COMMERCIAL LAW

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1989 BAR EXAMINATIONS

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1) Distinguish between cash dividend and stock dividend. When may the
declarations of these dividends be revoked?

2) After one year of operation, Safe Realty Inc., wanted to declare dividends
to its stockholders. Ramos, its President, asked Santos, its Treasurer.
Whether this is feasible, considering the financial standing of the
Corporation. Santos reported that the Corporation posted a P1 Million
profit and its real estate has appreciated in value to the tune of P4
million. The Board then declared dividends to its stockholders computed
on the basis of P5M representing profits and appreciation in value of its
real estate. Is the dividend declaration proper? Reasons.

SUGGESTED ANSWER:

1) Dividends may either be cash (property) or stock. Any dividend

other tahn from the uniisued share of the corporation is, in
contemplation of a law, a cash dividend. A stock dividend is one that
is declared and paid out from the unissued shares of corporation.
Declaration of the stock dividends, unlike cash dividends, need the
concurrence of the stockholders.

A declaration of dividends may be revoked if the same was

irregularly declared, such s when the same is violative of the trust
fund doctrine; otherwise it can no longer be revoked once the right
thereto thereto has already vested in the stockholders. Note:
Another way of stating the answer on when declaration may be
revoked is in the case of cash dividends, revovation may be had prior
to its announcement and in the case of stock dividends, prior to the
issuance of stock dividends.

2) The dividend declaration is improper. Dividends may be declared

only out of unrestricted retained earnings (Art. 43, Corporation
Code) and, as understood in generally accepted accounting
principles, such declaration would preclude its being sourced from
mere increments in the value of corporate assets which may
fluctuate from time to time.

II

1) A,B,C,D, & E decided to form Alphabet, Inc., a corporation dealing with

the manufacture and sale of school supplies, with an authorized capital
stock of P1M. The five equally subscribed to 25% of the authorized capital
stock or P50,000.00 each. Even before they could pay the 25% of their
total subscription, however, they entered into a contract with Manila
College to deliver desks worth P2M. For lack of funds, however, they
failed to fufill the contract with Manila College. Determine the liability of
A,B,C,D& E and Alphabet, Inc. vis-a-vis Manila College.

2) X subscribed and aid for P10,000.00 worth of shares of stock of Rainbow

Mines, Inc., as an incorporator and original subscriber. He was employed
as the mine superintendent and as such, made the design of certain
equipment used in its mines. Due to some technical error in the design,
the corporation suffered a loss of P1M. The Board accused X of infidelity
and breach of trust, and confiscated his shares. Is the action of the Board
legal?

SUGGESTED ANSWER:

1) Alphabet, Inc. not having been issued as yet a certificate of its

article of incorporation (for failure to meet the minimum paid-up
requirement) is without any legal personality, and it cannot thus
itself be made liable for the breach of contract. The rule,
furthermore, is that contracts for and behalf of a corporation prior to
its incorporation are not binding on it unless and until they are
approved, expressly or impliedly by its board of directors after due
incorporation. A, B, C, D, and E themselves, as a rule would not
themselves be liable for the breach of contract subject however, to
their respective representations and the extent thereof. Pre-
incorporation expenses,, in general, are for the account of the
corporation and unless the corporation is fictitious, the incorporators
or stockholders are not personally liable therefor. (see Caram v.
Court of Appeals, 151 SCRA 372). Note: Since the proble has
emphasized on the liability and the subscription on shares of stocks,
it is syggested that another answer should be accepted; viz; The only
ones who can be held liable for the breach of contract would be the
stockholders who have contracted for and in behalf of Alphabet, Inc.
but only to the extent of their unpaid subscriptions.

2) The action of the Board is not legal. The rights and liabilities of X
as the Mine Superintendent (or as an Officer) are apart from his
rights and liabilities arising from being likewise a stockholder. In
general, in order that directors and officers may be held personally
accountable they must have voted or assented to a patently illegal
act, or are guilty of bad faith or gross negligence, or are in conflict of
interest with the corporation (see Sec. 31 Corporation Code). A mere
technical error committed by X in the design of n equipment used by
the company, absent fault or negligence, would warrant liability on
his part even as an employee. (any of the following answers should
also be given full credit)

a) since there is no indication of gross negligence, bad faith or

conflict of interest, there is no liability that is created and
therefore there is nothing to offset; or

b) Assuming that there is liability on the part of the mine

superintendent for having made an erroneous design of the
equipment, the corporation has no authority to confiscate the
shares of stocks since there is no mutual debtor-creditor relation
between the parties.

