %hom the central
%as indebted& claimed the car!o and
presented the ori!inal o$ the 5O> statin!
that the Central had $ailed to settle its
obli!ations %ith the 5an..
Was there misdeliery by the carrier to the
su!ar central considerin! the non4
surrender o$ the 5O>? Why?
SUGGESTED ANSWER:
Mercantile Law Bar Examination Q & A (1990-2006) Page 101 of 103
)here %as no misdeliery by the carrier
since the car!o %as considered consi!ned
to the 1u!ar central per the 1hipper3s
Brder (<astern 1hippin! >ines CA 2H? s
@2#)
A8TERNAT7>E ANSWER:
)here %as misdeliery. )he 5O> %as a
ne!otiable document o$ title because it %as
to the 1hipper3s Brder. /ence& the
common carrier should hae deliered the
car!o to the Central only upon surrender o$
the 5O>. )he non4surrender o$ the 5O> %ill
ma.e it liable to holders in due course.
<;ners#i$ o& Goo6s Store6 ()**2)
)o !uarantee the payment o$ a loan
obtained $rom a ban.& 9aul pled!ed @??
bales o$ tobacco deposited in a %arehouse
to said ban. and endorsed in blan. the
%arehouse receipt. 5e$ore 9aul could pay
$or the loan& the tobacco disappeared $rom
the %arehouse.
Who should bear the loss G the pled!or or
the ban.? Why?
SUGGESTED ANSWER:
)he pled!or should bear the loss. In the
pled!e o$ a %arehouse receipt the
o%nership o$ the !oods remain %ith
depositor or his trans$eree. Any contract
or real security& amon! them a pled!e&
does not amount to or result in an
assumption o$ ris. o$ loss by the creditor.
)he Warehouse 9eceipts >a% did not
deiate $rom this rule.
Ri'#t to t#e Goo6s (2001)
Co"o deposited seeral cartons o$ !oods %ith
17 Warehouse Corporation. )he
correspondin! %arehouse receipt %as
issued to the order o$ Co"o. /e endorsed the
%arehouse receipt to <C %ho paid the alue
o$ the !oods deposited. 5e$ore <C could
%ithdra% the !oods& Aelchor in$ormed 17
Warehouse Corporation that the !oods
belon!ed to him and %ere ta.en by Co"o
%ithout his consent. Aelchor %ants to !et
the !oods& but <C also %ants to %ithdra%
the same. (@%)
Who has a better ri!ht to the !oods?
Why?
SUGGESTED ANSWER:
<C has a better ri!ht to the !oods& bein!
coered by a ne!otiable document o$ title&
namely the %arehouse receipts issued to
the Norder o$ Co"o.N ,nder the 1ales
proisions o$ the Ciil Code on ne!otiable
documents o$ title& and under the proisions
o$ the Warehouse 9eceipts >a%& %hen !oods
deposited %ith the bailee are coered by a
ne!otiable document o$ title& the
endorsement and deliery o$ the document
trans$ers o%nership o$ the !oods to the
trans$eree. 5y operation o$ la%& the
trans$eree obtains the direct obli!ation o$
the bailee to hold the !oods in his name.N
(Art. 2@2(& Ciil CodeK 1ection 42&
Warehouse 9eceipts >a%) 1ince <C is the
holder o$ the %arehouse receipt& he has the
better ri!ht to the !oods. 17 Warehouse is
obli!ed to hold the !oods in his name.
I$ 17 Warehouse Corporation is uncertain
as to %ho is entitled to the property&
%hat is the proper recourse o$ the
corporation? <=plain.
SUGGESTED ANSWER:
17 Warehouse can fle an I7)<9;><A'<9
to compel <C and Aelchor to liti!ate
a!ainst each other $or the o%nership o$
the !oods. 1ec. 2I o$ the Warehouse
9eceipts >a% states& NI$ more than one
person claims the title or possession o$ the
!oods& the %arehouse may& either as a
de$ense to an action brou!ht a!ainst him
$or non4deliery o$ the !oods or as an
ori!inal suit& %hicheer is appropriate&
re+uire all .no%n claimants to interplead.N
Un$ai6 Seller2 Ne'otiation o& t#e Recei$t ()**3)
A purchased $rom 1 2@? caans o$ palay
on credit. A deposited the palay in W3s
%arehouse. W issued to A a ne!otiable
%arehouse receipt in the name o$ A.
)herea$ter& A ne!otiated the receipt to 5
%ho purchased the said receipt $or alue
and in !ood $aith.
/$ Who has a better ri!ht to the deposit&
1& the unpaid endor or b& the purchaser o$
the receipt $or alue and in !ood $aith?
Why?
