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2008 bar question and answer for commercial law

I
X corporation entered into a contract with PT Contruction Corp. for the
latter to construct and build a sugar mill within six (6) months. They
agreed that in case of delay, PT Construction Corp. will pay X Corporation
P100,000 for every day of delay. To ensure payment of the agreed
amount of damages, PTConstruction Corp. secured from Atlantic Bank a
confirmed and irrevocable letter of credit which was accepted by X
Corporation in due time. One week before the expiration of the six (6)
month period, PTConstruction Corp. requested for an extension of time to
deliver claiming that the delay was due to the fault of X Corporation. A
controversy as to the cause of the delay which involved the workmanship
of the building ensued. The controversy remained unresolved. Despite
the controversy, X Corporation presented a claim against Atlantic Bank
by executing a draft against the letter of credit.
1.Can Atlantic Bank refuse payment due to the unresolved
controversy? Explain. (3%)
2.Can X Corporation claim directly from PT Construction Corp.?
Explain. (3%)
SUGGESTED ANSWER:
1. No, Atlantic Bank cannot refuse payment.
Under the independence principle of letters of credit, the issuing bank is
obliged to pay a draft drawn by the beneficiary upon tender of the
required documents without need of examining the main contract, the
letter of credit being an independent undertaking by the bank.
In the given case, the unresolved controversy as to the cause of the
delay in the main contract does not in any way affect Atlantic Bank's
obligation under the letter of credit. This is especially true since the letter
of credit is designated as irrevocable, which, thus, makes definite the
bank's undertaking to pay.
Hence, considering that all the required documents have been tendered
by X Corporation, Atlantic Bank cannot validly refuse to pay.
2. Yes, X Corporation may directly claim from PT Construction Corp.
Under the Civil Code, which is suppletory to the Code of Commerce, a
contract, once perfected binds the parties not only to the fulfillment of
what has been stipulated but also to all the consequences which
according to their nature may be in keeping with good faith, usage and
law.

A careful perusal of the contract between X Corporationand


PT Construction Corp. reveals the intention of the parties to make the
letter of credit answerable for damages occasioned by the latter's delay.
At the same time, there is no showing that this is the only remedy
available to X Corporation.
Hence, a claim against the letter of credit is merely an alternative
recourse and does not in any way prevent X Corporation from claiming
directly against PT Construction Corp. (Transfield Phils. Inc. vs. Luzon
Hydro Corporation, G.R. No. 146717, Nov. 22, 2004)
II
Tom Cruz obtained a loan of P 1 Million from XYZ Bank to finance his
purchase of 5,000 bags of fertilizer. He executed a trust receipt in favor
of XYZ Bank over the 5,000 bags of fertilizer. Tom Cruz withdrew the
5,000 bags from the warehouse to be transported to Lucena City where
his store was located. On the way, armed robbers took from Tom Cruz the
5,000 bags of fertilizer. Tom Cruz now claims that his obligation to pay
the loan to XYZ Bank is extinguished because the loss was not due to his
fault. Is Tom Cruz correct? Explain. (4%)
SUGGESTED ANSWER:
No, Tom Cruz is not correct.
Under the Trust Receipts Law, the entrustee is liable for loss of the goods
whether or not he is negligent. Moreover, in a trust receipt transaction
where a loan feature is involved, the obligation for the loan is not
extinguished until such loan is paid.
In the present case, the fact that the stealing of the goods was not Tom
Cruz' fault does not exculpate him from liability. This is especially true
since the goods subject of the trust receipt transaction serves only as
security for the payment of the loan. The loss of the security did not
impair XYZ Bank's title to the goods, which can only be extinguished
once Tom Cruz pays the advancement made.
Hence, it is not correct for Tom Cruz to avoid liability under the trust
receipt on the premise that the goods are lost without his fault.
III
1.As a rule under the Negotiable Instruments Law, a subsequent
party may hold a prior party liable but not vice-versa. Give two (2)
instances where a prior party may hold a subsequent party liable.
(2%)
2.How does the "shelter principle" embodied in the Negotiable
Instruments Law operate to give the rights of a holder-in-due course

to a holder who does not have the status of a holder-in-due course?