III

1. What do you understand by the "no fault indemnity" provision in the

Insurance Code? What are the rules on claims under said provision?
2. X applied for life insurance with Metropolitan Life Insurance company.
The application contained the question: "Have you ever had any ailment
or disease of xxx (b) the stomach or intestines, liver, kidney, or
genitourinary organ?" X, a laundry woman who has no medical
knowledge, answered "No." The application was approved, premuim was
paid and six months later, X died from cancer of the stomach. The post
medical examination of X shows that she had the cancer at the time she
 applied for the policy. Can the beneficiary of X collect on the policy?
Reasons.

SUGGESTED ANSWER:

1) The “no fault indemnity” in the Insurance Code provides that any
claim for death or injury to a passenger or to third party should be
paid without the necessity of proving fault or negligence, subject
to the following rules:
a. The total indemnity shall not exceed P5,000.00;
b. Proof of loss, e.g., police report, death certificate or
medical report when submitted under oath, shall be
sufficient to substantiate the claim; and
c. The claim may be made against one motor vehicle only. In
the case of an occupant of a vehicle, the claim shall lie
against the insurer of the vehicle in which the occupant is
riding, mounting or dismounting from. In any other case,
claim shall lie against the insurer of the directly offending
vehicle. The party paying the claim may recover against
the vehicle responsible for the accident (see Sec. 378
Insurance Code).
2) The beneficiary of X cannot collect on the policy. Concealment as
a defense against liability by the insurer, may either be
intentional or unintentional (see Sec. 27, Insurance Code as
amended by BP 874, revoking the rule in the Ng Gan Ze case, GR
230685, 30 May 1983). Lack of knowledge on the part of the
insured about her ailment will not preclude the insurer from
raising the defense (see Tang vs. Court of Appeals, G.R.No L-
48563, 25 may 1979). The insurer may be held in estoppels only
if, having known of the concealed or misrepresented fact, still
accepts the payment of premium (B.P. 874) which is not the
situation in this case.

Alternative Answer:

The beneficiary of X can collect on the policy. There being no

indication that there was knowledge of any ailment or disease, and
considering the nature of cancer, there can be no concealment.
Concealment by its very term, whether intentional or unintentional,
still requires knowledge.
 IV

1) Queens Insurance Company insured X, a resident of Baguio City, "against

all direct loss and damage by fire." X lived in a house heated by a
furnace. His servant built a fire in the furnace using material that was
highly flammable. The furnace fire caused intense heat and great volumes
of smoke and soot that damaged the furnishings in the room of X. When
X tried to collect on the policy, Queens Insurance refused to pay
contending that the damage is not covered by the policy, where the fire is
confined within the furnace. Decide?

2) Manpower Company obtained a group life insurance policy for its

employees from Phoenix Insurance Company. The master policy issued
by Phoenix on June 1, 1986 contained a provision that eligible employees
for insurance coverege were all full time employees of Manpower
regularly working at least 30 hours per week. The policy also had an
incontetable clause. Beforehand, the Phoenix sent enrollment cards to
Manpower for distribution to its eligible employees. X filled out the card
which contained a printed clause: "I request the insurance for which I
may become eligible under the said Group Policy." The cards were then
sent to Phoenix and X was among the employees of Manpower who was
issued a certificate of coverage by Phoenix. On July 3, 1988, X was killed
on the occasion of a robbery in their house. While processing the claim of
X's beneficiary, Phoenix found out that X was not an eligible employee as
defined in the group policy since he has not been employed 30 hours a
week by Manpower. Phoenix refused to pay. May X's beneficiary invoke
the incontestability clause against Phoenix? Reasons.

