EXAM RULES

This examination consists of 7 essay questions (with sub questions) to be finished in TWO (2) HOURS.

The exam answers will be sent to you by the examiner at the start of the examination period. Type your
answers in Microsoft Word or Google Docs and after completing the exam, convert the file to PDF and
email your answers to cyril.arnesto@gmail.com.

In taking the exam, enter the Zoom meeting room, use OBS Virtual Camera in your laptops and another
device for remote proctoring. If OBS virtual camera does not work in your laptop, use a separate camera
that clearly shows your computer and your desk. If these tools (OBS and another device) are not available
at your disposal, I trust you, together with the Almighty above, that you have the integrity to do the right
thing. After all, you will join a noble profession where integrity precedes one’s reputation. I may not catch
you cheating now, but rest assured, you will not be happy with all the things you do and accomplished by
cheating.

Reminder, cheating is a serious offense and subject to disciplinary action. Persons found with notes or
prohibited items, conversing, using gadgets other than those allowed by the Examiner, accessing
applications, files or programs other than or outside of MS Word or Google Docs, or committing other
suspicious acts at the examiner’s discretion shall be deemed prima facie evidence of cheating and will be
dealt with accordingly.

Answer the Essay questions legibly, clearly, and concisely. Your answer should demonstrate your ability
to analyze the facts presented by the question, to select the material from the immaterial facts, and to
discern the points upon which the question turns. It should show your knowledge and understanding of
the pertinent principles and theories of law involved and their qualifications and limitations. It should
demonstrate your ability to apply the law to the given facts, and to reason logically in a lawyer-like manner
to a sound conclusion from the given premises.

A mere "Yes" or "No" answer without any corresponding explanation or discussion will not be given any
credit. Thus, always briefly but fully explain your answers although the question does not expressly ask
for an explanation. At the same time, remember that a complete explanation does not require that you
volunteer information or discuss legal doctrines that are not necessary or pertinent to the solution to the
problem. Make sure you do not write your name or any extraneous notes or distinctive marking/s on your
exam answers such as names that are not in the given questions, prayers, or private notes to the Examiner.

PROBLEM SOLVING. Read the facts very carefully. There are no hidden bombshells or trick questions. This
set of problems simply requires utmost comprehension of the facts and straightforward application of the
legal rules and principles which you took up and which were explained in this course. You will be graded
according to the clarity of your reasoning. Long-winded but muddled answers will not earn you extra
points. Use red font in typing your answer below each question.
 I.

Franklin Vives was asked by his neighbor and friend Angeles Sanchez to help her friend and
townmate, Col. Arturo Doronilla, in incorporating his business, the Sterela Marketing and
Services ("Sterela" for brevity). Specifically, Sanchez asked Vives to deposit in a bank a certain
amount of money in the bank account of Sterela for purposes of its incorporation. She assured
Vives that he could withdraw his money from said account within a month’s time.

Relying on the assurances and representations of Sanchez and Doronilla, Vives issued a check in
the amount of Two Hundred Thousand Pesos (₱200,000.00) in favor of Sterela. Vives instructed
his wife, Mrs. Inocencia Vives, to accompany Doronilla and Sanchez in opening a savings account
in the name of Sterela in the Buendia, Makati branch of Producers Bank of the Philippines so that
a certification can be issued to the effect that Sterela had sufficient funds for purposes of its
incorporation but at the same time, Vives retained some degree of control over his money
through his wife who was made a signatory to the savings account and in whose possession the
savings account passbook was given.

Vives learned that Sterela was no longer holding office in the address previously given to him. He
demanded payment of the money deposited in the name of Sterela in the Buendia, Makati
branch of Producers Bank of the Philippines. Doronila failed to pay the amount. Hence, Vives
instituted an action for recovery of sum of money against Doronila and the Bank.

The Bank put forth the defense that the contract between Vives and Doronilla is a simple loan;
therefore, the Bank cannot be held liable for the return of private respondent’s ₱200,000.00
because it is not privy to the transaction between the latter and Doronilla.

Vives argued that he did not actually part with the ownership of his money and only allowed
Doronilla to use it for purposes of getting a certification of sufficient funds for incorporation.