Briefly explain. (2%)
SUGGESTED ANSWER:
1. The following are two (2) instances where a prior party may hold a
subsequent party liable:
When the subsequent party is guilty of fraud as in the case
of the author of the forgery who is liable not only to the
person whose signature he forged but also to all other
parties prejudiced by his forgery
When the subsequent party is an accommodated party, the
accommodating party, even though a prior party, may hold
him liable
2. Under the "shelter principle," the holder-in-due course, by
negotiating the instrument, to a party not a holder-in-due
course, transfers all his rights as such holder to the latter, who
thus acquires the right to enforce the instrument as if he was a
holder-in-due course. However, this principle presupposes that
the "sheltered" holder is not a party to any fraud or illegality
impairing the validity of the instrument.
IV
AB Corporation drew a check for payment to XY Bank. The check was
given to an officer of AB Corporation who was instructed to deliver it to
XY Bank. Instead, the officer, intending to defraud the Corporation, filled
up the check by making himself as the payee and delivered it to XY Bank
for deposit to his personal account. AB Corporation came to know of the
officer's fraudulent act after he absconded. AB Corporation asked XY
Bank to recredit its amount. XY Bank refused.
1.If you were the judge, what issues would you consider relevant to
resolve the case? Explain (3%)
2.How would you decide the case? Explain. (2%)
SUGGESTED ANSWER:
1. If I were the judge, I would consider the following issues as relevant to
the case:
Whether or not AB Corporation is negligent
If so, whether or not such negligence is the proximate
cause
Whether or not there is contributory negligence on the part
of XY Bank
2. AB Corporation must bear the loss.

The Negotiable Instruments Law provides that where an


instrument is wanting in any material particular,the person in
possession thereof has prima facie authority to complete it by
filling up the blanks therein. This rule is founded upon the
principle that where one of two persons must suffer by the bad
faith of another, the loss must fall upon the one who first
reposed confidence and made it possible for the loss to occur.
Applying said principle to the case at bar, although AB
Corporation cannot necessarily be faulted for placing confidence
on its own officer, the fact remains that such act is the
proximate cause of the loss. Moreover, there is no showing that
XY Bank is likewise negligent. By the very nature of negotiable
instruments, one is not obligated to inquire beyond what
appears on its face.
Hence, as between the drawer AB Corporation and drawee XY
Bank, the former bears the loss.
V
Pancho drew a check to Bong and Gerard jointly. Bong indorsed the check
and also forged Gerard's endorsement. The payor bank paid the check
and charged Pancho's account for the amount of the check. Gerard
received nothing from the payment.
1.Pancho asked the payor bank to recredit his account. Should the
bank comply? Explain fully. (3%)
2.Based on the facts, was Pancho as drawer discharged on the
instrument? Why?(2%)
SUGGESTED ANSWER:
1. Yes, the payor bank should comply.
Basic is the rule that if the payee's indorsement is forged, the drawee
bank cannot debit the drawer's account and the drawee bank shall bear
the loss.
In the case at bar, it was the indorsement of Gerard, one of the joint
payees, which was forged. In the first place, the payor bank had no right
to pay the check due to such forgery. In the second place, the fiduciary
nature of their relationship requires the bank to treat the accounts of its
depositors with meticulous care. By paying the check where the payee's
signature is forged, the bank is obviously wanting in that degree of care
required by the nature of its functions.
Hence, the payor bank is obliged to recredit Pancho's account.
2. Yes, Pancho was discharged.

