SIGNIFICANT DOCTRINES IN COMMERCIAL LAW

(2013 Bar Examinations)

By: Dean Ed Vincent S. Albano

Negotiable Instruments Law

1. When a check is crossed, it means that it could only be deposited and could not be converted into cash.
Thus, the effect of crossing a check relates to the mode of payment, meaning that the drawer had
intended the check for deposit only by the rightful person, i.e., the payee named therein. (Bank of
America, NT & SA, vs. Associated Citizens Bank, G.R. No. 141001, 141018, May 21, 2009, [Carpio, J.]) The
act of crossing a check serves as a warning to the holder that the check has been issued for a definite
purpose so that the holder thereof must inquire if he has received the check pursuant to that purpose;
otherwise, he is not a holder in due course. (Dino vs. Loot, G.R. No. 170912, April 19, 2010, [Carpio, J.])

2. The crossing may be “special” wherein between the two parallel lines is written the name of a bank or
business institution, in which case the drawee should pay only with the intervention of that bank or
company.

It may also be “general” wherein between two parallel diagonal lines are written the words “and Co.” or
none at all, in which case the drawee should not encash the same but merely accept the same for deposit.
(Bank of America, NT & SA, vs. Associated Citizens Bank, G.R. No. 141001, 141018, May 21, 2009, [Carpio,
J.])

3. A stale check is one which has not been presented for payment within a reasonable time after its issue. It
is valueless and, therefore should not be paid. Under the negotiable instruments law, an instrument not
payable on demand must be presented for payment on the day it falls due. When the instrument is
payable on demand, presentment must be made within a reasonable time after its issue. In the case of a
bill of exchange, presentment is sufficient if made within a reasonable time after the last negotiation
thereof. (International Corporate Bank vs. Sps. Gueco, G.R. No. 141968, February 12, 2001, [Kapunan, J.])

4. The object of certifying a check, as regards both parties, is to enable the holder to use it as money.”
When the holder procures the check to be certified, “the check operates as an assignment of a part of the
funds to the creditors.” Hence, the exception to the rule enunciated under Section 63 of the Central Bank
to the effect “that a check which has been cleared and credited to the account of the creditor shall be
equivalent to a delivery to the creditor in cash in an amount equal to the amount credited to his account” x
x x (Equitable PCI Bank vs. Rowena Ong, G.R. No. 156207 [September 15, 2006])

5. In check transactions, the collecting bank or last endorser generally suffers the loss because it has the duty
to ascertain the genuineness of all prior endorsements considering that the act of presenting the check for
payment to the drawee is an assertion that the party making the presentment has done its duty to
ascertain the genuineness of the endorsements. (Bank of America, NT & SA, vs. Associated Citizens Bank,
G.R. No. 141001, 141018, May 21, 2009, [Carpio, J.])

6. A check that is payable to a specified payee is an order instrument. However, under Section 9 (c) of the
NIL, a check payable to a specified payee may nevertheless be considered as a bearer instrument if it is
payable to the order of a fictitious or non-existing person, and such fact is known to the person making it
so payable. Thus, checks issued to “Prinsipe Abante” or “Si Malakas at si Maganda,” who are well-known
characters in Philippine mythology, are bearer instruments because the named payees are fictitious and
non-existent. (Philippine National Bank vs. Erlando T. Rodriguez and Norma Rodriguez, supra)

7. Fictitious Payee Rule: When a person making the check so payable did not intent for the specified payee
to have any part in the transaction, the payee is considered as fictitious payee. (Mueller & Martin vs.
Liberty Insurance Bank). Fictitious-payee rule extends protection even to non-bank transferee of the
checks. (Getty Petroleum Corp. vs. American Express Travel Related Services Company, Inc, 90 NY 2d 322
(1997), citing the Uniform Commercial Code, Sec. 3-405)
 In a fictitious-payee situation, the drawee bank is absolved from liability and the drawer bears the loss.
When faced with a check payable to a fictitious payee, it is treated as a bearer instrument that can be
negotiated by delivery. The underlying theory is that one cannot expect a fictitious payee to negotiate the
check by placing his indorsement thereon. And since the maker knew this limitation, he must have
intended for the instrument to be negotiated by mere delivery. Thus, in case of controversy, the drawer of
the check will bear the loss. This rule is justified for otherwise, it will be most convenient for the maker
who desires to escape payment of the check to always deny the validity of the indorsement. This despite
the fact that the fictitious payee was purposely named without any intention that the payee should receive
the proceeds of the check. (Philippine National Bank vs. Erlando T. Rodriguez and Norma Rodriguez, supra)

However, there is a ‘commercial bad faith’ exception to the fictitious-payee rule. A showing of commercial
bad faith on the part of the drawee bank, or any transferee of the check for that matter, will work to strip
it of its defense. The exception will cause it to bear the loss. Commercial bad faith is present if the
transferee of the checks acts dishonestly, and is a party to the fraudulent scheme. (Philippine National
Bank vs. Erlando T. Rodriguez, et al, G.R. No. 170325, September 26, 2008 [Reyes, R.T., J.])

8. General Rule: When there are blanks on the instrument, consisting of material particulars, the person in
possession thereof has a prima facie authority to fill it up. Provided, that he fills it up strictly in accordance
with the authority given and within a reasonable time.

9. Where an incomplete instrument has not been delivered, it will not, if completed and negotiated without
authority, be a valid contract in the hands of any holder, as against any person whose signature was placed
thereon before delivery. (Sec. 15, Negotiable Instruments Law)

10. Significantly, delivery is the final act essential to the negotiability of an instrument. Delivery denotes
physical transfer of the instrument by the maker or drawer coupled with an intention to convey title to the
payee and recognize him as a holder. It means more than handing over to another; it imports such
transfer of the instrument to another as to enable the latter to hold it for himself. (John Dy vs. People of
the Philippines, et al, G.R. No. 158312, November 14, 2008, [Quisumbing, Acting C.J.])

11. Note however that delivery as the term is used in the aforementioned provision means that the party
delivering did so for the purpose of giving effect thereto. Otherwise, it cannot be said that there has been
delivery of the negotiable instrument. Once there is delivery, the person to whom the instrument is
delivered gets the title to the instrument completely and irrevocably. (San Miguel Corporation vs. Puzon,
G.R. No. 167567, September 22, 2010, [Del Castillo, J.:])

12. The general rule is to the effect that a forged signature is “wholly inoperative”, and payment made
‘through or under such signature’ is ineffectual or does not discharge the instrument. If payment is made,
the drawee cannot charge it to the drawer’s account. The traditional justification for the result is that the
drawee is in a superior position to detect a forgery because he has the maker’s signature and is expected
to know and compare it. The rule has a healthy cautionary effect on banks by encouraging care in the
comparison of the signatures against those on the signature cards they have on file. Moreover, the very
opportunity of the drawee to insure and to distribute the cost among its customers who use checks makes
the drawee an ideal party to spread the risk to insurance. (Samsung Construction Company Philippines, Inc.
vs. Far East Bank and Trust Company, G.R. No. 129015, August 13, 2004 [Tinga, J.])

