33338208 red notes mercantile law

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San BedaCollege of Law

C O M M E R C I A LL A W

COMPILATION OF DOCTRINES IN COMMERCIAL LAWCODE OF COMMERCE

LETTERS OF CREDIT

In commercial transactions involving letters of credit, the functions assumed by a correspondentbank are classified according to the obligations taken up by it. The correspondent bank may becalled a notifying bank, a negotiating bank, or a confirming bank.In case of a notifying bank, the correspondent bank assumes no liability except to notify and/ortransmit to the beneficiary the existence of the letter of credit. The notifying bank may suggest tothe seller its willingness to negotiate, but this fact alone does not imply that the notifying bankpromises to accept the draft drawn under the documentary credit.A notifying bank is not a privy to the contract of sale between the buyer and the seller, its

relationship is only with that of the issuing bank and not with the beneficiary to whom he assumesno liability. It follows therefore that when the petitioner refused to negotiate with the privaterespondent, the latter has no cause of action against the petitioner for the enforcement of hisrights under the letter.A negotiating bank, on the other hand, is a correspondent bank which buys or discounts a draftunder the letter of credit. Its liability is dependent upon the stage of the negotiation. If beforenegotiation, it has no liability with respect to the seller but after negotiation, a contractualrelationship will then prevail between the negotiating bank and the seller.In the case of a confirming bank, the correspondent bank assumes a direct obligation to the sellerand its liability is a primary one as if the correspondent bank itself had issued the letter of credit.

(FEATI BANK VS. CA)

What characteries letters of credit, as distinguished from other accessory contracts, is theengagement of the issuing bank to pay the seller once the draft and the re!uired shipping

documents are presented to it. In turn, this arrangement assures the seller of prompt paymentindependent of any breach of the main sales contract. "y this so#called $independence principle,$the bank determines compliance with the letter of credit only by examining the shippingdocuments presented% it is precluded from determining whether the main contract is actually

accomplished or not. (BANK OF AMERICA VS. CA)

NEGOTIABLE INSTRUMENTS LAW

NEGOTIABILITYThe weight of authority in the &nited 'tates is that postal money orders are not negotiable

instruments, the reason behind this rule being that, in establishing and operating a postal moneyorder system, the government is not engaging in commercial transactions but merely exercises agovernmental power for the public benefit. It is to be noted in this connection that some of therestrictions imposed upon money orders by postal laws and regulations are inconsistent with thecharacter of negotiable instruments. (or instance, such laws and regulations usually provide for notmore than one endorsement% payment of money orders may be withheld under a variety of

circumstances. (PHIL. EDUC. CO. VS. SORIANO)

)n this score, the accepted rule is that the negotiability or non#negotiability of an instrument is

determined from the writing, that is, from the face of the instrument itself. (CALTEX PHIL. VS. CA)

The indication of (und *+ as the source of the payment to be made on the treasury warrants

makes the order or promise to pay $not unconditional and the warrants themselves non#negotiable.There should be no !uestion that the exception on 'ection - of the egotiable Instruments aw is

applicable in the case at bar. (METROBANK VS. CA)

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A negotiable instrument may, however, instead of being negotiated, also be assigned ortransferred. The legal conse!uences of negotiation as distinguished from assignment of anegotiable instrument are, of course, different. A nonnegotiable instrument may, obviously, not benegotiated% but it may be assigned or transferred, absent an express prohibition against assignmentor transfer written in the face of the instrument0The words 1not negotiable,1 stamped on the face of the bill of lading, did not destroy itsassignability, but the sole effect was to exempt the bill from the statutory provisions relativethereto, and a bill, though not negotiable, may be transferred by assignment% the assignee takingsub2ect to the e!uities between the original parties. (SESBREO VS. CA)

The essence of negotiability which characteries a negotiable paper as a credit instrument lies inits freedom to circulate freely as a substitute for money. (FIRESTONE TIRE & RUBBER VS. CA)

PAYABLE TO BEARERWhere a check is made payable to the order of 1cash1, the word cash 1does not purport to be thename of any person1, and hence the instrument is payable to bearer. The drawee bank need notobtain any indorsement of the check, but may pay it to the person presenting it without anyindorsement. (ANG TEK LIAN VS. CA)

COMPLETE BUT UNDELIERED INSTRUMENT

A negotiable instrument, of which a check is, is not only a written evidence of a contract rightbut is also a species of property. 3ust as a deed to a piece of land must be delivered in order toconvey title to the grantee, so must a negotiable instrument be delivered to the payee in order toevidence its existence as a binding contract.Thus, the payee of a negotiable instrument ac!uires no interest with respect thereto until its

delivery to him. 4elivery of an instrument means transfer of possession, actual or constructive,from one person to another. Without the initial delivery of the instrument from the drawer to thepayee, there can be no liability on the instrument. 5oreover, such delivery must be intended togive effect to the instrument. (DEVELOPMENT BANK VS. SIMA WEI)

FORGERY

A forged signature in a negotiable instrument is wholly inoperative and no right to discharge it orenforce its payment can be ac!uired through or under the forged signature except against a partywho cannot invoke the forgery, it stands to reason, upon the facts of record, that the respondent,as a collecting bank which endorsed the checks to the drawee#banks for clearing, should be liableto the latter for reimbursement, for, as found by the court a !uo and by the appellate court, theendorsements on the checks had been forged prior to their delivery to the petitioner. In legal

contemplation, therefore, the payments made by the drawee#banks to the respondent on accountof the said checks were ineffective% and, such being the case, the relationship of creditor anddebtor between the petitioner and the respondent had not been validly effected, the checks nothaving been properly and legitimately converted into cash. (JAI-ALAI VS. BPI)

Where a check is drawn payable to the order of one person and is presented to a bank byanother and purports upon its face to have been duly indorsed by the payee of the check, it is theduty of the bank to know that the check was duly indorsed by the original payee, and where the"ank pays the amount of the check to a third person, who has forged the signature of the payee,the loss falls upon the bank who cashed the check, and its only remedy is against the person to

whom it paid the money. (REPUBLIC BANK VS. EBRADA)

The records show that at the time the twenty#three 67-8 checks were prepared, negotiated, andencashed, the petitioner was using its own personalied checks, instead of the official 9"

:ommercial blank checks. In the exercise of this special privilege, however, the petitioner failed toprovide the needed security measures. ;ence, the petitioner is barred from setting up the defenseof forgery under 'ection 7- of the egotiable Instruments aw because it was guilty of negligence

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C O M M E R C I A L L A W 2005CENTRALIZEDBAROPERATIONS

not only before the !uestioned checks were negotiated but even after the same had already been

negotiated. (MWSS v. CA)

While the drawer generally owes no duty of diligence to the collecting bank, the law imposes a

duty of diligence on the collecting bank to scrutinie checks deposited with it for the purpose ofdetermining their genuineness and regularity. The collecting bank being primarily engaged inbanking holds itself out to the public as the expert and the law holds it to a high standard of

conduct. (BANCO DE ORO VS. E!UITABLE BANK)

The negligence of a depositor which will prevent recovery of an unauthoried payment is basedon failure of the depositor to act as a prudent businessman would under the circumstances.

(GEMPESAW VS. CA)

The bank on which a check is drawn, known as the drawee bank, is under strict liability to paythe check to the order of the payee. The drawer1s instructions are reflected on the face and by theterms of the check. 9ayment under a forged indorsement is not to the drawer1s order. When thedrawee bank pays a person other than the payee, it does not comply with the terms of the checkand violates its duty to charge its customer1s 6the drawer8 account only for properly payable items.'ince the drawee bank did not pay a holder or other person entitled to receive payment, it has noright to reimbursement from the drawer. The general rule then is that the drawee bank may notdebit the drawer1s account and is not entitled to indemnification from the drawer. The risk of lossmust perforce fall on the drawee bank.;owever, if the drawee bank can prove a failure by the customer/drawer to exercise ordinary carethat substantially contributed to the making of the forged signature, the drawer is precluded fromasserting the forgery.If at the same time the drawee bank was also negligent to the point of substantially contributing tothe loss, then such loss from the forgery can be apportioned between the negligent drawer and thenegligent bank. (ASSOCIATED BANK VS. CA)

The mere fact that the forgery was committed by the drawer#payor


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and sub2ect to conditions imposed by law. This right springs from an implied promise between theaccommodation makers to share e!ually the burdens that may ensue from their having consentedto stamp their signatures on the promissory note. (or having lent their signatures to the principaldebtor, they clearly placed themselves#in so far as payment made by one may create liability on

the other in the category of mere 2oint guarantors of the former. (SADA"A VS. SEVILLA)The afore!uoted provision of the egotiable Instruments aw which holds an accommodationparty liable on the instrument to a holder for value, although such holder at the time of taking theinstrument knew him to be only an accommodation party, does not include nor apply tocorporations which are accommodation parties. This is because the issue or indorsement ofnegotiable paper by a corporation without consideration and for the accommodation of another isultra vires. ;ence, one who has taken the instrument with knowledge of the accommodation naturethereof cannot recover against a corporation where it is only an accommodation party. If the formof the instrument, or the nature of the transaction, is such as to charge the indorsee with

knowledge that the issue or indorsement of the instrument by the corporation is for theaccommodation of another, he cannot recover against the corporation thereon."y way of exception, an officer or agent of a corporation shall have the power to execute orindorse a negotiable paper in the name of the corporation for the accommodation of a third person

only if specifically authoried to do so (CRISOLOGO-JOSE VS. CA)