Under the Negotiable Instruments Law, a person secondarily liable may


be discharged by any act which discharges the instrument. One of the
acts that discharges the instrument is payment made in due course by or
in behalf of the principal debtor. The same law provides that payment in
due course is one made at or after maturity to the holder in good faith
and without notice that title is defective.
The facts of the case reveal that payment by payor bank to Bong is one
made in due course, it being made at or after maturity to the holder
(Bong) in good faith and without notice that his title is defective.
Such being the case, the negotiable instrument is discharged, which in
turn discharges Pancho, as drawer, from his secondary liability.
VI
On January 1, 2000, Antonio Rivera secured a life insurance from SOS
Insurance Corp. for P1 Million with Gemma Rivera, his adopted daughter,
as the beneficiary. Antonio Rivera died on March 4, 2005 and in the police
investigation, it was ascertained that Gemma Rivera participated as an
accessory in the killing of Antonio Rivera. Can SOS Insurance Corp. avoid
liability by setting up as a defense the participation of Gemma Rivera in
the killing of Antonio Rivera? Discuss with reasons. (4%)
SUGGESTED ANSWER:
No, SOS Insurance Corp. cannot avoid liability by setting up as defense
the participation of Gemma Rivera in the killing of Antonio Rivera.
Although the Insurance Code provides that the interest of the beneficiary
in a life insurance policy shall be forfeited when the beneficiary is the
principal, accomplice, or accessory in willfully bringing about the death of
the insured, the same law also provides that in such an event, the
nearest relative of the insured shall receive the proceeds of said
insurance if not otherwise disqualified.
The facts of the case reveal that Gemma Rivera's participation as
accessory is only based on the findings of a police investigation. In other
words, there is yet no final judgment of conviction. But assuming
arguendo that a mere police investigation is enough to disqualify
Gemma, the fact remains that the law itself provides that the insurance
proceeds shall pertain to the nearest relatives of the insured.
Hence, all premises considered, the insurer cannot therefore escape
liability by simply raising the defense of Gemma's participation as an
accessory to the crime.
VII

Terrazas de Patio Verde, a condominium building, has a value of P50


Million. The owner insured the building against fire with three (3)
insurance companies for the following amounts: Northern Insurance Corp.
- P20 Million Southern Insurance Corp. - P30 Million Eastern Insurance
Corp. - P50 Million
1.Is the owner's taking of insurance for the building with three (3)
insurers valid? Discuss. (3%)
2.The building was totally razed by fire. If the owner decides to
claim from Eastern Insurance Corp. only P50 Million, will the claim
prosper? Explain. (2%)
SUGGESTED ANSWER:
1. Yes, as a general rule, the owner's taking of insurance for the building
with three (3) insurers is valid.This is a case of double insurance where
the same person is insured by several insurers separately in respect to
the same subject and interest.
Under the Insurance Code, such an arrangement is not prohibited per se,
although parties may agree upon an "other insurance" clause, in which
case the insured may be prohibited from taking additional insurance
without the insurer's consent.
In the present case, it does not appear that the parties agreed on an
other insurance clause. Hence, in the absence of any showing that such a
restriction exists, there is nothing to prevent the insured from taking
another insurance over the same property, subject only to the caveat
that he cannot recover more than the value of his interest in the thing
insured.
2. Yes, the claim will prosper.
In case double insurance, the insured has the option to go after any one
of the insurers unless the policy itself provides that insurers contribute
ratably to the loss. In either case, he cannot recover more than the value
of his insurable interest.
In the case at bar, the insured, as owner, has an insurable interest up to
P50 Million, the value of the building. That being the case, he can
therefore claim the entire P50 Million from Eastern Insurance Corp. In
turn, by the principle of contribution which applies in case of overinsurance due to double insurance, Eastern Insurance Corp. may require
the other insurers to contribute ratably to the loss, considering that they
separately insure the same interest against the same peril.
VIII
City Railways, Inc. (CRI) provides train services, for a fee, to commuters
from Manila to Calamba, Laguna. Commuters are required to purchase