What is the nature of the transaction, is it a simple loan or commodatum?

The nature of the transaction was commodatum.

Under New Civil Code, by the contract of commodatum, one of the contracting parties obligates
himself to the delivery of non-consumable things to another so that the latter may use the same
and thereafter return it. On the other hand, in a simple loan, one of the contracting parties deliver
money or consumable things subject to the condition that same amount of kind and quality shall
be paid. However, jurisprudence held that there are also instances when the subject of the
commodatum is consumable things when the purpose is not consumption but for exhibition. It
means that when the consumable thing is delivered the purpose is not consumption but rather
for exhibition and the very same consumable thing is returned to the owner.

Here, the contract is commodatum because the purpose is not for consumption or the use of the
money by the bank but rather for exhibition. In this case, the money was used only for
incorporation or making it appear that Sterela has funds and the said money can be withdrawn
within a month.

Hence, the nature of the transaction is commodatum.

II.

Colito Pajuyo and private respondent Eddie Guevarra executed a Kasunduan wherein Pajuyo, as
owner of the house situated in government lot, allowed Guevarra to live in Pajuyo’s house for
free provided Guevarra would maintain the cleanliness and orderliness of the house. Guevarra
promised that he would voluntarily vacate the premises on Pajuyo’s demand.

After two years, Pajuyo informed Guevarra of his need of the house and demanded that Guevarra
vacate the house. Guevarra refused. Hence, Pajuyo instituted an ejectment suit against Guevarra.

Guevarra argues that the ejectment suit has no basis since the agreement between them is
commodatum, and therefore the rules on ejectment do not apply.

II.a. Is Guevarra correct in saying that the agreement is commodatum?

No, the agreement is not commodatum.

Under New Civil Code, by the contract of commodatum, one of the contracting parties obligates
himself to the delivery of non-consumable things to another so that the latter may use the same
and thereafter return it. Further, one of the essential characteristics of commodatum is that it is
gratuitous, it means the contract was entered without a consideration.

Here, it is not a commodatum since the Kasunduan was entered into with a consideration. In one
case decided by the Supreme Court, the condition that the occupant would maintain the
cleanliness and orderliness of the house, is considered to be a consideration. The fact that
Guevarra was obliged to maintain the cleanliness and orderliness of the house is a consideration
that precludes the Kasunduan for being classified as a commodatum.

Hence, the agreement is not commodatum but other kind of agreement that an ejectment suit
can be instituted.

II.b. Is it correct for Guevarra to argue that in commodatum there is no obligation to return the
property?
No, Guevarra is not correct.

Under New Civil Code, by the contract of commodatum, one of the contracting parties obligates
himself to the delivery of non-consumable things to another so that the latter may use the same
and thereafter return it.

Here, Guevarra is not correct since the New Civil Code expressly provides that in commodatum,
there is an obligation on the party borrowing the thing to return the same. Even if the contract is
not a commodatum, there is still that obligation to return the thing since Gueverra is not the
owner of the thing.

III.

Spouses Ignacio F. Juico and Alice P. Juico obtained a loan from China Banking Corporation as
evidenced by two Promissory Notes both dated October 6, 1998 and numbered 507-001051-3
and 507-001052-0, for the sums of 16,216,000 and ₱4, 139,000, respectively. The loan was
secured by a Real Estate Mortgage (REM) over petitioners’ property located at 49 Greensville St.,
White Plains, Quezon City covered by Transfer Certificate of Title (TCT) No. RT-103568 (167394)
PR-41208 of the Register of Deeds of Quezon City.

Loan agreement was executed via two promissory notes, both of which have the following
stipulation:

“I/We hereby authorize the CHINA BANKING CORPORATION to increase or decrease as the case
may be, the interest rate/service charge presently stipulated in this note without any advance
notice to me/us in the event a law or Central Bank regulation is passed or promulgated by the
Central Bank of the Philippines or appropriate government entities, increasing or decreasing such
interest rate or service charge.”

When the spouses failed to pay the monthly amortizations due, respondent demanded the full
payment of the outstanding balance with accrued monthly interests. For failure to pay the
outstanding balance and interest, the mortgaged property was sold at a public auction.