13. “[T]he relation between an accommodation party and the accommodated party is one of principal and
surety—the accommodation party being the surety. As such, he is deemed an original promissors and
debtor from the beginning, he is considered in law as the same party as the debtor in relation to whatever
is adjudged touching the obligation of the latter since their liabilities are interwoven as to be inseparable.
Although a contract of suretyship is in essence accessory or collateral to a valid principal obligation, the
surety’s liability to the creditor is immediate, primary and absolute; he is directly and equally bound with
the principal. As an equivalent of a regular party to the undertaking, a surety becomes liable to the debt
and duty of the principal obligor even without possessing a direct or personal interest in the obligations
nor does he receive any benefit therefrom. (Eusebio Gonzales vs. Philippine Commercial and International
Bank, et. al., G.R. No. 180257, February 23, 2011, [Velasco, J.:])

14. Rule on Accommodation Party does not apply to Corporations: The aforequoted provision of the
Negotiable Instruments Law which holds an accommodation party liable on the instrument to a holder for
value, although such holder at the time of taking the instrument knew him to be only an accommodation
party, does not include nor apply to corporations which are accommodation parties. This is because the
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 issue or indorsement of negotiable paper by a corporation without consideration and for the
accommodation of another is ultra vires. Hence, one who has taken the instrument with knowledge of the
accommodation nature thereof cannot recover against a corporation where it is only an accommodation
party. If the form of the instrument, or the nature of the transaction, is such as to charge the indorsee
with knowledge that the issue or indorsement of the instrument by the corporation is for the
accommodation of another, he cannot recover against the corporation thereon. (Ernestina Crisologo-Jose
vs. Court of Appeals, et al, G.R. No. 80599, September 15, 1989, [Regalado, J.])
15. “An alteration is said to be material if it alters the effect of the instrument. It means an unauthorized
change in an instrument that purports to modify in any respect the obligation of a party or an
unauthorized addition of words or number or other change to an incomplete instrument relation to the
obligation of a party. In other words, a material alteration is one which changes the item which are
required to be stated under Section 1 of the Negotiable Instrument[s] Law.” (International Corporate
Bank, Inc. vs. Court of Appeals and Philippine National Bank, G.R. No. 129910, September 5, 2006, [Carpio,
J.])

Banking Laws

16. When a bank is placed under receivership, its officers, including its acting president, are no longer
authorized to transact business in connection with the bank’s assets and property. (Abacus Real Estate
Dev’t Center vs. Manila Bank, G.R. No. 162270, April 6, 2005)

17. The appointment of receiver does not dissolve the bank as a corporation nor does it interfere with the
exercise of corporate rights. Banks under liquidation retain their corporate personality. The bank can sue
and be sued but any case could be initiated and prosecuted through the liquidator. (Manalo vs. CA,
October 2002)

18. When a bank is declared insolvent and placed under receivership, the BSP through the Monetary Board
determines whether to proceed with the liquidation or reorganization of the financially distressed bank.
(Sps Larrobis, Jr. vs. Phil. Veterans Bank, G.R. No. 135706, October 1, 2004)

19. The assets of the bank shall be deemed in custodia legis in the hands of the receiver and shall, from the
moment the bank was placed under receivership or liquidation, be exempt from any order of garnishment,
levy, attachment or execution. (Phil. Veterans Bank vs. NLRC, G.R. No. 13039, October 26, 1999)

20. A bank should exercise its function and treat the accounts of their clients not only with the diligence of a
good father of a family but it should do so with the highest degree of care considering the fiduciary nature
of its relationship with its depositors. (BOI vs. CA, 326 SCRA 641 [2000])

Secrecy of Bank Deposits

21. All deposits of whatever nature with banks or banking institutions in the Philippines including investments
in bonds issued by the Government of the Philippines, its political subdivisions and its instrumentalities,
are hereby considered as absolutely confidential in nature and may not be examined, inquired, or looked
into by any person, government official, bureau or office. (Sec. 2, LSB)

22. Exceptions:
a. When there is written permission of the depositor or investor; (Sec. 2, LSB)
b. Impeachment cases; (Sec. 2, LSB)
c. Upon the order of a competent court in cases of bribery or dereliction of duty of public officials;
(Sec. 2, LSB)
d. Upon the order of a competent court in cases where the money deposited or invested is the
subject of litigation; (Sec. 2, LSB)
e. In case of prosecution of unexplained wealth; (BF vs. Purisima, 161 SCTA 576; RA 301)
f. In case of inquiry of the BIR of bank accounts of a decedent for real estate tax purposes or in case
of a tax compromise; (Sec. 6 [f], NIRC of 1997)
g. Upon order of a competent court in cases of violation of the AMLA; (RA 9160, as amended)
h. Incidental disclosures of unclaimed balances under the Unclaimed Balances Law. (RA 3696)

23. Take note of the Ombudsman’s action on the dollar deposits of the CJ as it is within the power of the
Office to inquire into the same. The power is so encompassing. Persons banned from looking into Bank
Deposits are any person, government official, bureau or office, subject to the exceptions.
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24. Garnishment of Bank Deposits
The foreign currency deposits shall be exempt from attachment, garnishment or any order or process of
any court, legislative body, government agency or any administrative body whatsoever. (Sec. 8, RA 6426,
FCDA) Except when it has been established that there is probable cause that the deposits involved are in
any way related to money laundering. (Sec. 11, AMLA)

Letter of Credit
25. A letter of credit is an engagement by a bank or other persons made at the request of a customer that the
issuer will honor drafts or other demands for payment upon compliance with the conditions specified in
the credit. (Bank of Commerce vs. Serrano, 51 SCRA 484, February 15, 2005)

26. The purpose of the law is to substitute for the agreement of the buyer-importer to pay money under a
contract or arrangement.

27. Nature of Letter of Credit

a. It is a contract of sale between the buyer and the seller;
b. It is a contract of the buyer with the issuing bank; and
c. Letter of credit proper in which the bank promises to pay the seller pursuant to the terms and
conditions stated thereto. (Keng Hua Paper Products Co. Inc. vs. CA, 268 SCRA 257)

28. As a contract, a letter of credit is perfected from the time the correspondent bank makes payment to the
seller or to the persons in whose favor the letter of credit has been opened.