To be sure, as regards an accommodation party 6such as 'T>>W>48, the fourth condition, i.e.,lack of notice of any infirmity in the instrument or defect in title of the persons negotiating it, hasno application. This is because 'ection 7? of the law above !uoted preserves the right of recourseof a $holder for value$ against the accommodation party notwithstanding that $such holder, at the

time of taking the instrument, knew him to be only an accommodation party.$ (STELCO v. CA)

In accommodation transactions recognied by the egotiable Instruments aw, anaccommodating party lends his credit to the accommodated party, by issuing or indorsing a checkwhich is held by a payee or indorsee as a holder in due course, who gave full value therefor to theaccommodated party. The latter, in other words, receives or realies full value which theaccommodated party then must repay to the accommodating party, unless of course theaccommodating party intended to make a donation to the accommodated party. "ut theaccommodating party is bound on the check to the holder in due course who is necessarily a thirdparty and is not the accommodated party. ;aving issued or indorsed the check, the accommodatingparty has warranted to the holder in due course that he will pay the same according to its tenor.

(TRAVEL-ON VS. CA)

(OLDER IN DUE COURSE

As the holder1s title was defective or suspicious, it cannot be stated that the payee ac!uired thecheck without knowledge of said defect in holder1s title, and for this reason the presumption that itis a holder in due course or that it ac!uired the instrument in good faith does not exist. And havingpresented no evidence that it ac!uired the check in good faith, it 6payee8 cannot be considered asa holder in due course. In other words, under the circumstances of the case, instead of thepresumption that payee was a holder in good faith, the fact is that it ac!uired possession of theinstrument under circumstances that should have put it to in!uiry as to the title of the holder whonegotiated the check to it. The burden was, therefore, placed upon it to show that notwithstandingthe suspicious circumstances, it ac!uired the check in actual good faith. (DE OCAMPO VS.GATCHALIAN)

Admittedly, petitioner became the holder of the cashier1s check as endorsed by Alexander im

who stole the check. ;e refused to say how and why it was passed to him. ;e had therefore noticeof the defect of his title over the check from the start. The holder of a cashier1s check who is not aholder in due course cannot enforce such check against the issuing bank which dishonors the same.If a payee of a cashier1s check obtained it from the issuing bank by fraud, or if there is some other

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reason why the payee is not entitled to collect the check, the respondent bank would, of course,have the right to refuse payment of the check when presented by the payee, since respondent bankwas aware of the facts surrounding the loss of the check in !uestion. (MESINA VS. IAC)

LIABILITY OF GENERAL INDORSER$@ecourse$ means resort to a person who is secondarily liable after the default of the person whois primarily liable. Appellant, by indorsing the note $with recourse$ does not make itself a !ualifiedindorser% but a general indorser who is secondarily liable, because by such indorsement, it agreedthat if 4r. illaruel fails to pay the note, plaintiff#appellee can go after said appellant. The effectof such indorsement is that the note was indorsed Without !ualification. A person who indorseswithout !ualification engages that on due presentment, the note shall be accepted or paid, or bothas the case may be, and that if it be dishonored, he will pay the amount thereof to the holder.Appellant 'ambok1s intention of indorsing the note without !ualification is made even moreapparent by the fact that the notice of demand, dishonor, protest and presentment were allwaived. The words added by said appellant do not limit his liability, but rather, confirm hisobligation as a general indorser. (METROPOL VS. SAMBOK)

The collecting bank or last endorser generally suffers the loss because it has the duty toascertain the genuineness of all prior endorsements considering that the act of presenting thecheck for payment to the drawee is an assertion that the party making the presentment has doneits duty to ascertain the genuineness of the endorsements.$ The rule finds more meaning in thiscase where the check involved is drawn on a foreign bank and therefore collection is more difficultthan when the drawee bank is a local one even though the check in !uestion is a manager1s check.(BPI VS. CA AND NAPI#A)

PRESENTMENT FOR PAYMENT)ACCEPTANCE

A letter of credit is defined as an engagement by a bank or other person made at the re!uest ofa customer that the issuer will honor drafts or other demands for payment upon compliance withthe 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 paythe bank the amount of funds mentioned in the letter of credit plus credit or commitment feesmutually agreed upon.In the instant case then, the drawee was necessarily the herein petitioner. It was to the latter thatthe drafts were presented for payment. In fact, there was no need for acceptance as the issueddrafts are sight drafts. 9resentment for acceptance is necessary only in the cases expresslyprovided for in 'ection B- of the egotiable Instruments aw 6I8. (PRUDENTIAL BANK VS. IAC)

&nder 'ection CD of the I, E a check must be presented for payment within a reasonable timeafter its issue or the drawer will be discharged from liability thereon to the extent of the losscaused by the delay=. "y current banking practice, a check becomes stale after more than Dmonths or C+ days.A stale check is one which has not been presented for payment within a reasonable time after itsissue. It is valueless and therefore should not be paid. This is because the nature and theory behindthe use of a check points to its immediate use and payability. (INT$L CORP. BANK VS. SPOUSESGUECO)

C(EC*S

The drawing and negotiation of a check have certain effects aside from the transfer of title orthe incurring of liability in regard to the instrument by the transferor. The holder who takes thenegotiated paper makes a contract with the parties on the face of the instrument. There is animplied representation that funds or credit are available for the payment of the instrument in thebank upon which it is drawn. :onse!uently, the withdrawal of the money from the bank to avoidliability on the checks cannot pre2udice the rights of a holder in due course. (STATE INVESTMENTHOUSE VS. CA)

In order to preserve the credit worthiness of chocks, 2urisprudence has pronounced that crossingof a check should have the following effects0 6a8 the check may not be encashed but only depositedin the bank% 6b8 the check may be negotiated only once#to one who has an account with a bank% 6c8

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and the act of crossing the check serves as warning to the holder that the check has been issued fora definite purpose so that he must in!uire if he has received the check pursuant to that purpose,

otherwise, he is not a holder in due course. (BATAAN CIGAR & CIGARETTE FACTOR" VS. CA)

While it is true that the delivery of a check produces the effect of payment only when it iscashed, pursuant to Art. 7B? of the :ivil :ode, the rule is otherwise if the debtor is pre2udiced bythe creditor1s unreasonable delay in presentment. The acceptance of a cheek implies anundertaking of due diligence in presenting it for payment, and if he from whom it is receivedsustains loss by want of such diligence, it will be held to operate as actual payment of the debt orobligation for which it was given. It has, likewise, been held that if no presentment is made at all,the drawer cannot be held liable irrespective of loss or in2ury unless presentment is otherwiseexcused.This is in harmony with Article 7B? of the :ivil :ode under which payment by way of check orother negotiable instrument is conditioned on its being cashed, except when through the fault ofthe creditor, the instrument is impaired. The payee of a check would be a creditor under thisprovision and if its non#payment is caused by his negligence, payment will be deemed effected andthe obligation for which the check was given as conditional payment will be discharged. (PAPA VS.A.U. VALENCIA & CO.% INC.)

INSURANCE LAW

INSURABLE INTEREST

A person who is interested in the safety and preservation of materials in his possession belongingto third parties because he stands either to benefit from their continued existence or to be

pre2udiced by their destruction, has an insurable interest thereon which is not necessarily limitedto the extent of his liability to the owners thereof. A person having mere right of possession ofproperty may insure it to its full value and in his own name, even when he is not responsible for its

safekeeping. (ANG KA "U v. PHOENIX ASSURANCE CO. LTD CAR ')

The automatic assignment of the policy to :F' under the provision of the lease contractpreviously !uoted is void for being contrary to law and/or public policy. The proceeds of the fireinsurance policy thus rightfully belong to the spouses ilo :ha and 'tella &y#:ha 6hereincopetitioners8, The insurer 6&nited8 cannot be compelled to pay the proceeds of the fire insurancepolicy to a person 6:F'8 who has no insurable interest in the property insured. (SPOUSES CHA v.CA% ' SCRA *+)

The rationale of a group insurance policy of mortgagors, otherwise known as the $mortgageredemption insurance,$ is a device for the protection of both the mortgagee and the mortgagor. )nthe part of the mortgagee, it has to enter into such form of contract so that in the event of theunexpected demise of the mortgagor during the subsistence of the mortgage contract, the proceedsfrom such insurance will be applied to the payment of the mortgage debt, thereby relieving theheirs of the mortgagor from paying the obligation. In a similar vein, ample protection is given tothe mortgagor under such a concept so that in the event of death% the mortgage obligation will beextinguished by the application of the insurance proceeds to the mortgage indebtedness.

