MERCANTILE LAW

PREWEEK NOTES
 Recoletos Law Center
“HOME OF THE NATION’S TOP BAR REVIEWERS”

PREWEEK NOTES IN MERCANTILE LAW

Negotiable Instruments; Requisites. An instrument to be negotiable must conform to the

following requirements:
1. It must be in writing and signed by the maker or drawer;
2. Must contain an unconditional promise or order to pay a sum certain in money;
3. Must be payable on demand, or at a fixed or determinable future time;
4. Must be payable to order or to bearer; and
5. Where the instrument is addressed to a drawee, he must be named or otherwise
indicated therein with reasonable certainty (Sec. 1, Negotiable Instruments Law
(NIL)).

Negotiable Instruments; Checks. A check is a bill of exchange drawn on a bank payable

on demand. Except as otherwise provided, the provisions of the NIL applicable to a bill
of exchange payable on demand apply to a check (Sec. 185, NIL).

Under the Negotiable Instruments Law, a check delivered and made payable to cash is
payable to the bearer and could be negotiated by mere delivery without the need of an
indorsement (People of the Philippines v. Gilbert Reyes Wagas, G.R. No. 157943, September 4,
2013).

Negotiable Instruments; Checks; Manager’s check; delivery. An ordinary check refers to

a bill of exchange drawn by a depositor (drawer) on a bank (drawee), requesting the latter
to pay a person named therein (payee) or to the order of the payee or to the bearer, a
named sum of money. The issuance of the check does not of itself operate as an
assignment of any part of the funds in the bank to the credit of the drawer. Here, the bank
becomes liable only after it accepts or certifies the check. After the check is accepted for
payment, the bank would then debit the amount to be paid to the holder of the check
from the account of the depositor-drawer.

There are checks of a special type called managers or cashier’s checks. These are bills of
exchange drawn by the bank’s manager or cashier, in the name of the bank, against the
bank itself. Typically, a manager’s or a cashier’s check is procured from the bank by
allocating a particular amount of funds to be debited from the depositor’s account or by
directly paying or depositing to the bank the value of the check to be drawn. Since the
bank issues the check in its name, with itself as the drawee, the check is deemed accepted
in advance. Ordinarily, the check becomes the primary obligation of the issuing bank and
constitutes its written promise to pay upon demand.

Nevertheless, the mere issuance of a manager’s check does not ipso facto work as an
automatic transfer of funds to the account of the payee. In case the procurer of the
manager’s or cashier’s check retains custody of the instrument, does not tender it to the
intended payee, or fails to make an effective delivery, we find the following provision on
undelivered instruments under the Negotiable Instruments Law applicable:

Mercantile Law 2021 Page 1 of 29

 Recoletos Law Center
“HOME OF THE NATION’S TOP BAR REVIEWERS”

Sec. 16. Delivery; when effectual; when presumed. – Every contract on a negotiable
instrument is incomplete and revocable until delivery of the instrument for the purpose
of giving effect thereto. As between immediate parties and as regards a remote party
other than a holder in due course, the delivery, in order to be effectual, must be made
either by or under the authority of the party making, drawing, accepting, or indorsing,
as the case may be; and, in such case, the delivery may be shown to have been conditional,
or for a special purpose only, and not for the purpose of transferring the property in the
instrument. But where the instrument is in the hands of a holder in due course, a valid
delivery thereof by all parties prior to him so as to make them liable to him is conclusively
presumed. And where the instrument is no longer in the possession of a party whose
signature appears thereon, a valid and intentional delivery by him is presumed until the
contrary is proved (Rizal Commercial Banking Corporation vs. Hi-Tri Development
Corporation and Luz R. Bakunawa, G.R. No. 192413, June 13, 2012).

Negotiable Instruments; Check; issuance for consideration. Upon issuance of a check, in

the absence of evidence to the contrary, it is presumed that the same was issued for
valuable consideration which may consist either in some right, interest, profit or benefit
accruing to the party who makes the contract, or some forbearance, detriment, loss or
some responsibility, to act, or labor, or service given, suffered or undertaken by the other
side. Under the Negotiable Instruments Law, it is presumed that every party to an
instrument acquires the same for a consideration or for value (Engr. Jose E. Cayanan vs.
North Star International Travel, Inc. G.R. No. 172954, October 5, 2011).

Negotiable Instruments; Checks; crossed checks. A crossed check is one where two
parallel lines are drawn across its face or across its corner. Based on jurisprudence, the
crossing of a check has the following effects: (a) the check may not be encashed but only
deposited in the bank; (b) the check may be negotiated only once — to the one who has
an account with the bank; and (c) the act of crossing the check serves as a warning to the
holder that the check has been issued for a definite purpose and he must inquire if he
received the check pursuant to this purpose; otherwise, he is not a holder in due course.
In other words, the crossing of a check is a warning that the check should be deposited
only in the account of the payee. When a check is crossed, it is the duty of the collecting
bank to ascertain that the check is only deposited to the payee’s account (Philippine
Commercial Bank vs. Antonio B. Balmaceda and Rolando N. Ramos, G.R. No. 158143, September
21, 2011).

Negotiable Instruments; Checks. Manager’s and cashier’s checks are still the subject of
clearing to ensure that the same have not been materially altered or otherwise completely
counterfeited. However, manager’s and cashier’s checks are preaccepted by the mere
issuance thereof by the bank, which is both its drawer and drawee. Thus, while manager’s
and cashier’s checks are still subject to clearing, they cannot be countermanded for being
drawn against a closed account, for being drawn against insufficient funds, or for similar
reasons such as a condition not appearing on the face of the check (Metrobank and Trust
Company vs Chiok, G.R. No. 172652, November 26, 2014).

Mercantile Law 2021 Page 2 of 29

 Recoletos Law Center
“HOME OF THE NATION’S TOP BAR REVIEWERS”

Negotiable Instruments; Holder in due course. A holder in due course is a holder who
has taken the instrument under the following conditions:
1. That it is complete and regular upon its face;
2. That he became the holder of it before it was overdue, and without notice that
it had been previously dishonored, is such was the fact;
3. That he took it in good faith and for value;
4. That at the time it was negotiated to him he had no notice of any infirmity in
the instrument or defect in the title of the person negotiating it (Sec. 52, NIL).

Every holder is deemed prima facie to be a holder in due course; but when it is shown
that the title of any person who has negotiated the instrument was defective, the burden
is on the holder to prove that he or some person under whom he claims acquired the title
as holder in due course. But the last mentioned rule does not apply in favor of a party
who became bound on the instrument prior to the acquisition of such defective title
(Sec. 59, NIL).

Negotiable Instruments; Rights of Holder; Defenses against the Holder. While a

manager's check is automatically accepted, a holder other than a holder in due course is
still subject to defenses. The drawee bank of a manager's check may interpose personal
defenses of the purchaser of the manager's check if the holder is not a holder in due
course. In short, the purchaser of a manager's check may validly countermand payment
to a holder who is not a holder in due course. Accordingly, the drawee bank may refuse
to pay the manager's check by interposing a personal defense of the purchaser (RCBC
Savings Bank vs. Noel M. Odrada, G.R No. 219037, October 19, 2016).

Insurance Contract; Concept. It is an agreement whereby one undertakes for a

consideration to indemnify another against the loss, damage or liability arising from an
unknown or contingent event (Insurance Code, Sec. 2[a]).

Insurance Contracts; Health Care Management. For purposes of determining the liability
of a health care provider to its members, jurisprudence holds that a health care agreement
is in the nature of non-life insurance, which is primarily a contract of indemnity.
Once the member incurs hospital, medical or any other expense arising from sickness,
injury or other stipulated contingent, the health care provider must pay for the same to
the extent agreed upon under the contract (Fortune Medicare, Inc. v. David Robert U.
Amorin, G.R. No. 195872, March 12, 2014).

Insurance; Insurance contracts; interpretation. In Philamcare Health Systems, Inc. v. CA,

we ruled that a health care agreement is in the nature of non-life insurance. It is an
established rule in insurance contracts that when their terms contain limitations on
liability, they should be construed strictly against the insurer. These are contracts of
adhesion the terms of which must be interpreted and enforced stringently against the
insurer which prepared the contract. This doctrine is equally applicable to health care
agreements (Fortune Medicare, Inc. v. David Robert U. Amorin, G.R. No. 195872, March 12,
2014).

Mercantile Law 2021 Page 3 of 29

 Recoletos Law Center
“HOME OF THE NATION’S TOP BAR REVIEWERS”

Insurance; Insurance contracts; contract of adhesion. A contract of insurance is a contract

of adhesion. When the terms of the insurance contract contain limitations on liability,
courts should construe them in such a way as to preclude the insurer from non-
compliance with his obligation (Alpha Insurance and Surety Co. v. Arsenia Sonia Castor, G.R.
No. 198174, September 2, 2013).

Insurance; collateral source rule. As part of American personal injury law, the collateral
source rule was originally applied to tort cases wherein the defendant is prevented from
benefiting from the plaintiff’s receipt of money from other sources. Under this rule, if an
injured person receives compensation for his injuries from a source wholly independent
of the tortfeasor, the payment should not be deducted from the damages which he would
otherwise collect from the tortfeasor. In a recent Decision by the Illinois Supreme Court,
the rule has been described as “an established exception to the general rule that damages
in negligence actions must be compensatory.” The Court went on to explain that
although the rule appears to allow a double recovery, the collateral source will have a
lien or subrogation right to prevent such a double recovery.

The collateral source rule applies in order to place the responsibility for losses on the
party causing them. Its application is justified so that “the wrongdoer should not benefit
from the expenditures made by the injured party or take advantage of contracts or other
relations that may exist between the injured party and third persons.” Thus, it finds no
application to cases involving no-fault insurances under which the insured is
indemnified for losses by insurance companies, regardless of who was at fault in the
incident generating the losses (Mitsubishi Motors Philippines Salaried Employees Union v.
Mitsubishi Motors Philippines Corporation, G.R. No. 175773, June 17, 2013).

Insurance; double insurance. By the express provision of Section 93 of the Insurance Code,
double insurance exists where the same person is insured by several insurers separately
in respect to the same subject and interest. The requisites in order for double insurance
to arise are as follows:
1. The person insured is the same;
2. Two or more insurers insuring separately;
3. There is identity of subject matter;
4. There is identity of interest insured; and
5. There is identity of the risk or peril insured against (Malayan Insurance Co., Inc. vs.
Philippine First Insurance, Co., Inc., et al., G.R. No. 184300, July 11, 2012).

Insurance; false claim. It has long been settled that a false and material statement made
with an intent to deceive or defraud voids an insurance policy (United Merchants
Corporation vs. Country Bankers Insurance Corporation, G.R. No. 198588, July 11, 2012).

Insurance; limitation in liability. An insurer who seeks to defeat a claim because of an

exception or limitation in the policy has the burden of establishing that the loss comes
within the purview of the exception or limitation. If loss is proved apparently within a
contract of insurance, the burden is upon the insurer to establish that the loss arose from

Mercantile Law 2021 Page 4 of 29

 Recoletos Law Center
“HOME OF THE NATION’S TOP BAR REVIEWERS”

a cause of loss which is excepted or for which it is not liable, or from a cause which limits
its liability (United Merchants Corporation vs. Country Bankers Insurance Corporation, G.R.
No. 198588, July 11, 2012).