Thereafter, the spouses received a demand letter from the bank for the payment of
₱8,901,776.63, the amount of deficiency after applying the proceeds of the foreclosure sale to
the mortgage debt.

Spouses are questioning the escalation clause as void for being unilaterally imposed by the bank.
On the other hand, the bank argues that the spouses agreed to the said interest rates as evidence
by the spouses’ signature.

Is the escalation clause valid or void?

The escalation clause is not valid.

Under the principle of mutuality of contracts, both contracting parties shall bind the contract.
The contract is not valid if the compliance as well as the validity of the contract is left to one of
the contracting parties.

According to jurisprudence, escalation clause is a stipulation to increase the interest rate subject
to the conformity of the contracting parties. The court held that escalation clauses are not invalid
per se as long as the agreement to increase was agreed upon by the contracting parties.

Here, the escalation clause is not valid since the stipulation is unilateral on the part of CHINA
BANKING CORPORATION to increase the interest rate. The Spouses Juico in this case, was not
aware of the increased rate since CHINA BANKING CORPORATION was authorized to increase or
decrease interest rate without any advance notice. Eventhough the spouses signed the
promissory notes but case law provides that it should have been prudent for the bank to send
written notice regarding the interest rate and also require the written consent of the Spouses
Juico. Said stipulation is a violation of the mutuality of contracts.

4. On March 22, 1999, spouses Romeo and Annie Abella executed an acknowledgment receipt to
spouses Salvador and Alma Abella, which states:

Batan, Aklan

March 22, 1999

This is to acknowledge receipt of the Amount of Five Hundred Thousand

(P500,000.00) Pesos from Mrs. Alma R. Abella, payable within one (1) year from
date hereof with interest.

Annie C. Abella (sgd.) Romeo M. Abella (sgd.)

4.a. Assuming spouses Romeo and Annie Abella paid portion of the loaned amount plus a
monthly interest rate of 2.5%, is the said monthly rate (30% annual rate) valid?

No, the monthly interest rate is not valid.

Under New Civil Code, parties have a right to stipulate provisions in the contract as long as it is
not contrary to law, morals, public order or public policy. The New Civil Code gives the contracting
parties a wide latitude to stipulate interest rates due to the suspension of the Usury Law.
However, jurisprudence provides that this does not give the parties unbridled or carte blanche
right to stipulate interest rates that will enslave their debtors. If the court determines that the
interest rates are excessive or unconscionable, the same shall be declared void.

Here, the monthly rate is not valid since it is excessive. The rate is excessive and unfair since it
can be gleaned that after more or less three years the principal obligation will become double
due to the high interest rate. Also, it is excessive since the legal interest rate at the time of the
transaction is only 12 percent.

4. Assuming spouses Romeo and Annie Abella failed to pay the loaned amount, what is the
applicable interest rate from 1999 to present under prevailing jurisprudence?

The applicable interest is 12%.

Under the prevailing rule, in the absence of stipulation with regard to the interest, the legal
interest rate shall no longer be 12% but effective July 1, 2013, the prevailing legal interest rate of
loan or forbearance in money is now at 6%. However, the application of this 6% rate is
prospective and not retrospective. Therefore, until June 30, 2013, the legal interest rate is 12%
but on July 1, 2013, the legal interest rate shall be 6%.

Here, the applicable interest is 12% since the transaction was entered into on March 22, 1999
before the effectivity of the 6% interest rate.

V.

Maurice McLoughlin, an Australian businessman-philanthropist, used to stay at Sheraton Hotel

during his trips to the Philippines prior to 1984 when he met Brunhilda Mata-Tan. Tan befriended
McLoughlin by showing him around, introducing him to important people, accompanying him in
visiting impoverished street children and assisting him in buying gifts for the children and in
distributing the same to charitable institutions for poor children. Tan convinced McLoughlin to
transfer from Sheraton Hotel to Tropicana where Erlinda Lainez, Anicia Payam and Danilo Lopez
were employed. Lopez served as manager of the hotel while Lainez and Payam had custody of
the keys for the safety deposit boxes of Tropicana. Tan took care of McLoughlin's booking at the
Tropicana where he started staying during his trips to the Philippines from December 1984 to
September 1987.

