ADVANCE PRE-WEEK REVIEW PREDICTIONS AND

REMINDERS
in

Mercantile Law
by:
Prof. Arturo M. de Castro
(Pre-Bar Reviewer, Global Best Practice, UP Law
Center; Professor of Law, Ateneo, Lyceum, U.E.)

1. Define Letter of Credit.

Ans: A Letter of Credit is an instrument issued by a bank on behalf of
one of its customers, authorizing an individual or a firm to draw
drafts on the bank or one of its correspondents for its account
under certain conditions of the credit.
2. What is the Independence principle in letters of credit transactions?
Ans: The correspondent bank is not duty bound to open and inspect the
goods to check if the contents tally with the description in the letter
of credit. By custom in international banking, the negotiating bank
deals only with the documents and not with the goods described in
the document (Bank of P. I. vs. De Reny Fabric Industries, Inc.,
35 SCRA 256 [1970]). This is the so-called independence
principle which assures the seller or the beneficiary of prompt
payment independent of any breach of the main contract and
precludes the issuing bank from determining whether the main
contract is actually accomplished or not. Under this principle, banks
assume no liability or responsibility for the form, sufficiency,
accuracy, genuineness, falsification or legal effect of any
documents, or for the general and/or particular conditions stipulated
in the documents or superimposed thereon, nor do they assume
any liability or responsibility for the description, quantity, weight,
quality, condition, packing, delivery, value or existence of the goods
represented by any documents, or for the good faith or acts and/or
omissions, solvency, performance or standing of the consignor, the
carries, or the insurers of the goods, or any other person
whomsoever. (Transfield vs. Luzon Hydro, Nov. 22, 2004, Justice
Callejo, Sr., Ponente)
3. What are the exceptions to the independence principle in letters of credit
transactions?

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Ans: Fraudulent abuse of the credit, in case of collusion between the

correspondent/paying bank and the exporter/seller of the goods.
(Transfield vs. Luzon Hydro, supra)
4. What is a trust receipt transaction? (Sec. 4)
Ans: A TRUST RECEIPT TRANSACTION is a transaction between an
entruster and an entrustee whereby the entruster, who owns or
holds absolute title or security interests over certain specified
goods, documents or instruments, releases the same to the
possession of the entrustee upon the latters execution and delivery
to the entruster of a trust receipt wherein the entrustee binds
himself to hold the specified goods, documents or instruments in
trust for the entruster and to sell or otherwise dispose of the goods,
documents or instruments with the obligation to turn over to the
entruster the proceeds thereof to the extent of the amount owing to
the entruster, or the goods, documents or instruments themselves if
they are unsold or not otherwise disposed of. (Colinares vs. Court
of Appeals, 339 SCRA 609 [2000])
5. How is Trust Receipt related to Letter of Credit?
Ans: A Trust Receipt secures the loan covered by the letter of credit.
(RCBC vs. Alfa RTW Mfg. Corp., G.R. No. 133877, 14 Nov. 2001)
6. Distinguish a Letter of Credit from a Trust Receipt.
Ans: A Letter of credit is a separate document from a trust receipt. While
the trust receipt may have been executed as a security on the letter
of credit, still the two documents involve different undertakings and
obligations. A letter of credit is an engagement by a bank or other
person made at the request of a customer that the issuer will honor
drafts or other demands for payment upon compliance with the
conditions specified in the credit. Through a letter of credit, the
bank merely substitutes its own promise to pay for the promise to
pay of one of its customers who in return promises to pay the bank
the amount of funds mentioned in the letter of credit plus credit or
commitment fees mutually agreed upon. By contrast, a trust receipt
transaction is one where the entruster, who holds an absolute title
or security interests over certain goods, documents or instruments,
released the same to the entrustee, who executes a trust receipt
binding himself to hold the goods, documents or instruments in trust
for the entruster and to sell or otherwise dispose of the goods,
documents and instruments with the obligation to turn over to the
entruster the proceeds thereof to the extent of the amount owing to
the entruster, or as appears in the trust receipt, or return the goods,
documents or instruments themselves if they are unsold, or not
otherwise disposed of, in accordance with the terms and conditions
specified in the trust receipt. (Bank of Commerce vs. Serrano,
Feb. 16, 2005)

