Mercantile Law Bar Examination Q & A (1990-2006) Page 1 of 103

ANSWERS TO BAR
EXAMINATION QUESTIONS
IN

MERCANTILE LAW
ARRANGED BY TOPIC
(1990 – 2006)

E dited and Arranged by:

Silliman University
College of Law Batch 2005

Updated by:
Dondee
D’ BAR-Retake 2007

From the ANSWERS TO BAR EXAMINATION QUESTIONS by

the UP LAW COMPLEX & PHILIPPINE ASSOCIATION OF LAW
SCHOOLS 2005

June 27, 2007

Version 1990-2003 Arranged by SULAW Class Version 1990-2006 U pdated by
2005 Dondee
 FOREWARD
This work is not intended for sale or commerce. This work is freeware. It may be

freely copied and distributed. It is primarily intended for all those who desire to have

a deeper understanding of the issues touched by the Philippine Bar Examinations and

its trend. It is specially intended for law students from the provinces who, very often,

are recipients of deliberately distorted notes from other unscrupulous law schools and

students. Share to others this work and you will be richly rewarded by God in heaven.

It is also very good karma.

We would like to seek the indulgence of the reader for some Bar Questions which are

improperly classified under a topic and for some topics which are improperly or

ignorantly phrased, for the authors are just Bar Reviewees who have prepared this

work while reviewing for the Bar Exams under time constraints and within their

limited knowledge of the law. We would like to seek the reader’s indulgence for a lot

of typographical errors in this work.

The Authors
July 26, 2005

Updated: June 27,

2007
 TABLE OF CONTENTS
0 General Principles of Mercantile Law.............................................................................. 12 408H408H

1H1H Commercial Transaction (2003) 409H409H 12

2H2H Joint Account (2000) 410H410H 12
3H3H Joint Account vs. Partnership (2000) 411H411H 12

4H4H Theory of Cognition vs. Theory of Manifestation (1997) 412H412H 12

5H5H Banking Law........................................................................................................................... 12
413H413H

6H6H Banks: Applicability: Foreign Currency Deposit Act & Secrecy of Bank Deposits (2005) 414H414H 12
7H7H Banks: Collateral Security (2002) 415H415H 12
8H8H Banks: Secrecy of Bank Deposits; Garnishment (2004) 416H416H 13
9H9H Banks; Classifications of Banks (2002) 417H417H 13
10H10H Banks; Conservator vs. Receiver (2006) 418H418H 13
11H11H Banks; Diligence Required (1992) 419H419H 14
12H12H Banks; Insolvency; Prohibited Transactions (2000) 420H420H 14
13H13H Banks; Insolvency; Requirements (1997) 421H421H 14
14H14H Banks; Restrictions on Loan Accommodations (2002) 422H422H 14
15H15H Banks; Restrictions on Loan Accommodations (2006) 423H423H 15
16H16H Banks; Safety Deposit Box; Liability 424H424H 15
17H17H Banks; Secrecy of Bank Deposit; AMLC (2006) 425H425H 15
18H18H Banks; Secrecy of Bank Deposit; Exceptions (2006) 426H426H 16
19H19H Banks; Secrecy of Bank Deposits (1990) 427H427H 16
20H20H Banks; Secrecy of Bank Deposits (1991) 428H428H 16
21H21H Banks; Secrecy of Bank Deposits (1992) 429H429H 17
22H22H Banks; Secrecy of Bank Deposits (1994) 430H430H 17
23H23H Banks; Secrecy of Bank Deposits (1995) 431H431H 17
24H24H Banks; Secrecy of Bank Deposits (1998) 432H432H 17
25H25H Banks; Secrecy of Bank Deposits (2000) 433H433H 18
26H26H Banks; Secrecy of Bank Deposits; Exceptions (2004) 434H434H 18
27H27H Banks; Secrecy of Bank Deposits; Garnishment (2001) 435H435H 18
28H28H BSP; Receivership; Jurisdiction (1992) 436H436H 18
29H29H Legal Tender (2000) 437H437H 19
30H30H PDIC Law vs. Secrecy of Bank Deposits Act (1997) 438H438H 19
31H31H Responsibilities & Objectives of BSP (1998) 439H439H 19
32H32H Truth in Lending Act (1991) 440H440H 19
33H33H Truth in Lending Act (2000) 441H441H 19
34H34H Bulk Sales Law ...................................................................................................................... 20
442H442H

35H35H Bulk Sales Law; Covered Transactions (1994) 443H443H 20

36H36H Bulk Sales Law; Covered Transactions (2000) 444H444H 20
37H37H Bulk Sales Law; Covered Transactions (2006) 445H445H 20
38H38H Bulk Sales Law; Exclusions (1993) 446H446H 20
39H39H Bulk Sales Law; Obligation of the Vendor (1995) 447H447H 21
40H40H Bulk Sales Law; Obligation of the Vendor (1997) 448H448H 21
41H41H Bulk Sales Law; Obligation of the Vendor (2001) 449H449H 21
42H42H Consumer Protection Law .................................................................................................. 21 450H450H

43H43H Metric System Law (1994) 451H451H 21

 44H44H Corporation Law.................................................................................................................... 22
452H452H