SUGGESTED ANSWER:

1. Any of the following suggested answers, should be given full credit:

a. The refusal of Queens Insurance Company to pay is justified. The
damage is not covered by the policy which only insures “against all
direct loss and damage by fire.” The damage being claimed by X
was claused by intense heat and great volumes of smoke and soot
and not directly by fire. The stipulation in the policy is paramount,
not being contrary to law.
b. The refusal of Queens Insurance Company to pay is not justified.
The insurance coverage was “against all direct loss and damage by
 fire.” Since, clearly, fire was the proximate cause of the damage,
recovery should be allowed as being the real intendment of the
parties. As a rule, recovery is due when the risk insured against is
either the proximate cause or the immediate cause. Even where
there is exclusion, the primordial rule in determining recovery is
whether or not the risk insured against is the proximate cause. In
the affirmative, recovery is allowed.

2. The beneficiary of X may validly invoke the incontestability clause. If the

incontestability clause can apply even to cases of intentional concealment
and misrepresentation, there would be no cogent reason for denying such
application where the insured had not been guilty thereof. When X filled
out the card containing the printed clause “I request the insurance for
which I may become eligible under said Group Policy”, it behooved the
insurer to look into the qualifications of X, Phoenix may, in fact, be said to
have waived the 30-hour per week requirement (see Edillon vs. Bankers
Life, 117 SCRA 187).

1. What is the test to determine whether an instrument is negotiable or not?

2. X bought a jeep from Reliable Motors Company for a consideration of
P50,000.00. He paid P25,000.00 in cash and executed the following
promissory note on the balance:

September 1, 1989.

I promise to pay the sum of P25,000.00 to Reliable Motors Company on

or before December 31, 1989.
Sgd. X."

At the bottom of the note, X wrote in his own handwriting the following:
"I will not sell the jeep until I shall have paid in full." Is the note
negotiable? Reasons.

SUGGESTED ANSWER:

1) In determining whether an instrument is negotiable or not, the sole

test is whether or not the requisities of negotiability expressed in
Section 1 of the Negotiable Instruments Law are met on the face of
 the instrument itself. The intrinsic validity of the instrument is of no
moment. Even the acceptance or non-acceptance by the drawee of the
instrument would be irrelevant.
2) The promissory note is not negotiable since the same is payable to
Reliable Motors, Inc., merely and not “to order or to bearer” or words
of similar import.
VI

1) X makes a promissory note for P500.00 payabe to A, a minor, to help him

buy school books. A indorses the note to B, who in turn, indorses the
note to C. C knows A's minority. If C sues X on the note, can X set up the
defenses of minority and lack of consideration?

2) Adam makes a note payable to Bert or order. Bert indorses the note to
Cora. Douglas steals the note and indorses it to Elvin by forging Cora's
signature. Elvin then indorses the note to Felix who is not aware of the
forgery. What is the right of Felix agains Adam, Bert, Cora, Douglas, and
Ervin?

SUGGESTED ANSWER:

1) The promissory note not being payable to order or to bearer, is

not a negotiable instrument. Accordingly, the transfee merely
steps into the shoes of the transferor and, being merely a
successor-in-interest, has no right greater that the of the
transferor. X may thus set up against C the possible defense of
(without delving into their merits) minority and lack of
consideration (see Consolidated Plywood vs. IFC Leasing, G.R
72593, and 30 April 1987).

ALTERNATIVE ANSWER:

a) On the assumption that it is a negotiable instrument, X cannot

invoke the minority of A as a defense because under Section 22 of
the Negotiable Instruments Law (NIL) title would pass even if the
one who indorsed it is a minor and under Section 16 of the NIL,
the maker acknowledges the capacity of the payee to contract.

b) Minority as a real defense can only be set up by the minor himself

and lack of consideration is not a defense against the holder in
 due course, “C”, which is to be presumed because the problem did
not indicate otherwise.

SUGGESTED ANSWER:

2) On the assumption that Bert made a blank endorsement, thereby

rendering the instrument payable to bearer in the hands of Cora, the
latter’s signature would be un-necessary so as to preserve the juridical
relation between parties prior to the forgery and parties after the forgery.
On the further assumption that Felix had acquired the instrument for
value, thus making him a holder in due course, he may accordingly hold
Adam, Bert and Douglas liable. The liability of Adam, as maker, and
Douglas, as forgery, is primary and that of Bert, as blank indorser,
secondary. If, however, Felix did not acquire it for value and is not thus a
holder in due course, he then acquires no right greater then that of the
immediate transferor and Adam, Bert and Cora would be without any
liability in favor of Felix.