(GREPALIFE VS. CA & LEUTERIO)

SUBROGATION

The insurer can only be subrogated to only such rights as the insured may have. ;owever if the

insured, after receiving payment from the insurer, releases the wrongdoer who caused the loss, theinsurer loses his rights against the latter. In such a case, the insurer will be entitled to recover fromthe insured whatever it has paid to the latter, unless the release was made with the consent of the

insurer. (MANILA MAHOGAN" MANUFACTURING CORP. v. CA% , SCRA ,+)

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'ubrogation is a normal incident of indemnity insurance &pon payment of the loss, the insurer isentitled to be subrogated pro tanto to any right of action which the insured may have against thethird person whose negligence or wrongful act caused the loss.

The right of subrogation is of the highest e!uity. The loss in the first instance is that of the insuredbut after reimbursement or compensation, it becomes the loss of the insurer.When the insurance company pays for the loss, such payment operates as an e!uitable assignmentto the insurer of the property and all remedies which the insured may have for the recoverythereof. That right is not dependent upon, nor does it grow out of, any privity of contract, or uponwritten assignment of claim, and payment to the insured makes the insurer an assignee in e!uity.

(MALA"AN INSURANCE VS. CA)

There are a few recognied exceptions to this rule on subrogation. (or instance, if the assuredby his own act releases the wrongdoer or third party liable for the loss or damage, from liability,the insurer1s right of subrogation is defeated. 'imilarly, where the insurer pays the assured thevalue of the lost goods without notifying the carrier who has in good faith settled the assured1s

claim for loss, the settlement is binding on both the assured and the insurer, and the latter cannotbring an action against the carrier on his right of subrogation. And where the insurer pays theassured for a loss which is not a risk covered by the policy, thereby effecting $voluntary payment$,the former has no right of subrogation against the third party liable for the loss. (PAN MALA"ANINSURANCE CORP. VS. CA)

INCONTESTABILITY CLAUSE

'ection BC of the Insurance :ode precludes the insurer from raising the defense of falserepresentations or concealment of material facts insofar as health and previous diseases areconcerned if the insurance has been in force for at least 7 years during the insured


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DOUBLE INSURANCE

The insurer may not recover under an insurance policy if he has violated the conditions of thepolicy to the effect that he did not reveal the existence of other insurance policies over the sameproperties as re!uired by the warranty appearing on the face of the policy. (UNIONMANUFACTURING CO. INC. v. PHILIPPINE GURANT" CO. INC.% SCRA ')

REINSURANCE

In an action on a contract of reinsurance, as a general rule, the reinsurer is entitled to availitself of every defense which the reinsured might urge in an action by the person originally insured.

(GIBSON v. REVILLA% *' SCRA '*)

IMPLIED WARRANTY OF SEAWORT(INESS

In every voyage policy of marine insurance, there is an implied warranty that the vessel is in allrespect seaworthy, and such warranty can be excluded only by clear provisions of the policy.

(PHILIPPINE AMERICAN GENERAL INSURANCE CO. v. CA ' SCRA '')

AUT(ORI+ED DRIER CLAUSE

The main purpose of the authoried driver clause is that a person other than the insured ownerwho drives the car with his person must be duly licensed and not dis!ualified to drive a car.Where a car is admittedly unlawfully and wrongfully taken without the owner


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Where the contract provides for indemnity against liability to third persons, then third personsto whom the insured is liable, can sue directly the insurer upon the occurrence of the in2ury orevent upon which the liability depends. The purpose is to protect the in2ured person against theinsolvency of the insured who causes such in2ury and to give him a certain beneficial interest in the

proceeds of the policy. It is as if such in2ured person were especially named in person. (SHAFER v.JUDGE% RTC% SCRA /)

COMPULSORY MOTOR E(ICLE LAW INSURANCE

'ection -GC of the Insurance :ode has established the following rules under the Eno faultindemnity provision= .8 a claim maybe made against one motor vehicle only% 78 if the victim is anoccupant of a vehicle, the claim shall lie against the insurer of the motor vehicle in which he isriding, mounting, dismounting from% -8 in any other case Hi.e. if the victim was not an occupant ofthe vehicle, the claim shall lie against the insurer of the directly offending vehicle% B8 in all cases,the right of the party paying the claim to recover the owner of the vehicle responsible for the

accident shall be maintained. (PERLA COMPANIA DE SEGURO INC. v. ANCHETA SCRA )

TRANSPORTATION LAWS

GENERAL CONCEPTSThere are two aspects of a contract of common carriage, namely0 a.8 the contract to carry, atsome future time, which contract is consensual and is necessarily perfected by mere consent andb.8 the contract of carriage itself which should be considered as a real contract for not until thecarrier is actually used can the carrier be said to have already assumed the obligation of a carrier.

(BRITISH AIRWA"S% INC. VS. CA)

Art. G-7 of the ew :ivil :ode avoids any distinction between one whose principal business

activity is the carrying of persons or goods or both and one who does such carrying only as anancillary activity 6sideline8. It also avoids a distinction between a person or enterprise offeringtransportation service on a regular or scheduled basis and one offering such service on anoccasional, episodic or unscheduled basis.either does the law distinguish between a carrier offering its services to the general public that isthe general community or population and one who offers services or solicits business only from anarrow segment of the general population.A person or entity is a common carrier even if he did not secure a :ertificate of 9ublic:onvenience. 6DE GU#MAN VS. CA)

)ne is a common carrier even if he has no fixed and publicly known route, maintains no

terminals, and issues no tickets. 6ASIA LIGHTERAGE SHIPPING% INC. VS. CA)

Art. G-7 makes no distinction as to the means of transporting, as long as it is by land, water orair. It does not provide that the transportation should be by motor vehicle.The test for determining whether a party is a common carrier is0

1. It must be engaged in the business of carrying goods for others as a public employment andmust hold itself out as ready to engage in the transportation of goods generally as abusiness and not as a casual occupation%

2. It must undertake to carry goods of the kind to which its business in confined%

3. It must undertake to carry by the method by which his business is conducted and over itsestablished roads% and

4. The transportation must be for hire. 6FIRST PHILIPPINE INDUSTRIAL CORPORATION VS. CA)

The true test of a common carrier is the carriage of goods or passengers provided it has space forall who opt to avail themselves of its transportation for a fee. 6NATIONAL STEEL CORP. VS. CA)

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The law of the country to which the goods are to be transported governs the liability of thecommon carrier in case of their loss, destruction, or deterioration and it is immaterial that the

collision actually occurred in foreign waters. 6NDC v. CA)

REGISTERED OWNER AND *ABIT SYSTEMThe registered owner of a certificate of public convenience is liable to the public for the in2uriesor damages suffered by passengers or third persons caused by the operation of said vehicle, even

thought the same had been transferred to a third person. 6ERE#O VS. JEPTE)

The kabit system is an arrangement whereby a person who has been granted a certificate ofpublic convenience allows other persons who own motor vehicles to operate term under his license,

sometimes for a fee or percentage of the earnings.(LIM VS. CA)

Although not outrightly penalied as a criminal offense, the kabit system is invariably recogniedas being contrary to public policy and, therefore, void and inexistent under Art. B+? of the :ivil:ode. It is a fundamental principle that the court will not aid either party to enforce an illegalcontract, but will leave them both where it finds them. 6LITA ENTERPRISES% INC. VS. IAC)Where a 2eepney is registered in the name of an authoried public operator but is actuallyowned by another and the same bumped somebody thru the negligence of its driver, such a 2eepneycan besold at a public auction to satisfy the court


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)wing to the high degree of diligence re!uired of them, common carriers as a general rule arepresumed to have been at fault or negligent if the goods they transported deteriorated or got lostor destroyed. 5ere proof of delivery of the goods in good order to a common carrier and of theirarrival in bad order at their destination constitutes a prima facie case of fault or negligence against

the carrier. (BELGIAN OVERSEAS CHARTERING AND SHIPPING N.V. VS. PHILIPPINE FIRST INSURANCECO.% INC.)

5ere proof of delivery of goods to a carrier in good order and the subse!uent arrival of the samegoods at the place of destination in bad order makes for a prima facie case against the carrier.

