Mercantile Law: Compilation of Supreme Court Decisions

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COMPILATION OF SUPREME COURT DECISIONS

(MARCH 2014-MARCH 2015)
MERCANTILE LAW The phraseology used in medical or

hospital service contracts, such as the
one at bar, must be liberally
• G.R. No. 195872. March 12, 2014 Fortune
construed in favor of the subscriber,
Medicare, Inc. Vs. David Robert U. Amorin
and if doubtful or reasonably
ISSUE: LIABILITY OF HEALTHCARE
susceptible of two interpretations the
PROVIDER
construction conferring coverage is to
be adopted, and exclusionary clauses
of doubtful import should be strictly
The Court finds no cogent reason to construed against the provider.
disturb the CA’s finding that Fortune
Care’s liability to Amorin under the subject
In Philamcare Health Systems, Inc. v. CA,
Health Care Contract should be based on
we ruled that a health care agreement is
the expenses for hospital and professional
in the nature of a non-life insurance. It is
fees which he actually incurred, and
an established rule in insurance contracts
should not be limited by the amount that
that when their terms contain limitations
he would have incurred had his
on liability, they should be construed
emergency treatment been performed in
strictly against the insurer. These are
an accredited hospital in the Philippines.
contracts of adhesion the terms of which
must be interpreted and enforced
We emphasize that for purposes of stringently against the insurer which
determining the liability of a health care prepared the contract. This doctrine is
provider to its members, jurisprudence equally applicable to health care
holds that a health care agreement is in agreements.
the nature of non-life insurance, which is
primarily a contract of indemnity. Once
xxx x
the member incurs hospital, medical or
any other expense arising from sickness,
x x x [L]imitations of liability on the part
injury or other stipulated contingent, the
of the insurer or health care provider must
health care provider must pay for the
be construed in such a way as to preclude
same to the extent agreed upon under the
contract. it from evading its obligations.
Accordingly, they should be scrutinized by
the courts with “extreme jealousy” and
To aid in the interpretation of health care
“care” and with a “jaundiced eye.”
agreements, the Court laid down the
following guidelines in Philamcare Health
In the instant case, the extent of Fortune
Systems v. CA: When the terms of
Care’s liability to Amorin under the
insurance contract contain limitations on
attendant circumstances was governed by
liability, courts should construe them in
Section 3(B), Article V of the subject
such a way as to preclude the insurer
Health Care Contract, considering that the
from non-compliance with his obligation.
appendectomy which the member had to
Being a contract of adhesion, the
undergo qualified as an emergency care,
terms of an insurance contract are to
but the treatment was performed at St.
be construed strictly against the party
Francis Medical Center in Honolulu,
which prepared the contract – the
Hawaii, U.S.A., a non-accredited hospital.
insurer. By reason of the exclusive
control of the insurance company over the
terms and phraseology of the insurance The point of dispute now concerns the
contract, ambiguity must be strictly proper interpretation of the phrase
interpreted against the insurer and “approved standard charges”, which shall
liberally in favor of the insured, especially be the base for the allowable 80% benefit.
to avoid forfeiture. This is equally The trial court ruled that the phrase
applicable to Health Care Agreements. should be interpreted in light of the
Prepared by: ATTY. RESCI ANGELLI RIZADA, RN

Ateneo de Davao University
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provisions of Section 3(A), i.e., to the only in the case of an emergency care in
extent that may be allowed for treatments an accredited hospital.
performed by accredited physicians in
accredited hospitals. As the appellate The proper interpretation of the phrase
court however held, this must be “standard charges” could instead be
interpreted in its literal sense, guided by correlated with and reasonably inferred
the rule that any ambiguity shall be from the other provisions of Section 3(B),
strictly construed against Fortune Care, considering that Amorin’s case fell under
and liberally in favor of Amorin. the second case, i.e., emergency care in a
non-accredited hospital. Rather than a
The Court agrees with the CA. As may be determination of Philippine or American
gleaned from the Health Care Contract, standards, the first part of the provision
the parties thereto contemplated the speaks of the full reimbursement of “the
possibility of emergency care in a foreign total hospitalization cost including the
country. As the contract recognized professional fee (based on the total
Fortune Care’s liability for emergency approved charges) to a member who
treatments even in foreign territories, it receives emergency care in a non-
expressly limited its liability only insofar accredited hospital” within the Philippines.
as the percentage of hospitalization and Thus, for emergency care in non-
professional fees that must be paid or accredited hospitals, this cited clause
reimbursed was concerned, pegged at a declared the standard in the determination
mere 80% of the approved standard of the amount to be paid, without any
charges. reference to and regardless of the
amounts that would have been payable if
The word “standard” as used in the cited the treatment was done by an affiliated
stipulation was vague and ambiguous, as physician or in an affiliated hospital. For
it could be susceptible of different treatments in foreign territories, the only
meanings. Plainly, the term “standard qualification was only as to the
charges” could be read as referring to the percentage, or 80% of that payable for
“hospitalization costs and professional treatments performed in non-accredited
fees” which were specifically cited as hospital.
compensable even when incurred in a
foreign country. Contrary to Fortune All told, in the absence of any qualifying
Care’s argument, from nowhere in the word that clearly limited Fortune Care's
Health Care Contract could it be liability to costs that are applicable in the
reasonably deduced that these “standard Philippines, the amount payable by
charges” referred to the “Philippine Fortune Care should not be limited to the
standard”, or that cost which would have cost of treatment in the Philippines, as to
been incurred if the medical services were do so would result in the clear
performed in an accredited hospital disadvantage of its member. If, as Fortune
situated in the Philippines. The RTC ruling Care argued, the premium and other
that the use of the “Philippine standard” charges in the Health Care Contract were
could be inferred from the provisions of merely computed on assumption and risk
Section 3(A), which covered emergency under Philippine cost and, that the
care in an accredited hospital, was American cost standard or any foreign
misplaced. Evidently, the parties to the country's cost was never considered, such
Health Care Contract made a clear limitations should have been distinctly
distinction between emergency care in an specified and clearly reflected in the
accredited hospital, and that obtained extent of coverage which the company
from a non-accredited hospital. The voluntarily assumed.
limitation on payment based on “Philippine
standard” for services of accredited Settled is the rule that ambiguities in a
physicians was expressly made applicable
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contract are interpreted against the party salesman who actually solicited the sale of
that caused the ambiguity. "[A]ny or sold unregistered securities issued by
ambiguity in a contract whose terms are PIPC Corporation and/or PIPC-BVI.
susceptible of different interpretations
must be read against the party who Solicitation is the act of seeking or asking
drafted it. for business or information; it is not a
• G.R. No. 195542. March 19, 2014 Securities commitment to an agreement.
and Exchange Commission Vs. Oudine
Santos Santos, by the very nature of her function
• Before us is another cautionary tale as what she now unaffectedly calls an
of an investment arrangement information provider, brought about the
which, at the outset, appeared sale of securities made by PIPC
good, unraveling unhappily as a Corporation and/or PIPC-BVI to certain
deal too- good-to-be-true. individuals, specifically private
complainants Sy and Lorenzo by providing
Hence, this appeal by certiorari raising the information on the investment products of
sole error of Santos’ exclusion from the PIPC Corporation and/or PIPC- BVI with
Information for violation of Section 28 of the end in view of PIPC Corporation
the Securities Regulation Code. closing a sale.
In excluding Santos from the prosecution While Santos was not a signatory to the
of the supposed violation of Section 28 of contracts on Sy’s or Lorenzo’s
the Securities Regulation Code, the investments, Santos procured the sale of
Secretary of the DOJ, as affirmed by the these unregistered securities to the two
appellate court, debunked the DOJ panel’s (2) complainants by providing information
finding that Santos was prima facie liable on the investment products being offered
for either: (1) selling securities in the for sale by PIPC Corporation and/or PIPC-
Philippines as a broker or dealer, or (2) BVI and convincing them to invest therein.
acting as a salesman, or an associated
person of any broker or dealer on behalf No matter Santos’ strenuous objections, it
of PIPC Corporation and/or PIPC-BVI is apparent that she connected the
without being registered as such with the probable investors, Sy and Lorenzo, to
SEC. PIPC Corporation and/or PIPC-BVI, acting
as an ostensible agent of the latter on the
We sustain the DOJ panel’s findings which viability of PIPC Corporation as an
were not overruled by the Secretary of the investment company. At each point of Sy’s
DOJ and the appellate court, that PIPC and Lorenzo’s investment, Santos’
Corporation and/or PIPC-BVI was: (1) an participation thereon, even if not shown
issuer of securities without the necessary strictly on paper, was prima facie
registration or license from the SEC, and established.
(2) engaged in the business of buying and
selling securities. Individual complainants and the SEC have
categorically alleged that Liew and PIPC
Tying it all in, there is no quarrel that Corporation and/or PIPC-BVI is not a
Santos was in the employ of PIPC legitimate investment company but a
Corporation and/or PIPC-BVI, a company which perpetrated a scam on 31
corporation which sold or offered for sale individuals where the president, a foreign
unregistered securities in the Philippines. national, Liew, ran away with their money.
To escape probable culpability, Santos Liew’s absconding with the monies of 31
claims that she was a mere clerical individuals and that PIPC Corporation
employee of PIPC Corporation and/or and/or PIPC-BVI were not licensed by the
PIPC-BVI and was never an agent or SEC to sell securities are uncontroverted

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facts. vanquished party.
The transaction initiated by Santos with This action by the RTC begs the question:
Sy and Lorenzo, respectively, is an may the RTC enforce the
investment contract or participation in a
profit sharing agreement that falls within alias writ of execution against Export
the definition of the law. When the Bank?
investor is relatively uninformed and turns
over his money to others, essentially From the preceding, it is therefore correct
depending upon their representations and to say that the court must first and
their honesty and skill in managing it, the foremost acquire jurisdiction over the
transaction generally is considered to be parties; and only then would the parties
an investment contract. The touchstone is be allowed to present evidence for and/or
the presence of an investment in a against piercing the veil of corporate
common venture premised on a fiction. If the court has no jurisdiction over
reasonable expectation of profits to be the corporation, it follows that the court
derived from the entrepreneurial or has no business in piercing its veil of
managerial efforts of others. corporate fiction because such action
offends the corporation’s right to due
At bottom, the exculpation of Santos process.
cannot be preliminarily established simply
by asserting that she did not sign the As Export Bank was neither served with
investment contracts, as the facts alleged summons, nor has it
in this case constitute fraud perpetrated
on the public. Specially so because the
voluntarily appeared before the court, the
absence of Santos’ signature in the
judgment sought to be enforced against
contract is, likewise, indicative of a
E-Securities cannot be made against its
scheme to circumvent and evade liability
parent company, Export Bank. Export
should the pyramid fall apart.
Bank has consistently disputed the RTC
jurisdiction, commencing from its filing of
Lastly, we clarify that we are only dealing an Omnibus Motion by way of special
herein with the preliminary investigation appearance during the execution stage
aspect of this case. We do not adjudge until the filing of its Comment before the
respondents’ guilt or the lack thereof. Court wherein it was pleaded that “RTC
Santos' defense of being a mere employee [of] Makati[, Branch] 66 never acquired
or simply an information provider is best jurisdiction over Export [B]ank. Export
raised and threshed out during trial of the [B]ank was not pleaded as a party in this
case. case. It was never served with summons
• G.R. No. 199687/G.R. No. 201537. March by nor did it voluntarily appear before RTC
24, 2014 Pacific Rehouse Corporation Vs. [of] Makati[, Branch] 66 so as to be
Court of Appeals and Export and Industry
Bank, Inc./Pacific Rehouse Corporation, subjected to the latter’s jurisdiction.”
Paicific Concorde Corporation, Mizpah
Holdings, Inc., Forum Holdings
The Alter Ego Doctrine is not
Corporation and East Asia Oil Company,
Inc. Vs. Export and Industry Bank, Inc.
• On the scales of justice applicable
precariously lie the right of a
prevailing party to his victor's cup, “The question of whether one corporation
no more, no less; and the right of a is merely an alter ego of
separate entity from being dragged
by the ball and chain ofthe another is purely one of fact. So is the

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question of whether a corporation is a complaint is made.”

paper company, a sham or subterfuge or
whether petitioner adduced the requisite The Court has laid down a three-pronged
quantum of evidence warranting the control test to establish when the alter
piercing of the veil of ego doctrine should be operative:
respondent’s corporate entity.” (1) Control, not mere majority or

complete stock control, but complete
“It is a fundamental principle of domination, not only of finances but of
corporation law that a corporation is policy and business practice in respect to
the transaction attacked so that the
an entity separate and distinct from its corporate entity as to this transaction had
stockholders and from other corporations at the time no separate mind, will or
to which it may be connected. But, this existence of its own; (2) Such control
separate and distinct personality of a must have been used by the defendant to
corporation is merely a fiction created by commit fraud or wrong, to perpetuate the
law for convenience and to promote violation of a statutory or other positive
justice. So, when the notion of separate legal duty, or dishonest and unjust act in
juridical personality is used to defeat contravention of plaintiff’s legal right; and
public convenience, justify wrong, protect
fraud or defend crime, or is used as a (3) The aforesaid control and breach of
device to defeat the labor laws, this duty must [have] proximately caused the
separate personality of the corporation injury or unjust loss complained of.
may be disregarded or the veil of
corporate fiction pierced. This is true The absence of any one of these elements
likewise when the corporation is merely an prevents ‘piercing the corporate veil’ in
adjunct, a business conduit or an alter ego applying the ‘instrumentality’ or ‘alter ego’
of another doctrine, the courts are concerned with
reality and not form, with how the
corporation.” corporation operated and the individual
defendant’s relationship to that operation.
“Where one corporation is so organized Hence, all three elements should concur
and controlled and its affairs for the alter ego doctrine to be applicable.
are conducted so that it is, in fact, a mere All the foregoing circumstances, with the
instrumentality or adjunct of the other, exception of the admittedb stock
the fiction of the corporate entity of the ownership, were however not properly
“instrumentality” may be disregarded. The pleaded and proved in accordance with
control necessary to invoke the rule is not the Rules of Court.
majority or even complete stock control
but such domination of finances, policies Albeit the RTC bore emphasis on the
and practices that the controlled alleged control exercised by
corporation has, so to speak, no separate
mind, will or existence of its own, and is Export Bank upon its subsidiary E-
but a conduit for its principal. It must be Securities, “[c]ontrol, by itself, does not
kept in mind that the control must be mean that the controlled corporation is a
shown to have been exercised at the time mere instrumentality or a business conduit
the acts complained of took place. of the mother company. Even control over
Moreover, the control and breach of duty the financial and operational concerns of a
must proximately cause the injury or subsidiary company does not by itself call
unjust loss for which the for disregarding its corporate fiction.
There must be a perpetuation of fraud
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behind the control or at least a fraudulent • G.R. No. 195580. April 21, 2014 Narra
or illegal purpose behind the control in Nickel Mining and Development Corp., et
order to justify piercing the veil of al. Vs. Redmont Consolidated Mines
corporate fiction. Such Dissenting Opinion J. Leonen 
• The main issue in this case is
fraudulent intent is lacking in this case.” centered on the issue of
petitioners’ nationality, whether
Moreover, there was nothing on record Filipino or foreign.
demonstrative of Export
Basically, there are two acknowledged
If used to perform legitimate functions, a tests in determining the nationality of a
subsidiary’s separate existence shall be corporation: the control test and the
respected, and the liability of the parent grandfather rule.
corporation as well as the subsidiary will
be confined to those arising in their Corporate layering” is admittedly allowed
respective business. To justify by the FIA; but if it is used to circumvent
the Constitution and pertinent laws, then
treating the sole stockholder or holding it becomes illegal. It is apparent that it is
company as responsible, it is not enough the intention of the framers of the
that the subsidiary is so organized and Constitution to apply the grandfather rule
controlled as to make it “merely an in cases where corporate layering is
instrumentality, conduit or adjunct” of its present.
stockholders. It must further appear that
to recognize their separate entities would Strict Rule or the Grandfather Rule Proper
aid in the and pertains to the portion in said
Paragraph 7 of the 1967 SEC Rules which
consummation of a wrong. states, “but if the percentage of Filipino
ownership in the corporation or
Furthermore, ownership by Export Bank of partnership is less than 60%, only the
a great majority or all of number of shares corresponding to such
percentage shall be counted as of
Philippine nationality.” Under the Strict
stocks of E-Securities and the existence of
Rule or Grandfather Rule Proper, the
interlocking directorates may serve as
combined totals in the Investing
badges of control, but ownership of
Corporation and the Investee Corporation
another corporation, per se, without proof
must be traced (i.e., “grandfathered”) to
of actuality of the other conditions are
determine the total percentage of Filipino
insufficient to establish an alter ego
ownership.
relationship or connection between the
two corporations, which will justify the
setting aside of the cover of corporate Moreover, the ultimate Filipino ownership
fiction. The Court has declared that “mere of the shares must first be traced to the
ownership by a single stockholder or by level of the Investing Corporation and
another corporation of all or nearly all of added to the shares directly owned in the
the capital stock of a corporation is not of Investee Corporation x x x.
itself sufficient ground for disregarding the
separate corporate personality.” The Court xxx x
has likewise ruled that the “existence of
interlocking directors, corporate officers In other words, based on the said SEC
and shareholders is not enough Rule and DOJ Opinion, the
justification to pierce the veil of corporate
fiction in the absence of fraud or other Grandfather Rule or the second part
public policy considerations.” of the SEC Rule applies only when the
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60-40 Filipino-foreign equity incorporation of a corporation.

ownership is in doubt (i.e., in cases •
where the joint venture corporation with • (2) Submission of plan to
Filipino and foreign stockholders with less stockholders or members of each
than 60% Filipino stockholdings [or 59%] corporation for approval. A meeting
invests in other joint venture corporation must be called and at least two (2)
which is either 60-40% Filipino-alien or weeks’ notice must be sent to all
the 59% less Filipino). Stated stockholders or members,
differently, where the 60-40 Filipino- personally or by registered mail. A
foreign equity ownership is not in summary of the plan must be
doubt, the Grandfather Rule will not attached to the notice. Vote of two-
apply. (emphasis supplied) thirds of the members or of
• G.R. No. 195615. April 21, 2014 Bank of stockholders representing two-
Commerce Vs. Radio Philippines Network, thirds of the outstanding capital
Inc., et al. Concurring Opinion J. stock will be needed. Appraisal
Velasco, Jr. Dissenting Opinion J. rights, when proper, must be
Mendoza, J. Leonen  respected.
• Merger and De Facto Merger •
• • (3) Execution of the formal
• Merger is a re-organization of two agreement, referred to as the
or more corporations that results in articles of merger o[r]
their consolidating into a single consolidation, by the corporate
corporation, which is one of the officers of each constituent
constituent corporations, one corporation. These take the place
disappearing or dissolving and the of the articles of incorporation of
other surviving. To put it another the consolidated corporation, or
way, merger is the absorption of amend the articles of incorporation
one or more corporations by of the surviving corporation.
another existing corporation, which •
retains its identity and takes over • (4) Submission of said articles of
the rights, privileges, franchises, merger or consolidation to the SEC
properties, claims, liabilities and for approval.
obligations of the absorbed •
corporation(s). The absorbing • (5) If necessary, the SEC shall set
corporation continues its existence a hearing, notifying all corporations
while the life or lives of the other concerned at least two weeks
corporation(s) is or are before.
terminated.13chanrobleslaw •
• • (6) Issuance of certificate of
• The Corporation Code requires the merger or consolidation.14
following steps for merger or •
consolidation:chanRoblesvirtualLaw • Indubitably, it is clear that no
library merger took place between
• Bancommerce and TRB as the
• (1) The board of each corporation requirements and procedures for a
draws up a plan of merger or merger were absent. A merger
consolidation. Such plan must does not become effective upon
include any amendment, if the mere agreement of the
necessary, to the articles of constituent corporations.15 All the
incorporation of the surviving requirements specified in the law
corporation, or in case of must be complied with in order for
consolidation, all the statements merger to take effect. Section 79
required in the articles of of the Corporation Code further
8
provides that the merger shall be consolidation of Philippine

effective only upon the issuance by Corporations, except insurance
the Securities and Exchange companies, railway corporations,
Commission (SEC) of a certificate and public utilities.16 And, except in
of merger. the case of insurance corporations,
• no procedure existed for bringing
• Here, Bancommerce and TRB about a merger.17 Still, the
remained separate corporations Supreme Court held in Reyes v.
with distinct corporate Blouse,18 that authority to merge
personalities. What happened is or consolidate can be derived from
that TRB sold and Bancommerce Section 28½ (now Section 40) of
purchased identified recorded the former Corporation Law which
assets of TRB in consideration of provides, among others, that a
Bancommerce’s assumption of corporation may “sell, exchange,
identified recorded liabilities of TRB lease or otherwise dispose of all or
including booked contingent substantially all of its property and
accounts. There is no law that assets” if the board of directors is
prohibits this kind of transaction so authorized by the affirmative
especially when it is done openly vote of the stockholders holding at
and with appropriate government least two-thirds of the voting
approval. Indeed, the dissenting power. The words “or otherwise
opinions of Justices Jose Catral dispose of,” according to the
Mendoza and Marvic Mario Victor F. Supreme Court, is very broad and
Leonen are of the same opinion. In in a sense, covers a merger or
strict sense, no merger or consolidation.
consolidation took place as the In his book, Philippine Corporate Law,20
records do not show any plan or Dean Cesar Villanueva explained that
articles of merger or consolidation. under the Corporation Code, “a de facto
More importantly, the SEC did not merger can be pursued by one corporation
issue any certificate of merger or acquiring all or substantially all of the
consolidation. properties of another corporation in
The dissenting opinion of Justice Mendoza exchange of shares of stock of the
finds, however, that a “de facto” merger acquiring corporation. The acquiring
existed between TRB and Bancommerce corporation would end up with the
considering that (1) the P & A Agreement business enterprise of the target
between them involved substantially all corporation; whereas, the target
the assets and liabilities of TRB; (2) in an corporation would end up with basically its
Ex Parte Petition for Issuance of Writ of only remaining assets being the shares of
Possession filed in a case, Bancommerce stock of the acquiring corporation.”
qualified TRB, the petitioner, with the (Emphasis supplied)
words “now known as Bancommerce;” and
(3) the BSP issued a Circular Letter (series • No de facto merger took place in
of 2002) advising all banks and non-bank the present case simply because
financial intermediaries that the banking the TRB owners did not get in
activities and transaction of TRB and exchange for the bank’s assets and
Bancommerce were consolidated and that liabilities an equivalent value in
the latter continued the operations of the Bancommerce shares of stock.
former. Bancommerce and TRB agreed with
BSP approval to exclude from the
• The idea of a de facto merger came sale the TRB’s contingent judicial
about because, prior to the present liabilities, including those owing to
Corporation Code, no law RPN, et al.21chanrobleslaw
authorized the merger or • The Bureau of Internal Revenue
9
(BIR) treated the transaction imposed upon the directors or