A steals goods from B, deposits the goods with Warehouseman C who

issues a negotiable Warehouse Receipt in favor of A, who then negotiates the

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Warehouse Receipt to D, who pays value to A in good faith and without any
notice of defect in the title of A.
B, the owner of the goods, notifies C that the goods were stolen from him
and demands delivery of the goods to him. As holder of the Negotiable
Warehouse Receipt, D claims delivery of the goods to him.
1. Who between B, the owner of the goods, and D, the holder of the
Negotiable Warehouse Receipt is entitled to the goods?
Ans: B, the owner, is entitled to the delivery of the goods. The authorities
are unanimous that in case of theft of goods, negotiation of the
warehouse receipt will not confer a better right to the holder. Article
1512 and 1513 of the Civil Code require that the negotiation must
be made by the owner or the person authorized by the owner.
2. Will your answer be the same if what is stolen by A from B is the
Negotiable Warehouse Receipt covering the goods, instead of the goods
themselves, and A then negotiates the stolen Negotiable Warehouse
Receipt to D?
Ans: No, my answer will be different. D, the holder will prevail. Under Art.
1518 of the Civil Code, the negotiation of the Warehouse Receipt is
not impaired by the fact that the owner has been deprived thereof
by theft, fraud, duress or conversion.
Note: The problem is the subject of an article published by the author in
the Ateneo Law Journal entitled The Rights of a Holder In Due
Course of a Negotiable Documents of Title to Goods to reconcile
the conflict between Art. 1518 on the one hand sustaining the
above answer and Articles 1512 and 1513 supporting the contrary
answer. If the problem is presented in another form requiring the
examinee to argue in favor of B, the owner of the stolen Warehouse
Receipt, Articles 1512 and 1513 may be cited and in favor of D,
Article 1518 may be cited. As Judge, the examinee may choose
and then support the answer with reasons. As for me, I suggest the
following answer.
As Judge, I would decide in favor of D, the holder, for the following
reasons:
1) The Code Commission that drafted the Civil Code made a
mistake in adopting both Articles 1512 and 1513 on the one
hand and Article 1518 on the other hand from the comparative
laws from the United States where the model of Articles 1512
and 1513 were already amended by the model for Article 1518.
As now codified in the Uniform Commercial Code in the United
States, the prevailing rule is as it now appears in Art. 1518
granting the holder of a Negotiable Document of Title to goods
the same right of a holder in due course of a Negotiable
Instrument, free from the personal defenses of prior parties.
2) The conflict may be reconciled by applying Articles 1512 and
1513 requiring negotiation by the owner or his authorized
representative to the situation of stolen goods, while Article

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1518 to stolen negotiable warehouse receipt, to harmonize the

seemingly conflicting provisions.
3) The prevailing practice in the United States granting a holder in
good faith and for value of the negotiable document the right of
a holder in due course of a negotiable instrument to take the
negotiable document of title free from personal defenses of prior
parties enhances the function of a negotiable document of title
to facilitate trade and commerce with relative ease and
convenience arising from the better faith and trust in the
negotiable documents of title as substitute to goods. The same
way that the negotiable instrument is a substitute for money
facilitates trade and commerce with ease and convenience.

1. May a holder of a negotiable instrument be a holder in due course when

the instrument was overdue at the time it was negotiated to him?
Ans: No. The second requisite of a holder in due course is that he
became holder of it before it was overdue, and without notice that it
had been previously dishonored, it such was the fact.
Alternative Ans:
Yes. When an instrument is overdue, it is payable on demand, and
it may still be negotiated conferring on the holder the status of a
holder in due course if it is negotiated within a reasonable period of
time after its issuance (Sec. 53). Moreover, the negotiability of an
instrument is not affected by the fact that it is anti-dated, which
always appears to be overdue.
2. A issues a check to B in the amount of Php100,000.00. B alters the
amount to Php1,100,000.00 and negotiates it to C who takes it under all
the conditions making him a holder in due course. C then indorses the
instrument to D, who is also a holder in due course.
a. How much may D collect from A, the drawer?
Ans: Php100,000.00 only, the original tenor prior to the alteration. When
an instrument is in the hands of a holder in due course, he may
enforce payment thereof according to its original tenor.
b. How much may D collect from B?
Ans: The full amount of Php1,1000,000.00 because B is the party to the
fraud.
c. How much may D collect from C?
Ans: The full Php1,1000,000.00 under his warranty as a general indorser
that the instrument is genuine and what it purports to be and that on
due presentment, the instrument shall be accepted or paid or both,
according to its tenor, and in case of dishonor and necessary notice
of dishonor is given he will pay the amount thereof to the holder or
to any subsequent indorser who may be compelled to pay it.

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3. By its payment of a check with forged signature of the drawer, does the
drawee bank become liable for the warranties of an acceptor?
Ans: No, the prevailing rule is that payment does not include
acceptance, for the following reasons:
a. Payment by the drawee as the party principally liable discharges
the instrument and reduces it into a mere voucher or receipt and it
may no longer be negotiated further.
b. Acceptance does not discharge the instrument, and instead
enhances its further negotiability by the firm commitment of the
drawee to pay upon presentment and its warranties as acceptor
admitting (1) the existence of the drawer, (2) the genuineness of the
drawers signature, (3) the capacity of the drawer to draw the
instrument and (4) the existence of the payee and his then capacity
to indorse.
4. Can a drawee be a holder in due course?
Ans: No, because by paying the instrument, the drawee discharges the
instrument whereas a holder in due course may negotiate the
instrument further.