6COASTWISE LIGHTERAGE CORP. V. CA)

4elivery of goods to the custom authorities is not delivery to the consignee. 6LU DO V.BINAMIRA)

DEFENSES

Where fortuitous event or force ma2eure is the immediate and proximate cause of the loss, theobligor is exempt from liability for non#performance.o extraordinary diligence by the carrier could have prevented the loss of the goods after they hadbeen deposited in the warehouse of the "ureau of :ustoms. 6SERVANDO VS. PHILIPPINE STEAMNAVIGATION CO.)Where loss of cargo results from the failure of the officers of a vessel to inspect their shipfre!uently, that loss cannot be attributed to force ma2eure, but to the negligence of the officials.6EDGAR COKALIONG SHIPPING LINES% INC. VS. UCPB GENERAL INSURANCE COMPAN" INC.)

(ire may not be considered as a natural disaster or calamity as it arises almost invariably from

some act of man or by human means. 6EASTERN SHIPPING LINES INC. VS. IAC)

To exculpate the carrier from liability arising from hi2acking, he must prove that the robbers orthe hi2ackers acted with grave or irresistible threat, violence, or force in accordance with Art.GB*

of the :ivil :ode. 6BASCOS VS. CA)

In order that a common carrier may be absolved from liability where the loss, destruction ordeterioration of the goods is due to a natural disaster or calamity, it must further be shown thatsuch natural disaster or calamity was the proximate and only cause of the loss and that thecommon carrier exercised due diligence to prevent or minimie the loss before, during, and afterthe occurrence of the natural disaster. 6PHILIPPINE AMERICAN GENERAL INSURANCE CO.% INC. VS.MGG MARINE SERVICES% INC.)

To absolve the common carrier from liability the public authority must be shown to have thepower to issue the order or that it was lawful, or that it was issued under legal process of

authority. 6GAN#ON VS. CA)

If the improper packing or the defects in the container are known to the carrier or his employeesor apparent upon ordinary observation, but he nevertheless accepts the same without protest orexception notwithstanding such condition, he is not relieved of liability for damage resulting

therefrom.(CALVO VS. UCPB GENERAL INSURANCE CO.% INC.8

CARRIAGE OF PASSENGERSA passenger is defined as one who travels in a public conveyance by virtue of a contract, expressor implied, with the carrier as to the payment of fare, or that which is accepted as an e!uivalentthereof. The relation of carrier and passenger commences when one puts himself in the care of

carrier, or directly under its control, with the bona fide intention of becoming a passenger and isaccepted by the carrier, as where he makes a contract for transportation and presents himself atthe proper place and in a proper manner to be transported. 6JESUSA VDA DE NUECA% ET AL. VS.MANILA RAILROAD COMPAN")

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The relation of carrier and passenger continues until the passenger has been landed at the portof destination and has left the vessel owner


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ETRAORDINARY DILIGENCEWhile the breaking of the idler may be due to an accident, or to something unexpected, thecause of the disaster which resulted in the loss of the gasoline can only be attributed to the

negligence and lack of precaution to avert it on the part of defendant. The ship was not seaworthyand defendant did not have a competent tug to effectuate the rescue. 6STANDARD VACUUM OILCOMPAN" VS. LU#ON STEVEDORING CO.% INC.)

The behavior of the captain of the E4on 3uan=# playing mah2ong before and up to the time ofthe collision# constitutes behavior that is simply unacceptable on the part of the master of thevessel upon whom the law imposes the duty of extraordinary diligence# Ethe duty to carry thepassengers safely as far as human care and foresight can provide, using the utmost diligence of very

cautious persons, with due regard for all the circumstances.= 6MECENAS VS. CA)

The common carrier


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contracts of adhesion wherein one party imposes a ready made form of contract on the other arecontracts not entirely prohibited. The one who adheres to the contract is in reality free to re2ect it

entirely% if he adheres, he gives his consent. 6ONG "IU VS. CA8

The consignee by making claim for loss on the basis of the bill of lading, to all intents andpurposes accepted said bill. ;aving done so, he becomes bound by all stipulations contained

therein whether on the front or at the back thereof. 6SEA-LAND SERVICE% INC. VS. IAC)

"asic is the rule that a stipulation limiting the liability of the carrier to the value of the goodsappearing in the bill of lading, unless the shipper or owner declares a greater value, is binding.(urther, a contract fixing the sum that may be recovered by the owner or shipper for the loss,destruction or deterioration of the goods is valid, if it is reasonable and 2ust under the

circumstances, and has been fairly and freely agreed upon. 6CITADEL LINES% INC. VS. CA)

A stipulation in the bill of lading limiting the common carrier


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&nder 'ec. - 6D8 of the :)J'A, only the carrier


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The re!uisite of registration on the registry, of the purchase of a vessel, is necessary andindispensable in order that the purchaser


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The articles in the Warsaw :onvention merely declare the carrier liable for damages in theenumerated cases, if the conditions specified therein are present. either said provisions norothers regulate or exclude liability for other breaches of contract by the carrier. (NOTHWESTAIRLINES% INC. VS CUENCA)

The Warsaw :onvention does not operate as an absolute limit of the extent of an airline


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land, however, when as in this case the two terminals, 5atnog and Allen are separated by an opensea it can not be considered as a continuation of the highway. @espondent 9AT@A:) shouldsecure a separate :9: for the operation of an interisland or coastwise shipping service inaccordance with the provisions of law. Its :9: as a bus transportation cannot be merely amendedto include this water service under the guise that it is a mere private ferry service. (SAN PABLO VS.PANTRANCO SOUTH EXPRESS% INC.)

'ection ? 6a8 of the 9ublic 'ervice Act contemplates of failure to provide a service that is safe,proper or ade!uate and refusal to render any service which can reasonably be demanded andfurnished. It refers specifically to the operator1s inability to provide reliable vehicles to transportthe riding public to their places of destination and to the failure to provide an ade!uate number ofunits authoried under his franchise at all times to secure the public of sustained service. While thewords $unsafe, inade!uate and improper$ may be broad enough to cover a lot of things, they mustbe interpreted in consonance with the purpose of the 9ublic 'ervice aw, which was specificallyenacted, among other things, to protect the public against unreasonable charges and poorinefficient service and to secure ade!uate sustained service for the public at the least possible

costs. (MAN#ANAL VS. AUSEJO)

CORPORATION LAW

ATTRIBUTES OF A CORPORATIONA corporation as known to 9hilippine 2urisprudence is a creature without any existence until ithas received the imprimatur of the state acting according to law. It is logically inconceivabletherefore that it will have rights and privileges of a higher priority than that of its creator. 5orethan that, it cannot legitimately refuse to yield obedience to acts of its state organs, :ertainly notexcluding the 2udiciary, whenever called upon to do so. (TA"AG VS. BENGUET CONSOLIDATED%INC.)

(or practical purposes, franchises, so far as relating to corporations, are divisible into 68corporate or general franchises% and 678 special or secondary franchises. The former is the franchiseto exist as a corporation, while the latter are certain rights and privileges conferred upon existingcorporations such as the right to use the streets of a municipality to lay pipes of tracks, erect polesor string wires.The primary franchise of a corporation, that is, the right to exist as such, is vested 1in theindividuals who compose the corporation and not in the corporation itself and cannot be conveyedin the absence of legislative authority so to do but the special or secondary franchises of acorporation are vested in the corporation and may ordinarily be conveyed or mortgaged under a

general power granted to a corporation to dispose of its property except such special or secondaryfranchises as are charged with a public use. (JRS BUSINESS CORP. VS. IMPERIAL INSURANCE% INC.)

The guaranties of the (ourteenth Amendment and so of the first paragraph of the 9hilippine "illof @ights, are universal in their application to all persons within the territorial 2urisdiction, withoutregard to any differences of race, color, or nationality. The word $person$ includes aliens. 9rivatecorporations, likewise, are $persons$ within the scope of the guaranties in so far as their property is

concerned. (SMITH% BELL & CO. VS. NATIVIDAD)

A corporation is, after all, but an association of individuals under an assumed name and with adistinct legal entity. In organiing itself as a collective body it waives no constitutional immunitiesappropriate to such body. Its property cannot be taken without compensation. It can only be

proceeded against by due process of law, and is protected, under the Bth Amendment, againstunlawful discrimination.In 'tonehill, et al. vs. 4iokno, et al., supra, this :ourt impliedly recognied the right of a

corporation to ob2ect against unreasonable searches and seiures. (BACHE & CO. VS. RUI#)

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It is elementary that the right against self#incrimination has no application to 2uridical persons.While an individual may lawfully refuse to answer incriminating !uestions unless protected by animmunity statute, it does not follow that a corporation, vested with special privileges and

franchises, may refuse to show its hand when charged with an abuse of such privileges. (BASECO v.PCGG)

It is a doctrine well#established and obtains both at law and in e!uity that a corporation is adistinct legal entity to be considered as separate and apart from the individual stockholders ormembers who compose it, and is not affected by the personal rights, obligations and transactions ofits stockholders or members. The property of the corporation is its property and not that of thestockholders, as owners, although they have e!uities in it. 9roperties registered in the name of thecorporation are owned by it as an entity separate and distinct from its members. :onversely, acorporation ordinarily has no interest in the individual property of its stockholders unlesstransferred to the corporation, $even in the case of a one#man corporation$. (SULO NG BA"AN% INC.VS. GREGORIO ARANETA% INC.)