Insurance; Contract; insurance surety. Section 175 of the Insurance Code defines a
suretyship as a contract or agreement whereby a party, called the surety, guarantees the
performance by another party, called the principal or obligor, of an obligation or
undertaking in favor of a third party, called the obligee. It includes official recognizances,
stipulations, bonds or undertakings issued under Act 536, as amended. Suretyship arises
upon the solidary binding of a person – deemed the surety – with the principal debtor,
for the purpose of fulfilling an obligation. Such undertaking makes a surety agreement
an ancillary contract as it presupposes the existence of a principal contract. Although the
contract of a surety is in essence secondary only to a valid principal obligation, the surety
becomes liable for the debt or duty of another although it possesses no direct or personal
interest over the obligations nor does it receive any benefit therefrom. And
notwithstanding the fact that the surety contract is secondary to the principal obligation,
the surety assumes liability as a regular party to the undertaking (First Lepanto-Taisho
Insurance Corporation (now known as FLT Prime Insurance Corporation) vs. Chevron
Philippines, Inc. (formerly known as Caltex Philippines, Inc.), G.R. No. 177839, January 18,
2012).

Insurance; Limited liability rule; availability. The Limited liability rule has been
explained to be that of the real and hypothecary doctrine in maritime law where the ship-
owner or ship agent’s liability is held as merely co-extensive with his interest in the vessel
such that a total loss thereof results in its extinction. In this jurisdiction, this rule is
provided in three articles of the Code of Commerce. These are:

Art. 587. The ship agent shall also be civilly liable for the indemnities in favor of third
persons which may arise from the conduct of the captain in the care of the goods which
he loaded on the vessel; but he may exempt himself therefrom by abandoning the vessel
with all her equipment and the freight it may have earned during the voyage.
Art. 590. The co-owners of the vessel shall be civilly liable in the proportion of their
interests in the common fund for the results of the acts of the captain referred to in Art.
587.

Each co-owner may exempt himself from this liability by the abandonment, before a
notary, of the part of the vessel belonging to him. Art. 837. The civil liability incurred by
ship-owners in the case prescribed in this section, shall be understood as limited to the
value of the vessel with all its appurtenances and freightage served during the voyage.
Article 837 specifically applies to cases involving collision which is a necessary
consequence of the right to abandon the vessel given to the ship-owner or ship agent
under the first provision – Article 587. Similarly, Article 590 is a reiteration of Article 587,
only this time the situation is that the vessel is co-owned by several persons. Obviously,
the forerunner of the Limited Liability Rule under the Code of Commerce is Article 587.

Mercantile Law 2021 Page 5 of 29

 Recoletos Law Center
“HOME OF THE NATION’S TOP BAR REVIEWERS”

Now, the latter is quite clear on which indemnities may be confined or restricted to the
value of the vessel pursuant to the said Rule, and these are the – “indemnities in favor of
third persons which may arise from the conduct of the captain in the care of the goods
which he loaded on the vessel.” Thus, what is contemplated is the liability to third
persons who may have dealt with the ship-owner, the agent or even the charterer in case
of demise or bareboat charter (Agustin P. Dela Torre v. The Hon. Court of Appeals, et
al./Philippine Trigon Shipyard Corporation, et al. v. Crisostomo G. Concepcion, et al., G.R. No.
160088/G.R. No. 160565, July 13, 2011).

Insurance; Presentation of policy as a condition for recovery by insurance company. The

presentation in evidence of the marine insurance policy is not indispensable before the
insurer may recover from the common carrier the insured value of the lost cargo in the
exercise of its subrogatory right. The subrogation receipt, by itself, is sufficient to establish
the amount paid to settle the insurance claim. The right of subrogation accrues simply
upon payment by the insurance company of the insurance claim. In International
Container Terminal Services, Inc. v. FGU Insurance Corporation, the Supreme Court
explained:

Indeed, jurisprudence has it that the marine insurance policy needs to be presented in
evidence before the trial court or even belatedly before the appellate court. In Malayan
Insurance Co., Inc. v. Regis Brokerage Corp., the Court stated that the presentation of the
marine insurance policy was necessary, as the issues raised therein arose from the very
existence of an insurance contract between Malayan Insurance and its consignee, ABB
Koppel, even prior to the loss of the shipment. In Wallem Philippines Shipping, Inc. v.
Prudential Guarantee and Assurance, Inc., the Court ruled that the insurance contract must
be presented in evidence in order to determine the extent of the coverage. This was also
the ruling of the Court in Home Insurance Corporation v. Court of Appeals.
However, as in every general rule, there are admitted exceptions. In Delsan Transport
Lines, Inc. v. Court of Appeals, the Court stated that the presentation of the insurance policy
was not fatal because the loss of the cargo undoubtedly occurred while on board the
petitioner’s vessel, unlike in Home Insurance in which the cargo passed through several
stages with different parties and it could not be determined when the damage to the cargo
occurred, such that the insurer should be liable for it (Asian Terminals, Inc. v. Malayan
Insurance, Co., Inc., G.R. No. 171406, April 4, 2011).

Insurance; Incontestability Clause. After a policy of life insurance made payable on the
death of the insured shall have been in force during the lifetime of the insured for a period
of two years from the date of its issue or of its last reinstatement, the insurer cannot prove
that the policy is void ab initio or is rescindible by reason of the fraudulent concealment
or misrepresentation of the insured or his agent. The insurer is deemed to have the
necessary facilities to discover such fraudulent concealment or misrepresentation within
a period of two (2) years. It is not fair for the insurer to collect the premiums as long as
the insured is still alive, only to raise the issue of fraudulent concealment or
misrepresentation when the insured dies in order to defeat the right of the beneficiary to

Mercantile Law 2021 Page 6 of 29

 Recoletos Law Center
“HOME OF THE NATION’S TOP BAR REVIEWERS”

recover under the policy (The Insular Life Assurance Company, Ltd. Vs. Paz Y. Khu, Felipe Y.
Khu, Jt. & Frederick Y. Khu, G.R. No. 195176, April 18, 2016).

Incontestability Clause - It is a settled rule that if the insured dies within the two-year
contestability period, the insurer is bound to make good its obligation under the policy,
regardless of the presence or lack of concealment or misrepresentation. Under Sec. 48, the
insurer is given two years — from the effectivity of a life insurance contract and while
the insured is alive — to discover or prove that the policy is void ab initio or is rescindible
by reason of the fraudulent concealment or misrepresentation of the insured or his agent.
After the two-year period lapses, or when the insured dies within the period, the insurer
must make good on the policy, even though the policy was obtained by fraud,
concealment, or misrepresentation. Thus, on May 11, 2001 when the insured died, or a
mere three months from the issuance of the policy, Sun Life loses its right to rescind the
policy (Sun Life of Canada v. Sibya, G.R. No. 211212, June 8, 2016).

Jurisdiction of the Insurance Commission; The settled rule is that criminal and civil cases
are altogether different from administrative matters, such that the disposition in the first
two will not inevitably govern the third and vice versa." In the context of the case at bar,
matters handled by the Insurance Commissioner are delineated as either regulatory or
adjudicatory, both of which have distinct characteristics. The authority to adjudicate
granted to the Commissioner under this section shall be concurrent with that of the civil
courts, but the filing of a complaint with the Commissioner shall preclude the civil courts
from taking cognizance of a suit involving the same subject matter. Any decision, order
or ruling rendered by the Commissioner after a hearing shall have the force and effect of
a judgment. Any party may appeal from a final order, ruling or decision of the
Commissioner by filing with the Commissioner within thirty days from receipt of copy
of such order, ruling or decision a notice of appeal to the Intermediate Appellate Court
(now the Court of Appeals) in the manner provided for in the Rules of Court for appeals
from the Regional Trial Court to the Intermediate Appellate Court (now the Court of
Appeals) (Malayan Insurance Co., Inc. v. Lin, G.R. No. 207277, January 16, 2017).

Duty of Insurance Commissioner; Security Deposits - the Insurance Commissioner had

the specific legal duty to hold the security deposits for the benefit of all policy holders.
The Commissioner may issue such rulings, instructions, circulars, orders and decisions
as he may deem necessary to secure the enforcement of the provisions of [the] Code,
subject to the approval of the Secretary of Finance. Except as otherwise specified,
decisions made by the Commissioner shall be appealable to the Secretary of Finance.” As
the officer vested with custody of the security deposit, the insurance commissioner is in
the best position to determine if and when it may be released without prejudicing the
rights of other policy holders.

It is clear in Sec. 203 of the Code that “no judgment creditor or other claimant shall have
the right to levy upon any securities of the insurer held on deposit”. As worded, the law
expressly and clearly states that the security deposit shall be (1) answerable for all the
obligations of the depositing insurer under its insurance contracts; (2) at all times free

Mercantile Law 2021 Page 7 of 29

 Recoletos Law Center
“HOME OF THE NATION’S TOP BAR REVIEWERS”

from any liens or encumbrance; and (3) exempt from levy by any claimant. To allow
garnishment of that deposit would impair the fund by decreasing it to less than the
percentage of paid-up capital that the law requires to be maintained. Further, this move
would create, in favor of respondent, a preference of credit over the other policy holders
and beneficiaries (Capital Insurance and Surety Co. v. Del Monte Motors, G.R. No. 159979,
December 9, 2015).

Transportation Law; Common Carrier. A common carrier is a person engaged in the

business of carrying or transporting passengers or goods or both, by land, water, or air,
for compensation, offering services to the public (New Civil Code, Art. 1732).

Transportation Law; Common Carrier. The Air Passenger Bill of Right mandates that the
airline must inform the passenger in writing of all the conditions and restrictions in the
contract of carriage. Purchase of the contract of carriage binds the passenger and imposes
reciprocal obligations on both the airline and the passenger. The airline must exercise
extraordinary diligence in the fulfillment of the terms and conditions of the contract of
carriage. The passenger, however, has the correlative obligation to exercise ordinary
diligence in the conduct of his or her affairs. Common carriers are required to exercise
extraordinary diligence in the performance of its obligations under the contract of
carriage. This extraordinary diligence must be observed not only in the transportation of
goods and services but also in the issuance of the contract of carriage, including its
ticketing operations (Alfredo Manay, Jr. vs. Cebu Air, Inc., G.R. No. 210621, April 4, 2016).

Transportation Law; Private Carrier. A private carrier is one who, without making the
activity a vocation, or without holding himself or itself out to the public as ready to act
for all who may desire his or its services, undertakes, by special agreement in a particular
instance only, to transport goods or persons from one place to another either gratuitously
or for hire (Spouses Pereña v. Spouses Zarate, G.R. No. 157917, August 29, 2012).

Transportation Law; Doctrine of Last Clear Chance. The doctrine of last clear chance
provides that where both parties are negligent but the negligent act of one is appreciably
later in point of time than that of the other, or where it is impossible to determine whose
fault or negligence brought about the occurrence of the incident, the one who had the last
clear opportunity to avoid the impending harm but failed to do so, is chargeable with the
consequences arising therefrom. Stated differently, the rule is that the antecedent
negligence of a person does not preclude recovery of damages caused by the supervening
negligence of the latter, who had the last fair chance to prevent the impending harm by
the exercise of due diligence (Greenstar Express, Inc. vs. Universal Robina Corporation &
Nissin Universal Robina Corporation, G.R. No. 205090, October 17, 2016).

Transportation Law; Liabilities of Common Carrier. Clearly, the trial court is not
required to make an express finding of the common carrier's fault or negligence. The
presumption of negligence applies so long as there is evidence showing that: (a) a contract
exists between the passenger and the common carrier; and (b) the injury or death took
place during the existence of such contract. In such event, the burden shifts to the

Mercantile Law 2021 Page 8 of 29

 Recoletos Law Center
“HOME OF THE NATION’S TOP BAR REVIEWERS”

common carrier to prove its observance of extraordinary diligence, and that an

unforeseen event or force majeure had caused the injury. However, for a common carrier
to be absolved from liability in case of force majeure, it is not enough that the accident
was caused by a fortuitous event. The common carrier must still prove that it did not
contribute to the occurrence of the incident due to its own or its employees' negligence
(Sulpicio Lines, Inc. vs. Napoleon Sesante, G.R. No. 17282, July 27, 2016).