V
1. What are the elements of insurance?
Ans: Elements of Insurance
a. Insurable Interest (Sec. 51, par. 9)
b. Risk of Loss (Sec. 2)
c. Assumption of Risk
d. Scheme to distributor losses
e. Payment of Premiums (Sec. 77; Phil-am Care Health System,
Inc. vs. CA, G.R. No. 125678, March 18, 2002)
2. A and B have children C, D & E. A and B obtained annulment of marriage
on the ground of psychological incapacity under Art. 36 of the Family
Code. Before partition of the conjugal property of A and B, do C, D and E
have insurable interest on the conjugal property of their parents, A and B?
Ans: Yes, to the extent of their entitlement to presumptive legitime, which
is an existing right. Children of parents whose marriage are
annulled or who obtain legal separation are entitled to presumptive
legitime.
3. Masagana Telemart Inc. insures its building against fire with UCPB
General Insurance Co. In the past, the insurer as a matter of practice had
been extending grace period within which to pay renewal premium after
expiration of the policy. The policy expires and the Building is gutted by fire

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within the usual grace period granted as a matter of practice in the past.
The insured pays the renewal premium the following day after the fire and
then files a claim with the insurer which refuses to pay the claim on the
ground that the renewal premium was paid after the building was already
lost by fire.
What will be your arguments
a. As counsel for the Insurer
b. As counsel for the Insured
c. As a Judge, decide, with reasons.
Ans:
a. As counsel for the Insurer, I will cite Sec. 77 of the Insurance
Code that the policy shall not take effect until the premium is
paid, notwithstanding any agreement to the contrary. Credit
extension for the payment of premium is contrary to the policy of
the law.
b. As counsel for the Insured, I will cite the latest ruling of the
Supreme Court in UCPB Insurance Company vs. Masagana
Telemart in which the Supreme Court held, under identical facts
as given in the problem, that the Insurer is liable for the claim
because (1) the Insurer is under estoppel by reason of the grace
period to pay the renewal period extended in the past, and (2)
the credit extension renders the policy effective.
c. As a Judge, I will apply the Supreme Court decision in UCPB
Insurance Company vs. Masagan Telemart and order the
insurer to pay the claims.
1) Although the legislative history of the amendment to Sec. 77
shows that notwithstanding any agreement to the contrary
was introduced to do away with credit extension as an
exception, as initially held by the Supreme Court in the
aforesaid case, on reconsideration the Supreme Court finally
ruled in said case that credit extension is a recognized
exception to the general rule that the policy shall not take
effect until the premium is paid.
2) The law is what the Supreme Court says it is, and judicial
decisions form part of the legal system.
3) The practice in the past of giving grace period to the insured
in the payment of renewal premium places the insurer in
estoppel to depart from the established practice under the
general principle of equity.
4. What are the exceptions to the rule that the policy shall not take effect until
the premium is paid?
Ans:
a. In case of life and industrial life whenever the grace period
provision applies (Sec. 77).

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b. Where there is an acknowledgment in the contract or policy of

insurance that the premium had already been paid. (Sec. 78,
ICP).
c. The rule laid down in Makati Tuscany Condominium v. Court
of Appeals to the effect that Section 77 may not apply if the
parties have agreed to the payment of the premium in
installments and partial payment has been made at the time of
the loss.
d. Where a credit term was agreed upon like the agreement in
UCPB General Insurance, Inc. v. Masagana Telemart where
the insurer granted a 60-90-day credit term for the payment of
the premiums despite full awareness of Section 77.
e. Where the parties are barred by estoppel.
5. Explain the synallagmatic characteristics of Insurance.
Ans: It is a highly reciprocal contract where the rights and obligations of
the parties correlate and mutually correspond. The insurer assumes
the risk of loss in consideration of premium payments under a risk
distributing device. (UCPB vs. General Insurance Co., Inc., vs.
Masagana Telemart, April 4, 2001)

V
1. Explain whether the following are common carriers bound to exercise
extra-ordinary diligence in the carriage of goods or passengers or a
private carrier.
a. Customs broker
Ans: Common carrier because although the transport services from the
pier to the warehouse of the shipper are only incidental or ancillary
to the brokerage business, the same is offered to the public in
general and for compensation.
b. Arrastre
Ans: Arrastre refers to hauling and handling of cargoes on the wharf
and between the establishment of the consignee or shipper and the
ships tackle, usually performed by the longshoreman.
An arrastre operator is not a common carrier, but more of a
warehouseman (Sua Kiam vs. Manila Railroad Co., 19 SCRA 5).
Hence,
1) The one year prescriptive period under the COGSA is
inapplicable
2) Arrastre services are not maritime hence maritime laws are
inapplicable.
c. Vessel chartered under Contract of affreightment.