On the assumption that Bert amde a special indorsement, the signature

of Cora would be essential to pass title to the instrument. Her signature,
forged by Douglas would be inoperative, and Elvin, whether a holder in
due course which is forged is required to pass title, all parties prior to the
forgery may raise the real defense of forgery against all parties
subsequent thereto (Secs. 23, 40, 52, 65-67, Negotiable Instruments
Law; see Republic Bank vs. Ebrada, 65 SCRA 680).

VII

1) What is meant by "Over-the-counter markets" as provide in the Revised

Securities Act?
2) X has the following plans:
a. organize the Tagaytay Country Club, Incorporated,
b. let the club buy a 10 hectare land for P10M which will be developed
into a sports and health club complete with an Olympic size swimming
pool, tennis and pelota courts, bowling lanes, pool rooms, etc.,
c. five of the ten million pesos needed to develop the club will be raised
thru the sale of certificates of membership,
d. The certificate of membership shall give the purchaser the right to use
all club facilities, and shall be transferrable. it shall not give the
 purchaser any right in the income or assets of the club. The purchaser
must also pay monthly dues."

X wants to know whether the certificate of membership is an investment

contract and hence a security within the meaning of the Revised Securities
Act. What is your opinion?

SUGGESTED ANSWER:

1. The term “Over-the-Counter Markets” refers to markets made or

created for the purchase and sale of securities other than on a
security exchange. The Securities and Exchange Commission may
provide rules and regulations of transactions therein, a violation
of which renders the same or the trading therein unlawful (see
Sec. 35, Revised Securities Act.) Alternative Answer: It is a
passing it thru the stock exchange should, it is suggested, be
given full credit.

Alternative Answer:

It is a transaction between the broker and customer without

passing thru the stock exchange.

2. The certificate of membership, although not providing for a right

of income or right over club asstes, gives, however, to the holder
thereof privileges on the use of club facilities, that are of value
and transferable. The certificate is thus a security within the
meaning of the Revised Securities Act (see Sec. 2, Revised
Securities Act).

VII

Assume that Greater Manila Telephone and Telegrpaph Company,

Incorporated has 10,000 employees. It has a policy of encouraging stock
ownership among its employees. Its Board of Directors, intends to sell P2M
worth of common stocks to either a) its managerial employees only
numbering about 1,000 or b) indiscriminately to all its 10,000 employees. In
case it decides to sell to the managerial employees only, does it have to
regiter its secturies? How about if intended sale is to all its employees?
 3) Philippine Chromite, Incpororated, after registration of its securites,
sold P10M worth of common stocks to the public at P.01 per share. In
its registration settlement, it alleged that it holds a perfected mining
claims on 100 hectares of chromite land in Botolan, Zambales. X, a
Botolan resident, bought P50,000.00 worth of stocks of the corporation
from the stock exchange. After its public offering, the value of the
stocks dropped to half its price. X made some investigations and
discovered that the mining claims of the corporation had not been
perfected at the time of the issuance of the securities. The stock,
however, rallied and after two years, commanded a price of one and a
half centavo per share. On its third year, the company collapsed and
its stocks became totally worthless. What is the remedy of X?

Answer:

(1) Exempt transactions are those that do not require registration

either because the law itself exempts them therefrom on the Securities and
Exchange Commission finds that the enforcement of the registration
requirement is not necessary in the public interest and for the protection of
investors by reason of the amount involved or the limited character of the
public offering. The proposed sales stated in the problem do not strictly fall
under any of the exempt transactions in the law itself (see Sec. 6, par. 11,
Revised Securities Act). Accordingly, if the corporation would want to
exempt the sale from registration, it must file an application with the SEC for
such exemption which may then act in accordance with the rule above-
stated.