Carriage of Goods by Sea Act; applicability. COGSA applies only in terms of loss or
damage of goods transported to and from Philippine ports in foreign trade and to
domestic trade when there is a paramount clause in the contract. COGSA applies only in
case of non-delivery or damage, and not to misdelivery or conversion of goods (Ang v.
American Steamship Agencies, Inc., G.R. No. L-22491, Jan. 27, 1967).

Carriage of Goods by Sea Act; prescription. The COGSA is the applicable law for all
contracts for carriage of goods by sea to and from Philippine ports in foreign trade. Under
Section 3(6) of the COGSA, the carrier is discharged from liability for loss or damage to
the cargo “unless the suit is brought within one year after delivery of the goods or the
date when the goods should have been delivered.” Jurisprudence, however, recognized
the validity of an agreement between the carrier and the shipper/consignee extending the
one-year period to file a claim (Benjamin Cua (Cua Hian Tek) vs. Wallem Philippines
Shipping, Inc. and Advance Shipping Corporation, G.R. No. 171337. July 11, 2012).

Carriage of Goods by Sea Act (COGSA); applicability of prescription period to arrastre

operator. Under the COGSA, the carrier and the ship may put up the defense of
prescription if the action for damages is not brought within one year after the delivery of
the goods or the date when the goods should have been delivered. It has been held that
not only the shipper, but also the consignee or legal holder of the bill may invoke the
prescriptive period. However, the COGSA does not mention that an arrastre operator
may invoke the prescriptive period of one year; hence, it does not cover the arrastre
operator (Insurance Company of North America vs. Asian Terminals, Inc., G.R. No. 180784,
February 15, 2012).

Common Carriers; Warehouse Receipts Act; Arrastre Operators; An arrastre operator

should adhere to the same degree of diligence as that legally expected of a warehouseman
or a common carrier as set forth in Section 3[b] of the Warehouse Receipts Act and Article
1733 of the Civil Code. In case of claim for loss filed by a consignee or the insurer as
subrogee, it is the arrastre operator that carries the burden of proving compliance with
the obligation to deliver the goods to the appropriate party. As held in International
Container Terminal Services, Inc. v. Prudential Guarantee & Assurance Co., Inc., 320 SCRA 244
(1999), the signature of the consignee’s representative on the gate pass is evidence of
receipt of the shipment in good order and condition (Marina Port Services, Inc. v. American
Home Assurance Corp., G.R. No. 201822, August 12, 2015).

Common Carriers; Shipper’s Load and Count; Marina Port Services, Inc. (MPSI) cannot
just the same be held liable for the missing bags of flour since the consigned goods were

Mercantile Law 2021 Page 9 of 29

 Recoletos Law Center
“HOME OF THE NATION’S TOP BAR REVIEWERS”

shipped under “Shipper’s Load and Count” arrangement. This means that the shipper
was solely responsible for the loading of the container, while the carrier was oblivious to
the contents of the shipment. Protection against pilferage of the shipment was the
consignee’s lookout (Marina Port Services, Inc. v. American Home Assurance Corp., G.R. No.
201822, August 12, 2015).

Corporation; definition. A corporation is an artificial being created by operation of law,

having the right of succession and the powers, attributes and properties expressly
authorized by law or incident to its existence. (Corporation Code, Sec. 2).

Corporation; Doing business without a license. The appointment of a distributor in the

Philippines is not sufficient to constitute “doing business” unless it is under the full
control of the foreign corporation. On the other hand, if the distributor is an independent
entity which buys and distributes products, other than those of the foreign corporation,
for its own name and its own account, the latter cannot be considered to be doing business
in the Philippines. It should be kept in mind that the determination of whether a foreign
corporation is doing business in the Philippines must be judged in light of the attendant
circumstances (Steelcase, Inc. Vs. Design International Selections, Inc. G.R. No. 171995, April
18, 2012).

Corporation; doing business without a license; estoppel. a foreign corporation doing

business in the Philippines without a license may still sue before the Philippine courts a
Filipino or a Philippine entity that had derived some benefit from their contractual
arrangement because the latter is considered to be estopped from challenging the
personality of a corporation after it had acknowledged the said corporation by entering
into a contract with it (Steelcase, Inc. Vs. Design International Selections, Inc., G.R. No.
171995, April 18, 2012).

Corporation; contracts before incorporation. Logically, there is no corporation to speak

of prior to an entity’s incorporation. And no contract entered into before incorporation
can bind the corporation (March II Marketing, Inc. and Lucila V. Joson vs. Alfredo M.
Joson, G.R. No. 171993, December 12, 2011).

Corporations; capacity to sue of dissolved corporations. The trustee of a corporation

may continue to prosecute a case commenced by the corporation within three years from
its dissolution until rendition of the final judgment, even if such judgment is rendered
beyond the three-year period allowed by Section 122 of the Corporation Code (Alabang
Development Corporation v. Alabang Hills Village Association and Rafael Tinio, G.R. No.
187456, June 2, 2014).

Corporations; refusal to allow inspection is a criminal offense. We find inaccurate the

pronouncement of the RTC that the act of refusing to allow inspection of the stock and
transfer book is not a punishable offense under the Corporation Code. Such refusal, when
done in violation of Section 74(4) of the Corporation Code, properly falls within the
purview of Section 144 of the same code and thus may be penalized as an offense

Mercantile Law 2021 Page 10 of 29

 Recoletos Law Center
“HOME OF THE NATION’S TOP BAR REVIEWERS”

(Aderito Z. Yujuico and Bonifacio C. Sumbilla v. Cezar T. Quiambao and Eric C. Pilapil, G.R.
No. 180416, June 2, 2014).

Corporations; persons who may be held liable under Section 74. A perusal of the second
and fourth paragraphs of Section 74, as well as the first paragraph of the same section,
reveal that they are provisions that obligates a corporation: they prescribe what books or
records a corporation is required to keep; where the corporation shall keep them; and
what are the other obligations of the corporation to its stockholders or members in
relation to such books and records. Hence, by parity of reasoning, the second and fourth
paragraphs of Section 74, including the first paragraph of the same section, can only be
violated by a corporation. It is clear then that a criminal action based on the violation of
the second or fourth paragraphs of Section 74 can only be maintained against corporate
officers or such other persons that are acting on behalf of the corporation. Violations of
the second and fourth paragraphs of Section 74 contemplates a situation wherein a
corporation, acting thru one of its officers or agents, denies the right of any of its
stockholders to inspect the records, minutes and the stock and transfer book of such
corporation (Aderito Z. Yujuico and Bonifacio C. Sumbilla v. Cezar T. Quiambao and Eric C.
Pilapil, G.R. No. 180416, June 2, 2014).

Corporation; Corporate officers; liability. “it is hornbook principle that personal liability
of corporate directors, trustees or officers attaches only when: (a) they assent to a patently
unlawful act of the corporation, or when they are guilty of bad faith or gross
negligence in directing its affairs, or when there is a conflict of interest resulting in
damages to the corporation, its stockholders or other persons; (b) they consent to
the issuance of watered down stocks or when, having knowledge of such issuance, do
not forthwith file with the corporate secretary their written objection; (c) they agree
to hold themselves personally and solidarily liable with the corporation; or (d) they are
made by specific provision of law personally answerable for their corporate action (SPI
Technologies, Inc., et al. v. Victoria K. Mapua,G.R. No. 199022, April 7, 2014).

Corporations; Corporate officers; liability. A corporation has a personality separate and

distinct from its officers and board of directors who may only be held personally liable
for damages if it is proven that they acted with malice or bad faith in the dismissal of an
employee (Mirant (Philippines) Corporation, et al. v. Joselito A. Caro, G.R. No. 181490, April
23, 2014).

Corporations; liability of corporate officers. As a general rule, the officer cannot be held
personally liable with the corporation, whether civilly or otherwise, for the consequences
his acts, if acted for and in behalf of the corporation, within the scope of his authority and
in good faith (Rodolfo Laborte, et al. v. Pagsanjan Tourism Consumers’ Cooperative, et al., G.R.
No. 183860, January 15, 2014).

Corporation; separate personality. A corporation is an artificial entity created by

operation of law. It possesses the right of succession and such powers, attributes, and
properties expressly authorized by law or incident to its existence. It has a personality

Mercantile Law 2021 Page 11 of 29

 Recoletos Law Center
“HOME OF THE NATION’S TOP BAR REVIEWERS”

separate and distinct from that of its stockholders and from that of other corporations to
which it may be connected. As a consequence of its status as a distinct legal entity and as
a result of a conscious policy decision to promote capital formation, a corporation incurs
its own liabilities and is legally responsible for payment of its obligations. In other words,
by virtue of the separate juridical personality of a corporation, the corporate debt or credit
is not the debt or credit of the stockholder. This protection from liability for shareholders
is the principle of limited liability (Phil. National Bank vs. Hydro Resources Contractors Corp.
G.R. Nos. 167530, 167561, 16760311. March 13, 2013).

Corporations; merger; concept. Merger is a re-organization of two or more corporations

that results in their consolidating into a single corporation, which is one of the constituent
corporations, one disappearing or dissolving and the other surviving. To put it another
way, merger is the absorption of one or more corporations by another existing
corporation, which retains its identity and takes over the rights, privileges, franchises,
properties, claims, liabilities and obligations of the absorbed corporation(s). The
absorbing corporation continues its existence while the life or lives of the other
corporation(s) is or are terminated (Bank of Commerce v. Radio Philippines Network, Inc., et
al., G.R. No. 195615, April 21, 2014).

Corporations; merger; de facto merger. A de facto merger can be pursued by one

corporation acquiring all or substantially all of the properties of another corporation in
exchange of shares of stock of the acquiring corporation. The acquiring corporation
would end up with the business enterprise of the target corporation; whereas, the target
corporation would end up with basically it’s only remaining assets being the shares of
stock of the acquiring corporation (Bank of Commerce v. Radio Philippines Network, Inc., et
al., G.R. No. 195615, April 21, 2014).

Corporations; merger; effectivity. A merger does not become effective upon the mere
agreement of the constituent corporations. All the requirements specified in the law must
be complied with in order for merger to take effect. Section 79 of the Corporation Code
further provides that the merger shall be effective only upon the issuance by the
Securities and Exchange Commission (SEC) of a certificate of merger (Bank of Commerce
v. Radio Philippines Network, Inc., et al., G.R. No. 195615, April 21, 2014).

Corporations; nationality; control test. The “control test” is still the prevailing mode of
determining whether or not a corporation is a Filipino corporation, within the ambit of
Sec. 2, Art. II of the 1987 Constitution, entitled to undertake the exploration, development
and utilization of the natural resources of the Philippines. When in the mind of the Court
there is doubt, based on the attendant facts and circumstances of the case, in the 60-40
Filipino-equity ownership in the corporation, then it may apply the “grandfather
rule.” (Narra Nickel Mining and Development Corp., et al. v. Redmont Consolidated Mines, G.R.
No. 195580, April 21, 2014).

Corporation; shares of stock. In a sale of shares of stock, physical delivery of a stock

certificate is one of the essential requisites for the transfer of ownership of the stocks

Mercantile Law 2021 Page 12 of 29

 Recoletos Law Center
“HOME OF THE NATION’S TOP BAR REVIEWERS”

purchased (Fil-Estate Gold and Development, Inc., et al. v. Vertex Sales and Trading, Inc., G.R.
No. 202079, June 10, 2013).