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Ans: An owner who retains possession of the ship remains liable as a

carrier (Coast wise lighterage Corp. vs. CA, 245 SCRA 796
[1995])
d. Vessel under bareboat or Demise Charter.
Ans: Under demise or bareboat charter, charterer will generally be
regarded as owner for the voyage or services stipulated; charterer
mans the vessel with his own people and becomes owners pro
hac vice, subject to liability to others for damages caused by
negligence. To create a demise, owner of vessel must completely
and exclusively relinquish possession, command and navigation
thereof to charter; anything short of such a complete transfer is a
contract of affreightment (or time or voyage charter party).
(Villanueva, Ibid, pp. 200-201)
2. Is the carrier liable for the death of newsboy or children permitted to ride
gratuitously by an employee who has no authority to do so?
Ans: No, because there is no compensation, and the permission to ride
is not authorized. (Meloon vs. Davis, C.C.A.N.H. 292 F. 82)
3. When may moral damages be recovered in case of breach of contract of
carriage?
Ans: In case of death or physical injuries, or wanton malice and bad
faith.
4. What is the Warsaw Convention?
Ans: The Warsaw Convention to which the Philippines is a party and
which has the force and effect of law in this country applies to all
international transportation of persons, baggage or goods
performed by an aircraft gratuitously or for hire. (American
Airlines v. Court of Appeals, 237 SCRA 482[2000])
5. When does a contract involve international transportation?
Ans: There are two categories of international transportations, to wit:
(1) that where the place of departure and the place of destination
are situated within the territories of two High Contracting Parties
regardless of whether or not there be a break in the transportation
or a transshipment; and (2) that were the place of departure and
the place of destination are within the territory of a single High
Contracting Party if there is an agreed stopping place within a
territory subject to the sovereignty, mandate, or authority of another
power, even though the power is not a party to the Convention.
(Mapa v. Court of Appeals, 275 SCRA 286 [1997])
6. Does the Warsaw Convention apply to loss of baggage? Shabby and
humiliating treatment from an airline employee?
Ans: A cause of action arising from slashing and loss of personal effects
by an airline passenger is well within coverage of the Warsaw
Convention; while a cause of action arising from the shabby and

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humiliating treatment received from airline employees is not.

(United Airlines v. Uy, 318 SCRA 576 [1999])
7. Does the Warsaw Convention on limitation of liability preclude the
operation of the Civil Code?
Ans: No. It does regulate, much less exempt, carrier from liability for
damages for violating the rights of its passengers under the
contract of carriage, especially if willful misconduct on the part of
the carriers employee is found or established here.
The Warsaw Convention denies to the carrier availment of the
provisions which exclude or limit the carriers liability if the damage
is caused by his willful misconduct or by such fault on his part
considered to be equivalent to willful misconduct, or if the damage
is similarly caused by any agent of carrier acting within the scope of
his employment. (Sabena Belgian World Airlines vs. CA, 69
SCAD 494, 255 SCRA 38 [1996])
8. Where is the venue for an action for damages against an international
airline comply?
Ans: Art. 28(1) of Warsaw Convention provides that an action for
damages must be brought at the option of the plaintiff either before
the court of the: (a) domicile of the carrier; (b) the carriers principal
place of business; (c) the place where the carrier has a place of
business through which the contract was made; (d) the place of
destination
Note, however, that under Art. 1 (3) of the Warsaw Convention,
transportation to be performed by several successive carriers
shall be deemed to be one undivided transportation. Manila
Courts have jurisdiction over a trip from Geneva to Copenhagen to
New York where the passenger purchased from Singapore Airlines
in Manila conjunction tickets that would end in GenevaCopenhagen- New York. The issuance by American Airlines of a
new ticket in Geneva to cover a one-way trip to New York should be
considered as part of the contract of transportation entered into by
the passenger with Singapore Airlines in Manila, and cannot be
considered separate and distinct from that entered into with
Singapore Airlines. (American Airlines vs. CA, 327 SCRA 482
[2000])
9. What is the prescriptive period under the Warsaw Convention?
Ans: 2 years from the arrival at the place of destination (Art. 29), unless
the airline employed delaying tactics. (United Airlines vs. Uy, 318
SCRA 576 [1999])

V
1. May a private corporation be organized under a special law or charter?
Ans: No. Under the Constitution, a private corporation may be organized
only under the Corporation Code as a general law and may not be
organized under a special law or charter. (Agrix Marketing Inc.)