between the two banks purely as a trustees who voted for such refusal:
sale of specified assets and and Provided, further, That it shall be
liabilities when it rendered its a defense to any action under this
opinion22 on the tax consequences section that the person demanding to
of the transaction given that there examine and copy excerpts from the
is a difference in tax treatment corporation's records and minutes has
between a sale and a merger or improperly used any information
consolidation. secured through any prior
• Aderito Z. Yujuico and Bonifacio C. examination of the records or minutes
Sumbilla Vs. Cezar T. Quiambao and of such corporation or of any other
Eric C. Pilapil G.R. No. 180416. June 2, corporation, or was not acting in good
2014 faith or for a legitimate purpose in
The act of refusing to allow inspection making his demand.
of the stock and transfer book of a
corporation, when done in violation of Stock corporations must also keep a book
Section 74(4) of the Corporation to be known as the "stock and transfer
Code, is punishable as an offense book", in which must be kept a record of
under Section 144 of the same code. all stocks in the names of the stockholders
alphabetically arranged; the installments
Section 74 is the provision of the paid and unpaid on all stock for which
Corporation Code that deals with the subscription has been made, and the date
books a corporation is required to keep. of payment of any installment; a
statement of every alienation, sale or
XXXXXThe records of all business transfer of stock made, the date thereof,
transactions of the corporation and and by and to whom made; and such
the minutes of any meetings shall be other entries as the by-laws may
open to inspection by any director, prescribe. The stock and transfer book
trustee, stockholder or member of the shall be kept in the principal office of
corporation at reasonable hours on the corporation or in the office of its
business days and he may demand, in stock transfer agent and shall be open
writing, for a copy of excerpts from for inspection by any director or
said records or minutes, at his stockholder of the corporation at
expense. reasonable hours on business
days.XXXXXX
Any officer or agent of the
corporation who shall refuse to allow Section 144 of the Corporation Code, on
any director, trustees, stockholder or the other hand, is the general penal
member of the corporation to provision of the Corporation Code. It
examine and copy excerpts from its reads:
records or minutes, in accordance Section 144. Violations of the Code. -
with the provisions of this Code, shall Violations of any of the provisions of this
be liable to such director, trustee, Code or its amendments not otherwise
stockholder or member for damages, specifically penalized therein shall be
and in addition, shall be guilty of an punished by a fine of not less than one
offense which shall be punishable thousand (P1,000.00) pesos but not more
under Section 144 of this than ten thousand (P10,000.00) pesos or
by imprisonment for not less than thirty
Code: Provided, That if such refusal is (30) days but not more than five (5)
made pursuant to a resolution or years, or both, in the discretion of the
order of the board of directors or court. If the violation is committed by a
trustees, the liability under this corporation, the same may, after notice
section for such action shall be and hearing, be dissolved in appropriate
10
proceedings before the Securities and Section 144 of the Corporation Code
Exchange Commission: Provided, That cannot be made to apply to violations of
such dissolution shall not preclude the the right of a stockholder to inspect the
institution of appropriate action against stock and transfer book of a corporation
the director, trustee or officer of the under Section 74(4) given the already
corporation responsible for said violation: unequivocal intent of the legislature to
Provided, further, That nothing in this penalize violations of a parallel right, i.e.,
section shall be construed to repeal the the right of a stockholder or member to
other causes for dissolution of a examine the other records and minutes of
corporation provided in this Code. (190 a corporation under Section 74(2).
112 a) (Emphasis supplied) Certainly, all the rights guaranteed to
In the assailed Orders, the RTC expressed corporators under Section 74 of the
its opinion that the act of refusing to allow Corporation Code are mandatory for the
inspection of the stock and transfer book, corporation to respect. All such rights are
even though it may be a violation of just the same underpinned by the same
Section 74(4), is not punishable as an policy consideration of keeping public
offense under the Corporation Code. 29 In confidence in the corporate vehicle thru an
justifying this conclusion, the RTC assurance of transparency in the
seemingly relied on the fact that, under corporation's operations.
Section 74 of the Corporation Code, the
application of Section 144 is expressly Verily, we find inaccurate the
mentioned only in relation to the act of pronouncement of the RTC that the act of
"refus[ing] to allow any director, trustees, refusing to allow inspection of the stock
stockholder or member of the corporation and transfer book is not a punishable
to examine and copy excerpts from [the offense under the Corporation Code. Such
corporation's] records or minutes" that refusal, when done in violation of Section
excludes its stock and transfer book. 74(4) of the Corporation Code, properly
falls within the purview of Section 144 of
We do not agree. the same code and thus may be penalized
as an offense.
While Section 74 of the Corporation Code
expressly mentions the application of A criminal action based on the
Section 144 only in relation to the act of violation of a stockholder's right to
"refus[ing] to allow any director, trustees, examine or inspect the corporate
stockholder or member of the corporation records and the stock and transfer
to examine and copy excerpts from [the hook of a corporation under the
corporation's] records or minutes," the second and fourth paragraphs of
same does not mean that the latter Section 74 of the Corporation Code
section no longer applies to any other can only he maintained against
possible violations of the former section. corporate officers or any other
persons acting on behalf of such
It must be emphasized that Section 144 corporation.
already purports to penalize "[v]iolations"
of "any provision" of the Corporation Code The foregoing notwithstanding, and
"not otherwise specifically penalized independently of the reasons provided
therein." Hence, we find inconsequential therefor by the RTC, we sustain the
the fact that that Section 74 expressly dismissal of Criminal Case No. 89724.
mentions the application of Section 144
only to a specific act, but not with respect Criminal Case No. 89724 accuses
to the other possible violations of the respondents of denying petitioners' right
former section. to examine or inspect the corporate
records and the stock and transfer book of
Indeed, we find no cogent reason why STRADEC. It is thus a criminal action that
11
is based on the violation of the second and STRADEC under the second and fourth
fourth paragraphs of Section 74 of the paragraphs of Section 74. What they
Corporation Code. seek to enforce is the proprietary
right of STRADEC to be in possession
A perusal of the second and fourth of such records and book. Such right,
paragraphs of Section 74, as well as the though certainly legally enforceable by
first paragraph of the same section, reveal other means, cannot be enforced by a
that they are provisions that obligates a criminal prosecution based on a violation
corporation: they prescribe what books of the second and fourth paragraphs of
or records a corporation is required to Section 74. That is simply not the
keep; where the corporation shall keep situation contemplated by the second and
them; and what are the other obligations fourth paragraphs of Section 74 of the
of the corporation to its stockholders or Corporation Code.
members in relation to such books and
records. Hence, by parity of reasoning, For this reason, we affirm the dismissal of
the second and fourth paragraphs of Criminal Case No. 89724 for lack of
Section 74, including the first paragraph probable cause.cra1awlaw1ibrary
of the same section, can only be violated • Alvin Patrimonio Vs. Napoleon Gutierrez
by a corporation. and Octavio Marasigan III G.R. No.
187769. June 4, 2014
It is clear then that a criminal action We note at the outset that the issues
based on the violation of the second or raised in this petition are essentially
fourth paragraphs of Section 74 can only factual in nature. The main point of
be maintained against corporate officers inquiry of whether the contract of loan
or such other persons that are acting on may be nullified, hinges on the very
behalf of the corporation. Violations of the existence of the contract of loan – a
second and fourth paragraphs of Section question that, as presented, is essentially,
74 contemplates a situation wherein a one of fact. Whether the petitioner
corporation, acting thru one of its authorized the borrowing; whether
officers or agents, denies the right of Gutierrez completely filled out the subject
any of its stockholders to inspect the check strictly under the petitioner’s
records, minutes and the stock and authority; and whether Marasigan is a
transfer book of such corporation. holder in due course are also questions of
fact, that, as a general rule, are beyond
The problem with the petitioners' the scope of a Rule 45 petition.
complaint and the evidence that they I. Liability Under the Contract of Loan
submitted during preliminary investigation
is that they do not establish that The petitioner seeks to nullify the contract
respondents were acting on behalf of of loan on the ground that he never
STRADEC. Quite the contrary, the scenario authorized the borrowing of money. He
painted by the complaint is that the points to Article 1878, paragraph 7 of the
respondents are merely outgoing officers Civil Code, which explicitly requires a
of STRADEC who, for some reason, written authority when the loan is
withheld and refused to tum-over the contracted through an agent. The
company records of STRADEC; that it is petitioner contends that absent such
the petitioners who are actually acting on authority in writing, he should not be held
behalf of STRADEC; and that STRADEC is liable for the face value of the check
actually merely trying to recover custody because he was not a party or privy to the
of the withheld records. agreement.
In other words, petitioners are not Contracts of Agency May be Oral

actually invoking their right to inspect the Unless
records and the stock and transfer book of The Law Requires a Specific Form
12
of attorney in Article 1878 of the Civil

Article 1868 of the Civil Code defines a Code and of a special authority in
contract of agency as a contract whereby Rule 138 of the Rules of Court refer to
a person "binds himself to render some the nature of the authorization and
service or to do something in not its form. The requirements are met if
representation or on behalf of another, there is a clear mandate from the principal
with the consent or authority of the specifically authorizing the performance of
latter." Agency may be express, or implied the act. As early as 1906, this Court in
from the acts of the principal, from his Strong v. Gutierrez-Repide (6 Phil. 680)
silence or lack of action, or his failure to stated that such a mandate may be
repudiate the agency, knowing that either oral or written, the one vital
another person is acting on his behalf thing being that it shall be express.
without authority. And more recently, We stated that, if the
special authority is not written, then it
As a general rule, a contract of agency must be duly established by evidence:
may be oral.6 However, it must be written
when the law requires a specific form, for x x x the Rules require, for attorneys to
example, in a sale of a piece of land or compromise the litigation of their clients,
any interest therein through an agent. a special authority. And while the same
does not state that the special authority
Article 1878 paragraph 7 of the Civil Code be in writing the Court has every reason
expressly requires a special power of to expect that, if not in writing, the
authority before an agent can loan or same be duly established by evidence
borrow money in behalf of the principal, to other than the self-serving assertion
wit:ChanRoblesVirtualawlibrary of counsel himself that such authority
was verbally given him. (Home
Art. 1878. Special powers of attorney Insurance Company vs. United States
are necessary in the following cases: lines Company, et al., 21 SCRA 863; 866:
Vicente vs. Geraldez, 52 SCRA 210; 225)
xxxx The Contract of Loan Entered Into by
Gutierrez in Behalf
(7) To loan or borrow money, unless of the Petitioner Should be Nullified
the latter act be urgent and indispensable for Being Void;
for the preservation of the things which Petitioner is Not Bound by the
are under administration. (emphasis Contract of Loan.
supplied)
A review of the records reveals that
Article 1878 does not state that the Gutierrez did not have any authority to
authority be in writing. As long as the borrow money in behalf of the petitioner.
mandate is express, such authority may Records do not show that the petitioner
be either oral or written. We executed any special power of attorney
unequivocably declared in Lim Pin v. Liao (SPA) in favor of Gutierrez. In fact, the
Tian, et al.,7 that the requirement under petitioner’s testimony confirmed that he
Article 1878 of the Civil Code refers to the never authorized Gutierrez (or anyone for
nature of the authorization and not to its that matter), whether verbally or in
form. Be that as it may, the authority writing, to borrow money in his behalf, nor
must be duly established by competent was he aware of any such
and convincing evidence other than the transaction:ChanRoblesVirtualawlibrary
self serving assertion of the party claiming
that such authority was verbally given, In the absence of any authorization,
thus:ChanRoblesVirtualawlibrary Gutierrez could not enter into a contract of
loan in behalf of the petitioner. As held in
The requirements of a special power Yasuma v. Heirs of De Villa,9 involving a
13
loan contracted by de Villa secured by real borrowing of money or release of the

estate mortgages in the name of East check. He was thus bound by the risk
Cordillera Mining Corporation, in the accompanying his trust on the mere
absence of an SPA conferring authority on assurances of Gutierrez.
de Villa, there is no basis to hold the No Contract of Loan Was Perfected
corporation liable, to Between
wit:ChanRoblesVirtualawlibrary Marasigan And Petitioner, as The
Latter’s
The power to borrow money is one of Consent Was Not Obtained.
those cases where corporate officers as
agents of the corporation need a special Another significant point that the lower
power of attorney. In the case at bar, no courts failed to consider is that a contract
special power of attorney conferring of loan, like any other contract, is subject
authority on de Villa was ever to the rules governing the requisites and
presented. x x x There was no showing validity of contracts in general.13 Article
that respondent corporation ever 1318 of the Civil Code14 enumerates the
authorized de Villa to obtain the loans on essential requisites for a valid contract,
its behalf. namely:
1. consent of the contracting parties;
xxxx 2. object certain which is the subject
matter of the contract; and
Therefore, on the first issue, the loan 3. cause of the obligation which is
was personal to de Villa. There was established.
no basis to hold the corporation liable In this case, the petitioner denied liability
since there was no authority, express, on the ground that the contract lacked the
implied or apparent, given to de Villa essential element of consent. We agree
to borrow money from petitioner. with the petitioner. As we explained
Neither was there any subsequent above, Gutierrez did not have the
ratification of his act. petitioner’s written/verbal authority to
enter into a contract of loan. While there
In the absence of any showing of any may be a meeting of the minds between
agency relations or special authority to act Gutierrez and Marasigan, such agreement
for and in behalf of the petitioner, the loan cannot bind the petitioner whose consent
agreement Gutierrez entered into with was not obtained and who was not privy
Marasigan is null and void. Thus, the to the loan agreement. Hence, only
petitioner is not bound by the parties’ loan Gutierrez is bound by the contract of loan.
agreement.
Furthermore, that the petitioner entrusted True, the petitioner had issued several
the blank pre-signed checks to Gutierrez pre-signed checks to Gutierrez, one of
is not legally sufficient because the which fell into the hands of Marasigan.
authority to enter into a loan can never be This act, however, does not constitute
presumed. The contract of agency and the sufficient authority to borrow money in his
special fiduciary relationship inherent in behalf and neither should it be construed
this contract must exist as a matter of as petitioner’s grant of consent to the
fact. The person alleging it has the burden parties’ loan agreement. Without any
of proof to show, not only the fact of evidence to prove Gutierrez’ authority, the
agency, but also its nature and extent.1 petitioner’s signature in the check cannot
be taken, even remotely, as sufficient
The records show that Marasigan merely authorization, much less, consent to the
relied on the words of Gutierrez without contract of loan. Without the consent
securing a copy of the SPA in favor of the given by one party in a purported
latter and without verifying from the contract, such contract could not have
petitioner whether he had authorized the been perfected; there simply was no
14
contract to speak of.15cralawred instrument against a party prior to the

II. Liability Under the Instrument instrument’s completion, two requisites
must exist: (1) that the blank must be
The answer is supplied by the applicable filled strictly in accordance with the
statutory provision found in authority given; and (2) it must be filled
up within a reasonable time. If it was
Section 14 of the Negotiable Instruments proven that the instrument had not been
Law (NIL) which filled up strictly in accordance with the
states:ChanRoblesVirtualawlibrary authority given and within a reasonable
time, the maker can set this up as a
Sec. 14. Blanks; when may be filled. - personal defense and avoid liability.
Where the instrument is wanting in any However, if the holder is a holder in due
material particular, the person in course, there is a conclusive presumption
possession thereof has a prima facie that authority to fill it up had been given
authority to complete it by filling up the and that the same was not in excess of
blanks therein. And a signature on a blank authority.17cralawred
paper delivered by the person making the
signature in order that the paper may be In the present case, the petitioner
converted into a negotiable instrument contends that there is no legal basis to
operates as a prima facie authority to fill it hold him liable both under the contract
up as such for any amount. In order, and loan and under the check because:
however, that any such instrument when first, the subject check was not
completed may be enforced against any completely filled out strictly under the
person who became a party thereto prior authority he has given and second,
to its completion, it must be filled up Marasigan was not a holder in due course.
strictly in accordance with the Marasigan is Not a Holder in Due
authority given and within a Course
reasonable time. But if any such
instrument, after completion, is The Negotiable Instruments Law (NIL)
negotiated to a holder in due course, defines a holder in due course,
it is valid and effectual for all purposes in thus:ChanRoblesVirtualawlibrary
his hands, and he may enforce it as if it
had been filled up strictly in accordance Sec. 52 — A holder in due course is a
with the authority given and within a holder who has taken the instrument
reasonable time. under the following conditions:
This provision applies to an incomplete but (a) That it is complete and regular upon
delivered instrument. Under this rule, if its face;
the maker or drawer delivers a pre-signed
blank paper to another person for the (b) That he became the holder of it before
purpose of converting it into a negotiable it was overdue, and without notice that it
instrument, that person is deemed to have had been previously dishonored, if such
prima facie authority to fill it up. It merely was the fact;
requires that the instrument be in the
possession of a person other than the (c) That he took it in good faith and for
drawer or maker and from such value;
possession, together with the fact that the
instrument is wanting in a material (d) That at the time it was negotiated
particular, the law presumes agency to fill to him he had no notice of any
up the blanks.16cralawred infirmity in the instrument or defect
in the title of the person negotiating
In order however that one who is not a it. (emphasis supplied)
holder in due course can enforce the
15
Section 52(c) of the NIL states that a their business provided that he could only
holder in due course is one who takes the use them upon his approval. His
instrument “in good faith and for value.” It instruction could not be any clearer as
also provides in Section 52(d) that in Gutierrez’ authority was limited to the use
order that one may be a holder in due of the checks for the operation of their
course, it is necessary that at the time it business, and on the condition that the
was negotiated to him he had no notice of petitioner’s prior approval be first
any infirmity in the instrument or defect in secured.
the title of the person negotiating it.
While under the law, Gutierrez had a
Acquisition in good faith means taking prima facie authority to complete the
without knowledge or notice of equities of check, such prima facie authority does
any sort which could be set up against a not extend to its use (i.e., subsequent
prior holder of the instrument.18 It means transfer or negotiation) once the check is
that he does not have any knowledge of completed. In other words, only the
fact which would render it dishonest for authority to complete the check is
him to take a negotiable paper. The presumed. Further, the law used the term
absence of the defense, when the "prima facie" to underscore the fact that
instrument was taken, is the essential the authority which the law accords to a
element of good faith.19cralawred holder is a presumption juris tantum only;
hence, subject to subject to contrary
Since he knew that the underlying proof. Thus, evidence that there was no
obligation was not actually for the authority or that the authority granted has
petitioner, the rule that a possessor of the been exceeded may be presented by the
instrument is prima facie a holder in due maker in order to avoid liability under the
course is inapplicable. As correctly noted instrument.
by the CA, his inaction and failure to
verify, despite knowledge of that the In the present case, no evidence is on
petitioner was not a party to the loan, record that Gutierrez ever secured prior
may be construed as gross negligence approval from the petitioner to fill up the
amounting to bad faith. blank or to use the check. In his
testimony, petitioner asserted that he
Yet, it does not follow that simply because never authorized nor approved the filling
he is not a holder in due course, up of the blank checks,
Marasigan is already totally barred from
recovery. The NIL does not provide that a Notably, Gutierrez was only authorized to
holder who is not a holder in due course use the check for business expenses;
may not in any case recover on the thus, he exceeded the authority when he
instrument.22 The only disadvantage of a used the check to pay the loan he
holder who is not in due course is that the supposedly contracted for the construction
negotiable instrument is subject to of petitioner's house. This is a clear
defenses as if it were non-negotiable.23 violation of the petitioner's instruction to
Among such defenses is the filling up use the checks for the expenses of Slam
blank not within the authority. Dunk. It cannot therefore be validly
Check Was Not Completed Strictly concluded that the check was completed
Under strictly in accordance with the authority
The Authority Given by The Petitioner given by the petitioner.
Our own examination of the records tells Considering that Marasigan is not a holder
us that Gutierrez has exceeded the in due course, the petitioner can validly
authority to fill up the blanks and use the set up the personal defense that the
check. To repeat, petitioner gave blanks were not filled up in accordance
Gutierrez pre-signed checks to be used in with the authority he gave. Consequently,
16
Marasigan has no right to enforce In fact, what the document established is

payment against the petitioner and the that when the loss/damage was
latter cannot be obliged to pay the face discovered, the shipment has been in
value of the check. ATI’s custody for at least two weeks. This
circumstance, coupled with the undisputed
• Asian Terminals, Inc. Vs. First Lepanto- declaration of PROVEN’s witnesses that
Taisho Insurance Corporation G.R. No. while the shipment was in ATI’s custody, it
185964. June 16, 2014 was left in an open area exposed to the
• ATI failed to prove that it elements, thieves and vandals,36 all
exercised generate the conclusion that ATI failed to
• due care and diligence while exercise due care and diligence while the
the shipment subject shipment was under its custody,
• was under its custody, control control and possession as arrastre
and possession operator.
• as arrastre operator.
The relationship between the consignee To prove the exercise of diligence in
and the arrastre operator is akin to that handling the subject cargoes, an arrastre
existing between the consignee and/or the operator must do more than merely show
owner of the shipped goods and the the possibility that some other party could
common carrier, or that between a be responsible for the loss or the
depositor and a warehouseman. Hence, in damage.37 It must prove that it used all
the performance of its obligations, an reasonable means to handle and store the
arrastre operator should observe the same shipment with due care and diligence
degree of diligence as that required of a including safeguarding it from weather
common carrier and a elements, thieves or vandals.
warehouseman. Being the custodian of Non-presentation of the insurance
the goods discharged from a vessel, an contract is not fatal to FIRST
arrastre operator’s duty is to take good LEPANTO’s
care of the goods and to turn them over cause of action for reimbursement as
to the party entitled to their possession.34 subrogee.
• “Subrogation is the substitution of
In a claim for loss filed by the consignee one person in the place of another
(or the insurer), the burden of proof to with reference to a lawful claim or
show compliance with the obligation to right, so that he who is substituted
deliver the goods to the appropriate party succeeds to the rights of the other
devolves upon the arrastre in relation to a debt or claim,
operator. Since the safekeeping of the including its remedies or
goods is its responsibility, it must prove securities.”42 The right of
that the losses were not due to its subrogation springs from Article
negligence or to that of its employees. To 2207 of the Civil Code
avoid liability, the arrastre operator must As a general rule, the marine insurance
prove that it exercised diligence and due policy needs to be presented in evidence
care in handling the shipment.35 before the insurer may recover the
insured value of the lost/damaged cargo
ATI failed to discharge its burden of in the exercise of its subrogatory
proof. Instead, it insisted on shifting the right. Nevertheless, the rule is not
blame to COSCO on the basis of the inflexible. In certain instances, the Court
Request for Bad Order Survey dated has admitted exceptions by declaring that
August 9, 1996 purportedly showing that a marine insurance policy is dispensable
when ATI received the shipment, one evidence in reimbursement claims
jumbo bag thereof was already in instituted by the insurer.
damaged condition.
• In Delsan Transport Lines, Inc. v.
17
CA,49 the Court ruled that the right negligence or wrongful act caused
of subrogation accrues simply upon the loss. The right of subrogation
payment by the insurance is not dependent upon, nor does it
company of the insurance grow out of any privity of contract
claim. Hence, presentation in or upon payment by the insurance
evidence of the marine insurance company of the insurance claim. It
policy is not indispensable before accrues simply upon payment by
the insurer may recover from the the insurance company of the
common carrier the insured value insurance claim.56
of the lost cargo in the exercise of ATI cannot invoke prescription
its subrogatory right. The ATI argued that the consignee, thru its
subrogation receipt, by itself, was insurer, FIRST LEPANTO is barred from
held sufficient to establish not only seeking payment for the lost/damaged
the relationship between the shipment because the claim letter of GASI
insurer and consignee, but also the to ATI was served only on September 27,
amount paid to settle the insurance 1996 or more than one month from the
claim. The presentation of the date the shipment was delivered to the
insurance contract was deemed not consignee’s warehouse on August 9,
fatal to the insurer’s cause of 1996. The claim of GASI was thus filed
action because the loss of the beyond the 15-day period stated in ATI’s
cargo undoubtedly occurred while Management Contract with PPA which in
on board the petitioner’s vessel.50 turn was reproduced in the gate passes
Based on the attendant facts of the issued to the consignee’s broker, PROVEN
instant case, the application of the
exception is warranted. As discussed The contention is bereft of merit. As
above, it is already settled that the clarified in Insurance Company of North
loss/damage to the GASI’s shipment America v. Asian Terminals, Inc.,58
occurred while they were in ATI’s custody, substantial compliance with the 15-day
possession and control as arrastre time limitation is allowed provided that
operator. Verily, the Certificate of the consignee has made a provisional
Insurance53 and the Release of Claim54 claim thru a request for bad order survey
presented as evidence sufficiently or examination report,
established FIRST LEPANTO’s right to viz:chanroblesvirtuallawlibrary
collect reimbursement as the subrogee of
the consignee, GASI. Although the formal claim was filed
beyond the 15-day period from the
With ATI’s liability having been positively issuance of the examination report on the
established, to strictly require the request for bad order survey, the purpose
presentation of the insurance contract will of the time limitations for the filing of
run counter to the principle of equity upon claims had already been fully satisfied by
which the doctrine of subrogation is the request of the consignee’s broker for a
premised. Subrogation is designed to bad order survey and by the examination
promote and to accomplish justice and is report of the arrastre operator on the
the mode which equity adopts to compel result thereof, as the arrastre operator
the ultimate payment of a debt by one had become aware of and had verified the
who in justice, equity and good conscience facts giving rise to its liability. Hence, the
ought to pay.55 arrastre operator suffered no prejudice by
the lack of strict compliance with the 15-
• The payment by the insurer to the day limitation to file the formal
insured operates as an equitable complaint.59 (Citations
assignment to the insurer of all the omitted)ChanRoblesVirtualawlibrary
remedies which the insured may
have against the third party whose In the present case, ATI was notified of
18
the loss/damage to the subject shipment properties expressly authorized by