Corporations; piercing the corporate veil. It has long been settled that the law vests a
corporation with a personality distinct and separate from its stockholders or members.
In the same vein, a corporation, by legal fiction and convenience, is an entity shielded by
a protective mantle and imbued by law with a character alien to the persons comprising
it. Nonetheless, the shield is not at all times impenetrable and cannot be extended to a
point beyond its reason and policy. Circumstances might deny a claim for corporate
personality, under the “doctrine of piercing the veil of corporate fiction.”

Piercing the veil of corporate fiction is an equitable doctrine developed to address

situations where the separate corporate personality of a corporation is abused or used for
wrongful purposes. Under the doctrine, the corporate existence may be disregarded
where the entity is formed or used for non-legitimate purposes, such as to evade a just
and due obligation, or to justify a wrong, to shield or perpetrate fraud or to carry out
similar or inequitable considerations, other unjustifiable aims or intentions, in which case,
the fiction will be disregarded and the individuals composing it and the two corporations
will be treated as identical (Eric Godfrey Stanley Livesey v. Binswanger Philippines, Inc. and
Keith Elliot, G.R. No. 177493, March 19, 2014).

Any piercing of the corporate veil has to be done with caution, albeit courts will not
hesitate to disregard the corporate veil when it is misused or when necessary in the
interest of justice. After all, the concept of corporate entity was not meant to promote
unfair objectives (Sarona v. National Labor Relations Commission, 663 SCRA 394, January 18,
2012).

Corporation; piercing the corporate veil. Under a variation of the doctrine of piercing the
veil of corporate fiction, when two business enterprises are owned, conducted and
controlled by the same parties, both law and equity will, when necessary to protect the
rights of third parties, disregard the legal fiction that two corporations are distinct entities
and treat them as identical or one and the same.

While the conditions for the disregard of the juridical entity may vary, the following are
some probative factors of identity that will justify the application of the doctrine of
piercing the corporate veil, as laid down in Concept Builders, Inc. v NLRC:
(1) Stock ownership by one or common ownership of both corporations;
(2) Identity of directors and officers;
(3) The manner of keeping corporate books and records, and
(4) Methods of conducting the business (Heirs of Fe Tan Uy [Represented by her heir, Manling
Uy Lim] vs. International Exchange Bank/Goldkey Development Corporation vs. International
Exchange Bank, G.R. No. 166282/G.R. No. 166283, February 13, 2013).

Mercantile Law 2021 Page 13 of 29

 Recoletos Law Center
“HOME OF THE NATION’S TOP BAR REVIEWERS”

Corporation; Non-stock Corporation; Quorum; By-laws. Under Section 52 of the

Corporation Code, for stock corporations, the quorum is based on the number of
outstanding voting stocks while for non-stock corporations, only those who are actual,
living members with voting rights shall be counted in determining the existence of a
quorum. To be clear, the basis in determining the presence of quorum in nonstock
corporations is the numerical equivalent of all members who are entitled to vote, unless
some other basis is provided by the By-Laws of the corporation. The qualification "with
voting rights" simply recognizes the power of a non-stock corporation to limit or deny
the right to vote of any of its members. To include these members without voting rights
in the total number of members for purposes of quorum would be superfluous for
although they may attend a particular meeting, they cannot cast their vote on any matter
discussed therein. Similarly, Section 6 of Condocor's By-Laws reads: "The attendance of
a simple majority of the members who are in good standing shall constitute a quorum ...
xx x." The phrase, "members in good standing," is a mere qualification as to which
members will be counted for purposes of quorum (Lim v. Moldex Land Inc, G.R. No.
206038, January 25, 2017).

Corporations; doctrine of apparent authority. The doctrine of apparent authority

provides that a corporation will be estopped from denying the agent’s authority if it
knowingly permits one of its officers or any other agent to act within the scope of an
apparent authority, and it holds him out to the public as possessing the power to do those
acts. The doctrine of apparent authority does not apply if the principal did not commit
any acts or conduct which a third party knew and relied upon in good faith as a result of
the exercise of reasonable prudence. Moreover, the agent’s acts or conduct must have
produced a change of position to the third party’s detriment (Advance Paper Corporation
and George Haw, in his capacity as President of Advance Paper Corporation v. Arma Traders
Corporation, Manuel Ting, et al., G.R. No. 176897, December 11, 2013).

Corporation; Stockholder’s Appraisal Right. It refers to the right of the stockholder to

demand payment of the fair value of his shares, after dissenting from a proposed
corporate action involving a fundamental change in the charter or articles of
incorporation in the cases provided by law (De Leon, 2010).

The corporation need not pay the value of the shares of a dissenting stockholder if at the
time of the demand, the corporation has no unrestricted retained earnings. No payment
shall be made to any dissenting stockholder unless the corporation has unrestricted
retained earnings in its books to cover the payment. The trust fund doctrine backstops
the requirement of unrestricted retained earnings to fund the payment of the shares of
stocks of the withdrawing stockholders. The fact that the Corporation subsequent to the
demand for payment and during the pendency of the collection case posted surplus profit
did not cure the prematurity of the cause of action (Philip Turner, et al., v. Lorenzo Shipping
Corporation, G.R. No. 157479, November 24, 2010).

Corporation; Dissolution; continuation of business. Section 122 of the Corporation Code

prohibits a dissolved corporation from continuing its business, but allows it to continue

Mercantile Law 2021 Page 14 of 29

 Recoletos Law Center
“HOME OF THE NATION’S TOP BAR REVIEWERS”

with a limited personality in order to settle and close its affairs, including its complete
liquidation. Thus:
Sec. 122. Corporate liquidation. – Every corporation whose charter expires by its own
limitation or is annulled by forfeiture or otherwise, or whose corporate existence for other
purposes is terminated in any other manner, shall nevertheless be continued as a body
corporate for three (3) years after the time when it would have been so dissolved, for the
purpose of prosecuting and defending suits by or against it and enabling it to settle and
close its affairs, to dispose of and convey its property and to distribute its assets, but not
for the purpose of continuing the business for which it was established (Vitaliano N.
Aguirre II and Fidel N. Aguirre II and Fidel N. Aguirre vs. FQB+, Inc., Nathaniel D. Bocobo,
Priscila Bocobo and Antonio De Villa, G.R. No. 170770. January 9, 2013).

Corporation; Dissolution; board of directors. A corporation’s board of directors is not

rendered functus officio by its dissolution. Since Section 122 allows a corporation to
continue its existence for a limited purpose, necessarily there must be a board that will
continue acting for and on behalf of the dissolved corporation for that purpose. In fact,
Section 122 authorizes the dissolved corporation’s board of directors to conduct its
liquidation within three years from its dissolution. Jurisprudence has even recognized
the board’s authority to act as trustee for persons in interest beyond the said three-year
period (Vitaliano N. Aguirre II and Fidel N. Aguirre II and Fidel N. Aguirre vs. FQB+, Inc.,
Nathaniel D. Bocobo, Priscila Bocobo and Antonio De Villa, G.R. No. 170770. January 9, 2013).

Corporation; Dissolution; effect on property rights. A party’s stockholdings in a

corporation, whether existing or dissolved, is a property right which he may vindicate
against another party who has deprived him thereof. The corporation’s dissolution does
not extinguish such property right. Section 145 of the Corporation Code ensures the
protection of this right, thus:
Sec. 145. Amendment or repeal. – No right or remedy in favor of or against any corporation,
its stockholders, members, directors, trustees, or officers, nor any liability incurred
by any such corporation, stockholders, members, directors, trustees, or officers, shall be
removed or impaired either by the subsequent dissolution of said corporation or by any
subsequent amendment or repeal of this Code or of any part thereof (Vitaliano N. Aguirre
II and Fidel N. Aguirre II and Fidel N. Aguirre vs. FQB+, Inc., Nathaniel D. Bocobo, Priscila
Bocobo and Antonio De Villa, G.R. No. 170770, January 9, 2013).

Corporation; derivative suit. A derivative suit is an action brought by a stockholder

on behalf of the corporation to enforce corporate rights against the corporation’s
directors, officers or other insiders. Under Sections 23 and 36 of the Corporation Code,
the directors or officers, as provided under the by-laws, have the right to decide whether
or not a corporation should sue. Since these directors or officers will never be willing to
sue themselves, or impugn their wrongful or fraudulent decisions, stockholders are
permitted by law to bring an action in the name of the corporation to hold these directors
and officers accountable. In derivative suits, the real party in interest is the corporation,
while the stockholder is a mere nominal party (Juanito Ang, for and in behalf of Sunrise
Marketing (Bacolod), Inc. v. Sps. Roberto and Rachel Ang, G.R. No. 201675, June 19, 2013).

Mercantile Law 2021 Page 15 of 29

 Recoletos Law Center
“HOME OF THE NATION’S TOP BAR REVIEWERS”

Corporation; derivative suits. The requisites for a derivative suit are

as follows:
a) The party bringing suit should be a shareholder as of the time of the act or transaction
complained of, the number of his shares not being material;
b) He has tried to exhaust intra-corporate remedies, i.e., has made a demand on the board
of directors for the appropriate relief but the latter has failed or refused to heed his plea;
and
c) The cause of action actually devolves on the corporation, the wrongdoing or harm
having been, or being caused to the corporation and not to the particular stockholder
bringing the suit (Legaspi Towers 300, Inc., Lilia Marquinez Palanca, et al. vs. Amelia P. Muer,
Samuel M. Tanchoco, et al., G.R. No. 170783. June 18, 2012).

Corporation; Intra-corporate controversy; fraud. It is essential for the complaint to show

on its face what are claimed to be the fraudulent corporate acts if the complainant wishes
to invoke the court’s special commercial jurisdiction. This is because fraud in intra-
corporate controversies must be based on “devises and schemes employed by, or any act
of, the board of directors, business associates, officers or partners, amounting to fraud or
misrepresentation which may be detrimental to the interest of the public and/or of the
stockholders, partners, or members of any corporation, partnership, or association,” as
stated under Rule 1, Section 1 (a) (1) of the Interim Rules. The act of fraud or
misrepresentation complained of becomes a criterion in determining whether the
complaint on its face has merits, or within the jurisdiction of special commercial court, or
merely a nuisance suit (Simny G. Guy, Geraldine G. Guy, Gladys G. Yao and the Heirs of the
late Grace G. Cheu vs. Gilbert Guy/Simny G. Guy, Geraldine G. Guy, Gladys G. Yao and the
heirs of the late Grace G. Cheu vs. The Hon. Ofelia C. Calo, in her capacity as Presiding Judge of
the RTC-Mandaluyong City-Branch 211 and Gilbert Guy G.R. No. 189486/G.R. No. 189699.
September 5, 2012).

Corporation; Corporate officer; intra-corporate dispute. There are two circumstances

which must concur in order for an individual to be considered a corporate officer, as
against an ordinary employee or officer, namely: (1) the creation of the position is under
the corporation’s charter or by-laws; and (2) the election of the officer is by the directors
or stockholders. It is only when the officer claiming to have been illegally dismissed is
classified as such corporate officer that the issue is deemed an intra-corporate dispute
which falls within the jurisdiction of the trial courts (Raul C. Cosare v. Broadcom Asia, Inc.,
et al., G.R. No. 201298, February 5, 2014).