The tenor of the @: 2udgment and the implementing writ is clear enough. It directedKualitrans imousine 'ervice, Inc. to reinstate the discharged employees and pay them fullbackwages. @espondent, however, chose to $pierce the veil of corporate entity$ usurping a powerbelonging to the court and assumed improvidently that since the complainant is theowner/president of Kualitrans imousine 'ervice, Inc., they are one and the same. It is a well#settled doctrine both in law and in e!uity that as a legal entity, a corporation has a personalitydistinct and separate from its individual stockholders or members. The mere fact that one ispresident of a corporation does not render the property he owns or possesses the property of thecorporation, since the president, as individual, and the corporation are separate entities. (CRU#VS. DALISA")

Inasmuch as the real properties included in the inventory of the estate of the late 9astor L. imare in the possession of and are registered in the name of private respondent corporations, whichunder the law possess a personality separate and distinct from their stockholders, and in theabsence of any cogency to shred the veil of corporate fiction, the presumption of conclusiveness of

said titles in favor of private respondents should stand undisturbed. (LIM VS. CA)

The test in determining the applicability of the doctrine of piercing the veil of corporate fictionis as follows0. :ontrol, not mere ma2ority or complete stock control, but complete domination, not only offinances but of policy and business practice in respect to the transaction attacked so that thecorporate entity as to this transaction had at the time no separate mind, will or existence of itsown%7. 'uch control must have been used by the defendant to commit fraud or wrong, to perpetuate theviolation of a statutory or other positive legal duty, or dishonest and un2ust act in contravention ofplaintiff1s legal rights% and-.The aforesaid control and breach of duty must proximately cause the in2ury or un2ust losscomplained of.The absence of any one of these elements prevents 1piercing the corporate veil.1 In applying the1instrumentality1 or 1alter ego1 doctrine, the courts are concerned with reality and not form, withhow the corporation operated and the individual defendant1s relationship to that operation.$

(CONCEPT BUILDERS% INC. VS. NLRC)

(urthermore, considering the nature of the legal services involved, whatever obligation saidincorporators, directors and officers of the corporation had incurred, it was incurred in theirpersonal capacity. When directors and officers of a corporation are unable to compensate a party

for a personal obligation, it is far#fetched to allege that the corporation is perpetuating fraud orpromoting in2ustice, and be thereby held liable therefor by piercing its corporate veil. (FRANCISCOMOTORS CORP. VS. CA)

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The award of moral damages cannot be granted in favor of a corporation because, being anartificial person and having existence only in legal contemplation, it has no feelings, no emotions,no senses. It cannot, therefore, experience physical suffering and mental anguish, which can beexperienced only by one having a nervous system. The statement in 9eople v. 5aneroand 5ambulaoumber :o. v. 9" that a corporation may recover moral damages if it $has a good reputation thatis debased, resulting in social humiliation$ is an obiter dictum. )n this score alone the award for

damages must be set aside, since @"' is a corporation. (ABS-CBN v. CA)

evertheless, A5>:: is entitled to moral damages. (FILIPINASBROADCASTING NETWORK% INC. VS. AMEC-BCCM% JANUAR" '% '++,)

Note:T31 452 1657 89v12 9:;< =18>>9: 0297?;@51= 4< 31 SC ?0 9 J?:1 '++. H91v12% 920?2091 9 8;52>:@ 31 89:;>8>:@ =18>>9: 5 9 31 1:>;171: 9 5 8920925>9: 9 7925;=575@1% 1 31214< 751 21121:81 9 31 851 9 F>;>0>:5 B295=85>:@ N192% I:8.% v. A@9M1=>85; 5:= E=?85>9:5; C1:12-B>89; C32>>5: C9;;1@1 9 M1=>8>:1% G.R. N9. **. J5:?52< %'++,.

An employee of a company or corporation engaged in illegal recruitment may be held liable asprincipal, together with his employer, if it is shown that he actively and consciously participated inillegal recruitment. It has been held that the existence of the corporate entity does not shield fromprosecution the corporate agent who knowingly and intentionally causes the corporation to commita crime. The corporation obviously acts, and can act, only by and through its human agents, and itis their conduct which the law must deter. The employee or agent of a corporation engaged inunlawful business naturally aids and abets in the carrying on of such business and will beprosecuted as principal if, with knowledge of the business, its purpose and effect, he consciouslycontributes his efforts to its conduct and promotion, however slight his contribution may be.

(PEOPLE VS. CHOWDUR")

In the absence of an express provision of law making the petitioner liable for the criminaloffense committed by the corporation of which lit is a president as in fact them is no suchprovisions in the @evised 9enal :ode under which petitioner is being prosecuted, the existence of acriminal liability on his part may not be said to be beyond any doubt. In all criminal prosecutions,the existence of a criminal liability for which the accused is made answerable must be clear andcertain. (SIA VS. PEOPLE)Note T3> 851 5 =18>=1= 5 31 >71 31: P.D. , 92 31 T2? R181>0 L5 5 :9 :118)

*INDS OF CORPORATIONS

It is conceded that the :lub derived profit from the operation of its bar and restaurant, but suchfact does not necessarily convert it into a profit#making enterprise. The bar and restaurant are

necessary ad2uncts of the :lub to foster its purposes and the profits derived therefrom arenecessarily incidental to the primary ob2ect of developing and cultivating sports for the healthfulrecreation and entertainment of the stockholders and members. That a :lub makes some profit

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does not make it a profit making club. As has been remarked, a club should always strive, whenever

possible, to have a surplus (CIR VS. CLUB FILIPINO)

The application of the doctrine of estoppel applies to a third party only when he tries to escape

liability on a contract from which it had benefited on the irrelevant ground of defectiveincorporation. In the case at bar, the petitioner is not trying to escape liability from the contract

but rather is the one claiming from the contract. (INT$L EXPRESS TRAVEL VS. CA)

The doctrine of corporation by estoppel may apply to the alleged corporation and to a thirdparty. In the first instance, an unincorporated association, which represented itself to be acorporation, will be estopped from denying its corporate capacity in a suit against it by a thirdperson who relied in good faith on such representation. It cannot allege lack of personality to besued to evade its responsibility for a contract it entered into and by virtue of which it receivedadvantages and benefits.)n the other hand, a third party who, knowing an association to be unincorporated, nonethelesstreated it as a corporation and received benefits from it, may be barred from denying its corporate

existence in a suit brought against the alleged corporation. In such case, all those who benefitedfrom the transaction made by the ostensible corporation, despite knowledge of its legal defects,may be held liable for contracts they impliedly assented to or took advantage of.Technically, it is true that petitioner did not directly act on behalf of the corporation. ;owever,having reaped the benefits of the contract entered into by persons with whom he previously had anexisting relationship, he is deemed to be part of said association and is covered by the scope of the

doctrine of corporation by estoppel. (LIM TONG LIM VS. PHILIPPINE FISHING GEAR INDUSTRIES)

The doctrine of corporation by estoppel advanced by private respondent cannot override2urisdictional re!uirements. 3urisdiction is fixed by law and is not sub2ect to the agreement of theparties. It cannot be ac!uired through or waived, enlarged or diminished by, any act or omission ofthe parties, neither can it be conferred by the ac!uiescence of the court.

:orporation by estoppel is founded on principles of e!uity and is designed to prevent in2ustice andunfairness. It applies when persons assume to form a corporation and exercise corporate functionsand enter into business relations with third persons. Where there is no third person involved andthe conflict arises only among those assuming the form of a corporation, who therefore know that

it has not been registered there is no corporation by estoppel. (LO#ANO VS. DE LOS SANTOS)

&nder our statute it is to be noted that it is the issuance of a certificate of incorporation by the'>: which calls a corporation into being. The immunity of collateral attack is granted tocorporations 1claiming in good faith to be a corporation under this act.1 'uch a claim is compatiblewith the existence of errors and irregularities% but not with a total or substantial disregard of thelaw. &nless there has been an evident attempt to comply with the law the claim to be a

corporation 1under this act1 could not be made in good faith. (HALL VS. PICCIO)

COMPONENTS OF A CORPORATION

A corporation, until organied, has no life and, therefore, no faculties. It is, as it were, a child inventre sa mere. This is not saying that under no circumstances may the acts of promoters ofcorporation be ratified by the corporation if and when subse!uently organied. (CAGA"AN FISHINGVS. SANDIKO)

Where similar acts have been approved by the directors as a matter of general practice, custom,and policy, the general manager may bind the company without formal authoriation of the boardof directors. In varying language, existence of such authority is established, by proof of the courseof business, the usages and practices of the company and by the knowledge which the board ofdirectors has, or must be presumed to have, of acts and doings of its subordinates in and about the

affairs of the corporation. (BOARD OF LI!UIDATORS VS. HEIRS OF MAXIMO KALAW)