as early as August 9, 1996 thru a Request law or incident to its existence. It
for Bad Order Survey60 jointly prepared by has a personality separate and
the consignee’s broker, PROVEN, and the distinct from that of its
representatives of ATI. For having stockholders and from that of other
submitted a provisional claim, GASI is corporations to which it may be
thus deemed to have substantially connected. As a consequence of its
complied with the notice requirement to status as a distinct legal entity and
the arrastre operator notwithstanding that as a result of a conscious policy
a formal claim was sent to the latter only decision to promote capital
on September 27, 1996. ATI was not formation, a corporation incurs its
deprived the best opportunity to probe own liabilities and is legally
immediately the veracity of such responsible for payment of its
claims. Verily then, GASI, thru its obligations. In other words, by
subrogee FIRST LEPANTO, is not barred virtue of the separate juridical
by filing the herein action in court. personality of a corporation, the
• Aboitiz Equity Ventures, Inc. Vs. Victor S. corporate debt or credit is not the
Chiongbian, Benjamin D. Gothong, debt or credit of the stockholder.
and Carlos A. Gothong Line, Inc. This protection from liability for
(CAGLI) G.R. No. 197530. July 9, 2014 shareholders is the principle of
• Pursuant to the January 8, 1996 limited liability.119
Agreement, the Aboitiz group (via •
ASC) and the Gothong group (via • In fact, even the ownership by a
CAGLI) became stockholders of single stockholder of all or nearly
WLI/WG&A, along with the all the capital stock of a
Chiongbian group (which initially corporation is not, in and of itself,
controlled WLI). This continued a ground for disregarding a
until, pursuant to the SPA, the corporation’s separate personality.
Gothong group and the Chiongbian As explained in Secosa v. Heirs of
group transferred their shares to Francisco:120cralawred
AEV. With the SPA, AEV became a •
stockholder of WLI/WG&A, which • It is a settled precept in this
was subsequently renamed ATSC. jurisdiction that a corporation is
Nonetheless, AEV’s status as invested by law with a personality
ATSC’s stockholder does not separate from that of its
subject it to ATSC’s obligations stockholders or members. It has a
• personality separate and distinct
• It is basic that a corporation has a from those of the persons
personality separate and distinct composing it as well as from that
from that of its individual of any other entity to which it may
stockholders. Thus, a stockholder be related. Mere ownership by a
does not automatically assume the single stockholder or by another
liabilities of the corporation of corporation of all or nearly all of
which he is a stockholder. As the capital stock of a corporation is
explained in Philippine National not in itself sufficient ground for
Bank v. Hydro Resources disregarding the separate
Contractors corporate personality. A
Corporation:118cralawred corporation’s authority to act and
• its liability for its actions are
• A corporation is an artificial entity separate and apart from the
created by operation of law. It individuals who own it.
possesses the right of succession •
and such powers, attributes, and • The so-called veil of corporation
19
fiction treats as separate and rules and regulations on unfair

distinct the affairs of a corporation competition.
and its officers and stockholders.
As a general rule, a corporation will To begin, Section 168.1 qualifies who is
be looked upon as a legal entity, entitled to protection against unfair
unless and until sufficient reason to competition. It states that “[a] person
the contrary appears. When the who has identified in the mind of the
notion of legal entity is used to public the goods he manufactures or deals
defeat public convenience, justify in, his business or services from those of
wrong, protect fraud, or defend others, whether or not a registered mark
crime, the law will regard the is employed, has a property right in the
corporation as an association of goodwill of the said goods, business or
persons. Also, the corporate entity services so identified, which will be
may be disregarded in the interest protected in the same manner as other
of justice in such cases as fraud property rights.”
that may work inequities among
members of the corporation Section 168.2 proceeds to the core of
internally, involving no rights of the the provision, describing forthwith who
public or third persons. In both may be found guilty of and subject to an
instances, there must have been action of unfair competition – that is,
fraud and proof of it. For the “[a]ny person who shall employ
separate juridical personality of a deception or any other means
corporation to be disregarded, the contrary to good faith by which he
wrongdoing must be clearly and shall pass off the goods manufactured
convincingly established. It cannot by him or in which he deals, or his
be presumed.121 (Emphasis business, or services for those of the
supplied) one having established such goodwill,
• or who shall commit any acts
• AEV’s status as ATSC’s stockholder calculated to produce said result
is, in and of itself, insufficient to Finally, Section 168.4 dwells on a matter
make AEV liable for ATSC’s of procedure by stating that the “[t]he
obligations. remedies provided by Sections 156,22
• Shang Properties Realty Corporation 157,23 and 16124 shall apply mutatis
(Formerly The Shang Grand Tower mutandis.”
Corporation) and Shang Properties,
Inc. (Formerly Edsa Properties The statutory attribution of the unfair
Holdings, Inc.) Vs. St.Francis competition concept is well-supplemented
Development Corporation   G.R. No. by jurisprudential pronouncements. In the
190706. July 21, 2014 recent case of Republic Gas Corporation v.
• With the decisions in both Inter Petron Corporation,25 the Court has
Partes Cases having lapsed into echoed the classic definition of the term
finality, the sole issue thus left for which is “‘the passing off (or palming off)
the Court’s resolution is whether or or attempting to pass off upon the public
not petitioners are guilty of unfair of the goods or business of one person as
competition in using the marks the goods or business of another with the
“THE ST. FRANCIS TOWERS” and end and probable effect of deceiving the
“THE ST. FRANCIS SHANGRI-LA public.’ Passing off (or palming off) takes
PLACE.” place where the defendant, by imitative
• devices on the general appearance of the
Section 168 of Republic Act No. goods, misleads prospective purchasers
8293,21 otherwise known as the into buying his merchandise under the
“Intellectual Property Code of the impression that they are buying that of his
Philippines” (IP Code), provides for the competitors. [In other words], the
20
defendant gives his goods the general determine whether or not the geographic
appearance of the goods of his competitor term in question is descriptively used, the
with the intention of deceiving the following question is relevant: (1) Is the
public that the goods are those of his mark the name of the place or region
competitor.”26 The “true test” of unfair from which the goods actually come?
competition has thus been “whether the If the answer is yes, then the
acts of the defendant have the intent geographic term is probably used in a
of deceiving or are calculated to descriptive sense, and secondary
deceive the ordinary buyer making his meaning is required for protection.
purchases under the ordinary
conditions of the particular trade to In Burke-Parsons-Bowlby Corporation v.
which the controversy relates.” Based Appalachian Log Homes, Inc.,31 it was
on the foregoing, it is therefore essential held that secondary meaning is
to prove the existence of fraud, or the established when a descriptive mark no
intent to deceive, actual or probable,27 longer causes the public to associate the
determined through a judicious scrutiny of goods with a particular place, but to
the factual circumstances attendant to a associate the goods with a particular
particular case.28 source. In other words, it is not enough
that a geographically-descriptive mark
Here, the Court finds the element of fraud partakes of the name of a place known
to be wanting; hence, there can be no generally to the public to be denied
unfair competition. The CA’s contrary registration as it is also necessary to
conclusion was faultily premised on its show that the public would make a
impression that respondent had the right goods/place association – that is, to
to the exclusive use of the mark “ST. believe that the goods for which the mark
FRANCIS,” for which the latter had is sought to be registered originate in
purportedly established considerable that place. To hold such a belief, it is
goodwill. What the CA appears to have necessary, of course, that the purchasers
disregarded or been mistaken in its perceive the mark as a place name, from
disquisition, however, is the which the question of obscurity or
geographically-descriptive nature of the remoteness then comes to the fore.32 The
mark “ST. FRANCIS” which thus bars its more a geographical area is obscure and
exclusive appropriability, unless a remote, it becomes less likely that the
secondary meaning is acquired. As deftly public shall have a goods/place
explained in the U.S. case of Great association with such area and thus, the
Southern Bank v. First Southern mark may not be deemed as
Bank:29“[d]escriptive geographical geographically descriptive. However,
terms are in the ‘public domain’ in the where there is no genuine issue that the
sense that every seller should have geographical significance of a term is
the right to inform customers of the its primary significance and where the
geographical origin of his goods. A geographical place is neither obscure
‘geographically descriptive term’ is any nor remote, a public association of
noun or adjective that designates the goods with the place may
geographical location and would tend to ordinarily be presumed from the fact
be regarded by buyers as descriptive of that the applicant’s own goods come
the geographic location of origin of the from the geographical place named in
goods or services. A geographically the mark.33
descriptive term can indicate any
geographic location on earth, such as Under Section 123.234 of the IP Code,
continents, nations, regions, states, cities, specific requirements have to be met in
streets and addresses, areas of cities, order to conclude that a geographically-
rivers, and any other location referred to descriptive mark has acquired secondary
by a recognized name. In order to meaning, to wit: (a) the secondary
21
meaning must have arisen as a result while it is true that respondent had been
of substantial commercial use of a using the mark “ST. FRANCIS” since 1992,
mark in the Philippines; (b) such use its use thereof has been merely confined
must result in the distinctiveness of to its realty projects within the Ortigas
the mark insofar as the goods or the Center, as specifically mentioned. As its
products are concerned; and (c) proof use of the mark is clearly limited to a
of substantially exclusive and certain locality, it cannot be said that
continuous commercial use in the there was substantial commercial use of
Philippines for five (5) years before the same recognized all throughout the
the date on which the claim of country. Neither is there any showing of a
distinctiveness is made. Unless mental recognition in buyers’ and
secondary meaning has been established, potential buyers’ minds that products
a geographically-descriptive mark, due to connected with the mark “ST. FRANCIS”
its general public domain classification, is are associated with the same source35 –
perceptibly disqualified from trademark that is, the enterprise of respondent.
registration. Thus, absent any showing that there
exists a clear goods/service-association
Cognizant of the foregoing, the Court between the realty projects located in the
disagrees with the CA that petitioners aforesaid area and herein respondent as
committed unfair competition due to the the developer thereof, the latter cannot be
mistaken notion that petitioner had said to have acquired a secondary
established goodwill for the mark “ST. meaning as to its use of the “ST.
FRANCIS” precisely because said FRANCIS” mark.
circumstance, by and of itself, does not
equate to fraud under the parameters of In fact, even on the assumption that
Section 168 of the IP Code as above-cited. secondary meaning had been acquired,
In fact, the records are bereft of any said finding only accords respondents
showing that petitioners gave their protectional qualification under Section
goods/services the general appearance 168.1 of the IP Code as above quoted.
that it was respondent which was offering Again, this does not automatically trigger
the same to the public. Neither did the concurrence of the fraud element
petitioners employ any means to induce required under Section 168.2 of the IP
the public towards a false belief that it Code, as exemplified by the acts
was offering respondent’s goods/services. mentioned in Section 168.3 of the same.
Nor did petitioners make any false Ultimately, as earlier stated, there can be
statement or commit acts tending to no unfair competition without this
discredit the goods/services offered by element. In this respect, considering too
respondent. Accordingly, the element of the notoriety of the Shangri-La brand in
fraud which is the core of unfair the real estate industry which dilutes
competition had not been established. petitioners’ propensity to merely ride on
Besides, respondent was not able to prove respondent’s goodwill, the more
its compliance with the requirements reasonable conclusion is that the former’s
stated in Section 123.2 of the IP Code to use of the marks “THE ST. FRANCIS
be able to conclude that it acquired a TOWERS” and “THE ST. FRANCIS
secondary meaning – and, thereby, an SHANGRI-LA PLACE” was meant only to
exclusive right – to the “ST. FRANCIS” identify, or at least associate, their real
mark, which is, as the IPO Director- estate project/s with its geographical
General correctly pointed out, location.
geographically-descriptive of the location • Chartis Philippines Insurance, Inc.
in which its realty developments have (formerly Philam Insurance Company,
been built, i.e., St. Francis Avenue and St. Inc.) Vs. Heung-A Shipping
Francis Street (now known as “Bank Corporation, et al./Heung-A Shipping
Drive”). Verily, records would reveal that Corporation, et al. Vs. Chartis
22
Philippines Insurance, Inc. (formerly considering HEUNG-A’s failure to

Philam Insurance Company, Inc.) G.R. demonstrate how it exercised due
Nos. 187701/187812. July 23, 2014 diligence in handling and preserving the
The arguments proffered by the parties container van while in transit, it is liable
can be summed up into the following for the damages sustained thereby.
issues: (1) Whether the shipment
sustained damage while in the possession As the carrier of the subject shipment,
and custody of HEUNG-A, and if so, HEUNG-A was bound to exercise
whether HEUNG-A’s liability can be limited extraordinary diligence in conveying the
to US$500 per package pursuant to the same and its slot charter agreement with
COGSA; (2) Whether or not DONGNAMA did not divest it of such
NOVARTIS/PHILAM failed to file a timely characterization nor relieve it of any
claim against HEUNG-A and/or WALLEM. accountability for the shipment.
The uncontested results of the inspection Based on the testimony of Gonzales,33
survey conducted by Manila Adjusters WALLEM’s employee and witness, the
Surveyors Company showed that sea charter party between HEUNG-A and
water seeped into the panels/sidings and DONGNAMA was a contract of
roofing of the container van. This was affreightment and not a bare boat or
confirmed by the examination conducted demise charter.
by Hernandez, the chemist of PRECISION, A charter party has two types. First, it
on samples from the cartons, boxes, could be a contract of affreightment
aluminum foil and laminated plastic whereby the use of shipping space on
packaging materials. Based on the vessels is leased in part or as a whole, to
laboratory examination results, the carry goods for others. The charter-party
contents of the van were drenched by sea provides for the hire of vessel only, either
water, an element which is highly for a determinate period of time (time
conspicuous in the high seas. It can thus charter) or for a single or consecutive
be reasonably concluded that negligence voyage (voyage charter). The shipowner
occurred while the container van was in supplies the ship’s stores, pay for the
transit, in HEUNG-A’s possession, control wages of the master and the crew, and
and custody as the carrier. defray the expenses for the maintenance
of the ship.37 The voyage remains under
Although the container van had defects, the responsibility of the carrier and it is
they were not, however, so severe as to answerable for the loss of goods received
accommodate heavy saturation of sea for transportation. The charterer is free
water. The holes were tiny and the rusty from liability to third persons in respect of
portions did not cause gaps or tearing. the ship.38
Hence, the van was still in a suitable
condition to hold the goods and protect Second, charter by demise or bareboat
them from natural weather elements or charter under which the whole vessel is let
even the normal flutter of waves in the to the charterer with a transfer to him of
seas. its entire command and possession and
consequent control over its navigation,
The scale of the damage sustained by the including the master and the crew, who
cargo inside the van could have been only are his servants.39 The charterer mans the
caused by large volume of sea water since vessel with his own people and becomes,
not a single package inside was spared. in effect, the owner for the voyage or
Aside from the defective condition of the service stipulated and hence liable for
van, some other circumstance or damages or loss sustained by the goods
occurrence contributed to the damages transported.40
sustained by the shipment. Since the
presence of sea water is highly Clearly then, despite its contract of
concentrated in the high seas and affreightment with DONGNAMA, HEUNG-A
23
remained responsible as the carrier, contract. It is a receipt for the goods

hence, answerable for the damages shipped and a contract to transport and
incurred by the goods received for deliver the same as therein stipulated.”43
transportation. “[C]ommon carriers, from PROTOP breached its contract with
the nature of their business and for NOVARTIS when it failed to deliver the
reasons of public policy, are bound to goods in the same quantity, quality and
observe extraordinary diligence and description as stated in Bill of Lading No.
vigilance with respect to the safety of the PROTAS 200387.
goods and the passengers they transport. The CA did not err in applying the
Thus, common carriers are required to provisions of the COGSA specifically, the
render service with the greatest skill and rule on Package Liability Limitation.
foresight and ‘to use all reasonable means
to ascertain the nature and characteristics Under Article 1753 of the Civil Code, the
of the goods tendered for shipment, and law of the country to which the goods are
to exercise due care in the handling and to be transported shall govern the liability
stowage, including such methods as their of the common carrier for their loss,
nature requires.’”41 destruction or deterioration. Since the
subject shipment was being transported
“[C]ommon carriers, as a general rule, are from South Korea to the Philippines, the
presumed to have been at fault or Civil Code provisions shall apply. In all
negligent if the goods they transported matters not regulated by the Civil Code,
deteriorated or got lost or destroyed. That the rights and obligations of common
is, unless they prove that they exercised carriers shall be governed by the Code of
extraordinary diligence in transporting the Commerce and by special laws,44 such as
goods. In order to avoid responsibility for the COGSA.
any loss or damage, therefore, they have
the burden of proving that they observed While the Civil Code contains provisions
such diligence.”42 Further, under Article making the common carrier liable for
1742 of the Civil Code, even if the loss, loss/damage to the goods transported, it
destruction, or deterioration of the goods failed to outline the manner of
should be caused by the faulty nature of determining the amount of such liability.
the containers, the common carrier must Article 372 of the Code of Commerce fills
exercise due diligence to forestall or in this gap,
lessen the loss. thus:chanroblesvirtuallawlibrary
Here, HEUNG-A failed to rebut this prima Article 372. The value of the goods
facie presumption when it failed to give which the carrier must pay in cases if
adequate explanation as to how the loss or misplacement shall be
shipment inside the container van was determined in accordance with that
handled, stored and preserved to forestall declared in the bill of lading, the
or prevent any damage or loss while the shipper not being allowed to present
same was in its possession, custody and proof that among the goods declared
control. therein there were articles of greater
value and money.
PROTOP is solidarily liable with HEUNG-A
for the lost/damaged shipment in view of In case, however, of the shipper’s failure
the bill of lading the former issued to to declare the value of the goods in the
NOVARTIS. “A bill of lading is a written bill of lading, Section 4, paragraph 5 of
acknowledgement of the receipt of goods the COGSA
and an agreement to transport and to provides:chanroblesvirtuallawlibrary
deliver them at a specified place to a
person named or on his or her order. It Neither the carrier nor the ship shall in
operates both as a receipt and as a any event be or become liable for any loss
24
or damage to or in connection with the

transportation of goods in an amount The notice in writing need not be given if
exceeding $500 per package lawful money the state of the goods has at the time of
of the United States, or in case of goods their receipt been the subject of joint
not shipped in packages, per customary survey or inspection. In any event the
freight unit, or the equivalent of that sum carrier and the ship shall be discharged
in other currency, unless the nature and from all liability in respect of loss or
value of such goods have been declared damage unless suit is brought within one
by the shipper before shipment and year after delivery of the goods or the
inserted in the bill of lading. This date when the goods should have been
declaration, if embodied in the bill of delivered: Provided, That if a notice of loss
lading shall be prima facie evidence, but or damage, either apparent or concealed,
shall be conclusive on the carrier. is not given as provided for in this section,
that fact shall not affect or prejudice the
Hence, when there is a loss/damage to right of the shipper to bring suit within
goods covered by contracts of carriage one year after the delivery of the goods or
from a foreign port to a Philippine port the date when the goods should have
and in the absence a shipper’s declaration been delivered.
of the value of the goods in the bill of
lading, as in the present case, the It was further ruled in Asian Terminals
foregoing provisions of the COGSA shall that pursuant to the foregoing COGSA
apply. The CA, therefore, did not err in provision, failure to comply with the notice
ruling that HEUNG-A, WALLEM and requirement shall not affect or prejudice
PROTOP’s liability is limited to $500 per the right of the shipper to bring suit within
package or pallet.45 one year after delivery of the goods.
Consonant with the ruling in the recent
Asian Terminals, Inc. v. Philam Insurance The consignee, NOVARTIS, received the
Co., Inc.,48 the prescriptive period for subject shipment on January 5, 2001.
filing an action for lost/damaged goods PHILAM, as the subrogee of NOVARTIS,
governed by contracts of carriage by sea filed a claim against PROTOP on June 4,
to and from Philippine ports in foreign 2001, against WALLEM on October 12,
trade is governed by paragraph 6, Section 2001 and against HEUNG-A on December
3 of the COGSA which 11, 2001, or all within the one-year
states:chanroblesvirtuallawlibrary prescriptive period. Verily then, despite
NOVARTIS’ failure to comply with the
(6) Unless notice of loss or damage and three-day notice requirement, its
the general nature of such loss or damage subrogee PHILAM is not barred from
be given in writing to the carrier or his seeking reimbursement from PROTOP,
agent at the port of discharge before or at HEUNG-A and WALLEM because the
the time of the removal of the goods into demands for payment were timely filed.
the custody of the person entitled to • Cesar V. Areza and Lolita B. Areza Vs.
delivery thereof under the contract of Express Savings Bank, Inc. and
carriage, such removal shall be prima Michael Potenciano   G.R. No. 176697.
facie evidence of the delivery by the September 10, 2014
carrier of the goods as described in the bill The central issue is whether the Bank had
of lading. If the loss or damage is not the right to debit P1,800,000.00 from
apparent, the notice must be given within petitioners’ accounts.
three days of the delivery. The fact that material alteration caused
the eventual dishonor of the checks issued
Said notice of loss or damage maybe by PVAO is undisputed. In this case,
endorsed upon the receipt for the goods before the alteration was discovered, the
given by the person taking delivery checks were already cleared by the
thereof. drawee bank, the Philippine Veterans
25
Bank. Three months had lapsed before which states that a material alteration
the drawee dishonored the checks and avoids an instrument except as against an
returned them to Equitable-PCI Bank, the assenting party and subsequent indorsers,
respondents’ depositary bank. And it was but a holder in due course may enforce
not until 10 months later when petitioners’ payment according to its original
accounts were debited. A question thus tenor. Thus, when the drawee bank pays
arises: What are the liabilities of the a materially altered check, it violates the
drawee, the intermediary banks, and the terms of the check, as well as its duty to
petitioners for the altered checks? charge its client’s account only for bona
fide disbursements he had made. If the
LIABILITY OF THE DRAWEE drawee did not pay according to the
original tenor of the instrument, as
Section 63 of Act No. 2031 or the directed by the drawer, then it has no
Negotiable Instruments Law provides that right to claim reimbursement from the
the acceptor, by accepting the instrument, drawer, much less, the right to deduct the
engages that he will pay it according to erroneous payment it made from the
the tenor of his acceptance. The acceptor drawer’s account which it was expected to
is a drawee who accepts the bill. In treat with utmost fidelity.21 The drawee,
Philippine National Bank v. Court of however, still has recourse to recover its
Appeals,14 the payment of the amount of a loss. It may pass the liability back to the
check implies not only acceptance but also collecting bank which is what the drawee
compliance with the drawee’s obligation. bank exactly did in this case. It debited
the account of Equitable-PCI Bank for the
In case the negotiable instrument is altered amount of the checks.
altered before acceptance, is the drawee LIABILITY OF DEPOSITARY BANK
liable for the original or the altered tenor AND COLLECTING BANK
of acceptance? There are two divergent
intepretations proffered by legal A depositary bank is the first bank to take
analysts.15 The first view is supported by an item even though it is also the payor
the leading case of National City Bank of bank, unless the item is presented for
Chicago v. Bank of the Republic.16 In said immediate payment over the counter. 22 It
case, a certain Andrew Manning stole a is also the bank to which a check is
draft and substituted his name for that of transferred for deposit in an account at
the original payee. He offered it as such bank, even if the check is physically
payment to a jeweler in exchange for received and indorsed first by another
certain jewelry. The jeweler deposited the bank.23 A collecting bank is defined as
draft to the defendant bank which any bank handling an item for collection
collected the equivalent amount from the except the bank on which the check is
drawee. Upon learning of the alteration, drawn.24cralawred
the drawee sought to recover from the
defendant bank the amount of the draft, When petitioners deposited the check with
as money paid by mistake. The court the Bank, they were designating the latter
denied recovery on the ground that the as the collecting bank. This is in
drawee by accepting admitted the consonance with the rule that a negotiable
existence of the payee and his capacity to instrument, such as a check, whether a
endorse.17 manager's check or ordinary check, is not
legal tender. As such, after receiving the
The second view is that the deposit, under its own rules, the Bank
acceptor/drawee despite the tenor of his shall credit the amount in petitioners’
acceptance is liable only to the extent of account or infuse value thereon only after
the bill prior to alteration.20 This view the drawee bank shall have paid the
appears to be in consonance with Section amount of the check or the check has
124 of the Negotiable Instruments Law been cleared for deposit.25cralawred
26
Petitioners faulted the drawee bank for