Corporation; Intra-corporate dispute; illegal dismissal case. As regards the issue of

jurisdiction, the Court has determined that contrary to the ruling of the Court of Appeals
(CA), it is the labor arbiter (LA), and not the regular courts, which has the original
jurisdiction over the subject controversy. An intra-corporate controversy, which falls
within the jurisdiction of regular courts, has been regarded in its broad sense to pertain
to disputes that involve any of the following relationships: (1) between the corporation,
partnership or association and the public; (2) between the corporation, partnership or
association and the state in so far as its franchise, permit or license to operate is concerned;

Mercantile Law 2021 Page 16 of 29

 Recoletos Law Center
“HOME OF THE NATION’S TOP BAR REVIEWERS”

(3) between the corporation, partnership or association and its stockholders, partners,
members or officers; and (4) among the stockholders, partners or associates, themselves.
Settled jurisprudence, however, qualifies that when the dispute involves a charge of
illegal dismissal, the action may fall under the jurisdiction of the LAs upon whose
jurisdiction, as a rule, falls termination disputes and claims for damages arising from
employer-employee relations as provided in Article 217 of the Labor Code (Raul C.
Cosare v. Broadcom Asia, Inc., et al., G.R. No. 201298, February 5, 2014).

Corporation; Rehabilitation; purpose. Rehabilitation is an attempt to conserve and

administer the assets of an insolvent corporation in the hope of its eventual return from
financial stress to solvency. It contemplates the continuance of corporate life and activities
in an effort to restore and reinstate the corporation to its former position of successful
operation and liquidity. The purpose of rehabilitation proceedings is precisely to enable
the company to gain a new lease on life and thereby allow creditors to be paid their claims
from its earnings.

Rehabilitation shall be undertaken when it is shown that the continued operation of the
corporation is economically feasible and its creditors can recover, by way of the present
value of payments projected in the plan, more, if the corporation continues as a going
concern than if it is immediately liquidated (Express Investments III Private Ltd. and Export
Development Canada Vs. Bayan Telecommunications, Inc., The Bank of New York (as trustee for
holders of the US$200,000,000 13.5% Seniour notes of Bayan Telecommunications, Inc.) and
Atty. Remigio A. Noval (as the Court-appointed Rehabilitation Receiver of Bayantel). G.R. Nos.
174457-59/G.R. Nos. 175418-20/G.R. No. 177270, December 5, 2012).

Rehabilitation proceedings are summary and non- adversarial in nature, and do not
contemplate adjudication of claims that must be threshed out in ordinary court
proceedings.

The jurisdiction of the rehabilitation court is over claims against the debtor that is under
rehabilitation, not over claims by the debtor against its own debtors or against third
parties. The corporation under rehabilitation must file a separate action against its
debtors/insurers to recover whatever claim it may have against them (Steel Corporation v.
Mapfre Insular Insurance Corporation, G.R. No. 201199, October 16, 2013, in Divina, 2014).

Corporation; Rehabilitation; priority of secured creditors. The resolution of the issue at

hand rests on a determination of whether secured creditors may enforce preference in
payment during rehabilitation by virtue of a contractual agreement.

The principle of equality in equity has been cited as the basis for placing secured and
unsecured creditors in equal footing or in pari passu with each other during rehabilitation.
In legal parlance, pari passu is used especially of creditors who, in marshaling assets, are
entitled to receive out of the same fund without any precedence over each other.

Mercantile Law 2021 Page 17 of 29

 Recoletos Law Center
“HOME OF THE NATION’S TOP BAR REVIEWERS”

The Court laid the guidelines for the treatment of claims against corporations
undergoing rehabilitation:
1. All claims against corporations, partnerships, or associations that are pending before
any court, tribunal, or board, without distinction as to whether or not a creditor is secured
or unsecured, shall be suspended effective upon the appointment of a management
committee, rehabilitation receiver, board, or body in accordance with the provisions of
Presidential Decree No. 902-A.
2. Secured creditors retain their preference over unsecured creditors, but enforcement of
such preference is equally suspended upon the appointment of a management
committee, rehabilitation receiver, board, or body. In the event that the assets of the
corporation, partnership, or association are finally liquidated, however, secured and
preferred credits under the applicable provisions of the Civil Code will definitely have
preference over unsecured ones (Express Investments III Private Ltd. and Export
Development Canada Vs. Bayan Telecommunications, Inc., The Bank of New York (as trustee for
holders of the US$200,000,000 13.5% Seniour notes of Bayan Telecommunications, Inc.) and
Atty. Remigio A. Noval (as the Court-appointed Rehabilitation Receiver of Bayantel). G.R. Nos.
174457-59/G.R. Nos. 175418-20/G.R. No. 177270. December 5, 2012).

Corporation; Rehabilitation; power of Monitoring Committee to manage

operations. The management committee or rehabilitation receiver, board or body shall
have the following powers: (1) to take custody of, and control over, all the existing assets
and property of the distressed corporation; (2) to evaluate the existing assets and
liabilities, earnings and operations of the corporation; (3) to determine the best way to
salvage and protect the interest of the investors and creditors; (4) to study, review and
evaluate the feasibility of continuing operations and restructure and rehabilitate such
entities if determined to be feasible by the Rehabilitation Court; and (5) it may overrule
or revoke the actions of the previous management and board of directors of the entity or
entities under management notwithstanding any provision of law, articles of
incorporation or by-laws to the contrary (Express Investments III Private Ltd. and Export
Development Canada Vs. Bayan Telecommunications, Inc., The Bank of New York (as trustee for
holders of the US$200,000,000 13.5% Seniour notes of Bayan Telecommunications, Inc.) and
Atty. Remigio A. Noval (as the Court-appointed Rehabilitation Receiver of Bayantel). G.R. Nos.
174457-59/G.R. Nos. 175418-20/G.R. No. 177270. December 5, 2012).

Corporation; Rehabilitation results. Corporate rehabilitation contemplates a

continuance of corporate life and activities in an effort to restore and reinstate the
corporation to its former position of successful operation and solvency, the purpose being
to enable the company to gain a new lease on life and allow its creditors to be paid their
claims out of its earnings. A principal feature of corporate rehabilitation is the Stay Order
which defers all actions or claims against the corporation seeking corporate rehabilitation
from the date of its issuance until the dismissal of the petition or termination of the
rehabilitation proceedings. Under Section 24, Rule 4 of the Interim Rules of Procedure on
Corporate, the approval of the rehabilitation plan also produces the following results:

Mercantile Law 2021 Page 18 of 29

 Recoletos Law Center
“HOME OF THE NATION’S TOP BAR REVIEWERS”

a. The plan and its provisions shall be binding upon the debtor and all persons who may
be affected by it, including the creditors, whether or not such persons have
participated
b. in the proceedings or opposed the plan or whether or not their claims have been
scheduled;
c. The debtor shall comply with the provisions of the plan and shall take all actions
necessary to carry out the plan;
d. Payments shall be made to the creditors in accordance with the provisions of the plan;
e. Contracts and other arrangements between the debtor and its creditors shall be
interpreted as continuing to apply to the extent that they do not conflict with the
provisions of the plan; and
f. Any compromises on amounts or rescheduling of timing of payments by the debtor
shall be binding on creditors regardless of whether or not the plan is successfully
implemented (Town and Country Enterprises, Inc. vs. Hon. Norberto J. Quisumbing, Jr., et
al./Town and Country Enterprises, G.R. No. 173610/G.R. No. 174132. October 1, 2012).

Corporate Rehabilitation; Rules - Under Rule 3, Section 5 of the Rules of Procedure on

Corporate Rehabilitation, the review of any order or decision of the rehabilitation court
or on appeal therefrom shall be in accordance with the Rules of Court, unless otherwise
provided (Robinson's Bank Corp. v. Gaerlan, G.R. No. 195289, September 24, 2014).

Securities Regulation Code; Tender Offer Rule. The mandatory tender offer rule covers
not only direct acquisition but also indirect acquisition or “any type of acquisition.” The
legislative intent of Section 19 of the Code is to regulate activities relating to acquisition
of control of the listed company and for the purpose of protecting the minority
stockholders of a listed corporation. Whatever may be the method by which control of a
public company is obtained, either through the direct purchase of its stocks or through
an indirect means, mandatory tender offer applies. What is decisive is the determination
of the power of control. The legislative intent behind the tender offer rule makes clear
that the type of activity intended to be regulated is the acquisition of control of the listed
company through the purchase of shares. Control may be effected through a direct and
indirect acquisition of stock, and when this takes place, irrespective of the means, a tender
offer must occur (Cemco Holdings v. National Life Insurance Company, G.R. No. 171815,
August 7, 2007).

Intellectual Property; Doctrine of Exhaustion. Doctrine of exhaustion (Also known as the

doctrine of first sale): it provides that the patent holder has control of the first sale of his
invention. He has the opportunity to receive the full consideration for his invention from
his sale. Hence, he exhausts his rights in the future control of his invention. It espouses
that the patentee who has already sold his invention and has received all the royalty and
consideration for the same will be deemed to have released the invention from his
monopoly. The invention thus becomes open to the use of the purchaser without further
restriction (Adams v. Burke, 84 U.S. 17, 1873).

Mercantile Law 2021 Page 19 of 29

 Recoletos Law Center
“HOME OF THE NATION’S TOP BAR REVIEWERS”

Intellectual Property; Copyright Infringement; Fair Use; ABS-CBN’s video footage of

Angelo dela Cruz is copyrightable because it falls under “audiovisual works and
cinematographic works and works produced by a process analogous to cinematographic
or any process for making audiovisual recordings.” The laws on copyright does not
require mens rea or criminal intent, as crimes under these laws are mala prohibita, hence
good faith is not an available defense for respondents. The act of infringement itself
produces the crime outright. A news or an event, say the event in the footage, is in itself
not copyrightable. Idea is different from expression. Idea means “a form, the look or
appearance of a thing” while expression is its reality or the “external, perceptible world
of articulate sounds and visible written symbols that others can understand.” Thus, only
the expression of an idea is protected by copyright, not the idea itself.
Fair use is “a privilege to use the copyrighted material in a reasonable manner without
the consent of the copyright owner or as copying the theme or ideas rather than their
expression.” Fair use is an exception to the copyright owner’s monopoly of the use of the
work to avoid stifling “the very creativity which that law is designed to foster.” It requires
application of the four-factor test: (1) The purpose and character of the use, including
whether such use is of a commercial nature or is for nonprofit educational purposes; (2)
The nature of the copyrighted work; (3) The amount and substantiality of the portion
used in relation to the copyrighted work as a whole; and (4) The effect of the use upon
the potential market for or value of the copyrighted work (ABS-CBN v. GMA & Atty.
Gozon, G.R. No. 195956, March 1, 2015).

Intellectual Property; Tests in Infringement. Literal Infringement - Resort must be had,

in the first instance, to the words of the claim. If accused matter clearly falls within the
claim, infringement is made out and that is the end of it. To determine whether the
particular item falls within the literal meaning of the patent claims, the Court must
juxtapose the claims of the patent and the accused product within the overall context of
the claims and specifications, to determine whether there is exactly identity of all material
elements (Godines v. The Honorable Court of Appeals, G.R. No. 97343, September 13, 1993).

Doctrine of Equivalents – There is infringement when a device appropriates a prior

invention by incorporating its innovative concept and, despite some modification and
change, performs substantially the same function in substantially the same way to
achieve substantially the same result (Ibid.).

The doctrine of equivalents thus requires satisfaction of the function-means-and-result

test, the patentee having the burden to show that all three components of such
equivalency test are met (Smithkline Beckman Corporation v. CA, G.R. No. 126627, August
14, 2003).

Meaning of “equivalent device”: It is such as a mechanic of ordinary skill in construction

of similar machinery, having the forms, specifications and machine before him, could

Mercantile Law 2021 Page 20 of 29

 Recoletos Law Center
“HOME OF THE NATION’S TOP BAR REVIEWERS”

substitute in the place of the mechanism described without the exercise of the inventive
faculty.