!$ When can the %arehouseman be obli!ed
to delier the palay to A?
SUGGESTED ANSWER:
/$ 5 has a better ri!ht than 1. )he ri!ht
o$ the unpaid seller& 1& to the !oods %as
de$eated by the act o$ A in endorsin! the
receipt to 5.
!$ )he %arehouseman can be obli!ed to
delier the palay to A i$ 5 ne!otiates bac.
the receipt to A. In that case& A becomes a
holder a!ain o$ the receipt& and A can
comply %ith 1ec J o$ the Warehouse
9eceipts >a%.
>ali6it% o& sti$ulations e9cusin' ;are#ouseman &rom
ne'li'ence (2000)
1 stored hard%are materials in the bonded
%arehouse o$ W& a licensed %arehouseman
under the Feneral 5onded Warehouse >a%
(Act (JH( as amended). W issued the
correspondin! %arehouse receipt in the
$orm he ordinarily uses $or such purpose in
the course o$ his business. All the essential
terms re+uired under 1ection # o$ the
Warehouse 9eceipts >a% (Act #2(I as
amended) are embodied in the $orm. In
addition& the receipt issued to 1 contains a
stipulation that W %ould not be
responsible $or the loss o$ all or any portion
o$ the hard%are materials coered by the
receipt een i$ such loss is caused by the
ne!li!ence o$ W or his representaties or
employees. 1 endorsed and ne!otiated the
%arehouse receipt to 5& %ho demanded
deliery o$ the !oods. W could not delier
because the !oods %ere no%here to be
$ound in his %arehouse. /e claims he is not
liable because o$ the $ree4$rom4liability
clause stipulated in the receipt. 'o you
a!ree %ith W3s contention? <=plain. (@%)
SUGGESTED ANSWER:
7o. I do not a!ree %ith the contention o$ W.
)he stipulation that W %ould not be
responsible $or the loss o$ all or any portion
o$ the hard%are materials coered by the
receipt een i$ such loss is caused by the
ne!li!ence o$ W or his representatie or
employees is oid. )he la% re+uires that a
%arehouseman should e=ercise due
dili!ence in the care and custody o$ the
thin!s deposited in his %arehouse.
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Mercantile Law Bar Examination Q & A (1990-2006) Page 102 of 103
#. )he Chie$ Custice also said that the
"udiciary must Nsa$e!uard the libertyN
and Nnurture the prosperityN o$
Mis#ellaneo0s
Ener'% Re'ulator% Commission: Juris6iction 0 "o;er
(2003)
CF& acustomer& sued A<9A>CB in the
AA 9e!ional )rial Court to disclose the
basis o$ the computation o$ the purchased
po%er ad"ustment (;;A). )he trial court
ruled it had no "urisdiction oer the case
because& as contended by the de$endant&
the customer not only demanded a
brea.do%n o$ A<9A>CBDs bill %ith respect
to ;;A but +uestioned as %ell the
imposition o$ the ;;A& a matter to be
decided by the 5oard o$ <ner!y& the
re!ulatory a!ency %hich should also hae
"urisdiction oer the instant suit. Is the
trial courtDs rulin! correct or not? 9eason
brieEy. (@%)
SUGGESTED ANSWER:
)he trial courtDs rulin! is correct. As held
in Aanila <lectric Company . Court o$
Appeals& #I21C9A 42I (2HHI)& the 5oard
o$ <ner!y had the po%er to re!ulate and
f= po%er rates to be char!ed by
$ranchised electric utilities li.e
A<9A>CB. In $act pursuant to <=ecutie
Brder 7o. 4IJ (April 2I& 2HHJ)& this
po%er has been trans$erred to the <ner!y
9e!ulatory 5oard (no% the <ner!y
9e!ulatory Commission). ,nder 1ection
4((u) o$ the <lectric ;o%er Industry
9e$orm Act o$ #??2& the <ner!y
9e!ulatory Commission has ori!inal and
e=clusie "urisdiction oer all cases
contestin! po%er rates.
/our AC7D "ro.lems o& "#ili$$ine Ju6iciar% (2004)
In seeral policy addresses e=tensiely
coered by media since his appointment
on 'ecember #2& #??@& Chie$ Custice
Artemio Q. ;an!aniban o%ed to leae a
"udiciary characteri6ed by N$our InsN and
to $ocus in solin! the N$our ACI'N
problems that corrode the administration
o$ "ustice in our country.
<=plain this N$our InsN and N$our ACI'N
problems.