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2. When may personal civil liability lawfully attach to a corporate director,

trustee or officer without piercing the veil of corporate fiction?
Ans: When:
(1) He assents
1. to a patently unlawful act of the corporation, or
2. for bad faith or gross negligence in directing its affairs, or
3. for conflict of interest, resulting in damages to the
corporation, its stockholders or other persons
(2) He consents to the issuance of watered stocks or who, having
knowledge thereof, does not forthwith file with the corporate
secretary his written objection thereto;
(3) He agrees to hold himself personally and solidarily liable with
the corporation; or
(4) He is made, by a specific provision of law, to personally answer
for is corporate action. (Republic vs. Institute for Social
Concern, January 28, 2005)
3. Which has jurisdiction over corporate officers dismissal?
Ans: The RTC. The question of remuneration involving a person who is
not a mere employee but a stockholder and officer of the
corporation is not a simple labor problem but a matter that comes
within the area of corporate affairs and management, and is in fact
a corporate controversy in contemplation of the Corporation Code.
(Velarde vs, Lopez Inc., Jan, 14, 2004)
4. What are the elements of intra-corporate controversy?
Ans: To determine whether a case involves an intra-corporate
controversy, and is to be heard and decided by the Branches of the
RTC specifically designated by the Court to try and decide such
cases, two elements must concur: (1) the status or relationship of
the parties; and (2) the nature of the question that is the subject of
their controversy. The first elements requires that the controversy
must arise out of intra-corporate or partnership relations between
any or all of the parties and the corporation, partnership or
association of which they are stockholders, members or associates;
between any or all of them and the corporation, partnership or
association of which they are stockholders, members or associates;
respectively; and between such corporation, partnership and the
State insofar as it concerns their individual franchises. The second
element requires that the dispute among the parties be intrinsically
connected with the regulation of the corporation. If the nature of the
controversy involves matters that are purely civil in character,
necessarily, the case does not involve an intra-corporate
controversy. For instance, the determination of whether a contract

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is simulated or not is an issue that could be resolved by applying

pertinent provisions of the Civil Code. (Callejo, Sr. J)
5. Is a corporation entitled to award of moral damages?
Ans: As a general rule, a corporation is not entitled to award of moral
damages because it is incapable of physical suffering mental
anguish and social humiliation. In a recent decision, the Supreme
Court, thru Mr. Justice Antonio Carpio held that the previous
decision holding that a corporation may recover moral damages for
besmirched reputation and damage to goodwill is only an obiter
dictum. A corporation may recover moral damages only in case of
libel and defamation because the offended party or victim is any
person, without limiting person to natural person, and the victim
may even be one who is already dead if his memory is blackened.
6. May the by-laws legally provide for a right of first refusal in favor of the
corporation only?
Ans:

No. It is an undue restriction on the right of the stockholder to

dispose of his shares freely. It is a different matter if the restriction
is in the subscription agreement, which is individually and freely
agreed upon. What is prohibited is the blanket restriction in the ByLaws.

7. What are the requisites for the validity of corporate transactions of:
a. A self-dealing director?
b. An interlocking director?
Ans:
a. Sec. 32. Dealings of directors, trustees or officers with the
corporation A contract of the corporation with one or more of
its directors or trustees or officers is voidable, at the option of
such corporation, unless all the following conditions are present:
1. That the presence of such director or trustee in the board
meeting in which the contract was approved was not
necessary to constitute a quorum for such meeting;
2. That the vote of such director or trustee was not necessary
for the approval of the contract;
3. That the contract is fair and reasonable under the
circumstances; and
4. That in case of an officer, the contract has been previously
authorized by the board of directors.
Where any of the first two conditions set forth in the preceding
paragraph is absent, in the case of a contract with a director or
trustee, such contract may be ratified by the vote of the
stockholders representing at least two-thirds (2/3) of the
outstanding capital stock or of at least two-thirds (2/3) of the
members in a meeting called for the purpose: Provided, That full

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disclosure of the adverse interest of the directors or trustees

involved is made at such meeting: Provided, however, That the
contract is fair and reasonable under the circumstances.
b. Sec. 33. Contracts between corporations with interlocking
directors Except in cases of fraud, and provided the contract
is fair and reasonable under the circumstances, a contract
between two or more corporations having interlocking directors
shall not be invalidated on that ground alone: Provided, That if
the interest of the interlocking director in one corporation is
substantial and his interest in the other corporation or
corporations is merely nominal, he shall be subject to the
provisions of the preceding section insofar as the latter
corporation or corporations are concerned.
Stockholdings exceeding twenty (20%) percent of the
outstanding capital stock shall be considered substantial for
purposes of interlocking directors.