Doctrine of file wrapper estoppel: It balances the doctrine of equivalents. Patentee is

precluded from claiming as part of patented product that which he had to excise or
modify in order to avoid patent office rejection, and he may omit any additions that he
was compelled to add by patent office regulations.

Contributory Infringement: Anyone who actively induces the infringement of a patent or

provides the infringer with a component of a patented product or of a product produced
because of a patented process knowing it to be especially adopted for infringing the
patented invention and not suitable for substantial non-infringing use shall be liable as a
contributory infringer and shall be jointly and severally liable with the infringer (Sec. 76.6,
IPC).

Copyright; Useful Articles - A “useful article” defined as an article “having an intrinsic

utilitarian function that is not merely to portray the appearance of the article or to convey
information” is excluded from copyright eligibility. The only instance when a useful
article may be the subject of copyright protection is when it incorporates a design element
that is physically or conceptually separable from the underlying product. This means that
the utilitarian article can function without the design element. In such an instance, the
design element is eligible for copyright protection. The design of a useful article shall be
considered a pictorial, graphic, or sculptural work only if, and only to the extent that,
such design incorporates pictorial, graphic, or sculptural features that can be identified
separately from, and are capable of existing independently of, the utilitarian aspects of
the article.

A hatch door, by its nature is an object of utility. It is defined as a small door, small gate
or an opening that resembles a window equipped with an escape for use in case of fire or
emergency. It is thus by nature, functional and utilitarian serving as egress access during
emergency. It is not primarily an artistic creation but rather an object of utility designed
to have aesthetic appeal. It is intrinsically a useful article, which, as a whole, is not eligible
for copyright. The allegedly distinct set of hinges and distinct jamb, were related and
necessary hence, not physically or conceptually separable from the hatch door’s
utilitarian function as an apparatus for emergency egress. Without them, the hatch door
will not function. More importantly, they are already existing articles of manufacture
sourced from different suppliers (Olano v. Lim, G.R. No. 195835, March 14, 2016).

Copyright; Must-carry Rule. It is limitation on copyright which obligates operators to

carry the signals of local channels within their respective systems. This is to give the
people wider access to more sources of news, information, education, sports event and
entertainment programs other than those provided for by mass media and afforded
television programs to attain a well informed, well- versed and culturally refined
citizenry and enhance their socio-economic growth (ABS-CBN Broadcasting Corporation v.
Philippine Multimedia System, G.R. No. 175769-70, Jan. 19, 2009).

Mercantile Law 2021 Page 21 of 29

 Recoletos Law Center
“HOME OF THE NATION’S TOP BAR REVIEWERS”

The rule mandates that the local television (TV) broadcast signals of an authorized TV
broadcast station, such as the GMA Network, Inc., should be carried in full by the cable
antenna television (CATV) operator, without alteration or deletion. In this case, the
Central CATV, Inc. was found not to have violated the must-carry rule when it solicited
and showed advertisements in its cable television system. Such solicitation and showing
of advertisements did not constitute an infringement of the “television and broadcast
markets” under Section 2 of E.O. No. 205 (GMA Network, Inc. v. Central CATV, Inc., G.R
No. 176694, July 18, 2014).

Intellectual Property; Trademarks; Acquisition, Registration. Under the Paris

Convention, the Philippines is obligated to assure nationals of the signatory-countries
that they are afforded an effective protection against violation of their intellectual
property rights in the Philippines in the same way that their own countries are obligated
to accord similar protection to Philippine nationals. “Thus, under Philippine law, a trade
name of a national of a State that is a party to the Paris Convention, whether or not the
trade name forms part of a trademark, is protected “without the obligation of filing or
registration.’”

The present law on trademarks, Republic Act No. 8293, otherwise known as the
Intellectual Property Code of the Philippines, as amended, has already dispensed with
the requirement of prior actual use at the time of registration (Ecole De Cuisine Manille
[Cordon Bleu of the Philippines], Inc. v. Renaud Cointreau & CIE and Le Condron Bleu Int’l.,
B.V., G.R. No. 185830, June 5, 2013).

The rights in a mark shall be acquired through registration made validly in accordance
with the provisions of the IP Code. Actual prior use in commerce in the Philippines has
been abolished as a condition for the registration of trademark.

Only the owner of the trademark, trade name or service mark used to distinguish his
goods, business or service from the goods, business or service of others is entitled to
register the same. An exclusive distributor does not acquire any proprietary interest in
the principal's trademark and cannot register it in his own name unless it is has been
validly assigned to him (Superior Commercial Enterprises, Inc. v. Kunnan Enterprises, G.R.
No. 169974, April 20, 2010).

Ownership of a mark or trade name may be acquired not necessarily by registration but
by adoption and use in trade or commerce. As between actual use of a mark without
registration, and registration of the mark without actual use thereof, the former prevails
over the latter (Shangri-la Hotel Management Ltd. v. Developers Group of companies, March
31, 2006 G.R. No. 159938).

A trade name need not be registered with the IPO before an infringement suit may be
filed by its owner against the owner of an infringing trademark. All that is required is
that the trade name is previously used in trade or commerce in the Philippines. (Coffee
Partners, Inc. v. San Francisco Coffee & Roastery, Inc., G.R. No. 169504, March 3, 2010).

Mercantile Law 2021 Page 22 of 29

 Recoletos Law Center
“HOME OF THE NATION’S TOP BAR REVIEWERS”

Intellectual Property; Trademark; test for similarity. A trademark device is susceptible

to registration if it is crafted fancifully or arbitrarily and is capable of identifying and
distinguishing the goods of one manufacturer or seller from those of another. Apart from
its commercial utility, the benchmark of trademark registrability is distinctiveness.

Section 123.1(d) of the IP Code provides that a mark cannot be registered if it is identical
with a registered mark belonging to a different proprietor with an earlier filing or priority
date, with respect to the same or closely related goods or services, or has a near
resemblance to such mark as to likely deceive or cause confusion.

In determining similarity and likelihood of confusion, case law has developed the
Dominancy Test and the Holistic or Totality Test. The Dominancy Test focuses on the
similarity of the dominant features of the competing trademarks that might cause
confusion, mistake, and deception in the mind of the ordinary purchaser, and gives more
consideration to the aural and visual impressions created by the marks on the buyers of
goods, giving little weight to factors like prices, quality, sales outlets, and market
segments. In contrast, the Holistic or Totality Test considers the entirety of the marks as
applied to the products, including the labels and packaging, and focuses not only on the
predominant words but also on the other features appearing on both labels to determine
whether one is confusingly similar to the other as to mislead the ordinary purchaser. The
“ordinary purchaser” refers to one “accustomed to buy, and therefore to some extent
familiar with, the goods in question.” (Great White Shark Enterprises, Inc. vs. Danilo M.
Caralde, Jr., G.R. No. 192294. November 21, 2012).

Intellectual property; infringement; Dominancy Test; Holistic Test; confusion. The

essential element of infringement under R.A. No. 8293 is that the infringing mark is likely
to cause confusion. In determining similarity and likelihood of confusion, jurisprudence
has developed tests the Dominancy Test and the Holistic or Totality Test. The Dominancy
Test focuses on the similarity of the prevalent or dominant features of the competing
trademarks that might cause confusion, mistake, and deception in the mind of the
purchasing public. Duplication or imitation is not necessary; neither is it required that
the mark sought to be registered suggests an effort to imitate. Given more consideration
are the aural and visual impressions created by the marks on the buyers of goods, giving
little weight to factors like prices, quality, sales outlets, and market segments.

In contrast, the Holistic or Totality Test necessitates a consideration of the entirety of the
marks as applied to the products, including the labels and packaging, in determining
confusing similarity. The discerning eye of the observer must focus not only on the
predominant words, but also on the other features appearing on both labels so that the
observer may draw conclusion on whether one is confusingly similar to the other.

Relative to the question on confusion of marks and trade names, jurisprudence has noted
two (2) types of confusion, viz.: (1) confusion of goods (product confusion), where the
ordinarily prudent purchaser would be induced to purchase one product in the belief
that he was purchasing the other; and (2) confusion of business (source or origin

Mercantile Law 2021 Page 23 of 29

 Recoletos Law Center
“HOME OF THE NATION’S TOP BAR REVIEWERS”

confusion), where, although the goods of the parties are different, the product, the mark
of which registration is applied for by one party, is such as might reasonably be assumed
to originate with the registrant of an earlier product, and the public would then be
deceived either into that belief or into the belief that there is some connection between
the two parties, though inexistent (Skechers, U.S.A., Inc. vs. Inter Pacific Industrial Trading
Corp., et al., G.R. No. 164321, March 28, 2011).

Intellectual Property; Mark; infringement. A “mark” is any visible sign capable of

distinguishing the goods (trademark) or services (service mark) of an enterprise and shall
include a stamped or marked container of goods.

In McDonald’s Corporation and McGeorge Food Industries, Inc. v. L.C. Big Mak Burger, Inc.,
this Court held: To establish trademark infringement, the following elements must be
shown: (1) the validity of plaintiff’s mark; (2) the plaintiff’s ownership of the mark; and
(3) the use of the mark or its colorable imitation by the alleged infringer results in
“likelihood of confusion.” Of these, it is the element of likelihood of confusion that is the
gravamen of trademark infringement.

A mark is valid if it is distinctive and not barred from registration. Once registered, not
only the mark’s validity, but also the registrant’s ownership of the mark is prima facie
presumed (Gemma Ong a.k.a. Ma. Theresa Gemma Catacutan vs. People of the Philippines, G.R.
No. 169440, November 23, 2011).

Intellectual Property; Trademark; Well-known mark; Harvard. There is no question

then, and this Court so declares, that “Harvard” is a well-known name and mark not only
in the United States but also internationally, including the Philippines. The mark
“Harvard” is rated as one of the most famous marks in the world. It has been registered
in at least 50 countries. It has been used and promoted extensively in numerous
publications worldwide. It has established a considerable goodwill worldwide since the
founding of Harvard University more than 350 years ago. It is easily recognizable as the
trade name and mark of Harvard University of Cambridge, Massachusetts, U.S.A.,
internationally known as one of the leading educational institutions in the world. As
such, even before Harvard University applied for registration of the mark “Harvard” in
the Philippines, the mark was already protected under Article 6bis and Article 8 of the
Paris Convention. Again, even without applying the Paris Convention, Harvard
University can invoke Section 4(a) of R.A. No. 166 which prohibits the registration of a
mark “which may disparage or falsely suggest a connection with persons, living or dead,
institutions, beliefs x x x.” (Fredco Manufacturing Corporation vs. President and Fellows of
Harvard College (Harvard University), G.R. No. 185917, June 1, 2011).

Intellectual Property; Patent. The right of priority given to a patent applicant is only
relevant when there are two or more conflicting patent applications on the same
invention. Because a right of priority does not automatically grant letters patent to an
applicant, possession of a right of priority does not confer any property rights on the
applicant in the absence of an actual patent. A patent is granted to provide rights and

Mercantile Law 2021 Page 24 of 29

 Recoletos Law Center
“HOME OF THE NATION’S TOP BAR REVIEWERS”

protection to the inventor after an invention is disclosed to the public. It also seeks to
restrain and prevent unauthorized persons from unjustly profiting from a protected
invention. However, ideas not covered by a patent are free for the public to use and
exploit. Thus, there are procedural rules on the application and grant of patents
established to protect against any infringement. To balance the public interests involved,
failure to comply with strict procedural rules will result in the failure to obtain a patent
(E.I Dupont De Nemours and Co. vs. Director Emma C. Francisco, G.R. 174379, August 31
2016).