On 30 October 1987, McLoughlin arrived from Australia and registered with Tropicana. He rented
a safety deposit box as it was his practice to rent a safety deposit box every time he registered at
Tropicana in previous trips. As a tourist, McLoughlin was aware of the procedure observed by
Tropicana relative to its safety deposit boxes. The safety deposit box could only be opened
through the use of two keys, one of which is given to the registered guest, and the other
remaining in the possession of the management of the hotel. When a registered guest wished to
open his safety deposit box, he alone could personally request the management who then would
assign one of its employees to accompany the guest and assist him in opening the safety deposit
box with the two keys.
McLoughlin executed “Undertaking For The Use of Safety Deposit Box” that absolves the hotel
and its management against any liability for the loss of items left with it for safekeeping by its
guests.

McLoughlin placed the following in his safety deposit box: Fifteen Thousand US Dollars
(US$15,000.00) which he placed in two envelopes, one envelope containing Ten Thousand US
Dollars (US$10,000.00) and the other envelope Five Thousand US Dollars (US$5,000.00); Ten
Thousand Australian Dollars (AUS$10,000.00) which he also placed in another envelope; two (2)
other envelopes containing letters and credit cards; two (2) bankbooks; and a checkbook,
arranged side by side inside the safety deposit box.

Mcloughlin went on a business trip abroad for a few days. After returning to Manila, he checked
out of Tropicana on 18 December 1987 and left for Australia. When he arrived in Australia, he
discovered that the envelope with Ten Thousand US Dollars (US$10,000.00) was short of Five
Thousand US Dollars (US$5,000).
He immediately confronted Lainez and Payam who admitted that Tan opened the safety deposit
box with the key assigned to him. McLoughlin went up to his room where Tan was staying and
confronted her. Tan admitted that she had stolen McLoughlin's key and was able to open the
safety deposit box with the assistance of Lopez, Payam and Lainez. Lopez also told McLoughlin
that Tan stole the key assigned to McLoughlin while the latter was asleep.

To recover his money, McLoughlin sued Tropicana for the amount lost inside the safety deposit
box.

The hotel contends that McLoughlin executed a waiver and therefore should not be held liable
for the loss.

Is the hotel’s argument tenable?

No, the argument of the Hotel is untenable.

Under Article 2003 of the New Civil Code, the hotel-keeper cannot free itself from liability by
posting of notices that it shall not be liable in case of loss of articles or belongings of the guest.
Also, the same Code provides that a stipulation by hotel-keepers that its liability shall be
suppressed or diminished, in case of loss of articles or belongings, is void.

Here, the stipulation that absolves the Tropicana hotel and its management against any liability
for the loss of items left with it for safekeeping by its guests is not valid for being contrary to
public policy. Hotels just like common carriers provides services that is imbued with public
interest. Hotels are expected to be diligent more than a good father of the family in its dealings
with its guests. Any attempt on the part of the Hotel to diminish or suppress its liability is void
since it is against public policy.

Therefore, the hotel is not correct since the stipulation is void.

 VI.

On 26 March 1997, Transfield Philippines Inc. (“TPI”) and Luzon Hydro Corporation (“LHC”)
entered into a Turnkey Contract whereby petitioner, as Turnkey Contractor, undertook to
construct, on a turnkey basis, a seventy (70)-Megawatt hydro-electric power station at the Bakun
River in the provinces of Benguet and Ilocos Sur (the “Project”). Petitioner was given the sole
responsibility for the design, construction, commissioning, testing and completion of the Project.

The Turnkey Contract provides that: (1) the target completion date of the Project shall be on 1
June 2000, or such later date as may be agreed upon between TPI and LHC or otherwise
determined in accordance with the Turnkey Contract; and (2) TPI is entitled to claim extensions
of time (EOT) for reasons enumerated in the Turnkey Contract, among which are variations, force
majeure, and delays caused by LHC itself.