The Bank and Equitable-PCI Bank are both not following the 24-hour clearing period
depositary and collecting banks. because it was only in August 2000 that
the drawee bank notified Equitable-PCI
A depositary/collecting bank where a that there were material alterations in the
check is deposited, and which endorses checks.
the check upon presentment with the
drawee bank, is an endorser. Under We do not subscribe to the position taken
Section 66 of the Negotiable Instruments by petitioners that the drawee bank was
Law, an endorser warrants “that the at fault because it did not follow the 24-
instrument is genuine and in all respects hour clearing period which provides that
what it purports to be; that he has good when a drawee bank fails to return a
title to it; that all prior parties had forged or altered check to the collecting
capacity to contract; and that the bank within the 24-hour clearing period,
instrument is at the time of his the collecting bank is absolved from
endorsement valid and subsisting.” It has liability.
been repeatedly held that in check
transactions, the depositary/collecting Antonio Viray, in his book Handbook on
bank or last endorser generally suffers the Bank Deposits,
loss because it has the duty to ascertain elucidated:ChanRoblesVirtualawlibrary
the genuineness of all prior endorsements
considering that the act of presenting the It is clear that the so-called “24-hour” rule
check for payment to the drawee is an has been modified. In the case of
assertion that the party making the Hongkong & Shanghai vs. People’s Bank
presentment has done its duty to reiterated in Metropolitan Bank and Trust
ascertain the genuineness of the Co. vs. FNCB, the Supreme Court strictly
endorsements.26 If any of the warranties enforced the 24-hour rule under which the
made by the depositary/collecting bank drawee bank forever loses the right to
turns out to be false, then the drawee claim against presenting/collecting bank if
bank may recover from it up to the the check is not returned at the next
amount of the check. 27cralawred clearing day or within 24
hours. Apparently, the commercial banks
The law imposes a duty of diligence on the felt strict enforcement of the 24-hour rule
collecting bank to scrutinize checks is too harsh and therefore made
deposited with it for the purpose of representations and obtained modification
determining their genuineness and of the rule, which modification is now
regularity. The collecting bank being incorporated in the Manual of
primarily engaged in banking holds itself Regulations. Since the same commercial
out to the public as the expert and the law banks controlled the Philippine Clearing
holds it to a high standard of House Corporation, incorporating the
conduct.28cralawred amended rule in the PCHC Rules naturally
followed.
As collecting banks, the Bank and
Equitable-PCI Bank are both liable for the As the rule now stands, the 24-hour rule
amount of the materially altered is still in force, that is, any check which
checks. Since Equitable-PCI Bank is not a should be refused by the drawee bank in
party to this case and the Bank allowed its accordance with long standing and
account with Equitable-PCI Bank to be accepted banking practices shall be
debited, it has the option to seek recourse returned through the PCHC/local clearing
against the latter in another forum. office, as the case may be, not later than
the next regular clearing (24-hour). The
24-HOUR CLEARING RULE modification, however, is that items which
have been the subject of material
27
alteration or bearing forged endorsement are:ChanRoblesVirtualawlibrary

may be returned even beyond 24 hours so
long that the same is returned within the Art. 1279. In order that compensation
prescriptive period fixed by law. The may be proper, it is
consensus among lawyers is that the necessary:ChanRoblesVirtualawlibrary
prescriptive period is ten (10) years
because a check or the endorsement (1) That each one of the obligors be bound p
thereon is a written contract. Moreover, principal creditor of the other;
the item need not be returned through the (2) That both debts consist in a sum of money,
clearing house but by direct presentation the same kind, and also of the same quality
to the presenting bank.29 (3) That the two debts be due;
(4) That they be liquidated and demandable;
In short, the 24-hour clearing rule does (5) That over neither of them there be any
not apply to altered checks. persons and communicated in due time to th
LIABILITY OF PETITIONERS
the Bank cannot debit the savings account It is well-settled that the relationship of
of petitioners. A depositary/collecting the depositors and the Bank or similar
bank may resist or defend against a claim institution is that of creditor-
for breach of warranty if the drawer, the debtor. Article 1980 of the New Civil Code
payee, or either the drawee bank or provides that fixed, savings and current
depositary bank was negligent and such deposits of money in banks and similar
negligence substantially contributed to the institutions shall be governed by the
loss from alteration. In the instant case, provisions concerning simple loans. The
no negligence can be attributed to bank is the debtor and the depositor is the
petitioners. We lend credence to their creditor. The depositor lends the bank
claim that at the time of the sales money and the bank agrees to pay the
transaction, the Bank’s branch manager depositor on demand. The savings deposit
was present and even offered the Bank’s agreement between the bank and the
services for the processing and eventual depositor is the contract that determines
crediting of the checks. True to the the rights and obligations of the
branch manager’s words, the checks were parties.33cralawred
cleared three days later when deposited
by petitioners and the entire amount of But as previously discussed, petitioners
the checks was credited to their savings are not liable for the deposit of the altered
account. checks. The Bank, as the depositary and
ON LEGAL COMPENSATION collecting bank ultimately bears the
loss. Thus, there being no indebtedness
Petitioners insist that the Bank cannot be to the Bank on the part of petitioners,
considered a creditor of the petitioners legal compensation cannot take place.
because it should have made a claim of • Roberto Co Vs. Keng Huan Jerry Yeung
the amount of P1,800,000.00 from and Emma Yeung   G.R. No. 212705.
Equitable-PCI Bank, its own depositary September 10, 2014
bank and the collecting bank in this case • The Issue Before the Court
and not from them. •
• The sole issue for the Court’s
The Bank cannot set-off the amount it resolution is whether or not the CA
paid to Equitable-PCI Bank with correctly upheld Co’s liability for
petitioners’ savings account. Under Art. unfair competition.
1278 of the New Civil Code, compensation Unfair competition is defined as the
shall take place when two persons, in their passing off (or palming off) or attempting
own right, are creditors and debtors of to pass off upon the public of the goods or
each other. And the requisites for legal business of one person as the goods or
compensation business of another with the end and
28
probable effect of deceiving the public. • Nestor Ching and Andrew Wellington Vs.
This takes place where the defendant Subic Bay Gold and Courtry Club, et
gives his goods the general appearance of al. G.R. No. 174353. September 10, 2014
the goods of his competitor with the • At the outset, it should be noted
intention of deceiving the public that the that the Complaint in question
goods are those of his appears to have been filed only by
competitor.18cralawred the two petitioners, namely Nestor
Ching and Andrew Wellington, who
Here, it has been established that Co each own one stock in the
conspired with the Laus in the respondent corporation
sale/distribution of counterfeit Greenstone SBGCCI. While the caption of the
products to the public, which were even Complaint also names the “Subic
packaged in bottles identical to that of the Bay Golfers and Shareholders Inc.
original, thereby giving rise to the for and in behalf of all its
presumption of fraudulent intent.19 In light members,” petitioners did not
of the foregoing definition, it is thus clear attach any authorization from said
that Co, together with the Laus, alleged corporation or its members
committed unfair competition, and should, to file the Complaint. Thus, the
consequently, be held liable therefor. To Complaint is deemed filed only by
this end, the Court finds the award of petitioners and not by SBGSI.
P300,000.00 as temperate damages to be •
appropriate in recognition of the pecuniary • On the issue of whether the
loss suffered by Sps. Yeung, albeit its Complaint is indeed a derivative
actual amount cannot, from the nature of suit, we are mindful of the doctrine
the case, as it involves damage to that the nature of an action, as
goodwill, be proved with certainty.20 The well as which court or body has
awards of moral and exemplary damages, jurisdiction over it, is determined
attorney’s fees, and costs of suit are based on the allegations contained
equally sustained for the reasons already in the complaint of the plaintiff,
fully-explained by the courts a quo in their irrespective of whether or not the
decisions. plaintiff is entitled to recover upon
all or some of the claims asserted
Although liable for unfair competition, the therein.20 We have also held that
Court deems it apt to clarify that Co was the body rather than the title of the
properly exculpated from the charge of complaint determines the nature of
trademark infringement considering that an action.21cralawred
the registration of the trademark •
“Greenstone”– essential as it is in a • In Cua, Jr. v. Tan,22 the Court
trademark infringement case – was not previously elaborated on the
proven to have existed during the time distinctions among a derivative
the acts complained of were committed, suit, an individual suit, and a
i.e., in May 2000.In this relation, the representative or class
distinctions between suits for trademark suit:XXXXXXChanRoblesVirtXXXual
infringement and unfair competition prove awlibraryXXXXX
useful: (a) the former is the unauthorized The reliefs sought in the Complaint,
use of a trademark, whereas the latter is namely that of enjoining defendants from
the passing off of one’s goods as those of acting as officers and Board of Directors of
another; (b) fraudulent intent is the corporation, the appointment of a
unnecessary in the former, while it is receiver, and the prayer for damages in
essential in the latter; and (c) in the the amount of the decrease in the value of
former, prior registration of the trademark the shares of stock, clearly show that the
is a pre-requisite to the action, while it is Complaint was filed to curb the alleged
not necessary in the latter.21cralawred mismanagement of SBGCCI. The causes of
29
action pleaded by petitioners do not related statutes authorizing the same, but
accrue to a single shareholder or a class of is instead a product of jurisprudence
shareholders but to the corporation itself. based on equity. However, a derivative
suit cannot prosper without first
However, as minority stockholders, complying with the legal requisites for its
petitioners do not have any statutory right institution.24cralawred
to override the business judgments of
SBGCCI’s officers and Board of Directors Section 1, Rule 8 of the Interim Rules of
on the ground of the latter’s alleged lack Procedure Governing Intra-Corporate
of qualification to manage a golf Controversies imposes the following
course. Contrary to the arguments of requirements for derivative
petitioners, Presidential Decree No. 902-A, suits:ChanRoblesVirtualawlibrary
which is entitled REORGANIZATION OF
THE SECURITIES AND EXCHANGE (1) He was a stockholder or member at
COMMISSION WITH ADDITIONAL POWERS the time the acts or transactions subject
AND PLACING THE SAID AGENCY UNDER of the action occurred and at the time the
THE ADMINISTRATIVE SUPERVISION OF action was filed;
THE OFFICE OF THE PRESIDENT, does not
grant minority stockholders a cause of (2) He exerted all reasonable efforts, and
action against waste and diversion by the alleges the same with particularity in the
Board of Directors, but merely identifies complaint, to exhaust all remedies
the jurisdiction of the SEC over actions available under the articles of
already authorized by law or incorporation, by-laws, laws or rules
jurisprudence. It is settled that a governing the corporation or partnership
stockholder’s right to institute a derivative to obtain the relief he desires;
suit is not based on any express provision
of the Corporation Code, or even the (3) No appraisal rights are available for
Securities Regulation Code, but is the act or acts complained of; and
impliedly recognized when the said laws
make corporate directors or officers liable (4) The suit is not a nuisance or
for damages suffered by the corporation harassment suit.
and its stockholders for violation of their
fiduciary duties.23cralawred The RTC dismissed the Complaint for
failure to comply with the second and
At this point, we should take note that fourth requisites above.
while there were allegations in the
Complaint of fraud in their subscription Upon a careful examination of the
agreements, such as the Complaint, this Court finds that the same
misrepresentation of the Articles of should not have been dismissed on the
Incorporation, petitioners do not pray for ground that it is a nuisance or harassment
the rescission of their subscription or seek suit. Although the shareholdings of
to avail of their appraisal rights. Instead, petitioners are indeed only two out of the
they ask that defendants be enjoined from 409 alleged outstanding shares or 0.24%,
managing the corporation and to pay the Court has held that it is enough that a
damages for their mismanagement. member or a minority of stockholders file
Petitioners’ only possible cause of action a derivative suit for and in behalf of a
as minority stockholders against the corporation.25cralawred
actions of the Board of Directors is the
common law right to file a derivative • With regard, however, to the
suit. The legal standing of minority second requisite, we find that
stockholders to bring derivative suits is petitioners failed to state with
not a statutory right, there being no particularity in the Complaint that
provision in the Corporation Code or they had exerted all reasonable
30
efforts to exhaust all remedies alter-ego, and business conduit of

available under the articles of Manlapaz; and (2) whether
incorporation, by-laws, and laws or Manlapaz is jointly and severally
rules governing the corporation to liable with WPM to the respondent
obtain the relief they desire. The for reimbursement, damages and
Complaint contained no allegation interest.
whatsoever of any effort to avail of •
intra-corporate remedies. Indeed, On the Application of the Principle of
even if petitioners thought it was Piercing the Veil of Corporate Fiction
futile to exhaust intra-corporate
remedies, they should have stated The rule is settled that a corporation has a
the same in the Complaint and personality separate and distinct from the
specified the reasons for such persons acting for and in its behalf and, in
opinion. Failure to do so allows the general, from the people comprising it.9
RTC to dismiss the Complaint, even Following this principle, the obligations
motu proprio, in accordance with incurred by the corporate officers, or other
the Interim Rules. The requirement persons acting as corporate agents, are
of this allegation in the Complaint the direct accountabilities of the
is not a useless formality which corporation they represent, and not theirs.
may be disregarded at will. Thus, a director, officer or employee of a
We ruled in Yu v. corporation is generally not held
Yukayguan26:ChanRoblesVirtualawlibrary personally liable for obligations incurred
by the corporation;10 it is only in
• The wordings of Section 1, Rule 8 exceptional circumstances that solidary
of the Interim Rules of Procedure liability will attach to them.
Governing Intra-Corporate
Controversies are simple and do Incidentally, the doctrine of piercing the
not leave room for statutory corporate veil applies only in three (3)
construction. The second basic instances, namely: a) when the
paragraph thereof requires that the separate and distinct corporate personality
stockholder filing a derivative suit defeats public convenience, as when the
should have exerted all corporate fiction is used as a vehicle for
reasonable efforts to exhaust the evasion of an existing obligation; b) in
all remedies available under the fraud cases, or when the corporate entity
articles of incorporation, by-laws, is used to justify a wrong, protect a fraud,
laws or rules governing the or defend a crime; or c) is used in alter
corporation or partnership to ego cases, i.e., where a corporation is
obtain the relief he desires; and to essentially a farce, since it is a mere
allege such fact with alter ego or business conduit of a
particularity in the complaint. The person, or where the corporation is so
obvious intent behind the rule is to organized and controlled and its
make the derivative suit the final affairs so conducted as to make it
recourse of the stockholder, after merely an instrumentality, agency,
all other remedies to obtain the conduit or adjunct of another
relief sought had failed. corporation.11cralawlawlibrary
• WPM International Trading, Inc. and
Warlito P. Manlapaz Vs. Fe Corazon Piercing the corporate veil based on the
Labayen   G.R. No. 182770. September alter ego theory requires the concurrence
17, 2014 of three elements,
• The Issues namely:chanRoblesvirtualLawlibrary
•
• The core issues are: (1) whether (1) Control, not mere majority or
WPM is a mere instrumentality, complete stock control, but complete
31
domination, not only of finances but of exercised absolute control over WPM.
policy and business practice in respect to
the transaction attacked so that the In this connection, we stress that the
corporate entity as to this transaction had control necessary to invoke the
at the time no separate mind, will or instrumentality or alter ego rule is not
existence of its own; majority or even complete stock control
but such domination of finances, policies
(2) Such control must have been used by and practices that the controlled
the defendant to commit fraud or wrong, corporation has, so to speak, no separate
to perpetuate the violation of a statutory mind, will or existence of its own, and is
or other positive legal duty, or dishonest but a conduit for its principal. The control
and unjust act in contravention of must be shown to have been exercised at
plaintiff’s legal right; and the time the acts complained of took
place. Moreover, the control and breach of
(3) The aforesaid control and breach of duty must proximately cause the injury or
duty must have proximately caused the unjust loss for which the complaint is
injury or unjust loss complained of. made.
The absence of any of these elements Here, the respondent failed to prove that
prevents piercing the corporate Manlapaz, acting as president, had
veil.12cralawlawlibrary absolute control over WPM. Even granting
that he exercised a certain degree of
In the present case, the attendant control over the finances, policies and
circumstances do not establish that WPM practices of WPM, in view of his position
is a mere alter ego of Manlapaz. as president, chairman and treasurer of
the corporation, such control does not
Aside from the fact that Manlapaz was the necessarily warrant piercing the veil of
principal stockholder of WPM, records do corporate fiction since there was not a
not show that WPM was organized and single proof that WPM was formed to
controlled, and its affairs conducted in a defraud CLN or the respondent, or that
manner that made it merely an Manlapaz was guilty of bad faith or fraud.
instrumentality, agency, conduit or
adjunct of Manlapaz. As held in Martinez On the contrary, the evidence establishes
v. Court of Appeals,13 the mere ownership that CLN and the respondent knew and
by a single stockholder of even all or acted on the knowledge that they were
nearly all of the capital stocks of a dealing with WPM for the renovation of the
corporation is not by itself a sufficient latter’s restaurant, and not with Manlapaz.
ground to disregard the separate That WPM later reneged on its monetary
corporate personality. To disregard the obligation to CLN, resulting to the filing of
separate juridical personality of a a civil case for sum of money against the
corporation, the wrongdoing must be respondent, does not automatically
clearly and convincingly indicate fraud, in the absence of any proof
established.14cralawlawlibrary to support it.
Likewise, the records of the case do not This Court also observed that the CA failed
support the lower courts’ finding that to demonstrate how the separate and
Manlapaz had control or domination over distinct personality of WPM was used by
WPM or its finances. That Manlapaz Manlapaz to defeat the respondent’s right
concurrently held the positions of for reimbursement. Neither was there any
president, chairman and treasurer, or that showing that WPM attempted to avoid
the Manlapaz’s residence is the registered liability or had no property against which
principal office of WPM, are insufficient to proceed.
considerations to prove that he had
32
Since no harm could be said to have been •

proximately caused by Manlapaz for which •
the latter could be held solidarily liable • Respondent Balmores' action in
with WPM, and considering that there was • the trial court is not a
no proof that WPM had insufficient funds, derivative suit
there was no sufficient justification for the •
RTC and the CA to have ruled that • A derivative suit is an action filed
Manlapaz should be held jointly and by stockholders to enforce a
severally liable to the respondent for the corporate action.56 It is an
amount she paid to CLN. Hence, only WPM exception to the general rule that
is liable to indemnify the respondent. the corporation's power to sue57 is
exercised only by the board of
Finally, we emphasize that the piercing of directors or
the veil of corporate fiction is frowned trustees.58cralawlawlibrary
upon and thus, must be done with •
caution.15 It can only be done if it has • Individual stockholders may be
been clearly established that the separate allowed to sue on behalf of the
and distinct personality of the corporation corporation whenever the directors
is used to justify a wrong, protect fraud, or officers of the corporation refuse
or perpetrate a deception. The court must to sue to vindicate the rights of the
be certain that the corporate fiction was corporation or are the ones to be
misused to such an extent that injustice, sued and are in control of the
fraud, or crime was committed against corporation.59 It is allowed when
another, in disregard of its rights; it the "directors [or officers] are
cannot be presumed. guilty of breach of . . . trust, [and]
On the Award of Moral Damages not of mere error of
judgment."60 In derivative suits,
On the award of moral damages, we find the real party in interest is the
the same in order in view of WPM’s corporation, and the suing
unjustified refusal to pay a just debt. stockholder is a mere nominal
Under Article 2220 of the New Civil party.61
Code,16 moral damages may be awarded Rule 8, Section 1 of the Interim Rules of
in cases of a breach of contract where the Procedure for Intra-Corporate
defendant acted fraudulently or in bad Controversies (Interim Rules) provides the
faith or was guilty of gross negligence five (5) requisites63 for filing derivative
amounting to bad faith. suits:chanRoblesvirtualLawlibrary
In the present case, when payment for the SECTION 1. Derivative action. - A
balance of the renovation cost was stockholder or member may bring an
demanded, WPM, instead of complying action in the name of a corporation or
with its obligation, denied having association, as the case may be, provided,
authorized the respondent to contract in that:chanRoblesvirtualLawlibrary
its behalf and accordingly refused to pay.
Such cold refusal to pay a just debt (1) He was a stockholder or member at the tim
amounts to a breach of contract in bad occurred and at the time the action was filed
faith, as contemplated by Article 2220. (2) He exerted all reasonable efforts, and alleg
Hence, the CA’s order to pay moral to exhaust all remedies available under the
damages was in order. governing the corporation or partnership to
• Alfredo L. Villamor, Jr. Vs. John S. Umale, (3) No appraisal rights are available for the act
in substitution fo Hernando F. (4) The suit is not a nuisance or harassment sui
Balmores   G.R. No. 172843. September
24, 2014 In case of nuisance or harassment suit,
• II the court shall forthwith dismiss the case.
33
individual suit.
The fifth requisite for filing derivative
suits, while not included in the The reasons given for not allowing direct
enumeration, is implied in the first individual suit
paragraph of Rule 8, Section 1 of the are:chanRoblesvirtualLawlibrary
Interim Rules: The action brought by the
stockholder or member must be "in the (1) . . . "the universally recognized doctrine t
name of [the] corporation or association. legal or equitable to the corporate property;
..." This requirement has already been for the benefit of the stockholders." In othe
settled in jurisprudence. would conflict with the separate corporate e
(2) . . . that the prior rights of the creditors ma
• Thus, in Western Institute of in the case of Evangelista v. Santos, that
Technology, Inc., et al v. Solas, et damages for themselves for that would res
al,64 this court said that "[a]mong among them of part of the corporate asset
the basic requirements for a the liquidation of its debts and liabilities, so
derivative suit to prosper is that Section 16 of the Corporation Law. . .";
the minority shareholder who is (3) the filing of such suits would conflict with
suing for and on behalf of the protection of all concerned;
corporation must allege in his (4) it would produce wasteful multiplicity of
complaint before the proper forum (5) it would involve confusion in ascertaining th
that he is suing on a derivative the damages recoverable by the corporation
cause of action on behalf of the
corporation and all other While it is true that the basis for allowing
shareholders similarly situated who stockholders to file derivative suits on
wish to join [him]." behalf of corporations is based on equity,
Moreover, it is important that the the above legal requisites for its filing
corporation be made a party to the must necessarily be complied with for its
case.69cralawlawlibrary institution.73cralawlawlibrary
This court explained in Asset Privatization Respondent Balmores' action in the trial
Trust v. Court of Appeals70 why it is a court failed to satisfy all the requisites of a
condition sine qua non that the derivative suit.
corporation be impleaded as party in
derivative suits. Respondent Balmores failed to exhaust all
Thus:chanRoblesvirtualLawlibrary available remedies to obtain the reliefs he
prayed for. Though he tried to
Not only is the corporation an communicate with PPC's directors about
indispensible party, but it is also the the checks in Villamor's possession before
present rule that it must be served with he filed an action with the trial court,
process. The reason given is that the respondent Balmores was not able to
judgment must be made binding upon the show that this comprised -all the remedies
corporation in order that the corporation available under the articles of
may get the benefit of the suit and may incorporation, by-laws, laws, or rules
not bring a subsequent suit against the governing PPC.
same defendants for the same cause of
action. In other words the corporation • An allegation that appraisal rights
must be joined as party because it is its were not available for the acts
cause of action that is being litigated and complained of is another requisite
because judgment must be a res judicata for filing derivative suits under Rule
against it.71chanrobleslaw 8, Section 1(3) of the Interim
Rules.
In the same case, this court enumerated Section 81 of the Corporation Code
the reasons for disallowing a direct provides the instances of appraisal
34
right:chanRoblesvirtualLawlibrary impossible or futile,74 respondent