29. Commercial credits and standby credits distinguished

Commercial credits involve the payment of money under the contract of sale. Such credits become
payable upon the presentation of the seller-beneficiary of the documents that show that he has taken
affirmative steps to comply with the sales agreement. In the standby type, the credits is payable upon
certification of a party’s non-performance of the agreement. The documents that accompany the
beneficiary’s draft tend to show the applicant has not performed. The beneficiary of a commercial credit
must demonstrate by documents that he has performed his contract. The beneficiary of the standby credit
must certify that his obligor has not performed the contract. (Transfield Philippines, Inc. vs. Luzon Hydro
Corporation, 443 SCRA 307, November 22, 2004)

30. Independence Principle: The so-called “independence principle” assures the seller or the beneficiary of
prompt payment independent of any breach of the main contract and precludes the issuing bank from
determining whether the main contract is actually accomplished or not. Under this principle, banks
assume no liability or responsibility for the form, sufficiency, accuracy, genuineness, falsification or legal
effect of any documents, of for the general and/or particular conditions stipulated in the document or
superimposed thereon, nor do they assume any liability or responsibility for the description, quantity,
weight, quality, condition, packing, delivery, value or existence of the goods represented by any
documents, or for the good faith or acts and/or omissions, solvency, performance or standing of the
consignor, the carriers, or the insurers of the goods, or any other person whomsoever. (Transfield
Philippines, Inc. vs. Luzon Hydro Corporation, et al, G.R. No. 146717, November 22, 2004, [Tinga, J.])

31. Fraud Exception Principle: This exits when the beneficiary, for the purpose of drawing on the credit,
fraudulently presents to the confirming bank, documents that contain, expressly or by implication,
material representations of fact that to his knowledge are untrue. This is an exception to the
independence principle. (Transfield Philippines, Inc. vs. Luzon Hydro Corporation, et al, G.R. No. 146717,
November 22, 2004, [Tinga, J.])

Bulk Sales Law

32. What constitutes Bulk Sale:

a. Any sake, transfer, mortgage, or assignment of a stock of goods, wares, merchandise, provisions,
or materials otherwise than in the ordinary course of trade and the regular prosecution of the
business of the vendor;
b. Any sale, transfer, mortgage, or assignment of all or substantially all of the business or trade
conducted by the seller, mortgagor, transferor, or assignor; and
c. Any sale, transfer, mortgage, or assignment of all or substantially all of the fixtures and
equipment used in and about the business of the seller, mortgagor, transferor, or assignor. (Sec.
2, Bulk Sales Law)
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Warehouse Receipts Law

33. Instances when warehouseman may legally refuse to deliver goods

a. When the holder of the receipt does not satisfy the conditions prescribed in Sec. 8 Act 2137, as
amended;
b. When the warehouseman has legal title in himself on the goods, such title or right being derived
directly or indirectly from the transfer made by the depositor at the time or subsequent to the
deposit for storage, or from the warehouseman’s lien. (Sec. 16)
c. If he had been requested by a person lawfully entitled to a right of property or possession in the
goods not to make delivery to any person. (Sec. 10)
d. If he had information that the delivery to be made was to one not lawfully entitled to the
possession of the goods. (Sec. 10)
e. Where the goods have already been lawfully sold to third persons to satisfy the warehouseman’s
lien or disposed of because of their perishable nature. (Sec. 36)
f. In case of adverse claimants. (Secs. 16 & 18)
g. In the valid exercise of the warehouseman’s lien. (Sec. 31)

34. The warehouseman is also liable even with indorsement or with authority. He is likewise liable, if prior to
delivery he had either:
a. Been requested, by or on behalf of the person lawfully entitled to a right of property or possession
in the goods, not to make such delivery; or
b. Had information that the delivery about to be made was to one not lawfully entitled to the
possession of the goods. (Sec. 10)

35. Duty of the warehouseman if there are several claimants over the goods:
a. Determine within reasonable time the validity of the conflicting claim; (Sec. 18)
b. Bring a complaint in interpleader. (Sec. 1, Rule 62, Rules of Court)
c. Require claimant to litigate among themselves. (Sec. 17)

Trust Receipt Law

36. A trust receipt is one where the entruster, who holds an absolute title or security interests over certain
goods, documents or instruments, released the same to the entrustee, who executes a trust receipt
binding himself to hold the goods, documents or instruments in trust for the entruster and to sell or
otherwise dispose of the goods, documents, or instruments with the obligation to turn over to the
entruster the proceeds thereof to the extent of the amount owing to the entruster, or as appears in the
trust receipt, or return the goods, documents or instruments themselves of they are unsold, or not
otherwise disposed of, in accordance with the terms and conditions specified in the trust receipt. (Bank of
Commerce vs. Serrano, 451 SCRA 484, February 16, 2005)

37. The basic purpose of the law is to punish dishonesty and abuse of confidence in the handling of money or
goods to the prejudice of public order. (Ong vs. CA, G.R. No. 119858, April 29, 2003)

38. A trust receipt partakes of the nature of a security transaction. It could never be a mere additional or side
document. Otherwise, a party to a trust receipt agreement could easily renege undermining the
importance and defeating with impunity the purpose of such an indispensable tool in commercial
transactions. (Ong vs. CA, G.R. No. 119858, April 29, 2003)

Chattel Mortgage Law

39. By a chattel mortgage, personal property is recorded in the Chattel Mortgage Register as a security for the
performance of an obligation. If the movable instead of being recorded, is delivered to the creditor or a
third person, the contract is a pledge and not a chattel mortgage. (Sec. 2140, NCC)

40. When the proceeds of the sale are insufficient to cover the debts in an extrajudicial foreclosure of chattel
mortgage, the mortgagee is entitled to claim the deficiency from the debtor. (State Investment House, Inc.
vs. CA, 217 SCRA 32, 1993)

41. Equity of Redemption distinguished from Right of Redemption

The right of redemption in relation to a mortgage exists only in the case of the extrajudicial foreclosure of
the mortgage. No such right is recognized in a judicial foreclosure except only where the mortgagee is
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 bank or banking institution. The period to exercise the right of redemption is within one year from the
registration of the sheriff’s certificate of foreclosure sale.

Where no right of redemption exists in case of a judicial foreclosure because the mortgagee is not a bank
or banking institution, the foreclosure sale when conformed by an order of the court shall operate to
divest the rights of all parties to the action and to vest their rights in the purchaser. There then exists only
what is simply known as the equity of redemption. Thus is simply the right of the defendant mortgagor to
extinguish the mortgage and retain ownership of the property by paying the secured debt within the 90-
day period after the judgment becomes final, in accordance with Rule 68 of the Rules of Court, or even
after the foreclosure sale, but prior to confirmation. (Huerta Alba Resort, Inc. vs. CA, September 1, 2000,
G.R. No. 128567)

Transportation Laws

42. A “common carrier” is one who holds himself out to the public as engaged in the business of transporting
persons or property from place to place, for compensation, offering his services to the public generally.

43. A customs broker is a common carrier—the concept of “common carrier” under Article 1732 of the Civil
Code may be seen to coincide nearly with the notion of “public service”, under the Public Service Act
(Commonwealth Act No. 1416) which at least partially supplements the law on common carriers set forth
in the Civil Code.