To secure performance of TPI's obligation on or before the target completion date, or such time
for completion as may be determined by the parties' agreement, TPI opened in favor of LHC two
(2) standby letters of credit both dated 20 March 2000 (hereinafter referred to as "the
Securities"), to wit: Standby Letter of Credit No. E001126/8400 with the local branch of
respondent Australia and New Zealand Banking Group Limited (ANZ Bank) and Standby Letter of
Credit No. IBDIDSB-00/4 with respondent Security Bank Corporation (SBC) each in the amount of
US$8,988,907.00.

In the course of the construction of the project, TPI sought various EOT to complete the Project.
The extensions were requested allegedly due to several factors which prevented the completion
of the Project on target date, such as force majeure occasioned by typhoon Zeb, barricades and
demonstrations. LHC denied the requests, however. This resulted in a series of legal actions
between TPI and LHC.

Meanwhile, foreseeing that LHC would call on the Securities pursuant to the pertinent provisions
of the Turnkey Contract, TPI advised ANZ Bank and SBC LHC had no right to call on the Securities
until the resolution of pending actions between TPI and LHC and warned the banks that any
transfer, release, or disposition of the Securities in favor of LHC or any person claiming under LHC
would constrain it to hold the banks liable for liquidated damages.

LHC submitted a certification stating that TPI defaulted in its deliverables for the Project and
called on the Securities. The bank released the amount to LHC.

TPI is now arguing that the banks erroneously released the Securities since the issue of whether
or not TPI defaulted in its obligations is still pending resolution in a separate case.

Is TPI’s argument tenable? Did the banks released the Securities in violation of applicable
principles for Letters of Credit?
No, the argument of TPI is untenable.

Under the Independence Principle in Letters of Credit, it assures the seller or the beneficiary
prompt payment independent of any breach under the main contract. Under this principle, it
precludes the bank in determining whether the main contract was accomplished, as long as the
required documents are submitted, then the bank shall pay the seller.

Here, due to the fact that LHC submitted a certification stating that TPI defaulted in its
deliverables for the Project, then bank was justified in releasing the securities. The bank is
precluded in determining whether or not TPI defaulted in its deliverables. The fact that LHC
already submitted the required document, then, the bank was already justified in releasing the
securities.

Hence, TPI was wrong in its argument that the bank committed an error in releasing the
securities.

VII.

Spouses Raul and Elea Claveria, doing business under the name "Agro Brokers," applied for a loan
with SOLIDBANK in the amount of Two Million Eight Hundred Seventy Five Thousand Pesos
(P2,875,000.00) to finance the purchase of two (2) maritime barges and one tugboat 3 which
would be used in their molasses business. The loan was granted subject to the condition that
respondent spouses execute a chattel mortgage over the three (3) vessels to be acquired and
that a continuing guarantee be executed by E. Zobel, Inc. in favor of SOLIDBANK. The spouses
agreed to the arrangement. Consequently, a chattel mortgage and a Continuing Guaranty were
executed.

The Continuing Guaranty states:

For and in consideration of any existing indebtedness to you of AGRO BROKERS, a

single proprietorship owned by MR. RAUL P. CLAVERIA, of legal age, married and
with business address . . . (hereinafter called the Borrower), for the payment of
which the undersigned is now obligated to you as surety and in order to induce
you, in your discretion, at any time or from time to time hereafter, to make loans
or advances or to extend credit in any other manner to, or at the request or for
the account of the Borrower, either with or without purchase or discount, or to
make any loans or advances evidenced or secured by any notes, bills receivable,
drafts, acceptances, checks or other instruments or evidences of indebtedness . .
. upon which the Borrower is or may become liable as maker, endorser, acceptor,
or otherwise, the undersigned agrees to guarantee, and does hereby guarantee,
the punctual payment, at maturity or upon demand, to you of any and all such
instruments, loans, advances, credits and/or other obligations herein before
referred to, and also any and all other indebtedness of every kind which is now or
may hereafter become due or owing to you by the Borrower, together with any
and all expenses which may be incurred by you in collecting all or any such
instruments or other indebtedness or obligations hereinbefore referred to, and or
in enforcing any rights hereunder, and also to make or cause any and all such
payments to be made strictly in accordance with the terms and provisions of any
agreement (g), express or implied, which has (have) been or may hereafter be
made or entered into by the Borrower in reference thereto, regardless of any law,
regulation or decree, now or hereafter in effect which might in any manner affect
any of the terms or provisions of any such agreements(s) or your right with respect
thereto as against the Borrower, or cause or permit to be invoked any alteration
in the time, amount or manner of payment by the Borrower of any such
instruments, obligations or indebtedness, xxx