V
1 What are pre-need plans?
Ans: These are contracts which provide for the performance of future
services in the payment of future monetary consideration at the
time of actual need, for which the plan holders pay in cash or
installment at stated prices, which includes life, pension, education,
interments and other plans which the SEC may approve.
2 What is a tender offer?
Ans: A tender of offer is a publicly announced intention by a person
acting alone or in concert with other persons to acquire equity
securities of a public company (Sec. 19).
3 Why are tender offers regulated?
Ans: Tender offers are regulated to prevent the stockholders of the target
company from being misled by the offeror or the targets
management. Thus, a principal requirement of the SEC rules on
tender offers is the disclosure by the offeror of certain information
about the offer, with a copy of such information being given or sent
to the stockholders. (See SRC Rule 19.1, para. 7)
4 Under what circumstances is a tender offer mandatory?
Ans: Except when relief from the mandatory tender offer requirement is
granted under SRC Rule 19.1, paragraph 3, a person is required
under the following circumstances to make a tender offer for equity
shares of a pubic company in an amount equal to the number of
shares that the person intends to acquire:
a Where the person intends to acquire 15% or more of the equity
shares of a public company pursuant to an agreement made
between or among the person and one or more sellers;

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b Where the person intends to acquire 30% or more of the equity

shares of a public company within a period of 12 months; and;
c

Where the person intends to acquire shares that would result in

the ownership of more than 50% of the equity shares of a public
company.

5 What is the procedure to comply with the requirements of mandatory

tender offers?
Ans: The following:
a Make a tender offer to stockholders by filing with SEC a
declaration to that effect; and furnish the Issuer a statement
containing such of the information required of issuers as SEC
may prescribe, including subsequent or additional materials;
b Publish all requests or invitations for tender, or materials making
a tender offer or requesting or inviting letters of such a security;
c

Pay at time of filing of statement with SEC a filing fee.

6 Who is an independent director?

Ans: An Independent director is a person other than an officer or
employee of the bank, its subsidiaries or affiliates or related
interests.
Note that the term independent director is also used in the
Securities Regulation Code (Sec. 38; see Paragraph 16.25) to refer
to a person other than an officer or employee of the corporation, its
parent or subsidiaries, or any other individual having a relationship
with the corporation, which would interfere with the exercise of
independent judgment in carrying out the responsibilities of a
director.
7 When is a foreign corporation deemed doing business here in the
Philippines?
Ans: Under Section 3(d) of the Foreign Investment Act doing business in
the Philippines is deemed to include the following acts:
a Soliciting orders, service contracts, opening offices, whether
liaison offices or branches;
b Appointing representatives or distributors operating under full
control of the foreign corporation, domiciled in the Philippines or
who in any calendar year stay in the country for a period or
periods totaling one hundred eighty (180) days or more;
c

Participating in the management, supervision or control of any

domestic business, firm, entity or corporation in the Philippines;
and

d Any other act or acts that imply a continuity of commercial

dealings or arrangements, and contemplate to that extent the
performance of acts or works, or the exercise of some of the

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functions normally incident to and in progressive prosecution of

commercial gain or of the purpose or object of the business
organization.
8 What are not deemed doing business?
Ans: The following:
(a) Mere investment as a share-holder by a foreign entity in
Domestic Corporation duly registered to do business and/or the
exercise of rights as such investor;
(b) Having a nominee director or officer to represents its interests in
such corporation; and
(c) Appointing a representative or distributor domiciled in the
Philippines which transacts business in its own name and for its
own account. (pp. 755-756 Villanueva)

V
1 What are the primary objectives of the BSP? (Sec. 3)
Ans:
(a) To maintain price stability for a balanced and sustainable
growth of the economy.
(b) Promote and maintain
convertibility of the peso.

monetary

stability

and

the

2 What are the grounds for closing a bank or a quasi-bank?

ANS: The following:
1 Equity test unable to pay its liabilities in the ordinary course of
business (Sec. 30[a], RA 265)
2 Balance Sheet Test insufficient assets to meet liabilities (Sec.
30(b), RA 265)
3 Violation of Cease and Desist Order or Transactions constituting
fraud or dissipation of assets.
4 Announced Bank Holiday (Sec. 53, RA 8791)
5 Suspension of Payment of deposits for more than 30 days (Sec.
53)
6 Unsound and unsafe banking practice (Sec. 56, RA 8791)
3 A borrows Php1 Million from XY Bank with 20% interest per annum on the
security of a Real Estate Mortgage over his house and lot. On maturity, A
defaults and XY Bank forecloses the mortgage to enforce repayment of
the loan, which amounts to Php2 Million at the time of the Auction Sale,
including interest of 20% per annum. The highest bid at the Auction Sale is