44. Where a customs broker offers its services, even to select parties to transport goods from one place to
another for compensation, it is a common carrier. There is a greater reason for holding a person who is a
customs broker to be a common carrier because the transportation of goods is an integral part of its
business. (Calvo vs. UCPB General Insurance Co., Inc. 379 SCRA 510; Loadmasters Customs Services, Inc.
vs. Glodel Brokerage Corp., el al, G.R. No. 179446, January 10, 2011)

45. The operator of a bus service for children whose bus was hired to bring passengers to a province is
engaged in the business of a common carrier because the law does not distinguish between a carrier
offering its services on a regular or episodic basis and between one that offers services to the general
public or a narrow segment of the public. (Fabre v. CA, 259 SCRA 426). A person engaged in the business of
transporting cargoes whose services are offered to a select group of people is a common carrier. (Bascos v.
CA, 221 SCRA 318)

46. One does not need to have a certificate of public convenience to be considered a common carrier. Also,
one does not need to have scheduled trips on a regular basis to be considered a common carrier. (De
Guzman v. CA, 168 SCRA 612; Loadstar Shipping v. CA, 315 SCRA 339)

47. A company engaged in the business of transporting oil and other petroleum products through pipelines
(pipeline operator), is a common carrier. (First Philippine Industrial Corporation v. CA, 300 SCRA 661)

48. Much of the distinction between a “common or public carrier” and a “private or special carrier” lies in the
character of the business, such that if the undertaking is an isolated transaction, not a part of the business
or occupation and the carrier does not hold itself out to carry the goods for the general public or to a
limited clientele, although involving the carriage of goods for a fee, the person or corporation providing
such service could very well be just a private carrier. A typical case is that of a charter party which includes
both the vessel and its crew, such as in a bareboat or demise, where the character obtains the use and
service of all or some part of a ship for a period of time or a voyage or voyages and gets the control of the
vessel and its crew. The concept of a common carrier cannot change merely because individual contracts
are executed or entered into with patrons of the carrier. Such restrictive interpretation would make it easy
for a common carrier to escape liability by the simple expedient of entering into those distinct agreement
with clients. (Philippine American General Insurance Company v. PKS Shipping Company, G.R. No. 149038,
April 9, 2003; Leas Mer Industries, Inc. v. Malayan Insurance. Co.,e., 508 Phil. 656; Loadmasters Customs
Services, Loadmasters Customs Services, Inc. v. Glodel Brokerage Corp., et al., G.R. No. 179446, January 10,
2011).

Liabilities of Common Carriers

49. The law requires common carriers to carry passengers safely using the utmost diligence of every cautious
persons. Such duty of a common carrier to provide safety to its passengers so obligates it not only during

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 the course of the trip but for so long as the passengers are within its premises and where they ought to be
in pursuance to the contract of carriage.

The statutory provisions render a common carrier liable for death of or injury to passengers (a) through
negligence or willful acts of its employees or (b) on account of willful acts or negligence of other
passengers if the common carrier’s employees through the exercise of due negligence could have
prevented or stopped the act or omission.

In case of such death or injury, a carrier is presumed to have been negligent and by simple proof of injury,
the passenger is relieved of the duty to still establish the fault or negligence of the carrier or of its
employees and the burden shifts upon the carrier to prove that the injury is due to an unforeseen event or
to force majeure. In the absence of satisfactory explanation by the carrier on how the accident occurred,
the presumption would be that it has been at fault, a rule which is an exemption from the general rule that
negligence must be proved. (Light Rail Transit Authority & Rodolfo Roman v. Marjorie Navidad, et al., G.R.
No. 145804, February 6, 2003)

50. By the nature of its business and for reasons of public policy, a common carrier is bound to carry
passengers safely as human care and foresight can provide. (Baritua v. Mercader, 350 SCRA 86). A common
carrier is expected to observe extraordinary diligence in the handling of goods placed in its possession for
transport. The standard of extraordinary diligence imposed upon common carriers is considerably more
demanding than the standard of ordinary diligence. (Sulpicio Lines, Inc. v. First Lepanto-Taisho Insurance
Corporation, G.R. No. 140349, June 29, 2005). The reason for the rule is that, the passenger or shipper is at
the mercy of the carrier.

51. Owing to the high degree of diligence required of them, common carriers, as a general rule, are presumed
to have been at fault or negligent if the good transported by them are at lost, destroyed or if the same
deteriorated. (Philippine American General Insurance, Co., Inc. v. MGG Marine Services, Inc., 378 SCRA
650; Belgian Overseas Chartering and Shipping N.V. v. Philippine First Insurance Co., Inc., 383 SCRA 23).
The aggrieved party does not have to prove that the common carrier is at fault or was negligent. All that he
has to prove is the existence of the contract and the facts of its non-performance by the carrier. (Air France
v. Gillego, G.R. No. 165266, December 15, 2012)

52. When a passenger steps on the platform of a bus, he is already deemed a passenger. The acceleration by
the bus driver just as the deceased stepped on the platform causing him to fall and die is clearly the
carrier’s liability. It is the duty of the carrier to stop their conveyances for a reasonable length of time to
afford a passenger an opportunity to board and alight. When a public utility bus stops, it is in effect making
an offer for the public to ride. Thence when the bus is not in motion, there is no need for a prospective
passenger to signal his intention to board. (Dangwa transportation Co. v. CA, 202 SCRA 575)

53. When the victim entered the LRT station after having purchased a “token” and he fell from the platform
while waiting for the train and was struck by a train which was coming at the exact time he fell, the victim
should be treated as passenger. His standing on the platform while waiting for the train was where he was
supposed to be. (LRTA v. Navidad, G.R. No. 145804, February 6, 2003). In fact, it is enough that he places
himself at the control of the carrier at a reasonable time prior to the departure of the vehicle.

54. Passengers who remain within the premises of the carrier to retrieve their baggage and stay therein for a
reasonable time for the purpose are treated as passengers. Injuries or death occasioned by the carrier at
the point in time, are liabilities of the carrier under the contract of carriage. (La Mallorca v. CA, 17 SCRA
739). In a similar vein, a passenger who had disembarked from a vessel and returned after an hour to
retrieve a baggage which he left unintentionally and died when hit by the crane by a stevedoring company
is still a passenger because he was there for a purpose and considering that it was the practice of the
carrier to offload goods and cargo an hour after arrival. (Aboitiz Shipping Corp. v. CA, 179 SCRA 95)

55. In a contract of carriage, an airline’s obligation is limited to transporting the passenger and the latter’s
luggage safely to the agreed destination. An airline does not breach its contract with the passenger if he is
held in custody by immigration official during a stop-over. The obligation of an airline to inspect the
necessary travel documents of a passenger does not extend to checking the veracity of every entry in the
travel documents. The power to admit an alien into a country is a sovereign act which cannot be interfered
with by an airline. (Japan Airlines v. Asuncion, G.R. No. 61730, January 28, 2005)

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56. Common carriers are not absolutely responsible for all injuries or damages caused by a fortuitous event.
There is no question that when a party is unable to fulfill his obligation because of force majeure, the
general rule is that he cannot be held liable for damages for non-performance. However, if the fortuitous
event was accompanied by neglect and malfeasance by the carrier’s employees, an action for damages
against the carrier is permissible. (Japan Airlines v. Court of Appeals, 294 SCRA 19). This is because for a
carrier to be exempt from liability due to fortuitous event, it must be the proximate and only and cause. If
coupled with fault, then the act of God would become humanized and with the humanization of the act of
God, the common carrier is liable for damages.