(2) The remedy of X for damages is lost by prescription. Any suit

thereof must be filed within two years after the discovery of the facts
constituting the cause of action (but not beyond five years after such cause
of action accured). Two years having already elapsed since the time that X
had discovered the mispresentation in the registration statement of the
corporation, the latter’s civil liability has prescribed (Sec. 14, Revised
Securities Act). X, however, is not prevented from invoking SEC’s regulatory
powers against the corporation.
 4) Felix copyrighted the oil painting showing the oath taking of President
C. Aquino and Vice-President S. Laurel after the EDSA Revolution. Val
engaged an artist to paint the same scene for use as postcards. Val
then stareted sending the picture postcards to his friends abroad. Is
there a violation of Felix's copyright? Reasons.

5) X copyrighted a scientific research paper consisting of 50 pages

dealing with the Tasadays. Y wrote a 100-page review of X's paper
criticizing X's findings and dismissing X's story as a hoax. Y's review
literally reproduced 90% of X's paper. Can X sue Y for infringement of
his copyright? Reasons.

Answer:

(1) While Felix can have a copyright on his own painting which is
expressive of his own artistic interpretation of the event he has portrayed,
the scene or the event itself, however, is not susceptible to exclusive
ownership. Accordingly, there would be no violation of Felix copyright if
another painter were to do a similar work.

(2) The Copyright Law provides that to an extent compatible with fair
practice and justified by scientific, critical, informatory or educational
purposes, it is permissible to make quotations or exempts from a work
already made accessible to the public. Such quotations may be utilized in
their original form or in translation (Sec. 11, Copyright Law). Viewed from
the foregoing, a review by another that “liability reproduced 90%” of the
research work done by X may no longer be considered as fair play, and X
can sue Y for the violation of the copyright.

6) X shipped thru M/V Kalayaan, spare parts worth P500,000.00. The bill
of lading limits the liabilty of the carrier to P500.00 and contains a
notation indicating the amount of the letter of credit (i.e. P500,000.00)
which X obtained from a bank to import spare parts. The spare parts
were not delivered to X so X sued the carrier for P50,000.00. Decide.

7) X boarded an airconditionedPantranco bus bound for Baguio. X was

given notice that the carrier is not liable for baggege bought in by
passengers. X kept in his custody his attache case containing
$10,000.00. inTarlac, all the passengers, including X were told to get
 off and to take their lunch, the cost of which is included in the ticket. X
left his attache case on his seat as the door of the bus was locked.
After lunch and X returned to the bus, he discovered that his attache
case was missing. A vendor said that a man picked the lock of the
door, entered th bus and ran away with the attache case. What, if any,
is the liability of the carrier?

Answer:

(1) The limit of liability stipulated in a bill of lading is subordinated to a

declaration therein of the actual value of the goods. Since the bill of lading
itself contains a notation indicating the true value of the goods shipped
(supported by the letter of credit), X can sue the carrier on the basis of such
true value. (see National Development Corporation vs. Court of Appeals, G.R
L-49407, and Maritine Co. vs. Court of Appeals, G.R L-49469, 18 August
1988).

(2) Hand-carried luggages of passengers are governed by the rules on

necessary deposits. Under Article 2000 of the Civil Code the responsibility of
the depository shall, among other cases, include the loss of property of the
guest caused by strangers but not that which may proceed from force
majeure . Article 2001 of the same Code considersan act of a thief as not
one or force majeure unless done with the use of arms or though an
irresistable force. Accordingly, the carrier may, given the factual setting in
the problem, still be held liable (See Art. 1754, Civil Code).

8) X took the Benguet bus from Baguio going to Manila. He deposted his
maleta in the baggage compartment of the bus common to all
passengers. He did not declare his bggage not pay its charges contrary
to the regulations of the company. When X got off, he could not find
his baggage which obviously was taken by another passenger.
Determing the liability of the bus company.

9) X bought seven sacks of palay to the PNR. He paid its freight charges
and was issued Way Bill No.1 The cargo was loaded on the freight
wagon of the train. Without any permission, X boarded the boarded
the freight wagon and not the passenger coach. Shortly after the train
started, it was derailed. The frieght wagon fell on its side, killing X.
There is no evidence that X bought a ticket or paid his fare at the
 same time that he paid the freight charges for his cargo. Is X a
passenger of PNR?