Balmores failed to allege that appraisal
SEC. 81. Instances of appraisal right.— rights were not available for the acts
Any stockholder of a corporation shah1 complained of here.
have the right to dissent and demand
payment of the fair value of his shares in •Neither did respondent Balmores
the following instances: implead PPC as party in the case
• In case any amendment to the articles nor did he allege that he was filing
of incorporation has the effect of on behalf of the corporation.
changing or restricting the rights of Individual suits are filed when the cause of
any stockholders or class of shares, action belongs to the individual
or of authorizing preferences in any stockholder personally, and not to the
respect superior to those of stockholders as a group or to the
outstanding shares of any class, or corporation, e.g., denial of right to
of extending or shortening the inspection and denial of dividends to a
term of corporate existence; stockholder.76 If the cause of action
• In case of sale, lease, exchange, belongs to a group of stockholders, such
transfer, mortgage, pledge or other as when the rights violated belong to
disposition of all or substantially all preferred stockholders, a class or
of the corporate property and representative suit may be filed to protect
assets as provided in this Code; the stockholders in the
and group.77cralawlawlibrary
• In case of merger or consolidation.
In this case, respondent Balmores filed an
Section 82 of the Corporation Code individual suit. His intent was very clear
provides that the stockholder may from his manner of describing the nature
exercise the right if he or she voted of his action:chanRoblesvirtualLawlibrary
against the proposed corporate action and
if he made a written demand for payment 1.1
This is an action under Section 1
on the corporation within thirty (30) days (a) (1), Rule 1 of the Interim Rules
after the date of voting. of Procedure for Intra-corporate
Controversies, involving devices or
Respondent Balmores complained about schemes employed by, or acts of,
the alleged inaction of PPC's directors in the defendants as board of
his letter informing them that Villamor directors, business associates and
should be made to deliver to PPC and officers of Pasig Printing
account for MC Home Depot's checks or Corporation (PPC), amounting to
their equivalent value. He alleged that fraud or misrepresentation, which
these are devices or schemes amounting are detrimental to the interest
to fraud or misrepresentation detrimental of the plaintiff as stockholder of
to the corporation's and the stockholders' PPC.78
interests. He also alleged that the Respondent Balmores did not bring the
directors' inaction placed PPC's assets in action for the benefit of the corporation.
imminent and/or actual dissipation, loss, Instead, he was alleging that the acts of
wastage, and destruction. PPC's directors, specifically the waiver of
rights in favor of Villamor's law firm and
Granting that (a) respondent Balmores' their failure to take back the MC Home
attempt to communicate with the other Depot checks from Villamor, were
PPC directors already comprised all the detrimental to his individual interest as
available remedies that he could have a stockholder. In filing an action,
exhausted and (b) the corporation was therefore, his intention was to
under full- control of petitioners that vindicate his individual interest and
exhaustion of remedies became not PPC's or a group of stockholders'.
35
jurisdiction over it. On this matter, it is an

The essence of a derivative suit is that it indispensable party, without which, no
must be filed on behalf of the corporation. final determination can be had.
This is because the cause of action
belongs, primarily, to the corporation. The Hence, it is not only respondent Balmores'
stockholder who sues on behalf of a failure to implead PPC that is fatal to his
corporation is merely a nominal party. action, as petitioners point out. It is the
fact that he alleged no cause of action
2 Respondent Balmores' intent to file an that pertains personally to him that
individual suit removes it from the disqualifies him from the reliefs he sought
coverage of derivative suits. in his complaint.
Respondent Balmores has no Appointment of a management
cause of action that would entitle committee was not proper
him to the reliefs sought
Assuming that respondent Balmores has
Corporations have a personality that is an individual cause of action, the Court of
separate and distinct from their Appeals still erred in placing PPC under
stockholders and directors. A wrong to the receivership and in creating and
corporation does not necessarily create an appointing a management committee.
individual cause of action. "A cause of
action is the act or omission by which a A corporation may be placed under
party violates the right of another."80 A receivership, or management committees
cause of action must pertain to may be created to preserve properties
complainant if he or she is to be entitled involved in a suit and to protect the rights
to the reliefs sought. of the parties under the control and
supervision of the court.83 Management
In this case, respondent Balmores did not committees and receivers are appointed
allege any cause of action that is personal when the corporation is in imminent
to him. His allegations are limited to the danger of "(1) [dissipation, loss, wastage
facts that PPC's directors waived their or destruction of assets or other
rights to rental income in favor of properties; and (2) [p]aralysation of its
Villamor's law firm without consideration business operations that may be
and that they failed to take action when prejudicial to' the interest of the minority
Villamor refused to turn over the amounts stockholders, parties-litigants, or the
to PPC. These are wrongs that pertain to general public."84cralawlawlibrary
PPC. Therefore, the cause of action
belongs to PPC — not to respondent Applicants for the appointment of a
Balmores or any stockholders as receiver or management committee need
individuals. to establish the confluence of these two
requisites. This is because appointed
For this reason, respondent Balmores is receivers and management committees
not entitled to the reliefs sought in the will immediately take over the
complaint. Only the corporation, or management of the corporation and will
arguably the stockholders as a group, is have the management powers specified in
entitled to these reliefs, which should have law.85 This may have a negative effect on
been sought in a proper derivative suit the operations and affairs of the
filed on behalf of the corporation. corporation with third parties,86 as persons
who are more familiar with its operations
PPC will not be bound by a decision are necessarily dislodged from their
granting the application for the positions in favor of appointees who are
appointment of a receiver or management strangers to the corporation's operations
committee. Since it was not impleaded in and affairs.
the complaint, the courts did not acquire
36
PPC waived its rights, without any interlocutory one. This means that
consideration in favor of Villamor. The jurisdiction over the main case was still
checks were already in Villamor's lodged with the trial court.
possession. Some of the checks may have
already been encashed. This court takes The court making the appointment
judicial notice that the goodwill money of controls and supervises the appointed
PI 8,000,000.00 and the rental payments receiver or management committee. Thus,
of P4,500,000.00 every month are not the Court of Appeals' appointment of a
meager amounts only to be waived management committee would result in
without any consideration. It is, therefore, an absurd scenario wherein while the main
enough to constitute loss or dissipation of case is still pending before the trial court,
assets under the Interim Rules. the receiver or management committee
reports' to the Court of Appeals.
Respondent Balmores, however, failed to • Subic Bay Legend Resorts and Casinos,
show that there was an imminent danger Inc. Vs. Bernard C. Fernandez G.R. No.
of paralysis of PPC's business operations. 193426. September 29, 2014
Apparently, PPC was- earning substantial Petitioner’s underlying theory is that the
amounts from its other sub-lessees. subject casino chips were in fact stolen by
Respondent Balmores did not prove its employee Cabrera, then handed over
otherwise. He, therefore, failed to show at to respondent’s brothers, Ludwin and
least one of the requisites for appointment Deoven, for encashment at the casino;
of a receiver or management committee. that Ludwin and Deoven played at the
The Court of Appeals had no casino only for show and to conceal their
jurisdiction to appoint the receiver true intention, which is to encash the
or management committee chips; that respondent’s claim that he
owned the chips, as they were given to
The Court of Appeals has no power to him in payment of services he rendered to
appoint a receiver or management a Chinese client, is false.
committee. The Regional Trial Court has
original and exclusive jurisdiction89 to hear Moreover, if petitioner should stick to its
and decide intra-corporate theory that Cabrera stole the subject
controversies,90 including incidents of such casino chips, then its failure to file a
controversies.91 These incidents include criminal case against the latter – including
applications for the appointment of Ludwin and Deoven for that matter – up
receivers or management committees. to this point certainly does not help to
convince the Court of its position,
"The receiver and members of the especially considering that the supposed
management committee . . . are stolen chips represent a fairly large
considered officers of the court and shall amount of money. Indeed, for purposes
be under its control and supervision."92 of this proceeding, there appears to be no
They are required to report to the court on evidence on record – other than mere
the status of the corporation within sixty allegations and suppositions – that
(60) days from their appointment and Cabrera stole the casino chips in question;
every three (3) months such conclusion came unilaterally from
after.93cralawlawlibrary petitioner, and for it to use the same as
foundation to the claim that Ludwin,
When respondent Balmores filed his Deoven and respondent are dealing in
petition for certiorari with the Court of stolen chips is clearly irregular and unfair.
Appeals, there was still a pending action in
the trial court. No less than the Court of Thus, there should be no basis to suppose
Appeals stated that it allowed respondent that the casino chips found in Ludwin’s
Balmores' petition under Rule 65 because and Deoven’s possession were stolen;
the order or resolution in question was an petitioner acted arbitrarily in confiscating
37
the same without basis. Their Joint representative value – it is with more
Affidavit – which was later recanted – reason that this Court should require
does not even bear such fact; it merely petitioner to prove convincingly and
states that the chips came from persuasively that the chips it confiscated
Cabrera. If it cannot be proved, in the from Ludwin and Deoven were indeed
first place, that Cabrera stole these chips, stolen from it; if so, any Tom, Dick or
then there is no more reason to suppose Harry in possession of genuine casino
that Ludwin and Deoven were dealing in chips is presumed to have paid for their
or possessed stolen goods; unless the representative value in exchange
independent fact that Cabrera stole the therefor. If petitioner cannot prove its
chips can be proved, it cannot be said that loss, then Article 559 cannot apply; the
they must be confiscated when found to presumption that the chips were
be in Ludwin’s and Deoven’s possession. exchanged for value remains.
• Gerardo Lanuza, Jr. and Antonio O. Olbes
It is not even necessary to resolve Vs. BF Corporation, et al.   G.R. No.
whether Ludwin’s and Deoven’s Joint 174938. October 1, 2014
Affidavit was obtained by duress or Corporate representatives may be
otherwise; the document is irrelevant to compelled to submit to arbitration
petitioner’s cause, as it does not suggest proceedings pursuant to a contract
at all that Cabrera stole the subject casino entered into by the corporation they
chips. At most, it only shows that Cabrera represent if there are allegations of bad
gave Ludwin and Deoven casino chips, if faith or malice in their acts representing
this fact is true at all – since such the corporation.
statement has since been recanted. The issue in this case is whether
petitioners should be made parties to the
The fact that Ludwin and Deoven appear arbitration proceedings, pursuant to the
to be indecisive as to who gave them the arbitration clause provided in the contract
casino chips does not help petitioner at between BF Corporation and Shangri-La.
all. It cannot lead to the conclusion that Thus, we rule that petitioners may be
Cabrera stole the chips and then gave compelled to submit to the arbitration
them to the two; as earlier stated, proceedings in accordance with Shangri-La
petitioner had to prove this fact apart and BF Corporation's agreement, in order
from Ludwin’s and Deoven’s claims, no to determine if the distinction between
matter how incredible they may seem. Shangri-La's personality and their
personalities should be disregarded.
Though casino chips do not constitute
legal tender,24 there is no law which This jurisdiction adopts a policy in favor of
prohibits their use or trade outside of the arbitration. Arbitration allows the parties
casino which issues them. In any case, it to avoid litigation and settle disputes
is not unusual – nor is it unlikely – that amicably and more expeditiously by
respondent could be paid by his Chinese themselves and through their choice of
client at the former’s car shop with the arbitrators.
casino chips in question; said transaction,
if not common, is nonetheless not The policy in favor of arbitration has been
unlawful. These chips are paid for affirmed in our Civil Code,69 which was
anyway; petitioner would not have parted approved as early as 1949. It was later
with the same if their corresponding institutionalized by the approval of
representative equivalent – in legal Republic Act No. 876,70 which expressly
tender, goodwill, or otherwise – was not authorized, made valid, enforceable, and
received by it in return or irrevocable parties' decision to submit
exchange. Given this premise – that their controversies, including incidental
casino chips are considered to have been issues, to arbitration.
exchanged with their corresponding Indeed, as petitioners point out, their
38
personalities as directors of Shangri-La participate in arbitration proceedings

are separate and distinct from Shangri-La. made pursuant to an agreement entered
into by the corporation. He or she is
A corporation is an artificial entity created generally not considered a party to that
by fiction of law.76 This means that while it agreement.
is not a person, naturally, the law gives it
a distinct personality and treats it as such. However, there are instances when the
A corporation, in the legal sense, is an distinction between personalities of
individual with a personality that is distinct directors, officers, and representatives,
and separate from other persons including and of the corporation, are disregarded.
its stockholders, officers, directors, We call this piercing the veil of corporate
representatives,77 and other juridical fiction.
entities.
Piercing the corporate veil is warranted
The law vests in corporations rights, when "[the separate personality of a
powers, and attributes as if they were corporation] is used as a means to
natural persons with physical existence perpetrate fraud or an illegal act, or as a
and capabilities to act on their own.78 For vehicle for the evasion of an existing
instance, they have the power to sue and obligation, the circumvention of statutes,
enter into transactions or contracts. or to confuse legitimate issues."85 It is
Section 36 of the Corporation Code also warranted in alter ego cases "where a
enumerates some of a corporation's corporation is merely a farce since it is a
powers, mere alter ego or business conduit of a
person, or where the corporation is so
Because a corporation's existence is only organized and controlled and its affairs are
by fiction of law, it can only exercise its so conducted as to make it merely an
rights and powers through its directors, instrumentality, agency, conduit or
officers, or agents, who are all natural adjunct of another
persons. A corporation cannot sue or enter corporation."86cralawred
into contracts without them.
When corporate veil is pierced, the
A consequence of a corporation's separate corporation and persons who are normally
personality is that consent by a treated as distinct from the corporation
corporation through its representatives is are treated as one person, such that when
not consent of the representative, the corporation is adjudged liable, these
personally. Its obligations, incurred persons, too, become liable as if they
through official acts of its representatives, were the corporation.
are its own. A stockholder, director, or
representative does not become a party to Among the persons who may be treated
a contract just because a corporation as the corporation itself under certain
executed a )C contract through that circumstances are its directors and
stockholder, director or representative. officers. Section 31 of the Corporation
Code provides the instances when
Hence, a corporation's representatives are directors, trustees, or officers may
generally not bound by the terms of the become liable for corporate
contract executed by the corporation. acts:chanRoblesvirtualLawlibrary
They are not personally liable for
obligations and liabilities incurred on or in Based on the above provision, a director,
behalf of the corporation. trustee, or officer of a corporation may be
As a general rule, therefore, a made solidarily liable with it for all
corporation's representative who did not damages suffered by the corporation, its
personally bind himself or herself to an stockholders or members, and other
arbitration agreement cannot be forced to persons in any of the following
39
cases:chanroblesvirtuallawlibrary
Hence, when the directors, as in this case,
a) The director or trustee willfully and knowinglyarevoted
impleaded
for or assented
in a to case
a patently
againstunlawful
a co
act; corporation, alleging malice or bad faith
b) The director or trustee was guilty of gross negligence
on their partor bad
in directing
faith in directing
the affairs
corporate
of the affairs
c) The director or trustee acquired personal orcorporation,
pecuniary interest
complainants
in conflict
are with
effectively
his or her du
director or trustee. alleging that the directors and the
corporation are not acting as separate
entities. They are alleging that the acts or
Solidary liability with the corporation will omissions by the corporation that violated
also attach in the following their rights are also the directors' acts or
instances:chanroblesvirtuallawlibrary omissions.90 They are alleging that
contracts executed by the corporation are
a) "When a director or officer has consented contracts
to the issuance
executed of bywatered
the directors.
stocks or who,
knowledge thereof, did not forthwith file withComplainants
the corporate effectively
secretary hispray
written
that
objection
the ther
b) "When a director, trustee or officer has contractually
corporate agreed
veil beor stipulated
pierced because
to hold himself
the per
and solidarity liable with the corporation";88 cause
and of action between the corporation
c) "When a director, trustee or officer is made, andby thespecific
directorsprovision
is the same.
of law, personally liable
corporate action."89
In that case, complainants have no choice
but to institute only one proceeding
When there are allegations of bad faith or against the parties. Under the Rules of
malice against corporate directors or Court, filing of multiple suits for a single
representatives, it becomes the duty of cause of action is prohibited. Institution of
courts or tribunals to determine if these more than one suit for the same cause of
persons and the corporation should be action constitutes splitting the cause of
treated as one. Without a trial, courts and action, which is a ground for the dismissal
tribunals have no basis for determining of the others.
whether the veil of corporate fiction
should be pierced. Courts or tribunals do It is because the personalities of
not have such prior knowledge. Thus, the petitioners and the corporation may later
courts or tribunals must first determine be found to be indistinct that we rule that
whether circumstances exist to warrant petitioners may be compelled to submit to
the courts or tribunals to disregard the arbitration.
distinction between the corporation and
the persons representing it. The In this case, the Arbitral Tribunal rendered
determination of these circumstances a decision, finding that BF Corporation
must be made by one tribunal or court in failed to prove the existence of
a proceeding participated in by all parties circumstances that render petitioners and
involved, including current representatives the other directors solidarity liable. It
of the corporation, and those persons ruled that petitioners and Shangri-La's
whose personalities are impliedly the other directors were not liable for the
same as the corporation. This is because contractual obligations of Shangri-La to BF
when the court or tribunal finds that Corporation. The Arbitral Tribunal's
circumstances exist warranting the decision was made with the participation
piercing of the corporate veil, the of petitioners, albeit with their continuing
corporate representatives are treated as objection. In view of our discussion above,
the corporation itself and should be held we rule that petitioners are bound by such
liable for corporate acts. The corporation's decision.
distinct personality is disregarded, and the • Sun Life of Canada (Philippines), Inc. Vs.
corporation is seen as a mere aggregation Sandra Tan Kit and The Estate of the
of persons undertaking a business under Deceased Norberto Tan Kit   G.R. No.
the collective name of the corporation. 183272. October 15, 2014
40
The Court of Appeals’ (CA) imposition of to have failed to comply with his
12% interest on the P13,080.93 premium obligation.31cralawlawlibrary
refund is the only matter in question in
this case. In this case, it is undisputed that
Nature of interest imposed by the CA simultaneous to its giving of notice to
respondents that it was rescinding the
There are two kinds of interest – policy due to concealment, petitioner
monetary and compensatory. tendered the refund of premium by
attaching to the said notice a check
“Monetary interest refers to the representing the amount of refund.
compensation set by the parties for the However, respondents refused to accept
use or forbearance of money.”25 No such the same since they were seeking for the
interest shall be due unless it has been release of the proceeds of the policy.
expressly stipulated in writing.26 “On the Because of this discord, petitioner filed for
other hand, compensatory interest refers judicial rescission of the contract.
to the penalty or indemnity for damages Petitioner, after receiving an adverse
imposed by law or by the courts.”27 The judgment from the RTC, appealed to the
interest mentioned in Articles 2209 and CA. And as may be recalled, the appellate
221228 of the Civil Code applies to court found Norberto guilty of
compensatory interest.29cralawlawlibrary concealment and thus upheld the
rescission of the insurance contract and
Clearly and contrary to respondents’ consequently decreed the obligation of
assertion, the interest imposed by the CA petitioner to return to respondents the
is not monetary interest because aside premium paid by Norberto. Moreover, we
from the fact that there is no use or find that petitioner did not incur delay or
forbearance of money involved in this unjustifiably deny the claim.
case, the subject interest was not one
which was agreed upon by the parties in Based on the foregoing, we find that
writing. This being the case and judging petitioner properly complied with its
from the tenor of the CA, to obligation under the law and contract.
wit:chanRoblesvirtualLawlibrary Hence, it should not be made liable to pay
compensatory interest.
Accordingly, [petitioner] is ordered to
reimburse [respondents] the sum of Considering the prevailing circumstances
P13,080.93 representing the [premium] of the case, we hereby direct petitioner to
paid by the insured with interest at the reimburse the premium paid within 15
rate of 12% per annum from time of days from date of finality of this Decision.
death of the insured until fully If petitioner fails to pay within the said
paid.30chanrobleslaw period, then the amount shall be deemed
equivalent to a forbearance of credit.32 In
there can be no other conclusion than that such a case, the rate of interest shall be
the interest imposed by the appellate 6% per annum.33cralawlawlibrary
court is in the nature of compensatory • Philippine Bank of Communications Vs.
interest. Basic Polyprinters and Packaging
The CA incorrectly imposed Corporation   G.R. No. 187581. October
compensatory interest on the 20, 2014
premium •
refund reckoned from the time of • I
death • Liquidity was not an issue
of the insured until fully paid • in a petition for rehabilitation
•
As a form of damages, compensatory • The petitioner contends that the
interest is due only if the obligor is proven sole issue in corporate
41
rehabilitation is one of liquidity;

hence, the petitioning corporation Moreover, Republic Act No. 10142
should have sufficient assets to (Financial Rehabilitation and Insolvency
cover all its indebtedness because Act (FRIA) of 2010), a law that is
it only foresees the impossibility of applicable hereto,26 has defined a
paying the indebtedness falling corporate debtor as a corporation duly
due. It claims that rehabilitation organized and existing under Philippine
became inappropriate because laws that has become insolvent.27 The
Basic Polyprinters was insolvent term insolvent is defined in Republic Act
due to its assets being inadequate No. 10142 as “the financial condition of a
to cover the outstanding debtor that is generally unable to pay its
obligations.20 or his liabilities as they fall due in the
• ordinary course of business or has
• We disagree with the contention of liabilities that are greater than its or his
the petitioner. assets.”28 As such, the contention that
• rehabilitation becomes inappropriate
• Under the Interim Rules, because of the perceived insolvency of
rehabilitation is the process of Basic Polyprinters was incorrect.
restoring “the debtor to a position •
of successful operation and II
solvency, if it is shown that its A material financial commitment is
continuance of operation is significant in a rehabilitation plan
economically feasible and its The petitioner next argues that Basic
creditors can recover by way of the Polyprinters did not present any material
present value of payments financial commitment in the rehabilitation
projected in the plan more if the plan, thereby violating Section 5, Rule 4 of
corporation continues as a going the Interim Rules, the rule applicable at
concern that if it is immediately the time of the filing of the petition for
liquidated.”21 It contemplates a rehabilitation. In that regard, Basic
continuance of corporate life and Polyprinters made no commitment in
activities in an effort to restore and relation to the infusion of fresh capital by
reinstate the corporation to its its stakeholders,29 and presented only a
former position of successful “lopsided” protracted repayment schedule
operation and solvency. 22
that included the dacion en pago involving
• an asset mortgaged to the petitioner itself
• In Asiatrust Development Bank v. in favor of another creditor.
First Aikka Development, Inc.,23 we
said that rehabilitation proceedings A material financial commitment becomes
have a two-pronged purpose, significant in gauging the resolve,
namely: (a) to efficiently and determination, earnestness and good faith
equitably distribute the assets of of the distressed corporation in financing
the insolvent debtor to its the proposed rehabilitation plan.30 This
creditors; and (b) to provide the commitment may include the voluntary
debtor with a fresh start, undertakings of the stockholders or the
Consequently, the basic issues in would-be investors of the debtor-
rehabilitation proceedings concern the corporation indicating their readiness,
viability and desirability of continuing the willingness and ability to contribute funds
business operations of the petitioning or property to guarantee the continued
corporation. The determination of such successful operation of the debtor
issues was to be carried out by the court- corporation during the period of
appointed rehabilitation rehabilitation.31
receiver,25cralawred who was Cacho in
this case. The commitment to add P10,000,000.00
42
working capital appeared to be doubtful not be considered as firm assurances that

considering that the insurance claim from could convince creditors, future investors
which said working capital would be and the general public of its financial and
sourced had already been written-off by operational viability.
Basic Polyprinters’s affiliate, Wonder Book
Corporation.34 A claim that has been Due to the rehabilitation plan being an
written-off is considered a bad debt or a indispensable requirement in corporate
worthless asset,35 and cannot be deemed rehabilitation proceedings,38 Basic
a material financial commitment for Polyprinters was expected to exert a
purposes of rehabilitation. At any rate, the conscious effort in formulating the same,
proposed additional P10,000,000.00 for such plan would spell the future not
working capital was insufficient to cover at only for itself but also for its creditors and
least half of the shareholders’ deficit that the public in general. The contents and
amounted to P23,316,044.00 as of June execution of the rehabilitation plan could
30, 2006. not be taken lightly.
Basic Polyprinters’s rehabilitation plan We are not oblivious to the plight of