57. Where the robbers used grave and irresistible force in hijacking the truck, the carrier is not liable. (De
Guzman v. CA, 168 SCRA 12)

Where armed robbery was committed by other passengers, the carrier may be absolved from liability if the
incident could not have been prevented with the use of the diligence of a good father of a family.
(Quisumbing v. CA, 189 SCRA 605)

Where the common carrier did not exercise precautionary measures despite knowledge that its buses
would be attacked by armed men, it is liable for the death of its passenger killed by said armed men.
(Fortune Express v. CA, 305 SCRA 14)

58. A common carrier is entitled to defenses because it is not an insurer and it is not absolutely liable for all
injuries to passengers or damage to the cargo. (Yobido v. CA, 281 SCRA 1). In consideration for the
franchise granted it by the government, a common carrier does not give its consent to become an insurer
of any and all risks to passengers and goods. It merely undertakes to perform certain duties to the public
as the law imposes, and hold itself liable for any breach thereof. (Pilapil v. CA, 189 SCRA 158)

Bill of Lading

59. A stipulation that limits liability is valid as long as it is not against public policy. In Everett Steamship
Corporation v. CA, 358 SCRA 129, the SC said:

“A stipulation in the bill of lading limiting the common carrier’s liability for loss or destruction of a
cargo to a certain sum, unless the shipper or owner declares a greater value, is sanctioned by law,
particularly Articles 1749 and 1750 of the Civil Code which provides:

“Art. 1749. A stipulation that the common carrier’s liability is limited to the value of the goods
appearing in the bill of lading, unless the shipper or owner declares greater value is binding. In Art. 1750, x
x x “a contract fixing the sum.

60. A stipulation limiting the common carrier’s liability printed at the back of the ticket is binding upon a
passenger. It is a contract of adhesion but such contracts are not entirely prohibited because a shipper is
free to reject it entirely. (Ong Yu vs. CA, 91 SCRA 223)

However, where the conditions printed at the back of a ticket stub are in letters so small that they are
hard to read, this would not warrant the presumption that the passenger was aware of those conditions.
In such a case, he did not “fairly and freely agree” to the stipulations. Hence, he cannot be bound by the
conditions fixed at the back of the ticket. (Shewaram vs. PAL, 17 SCRA 606)

Carriage of Goods by Sea Act (COGSA)

61. A contract of affreightment may be either time charter, wherein the leased vessel is leased to the
charterer for a fixed period of time; or voyage charter, wherein the ship is leased for a single voyage. In
both cases, the charterer provides for the hire of the vessel only, either for a determinate period of time or
for a single or consecutive voyage, the ship owner to the ship’s store, pay for the wages of the master of
the crew and defray the expenses for the maintenance ship. The charterer does not in either of these
cases become the owner of the vessel pro hac vice.

If the charterer is a contract of affreightment, which leaves the general owner in possession of the ship
as owner for the voyage, the rights and the responsibilities of ownership rest on the owner. The charterer
is free from liabilities to third persons. (San Miguel vs. Heirs of Sabiniano Inguito, et al, G.R. No. 141716;
Julius Dungao vs. CA, G.R. No. 142025, July 4, 2002; Coastwise Lightrage Corp. vs. CA, 245 SCRA 796)
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62. To escape solidary liability for a quasi-delict committed by his employee, an employer must rebut the
presumption by presenting convincing proof that in the selection and supervision of his employer, he has
exercised the care and diligence of a good father of a family. (Metro Manila Transit Corp, vs. Cam 386
SCRA 126)

The owner or the person in possession and control of a vessel and the vessel are liable for all natural
and proximate damage caused to persons or property by reason of negligent management or navigation.
(Smith Bell Dodwell Shipping Agency Corporation vs. Borja, 383 SCRA 341)

The doctrine of limited liability under Article 587 of the Code of Commerce does not apply to situations
in which the loss or the injury is due to the concurrent negligence of the ship owner and the captain. It has
already been established that the sinking vessel had been caused by the fault or negligence of the ship
captain and the crew as shown by the improper stowage of the cargo logs. “Closer supervision on the part
of the ship owner could have prevented this fatal miscalculation.” As such, the ship owner was equally
negligent. It cannot escape liability by virtue of the limited liability rule. (Central Shipping Company, Inc.
vs. Insurance Company of North America, G.R. No. 150751, September 20, 2004)

63. The doctrine of last clear chance states that where both parties are negligent but the negligent act of one
is appreciably later than that of the other or where it is impossible to determine whose fault or negligence
caused the loss, the one who had the last clear opportunity to avoid the loss but failed to do so, is
chargeable with the loss. (Consolidated Bank and Trust Corporation vs. CA, 410 SCRA 562)

64. Doctrine of last clear chance is not applicable in a case of culpa contractual. (id.)

65. The principle of last clear chance applies in a suit between the owners and drivers of two colliding vehicles.
It does not arise where a passenger demands responsibility from the carrier to enforce its contractual
obligations, for it would be inequitable to exempt the negligent driver and its owner on the ground that
the other driver was likewise guilty of negligence. The common law notion of last clear chance permits
courts to grant recovery to a plaintiff who has also been negligent provided that the defendant had the last
clear chance to avoid the accident and filed to do so. (William Tiu, doing business under the name and
style of “D” Rough Riders”, and Virgilio Te Las Pinas vs. Pedro Arriegado, et al, G.R. No. 138060, September
1, 2004; Philippine Rabbit Bus Lines vs. IAC, 189 SCRA 158)

66. The responsibility of employers for the negligence of their employees in the performance of their duties is
primary and the injured party may recover from the employers directly regardless of the solvency of their
employees. (Victory Liner, Inc. vs. Heirs of Andres Malecdan, 9394 SCRA 520)

Public Service Act

67. The registered owner of any vehicle, even if not used for public service, would primarily be responsible to
the public or to the third persons for injuries caused by the latter while the vehicle was being driven on the
highways or streets. (St. Mary’s Academy vs. Carpitanos, 376 SCRA 473) If the property covered by a
franchise is transferred or leased to another without obtaining the requisite approval of the Public Service
Commission, the transfer is not binding upon the public and the registered owner continues to be
responsible for damages that may arise from consequences incident to the operation of the public service.
(Gelisan vs. Alday, 154 SCRA 388) The prevailing doctrine on common carrier makes the registered owner
liable for the consequences flowing from the operation of the carrier, even though the specific vehicle
involved may already have been transferred to another person. (Benedicto vs. IAC, 187 SCRA 547)

68. It has been consistently ruled that the registered owner of any vehicle is directly and primarily responsible
to the public and third persons while it is being operated.