tickets and then proceed to designated loading ang unloading facilities to


board the train. Ricardo Santos purchased a ticket for Calamba and
entered the station. While waiting, he had an altercation with the security
guard of CRI leading to a fistfight. Ricardo Santos fell on the railway just
as a train was entering the station. Ricardo Santos was run over by the
train. He died. In the action for damages filed by the heirs of Ricardo
Santos, CRI interposed lack of cause of action, contending that the
mishap occurred before Ricardo Santos boarded the train and that it was
not guilty of negligence. Decide.(5%)
SUGGESTED ANSWER:
The contention of CRI is not tenable.
Under the law, the degree of care required of a common carrier is
extraordinary diligence or the obligation to carry the passenger safely as
far as human care and foresight can provide, using the utmost diligence
of very cautious persons with due regard to all the consequences. Thus,
in case of death or injury to passengers, the common carrier is presumed
negligent and upon him rests the burden of proof of exercise of
extraordinary diligence. The duty to exercise extraordinary diligence
attaches from the moment the person who purchases the ticket from the
carrier presents himself at the proper place and in a proper manner to be
transported.
In the given case, there is no doubt that CRI is a common carrier for the
reason that it is engaged in the business of transporting passengers by
land, for compensation, offering its services to the public. As such, it is
required to exercise extraordinary diligence and this responsibility
attached from the moment Ricardo Santos purchased the ticket and
entered the station. When Ricardo died while he was within the premises
of CRI, the latter is presumed to be at fault. This is true even if Ricardo
has not yet boarded the train, so long as he has presented himself to the
carrier at the proper place and in a proper manner.
Hence, CRI, as a common carrier, is liable to the heirs of Ricardo Santos.
IX
On October 30, 2007, M/V Pacific, a Philippine registered vessel owned by
Cebu Shipping Company (CSC), sank on her voyage from Hong Kong to
Manila. Empire Assurance Company (Empire) is the insurer of the lost
cargoes loaded on board the vessel which were consigned to Debenhams
Company. After it indemnified Debenhams, Empire as subrogee filed an
action for damages against CSC.
1.Assume that the vessel was seaworthy. Before departing, the
vessel was advised by the Japanese Meteorological Center that it
was safe to travel to its destination. But while at sea, the vessel

received a report of a typhoon moving within its general path. To


avoid the typhoon, the vessel changed its course. However, it was
still at the fringe of the typhoon when it was repeatedly hit by huge
waves, foundered and eventually sank. The captain and the crew
were saved except three (3) who perished. Is CSC liable to Empire?
What principle of maritime law is applicable? Explain. (3%)
2.Assume the vessel was not seaworthy as in fact its hull had
leaked, causing flooding in the vessel. Will your answer be the
same? Explain. (2%)
3.Assume the facts in question (b). Can the heirs of the three (3)
crew members who perished recover from CSC? Explain fully. (3%)
SUGGESTED ANSWER:
1. No, CSC is not liable to Empire.
The principle of maritime law applicable is the Doctrine of Limited
Liability. Under this rule, the exclusively real and hypothecary nature of
maritime law operates to limit the liability of the shipowner to the value
of the vessel, earned freightage and proceeds of insurance if any. Hence,
the phrase "NO VESSEL, NO LIABILITY." Total destruction or sinking of the
vessel extinguishes the maritime lien as there is no longer any res to
which it can attach.
This doctrine is applicable in the case because, as the facts reveal, the
ship sank and was totally lost. The exception that the carrier failed to
overcome the presumption of negligence is not obtaining as in fact CSC
was able to prove that the ship was seaworthy. Moreover, the loss is due
to a typhoon -- a fortuitous event, which is one of the exempting
circumstances when the carrier can avoid liability.
Hence, CSC is not liable under the Doctrine of Limited Liability.
2. No, my answer will not be the same.
While as a rule, the shipowner's liability is limited only to the value of the
vessel so that loss of the vessel operates to extinguish his liability, the
same rule has no application when the carrier failed to overcome the
presumption of negligence. Such presumption is only rebutted when the
carrier establishes that the vessel is seaworthy.
According to the facts of the case, the vessel is not seaworthy. Absent
this requirement of seaworthiness of the vessel, CSC has failed to
overcome the presumption of negligence.
Hence, the Doctrine of Limited Liability is inapplicable and CSC is liable
for the loss.
3. Yes, the heirs of the three (3) crewmembers who perished can recover

from CSC. This is because another exception to the applicability of the


Limited Liability Rule is Workmen's Compensation Claims.
However, in this case, the heirs cannot go after CSC directly since their
claim based on workmen's compensation would have be to be filed with
the Social Security System (SSS). After paying said claims, the SSS is
subrogated to their rights and is thus entitled to go after CSC. In either
case, CSC cannot raise the defense that its liability is limited to the value
of his vessel.