likewise failed to offer any proposal on corporate debtors like Basic Polyprinters
how it intended to address the low that have inevitably fallen prey to
demands for their products and the effect economic recession and unfortunate
of direct competition from stores like SM, incidents in the course of their operations.
Gaisano, Robinsons, and other malls. Even However, we must endeavor to balance
the P245 million insurance claim that was the interests of all the parties that had a
supposed to cover the destroyed stake in the success of rehabilitating the
inventories worth P264 million appears to debtors. In doing so here, we cannot now
have been written-off with no probability find the rehabilitation plan for Basic
of being realized later on. Polyprinters to be genuine and in good
faith, for it was, in fact, unilateral and
We observe, too, that Basic Polyprinters’s detrimental to its creditors and the public.
proposal to enter into the dacion en pago • Securities and Exchange Commission Vs.
to create a source of “fresh capital” was Court of Appeals, et al./Astra
not feasible because the object thereof Securities Corporation Vs. Omico
would not be its own property but one Corporation, et al.   G.R. Nos.
belonging to its affiliate, TOL Realty and 187702/189014. October 22, 2014
Development Corporation, a corporation • ISSUE
also undergoing rehabilitation. Moreover, •
the negotiations (for the return of books • Whether the SEC has jurisdiction
and magazines from Basic Polyprinters’s over controversies arising from the
trade creditors) did not partake of a validation of proxies for the
voluntary undertaking because no actual election of the directors of a
financial commitments had been made corporation.
thereon. OUR RULING
Worthy of note here is that Wonder Book
Corporation was a sister company of Basic About a month after the CA issued the
Polyprinters, being one of the corporations assailed Decision, this Court promulgated
that had filed the joint petition for GSIS v. CA,31 which squarely answered
suspension of payments and rehabilitation the above issue in the negative.
in SEC Case No. 031-04 adverted to
earlier. Both of them submitted identical In that case, we observed that Section
commitments in their respective 632(g) of Presidential Decree No. (P.D.)
rehabilitation plans. As a result, as the 902-A dated 11 March 1976 conferred on
Court observed in Wonder Book,37 the SEC the power “[t]o pass upon the validity
commitments by Basic Polyprinters could of the issuance and use of proxies and
43
voting trust agreements for absent proxy solicitation, and the statutory
stockholders or members.” Section 6, jurisdiction of regular courts over election
however, opens thus: “In order to contests or controversies. The power of
effectively exercise such jurisdiction x x the SEC to investigate violations of its
x.” This opening clearly refers to the rules on proxy solicitation is unquestioned
preceding Section 5.33 The Court pointed when proxies are obtained to vote on
out therein that the power to pass upon matters unrelated to the cases
the validity of proxies was merely enumerated under Section 5 of
incidental or ancillary to the powers Presidential Decree No. 902-A. However,
conferred on the SEC under Section 5 of when proxies are solicited in relation
the same decree. With the passage of the to the election of corporate directors,
SRC, the powers granted to SEC under the resulting controversy, even if it
Section 5 were withdrawn, together with ostensibly raised the violation of the
the incidental and ancillary powers SEC rules on proxy solicitation, should
enumerated in Section 6. be properly seen as an election
controversy within the original and
While the regular courts now had the exclusive jurisdiction of the trial
power to hear and decide cases involving courts by virtue of Section 5.2 of the
controversies in the election of directors, it SRC in relation to Section 5 (c) of
was not clear whether the SRC also Presidential Decree No. 902-A.
transferred to these courts the incidental
and ancillary powers of the SEC as The conferment of original and exclusive
enumerated in Section 6 of P.D. 902-A. jurisdiction on the regular courts over
Thus, in GSIS v. CA, it was necessary for such controversies in the election of
the Court to determine whether the action corporate directors must be seen as
to invalidate the proxies was intimately intended to confine to one body the
tied to an election controversy. Hence, the adjudication of all related claims and
Court controversy arising from the election of
pronounced:chanRoblesvirtualLawlibrary such directors. For that reason, the
aforequoted Section 2, Rule 6 of the
Under Section 5(c) of Presidential Decree Interim Rules broadly defines the term
No. 902-A, in relation to the SRC, the “election contest” as encompassing all
jurisdiction of the regular trial courts with plausible incidents arising from the
respect to election-related controversies is election of corporate directors, including:
specifically confined to “controversies in (1) any controversy or dispute involving
the election or appointment of directors, title or claim to any elective office in a
trustees, officers or managers of stock or nonstock corporation, (2) the
corporations, partnerships, or validation of proxies, (3) the manner
associations.” Evidently, the and validity of elections and (4) the
jurisdiction of the regular courts over qualifications of candidates, including the
so-called election contests or proclamation of winners. If all matters
controversies under Section 5 (c) anteceding the holding of such election
does not extend to every potential which affect its manner and conduct, such
subject that may be voted on by as the proxy solicitation process, are
shareholders, but only to the election deemed within the original and exclusive
of directors or trustees, in which jurisdiction of the SEC, then the prospect
stockholders are authorized to of overlapping and competing jurisdictions
participate under Section 24 of the between that body and the regular courts
Corporation Code. becomes frighteningly real. From the
language of Section 5 (c) of Presidential
This qualification allows for a useful Decree No. 902-A, it is indubitable that
distinction that gives due effect to the controversies as to the qualification of
statutory right of the SEC to regulate voting shares, or the validity of votes cast
44
in favor of a candidate for election to the

board of directors are properly cognizable SECTION 1. (a) Cases Covered – These
and adjudicable by the regular courts Rules shall govern the procedure to
exercising original and exclusive be observed in civil cases involving
jurisdiction over election cases.34 x x x. the following:
The ruling harmonizes the seeming a) Devices or schemes employed by, or

conflict between the Amended SRC Rules any act of, the board of directors,
promulgated by the SEC and the Interim business associates, officers or partners,
Rules of Procedure Governing Intra- amounting to fraud or misrepresentation
Corporate Disputes promulgated by the which may be detrimental to the interest
Court. of the public and/or of the stockholders,
partners, or members of any corporation,
SRC Rule 20(11)(b)(xxi) of the Amended partnership, or
SRC Rules association;cralawlawlibrary
provides:chanRoblesvirtualLawlibrary
b) Controversies arising out of intra-
SRC RULE 20. corporate, partnership, or association
relations, between and among
Disclosures to Stockholders Prior to stockholders, members, or associates;
Meeting and between, any or all of them and the
(formerly, SRC Rule 20 – The Proxy Rule) corporation, partnership, or association of
which they are stockholders, members, or
xxxx associates, respectively;cralawlawlibrary
11. Other Procedural Requirements c) Controversies in the election or

appointment of directors, trustees,
xxxx officers, or managers of corporations,
partnerships, or associations;
b. Proxy
d) Derivative suits; and
xxxx
xxi. In the validation of proxies, a e) Inspection of corporate books.
special committee of inspectors shall be
designated or appointed by the Board of xxxx
Directors which shall be empowered to
pass on the validity of proxies. Any RULE 6
dispute that may arise pertaining Election Contests
thereto, shall be resolved by the
Securities and Exchange Commission xxxx
upon formal complaint filed by the
aggrieved party, or by the SEC officer SECTION 2. Definition. – An election
supervising the proxy validation contest refers to any controversy or
process. (Emphasis supplied) dispute involving title or claim to any
elective office in a stock or non-stock
On the other hand, these are the corporation, the validation of proxies,
provisions of Section 1, Rule 1; and the manner and validity of elections, and
Section 2, Rule 6 of the Interim Rules of the qualifications of candidates, including
Procedure Governing Intra-Corporate the proclamation of winners, to the office
Disputes:chanRoblesvirtualLawlibrary of director, trustee or other officer directly
elected by the stockholders in a close
RULE 1 corporation or by members of a non-stock
General Provisions corporation where the articles of
45
incorporation or by-laws so provide. to speak of.

(Emphases supplied)
First, this interpretation is akin to the
The Court explained that the power of the argument struck down by the Court in
SEC to regulate proxies remains in place GSIS v. CA. If the Court adopts the
in instances when stockholders vote on suggestion, “we would be perpetually
matters other than the election of confronted with the spectacle of election
directors.35 The test is whether the controversies being heard and adjudicated
controversy relates to such election. All by both the SEC and the regular courts,
matters affecting the manner and conduct made possible through a mere allegation
of the election of directors are properly that the anteceding x x x process was
cognizable by the regular courts. errant, but the competing cases [were]
Otherwise, these matters may be brought filed with one objective in mind – to affect
before the SEC for resolution based on the the outcome of the election of the board
regulatory powers it exercises over of directors.”38
corporations, partnerships and
associations. Second, the validation of proxies serves a
number of purposes, including
Astra endeavors to remove the instant determining the existence of a quorum
case from the ambit of GSIS v. CA by and ascertaining the authenticity of
arguing that 1) the validation of proxies in proxies to be used for the election of
this case relates to the determination of directors at the stockholders’ meeting.
the existence of a quorum; and 2) no Section 2, Rule 6, of the Interim Rules of
actual voting for the members of the Procedure Governing Intra-Corporate
board of directors was conducted, as the Disputes provides that an election contest
directors were merely elected by motion. covers any controversy or dispute
involving the validation of proxies, in
Indeed, the validation of proxies in this general. Thus, it can only refer to all the
case relates to the determination of the beneficial purposes that validation of
existence of a quorum. Nonetheless, it is a proxies can bring about when made in
quorum for the election of the directors, connection with a forthcoming election of
and, as such, which requires the presence directors. Thus, there is no point in
– in person or by proxy – of the owners of making distinctions between who has
the majority of the outstanding capital jurisdiction before and who has
stock of Omico.36 Also, the fact that there jurisdiction after the election of directors,
was no actual voting did not make the as all controversies related thereto –
election any less so, especially since Astra whether before, during or after – shall be
had never denied that an election of passed upon by regular courts as provided
directors took place. by law.
We find no merit either in the proposal of The Court closes with an observation.
Astra regarding the “two (2) viable, non-
exclusive and successive legal remedies to As in the instant cases, GSIS v. CA is a
question the validity of proxies.”37 It consolidation of two cases, one of which
suggests that the power to pass upon the was filed by a private party and the other
validity of proxies to determine the by the SEC itself. In both cases, the
existence of a quorum prior to the conduct parties were aggrieved by the CA ruling,
of the stockholders’ meeting should lie so they filed the cases seeking a
with the SEC; but, after the stockholders’ pronouncement from the Court that it
meeting, questions regarding the use of recognizes the jurisdiction of the SEC over
invalid proxies in the election of directors the controversy.
should be cognizable by the regular
courts, since there was already an election Calling to mind established jurisprudential
46
principles, the Court therein ruled that application forms, duly proposed and seconded,
quasi-judicial agencies do not have the and the nominees were evaluated as to their
right to seek the review of an appellate qualifications. The nominees automatically
court decision reversing any of their became ineligible for membership once they
rulings.39 This is because they are not real ceased to be officers of the corporate member
parties-in-interest. Thus, the Court under its by-laws upon certification of such loss
expunged the petition filed by the SEC for of tenure by a responsible officer of the corporate
the latter’s lack of capacity to file the suit. member.
So it must be in the instant cases.
Forest Hills Gold and Courtry Club, Inc. Vs. Under Section 2.2.6 of the Club’s by-laws,
Gardpro, Inc. G.R. No. 164686. October 22, membership fees of P45,000.00 must be paid by
2014 the applicant within 30 days from the approval of
The articles of incorporation and the by-laws of a the application before the share could be
corporation define and regulate the relations registered in the Stock and Transfer Books of the
between the corporation and the stockholders. In Club. Non-payment of the membership fees
interpreting them, the literal meaning of their within the 30-day period would be deemed a
provisions shall control, and such provisions withdrawal of the application. The amount of the
should be construed as a whole and not in fees could be waived, increased or decreased by
isolation. the Board of Directors. Pursuant to the Club’s
1. articles of incorporation and by-laws, the
Replacement nominees of Gardpro membership fees should be paid by the corporate
were not required to pay membership fees member. Based on the procedure set forth in
Section 2.2.7 of the by-laws, the applicant was
Forest Hills was not authorized under its articles the juridical entity, not its nominee or nominees.
of incorporation and by-laws to collect new Although the nominee or nominees also
membership fees for the replacement nominees accomplished their application forms for
of Gardpro. membership in the Club, it was the corporate
member that was obliged to pay the membership
There is no question that Gardpro held class “C” fees in its own capacity because the share was
common stocks that entitled it to two registered in its name in the Stock and Transfer
memberships in the Club. Its nominees could be Book.
admitted as regular members upon approval of
the Board of Directors but only one nominee for Corporations buy shares in clubs in order to
each class “C” share as designated in the invest for earnings. Their purchases may also be
resolution could vote as such. A regular member to reward their corporate executives by having
was then entitled to use all the facilities and them enjoy the facilities and perks concomitant
privileges of the Club. In that regard, Gardpro to the club memberships. When Gardpro
could only designate as its purchased and registered its ownership of the
nominees/representatives its officers whose class “C” common shares, it did not only invest
functions and office were defined by its own by- for earnings because it also became entitled to
laws. nominate two of its officers in the Club as set
forth in its seventh purpose of the articles of
The membership in the Club was a privilege, it incorporation and Section 2.2.2 of the by-laws
being clear that the mere purchase of a share in
the Club did not immediately qualify a juridical Entitle is a term that means to give a right, claim
entity for membership. Admission for or legal title to.21 And, as far as the courts have
membership was still upon the favorable action of dealt with the term, it may be gathered that
the Board of Directors of the Club. Under Section entitle signifies the granting of a privilege or right
2.2.7 of its by-laws, the application form was to be exercised at the option of the party for
accomplished by the chairman of the board, whose benefit the term is used upon which no
president or chief executive officer of the limitation can be arbitrarily imposed.22
applicant juridical entity. The designated Nonetheless, the use of the recreational facilities
nominees also accomplished their respective of the Club is commonly known as playing rights
47
of the corporate member or its nominees. Court leaves the matter to the internal
determination of Gardpro and its nominees.
Golf clubs usually sell shares to individuals and
juridical entities in order to raise capital for the The relevant provisions of the articles of
construction of their recreational facilities. In that incorporation and the by-laws of Forest Hills
regard, golf clubs accept juridical entities to governed the relations of the parties as far as the
become regular members,23 and allow such issues between them were concerned. Indeed,
entities to designate corporate nominees because the articles of incorporation of Forest Hills defined
only natural persons can enjoy the sports its charter as a corporation and the contractual
facilities. In the context of this arrangement, relationships between Forest Hills and the State,
Gardpro’s two nominees held playing rights. But between its stockholders and the State, and
the articles of incorporation of Forest Hills and between Forest Hills and its stockholder; hence,
Section 2.2.2 of its by-laws recognized the right there could be no gainsaying that the contents of
of the corporate member to replace the the articles of incorporation were binding not only
nominees, subject to the payment of the transfer on Forest Hills but also on its shareholders. 26 On
fee in such amount as the Board of Directors the other hand, the by-laws were the self-
determined for every change. The replacement imposed rules resulting from the agreement
could take place for any of the following reasons, between Forest Hills and its members to conduct
namely: (a) if the nominee should cease to be an the corporate business in a particular way. In
officer of the corporate member;24 or (b) if the that sense, the by-laws were the private
corporate member should request the “statutes” by which Forest Hills was regulated,
replacement. In case of a replacement, the and would function. The charter and the by-laws
playing rights would also be transferred to the were thus the fundamental documents governing
new nominees. the conduct of Forest Hills’ corporate affairs; they
established norms of procedure for exercising
According to the second paragraph of Section rights, and reflected the purposes and intentions
13.6 of the by-laws, the transfer of playing rights of the incorporators. Until repealed, the by-laws
entailed the payment of P10,000.00. Yet, Section were a continuing rule for the government of
2.2.2 of the by-laws stipulated a transfer fee for Forest Hills and its officers, the proper function
every replacement. This warranted the conclusion being to regulate the transaction of the incidental
that Gardpro should pay to Forest Hills the business of Forest Hills. The by-laws constituted
transfer fee of P10,000.00 because it desired to a binding contract as between Forest Hills and its
change its nominees. members, and as between the members
themselves. Every stockholder governed by the
There was an inconsistency between the by-laws by-laws was entitled to access them.27 The by-
of Forest Hills and the affidavit of Albert as to the laws were self-imposed private laws binding on
amounts of the membership fees of corporate all members, directors and officers of Forest Hills.
members. On one hand, Section 13.7 The prevailing rule is that the provisions of the
(Membership Fees) of the by-laws stated that articles of incorporation and the by-laws must be
“the membership fee of Forty Five Thousand strictly complied with and applied to the letter.28
Pesos (P45,000.00) x x x for corporate members
must be paid by the applicant;” on the other, In construing and applying the provisions of the
Albert’s affidavit alleged that “each nominee shall articles of incorporation and the by-laws of Forest
pay the P75,000.00 membership fee.” To resolve Hills, the CA has leaned on the plain meaning
the inconsistency, the by-laws should prevail rule embodied in Article 1370 of the Civil Code, to
because they constituted the private statutes of the effect that if the terms of the contract are
the corporation and its members and must be clear and leave no doubt upon the intention of
strictly complied with and applied to the letter.
the contracting parties, the literal meaning of its
Martin attested that he and Reyes, as the stipulations shall control. The CA was also guided
nominees of Gardpro, paid P50,000.00 each as by Article 1374 of the Civil Code, which declares
membership fees.25 With the payment of the fees that “[t]he various stipulations of a contract shall
being the personal obligation of Gardpro, the be interpreted together, attributing to the
48
doubtful ones that sense which may result from authority to decide all questions on the
all of them taken jointly.” Verily, all stipulations construction of its articles of incorporation and
of the contract are considered and the whole by-laws, and its rules and regulations.
agreement is rendered valid and enforceable, 3.
instead of treating some provisions as Intervention of the Federation of Golf Clubs
superfluous, void, or inoperable. of the Philippines, Inc. as amicus curiae was
2. not necessary
The CA did not encroach upon the
prerogative The CA properly disallowed the intervention of
of Forest Hills to determine its own rules the Federation of Golf Clubs of the Philippines,
and procedures Inc. as amicus curiae.
and to decide all questions on the
construction of The courts may invite experienced and impartial
its articles of incorporation and by-laws attorneys to appear as amici curiae to help in the
disposition of issues submitted to them.33 As
Anent the second issue, the Court disagrees with such, the appearance of amicus curiae, whether
the contention of Forest Hills that the CA by invitation or by leave, has always been a
encroached upon its prerogative to determine its matter of favor or grace, not of right or privilege.
own rules and procedures and to decide all issues There is no right to compel the courts to permit
on the construction of its articles of incorporation amici curiae to appear. This simply means that
and by-laws. On the contrary, the CA acted the intervention of amicus curiae lies in the
entirely within its legal competence to decide the discretion of the courts, which may grant or
issues between the parties. refuse leave, according as they deem the
proffered information timely and useful, or
The complaint of Gardpro stated a cause of otherwise. Where matters of public concern are
action, and thus contained the operative acts that involved, the courts exercise great liberality in
gave rise to its remedial right against Forest granting leave to appear; but where the parties
Hills.30 The cause of action required not only the are assisted by competent counsel, leave to
interpretation of contracts and the application of appear as amici curiae has been usually withheld.
corporate laws but also the application of the civil In general, the courts desist from allowing the
law itself, particularly its tenets on unjust intervention as amicus curiae of anyone whose
enrichment31 and those regulating property rights attitude appears to be partisan (such as a person
arising from ownership. If Forest Hills were in the service of those having private interests in
allowed to charge nominees membership fees, the outcome of the litigation).34
and then to still charge their replacement
nominees every time a corporate member The membership of Federation of Golf Clubs of
changed its nominees, Gardpro would be unduly the Philippines Inc. included Forest Hills and
deprived of its full enjoyment and control of its other similarly situated golf clubs. Hence, its
property even as the former would be unjustly partisanship or partiality on the pending issues
enriched. was beyond question. Its participation in the
action would not advance the objective
The interpretation and application of laws have appreciation by the CA of such issues. In any
been assigned to the Judiciary under our system event, the action herein involved the contract
of constitutional government. Indeed, defining between parties, and was a private matter fully
and interpreting the laws are truly a judicial within the competence of the SEC and the CA to
function.32 Hence, the CA could not be denied the consider and resolve. It is notable that Forest
authority to interpret the provisions of the Hills was adequately represented by capable
articles of incorporation and by-laws of Forest counsel.
Hills, because such provisions, albeit in the • Lopez Realty, Inc. and Asuncion Lopez-
nature of private laws, impacted on the definition Gonzalez Vs. Sps. Reynaldo Tanjangco
of the rights and obligations of the parties. This, and Maria Luisa Aguelles-Tanjangco 
notwithstanding that Section 16.4 of the by-laws G.R. No. 154291. November 12, 2014
gave to the Board of Directors of Forest Hills the • Ratification of the August 17,
49
1981 with the requirements or