Answer:

(1) The bus company is liable for the loss of the maleta. The duty of
extraordinary diligence in the vigilance over the goods is due on such goods
as are deposited or surrendered to the common carrier for transportation.
The fact that the maleta was not declared nor the charges paid thereon,
would not be consequential so long as it was received by the carrier fro
transportation (Art. 1754, in relation to Arts. 1733-1753, Civil Code)

Alternative Answer:

The act of the passenger who “did not declare his baggage nor pay its
charges contrary to the regulations of the bus company” conveys a
surreptitious act on his part which constitutes an act of bad faith and would
therefore disentitle recovery.

(2) No, X was not a “passenger” (see Nueca vs. Manila Railroad, 65
O.G. 3153). A “stowaway”, being a trespasser, has been held to assume the
risk of damage (see Pontillas vs. Cebu Autobus Co. 13 CA Reps., 211).

10) X owns the ship M/V Aguinaldo. He bareboat chartered the ship
of Y who appointed all its crew members from the captain down to its
last official. Y then transported a shipment of 10,000 bags of sugar
belonging to Z. Thru the negligence of the ship captain, half of the
sugar was damaged due to sea water. Since Y is bankrupt, Z sued
captain and X. Will the suit succeed?

11) X chartered the ship of Y to transport his logs from Zamboanga

to Manila. In the course of their voyage, the ship met a storm and had
to dock in Cebu for three days. Z, the captain of the ship, borrowed
P20,000.00 from X on the pretext the he needs to money for the
repair of the ship. Z misappropriated the money and converted it for
his own benefit. what is the liability of Y, if any?

14) 1. X, a rich trader, boarded M/V Cebu, a small vessel with a value of
P3M and owned by Y, plying the route Cotabato to Pagadian City. X had in
 his possession a diamond worth P5M. The vessel had a capacity of 40
passengers. Near Pagadian, the vessel met squally weather and was ht by
six foot waves every seconds. Soon, water entered the engine room and
the full of the vessel. The patron of the vessel ordered the distribution of
life belts to the passengers. He told them the vessel was sinking and for
them to take care fo themselves. The vessel turned out to be overloaded
by 20 passengers and had no suffecient life belts. X failed to get a life
belt and died when the vessel totally sunk. The heirs of X sued Y for P10M
for damages. Y raised the defensed of limited liability. Decide

2. X, an 80-year old epileptic, boarded the S/S Tamarraw in Manila

going to Mindoro. To disembark, the passengers have to walk thru a
gang plant. While negotiating the gang plank, X slipped and fell into
the waters. X was saved from drowning, brought to a hospital but after
a month died from pneumonia. Except for X, all the passengers were
able to walk thru the gang plank. What is the liability of the owner of
S/S Tamarraw?

Answer:

(1) The doctrine of limited liability does not apply when death or injury
or damage sustained is attributable to the fault or negligence of the
shipowner or shipagent or to the concurring fault or negligence of the
shipowner or shipagent and the captain (or patron) of the vessel (see Chua
vs. Intermediate Appeallate Court, G.R 74811, 30 September 1988).
Undoubtedly, the shipowner himself, was guilty of such fault or negligence in
not making certain that the passenger vessel is not overloaded, as well as
and is having failed to provided sufficient life belts on board the vessel.

(2) The owner of S/S Tamarraw is liable for the death of X in failing to
exercise utmost diligence in the safety of passengers. Evidently, the carrier
did not take the necessary precautions in ensuring the safety of passengers
in the boarding of and disembarking from the vessel. Unless shown to the
contrary, a common carrier is presumed to have been negligent in cases of
death or injury to its passengers (Arts. 1755-1756, Civil Code). Since X has
not completely disembarked yet, the obligation of the shipowner to exercise
utmost diligence still then subsisted and he can still be held liable.

12) X deposited 1,000 sacks of wheat flour with Luzon Warehouse

Company, for which he was issued a negotiable receipt. Y was able to
get hold of the reciept, forged the signature of X, presented the receipt
to Luzon Warehouse and was able to withdraw the wheat flour. What
are the rights of X?