BY2LAWS

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>ven under the foregoing express grant of power and authority, there can be no automaticcorporate dissolution simply because the incorporators failed to abide by the re!uired filing ofbylaws embodied in 'ection BD of the :orporation :ode, There is no outright $demise$ of corporateexistence. 9roper notice and hearing are cardinal components of due process in any democraticinstitution, agency or society. In other words, the incorporators must be given the chance toexplain their neglect or omission and remedy the same. (LO"OLA GRAND VILLAS HOMEOWNERSASSOC. VS. CA)

or can petitioner claim a vested right to sit in the board on the basis of $practice.$ 9ractice, nomatter how long continued, cannot give rise to any vested right if it is contrary to law. >ven lesstenable is petitioner1s claim that its right is $coterminous with the existence of the association.$

(GRACE CHRISTIAN HIGH SCHOOL VS. CA)

Admittedly, the right to amend the by#laws lies solely in the discretion of the employer, thisbeing in the exercise of management prerogative or business 2udgment. ;owever this right,extensive as it may be, cannot impair the obligation of existing contracts or rights.9rescinding from these premises, private respondent1s insistence that it can legally dismisspetitioner on the ground that his tenure has expired is untenable. To reiterate, petitioner, being aregular employee, is entitled to security of tenure% hence, his services may only be terminated forcauses provided by law. A contrary interpretation would not find 2ustification in the laws or the:onstitution. If we were to rule otherwise, it would enable an employer to remove any employeefrom his employment by the simple expediency of amending its by#laws and providing that his/herposition shall cease to exist upon the occurrence of a specified event. (SALAFRANCA VS.PHILAMLIFE)

POWERS OF T(E CORPORATION

While as a rule an ultra vires act is one committed outside the ob2ect for which a corporation iscreated as defined by the law of its organiation and therefore beyond the powers conferred uponit by law, there are however certain corporate acts that may be performed outside of the scope ofthe powers expressly conferred if they are necessary to promote the interest or welfare of thecorporation. Thus, it has been held that $although not expressly authoried to do so a corporationmay become a surety where the particular transaction is reasonably necessary or proper to theconduct of its business, and here it is undisputed that the establishment of the local post office is areasonable and proper ad2unct to the conduct of the business of appellant company. Indeed, suchpost office is a vital improvement in the living condition of its employees and laborers who came tosettle in its mining camp which is far removed from the postal facilities or means of communication

accorded to people living in a city or municipality. (REPUBLIC VS. ACOJE MINING)

Inasmuch as a corporate president is often given general supervision and control over corporateoperations, the strict rule that said officer has no inherent power to act for the corporation isslowly giving way to the realiation that such officer has certain limited powers in the transactionof the usual and ordinary business of the corporation. In the absence of a charter or bylaw provisionto the contrary, the president is presumed to have the authority to act within the domain of thegeneral ob2ectives of its business and within the scope of his or her usual duties. (PEOPLE$SAIRCARGO VS. CA)

'ince a corporation, such as the private respondent, can act only through its officers and agents,all acts within the powers of said corporation may be performed by agents of its selection% and,except so far as limitations or restrictions may be imposed by special charter, by#law or statutory

provisions, the same general principles of law which govern the relation of agency for a naturalperson govern the officer or agent of a corporation, of whatever status or rank, in respect to hispower to act for the corporation% and agents when once appointed, or members acting in their

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stead, are sub2ect to the same rules, liabilities, and incapacities as are agents of individuals and

private persons. (AF REALT" VS. DIESELMAN)

(or the principle of apparent authority to apply, the petitioner was burdened to prove the

following0 6a8 the acts of the respondent 2ustifying belief in the agency by the petitioner% 6b8knowledge thereof by the respondent which is sought to be held% and 6c8 reliance thereon by thepetitioner consistent with ordinary care and prudence. In this case, there is no evidence on recordof specific acts made by the respondent showing or indicating that it had full knowledge of anyrepresentations made by @oxas to the petitioner that the respondent had authoried him to grantto the respondent an option to buy a portion of ot o. B?#A#-#"# covered by T:T o. GC+C*, orto create a lien or burden thereon, or that the respondent allowed him to do so. (WOODCHILDHOLDINGS VS. ROXAS ELECTRIC)

LIABILITY OF DIRECTORS AND OFFICERS

In Tramat 5ercantile, Inc., vs. :ourt of Appeals, the :ourt has collated the settled instanceswhen, without necessarily piercing the veil of corporate fiction, personal civil liability can also be

said to lawfully attach to a corporate director, trustee or officer% to wit0When 68 ;e assents 6a8 to a patently unlawful act of the corporation, or 6b8 for bad faith or grossnegligence in directing its affairs, or 6c8 for conflict of interest, resulting in damages to thecorporation, its stockholders or other persons%678 ;e consents to the issuance of watered stocks or who, having knowledge thereof, does notforthwith file with the corporate secretary his written ob2ection thereto%6-8 ;e agrees to hold himself personally and solidarity liable with the corporation% or6B8 ;e is made, by a specific provision of law, to personally answer for his corporate action.

(SANTOS VS. NLRC)

RIG(TS OF S(ARE(OLDERS

)ne of the rights of a stockholder is the right to participate in the control and management of

the corporation that is exercised through his vote. The right to vote inherent in and incidental tothe ownership of corporate stock, and as such is a property right. The stockholder cannot bedeprived of the to vote his stock nor may the right be essentially impaired, either by the legislatureor by the corporation without his consent, through amending the charter, or the by#laws.

(CASTILLO VS. BALINGHASA")

While it may be true that the right of inspection granted by 'ec. GB of the :orporation :ode isnot absolute, as when the stockholder is not acting in good faith and for a legitimate purpose% orwhen the demand is purely speculative or merely to satisfy curiosity, the same may not be said inthe case of private respondent. This is because the impropriety of purpose such as will defeatenforcement must be set up 6by8 the corporation defensively if the :ourt is to take cogniance of itas a !ualification. In other words, the specific provisions take from the stockholder the burden of

showing impropriety of purpose or motive.In the case at bar, petitioner failed to discharge the burden of proof to show that privaterespondent1s action in seeking examination of the corporate records was moved by unlawful or illmotivated designs which could appropriately call for a 2udicial protection against the exercise ofsuch right. 'ave for its unsubstantiated allegations, petitioner could offer no proof, nay, not even ascintilla of evidence that respondent :o2uangco, 3r., was motivated by bad faith% that the demandwas for an illegitimate purpose or that the demand was impelled by speculation or idle curiosity.'urely, respondent1s substantial shareholdings in the '5: and &:9" cannot be an ob2ect of mere

curiosity. (REPUBLIC VS. SANDIGANBA"AN)

The power to issue shares of stocks in a corporation is lodged in the board of directors and nostockholders1 meeting is necessary to consider it because additional issuance of shares of stocksdoes not need approval of the stockholders. The by#laws of the corporation itself states that 1the

"oard of Trustees shall, in accordance with law, provide for the issue and transfer of shares ofstock of the Institute and shall prescribe the form of the certificate of stock of the Institute1.9etitioner bewails the fact that in view of the lack of notice to him of such subse!uent issuance, hewas not able to exercise his right of pre#emption over the unissued shares. ;owever, the general

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rule is that pre#emptive right is recognied only with respect to new issue of shares, and not withrespect to additional issues of originally authoried shares. This is on the theory that when acorporation at its inception offers its first shares, it is presumed to have offered all of those whichit is authoried to issue. An original subscriber is deemed to have taken his shares knowing thatthey form a definite proportionate part of the whole number of authoried shares. When the sharesleft unsubscribed are later reoffered, he cannot therefore claim a dilution of interest. (BENITO VS.SEC)

S(ARES AND SUBSCRIPTIONS

A subscription contract necessarily involves the corporation as one of the contracting partiessince the sub2ect matter of the transaction is property owned by the corporation M its shares ofstock.

The real contracting parties to a subscription agreement are the corporation and the subscriberalone. Thus, a civil case for rescission on the ground of breach of contract filed by a third party intheir personal capacities will not prosper. )nly the corporation has the legal personality to file suitrescinding the subscription agreement with the subscriber inasmuch as it was the real party in

interest therein. (ONG "ONG VS. TIU)

The usual practice is for the stockholder to sign the form on the back of the stock certificate.The certificate may thereafter be transferred from one person to another. If the holder of thecertificate desires to assume the legal rights of a shareholder to enable him to vote at corporateelections and to receive dividends, he fills up the blanks in the form by inserting his own name astransferee. Then he delivers the certificate to the secretary of the corporation so that the transfermay be entered in the corporation1s books. The certificate is then surrendered and a new oneissued to the transferee.