• Board Resolution formalities of the law or the
• corporation's by laws and any
• The Court agrees with the action taken on such meeting may
petitioners that the August 17, be challenged as a
1981 Board Resolution did not give consequence:chanRoblesvirtualLaw
Arturo the authority to act as LRI's library
representative in the subject sale, •
as the meeting of the board of • The general rule is that a
directors where such was passed corporation, through its board of
was conducted without giving any directors, should act in the manner
notice to Asuncion. Section 53 of and within the formalities, if any,
the Corporation Code provides for prescribed by its charter or by the
the general law. Thus, directors must
following:chanRoblesvirtualLawlibra act as a body in a meeting called
ry pursuant to the law or the
• corporation's by-laws, otherwise,
• SEC. 53. Regular and special any action taken therein may be
meetings of directors or trustees.— questioned by any objecting
Regular meetings of the board of director or shareholder.38
directors or trustees of every •
corporation shall be held monthly, • However, the actions taken in such
unless the by-laws provide a meeting by the directors or
otherwise. trustees may be ratified expressly
• or impliedly. "Ratification means
• Special meetings of the board of that the principal voluntarily
directors or trustees may be held adopts, confirms and gives
at any time upon call of the sanction to some unauthorized act
president or as provided in the by- of its agent on its behalf. It is this
laws. voluntary choice, knowingly made,
• which amounts to a ratification of
• Meetings of directors or trustees of what was theretofore unauthorized
corporations may be held and becomes the authorized act of
anywhere in or outside of the the party so making the
Philippines, unless the by-laws ratification. The substance of the
provide otherwise. Notice of doctrine is confirmation after
regular or special meetings conduct, amounting to a substitute
stating the date, time and place for a prior authority. Ratification
of the meeting must be sent to can be made either expressly or
every director or trustee at impliedly. Implied ratification may
least one (1) day prior to the take various forms — like silence or
scheduled meeting, unless acquiescence, acts showing
otherwise provided by the by- approval or adoption of the act, or
laws. A director or trustee may acceptance and retention of
waive this requirement, either benefits flowing
expressly or impliedly. (Emphasis therefrom."39chanrobleslaw
ours) •
• • The Court's decision in Fontecha
• The Court took this matter up in concerns the implied ratification of
Fontecha, involving herein parties, one of the resolutions passed on
where it was held that a meeting of August 17, 1981 by the board of
the board of directors is legally directors of LRI despite of the lack
infirm if there is failure to comply of notice of meeting to Asuncion.
50
This was owing to the subsequent even though not a director, is

actions taken therein by the entitled to vote on behalf of
stockholders, including Asuncion Teresita's estate as the
herself, as cited by the CA in its administrator thereof. The Court
decision. On the other hand, the reiterates its ruling in Tan v.
sale of the property to the spouses Sycip,40viz:chanRoblesvirtualLawlib
Tanjangco was ratified, not rary
because of implied ratification as •
was the case in Fontecha but • In stock corporations, shareholders
through the passage of the July 30, may generally transfer their
1982 Board Resolution. shares. Thus, on the death of a
• shareholder, the executor or
• In the present case, the ratification administrator duly appointed
was expressed through the July 30, by the Court is vested with the
1982 Board Resolution. Asuncion legal title to the stock and
claims that the July 30, 1982 Board entitled to vote it. Until a
Resolution did not ratify the Board settlement and division of the
Resolution dated August 17, 1981 estate is effected, the stocks of the
for lack of the required number of decedent are held by the
votes because Juanito is not administrator or executor.41
entitled to vote while Leo voted (Citation omitted and emphasis
"no" to the ratification of the sale ours)
even if the minutes stated On the issue that Leo voted against the
otherwise. ratification of sale, the Court notes that
• only Juanito, Benjamin and Rosendo
• Asuncion assails the authority of signed the minutes of the meeting. It was
Juanito to vote because he was not also not stated who prepared the minutes,
a director and he did not own any given that Asuncion as the corporate
share of stock which would qualify secretary refused to record the same.
him to be one. On the contrary, Also, it was not explained why Leo was
Juanito defends his right to vote as not able to affix his signature on the said
the representative of Teresita's minutes if he really voted in favor of the
estate. Upon examination of the ratification of the sale. What's more, Leo
July 30, 1982 minutes of the was not presented to testify on the
meeting, it can be deduced that witness stand. Hence, contrary to the
the meeting is a joint stockholders position adopted by the CA, only those
and directors' meeting. The Court whose signatures appear on the minutes
takes into account that majority of of the meeting can be said to have voted
the board of directors except for in favor of the ratification. This case must
Asuncion, had already approved of be differentiated from the Court's ruling in
the sale to the spouses Tanjangco People v. Dumlao, et al.42chanrobleslaw
prior to this meeting. As a
consequence, the power to ratify In Dumlao, the Court ruled that the
the previous resolutions and signing of the minutes by all the directors
actions of the board of directors in is not a requisite and that the lack of
this case lies in the stockholders, signatures on the minutes does not mean
not in the board of directors. It that the resolution was not passed by the
would be absurd to require the board. However, there is a notable
board of directors to ratify their disparity between the facts in Dumlao and
own acts—acts which the same the instant case. In Dumlao, the corporate
directors already approved of secretary therein recorded, prepared and
beforehand. Hence, Juanito, as the certified the correctness of the minutes of
administrator of Teresita's estate the meeting despite the fact that not all
51
directors signed the minutes. In this case, the other directors or stockholders as the
it could not even be established who case may be, to submit proof that the
recorded the minutes in view of Asuncion's minutes of the meeting is accurate and
refusal to do so, as demonstrated during reflective of what transpired during the
the cross examination of Benjamin by the meeting. Conformably to the foregoing, in
petitioners' the absence of Asuncion's certification,
counsel:chanRoblesvirtualLawlibrary only Juanito, Benjamin and Rosendo,
whose signatures appeared on the
It is the signature of the corporate minutes, could be considered as to have
secretary, as the one who is tasked to ratified the sale to the spouses Tanjangco.
prepare and record the minutes, that
gives the minutes of the meeting In sum, whatever defect there was on the
probative value and credibility, as the sale to the spouses Tanjangco pursuant to
Court explained in Dumlao, to the August 17, 1981 Board Resolution, the
wit:chanRoblesvirtualLawlibrary same was cured through its ratification in
the July 30, 1982 Board Resolution. It is
The non-signing by the majority of the of no moment whether Arturo was
members of the GSIS Board of Trustees of authorized to merely negotiate or to enter
the said minutes does not necessarily into a contract of sale on behalf of LRI as
mean that the supposed resolution was all his actions in connection to the sale
not approved by the board. The signing of were expressly ratified by the stockholders
the minutes by all the members of the holding 67% of the outstanding capital
board is not required. There is no stock.
provision in the Corporation Code of the
Philippines-that requires that the minutes In Cua, Jr. et al. v. Tan, et al.,46 the Court
of the meeting should be signed by all the held that by virtue of ratification, the acts
members of the board. of the board of directors become the acts
of the stockholders themselves, even if
The proper custodian of the books, those acts were, at the outset,
minutes and official records of a unauthorized:chanRoblesvirtualLawlibrary
corporation is usually the corporate • Loadstar Shipping Company Inc., et al. Vs.
secretary. Being the custodian of Malayan Insurance Company, Inc.  
corporate records, the corporate G.R. No. 185565. November 26, 2014
secretary has the duty to record and • The following provisions of the
prepare the minutes of the meeting. Code of Commerce state how
The signature of the corporate damages on goods delivered by the
secretary gives the minutes of the carrier should be appraised:
meeting probative value and • Article 361. The merchandise shall
credibility. In this case, Antonio Eduardo be transported at the risk and
B. Nachura, Deputy Corporate Secretary, venture of the shipper, if the
recorded, prepared and certified the contrary has not been expressly
correctness of the minutes of the meeting stipulated. As a consequence, all
of 23 April 1982; and the same was the losses and deteriorations which
confirmed by Leonilo M. Ocampo, the goods may suffer during the
Chairman of the GSIS Board of Trustees. transportation by reason of
Said minutes contained the statement that fortuitous event, force majeure, or
the board approved the sale of the the inherent nature and defect of
properties, subject matter of this case, to the goods, shall be for the account
respondent La'o.44 (Citations omitted and and risk of the shipper. Proof of
emphasis ours) these accidents is incumbent upon
the carrier.
Thus, without the certification of the •
corporate secretary, it is incumbent upon • Article 362. Nevertheless, the
52
carrier shall be liable for the losses should be some pieces in good
and damages resulting from the condition and without any defect,
causes mentioned in the preceding the foregoing provision shall be
article if it is proved, as against applicable with respect to those
him, that they arose through his damaged and the consignee shall
negligence or by reason of his receive those which are sound, this
having failed to take the segregation to be made by distinct
precautions which usage has and separate pieces and without
established among careful persons, dividing a single object, unless the
unless the shipper has committed consignee proves the impossibility
fraud in the bill of lading, of conveniently making use of
representing the goods to be of a them in this form.
kind or quality different from what •
they really were. • The same rule shall be applied to
• merchandise in bales or packages,
• If, notwithstanding the precautions separating those parcels which
referred to in this article, the goods appear sound.
transported run the risk of being • From the above-cited provisions, if
lost, on account of their nature or the goods are delivered but arrived
by reason of unavoidable accident, at the destination in damaged
there being no time for their condition, the remedies to be
owners to dispose of them, the pursued by the consignee depend
carrier may proceed to sell them, on the extent of damage on the
placing them for this purpose at goods.
the disposal of the judicial •
authority or of the officials • If the goods are rendered useless
designated by special for sale, consumption or for the
provisions.cralawred intended purpose, the consignee
• may reject the goods and demand
• xxxx the payment of such goods at their
• market price on that day pursuant
• Article 364. If the effect of the to Article 365. In case the
damage referred to in Article 361 is damaged portion of the goods can
merely a diminution in the value of be segregated from those delivered
the goods, the obligation of the in good condition, the consignee
carrier shall be reduced to the may reject those in damaged
payment of the amount which, in condition and accept merely those
the judgment of experts, which are in good condition. But if
constitutes such difference in the consignee is able to prove that
value. it is impossible to use those goods
• which were delivered in good
• Article 365. If, in consequence of condition without the others, then
the damage, the goods are the entire shipment may be
rendered useless for sale and rejected. To reiterate, under
consumption for the purposes for Article 365, the nature of damage
which they are properly destined, must be such that the goods are
the consignee shall not be bound to rendered useless for sale,
receive them, and he may have consumption or intended purpose
them in the hands of the carrier, for the consignee to be able to
demanding of the latter their value validly reject them.
at the current price on that day. •
• • If the effect of damage on the
• If among the damaged goods there goods consisted merely of
53
diminution in value, the carrier is based on subrogation to the rights

bound to pay only the difference possessed by PASAR as consignee of the
between its price on that day and allegedly damaged goods. The right of
its depreciated value as provided subrogation stems from Article 2207 of
under Article 364. the New Civil Code which states:
• Art. 2207. If the plaintiff’s property has
• Malayan, as the insurer of PASAR, been insured, and he has received
neither stated nor proved that the indemnity from the insurance company for
goods are rendered useless or unfit the injury or loss arising out of the wrong
for the purpose intended by PASAR or breach of contract complained of, the
due to contamination with insurance company shall be subrogated to
seawater. Hence, there is no basis the rights of the insured against the
for the goods’ rejection under wrongdoer or the person who has violated
Article 365 of the Code of the contract. If the amount paid by the
Commerce. Clearly, it is erroneous insurance company does not fully cover
for Malayan to reimburse PASAR as the injury or loss, the aggrieved party
though the latter suffered from shall be entitled to recover the deficiency
total loss of goods in the absence from the person causing the loss or injury.
of proof that PASAR sustained such “The right of subrogation is not dependent
kind of loss. Otherwise, there will upon, nor does it grow out of, any privity
be no difference in the of contract or upon written assignment of
indemnification of goods which claim. It accrues simply upon payment of
were not delivered at all; or the insurance claim by the insurer.”20 The
delivered but rendered useless, right of subrogation is however, not
compared against those which absolute. “There are a few recognized
were delivered albeit, there is exceptions to this rule. For instance, if
diminution in value. the assured by his own act releases the
• wrongdoer or third party liable for the loss
• Malayan also failed to establish the or damage, from liability, the insurer’s
legal basis of its decision to sell right of subrogation is defeated. x x x
back the rejected copper Similarly, where the insurer pays the
concentrates to PASAR. It cannot assured the value of the lost goods
be ascertained how and when without notifying the carrier who has in
Malayan deemed itself as the good faith settled the assured’s claim for
owner of the rejected copper loss, the settlement is binding on both the
concentrates to have these validly assured and the insurer, and the latter
disposed of. If the goods were cannot bring an action against the carrier
rejected, it only means there was on his right of subrogation. x x x And
no acceptance on the part of where the insurer pays the assured for a
PASAR from the carrier. loss which is not a risk covered by the
Furthermore, PASAR and Malayan policy, thereby effecting ‘voluntary
simply agreed on the purchase payment,’ the former has no right of
price of US$90,000.00 without any subrogation against the third party liable
allegation or proof that the said for the loss x x x.”21chanrobleslaw
price was the depreciated value
based on the appraisal of experts The rights of a subrogee cannot be
as provided under Article 364 of superior to the rights possessed by a
the Code of Commerce. subrogor. “Subrogation is the substitution
• of one person in the place of another with
II. Subrogation of Malayan to the reference to a lawful claim or right, so
rights of PASAR that he who is substituted succeeds to the
rights of the other in relation to a debt or
Malayan’s claim against the petitioners is claim, including its remedies or
54
securities. The rights to which the character and general use in

subrogee succeeds are the same as, but commerce, a manager’s check or a
not greater than, those of the person for cashier’s check is regarded
whom he is substituted, that is, he cannot substantially to be as good as the
acquire any claim, security or remedy the money it represents.32 Thus, the
subrogor did not have. In other words, a succeeding discussions and
subrogee cannot succeed to a right not jurisprudence on manager’s
possessed by the subrogor. A subrogee in checks, unless stated otherwise,
effect steps into the shoes of the insured are applicable to cashier’s checks,
and can recover only if the insured and vice versa.
likewise could have •
recovered.”22chanrobleslaw • The RTC effectively ruled that
payment of manager’s and
Consequently, an insurer indemnifies the cashier’s checks are subject to the
insured based on the loss or injury the condition that the payee thereof
latter actually suffered from. If there is complies with his obligations to the
no loss or injury, then there is no purchaser of the checks:
obligation on the part of the insurer to • The RTC made an error at this
indemnify the insured. Should the insurer point. While indeed, it cannot be
pay the insured and it turns out that said that manager’s and cashier’s
indemnification is not due, or if due, the checks are pre-cleared, clearing
amount paid is excessive, the insurer should not be confused with
takes the risk of not being able to seek acceptance. Manager’s and
recompense from the alleged cashier’s checks are still the
wrongdoer. This is because the supposed subject of clearing to ensure that
subrogor did not possess the right to be the same have not been materially
indemnified and therefore, no right to altered or otherwise completely
collect is passed on to the subrogee. counterfeited. However, manager’s
• Metropolitan Bank and Trust Company Vs. and cashier’s checks are pre-
Wilfred N. Chiok/Bank of the accepted by the mere issuance
Philippine Islands Vs. Wilfred N. thereof by the bank, which is both
Chiok/Global Business Bank, Inc. Vs. its drawer and drawee. Thus, while
Wilfred N. Chiok   G.R. Nos. manager’s and cashier’s checks are
172652/175302/175394. November 26, still subject to clearing, they
2014 cannot be countermanded for being
• Whether or not payment of drawn against a closed account, for
manager’s being drawn against insufficient
• and cashier’s checks are funds, or for similar reasons such
subject to the as a condition not appearing on the
• condition that the payee face of the check. Long standing
thereof should and accepted banking practices do
• comply with his obligations to not countenance the
the countermanding of manager’s and
• purchaser of the checks cashier’s checks on the basis of a
• mere allegation of failure of the
• The legal effects of a manager’s payee to comply with its
check and a cashier’s check are the obligations towards the purchaser.
same. A manager’s check, like a On the contrary, the accepted
cashier’s check, is an order of the banking practice is that such
bank to pay, drawn upon itself, checks are as good as cash.
committing in effect its total Even more telling is the Court’s
resources, integrity, and honor pronouncement in Tan v. Court of
behind its issuance. By its peculiar Appeals,36 which unequivocally settled the
55
unconditional nature of the credit created case one of the obligors should not comply
by the issuance of manager’s or cashier’s with what is incumbent upon him.
checks:
The injured party may choose between
A cashier’s check is a primary obligation of the fulfillment and the rescission of the
the issuing bank and accepted in advance obligation, with the payment of damages
by its mere issuance. By its very nature, a in either case. He may also seek
cashier’s check is the bank’s order to pay rescission, even after he has chosen
drawn upon itself, committing in effect its fulfillment, if the latter should become
total resources, integrity and honor behind impossible.
the check. A cashier’s check by its peculiar
character and general use in the The court shall decree the rescission
commercial world is regarded substantially claimed, unless there be just cause
to be as good as the money which it authorizing the fixing of a period.
represents. In this case, therefore, PCIB
by issuing the check created an This is understood to be without prejudice
unconditional credit in favor of any to the rights of third persons who have
collecting bank. (Emphases supplied, acquired the thing, in accordance with
citations omitted.) Articles 1385 and 1388 and the Mortgage
Law.
• Furthermore, under the principle of
ejusdem generis, where a statute The cause of action supplied by the above
describes things of a particular article, however, is clearly predicated
class or kind accompanied by upon the reciprocity of the obligations of
words of a generic character, the the injured party and the guilty party.
generic word will usually be limited Reciprocal obligations are those which
to things of a similar nature with arise from the same cause, and in which
those particularly enumerated, each party is a debtor and a creditor of
unless there be something in the the other, such that the obligation of one
context of the statute which would is dependent upon the obligation of the
repel such inference.37 Thus, any other. They are to be performed
long standing and accepted simultaneously such that the performance
banking practice which can be of one is conditioned upon the
considered as a valid cause to simultaneous fulfillment of the other. 42
return manager’s or cashier’s When Nuguid failed to deliver the agreed
checks should be of a similar amount to Chiok, the latter had a cause of
nature to the enumerated cause action against Nuguid to ask for the
applicable to manager’s or rescission of their contract. On the other
cashier’s checks: material hand, Chiok did not have a cause of action
alteration. As stated above, an against Metrobank and Global Bank that
example of a similar cause is the would allow him to rescind the contracts
presentation of a counterfeit check. of sale of the manager’s or cashier’s
Whether or not the purchaser of checks, which would have resulted in the
manager’s and cashier’s checks has crediting of the amounts thereof back to
the right to have the checks cancelled his accounts.
by filing an action for rescission of its
contract with the payee Otherwise stated, the right of rescission43
The right to rescind invoked by the Court under Article 1191 of the Civil Code can
of Appeals is provided by Article 1191 of only be exercised in accordance with the
the Civil Code, which reads: principle of relativity of contracts under
Article 1131 of the same code, which
Art. 1191. The power to rescind provides:
obligations is implied in reciprocal ones, in
56
Art. 1311. Contracts take effect only easily deposited personal checks, instead
between the parties, their assigns and of going through the trouble of purchasing
heirs, except in case where the rights and manager’s and cashier’s checks. Chiok
obligations arising from the contract are therefore knew, and actually intended,
not transmissible by their nature, or by that Nuguid will be allowed to immediately
stipulation or by provision of law. x x x. withdraw the proceeds of the subject
checks. The deposit of the checks which
In several cases, this Court has ruled that were practically as good as cash was
under the civil law principle of relativity of willingly and voluntarily made by Chiok,
contracts under Article 1131, contracts without any assurance that Nuguid will
can only bind the parties who entered into comply with his end of the bargain on the
it, and it cannot favor or prejudice a third same day. The explanation for such
person, even if he is aware of such apparently reckless action was admitted
contract and has acted with knowledge by Chiok in the Amended Complaint itself:
thereof.44 Metrobank and Global Bank are
not parties to the contract to buy foreign That plaintiff [Chiok] due to the number of
currency between Chiok and Nuguid. years (five to seven years) of business
Therefore, they are not bound by such transactions with defendant [Nuguid] has
contract and cannot be prejudiced by the reposed utmost trust and confidence
failure of Nuguid to comply with the terms on the latter that their transactions as of
thereof. June 1995 reaches millions of pesos. x x
x.48 (Emphases supplied.)
Neither could Chiok be validly granted a
writ of injunction against Metrobank and As between two innocent persons, one of
Global Bank to enjoin said banks from whom must suffer the consequences of a
honoring the subject manager’s and breach of trust, the one who made it
cashier’s checks. It is elementary that possible by his act of confidence must
“(a)n injunction should never issue when bear the loss.49 Evidently, it was the
an action for damages would adequately utmost trust and confidence reposed by
compensate the injuries caused. The very Chiok to Nuguid that caused this entire
foundation of the jurisdiction to issue the debacle, dragging three banks into the
writ of injunction rests in the fact that the controversy, and having their resources
damages caused are irreparable and that threatened because of an alleged default
damages would not adequately in a contract they were not privy to.
compensate.”45 Chiok could have and • Eastern Shipping Line, Inc. Vs. BPI/MS
should have proceeded directly against Insurance Corp., & Mitsu Sumitomo
Nuguid to claim damages for breach of Insurance Co., Ltd.   G.R. No. 182864.
contract and to have the very account January 12, 2015
where he deposited the subject checks • Common carriers, from the nature
garnished under Section 7(d)46 and of their business and on public
Section 8,47 Rule 57 of the Rules of Court. policy considerations, are bound to
Instead, Chiok filed an action to enjoin observe extraordinary diligence in
Metrobank and Global Bank from the vigilance over the goods
complying with their primary obligation transported by them. Subject to
under checks in which they are liable as certain exceptions enumerated
both drawer and drawee. under Article 173451 of the Civil
Code, common carriers are
It is undisputed that Chiok personally responsible for the loss,
deposited the subject manager’s and destruction, or deterioration of the
cashier’s checks to Nuguid’s account. If goods. The extraordinary
the intention of Chiok was for Nuguid to responsibility of the common
be allowed to withdraw the proceeds of carrier lasts from the time the
the checks after clearing, he could have goods are unconditionally placed in
57
the possession of, and received by sustained by the two shipments.