SU44ESTE) ANSWER(
,pon assumin! his o-ice& Chie$ Custice
;an!aniban o%ed to lead a "udiciary
characteri6ed by the N$our Ins*N Inte!rity&
Independence& Industry and Intelli!enceK
one that is morally coura!eous to resist
inEuence& inter$erence& indi-erence and
insolence. /e enisions a "udiciary that is
imperious to the pla!ue o$ undue
inEuence brou!ht about by .inship&
relationship& $riendship and $ello%ship. /e
calls on the "udiciary to battle the N8our
ACI'N problems corrodin! our "ustice
system* (2) limited access to "ustice by the
poorK (#) corruptionK (() incompetenceK and
(4) delay in the deliery o$ +uality
"ud!ments. )he "udicial department should
dischar!e its $unctions %ith transparency&
accountability and di!nity.
(012# BE0E %t is respectfully
suggested that all Bar
"andidates receive a ('5%
bonus for the above question
regardless of the answer!
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2005
our people. <=plain this philosophy. Cite
'ecisions o$ the 1upreme Court
implementin! each o$ these t%in beacons
o$ the Chie$ Custice. (#.@%)
SU44ESTE) ANSWER(
)he Chie$ CusticeDs philosophy
N1a$e!uardin! >iberty& 7urturin!
;rosperityN embodies the 1upreme
CourtDs approach in decision4ma.in! in
the e=ercise o$ its constitutional po%er
o$ "udicial reie% %hich proides* In cases
inolin! liberty& the scales o$ "ustice
should %ei!ht heaily a!ainst !oernment
and in $aor o$ the poor& the oppressed&
the mar!inali6ed& the dispossessed and
the %ea.K and that la%s and action that
restrict $undamental ri!hts come to the
court N%ith a heay presumption a!ainst
their constitutional alidity. Bn the other
hand& as a !eneral rule& the 1upreme
Court must adopt a de$erential or
respect$ul attitude to%ards actions ta.en
by the !oernmental a!encies that hae
primary responsibility $or the economic
deelopment o$ the countryK and only
%hen an act has been clearly made or
e=ecuted %ith !rae abuse o$ discretion
does the Court !et inoled in policy
issues.
Decisions i'ple'enting t&e Jsafeguar.ing of
libertyJ in< clu.e t&ose in)ol)ing t&e
constitutionality of Presi.ential Procla'ation
=o* /"/3 (&avid v' #rroyo, 4'+' 0o' )7).*;,
6ay ., (;;-!C the validity of "alibrated
3re$emptive +esponse ("3+! and B'3' Big'
88; or the 3ublic #ssembly #ct (Bayan v'
Ermita, 4'+' 0o' )-*8,8, #pril (5, (;;-!C
and the legality of Executive 1rder 0o' ,-,
and the 3residentQs exercise of Execu$ tive
3rivilege (Senate of the 3hilippines v'
Ermita, 4'+' 0o' )-*777, #pril (;, (;;-!'
8n t&e ot&er &an.B cases t&at relate to
Jnurturing t&e prosperityJ of t&e people
inclu.e t&e -uestion t&e constitutionality of
t&e Mining Law (Fa Bugal$BQFaan v' +amos,
4'+' 0o' )(788(, &ec' ), (;;,$ an. t&e
?28 Agree'ent 2anada v' #ngara, 4'+'
))8(*5, 6ay (,)**7$* Goernment Dere'ulation
s! "riatiDation o& an 7n6ustr% (2003)
What is the di-erence bet%een
!oernment dere!ulation and the
priati6ation o$ an industry? <=plain brieEy.
(#%)
SUGGESTED ANSWER:
Foernment dere!ulation is the rela=ation
or remoal o$ re!ulatory constraints on
frms or indiiduals& %ith a ie% to
promotin! competition and mar.et4oriented
approaches to%ard pricin!& output& entry&
and other related economic decisions.
;riati6ation o$ an industry re$ers to the
trans$er o$ o%nership and control by the
!oernment o$ assets& frms and operations
in an industry to priate inestors.
"olitical 8a;2 WT< ()***)
Foernment plans to impose an additional
duty on imported su!ar on top o$ the
current tari- rate. )he intent is to ensure
that the landed cost o$ su!ar shall not be
lo%er than ;J?? per ba!. )his is the
price at %hich locally produced su!ar
%ould be sold in order to enable su!ar
producers to reali6e reasonable profts.