. . . If default be made in the payment of any of the instruments, indebtedness or

other obligation hereby guaranteed by the undersigned, or if the Borrower, or the
undersigned should die, dissolve, fail in business, or become insolvent, . . ., or if
any funds or other property of the Borrower, or of the undersigned which may be
or come into your possession or control or that of any third party acting in your
behalf as aforesaid should be attached of distrained, or should be or become
subject to any mandatory order of court or other legal process, then, or any time
after the happening of any such event any or all of the instruments of
indebtedness or other obligations hereby guaranteed shall, at your option become
(for the purpose of this guaranty) due and payable by the undersigned forthwith
without demand of notice, and full power and authority are hereby given you, in
your discretion, to sell, assign and deliver all or any part of the property upon
which you may then have a lien hereunder at any broker's board, or at public or
private sale at your option, either for cash or for credit or for future delivery
without assumption by you of credit risk, and without either the demand,
advertisement or notice of any kind, all of which are hereby expressly waived. At
any sale hereunder, you may, at your option, purchase the whole or any part of
the property so sold, free from any right of redemption on the part of the
undersigned, all such rights being also hereby waived and released. In case of any
sale and other disposition of any of the property aforesaid, after deducting all
costs and expenses of every kind for care, safekeeping, collection, sale, delivery or
otherwise, you may apply the residue of the proceeds of the sale and other
disposition thereof, to the payment or reduction, either in whole or in part, of any
one or more of the obligations or liabilities hereunder of the undersigned whether
or not except for disagreement such liabilities or obligations would then be due,
making proper allowance or interest on the obligations and liabilities not
otherwise then due, and returning the overplus, if any, to the undersigned; all
without prejudice to your rights as against the undersigned with respect to any
 and all amounts which may be or remain unpaid on any of the obligations or
liabilities aforesaid at any time (s).

Should the Borrower at this or at any future time furnish, or should be heretofore
have furnished, another surety or sureties to guarantee the payment of his
obligations to you, the undersigned hereby expressly waives all benefits to which
the undersigned might be entitled under the provisions of Article 1837 of the Civil
Code (beneficio division), the liability of the undersigned under any and all
circumstances being joint and several

Spouses Calveria defaulted in its obligation. Hence, SOLIDBANK sued E. Zobel, Inc. to recover the
loaned amount. E. Zobel argues that it’s obligation is a mere guarantee and therefore, the bank
should go after the spouses first before the bank can file an action against E. Zobel Inc.

Is it correct for E. Zobel to claim that the “Continuing Guaranty” is a contract of guarantee and
not of surety?

No, the “Continuing Guaranty” is a surety not a contract of guarantee.

According to Jurisprudence, the main distinction between a guaranty and a surety is that in a
surety, it guarantees the debt of the debtor. It means that when the debtor does not pay, the
surety is liable to pay. On the other hand, in a contract of guaranty, it guarantees the solvency of
the debtor. It means that if the debtor is unable to pay the debt and the assets of the debtor was
already exhausted, the guarantor is now liable to pay the debt.

In this case, by the tenor of the “continuing guaranty” it presupposes that the contract is a surety
since E.Zobel obliged itself to be solidarily liable to pay the debt of Spouses Claveria. Here, it is
clear that E.Zobel obligated itself as a surety in order to induce Solidbank to enter the transaction
with Spouses Claveria.

Therefore, fact that the liability of E. Zobel is solidary with Spouses Claveria only proves that the
Continuing Guaranty is a surety.

VIII. BONUS QUESTIONS (5pts each)

What is the name of the Police Dog in “Paw Patrol”?

Who is the twin brother of Wanda Maximoff in Marvel Cinematic Universe?

Peter Maximoff