the carrier for transportation until Based on the Requests for Bad
the same are delivered, actually or Order Survey Nos. 5826757 and
constructively, by the carrier to the 5825458 covering the first shipment
consignee, or to the person who dated 13 and 17 February 2004,
has a right to receive four coils were damaged prior to
them.52chanRoblesvirtualLawlibrary turnover. The second Request for
• Bad Order Survey No. 5865859
• In maritime transportation, a bill of dated 25 May 2004 also affirmed
lading is issued by a common the earlier findings that eleven coils
carrier as a contract, receipt and on the second shipment were
symbol of the goods covered by it. damaged prior to turnover.
If it has no notation of any defect •
or damage in the goods, it is • In Asian Terminals, Inc., v. Philam
considered as a “clean bill of Insurance Co., Inc.,60 the Court
lading.” A clean bill of lading based its ruling on liability on the
constitutes prima facie evidence of Bad Order Cargo and Turn Over of
the receipt by the carrier of the Bad Order. The Receipt bore a
goods as therein notation “B.O. not yet t/over to
described.53chanRoblesvirtualLawli ATI,” while the Survey stated that
brary the said steel case was not opened
• at the time of survey and was
• Based on the bills of lading issued, accepted by the arrastre in good
it is undisputed that ESLI received order. Based on these documents,
the two shipments of coils from packages in the Asian Terminals,
shipper Sumitomo Corporation in Inc. case were found damaged
good condition at the ports of while in the custody of the carrier
Yokohama and Kashima, Japan. Westwind Shipping Corporation.
However, upon arrival at the port •
of Manila, some coils from the two • Mere proof of delivery of the goods
shipments were partly dented and in good order to a common carrier
crumpled as evidenced by the Turn and of their arrival in bad order at
Over Survey of Bad Order Cargoes their destination constitutes a
No. 67982 dated 13 February prima facie case of fault or
200454 and Turn Over Survey of negligence against the carrier. If
Bad Order Cargoes Nos. 6836355 no adequate explanation is given
and 6836556 both dated 24 May as to how the deterioration, loss,
2004 signed by ESLI’s or destruction of the goods
representatives, a certain Tabanao happened, the transporter shall be
and Rodrigo together with ATI’s held responsible.61 From the
representative Garcia. According to foregoing, the fault is attributable
Turn Over Survey of Bad Order to ESLI. While no longer an issue,
Cargoes No. 67982, four coils and it may be nonetheless state that
one skid were partly dented and ATI was correctly absolved of
crumpled prior to turnover by ESLI liability for the damage.
to ATI’s possession while a total of Second Issue: Limitation of Liability
eleven coils were partly dented and
crumpled prior to turnover based ESLI assigns as error the appellate court’s
on Turn Over Survey Bad Order finding and reasoning that the package
Cargoes Nos. 68363 and 68365. limitation under the COGSA62 is
• inapplicable even if the bills of lading
• Calamba Steel requested for a re- covering the shipments only made
examination of the damages reference to the corresponding invoices.
58
Noticeably, the invoices specified among Accordingly, the issue whether or not ESLI
others the weight, quantity, description has limited liability as a carrier is
and value of the cargoes, and bore the determined by either absence or presence
notation “Freight Prepaid” and “As of proof that the nature and value of the
Arranged.”63 ESLI argues that the value of goods have been declared by Sumitomo
the cargoes was not incorporated in the Corporation and inserted in the bills of
bills of lading64 and that there was no lading.
evidence that the shipper had presented
to the carrier in writing prior to the There is no question about the declaration
loading of the actual value of the cargo, of the nature, weight and description of
and, that there was a no payment of the goods on the first bill of lading.
corresponding freight.65 Finally, despite
the fact that ESLI admits the existence of The bills of lading represent the formal
the invoices, it denies any knowledge expression of the parties’ rights, duties
either of the value declared or of any and obligations. It is the best evidence of
information contained the intention of the parties which is to be
therein.66chanRoblesvirtualLawlibrary deciphered from the language used in the
contract, not from the unilateral post facto
According to the New Civil Code, the law assertions of one of the parties, or of third
of the country to which the goods are to parties who are strangers to the
be transported shall govern the liability of contract.72 Thus, when the terms of an
the common carrier for their loss, agreement have been reduced to writing,
destruction or deterioration.67 The Code it is deemed to contain all the terms
takes precedence as the primary law over agreed upon and there can be, between
the rights and obligations of common the parties and their successors in
carriers with the Code of Commerce and interest, no evidence of such terms other
COGSA applying than the contents of the written
suppletorily.68chanRoblesvirtualLawlibrary agreement.73chanRoblesvirtualLawlibrary
The New Civil Code provides that a As to the non-declaration of the value of
stipulation limiting a common carrier’s the goods on the second bill of lading, we
liability to the value of the goods see no error on the part of the appellate
appearing in the bill of lading is binding, court when it ruled that there was a
unless the shipper or owner declares a compliance of the requirement provided
greater value.69 In addition, a contract by COGSA. The declaration requirement
fixing the sum that may be recovered by does not require that all the details must
the owner or shipper for the loss, be written down on the very bill of lading
destruction, or deterioration of the goods itself. It must be emphasized that all the
is valid, if it is reasonable and just under needed details are in the invoice, which
the circumstances, and has been fairly “contains the itemized list of goods
and freely agreed shipped to a buyer, stating quantities,
upon.70chanRoblesvirtualLawlibrary prices, shipping charges,” and other
details which may contain numerous
COGSA, on the other hand, provides sheets.74 Compliance can be attained by
under Section 4, Subsection 5 that an incorporating the invoice, by way of
amount recoverable in case of loss or reference, to the bill of lading provided
damage shall not exceed US$500.00 per that the former containing the description
package or per customary freight unless of the nature, value and/or payment of
the nature and value of such goods freight charges is as in this case duly
have been declared by the shipper admitted as evidence.
before shipment and inserted in the
bill of lading. In Unsworth Transport International
(Phils.), Inc. v. Court of Appeals,75 the
59
Court held that the insertion of an invoice shipper declared the nature and value of
number does not in itself sufficiently and the goods with the corresponding payment
convincingly show that petitioner had of the freight on the bills of lading.
knowledge of the value of the cargo. Further, under the caption “description of
However, the same interpretation does packages and goods,” it states that the
not squarely apply if the carrier had been description of the goods to be transported
advised of the value of the goods as as “various steel sheet in coil” with a gross
evidenced by the invoice and payment of weight of 383,532 kilograms (89.510 M3).
corresponding freight charges. It would be On the other hand, the amount of the
unfair for ESLI to invoke the limitation goods is referred in the invoice, the due
under COGSA when the shipper in fact execution and genuineness of which has
paid the freight charges based on the already been admitted by ESLI, is
value of the goods. In Adams Express US$186,906.35 as freight on board with
Company v. Croninger,76 it was said: payment of ocean freight of US$32,736.06
“Neither is it conformable to plain and insurance premium of US$1,813.17.
principles of justice that a shipper may From the foregoing, we rule that the non-
understate the value of his property for limitation of liability applies in the present
the purpose of reducing the rate, and then case.
recover a larger value in case of loss. Nor • Rodrigo Rivera Vs. Spouses Salvador C.
does a limitation based upon an agreed Chua and Violeta S. Chua/Spouses
value for the purpose of adjusting the rate Salvador C. Chua and Violeta S. Chua
conflict with any sound principle of public Vs. Rodrigo Rivera   G.R. Nos.
policy.” Conversely, but for the same 184458/184472. January 14, 2015
reason, it is unjust for ESLI to invoke the • Rivera next argues that even
limitation when it is informed that the assuming the validity of the
shipper paid the freight charges Promissory Note, demand was still
corresponding to the value of the goods. necessary in order to charge him
liable thereunder. Rivera argues
Also, ESLI admitted the existence and due that it was grave error on the part
execution of the Bills of Lading and the of the appellate court to apply
Invoice containing the nature and value of Section 70 of the Negotiable
the goods on the second shipment. As Instruments Law
written in the Pre-Trial Order,77 the (NIL).22chanRoblesvirtualLawlibrary
parties, including ESLI, admitted the •
existence and due execution of the • We agree that the subject
two Bills of Lading78 together with the promissory note is not a negotiable
Invoice on the second shipment with instrument and the provisions of
Nos. KJGE-04-1327-NT/KE279 dated 12 the NIL do not apply to this case.
May 2004. On the first shipment, ESLI Section 1 of the NIL requires the
admitted the existence of the Invoice concurrence of the following
with Nos. KJGE-031228-NT/KE380 elements to be a negotiable
dated 2 February 2004. instrument:chanroblesvirtuallawlibr
ary
The effect of admission of the genuineness •
and due execution of a document means • (a) It must be in writing and signed
that the party whose signature it bears by the maker or drawer;
admits that he voluntarily signed the • (b) Must contain an unconditional
document or it was signed by another for promise or order to pay a sum
him and with his certain in money;
authority.81chanRoblesvirtualLawlibrary • (c) Must be payable on demand, or
at a fixed or determinable future
A review of the bill of ladings and invoice time;
on the second shipment indicates that the • (d) Must be payable to order or to
60
bearer; and •
• (e) Where the instrument is • Article 1169 of the Civil Code
addressed to a drawee, he must be explicitly
named or otherwise indicated provides:chanroblesvirtuallawlibrar
therein with reasonable certainty. y
• •
• On the other hand, Section 184 of • Art. 1169. Those obliged to deliver
the NIL defines what negotiable or to do something incur in delay
promissory note from the time the obligee judicially
is:chanroblesvirtuallawlibrary or extrajudicially demands from
• them the fulfillment of their
• SECTION 184. Promissory Note, obligation.
Defined. – A negotiable promissory •
note within the meaning of this Act • However, the demand by the
is an unconditional promise in creditor shall not be necessary
writing made by one person to in order that delay may exist:
another, signed by the maker, • (1) When the obligation or the
engaging to pay on demand, or at law expressly so declare; or
a fixed or determinable future • (2) When from the nature and the
time, a sum certain in money to circumstances of the obligation it
order or to bearer. Where a note is appears that the designation of the
drawn to the maker’s own order, it time when the thing is to be
is not complete until indorsed by delivered or the service is to be
him. rendered was a controlling motive
• for the establishment of the
• The Promissory Note in this case is contract; or
made out to specific persons, • (3) When demand would be
herein respondents, the Spouses useless, as when the obligor has
Chua, and not to order or to rendered it beyond his power to
bearer, or to the order of the perform.
Spouses Chua as payees. • In reciprocal obligations, neither
• party incurs in delay if the other
• However, even if Rivera’s does not comply or is not ready to
Promissory Note is not a negotiable comply in a proper manner with
instrument and therefore outside what is incumbent upon him. From
the coverage of Section 70 of the the moment one of the parties
NIL which provides that fulfills his obligation, delay by the
presentment for payment is not other begins. (Emphasis supplied)
necessary to charge the person •
liable on the instrument, Rivera is • There are four instances when
still liable under the terms of the demand is not necessary to
Promissory Note that he issued. constitute the debtor in default: (1)
• when there is an express
• The Promissory Note is unequivocal stipulation to that effect; (2) where
about the date when the obligation the law so provides; (3) when the
falls due and becomes period is the controlling motive or
demandable—31 December 1995. the principal inducement for the
As of 1 January 1996, Rivera had creation of the obligation; and (4)
already incurred in delay when he where demand would be useless.
failed to pay the amount of In the first two paragraphs, it is
P120,000.00 due to the Spouses not sufficient that the law or
Chua on 31 December 1995 under obligation fixes a date for
the Promissory Note. performance; it must further state
61
expressly that after the period

lapses, default will commence. Art. 2209. If the obligation consists in
We refer to the clause in the Promissory the payment of a sum of money, and
Note containing the stipulation of the debtor incurs in delay, the
interest:chanroblesvirtuallawlibrary indemnity for damages, there being no
stipulation to the contrary, shall be the
It is agreed and understood that failure on payment of the interest agreed upon, and
my part to pay the amount of in the absence of stipulation, the legal
(P120,000.00) One Hundred Twenty interest, which is six percent per annum.
Thousand Pesos on December 31, 1995. (Emphasis supplied)
(sic) I agree to pay the sum equivalent to
FIVE PERCENT (5%) interest monthly from Article 2209 is specifically applicable in
the date of default until the entire this instance where: (1) the obligation is
obligation is fully paid for.23 for a sum of money; (2) the debtor,
Rivera, incurred in delay when he failed to
which expressly requires the debtor pay on or before 31 December 1995; and
(Rivera) to pay a 5% monthly interest (3) the Promissory Note provides for an
from the “date of default” until the entire indemnity for damages upon default of
obligation is fully paid for. The parties Rivera which is the payment of a 5%
evidently agreed that the maturity of the monthly interest from the date of default.
obligation at a date certain, 31 December
1995, will give rise to the obligation to pay We do not consider the stipulation on
interest. The Promissory Note expressly payment of interest in this case as a penal
provided that after 31 December 1995, clause although Rivera, as obligor,
default commences and the stipulation on assumed to pay additional 5% monthly
payment of interest starts. interest on the principal amount of
P120,000.00 upon default.
The date of default under the Promissory
Note is 1 January 1996, the day following Article 1226 of the Civil Code
31 December 1995, the due date of the provides:chanroblesvirtuallawlibrary
obligation. On that date, Rivera became
liable for the stipulated interest which the Art. 1226. In obligations with a penal
Promissory Note says is equivalent to 5% clause, the penalty shall substitute the
a month. In sum, until 31 December indemnity for damages and the
1995, demand was not necessary before payment of interests in case of
Rivera could be held liable for the principal noncompliance, if there is no
amount of P120,000.00. Thereafter, on 1 stipulation to the contrary.
January 1996, upon default, Rivera Nevertheless, damages shall be paid if the
became liable to pay the Spouses Chua obligor refuses to pay the penalty or is
damages, in the form of stipulated guilty of fraud in the fulfillment of the
interest. obligation.
The liability for damages of those who The penalty may be enforced only when it
default, including those who are guilty of is demandable in accordance with the
delay, in the performance of their provisions of this Code.
obligations is laid down on Article 1170 24
of the Civil Code. The penal clause is generally undertaken
to insure performance and works as
Corollary thereto, Article 2209 solidifies either, or both, punishment and
the consequence of payment of interest as reparation. It is an exception to the
an indemnity for damages when the general rules on recovery of losses and
obligor incurs in damages. As an exception to the general
delay:chanroblesvirtuallawlibrary rule, a penal clause must be specifically
62
set forth in the failed to appreciate the clear import of,

obligation.25chanRoblesvirtualLawlibrary the Court’s April 21, 2014 Decision.
Nowhere in that disposition did the Court
In high relief, the stipulation in the foreclose the application of the Control
Promissory Note is designated as payment Test in determining which corporations
of interest, not as a penal clause, and is may be considered as Philippine nationals.
simply an indemnity for damages incurred Instead, to borrow Justice Leonen’s term,
by the Spouses Chua because Rivera the Court used the Grandfather Rule as a
defaulted in the payment of the amount of “supplement” to the Control Test so that
P120,000.00. The measure of damages for the intent underlying the averted Sec. 2,
the Rivera’s delay is limited to the interest Art. XII of the Constitution be given effect.
stipulated in the Promissory Note. In apt
instances, in default of stipulation, the The following excerpts of the April 21,
interest is that provided by 2014 Decision cannot be clearer:
law.26chanRoblesvirtualLawlibrary
• In ending, the “control test” is still the
• Narra Nickel Mining and Development prevailing mode of determining whether or
Corp., Tesoro Mining and not a corporation is a Filipino corporation,
Development, Inc. and McArthur within the ambit of Sec. 2, Art. XII of the
Mining, Inc. Vs. Redmont 1987 Constitution, entitled to undertake
Consolidated Mines Corp.   G.R. No. the exploration, development and
195580. January 28, 2015 Dissenting utilization of the natural resources of the
Opinion Philippines. When in the mind of the
• J. Leonen Court, there is doubt, based on the
• Very simply, the challenged attendant facts and circumstances of the
Decision sustained the appellate case, in the 60-40 Filipino equity
court's ruling that petitioners, ownership in the corporation, then it may
being foreign corporations, are not apply the “grandfather rule.” (emphasis
entitled to Mineral Production supplied)
Sharing Agreements (MPSAs). In
reaching its conclusion, this Court With that, the use of the Grandfather Rule
upheld with approval the appellate as a “supplement” to the Control Test is
court's finding that there was doubt not proscribed by the Constitution or the
as to petitioners' nationality since a Philippine Mining Act of 1995.
100% Canadian-owned firm, MBMI The Grandfather Rule implements the
Resources, Inc. (MBMI), effectively intent of the Filipinization provisions
owns 60% of the common stocks of the Constitution.
of the petitioners by owning equity
interest of petitioners' other
To reiterate, Sec. 2, Art. XII of the
majority corporate shareholders.
Constitution reserves the exploration,
development, and utilization of natural
II. resources to Filipino citizens and
The application of the Grandfather “corporations or associations at least sixty
Rule is justified by the circumstances per centum of whose capital is owned by
of the case to determine the such citizens.” Similarly, Section 3(aq) of
nationality of petitioners. the Philippine Mining Act of 1995
considers a “corporation x x x registered
The application of the Grandfather Rule in in accordance with law at least sixty per
the present case does not eschew the cent of the capital of which is owned by
Control Test. citizens of the Philippines” as a person
qualified to undertake a mining operation.
Clearly, petitioners have misread, and Consistent with this objective, the

63
Grandfather Rule was originally conceived was subsequently used in tandem with the
to look into the citizenship of the “situs of control” to determine the
individuals who ultimately own and control nationality of a corporation in DOJ Opinion
the shares of stock of a corporation for No. 84, S. of 1988, through the
purposes of determining compliance with Grandfather Rule, despite the fact that
the constitutional requirement of Filipino both the investee and investor
ownership. It cannot, therefore, be denied corporations purportedly satisfy the 60-40
that the framers of the Constitution have Filipino equity requirement
not foreclosed the Grandfather Rule as a Application of the Grandfather Rule
tool in verifying the nationality of with the Control Test.
corporations for purposes of ascertaining
their right to participate in nationalized or Admittedly, an ongoing quandary obtains
partly nationalized activities. as to the role of the Grandfather Rule in
determining compliance with the minimum
As further defined by Dean Cesar Filipino equity requirement vis-à-vis the
Villanueva, the Grandfather Rule is “the Control Test. This confusion springs from
method by which the percentage of the erroneous assumption that the use of
Filipino equity in a corporation one method forecloses the use of the
engaged in nationalized and/or partly other.
nationalized areas of activities, provided
for under the Constitution and other As exemplified by the above rulings,
nationalization laws, is computed, in opinions, decisions and this Court’s April
cases where corporate shareholders 21, 2014 Decision, the Control Test can
are present, by attributing the be, as it has been, applied jointly with the
nationality of the second or even Grandfather Rule to determine the
subsequent tier of ownership to observance of foreign ownership
determine the nationality of the restriction in nationalized economic
corporate shareholder.” Thus, to arrive activities. The Control Test and the
at the actual Filipino ownership and Grandfather Rule are not, as it were,
control in a corporation, both the direct incompatible ownership-determinant
and indirect shareholdings in the methods that can only be applied
corporation are determined. alternative to each other. Rather, these
methods can, if appropriate, be used
The method employed in the Grandfather cumulatively in the determination of
Rule of attributing the shareholdings of a the ownership and control of
given corporate shareholder to the second corporations engaged in fully or
or even the subsequent tier of ownership partly nationalized activities, as the
hews with the rule that the “beneficial mining operation involved in this case or
ownership” of corporations engaged in the operation of public utilities as in
nationalized activities must reside in the Gamboa or Bayantel.
hands of Filipino citizens. Thus, even if the
60-40 Filipino equity requirement appears The Grandfather Rule, standing alone,
to have been satisfied, the Department of should not be used to determine the
Justice (DOJ), in its Opinion No. 144, S. of Filipino ownership and control in a
1977, stated that an agreement that corporation, as it could result in an
may distort the actual economic or otherwise foreign corporation rendered
beneficial ownership of a mining qualified to perform nationalized or partly
corporation may be struck down as nationalized activities. Hence, it is only
violative of the constitutional when the Control Test is first
requirement, complied with that the Grandfather
Rule may be applied. Put in another
The “beneficial ownership” requirement manner, if the subject corporation’s

64
Filipino equity falls below the threshold utilized or [are] allowing themselves to be
60%, the corporation is immediately used as dummies by foreign investors”
considered foreign-owned, in which case, specifically in joint ventures for national
the need to resort to the Grandfather Rule resource exploitation.
disappears.
Thus, In the Matter of the Petition for
On the other hand, a corporation that Revocation of the Certificate of
complies with the 60-40 Filipino to Registration of Linear Works Realty
foreign equity requirement can be Development Corporation, the SEC held
considered a Filipino corporation if that when foreigners contribute more
there is no doubt as to who has the capital to an enterprise, doubt exists
“beneficial ownership” and “control” as to the actual control and
of the corporation. In that instance, ownership of the subject corporation
there is no need for a dissection or even if the 60% Filipino equity
further inquiry on the ownership of the threshold is met.
corporate shareholders in both the
investing and investee corporation or the As will be discussed, even if at first glance
application of the Grandfather Rule. the petitioners comply with the 60-40
As a corollary rule, even if the 60-40 Filipino to foreign equity ratio, doubt
Filipino to foreign equity ratio is exists in the present case that gives rise
apparently met by the subject or investee to a reasonable suspicion that the Filipino
corporation, a resort to the Grandfather shareholders do not actually have the
Rule is necessary if doubt exists as to requisite number of control and beneficial
the locus of the “beneficial ownership in petitioners Narra, Tesoro,
ownership” and “control.” In this case, and McArthur. Hence, a further
a further investigation as to the nationality investigation and dissection of the extent
of the personalities with the beneficial of the ownership of the corporate
ownership and control of the corporate shareholders through the Grandfather
shareholders in both the investing and Rule is justified.
investee corporations is necessary. • Unknown Owner of the Vessel M/V China
Joy, Samsun Shipping Ltd., and Inter-
As explained in the April 21, 2012 Asia Marine Transport, Inc. Vs. Asian
Decision, the “doubt” that demands the Terminals, Inc. G.R. No. 195661. March
application of the Grandfather Rule in 11, 2015
addition to or in tandem with the Control • Issues
Test is not confined to, or more bluntly, • The instant petition raises the
does not refer to the fact that the questions of whether or not the CA
apparent Filipino ownership of the erred in (a) applying the doctrine
corporation’s equity falls below the 60% of res ipsa loquitur, and (b)
threshold. Rather, “doubt” refers to rejecting the argument that “the
various indicia that the “beneficial petitioners had no participation in
ownership” and “control” of the the loading and discharge of the
corporation do not in fact reside in bulk cargo except to provide use of
Filipino shareholders but in foreign the vessel’s gear.”
stakeholders. As provided in DOJ
Opinion No. 165, Series of 1984, which The petitioners present two issues for the
applied the pertinent provisions of the Court’s resolution, to wit: (a) the
Anti-Dummy Law in relation to the applicability of the doctrine of res ipsa
minimum Filipino equity requirement in loquitur in the case at bar; and (b) who
the Constitution, “significant indicators of participated and should thus assume
the dummy status” have been recognized liability for the loading of the soybean
in view of reports “that some Filipino meal cargo.
investors or businessmen are being
65
There is no contract of carriage the doctrine of res ipsa loquitur apply.

between the petitioners and ATI.
Notwithstanding the above, the petitioners
There is no contract of carriage between cannot evade liability for the damage
ATI, on one hand, and the shipowner, caused to ATI’s unloader in view of Article
Samsun, ContiQuincyBunge L.L.C., and 2176 of the New Civil Code, which
Inter-Asia, on the other. It likewise bears pertinently provides as follows:
stressing that the subject of the
complaint, from which the instant petition Art. 2176. Whoever by act or omission
arose, is not the damage caused to the causes damage to another, there being
cargo, but to the equipment of an arrastre fault or negligence, is obliged to pay for
operator. Further, ATI’s contractual the damage done. Such fault or
relation is not with the petitioners, but negligence, if there is no pre-existing
with the consignee and with the Philippine contractual relation between the parties,
Ports Authority (PPA). is called a quasi-delict and is governed by
the provisions of this Chapter.
The functions of an arrastre operator
involve the handling of cargo deposited on In Taylor v. Manila Electric Railroad and
the wharf or between the establishment of Light Co., the Court explained that to
the consignee or shipper and the ship’s establish a plaintiff’s right to recovery for
tackle. Being the custodian of the goods quasi-delicts, three elements must exist,
discharged from a vessel, an arrastre to wit: (a) damages to the plaintiff; (b)
operator’s duty is to take good care of the negligence by act or omission of which
goods and to turn them over to the party defendant personally, or some person for
entitled to their possession.” whose acts it must respond, was guilty;
and (c) the connection of cause and effect
The legal relationship between an arrastre between the negligence and the damage.
operator and a consignee is akin to that
between a warehouseman and a In the case under consideration, the
depositor. As to both the nature of the parties do not dispute the facts of damage
functions and the place of their upon ATI’s unloader, and of such damage
performance, an arrastre operator’s being the consequence of someone’s
services are clearly not maritime in negligence. However, the petitioners deny
character.” liability claiming that it was not
established with reasonable certainty
the Court explained that the liabilities of whose negligence had caused the co-
the arrastre operator for losses and mingling of the metal bars with the
damages are set forth in the contract for soybean meal cargo. The Court, on this
cargo handling services it had executed matter, agrees with the CA’s disquisition
with the PPA. Corollarily then, the rights of that the petitioners should be held jointly
an arrastre operator to be paid for and severally liable to ATI. ATI cannot be
damages it sustains from handling cargoes faulted for its lack of direct access to
do not likewise spring from contracts of evidence determinative as to who among
carriage. the shipowner, Samsun,
ContiQuincyBunge and Inter-Asia should
However, in the instant petition, the assume liability. The CA had exhaustively
contending parties make no references at discussed why the doctrine of res ipsa
all to any provisions in the contract for loquitur applies. The metal bars which
cargo handling services ATI had executed caused damage to ATI’s unloader was
with the PPA. found co-mingled with the cargo inside
Article 2176 of the New Civil Code and Hold No. 2 of the ship, which was then
within the exclusive control of the

66
petitioners. Thus, the presumption that it

was the petitioners’ collective negligence,
which caused the damage, stands. This is,
however, without prejudice to the
petitioners’ rights to seek reimbursements
among themselves from the party whose
negligence primarily caused the damage.


Mercantile Law: Compilation of Supreme Court Decisions

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COMPILATION OF SUPREME COURT DECISIONS

MERCANTILE LAW The phraseology used in medical or

Prepared by: ATTY. RESCI ANGELLI RIZADA, RN

Prepared by: ATTY. RESCI ANGELLI RIZADA, RN

facts. vanquished party.

Prepared by: ATTY. RESCI ANGELLI RIZADA, RN

question of whether a corporation is a complaint is made.”

respondent’s corporate entity.” (1) Control, not mere majority or

60-40 Filipino-foreign equity incorporation of a corporation.

provides that the merger shall be consolidation of Philippine

(BIR) treated the transaction imposed upon the directors or

In other words, petitioners are not Contracts of Agency May be Oral

of attorney in Article 1878 of the Civil

loan contracted by de Villa secured by real borrowing of money or release of the

contract to speak of.15cralawred instrument against a party prior to the

Marasigan has no right to enforce In fact, what the document established is

the loss/damage to the subject shipment properties expressly authorized by

fiction treats as separate and rules and regulations on unfair

Philippines Insurance, Inc. (formerly considering HEUNG-A’s failure to

remained responsible as the carrier, contract. It is a receipt for the goods

or damage to or in connection with the

Petitioners faulted the drawee bank for

alteration or bearing forged endorsement are:ChanRoblesVirtualawlibrary

efforts to exhaust all remedies alter-ego, and business conduit of

Since no harm could be said to have been •

right:chanRoblesvirtualLawlibrary impossible or futile,74 respondent

jurisdiction over it. On this matter, it is an

personalities as directors of Shangri-La participate in arbitration proceedings

rehabilitation is one of liquidity;

working capital appeared to be doubtful not be considered as firm assurances that

Basic Polyprinters’s rehabilitation plan We are not oblivious to the plight of

in favor of a candidate for election to the

The ruling harmonizes the seeming a) Devices or schemes employed by, or

11. Other Procedural Requirements c) Controversies in the election or

incorporation or by-laws so provide. to speak of.

1981 with the requirements or

This was owing to the subsequent even though not a director, is

diminution in value, the carrier is based on subrogation to the rights

securities. The rights to which the character and general use in

the possession of, and received by sustained by the two shipments.

expressly that after the period

set forth in the failed to appreciate the clear import of,

Prepared by: ATTY. RESCI ANGELLI RIZADA, RN

Prepared by: ATTY. RESCI ANGELLI RIZADA, RN

There is no contract of carriage the doctrine of res ipsa loquitur apply.

Prepared by: ATTY. RESCI ANGELLI RIZADA, RN

petitioners. Thus, the presumption that it

Prepared by: ATTY. RESCI ANGELLI RIZADA, RN

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