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Php1.5 Million submitted by XY Bank. The Certificate of Sale executed by

the Sheriff is registered with the Register of Deeds and duly annotated at
the title of A.
a A wants to redeem the mortgage. What will be the redemption price?
Ans: Php2 Million with 20% interest stipulated in the mortgage and all
the costs and expenses. Section 47 of the General Banking Act
of 2000 provides in pertinent part that: In the event of a
foreclosure, whether judicially or extra-judicially, of any
mortgage on real estate which is security for any loan or other
credit accommodation granted, the mortgagor or debtor whose
real property has been sold for the full or partial payment of his
obligation shall have the right within one year after the sale of
the real estate, to redeem the property by paying the amount
due under the mortgage deed, with interest thereon at the
rate specified in the mortgage, and all the costs and
expenses incurred by the bank or institution from the sale and
custody of said property less the income derived therefrom.
(NOTE: There are Supreme Court Decisions up to 2004
upholding this provision of law)
b If A were a corporation or a partnership, what is the period within which
the corporation or partnership may redeem the mortgage?
Ans: Notwithstanding Act 3135, juridical persons whose property is
being sold pursuant to an extrajudicial foreclosure, shall have
the right to redeem the property in accordance with this
provision until, but not after, the registration of the certificate of
foreclosure sale with the applicable Register of Deeds which in
no case shall be more than three (3) months after foreclosure,
whichever is earlier. (Sec. 47, General Banking Act of 2000)
4 (a) When is the purchaser in the Auction Sale entitled to possession of the
mortgaged property?
Ans: However, the purchaser at the auction sale concerned whether in a
judicial or extrajudicial foreclosure shall have the right to enter upon
and take possession of such property immediately after the date
of the confirmation of the auction sale and administer the same
in accordance with law. (Sec. 47, General Banking Act of 2000)
(b) What is the requirement for the mortgagor to restrain or enjoin
foreclosure?
Ans: Any petition in court to enjoin or restrain the conduct of foreclosure
proceedings instituted pursuant to this provision shall be given due
course only upon the filing by the petitioner of a bond in an
amount fixed by the court conditioned that he will pay all the
damages which the bank may suffer by the enjoining or the
restraint of the foreclosure proceeding. (Sec. 47, General
Banking Act of 2000)

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1. (a) What is the so called TRIPs Agreement?

Ans:

It is an agreement on the Trade Related Aspects of Intellectual

Property attached to the Treaty establishing the World Trade
Organization (WTO).

(b) What is the basic policy adopted in the trips agreement?

Ans:

Equality and reciprocal treatment of nationals of member countries

1) Non-discrimination (Art 3) no less favorable than that
accorded to its nationals.
2) Most favored treatment (Art 4) advantage, favor or privilege
granted to nationals of a member country automatically
accorded to nationals of other member countries.
3) Reverse reciprocity (Sec. 231, IPC) Restrictions on Filipino
national in a foreign law are reciprocally enforceable against its
national, in the Philippines.

2. Is the accession of the Philippines to the Agreement establishing the

World Trade Organization (WTO) and the TRIPS (Trade Related Aspect of
Intellectual Property) Agreement which require the contracting parties to
accord other contracting parties treatment no less favorable than that
accorded their own nationals under the principles of equality and
reciprocity among nationals of the member countries unconstitutional for
being violative of (1) Sec. 19, Art. of the Constitution which requires the
Philippines to develop a self-reliant and independent national economy
controlled by Filipinos, (2) Sec. 10, Art. X which requires preference in
favor of qualified Filipino in the grant of rights, privileges and concession
covering the national economy and patrimony, and (3) Sec. 12, Art. X
which provides for preferential use of Filipino Labor domestic materials
and locally produced goods?
Ans: No. The principles in Article are not self-executing principles
ready for enforcement through the courts. They do not embody
judicially enforceable constitutional rights but guidelines for
legislation. (Taada vs. Angara, 272 SCRA 18).
Sections 10 and 12, Article X of the Constitution should be read
and understood in relation to the other sections in Article X of the
Constitution, especially Sections 1 and 13. Section 1, Article X of
the Constitution lays down the basic goals of national economic
development as a more equitable distribution of wealth, a sustained
increase in the amount of goods and services for the benefit of the
people, and an expanding productivity to raise the quality of life for
all. Likewise, the Constitution takes into account the realities of the
outside world, as it requires a trade policy that serves the general
welfare and utilizes all forms of exchange on the basis of equality
and reciprocity and speaks of industries which are competitive in
both domestic and foreign markets, as well as the protection of
Filipino enterprises against unfair foreign competition and trade
practices. There are enough balancing provisions in the
Constitution to allow the Senate to ratify the concurrence of the
Philippines in the Agreement Establishing the World Trade