The principle upon which this doctrine is based is that in dealing with vehicles registered under the
Public Service Law, the public has the right to assume or presume that the registered owner is the actual
owner thereof, for it would be difficult for the public to enforce actions that they may have for injuries
caused to them by vehicles being negligently operated of the public should be required to prove who the
actual owner is. How would the public or third persons know against whom to enforce their rights in case
of subsequent transfers of the vehicles? It is not implied, however, by this doctrine, that the registered
owner may not recover whatever amount he had paid by virtue of his liability to third persons from the
person to whom he had actually sold, assigned or conveyed the vehicle.
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 Under the same principle, the registered owner of any vehicle, even if not used for a public service,
should primarily be responsible to the public or to third persons for injuries caused the latter while the
vehicle is being driven on the highways or streets. To plaintiff-appellee for the injuries occasioned to the
latter because of the negligence of the driver, even if the defendant-appellant was no longer the owner of
the vehicle at the time of the damage because he had previously sold it to another. What is the legal basis
for defendant-appellant’s liability?

There is a presumption that the owner of the guilty vehicle is the defendant-appellant as he is the
registered owner in the Motor Vehicle Office. He should not be allowed to prove that he had sold it to
another and thus shift the responsibility of the injury to the real and actual owner. (Villanueva vs.
Domingo, et al, G.R. No. 144274, September 20, 2004)

69. The Revised Motor Vehicle Law (Act No. 3992, as amended) provides that no vehicle may be used or
operated upon any public highways unless the same is properly registered. It has been stated that the
system of licensing and the requirement that each machine must carry a registration number,
conspicuously displayed, is one of the precautions taken to reduce the danger of injury to pedestrians and
other travellers from the careless management of automobiles. And to furnish a means of ascertaining the
identity of persons violating the laws and ordinances, regulating the speed and operation of machines
upon the highways (2 R.C.L. 1176). Not only are vehicles to be registered and that no motor vehicles are to
be used or operated without being properly registered for the current year, but the dealers in motor
vehicles shall furnish the Motor Vehicle Office a report showing the name and address of each purchaser
of motor vehicle during the previous month and the manufacturer’s serial number and motor number.
(Sec. 5 (c), Act. No. 3992, as amended; Villanueva vs. Domingo, supra)

70. Registration is required not to make said registration the operative act by which ownership in vehicles is
transferred, as in land registration cases, because the administrative proceeding of registration does not
bear any essential relation to the contract of sale between the parties. (Chincilla vs. Rafael and Verdaquer,
30 Phil 888), not to permit the use and operation of the vehicle upon any public highway (Sec. 5(a), Act No.
3992, as amended). The main aim of motor vehicle registration is to identify the owner so that if any
accident happens, or that any damage therefore can be fixed on a definite individual, the registered
owner. Instances are numerous where vehicles running on public highways caused accidents or injuries to
pedestrians or other vehicles without positive identification of the owners or drivers, or with very scant
means of identification. It is to forestall these circumstances, so inconvenient or prejudicial to the public,
that the motor vehicle registration is primarily ordained, in the interest of the determination of persons
responsible for damages or injuries caused on public highways. (Villanueva vs. Domingo, supra)

71. The “Kabit System” is an arrangement whereby a person who has been granted a certificate of public
convenience allows another person who owns a motor vehicle to operate under such a franchise for a fee.
Although not outrightly penalized as a criminal offense, the “Kabit System” is recognized as being contrary
to public policy and therefore, is void and inexistent. (Lita Enterprises vs. IAC) It is a fundamental principle
that the courts will not aid either party to enforce an illegal contract but will leave them both where it
finds them. Where the parties are in pari delicto, no affirmative relief of any kind will be given to one
against the other. (Teja Marketing vs. IAC, 148 SCRA 347)

Warsaw Convention

72. The Warsaw Convention should be deemed a limit of liability only in those cases where the cause of the
death or injury to person, or destruction to, attended by any willful misconduct, bad faith, recklessness, or
otherwise improper conduct on the part of any official or employee for which the carrier is responsible,
and there is otherwise no special or extraordinary form of resulting injury. (Northwest Airlines, Inc. vs. CA,
284 SCRA 408)

CORPORATION LAW

73. A corporation has no power except hose conferred on it by the Corporation Code and the by its articles of
incorporation, those which may be incidental to such conferred powers, those that are implied ti its
existence, and those reasonable necessary to accomplish its purpose. (Monfort Hermanos Agricultural Dev.
Corp. v. Monfort III, 434 SCRA 27 (2004)).

Four Basic Advantages of Corporate Organizations:

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 1. Strong Separate Juridical Personality – A corporation separate and distinct from its individual
stockholders or members. Being an officer or stockholder of a corporation does not make one’s
property also that of the corporation, and vice-versa, for they are separate entities. (Traders Royal
Bank v. CA 177 SCRA 788 (1989).
2. Limited Liability to Investors – As a general rule, stockholders in a stock corporation are personally
liable for corporate debts and liabilities only to the extent of what they have invested (paid-up
capital) and what they have promised to invest in the corporation (unpaid subscription).

3. Centralized Management – Except when otherwise provided in the Corporation Code, all
corporate powers and all corporate properties are vested in the Board of Directors or Trustees;
and other than electing directors or trustees, the stockholders or members do not have
management power relating to the operations and assets of the corporation.

4. Free Transferability of Units of Ownership – The doctrine of delectus personam in partnership is

not applicable to corporate setting, and that stockholders hold their shares as personal property
with rights to dispose, assign of its stockholders or members, and the officers that represent it.

74. Main doctrine on Separate Juridical Personality – A corporation has a personality separate and distinct
from that of its stockholders or members, and the officers that represent it.

75. Upon coming to its existence, a corporation is invested by law with a personality separate and distinct
from those persons composing it, its directors and officers, as well as from any other legal entity to which
it may be related. This separate and distinct personality is, however, merely a fiction created by law for
conveyance and to promote the ends of justice.

76. Piercing the Veil of Corporate Fiction – The separate personality of a corporation may be disregarded
under the doctrine of “piercing the veil of corporate fiction,” as in fact at times the courts will look at the
corporation as an aggregation of persons undertaking business as a group, disregarding the separate
juridical personality of the corporate in unifying the group. The classic language by which we now invoke
the piercing of the veil of corporate doctrines was first enunciated in Unite States v. Milwaukee
Refrigerator Transit Co., 142 Fed. 247 (1905).

77. “…If any general rule can be laid down, in the present state of authority, it is that a corporation will be
looked upon as a legal entity as a general rule, and until sufficient reason to the contrary appears; but,
when the notion of legal entity is used to defeat public convenience, justify wrong, protect fraud, or
defend crime, the law will regard the corporation as an association of persons.” x x x Piercing the veil of
corporate entity requires the court to see through the protective shroud which exempts its stockholders
from liabilities that ordinarily, they could be subject to, or distinguishes one corporation from a seemingly
separate one, were it not for the existing corporate fiction. (Lim v. Court of Appeals, 323 SCRA 102 (2000)).