Banks; degree of diligence required. Public interest is intimately carved into the banking
industry because the primordial concern here is the trust and confidence of the public.
This fiduciary nature of every bank’s relationship with its clients/depositors impels it to
exercise the highest degree of care, definitely more than that of a reasonable man or a
good father of a family. It is, therefore, required to treat the accounts and deposits of these
individuals with meticulous care. The rationale behind this is well expressed in Sandejas
v. Ignacio. The banking system has become an indispensable institution in the modern
world and plays a vital role in the economic life of every civilized society – banks have
attained a ubiquitous presence among the people, who have come to regard them with
respect and even gratitude and most of all, confidence, and it is for this reason, banks
should guard against injury attributable to negligence or bad faith on its part.
Considering that banks can only act through their officers and employees, the fiduciary
obligation laid down for these institutions necessarily extends to their employees. Thus,
banks must ensure that their employees observe the same high level of integrity and
performance for it is only through this that banks may meet and comply with their own
fiduciary duty. It has been repeatedly held that “a bank’s liability as an obligor is
not merely vicarious, but primary” since they are expected to observe an equally high
degree of diligence, not only in the selection, but also in the supervision of its employees.
Thus, even if it is their employees who are negligent, the bank’s responsibility to its client
remains paramount making its liability to the same to be a direct one (Westmont Bank,
formerly Associates Bank now United Overseas Bank Philippines vs.. Myrna Dela Rosa-Ramos,
Domingo Tan and William Co., G.R. No. 160260. October 24, 2012).

Banks; diligence required. Republic Act No. 8971, or the General Banking Law of 2000,
recognizes the vital role of banks in providing an environment conducive to the sustained
development of the national economy and the fiduciary nature of banking; thus, the
law requires banks to have high standards of integrity and performance. The fiduciary
nature of banking requires banks to assume a degree of diligence higher than that of a
good father of a family (Metropolitan Bank and Trust Company vs. Centro Development Corp.,
et al., G.R. No. 180974, June 13, 2012).

Banks; Bank secrecy; foreign currency deposits. Republic Act No. 1405 was enacted for
the purpose of giving encouragement to the people to deposit their money in banking
institutions and to discourage private hoarding so that the same may be properly utilized
by banks in authorized loans to assist in the economic development of the country. It
covers all bank deposits in the Philippines and no distinction was made between

Mercantile Law 2021 Page 25 of 29

 Recoletos Law Center
“HOME OF THE NATION’S TOP BAR REVIEWERS”

domestic and foreign deposits. Thus, Republic Act No. 1405 is considered a law of
general application. On the other hand, Republic Act No. 6426 was intended to
encourage deposits from foreign lenders and investors. It is a special law designed
especially for foreign currency deposits in the Philippines. A general law does not nullify
a specific or special law. Generalia specialibus non derogant (Government Service Insurance
System vs. Court of Appeals, et al., G.R. No. 189206. June 8, 2011).

Banks; Receivership; power of Monetary Board. The Monetary Board (MB) may forbid a
bank from doing business and place it under receivership without prior notice and
hearing. It must be emphasized that R.A .No. 7653 is a later law and under said act, the
power of the MB over banks, including rural banks, was increased and expanded. The
Court, in several cases, upheld the power of the MB to take over banks without need for
prior hearing. It is not necessary inasmuch as the law entrusts to the MB the appreciation
and determination of whether any or all of the statutory grounds for the closure and
receivership of the erring bank are present. The MB, under R.A. No. 7653, has been
invested with more power of closure and placement of a bank under receivership for
insolvency or illiquidity, or because the bank’s continuance in business would probably
result in the loss to depositors or creditors.

Accordingly, the MB can immediately implement its resolution prohibiting a banking

institution to do business in the Philippines and, thereafter, appoint the PDIC as receiver.
The procedure for the involuntary closure of a bank is summary and expeditious in
nature. Such action of the MB shall be final and executory, but may be later subjected to
a judicial scrutiny via a petition for certiorari to be filed by the stockholders of record of
the bank representing a majority of the capital stock. Obviously, this procedure is
designed to protect the interest of all concerned that is, the depositors, creditors and
stockholders, the bank itself and the general public. The protection afforded public
interest warrants the exercise of a summary closure (Alfeo D. Vivas, on his behalf and on
behalf of the Shareholders or Eurocredit Community Bank v. The Monetary Board of the Bangko
Sentral ng Pilipinas and the Philippine Deposit Insurance Corporation, G.R. No. 191424, August
7, 2013).

Financial Rehabilitation and Insolvency; Liquidation; right of secured creditor to

foreclose mortgage. Under Republic Act No. 10142, otherwise known as the Financial
Rehabilitation and Insolvency Act (FRIA) of 2010, the right of a secured creditor to enforce
his lien during liquidation proceedings is retained. Section 114 of said law thus provides:
SEC. 114. Rights of Secured Creditors. – The Liquidation Order shall not affect the right
of a secured creditor to enforce his lien in accordance with the applicable contract or law.
A secured creditor may:
(a) Waive his rights under the security or lien, prove his claim in the liquidation
proceedings and share in the distribution of the assets of the debtor; or
(b) Maintain his rights under his security or lien;
If the secured creditor maintains his rights under the security or lien:

Mercantile Law 2021 Page 26 of 29

 Recoletos Law Center
“HOME OF THE NATION’S TOP BAR REVIEWERS”

(1) The value of the property may be fixed in a manner agreed upon by the creditor and
the liquidator. When the value of the property is less than the claim it secures, the
liquidator may convey the property to the secured creditor and the latter will be admitted
in the liquidation proceedings as a creditor for the balance; if its value exceeds the claim
secured, the liquidator may convey the property to the creditor and waive the debtor’s
right of redemption upon receiving the excess from the creditor;
(2) The liquidator may sell the property and satisfy the secured creditor’s entire claim
from the proceeds of the sale; or
(3) The secured creditor may enforce the lien or foreclose on the property pursuant to
applicable laws (Manuel D. Yngson, Jr., (in his capacity as the Liquidator of ARCAM & Co.,
Inc.) vs. Philippine National Bank, G.R. No. 171132, August 15, 2012).

Financial Rehabilitation and Insolvency; Liquidation; preference for unpaid wages. As

to the right of first preference as regards unpaid wages, the Court has elucidated in the
case of Development Bank of the Philippines v. NLRC that a distinction should be made
between a preference of credit and a lien. A preference applies only to claims which do
not attach to specific properties. A lien creates a charge on a particular property. The right
of first preference as regards unpaid wages recognized by Article 110 of the Labor Code,
does not constitute a lien on the property of the insolvent debtor in favor of workers. It is
but a preference of credit in their favor, a preference in application. It is a method adopted
to determine and specify the order in which credits should be paid in the final
distribution of the proceeds of the insolvent’s assets. It is a right to a first preference in
the discharge of the funds of the judgment debtor (Manuel D. Yngson, Jr., (in his capacity
as the Liquidator of ARCAM & Co., Inc.) vs. Philippine National Bank, G.R. No. 171132, August
15, 2012).

Trust receipts; Trust receipt transaction; Definition. A trust receipt transaction is one
where the entrustee has the obligation to deliver to the entruster the price of the sale, or
if the merchandise is not sold, to return the merchandise to the entruster. There are,
therefore, two obligations in a trust receipt transaction: the first refers to money received
under the obligation involving the duty to turn it over (entregarla) to the owner of the
merchandise sold, while the second refers to the merchandise received under the
obligation to “return” it (devolvera) to the owner (Hur Tin Yang v. People of the
Philippines, G.R. No. 195117, August 14, 2013).

Trust receipts; Trust receipts distinguished from loan. When both parties enter into an
agreement knowing fully well that the return of the goods subject of the trust receipt is
not possible even without any fault on the part of the trustee, it is not a trust receipt
transaction penalized under Sec. 13 of PD 115 in relation to Art. 315, par. 1(b) of the RPC,
as the only obligation actually agreed upon by the parties would be the return of the
proceeds of the sale transaction. This transaction becomes a mere loan, where the
borrower is obligated to pay the bank the amount spent for the purchase of the goods
(Hur Tin Yang v. People of the Philippines, G.R. No. 195117, August 14, 2013).

Mercantile Law 2021 Page 27 of 29

 Recoletos Law Center
“HOME OF THE NATION’S TOP BAR REVIEWERS”

Trust receipts; Res perit domino. Not a valid defense against an Entrustee in cases of loss
or destruction of the goods, documents, or instruments secured by a Trust Receipt. For
the principle of res perit domino to apply the entrustee must be the owner of the goods
at the time of the loss. A TR is a security agreement, pursuant to which a bank acquires a
‘security interest’ in the goods. It secures an indebtedness and there can be no such thing
as security interest that secures no obligation. If under a trust receipt transaction, the
entruster is made to appear as the owner, it was but an artificial expedient, more of legal
fiction than fact, for if it were really so, it could dispose of the goods in any manner it
wants. Thus, the ownership of the goods remaining with the entrustee, he cannot be
relieved of the obligation to pay his/her loan in case of loss or destruction (Rosario Textile
Mills vs. Home Bankers Association, G.R. No. 137232, June 29, 2005).

Trust receipts; definition; obligations; intent to defraud. There are two obligations in a
trust receipt transaction. The first is covered by the provision that refers to money under
the obligation to deliver it (entregarla) to the owner of the merchandise sold. The second
is covered by the provision referring to merchandise received under the obligation to
return it (devolvera) to the owner. Thus, under the Trust Receipts Law, intent to defraud
is presumed when (1) the entrustee fails to turn over the proceeds of the sale of goods
covered by the trust receipt to the entruster; or (2) when the entrustee fails to return the
goods under trust, if they are not disposed of in accordance with the terms of the trust
receipts.

In all trust receipt transactions, both obligations on the part of the trustee exist in the
alternative – the return of the proceeds of the sale or the return or recovery of the goods,
whether raw or processed. When both parties enter into an agreement knowing that the
return of the goods subject of the trust receipt is not possible even without any fault on
the part of the trustee, it is not a trust receipt transaction penalized under Section 13 of
P.D. 115; the only obligation actually agreed upon by the parties would be the return of
the proceeds of the sale transaction. This transaction becomes a mere loan, where the
borrower is obligated to pay the bank the amount spent for the purchase of the goods
(Land Bank of the Philippines vs. Lamberto C. Perez, et al., G.R. No. 166884. June 13, 2012).

Credit Cards - This Court cannot completely blame the MeTC, RTC, and CA for their
failure to understand or realize the fact that a monthly credit card statement of account
does not always necessarily involve purchases or transactions made immediately prior
to the issuance of such statement; certainly, it may be that the card holder did not at all
use the credit card for the month, and the statement account sent to him or her refers to
principal, interest, and penalty charges incurred from past transactions which are too
multiple or cumbersome to enumerate but nonetheless remain unsettled by the card
holder. This Court cannot judge them for their lack of experience or practical
understanding of credit card arrangements, although it would have helped if they just
endeavored to derive such an understanding of the process. [W]hile the Court believes
that petitioner's claim may be well-founded, it is not enough as to allow judgment in its
favor on the basis of extant evidence. It must prove the validity of its claim; this it may
do by amending its Complaint and adducing additional evidence of respondent's credit
history and proving the loan transactions between them. After all, credit card

Mercantile Law 2021 Page 28 of 29

 Recoletos Law Center
“HOME OF THE NATION’S TOP BAR REVIEWERS”

arrangements are simple loan arrangements between the card issuer and the card holder.
xxx Simply put, every credit card transaction involves three contracts, namely: (a) the
sales contract between the credit card holder and the merchant or the business
establishment which accepted the credit card; (b) the loan agreement between the credit
card issuer and the credit card holder; and lastly, (c) the promise to pay between the credit
card issuer and the merchant or business establishment (Bankard, Inc. v. Alarte, G.R. No.
202573, April 19, 2017).