XV
Eloise, an accomplished writer, was hired by Petong to write a bimonthly
newspaper column for Diario de Manila, a newly-established newspaper
of which Petong was the editor-in-chief. Eloise was to be paid P1,000 for
each column that was published. In the course of two months, Eloise
submitted three columns which, after some slight editing, were printed in
the newspaper. However, Diario de Manila proved unprofitable and
closed only after two months. Due to the minimal amounts involved,
Eloise chose not to pursue any claim for payment from the newspaper,
which was owned by New Media Enterprises.
Three years later, Eloise was planning to publish an anthology of her
works, and wanted to include the three columns that appeared in the
Diario de Manila in her anthology. She asks for your legal advice:
1.Does Eloise have to secure authorization from New Media
Enterprises to be able to publish her Diario de Manila columns in
her own anthology? Explain fully. (4%)
2.Assume that New Media Enterprises plans to publish Eloise's
columns in its own anthology entitled, "The Best of Diaro de
Manila." Eloise wants to prevent the publication of her columns in
that anthology since she was never paid by the newspaper. Name
one irrefutable legal arguments Eloise could cite to enjoin New
Media Enterprises from including her columns in its anthology. (2%)
SUGGESTED ANSWER:
1. Yes, Eloise has to secure authorization from New Media Enterprise.
In case of a work by an author during and in the course of his
employment, the copyright shall belong to the employer, if the work is
the result of his regular duties, even if the employee uses the time,
facilities and materials of the employer.
The facts reveal that Eloise created the works in question during the
course of her employment with New Media Enterprises. Anent the fact
that she was specifically hired by Petong to write a bimonthly column,

the said works are the result of her regular duties.


Hence, being a mere employee, Eloise is not the owner of the copyright
and must therefore secure the authority of the real owner before she can
publish the works in her own anthology.
2. Eloise can invoke her moral rights in her works.
Although copyright over the works belong to the employer, the author of
the work shall, independently of the economic rights, have moral rights
in her works. This includes the right to make alterations to her work prior
to, or withhold it from publication.
In the given case, Eloise as the true author continues to hold moral rights
in her works, regardless of the fact that New Media Enterprises owns the
economic rights thereto.
Hence, she may enjoin New Media Enterprises from publishing her
columns by invoking her moral rights as author.
XVI
In 1999, Mocha Warm, an American musician, had a hit rap single called
Warm Warm Honey which he himself composed and performed. The
single was produced by a California record company, Galactic Records.
Many noticed that some passages from Warm Warm Honey sounded
eerily similar to parts of Under Hassle, a 1978 hit song by the British rock
band Majesty. A copyright infringement suit was filed in the United States
against Mocha Warm by Majesty. It was later settled out of court, with
Majesty receiving attribution as co-author of Warm Warm Honey as well
as a share in the royalties. By 2002, Mocha Warm was nearing
bankruptcy and he sold his economic rights over Warm Warm Honey to
Galactic Records for $10,000 In 2008, Planet Films a Filipino movie
producing company, commissioned DJ Chef Jean, a Filipino musician, to
produce an original re-mix of Warm Warm Honey for use in one of its
latest films, Astig!. DJ Chef Jean remixed Warm Warm Honey with salsa
beat and interspersed as well a recital of a poetic stanza by John Blake, a
17th century Scottish poet. DJ Chef Jean died shortly after submitting the
remixed Warm Warm Honey to Planet Films. Prior to the release of Astig!,
Mocha Warm learns of the remixed Warm Warm Honey and demands that
he be publicity identified as the author of the remixed song in all the CD
covers and publicity releases of Planet Films.
1.Who are the parties or entities entitled to be credited as author of
the remixed Warm Warm Honey? Reason out your answer. (3%)
2.Who are the particular parties or entities who exercise copyright
over the remixed Warm Warm Honey? Explain. (3%)
SUGGESTED ANSWER:

1. The parties or entities entitled to be credited as author of the remixed


Warm Warm Honey are the following:
Mocha Warm, because as author, he has the moral right of
attribution, which exists independently of any grant of an
assignment or license with respect to his economic rights
Majesty, because as co-author, it is one of the original
owners of the copyright and as such has the right to be
credited as author
DJ Chef Jean, because as an author commissioned to
produce a derivative work, he enjoys all the rights of a
copyright holder as though it were a new work, without
prejudice to any subsisting copyright over the original
works
2. The parties or entities who exercise copyright over the
remixed Warm Warm Honey are the following:
DJ Chef Jean, as producer, for purposes of exhibition, and
also as author commissioned to produce a derivative work,
he also exercises copyright over the work for all other
purposes.
Galactic Records, as owner of a subsisting copyright over
the original work
Majesty, as author of the original work
XVII
On January 1, 2008, Al obtained a loan of P10,000 from Bob to be paid on
January 30, 2008, secured by a chattel mortgage on a Toyota motor car.
On February 1, 2008, Al obtained another loan of P10,000 from Bob to be
paid on February 15, 2008. he secured this by executing a chattel
mortgage on a Honda motorcycle. On the due date of the first loan Al
failed to pay. Bob foreclosed the chattel mortgage but the car was bidded
for P6,000 only. Al also failed to pay the second loan due on February 15,
2008. Bob filed an action for collection of sum of money. Al filed a motion
to dismiss claiming that Bob should first foreclose the mortgage on the
Honda motorcycle before he can file the action for sum of money. Decide
with reasons. (4%)
SUGGESTED ANSWER:
The motion to dismiss must be denied. Under the Chattel Mortgage Law,
the mortgagee has two remedies in case of default. He may file a
collection suit or he may foreclose the chattel mortgage with right to
recover any deficiency. These remedies are alternative and neither one is
a condition sine qua non of the other. In the given case, Bob chose to file
an action for collection of sum of money. The law itself provides for this
remedy to the mortgagee and nothing in its language suggests that

before such a remedy is availed of, there must first be


foreclosure. Hence, all premises considered, the motion to dismiss is
without merit because foreclosure is not necessary for an action for
collection of sum of money.

XIX
Industry Bank, which has a net worth of P1 Billion, extended a loan to
Celestial Properties Inc. amounting to P270 Million. The loan was secured
by a mortgage over a vast commercial lot in the Fort Bonifacio Global
City, appraised at P350 Million. After audit, the Bangko Sentral ng
Pilipinas gave notice that the loan to Celestial Properties exceeded the
single borrower's limit of 25% of the bank's net worth under a recent BSP
Circular. In light of other previous similar violations of the credit limit
requirement, the BSP advised Industry Bank to reduce the amount of the
loan to Celestial Properties under pain of severe sanctions. When
Industry Bank informed Celestial Properties that it intended to reduce the
loan by P50 Million, Celestial Properties countered that the bank should
first release a part of the collateral worth P50 Million. Industry Bank
rejected the counter-proposal, and referred the matter to you as counsel.
How would you advise Industry Bank to proceed, with its best interest in
mind? (5%)
SUGGESTED ANSWER:
I would advise Industry Bank to release a part of the collateral worth P50
Million.
While it is true that under the Civil Code a mortgage is one and
indivisible as to the contracting parties so that every portion of the
property mortgaged is answerable for the whole obligation as soon as it
falls due, the Supreme Court has held that this rule is not applicable to a
situation where only a portion of the loan was released. In such a case,
the mortgage on the loan became unenforceable to the extent of the
unreleased portion.
In the case at bar, the loan agreement is for P270 Million. By reducing
the amount to P220 Million (or P270 Million less P50 Million), the real
estate mortgage over the commercial lot became unenforceable to the
extent of P50 Million and subsists as a security only for P220 Million debt.
In other words, in case of default of Celestial Properties, the mortgage
can be foreclosed only to the extent of the P220 Million. (Central Bank of
the Philippines vs. CA, 139 SCRA 46[1985])
Hence, it would be in the best interest of the bank to comply with its

client's request since retaining the entire collateral would not result in
any benefit. On the contrary, it might damage its relationship with its
client by refusing to accommodate its request.

Bar question 2009 commercial law.

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