That procedure cannot be followed in the instant case because, as already noted, the twentyshares in !uestion we 4ot covered by any certificate of stork in 9o1s name. 5oreover, thecorporation has a claim on the said shares for the unpaid balance of 9o1s subscription. A stocksubscription in a subsisting liability from the time the subscription is made. The subscriber is asmuch bound to pay his subscription, as he would be to pay any other debt. The right of the

corporation to demand payment is no less incontestable. (NAVA VS. PEERS)

It may be argued that despite non#compliance with the re!uisite endorsement and delivery, theassignment was valid between the parties, meaning the private respondents as assignors and thepetitioners as assignees. While the assignment may be valid and binding on the petitioners andprivate respondents, it does not necessarily make the transfer effective. :onse!uently, thepetitioners as mere assignees, cannot en2oy the status of a stockholder, cannot vote nor be voted

for, and will not be entitled to dividends, insofar as the assigned shares are concerned.9arenthetically, the private respondents cannot, as yet, be deprived of their rights as stockholders,until and unless the issue of ownership and transfer of the shares in !uestion is resolved with

finality. (RURAL BANK OF LIPA CIT" VS. CA)

"efore a transferee may ask for the issuance of stock certificates, he must first cause theregistration of the transfer and thereby en2oy the status of a stockholder insofar as the corporationis concerned. A corporate secretary may not be compelled to register transfers of shares on thebasis merely of an indorsement of stock certificates. With more reason, a corporate secretary maynot be compelled to issue stock certificates without such registration. (PONCE VS. ALSONS CEMENTCORP)

Are attachments of shares of stock included in the term $transfer$ as provided in 'ec. D- of the:orporation :odeN We rule in the negative. As succinctly declared in the case of 5onserrat v.:eron, chattel mortgage over shares of stock need not be registered in the corporation1s stock andtransfer book inasmuch as chattel mortgage over shares of stock does not involve a $transfer of

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shares,$ and that only absolute transfers of shares of stock are re!uired to be recorded in thecorporation1s stock and transfer book in order to have $force and effect as against third persons.$

(CHEMPHIL EXPORT VS. CA)

DISSOLUTION AND LI3UIDATION

The word $trustee$ as used in the corporation statute must be understood in its general conceptwhich could include the counsel to whom was entrusted in the instant case, the prosecution of thesuit filed by the corporation. The purpose in the transfer of the assets of the corporation to atrustee upon its dissolution is more for the protection of its creditor and stockholders. 4ebtors likethe petitioners herein may not take advantage of the failure of the corporation to transfer itsassets to a trustee, assuming it has any to transfer which petitioner has failed to show, in the firstplace. To sustain petitioners1 contention would be to allow them to enrich themselves at the

expense of another, which all enlightened legal systems condemn. (GELANO VS. CA)

FOREIGN CORPORATIONS

As between the parties themselves, @.A. o. *B** does not declare as void or invalid the

contracts entered into without at securing a license or certificate to do business in the 9hilippines.either does it appear to intend to prevent the courts from enforcing contracts made incontravention of its licensing provisions, There is no denying, though, that an $illegal situation,$ asthe appellate court has put it, was created when the parties voluntarily contracted without suchlicense.The parties are charged with knowledge of the existing law at the time they enter into the contractand at the time it is to become operative. 5oreover, a person is presumed to be moreknowledgeable about his own state law than his alien or foreign contemporary. In this case, therecord shows that, at least, petitioner had actual knowledge of the applicability of @.A. o. *B** atthe time the contract was executed and at all times thereafter. This conclusion is compelled by thefact that the same statute is now being propounded by the petitioner to bolster its claim. We,therefore, sustain the appellate court1s view that $it was incumbent upon T)9#W>4 to knowwhether or not I@TI and >:>4 were properly authoried to engage in business in the 9hilippineswhen they entered into the licensing and distributorship agreements.$ The very purpose of the lawwas circumvented and evaded when the petitioner entered into said agreements despite theprohibition of @.A. o. *B**. The parties in this case being e!ually guilty of violating @.A. o. *B**,they are in pari delicto, in which case it follows as a conse!uence that petitioner is not entitled to

the relief prayed for in this case. (TOP-WELD MFG. VS. ECED)

The prohibition against doing business without first securing a license is now given penal sanctionwhich is also applicable to other violations of the :orporation :ode under the general provisions of'ection BB of the :ode.It is, therefore, not necessary to declare the contract null and void even as against the erringforeign corporation. The penal sanction for the violation and the denial of access to our courts andadministrative bodies are sufficient from the viewpoint of legislative policy.

)ur ruling that the lack of capacity at the time of the execution of the contracts was cured by thesubse!uent registration is also strengthened by the procedural aspects of these cases. (HOMEINSURANCE CO. VS. EASTERN SHIPPING)

The obtainment of a license prescribed by 'ection 7* of the :orporation :ode is not a conditionprecedent to the maintenance of any kind of action in 9hilippine courts by a foreign corporation.;owever, under the afore!uoted provision, no foreign corporation shall be permitted to transactbusiness in the 9hilippines, as this phrase is understood under the :orporation :ode, unless it shallhave the license re!uired by law, and until it complies with the law in transacting business here, itshall not be permitted to maintain any suit in local courts.As thus interpreted, any foreign corporation not doing business in the 9hilippines may maintain anaction in our courts upon any cause of action, provided that the sub2ect matter and the defendant

are within the 2urisdiction of the court. It is not the absence of the prescribed license but $doingbusiness$ in the 9hilippines without such license which debars the foreign corporation from accessto our courts. In other words, although a foreign corporation is without license to transact business

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in the 9hilippines, it does not follow that it has no capacity to bring an action. 'uch license is notnecessary if it is not engaged in business in the 9hilippines. (COLUMBIA PICTURES VS. CA)

5ore than the sheer number of transactions entered into, a clear and unmistakable intention onthe part of petitioner to continue the body of its business in the 9hilippines is more than apparent.As alleged in its complaint, it is engaged in the manufacture and sale of elements used in sealingpumps, valves, and pipes for industrial purposes, valves and control e!uipment used for industrialfluid control and 9: pipes and fittings for industrial use. Thus, the sale by petitioner of the itemscovered by the receipts, which are part and parcel of its main product line, was actually carriedout in the progressive prosecution of commercial gain and the pursuit of the purpose and ob2ect ofits business, pure and simple. (urther, its grant and extension of ?+#day credit terms to privaterespondent for every purchase made, unarguably shows an intention to continue transacting withprivate respondent, since in the usual course of commercial transactions, credit is extended only tocustomers in good standing or to those on whom there is an intention to maintain long#term

relationship. (ERIKS PTE. LTD. VS. CA)

We agree with the finding of the respondent court that petitioner is not suing on an isolatedtransaction as it claims to be, as it is very obvious from the deed of assignment and its relationshipswith 5arcopper and 9lacer 4ome, Inc. that its unmistakable intention is to continue the operationsof 5arcopper and shield its properties/assets from the reach of legitimate creditors, even thoseholding valid and executory court 2udgments against it. There is no other way for petitioner torecover its huge financial investments which it poured into 5arcopper


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substitute the defendant in any pending action against it before any court, tribunal, board or body.)bviously, the real 2ustification is to enable the management committee or rehabilitation receiverto effectively exercise its/his powers free from any 2udicial or extra#2udicial interference thatmight duly hinder or prevent the Erescue= of the debtor company. (B.F. HOMES% INC. VS. CA 8>1=

>: PAL VS. SPOUSES SADIC)

BAN*ING LAWS

NEW CENTRAL BAN* ACTIt must be remembered that the :entral "ank of the. 9hilippines 6now "angko 'entral ng9ilipinas8, through the 5onetary "oard, is the government agency charged with the responsibility ofadministering the monetary, banking and credit system of the country and is granted, the power ofsupervision and examination over banks and non#bank financial institutions performing !uasi#banking functions, of which savings and loan associations, such as 9>'AA, form part of. (BUSUEGOVS. CA)

While admittedly the :entral "ank Act gives vast and far#reaching powers to the conservator of abank, it must be pointed out that such powers must be related to the Epreservation of the assets ofthe bank 6the reorganiation thereof8 and the restoration of its viability.= 'uch powers, enormousand extensive as they are, cannot extend to ex post facto repudiation of perfected transactions,otherwise they would infringe against the non#impairment clause of the :onstitution. (FIRST PHIL.INT$L BANK VS. CA)

There is no re!uirement whether express or implied, that a hearing be first conducted before abanking institution may be placed under receivership. )n the contrary, the law is explicit as to theconditions prere!uisite to the action of the 5onetary "oard to forbid the institution to do businessin the 9hilippines and to appoint a receiver to immediately take charge of the bank1s assets andliabilities. They are0 6a8 an examination made by the examining department of the :entral "ank%