78. The piercing of the veil of corporate fiction is employed only “to hold officers and stockholders directly
liable for a corporate debt or obligation,” and does not apply in a case which does not apply in a case
which does not impose a claim against the officer or members of the corporation such as seeking to
establish a bargaining unit for purposes of CBA.” (Umali v. Court of Appeals. 189 SCRA 529 (1990) x x x To
disregard the said separate juridical personality of a corporation, the wrong doing must be proven clearly
and convincingly. (Martinez v. Court of Appeals, 438 SCRA 130 (2004)).

79. Piercing is not available when the personal obligations of an individual are sought to be enforced against
the corporation. (Robledo v. NLRC, 238 SCRA 52 (1994)).

80. Standing on who can invoke piercing doctrine:

The corporate entity may be disregarded in the interest of justice in such cases as fraud that work
inequities among members of the corporation internality, involving no rights of the public or third persons.
In both instances, there must have been fraud and proof of it. (Sacosa v. Heirs of Erwin Suarez Francisco,
433 SCRA 273 (2004)

81. Piecing not available to Establish a Right for the First Time or to Support a Legal Theory; Piercing the veil
of corporate fiction is allowed to remedy a wrong done by virtue of the use of corporate fiction;
consequently it cannot be allowed when there is wrong committed, such as in the case to justify a theory
of co-ownership to allow the stockholder the continued use and possession of corporate properties.
(Boyer-Roxas v. CA, 211 SCRA 470 (1992)).
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82. Piercing the veil cannot be availed by one who is not a “victim” of a fraud or wrong :

83. Tests Evolved to Determine Applicability of Piercing Doctrine:

The tests in determining the applicability of the doctrine of piercing the veil of corporate fiction are as
follows:

Control, not mere majority or complete stock control, but complete domination, not only of the finances
but of policy and business practice in respect to the transaction attacked so that the corporate entity as to
this transaction had at the time no separate mind, will or existence of its own;

Such control must have been used by the defendant to commit fraud or wrong, to perpetuate the violation
of a statutory or other positive legal duty, or dishonest and unjust acts in contravention of plaintiff’s legal
right; and

The aforesaid control and breach of duty must proximately cause the injury or unjust loss complained of.
(Heirs of Ramon Durano, Sr. vs. Uy, 344 SCRA 238 (2000).

84. Grandfather Rule- Method used to determine the nationality of a corporation, in cases where corporate
shareholders are present in the situation, by which the percentage of Filipino equity in a corporation
engaged in nationalized and/or partly nationalized areas of activities, is computed by attributing the
nationality of second or even subsequent tier of ownership to determine the nationality of the corporate
shareholder.

85. As a general rule, a banking corporation is liable for the wrongful or tortuous acts and declarations of its
officers or agents within the course and scope of their employment. A bank will be held liable for the
negligence of its officers or agents when acting within the course and scope of their employment. It may
be liable for tortuous acts of its officers even as regards that species of tort of which malice is an essential
element. In this case, we find a situation where the PCI Bank appears also to be the victim of the scheme
hatched by a syndicate in which its own management employees had participated.

86. Liability for Crimes- Since a corporation is a mere legal fiction, it cannot be held liable for a crime
committed by its officers, since it does not have the essential element of malice; in such case the
responsible officers would be criminally liable. (People v. Tan Boo Kong, 54 Phil 607 (1930); Sia v. CA, 121
SCRA 655 (1983); Times, Inc. v. Reyes, 39 SCRA 303 (1971) x x x While it is true that a criminal case can only
be filed against the officers of a corporation and not against the corporation itself, it does not follow,
however that the corporation cannot be a real-party-in-interest for the purpose of bringing a civil action
for malicious prosecution for the damages incurred by the corporation for the criminal proceedings
brought against its officers. (Cometa v. CA, 301 SCRA 459 (1999)

87. It has been held that the existence of the corporate entity does not shield from prosecution the corporate
agent who knowingly and intentionally causes the corporation to commit the crime. The corporation
obviously acts, and can act, only by and through its human agents, and it is their conduct which the law
must deter. The employee or agent of a corporation engaged in unlawful business naturally aids and abets
in the carrying on of such business and will be prosecuted as principal if, with knowledge of the business,
its purpose and effect, he consciously contributes his efforts to its conduct and promotion (illegal
recruitment in this case), however slight his contribution may be. (The Executive Secretary v. CA, 429 SCRA
81 (2004)

88. Requisites De Facto Corporation:

a. Organized under a valid law;
b. Bona fide compliance with formalities of law;
c. Use of corporate powers;
d. SEC issuance of certificate of incorporation (Arnold Hall v. Piccio, 86 Phil 603 (1950)

89. Corporation by Estoppel—all person who assume to act as a corporation knowing it to be without
authority to do so shall be liable as general partners for all debts, liability and damages incurred or arising
as a result thereof. (Sec. 21)

Facts: Albert wrote a book on the Penal Code and had it published by the University Publishing Co. Many
copies were sold but the publisher refused to pay the agreed royalties. Albert’s heirs sued in the CFI and
won. Both the Court of Appeals and the Supreme Court, on appeal, affirmed the CFI decision ordering the

12
 publishing company to pay, the contract having been signed by its President. The affirmed judgment was
made the subject of a motion for reconsideration (in the Supreme Court) wherein it was alleged for the
first time that the company was not a corporation (as it was alleged it was).

Held: The publishing company is a corporation by estoppel because its corporate status was not raised as
an issue during the proceedings in the CFI, Court of Appeals and in the Supreme Court. (Albert v. University
Publishing Co., 13 SCRA 84 (1965).

90. Effects of Non-use of Corporate Charter and Continuous Incorporation

Two Situations Contemplated Under Section 22:

a. Non-User 2 years- When corporation does not formally organize and commence the
transaction of its business the constructions of its works within two years from the
date of its incorporation its corporate powers cease and the corporation shall be
deemed dissolved (automatic).

“Formal organization “may consist in the election of new board of directors or

trustees and corporate officers.”Commencement of business” may take the form of
contracting for lease or sale of properties to be used as business site of the
corporation and other preparatory act geared towards fulfillment of the purpose for
which the corporation was established

b. Non-User 5 years- When the corporation has commenced the transaction of its business but
subsequently becomes continuously inoperative for a period of at least five years.

The same shall be a ground for the suspension or revocation of its corporate
franchise or certificate of incorporation (not automatic). Notice and hearing are
required.

BOARD OF DIRECTORS OR TRUSTEES, CORPORATE OFFICERS

91. “Centralized Management” Doctrine: The Board is Seat of Corporate Power – Unless otherwise provided in
the Corporation Code, the corporate powers of all corporations shall be exercised, all business conducted
and all property of such corporations controlled and held by the board of directors or trustees to be
elected from among the holders of stock, or where there is no stock, from among the members of the
corporation, who shall hold office for one (1) year and until their successors are elected and qualified.