Letters of Credit; Doctrine of Independence. Letters of credit are governed primarily by

their own provisions, by laws specifically applicable to them, and by usage and custom.
Consistent with the rulings in several cases, usage and custom refers to UCP 400. Article
17 of UCP 400 explains that under this principle, an issuing bank assumes no liability or
responsibility "for the form, sufficiency, accuracy, genuineness, falsification or legal effect
of any documents, or for the general and/or particular conditions stipulated in the
documents or superimposed thereon..." Thus, as long as the proper documents are
presented, the issuing bank has an obligation to pay even if the buyer should later on
refuse payment. To allow issuing bank to refuse to honor the Letter of Credit simply
because it could not collect first from the buyer is to countenance a breach of the
Independence Principle (The Hongkong & Shanghai Banking Corporation, Limited vs.
National Steel Corporation and Citytrust Banking Corporation (now Bank of the Philippine
Islands), G.R. No. 183486, February 24, 2016).

Letters of Credit; Fraud Exception Principle. It provides that the untruthfulness of a

certificate accompanying a demand for payment under a standby letter of credit may
qualify as fraud sufficient to support an injunction against payment.

Under the fraud exception principle, the beneficiary may be enjoined from collecting on
the letter of credit if the beneficiary committed fraud by substituting fraudulent
documents even if on their face the documents complied with the requirements. This
principle refers to fraud in relation with the independent purpose or character of the L/C
and not only fraud in the performance of the obligation or contract supporting the letter
of credit (Transfield vs. Luzon Hydro Corp., G.R. NO. 146717, November 22, 2004).

The documents tendered by the seller/beneficiary must strictly conform to the terms of
the L/C. The tender of documents must include all documents required by the letter. It is
not a question of whether or not it is fair or equitable to require submission of documents
but whether or not the documents were agreed upon. Thus, a correspondent bank which
departs from what has been stipulated under the L/C acts on its own risk and may not
thereafter be able to recover from the buyer or the issuing bank, as the case may be, the
money thus paid to the beneficiary (Feati Bank and Trust Company v. CA, G.R. No. 94209,
April 30, 1991).

Mercantile Law 2021 Page 29 of 29

 Recoletos Law Center
“HOME OF THE NATION’S TOP BAR REVIEWERS”

R.A. 11057 or the Personal Property Security Act (PPSA)

(17 August 2018)

It promotes economic activity by increasing access to least cost credit, specifically for
micro, small, and medium enterprises. The main purpose is to secure obligations with
personal property.

Prior to PPSA, the Civil Code and the Chattel Mortgage law are governing the creation
of a valid security interest over personal property.

Under the PPSA Rules, all security interests from February 9, 2019 to its full
implementation will be governed by PPSA itself except that the registration will be in
accordance with the Chattel Mortgage Law until the registry is established.

All will be governed under PPSA once the registry has been established except for the
interests in aircraft which is under the Civil Aviation Authority Act of 2008; the interests
in ships will be governed by the Ship Mortgage Decree of 1978.

Before, banks prefer the conventional collateral such as land, buildings and other
immovable properties. This gave burden to small businesses since they cannot secure
loans without these properties.

PPSA mandates the Land Registration Authority to create a centralized Registry where
notice of security interests and liens in personal property may be registered.

Under this new law, the registrable collateral now includes deposit accounts, receivables,
negotiable instruments, motor vehicle, equipment, livestock, store inventory, and
intellectual property rights.

Latest Jurisprudence

Zuneca Pharmaceutical v. Natrapharm Inc.

G.R. No. 211850
8 September 2020

Zuneca has been distributing the drug “Zynaps” since 2004 but has not registered such
tradename before the IPO. Natrapharm registered the trademark “Zynapse” in 2007.
Consequently, Natrapharm filed an infringement case against Zuneca for confusingly
similar trade names. In defense, the latter claimed its own trademark was based on the
doctrine of prior user in good faith. The Court rule that there was no trademark
infringement. Prior users in good faith are also protected in the sense that they will not
be made liable for trademark infringement even if they are using a mark that was
subsequently registered by another person. (Section 159.1 of the IP Code)

Mercantile Law 2021 Page 30 of 29

 Recoletos Law Center
“HOME OF THE NATION’S TOP BAR REVIEWERS”

Domingo v. Civil Service Commission

G.R. No. 236050
17 June 2020

Domingo is the Chief Archivist of the Archives Preservation Division of the National
Archives of the Philippines (NAP). She participated in a seminar workshop without the
approval of NAP. She is being charged with copyright infringement as regard the
dissemination of NAP materials.

There is no finding that she benefitted nor obtained monetary profit in the seminar. It is
further an established fact of good will created by the petitioner. Furthermore, Sec. 176.1
of the Intellectual Property Code states that the government holds no copyright to its
materials.

Under the law, the NAP materials were free to be disseminated to the City of Bacoor
stakeholders. It is not an exploitation for profit but for noble cause of improving the basic
records management of the local government unit.

Kolin Electronics v. Kolin Philippines International Inc.

G.R. No. 228165
9 February 2021

KPII filed a trademark application for the “kolin” mark covering televisions and DVD
players. Meanwhile, KECI filed an opposition on the ground that it will cause confusion
among the consumers.

KPII countered that it is limited only to goods such as automatic voltage, regulator, stereo
booster and the like. However, The IPO sided with KECI.

On the other hand, the Court of Appeals disagreed with the IPO. It cited the Taiwan Kolin
case (G.R. No. 209843, 25 March 2015), wherein the SC allowed Taiwan Kolin Corporation
Ltd. (TKC) to register the “kolin” mark. Because of this, the CA equally allowed KPII to
have the “kolin” mark registered on the ground that this case amounts to res judicata.

The SC, however, reversed the CA’s decision. Jurisprudence has flip-flopped over the
years between the Holistic and Dominancy Tests to settle the confusion in trademarks.
The Dominancy Test focuses on the similarity of the prevalent features of the competing
marks; the Holistic Test requires that the entirety of the marks in question be considered
in resolving confusing similarity. Here, it was found that there is a resemblance between
the two trademarks and the goods are related to each other.

Consequently, the trademark application filed by respondent KPPI under Class 9 for
"Television and DVD players" is rejected.

Mercantile Law 2021 Page 31 of 29

 Recoletos Law Center
“HOME OF THE NATION’S TOP BAR REVIEWERS”

Kaizen Builders, Inc. v. Court of Appeals

G.R. Nos. 226894 and 247647
3 September 2020

Ofelia purchased from Kaizen Builders a house in Baguio City. The contract to sell was
converted into an investment agreement. Kaizen, however, stopped remitting monthly
interest. Consequently, she filed a complaint for sum of money. The RTC ordered the
company liable to pay Ofelia. Aggrieved, Kaizen filed before the special commercial court
a petition for corporate rehabilitation. The rehabilitation court then issued a
Commencement Order suspending all actions for the enforcement of claim against it.
Kaizen moved to consolidate the appealed cases with the rehabilitation proceedings.

The CA rejected citing that the two proceedings involved different parties. It further ruled
in favor of Ofelia to be paid. Consequently, Kaizen assailed the decision before the SC.

RA 10142 of the Financial Rehabilitation and Insolvency Act of 2010 defined rehabilitation
as the restoration of the debtor to a condition of successful operation and solvency. Case
law explains that rehabilitation is an attempt to conserve and administer the assets of an
insolvent corporation in the hope of its eventual return from financial stress.

It declared the decision of the CA void and against the provisions of a mandatory law.

Yambao v. Republic
G.R. No. 171054
26 January 2021

The Office of the Ombudsman forwarded a complaint from the OMB to the AMLC for
perjury. The OMB further recommended that Gen. Ligot be further investigated for
violation of RA 9160 or the Anti Money Laundering Act of 2001. In its report, it found out
that they used Gen. Ligot’s brother-in-law, Yambao, as a dummy to conceal the wealth.
The AMLC has conducted its own investigation and found reasonable grounds that Gen.
Ligot’s monetary instruments are related to unlawful activities.

A freeze order was issued consequently by the CA which was initially valid for 20 days.
The petitioner countered by filing a Motion to Lift Freeze Order against the monetary
instruments of Yambao. The CA denied the motion.

However, the Court found the CA erring in its decision. It cited that since Ligot’s motion
for reconsideration was still a pending resolution at that time when the Rule in Civil
Forfeiture Cases came effect on December 15, 2005. Thus, the Rule applies to the case.

Mercantile Law 2021 Page 32 of 29

 Recoletos Law Center
“HOME OF THE NATION’S TOP BAR REVIEWERS”

Llorente v. Star City Pty Limited

G.R. Nos. 212050 and 212216
15 January 2020

SCPL is an Australian corporation which operates the Star City Casino in Sydney and
New South Wales. In July 2000, Llorente negotiated 2 Equitable PCI bank (EPCIB)
amounting to 300 thousand USD to play in the premium program of the casino. No stop
payment orders were found so he was credited with the money. However, in August
2000, the Bank of New York gave an advice of Stop Payment Order demanding Llorente
to settle his obligation but still refused to pay. EPCIB meanwhile mentioned that Llorente
himself was the one who requested the Stop Payment Order and no notice of dishonor
was given.

SCPL consequently filed a complaint for collection of sum money with prayer for
preliminary attachment both against Llorente and EPCIB. The RTC held both liable for
the value of the subject drafts. On appeal, EPCIB was absolved by the CA but affirmed
Llorente’s liability.

Llorente argues that the delict must have occurred in the Philippines and the transaction
between him and the SCPL are in pursuance of the latter’s casino business. The SC ruled
that under the Corporation Code, foreign corporations not engaged in business in the
Philippines may not be denied the right to file an action in the Philippine courts for an
isolated transaction. Furthermore, a foreign corporation that is not doing business in the
Phlippines must disclose such fact if it desires to sue in Philippine courts under the
isolated transaction rule. Absent this disclosure, the Court may opt to deny the right to
sue.

The Court rendered judgment in favor of SCPL and ordered both Llorente and EPCIB to
pay the former.

Philippine Contractors Accreditation Board v. Manila Water Co., Inc.

G.R. No. 217590
10 March 2020

MWCI seeks accreditation from PCAB of its foreign contractors for its waterworks and
sewerage system. PCAB responded that under Sec. 3.1, Rule 3 of the IRR of RA 4566,
regular licenses are only reserved for and issued to contractor firms of Filipino sole
propriertorship with atleast 60% Filipino equity participation. Aggrieved, it filed for a
Petition for Declaratory Relief claiming that the provision cited is unconstitutional. It
further stated that it creates restrictions to foreign investments which is a power
exclusively vested on Congress.

The SC held that it is unconstitutional. It ruled that there is nothing in RA 4566 that would
indicate that PCAB is authorized to set an equity limit for a contractor’s license. It is the
Congress which has the power to determine certain areas of investments which must be
reserved to Filipinos as recommended by the NEDA.

Mercantile Law 2021 Page 33 of 29

 Recoletos Law Center
“HOME OF THE NATION’S TOP BAR REVIEWERS”

While the Constitution favors Filipino goods and enterprises, it still

recognizes the need for business exchange around the world on the bases of equality and
reciprocity. It seeks to protect Filipino enterprises only against foreign competition and
trade practices that are unfair. In other words, it does not pursue an isolationist policy
nor prohibit any foreign investments or goods. Hence, the disputed provision in the IRR
of RA 4566 was declared void.

- oOo -

Mercantile Law 2021 Page 34 of 29