6b8 report by said department to the 5onetary "oard% and 6c8 prima facie showing that the bank isin a condition of insolvency or so situated that its continuance in business would involve probableloss to its depositors or creditors.The evident implication of the law, therefore, is that the appointment of a receiver may be madeby the 5onetary "oard without notice and hearing but its action is sub2ect to 2udicial in!uiry toinsure the protection of the banking institution. 'tated otherwise, due process does not necessarilyre!uire a prior hearing% a hearing or an opportunity to be heard may be subse!uent to the closure.)ne can 2ust imagine the dire conse!uences of a prior hearing0 bank runs would be the order of theday, resulting in panic and hysteria. In the process, fortunes may be wiped out, and disillusionment

will ran the gamut of the entire banking community. (RURAL BANK OF BUHI VS. CA)

The purpose of the law in re!uiring that only the stockholders of record representing the

ma2ority of the capital stock may bring the action to set aside a resolution to place a bank underconservatorship is to ensure that it be not frustrated or defeated by the incumbent "oard of4irectors or officers who may immediately resort to court action to prevent its implementation orenforcement. It is presumed that such a resolution is directed principally against acts of said4irectors and officers which place the bank in a state of continuing inability to maintain a conditionof li!uidity ade!uate to protect the interest of depositors and creditors. Indirectly, it is likewiseintended to protect and safeguard the rights and interests of the stockholders. :ommon sense andpublic policy dictate then that the authority to decide on whether to contest the resolution shouldhe lodged with the stockholders owning a ma2ority of the shares for they are expected to be moreob2ective in determining whether the resolution is plainly arbitrary and issued in bad faith.

(CENTRAL BANK VS. CA)

It has been said that where upon the insolvency of a bank a receiver therefor is appointed, theassets of the bank pass beyond its control into the possession and control of the receiver whoseduty it is to administer the assets for the benefit of the creditors of the bank. Thus, theappointment of a receiver operates to suspend the authority of the bank and of its directors andofficers over its property and effects, such authority being reposed in the receiver, and in this

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respect, the receivership is e!uivalent to an in2unction to restrain the bank officers fromintermeddling with the property of the bank in any way. (VILLANUEVA VS. CA)

The fact that the insolvent bank is forbidden to do business, that its assets are turned over tothe 'uperintendent of "anks, as a receiver, for conversion into cash, and that its li!uidation isundertaken with 2udicial intervention means that, as far as lawful and practicable, all claimsagainst the insolvent bank should be filed in the li!uidation proceeding.We explained therein the rationale behind the provision, i.e., the 2udicial li!uidation is intended toprevent multiplicity of actions against the insolvent bank. It is a pragmatic arrangement designedto establish due process and orderliness in the li!uidation of the bank, to obviate the proliferationof litigations and to avoid in2ustice and arbitrariness. The lawmaking body contemplated that forconvenience only one court, if possible, should pass upon the claims against the insolvent bank andthat the li!uidation court should assist the 'uperintendent of "anks and regulate his operations.

(ONG VS. CA)

SECRECY OF BAN* DEPOSITS ACTThe lower court did not order an examination of or in!uiry into the deposit of " O " (orest4evelopment :orporation, as contemplated in the law. It merely re!uired Tan Fim iong to informthe court whether or not the defendant " O " (orest 4evelopment :orporation had a deposit in the:hina "anking :orporation only for purposes of the garnishment issued by it, so that the bank wouldhold the same intact and not allow any withdrawal until further order.It is clear that the prohibition against examination of or in!uiry into a bank deposit under @epublicAct B+* does not preclude its being garnished to insure satisfaction of a 2udgment. Indeed there isno real in!uiry in such a case, and if the existence of the deposit is disclosed the disclosure ispurely incidental to the execution process. It is hard to conceive that it was ever within the

intention of :ongress to enable debtors to evade payment of their 2ust debts, even if ordered bythe :ourt, through the expedient of converting their assets into cash and depositing the same in a

bank. (CHINA BANKING CORP. VS. ORTEGA)

"efore an in#camera inspection may be allowed of bank deposits, there must be a pending casesbefore a court of competent 2urisdiction. (urther, the account must be clearly identified, theinspection limited to the sub2ect matter of the pending case before the court of competent2urisdiction. The bank personnel and the account holder must be notified to be present during theinspection, and such inspection may cover only the account identified in the pending case.An examination by the )ffice of the )mbudsman is not a pending litigation to allow examination of

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a public trust and any person who enters upon its discharge does so with the full knowledge that his

life, so far as relevant to his duty, is open to public scrutiny. (PNB VS.GANCA"CO)

The in!uiry into illegally ac!uired property#or property )T $legitimately ac!uired$#extends to

cases where such property is concealed by being held by or recorded in the name of other persons.This proposition is made clear by @.A. o. -+? which !uite categorically states that the term,$legitimately ac!uired property of a public officer or employee shall not include propertyunlawfully ac!uired by the respondent, but its ownership is concealed by its being recorded in thename of, or held by, respondent1s spouse, ascendants, descendants, relatives or any other persons.$To sustain the petitioner1s theory, and restrict the in!uiry only to property held by or in the nameof the government official or employee, or his spouse and unmarried children is unwarranted in thelight of the provisions of the statutes in !uestion, and would make available to persons ingovernment who illegally ac!uire property an easy and foolproof means of evading investigationand prosecution% all they would have to do would be to simply place the property in the possessionor name of persons other than their spouse and unmarried children. This is an absurdity that we

will not ascribe to the lawmakers. (BANCO FILIPINO VS. PURISIMA)

SPECIAL LAWS

C(ATTEL MORTGAGEWhile a pledge, real estate mortgage, or antichresis may exceptionally secure after#incurredobligations so long as these future debts are accurately described, a chattel mortgage, however,can only cover obligations existing at the time the mortgage is constituted. Although a promiseexpressed in a chattel mortgage to include debts that are yet to be contracted can be a bindingcommitment that can be compelled upon, the security itself, however, does not come intoexistence or arise until after a chattel mortgage agreement covering the newly contracted debt isexecuted either by concluding a fresh chattel mortgage or by amending the old contractconformably with the form prescribed by the :hattel 5ortgage aw. @efusal on the part of the

borrower to execute the agreement so as to cover the after#incurred obligation can constitute anact of default on the part of the borrower of the financing agreement whereon the promise iswritten but, of course, the remedy of foreclosure can only cover the debts extant at the time ofconstitution and during the life of the chattel mortgage sought to be foreclosed. (ACME SHOE%RUBBER & PLASTIC VS. CA)

A stipulation in the chattel mortgage, extending its scope and effect to after#ac!uired property,is valid and binding where the after#ac!uired property is in renewal of, or in substitution for, goodson hand when the mortgage was executed, or is purchased with the proceeds of the sale of suchgoods. A mortgage may, by express stipulations, be drawn to cover goods put in stock in place ofothers sold out from time to time. A mortgage may be made to include future ac!uisitions of goodsto be added to the original stock mortgaged, but the mortgage must expressly provide that futureac!uisitions shall be held as included in the mortgage. Where a mortgage covering the stock in

trade, furniture, and fixtures in the mortgagor1s store provides that $all goods, stock in trade,furniture, and fixtures hereafter purchased by the mortgagor shall be included in and covered bythe mortgage,$ the mortgage covers all after#ac!uired property of the classes mentioned, and,upon foreclosure, such property may be taken and sold by the mortgagee the same as the property

in possession of the mortgagor at the time the mortgage was executed. (TORRES VS. LIMJAP)

In the instant case, defendant corporation elected to foreclose its mortgage upon default by theplaintiffs in the payment of the agreed installments, ;aving chosen to foreclose the chattelmortgage, and bought the purchased vehicles at the public auction as the highest bidder, itsubmitted itself to the conse!uences of the law as specifically mentioned, by which it is deemed tohave renounced any and all rights which it might otherwise have under the promissory note and the

chattel mortgage as well as the payment of the unpaid balance. (RIDAD VS. FILIPINAS INVESTMENT)

There is also no legal provision nor 2urisprudence in our 2urisdiction which makes a third personwho secures the fulfillment of another1s obligation by mortgaging his own property to be solidarilybound with the principal obligor. A chattel mortgage may be $an accessory contract$ to a contractof loan, but that fact alone does not make a third#party mortgagor solidarily bound with the

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principal debtor in fulfilling the principal obligation that is, to pay the loan. The signatory to theprincipal contract#loan#remains to be primarily bound. It is only upon the default of the latter thatthe creditor may have recourse on the mortgagors by foreclosing the mortgaged properties in lieuof an action for the recovery of the amount of the loan. And the liability of the third#partymortgagors extends only to the property mortgaged. 'hould there be any deficiency, the creditor

has recourse on the principal debtor. (CERNA VS. CA)

WARE(OUSE RECEIPTS LAWAny deposit made with a bonded warehouseman must necessarily be governed by the provisionsof

33338208 red notes mercantile law

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