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Organizations. The Constitution does not intend to pursue an

isolationist policy. The Agreement Establishing the World Trade
Organization establishes rules of equality and reciprocity that apply
to all members. The Constitution encourages industries that are
competitive in both domestic and foreign markets, thereby
demonstrating a clear policy against a sheltered domestic
environment. Whether the Agreement Establishing the World Trade
Organization will favor the general welfare of the public at large are
to be answered by the policy makers. Such answers are not subject
to judicial review based on grave abuse of discretion. (Taada vs.
Angara, 272 SCRA 18)

X
1. Distinguish Trademark Infringement from Unfair Competition.
Ans:
(a) Infringement of trademark is the unauthorized use of a
trademark, whereas unfair competition is the passing off of
ones goods as those of another.
(b) In infringement of trademark, fraudulent intent is unnecessary,
whereas in unfair competition fraudulent intent is essential.
(c) In infringement of trademark the prior registration of the
trademark is a prerequisite to the action, whereas in unfair
competition registration is not necessary. (Mighty Corp. vs.
E.J. Gallo Winery, July 14, 2004)
2. Are tradenames protected even without registration?
Ans:

Yes, because tradenames are not required to be registered. (Sec.

165)

3. What is the related goods principle?

Ans: There is likely confusion from the use of identical marks on noncompeting but related goods.
1) belonging to the same class
2) have the same descriptive properties or physical attributes
3) serve the same purpose or
4) flow through the same channel of trade
4. What are the tests to determine similarity and likelihood of confusion in
trademark resemblance?
Ans: Two tests to determine similarity and likelihood of confusion in
trademark resemblance:
(a) The Dominancy Test applied in Asia Brewery, Inc. vs. CA
(1993) focuses on the similarity of the prevalent features;

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whether the use of the marks involved is likely to cause

confusion or mistake in the mind of the public or deceive
purchasers.
(b) The Holistic or Totality Test used in Del Monte Corporation vs.
CA (1990) the trademarks in their entirety as they appear in
their respective labels or hang tags must also be considered.
(Mighty Corp. vs. E.J. Gallo Winery, July 14, 2004)
5. What are the essential elements for Unfair Competition?
Ans: The essential elements of an action for unfair competition are (1)
confusing similarity in the general appearance of the goods, and (2)
intent to deceive the public and defraud a competitor. The
confusing similarity may or may not result from similarity in the
marks, but may result from other external factors in the packaging
or presentation of the goods. The intent to deceive and defraud
may be inferred from the similarity of the appearance of the goods
as offered for sale to the public. Actual fraudulent intent need not be
shown. Unfair competition is broader than trademark infringement
and includes passing off goods with or without trademark
infringement. (McDonalds Corp. vs. LC BigMak Burger, Inc.,
August 18, 2004)
6. Can there be trademark infringement without unfair competition?
Ans: There can be trademark infringement without unfair competition as
when the infringer discloses on the labels containing the mark that
he manufactures the goods, thus preventing the public from being
deceived that the goods originate from the trademark owner.
(McDonalds Corp. vs. LC BigMak Burger, Inc., August 18, 2004)

X
1. May a bank collect handling charges if the PN does not contain stipulation
on payment of handling charges?
Ans: No, for violation of the Truth and Lending Act (Solid Bank vs. CA,
246 SCRA 193 [1995]).
2. Is the assignment of credit covered by the Truth and Lending Act?
Ans: Yes.
3. For what amount may foreclosure of real estate mortgage be made?
Ans: A mortgage may be foreclosed only for the amount appearing in the
mortgage document. (Landrito, Jr. vs. Court of Appeals, 466
SCRA 107 [2005])
4. What is the effect of iniquitous and unconscionable interest rate?
Ans: Stipulations authorizing iniquitous or unconscionable interest are
contrary to morals (contra bonos mores), if not against the law.
Under Article 1409 of the Civil Code, these contracts are inexistent

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and void from the beginning. They cannot be ratified nor the right to
set up their illegality as a defense be waived.
Since the stipulation on the interest rate is void, it is as if there were
no express contract thereon (Tongoy vs. CA, 123 SCRA 99
(1983). Hence, courts may reduce the interest rate as reason and
equity demand.
In Medel vs. CA, 359 SCRA 820 (1998) it was held that the
stipulated interest rate of 5.5 percent per month, or 66 percent per
annum, was unconscionable. In the present case, the rate is even
more iniquitous and unconscionable, as it amounts to 192 percent
per annum. When the agreed rate is iniquitous or unconscionable, it
is considered contrary to morals, if not against the law. Such
stipulation is void (Ibarra vs. Aveyro, 37 Phil. 274 (1917); Sps.
Almeda vs. CA, 326 Phil. 309 [1996]). (Imperial vs. Jaucian, April
14, 2004)

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