92. In this jurisdiction, a corporation’s Board of Directors is understood to be that body which (a) exercises all
powers provided for under the Corporation Code; (b) conducts all business of the corporation; and (c)
controls and holds all property of the corporation. Its members have been characterized as trustees or
directors clothed with a fiduciary character. It is clearly separate and distinct from the corporate entity
itself. (Hornilla v. Salunat, 405 SCRA 220 (2003)

93. Under the Corporation Code, unless otherwise provided by said Code, corporate powers, such as the
power to enter into contracts, are exercised by the Board of Directors. However, the Board may delegate
such powers to either an executive committee or officials or contracted managers. The delegation, except
for the executive committee, must be for specific purposes. The delegation to officers makes the latter
agents of the corporation; accordingly, the general rules of agency as to the binding effects of their acts
would apply. For such officers deemed to be fully clothed by the corporation to exercise the power of the
Board, the latter must specially authorize them to do so. (ABS-CBN Broadcasting Corp. v. Court Appeals,
301 SCRA 572 (1999)

94. Principle of Delegation of Board Power

Under Section 23 of the Corporation Code, the power and the responsibility to decide whether the
corporation should enter into a contract is lodged in the Board, subject to the articles of incorporation, by-
laws, or relevant provisions of law. However, just as a natural person may authorize another to do certain
acts for and on his behalf, the Board of Directors may validly delegate some of its functions and power to
officers, committees or agents. The authority of such individuals to bind the corporation is generally
derived from law, corporate by-laws or authorization from the board, either expressly or impliedly by
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 habit, custom or acquiescence in the general course of business. (People’s Aircargo v. Court of Appeals,
297 SCRA 170 (1998)

Contracts between Corporations between Corporation with Interlocking directors

RULE: Contracts between corporation with interlocking directorates are valid so long as there as there
is no fraud and the contract is fair and reasonable under the existing facts.

LIMIT: if the director’s interest is nominal in one of the contracting corporations (i.e., not exceeding
20% of outstanding capital stock), then the contract must comply with the requisites provided for
under Sec. 32, otherwise, the contract is voidable at the option of the corporation.

Power to Sue and Be Sued

The power of the corporation to sue and be sued in any court is lodged with the Board of Directors
that exercises its corporate powers. No person, not even its officers, could validly sue in behalf of a
corporation in the absence of any resolution from the Board of Directors authorizing the filing of such
suit. (Shipside Inc. v. Court of Appeals, 352 SCRA 334 (2001)

95. Ultra vires Acts - a corporation is a being of express powers; a creature of the law and may only exercise
such powers as the law creating it has granted. Acts performed by it in excess of its corporate powers are
ultra vires, which are generally not binding on the corporation. A person dealing with a corporation is
charged with inquiry as to corporate powers, because the corporation, being a creature of law, has
necessarily limited powers and acts done beyond those are ultra vires.

There are three (3) types of ultra vires

- First type: those which are outside of the express, implied or incidental powers of the corporation.
- Second type: those which are effected by corporate representatives who act without authority
(even
though the contract is within the express/implied/incidental powers of the corporation they
represent);
- Third type: those which are contrary to laws or public policy.

96. Ultra Vires of Second Type – Generally, the acts of the corporate officers within the scope of their
authority are binding on the corporation. However, under Article 1910 of Civil Code, acts done by such
officers beyond the scope of their authority cannot bind the corporation unless it has ratified such acts
expressly or tacitly, or is stopped from denying them. Thus, contracts entered into by corporate officers
beyond the scope of authority are unenforceable against the corporation unless ratified by the
corporation. (Woodchild Holdings, Inc. v. Roxas Electric Construction Co., Inc., 46 SCRA 235 (2004)

97. Issue: Can the corporation be held liable for the issuance of a check by a corporate officer who was
granted no authority to accommodate a third party?

Held: No. An ultra vires act is one committed outside the object for which a corporation is created as
defined by the law of its organization and therefore beyond the power conferred upon it by law. The
term “ultra vires” is “distinguished from an illegal act where the former is merely voidable which may
be enforced by performance, ratification, or estoppel, while the other is void and cannot be validated.

It is however our view that there is basis to the rule that the act of issuing the checks was well within
the ambit of a valid corporate act, for it was for securing a loan to finance the activities of the
corporation, hence, not an ultra vires act. (Atrium Management Corp. v. Court of Appeals, 353 SCRA 23
(2001)

Trust Fund Doctrine – Under Sec. 43 of Code, the corporation can declare dividends only out of “unrestricted
retained earnings;” and that under Sec. 122, no corporation shall distribute any of its assets or
property except upon lawful dissolution and after payment of all its debts and liabilities.

These provision in essence provide for the “trust and doctrine” where the “subscription to the capital
of a corporation constitute a fund to which creditors have a right to look for satisfaction of their
claims.” (Philippine Trust Co. v. Rivera, 44 Phil. 469 (1923)

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98. “The Trust Fund Doctrine, first enunciated by this Court in the 1923 case of Philippine Trust Co. v. Rivera,
provides the subscriptions to the capital stock of a corporation constitute a fund to which the creditors
have a right to look for the satisfaction of their claims. This doctrine is the underlying principle in the
procedure for the distribution of capital assets, embodied in Corporation Code, which allows the
distribution of corporate capital only in three instances: (1) amendment of the Articles of the Incorporation
to reduce the authorized capital stock; (2) purchase of redeemable shares by the corporation, regardless of
the existence of unrestricted retained earnings; and (3) dissolution and eventual liquidation of the
corporation. Furthermore, the doctrine is articulated in Section 41 on the power of a corporation to
acquire its own shares and in Section 122 on the prohibition against the distribution of corporate assets
and property unless the stringent requirements therefore are complied with.” (Ong Yong v. Tiu, 401 SCRA
1 (2001)

RIGHTS OF STOCKHOLDERS AND MEMBERS

99. As early as Fisher v. Trinidad, the Court already declared that “the distinction between the title of a
corporation, and the interest of its members or stockholders in the property of the corporation, is familiar
and well-settled. The ownership of the property is in the corporation, and not in the holders of shares of its
stock. The interest of each stockholder consists in the right to a proportionate part of the profits whenever
dividends are declared by the corporation, during its existence under its charter, and to a like proportion of
the property remaining, upon the termination or dissolution of the corporation, after payment of its
debts.”

100. Right to Vote

Nature of the Right to Vote
One of the rights of a stockholder is the right to participate in the control and management of the
corporation that is exercised through his vote. The right to vote is a right inherent in and incidental to
the ownership of corporate stock, and as such is a property right. (Castillo v. Balinghasay, 440 SCRA
442 (2004)

GOOD LUCK TO ALL BAR CANDIDATES

IN THE 2013 BAR EXAMINATIONS
We are praying for your success which is a part of the service of
ALBANO BAR REVIEW CENTER.

God Bless You All.

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