Without
Mercantile Law Bar Examination Q & A (1990-2006) Page 103 of 103
this additional duty& the current lo% price o$
su!ar in the %orld mar.et %ill surely pull
the domestic price to leels lo%er than the
cost to producer domestic su!ar G a
situation that could spell the demise o$ the
;hil su!ar industry.
a$ 'iscuss the alidity o$ this proposal to
impose an additional ley on imported su!ar
((%)
b$ Would the proposal be consistent %ith
the tenets o$ the World )rade Br!ani6ation
(W)B)? ((%)
+eco''en.ation: Since t&e sub9ect 'atter of t&ese
two !$ -uestions is not inclu.e. wit&in t&e scope of
t&e Bar Cuestions in Mercantile LawB it is suggeste.
t&at w&ate)er answer is gi)en by t&e e4a'ineeB or t&e
lack of answer s&oul. be gi)en full cre.it* 1f t&e
e4a'inee gi)es a goo. answerB &e s&oul. be gi)en
a..itional cre.it*
SUGGESTED ANSWER:
a$ )he proposal to impose an additional
duty on imported su!ar on top o$ the
current tari- rate is alid& not bein!
prohibited by the Constitution. It %ould
enable producers to reali6e reasonable
profts& and %ould allo% the su!ar industry
o$ the country to surie.
b$ 7o. )he proposal %ould not be
consistent %ith the tenets o$ the W)B
%hich call $or the liberali6ation o$ trade.
/o%eer& such proposal may be acceptable
%ithin the allo%able period under the W)B
$or ad"ustment o$ the local industry
"o;er o& t#e State: Re'ulatin' o& Domestic Tra6e (2003) In
its e=ercise o$ police po%er and business
re!ulation& the le!islature o$ >QA 1tate
passed a la% prohibitin! aliens $rom
en!a!in! in domestic timber trade. Qiolators
includin! dummies %ould& a$ter proper trial&
be fned and imprisoned or deported. Ars.
5C& a citi6en o$ >QA but married to SC& an
alien merchant o$ ;7F& fled suit to
inalidate the la% or e=empt $rom its
coera!e their timber business.
1he contended that the la% is& inter alia&
!raely oppressie and discriminatory. It
iolated the ,niersal 'eclaration o$ /uman
9i!hts (,'/9) passed in 2H4J by the
,nited 7ations& o$ %hich >QA is a member&
she said& as %ell as the reciprocity
proisions o$ the World )rade Br!ani6ation
(W)B) A!reement o$ 2HH4& o$ %hich ;7F
and >QA are parties. Aside $rom denyin!
them e+ual protection& accordin! to 5C& the
la% %ill also deprie her $amily their
lielihood %ithout due process nor "ust
compensation. Assumin! that the le!al system
o$ >QA is similar to ours& %ould Ars. 5CDs
contention be tenable or not? 9eason brieEy.
(@%)
SUGGESTED ANSWER:
Ars. 5CDs contention is not tenable. 8irst&
the ,'/9 does not purport to limit the ri!ht
o$ states (li.e >QA) to re!ulate domestic
trade. 1econd& the W)B A!reement inoles
international trade bet%een states or
!oernments& not domestic trade in timber or
other commodities. )hird& nationality is an
accepted norm $or ma.in! classifcations
that do not run counter to the
e+ual protection o$ la% clause o$ the
Constitution. 8ourth& there is no
impairment o$ due process here because
iolators o$ the la% %ill be punished only
a$ter Nproper trial.N 8i$th& the issue o$
N"ust compensationN does not arise&
because the property o$ Ars. 5C is not
bein! e=propriated. Bn the contrary& as a
citi6en o$ >QA& Ars. 5C is $reely allo%ed
to en!a!e in domestic timber trade in
>QA.
Tari&& an6 Customs Co6e: >iolation o& Customs 8a;s
(2003)
)he Collector o$ Customs ordered the
sei6ure and $or$eiture o$ ne% electronic
appliances shipped by )B7 Corp. $rom
/on!.on! $or iolation o$ customs la%s
because they %ere $alsely declared as used
o-ice e+uipment and then underalued $or
purposes o$ customs duties. )B7 fled a
complaint be$ore the AA 9e!ional )rial
Court $or replein& alle!in! that the
Customs o-icials erred in the classifcation
and aluation o$ its shipment& as %ell as in
the issuance o$ the %arrant o$ sei6ure. )he
Collector moed to dismiss the suit $or lac.
o$ "urisdiction on the part o$ the trial court.
1hould the CollectorDs motion be !ranted or
denied? 9eason brieEy. (@%)
SUGGESTED ANSWER:
)he CollectorDs motion should be !ranted.
,nder 1ection :?#(!) o$ the )ari- and
Customs Code& the 5ureau o$ Customs has
e=clusie ori!inal "urisdiction oer sei6ure
and $or$eiture cases under the tari- and
customs la%s.
=825: 2&is -uestion is outsi.e t&e co)erage of t&e
Bar 54a'inations* 1t is t&erefore reco''en.e. t&at
w&ate)er answer 'a.e by t&e can.i.ate s&oul. be
gi)en full cre.it*$