45H45H BOD: Election of Aliens as members (2005) 453H453H 22

46H46H BOD; Capacity of Directors (1996) 454H454H 22
47H47H BOD; Compensation (1991) 455H455H 22
48H48H BOD; Conflict of Interest (1994) 456H456H 22
49H49H BOD; Interlocking Directors (1995) 457H457H 22
50H50H BOD; Interlocking Directors (1996) 458H458H 23
51H51H By-Laws; Validity; limiting qualifications of BOD members (1998) 459H459H 23
52H52H By-Laws; Validity; limiting qualifications of BOD members (2000) 460H460H 23
53H53H By-Laws; Validity; limiting qualifications of BOD members (2001) 461H461H 23
54H54H By-Laws; Validity; limiting qualifications of BOD members (2003) 462H462H 24
55H55H Close Corporations; Deadlocks (1995) 463H463H 24

56H56H Closed Corporation; Restriction; Transfer of shares (1994) 464H464H 24

57H57H Controversy; Intra-Corporate (1994) 465H465H 25
58H58H Controversy; Intra-Corporate (1996) 466H466H 25
59H59H Controversy; Intra-Corporate (1996) 467H467H 25
60H60H Controversy; Intra-Corporate (2006) 468H468H 25
61H61H Controversy; Intra-corporate; Jurisdiction (1997) 469H469H 25
62H62H Corporation Sole; Definition (2004) 470H470H 26
63H63H Corporation: Issuance of shares of stock to pay for the services (2005) 471H471H 26
64H64H Corporation: Right of Repurchase of Shares; Trust Fund Doctrine (2005) 472H472H 26
65H65H Corporation: Sole Proprietorship (2004) 473H473H 26
66H66H Corporation; Articles of Incorporation (1990) 474H474H 26
67H67H Corporation; Bulk Sales Law (2005) 475H475H 27
68H68H Corporation; By-laws (2001) 476H476H 28
69H69H Corporation; Commencement; Corporate Existence (2003) 477H477H 28
70H70H Corporation; Conversion of Stock Corporation (2001) 478H478H 28
71H71H Corporation; De Facto Corporation (1994) 479H479H 28
72H72H Corporation; Dissolution; Methods of Liquidation (2001) 480H480H 28
73H73H Corporation; Incorporation; Requirements (2006) 481H481H 28
74H74H Corporation; Incorporation; Requisites (2002) 482H482H 29
75H75H Corporation; Meetings; BOD & Stockholders (1993) 483H483H 29
76H76H Corporation; Nationality of Corporation (1998) 484H484H 29
77H77H Corporation; Non-Stock Corporation (1993) 485H485H 29
78H78H Corporation; Power to Invest Corporate Funds for other Purpose (1995) 486H486H 30
79H79H Corporation; Power to Invest Corporate Funds in another Corporation (1996) 487H487H 30
80H80H Corporation; Recovery of Moral Damages (1998) 488H488H 30
81H81H Corporation; Separate Juridical Personality (1995) 489H489H 31
82H82H Corporation; Separate Juridical Personality (1996) 490H490H 31
83H83H Corporation; Separate Juridical Personality (1996) 491H491H 31
84H84H Corporation; Separate Juridical Personality (1999) 492H492H 31
85H85H Corporation; Separate Juridical Personality (2000) 493H493H 32
86H86H Corporation; Separate Juridical Personality (2000) 494H494H 32
87H87H Corporation; Set-Off; Unpaid Subscription (1994) 495H495H 32
88H88H Corporation; Stock Corporation (2001) 496H496H 32
89H89H Corporation; Validity of Corporate Acts (1998) 497H497H 33
90H90H Corporation; Validity of Corporate Acts (2002) 498H498H 33
91H91H Corporation; Voluntary Dissolution (2002) 499H499H 33
92H92H Corporation; Voting Trust Agreement (1992) 500H500H 33
93H93H Derivative Suit: Requisites (2004) 501H501H 34
94H94H Derivative Suit: Watered Stock (1993) 502H502H 34
95H95H Derivative Suit; Close Corporation; Corporate Opportunity (2005) 503H503H 34
96H96H Derivative Suit; Minority Stockholder (2003) 504H504H 35
97H97H Distinction: De facto Corporation vs. Corporation by Estoppel (2004) 505H505H 35
98H98H Distinction: Dividends vs. Profit: Cash Dividend vs. Stock Dividend (2005) 506H506H 35
99H99H Distinction; Private vs. Public Corporation (2004) 507H507H 35
100H100H Distinction; Stock vs. Non-Stock Corporation (2004) 508H508H 36
101H101H Dividends: Declaration of Dividends (2005) 509H509H 36
102H102H Dividends: Sources of Dividends; Trust Fund Doctrine (2005) 510H510H 36
103H103H Dividends; Declaration of Dividends (1990) 511H511H 36
104H104H Dividends; Declaration of Dividends (1991) 512H512H 36
105H105H Dividends; Declaration of Dividends (2001) 513H513H 36
106H106H Dividends; Right; Managing Corporation (1991) 514H514H 37
107H107H Doctrine of Corporate Opportunity (2005) 515H515H 37
108H108H Effect: Expiration of Corporate Term (2004) 516H516H 37
109H109H Effects; Merger of Corporations (1999) 517H517H 37
110H110H Effects; Winding Up Period of a Corporation (1997) 518H518H 38
111H111H Effects; Winding Up Period of a Corporation (2000) 519H519H 38
112H112H Foreign Corporation; “Doing Business” in the Philippines (1998) 520H520H 38
113H113H Foreign Corporation; “Doing Business” in the Philippines; Acts or Activities (2002) 521H521H 38
114H114H Foreign Corporation; “Doing Business” in the Philippines; Test (2002) 522H522H 39
115H115H Joint Venture; Corporation (1996) 523H523H 39
116H116H Liabilities; BOD; Corporate Acts (1996) 524H524H 39
117H117H Liabilities; Stockholders, Directors, Officers (1997) 525H525H 39
118H118H Piercing the Corporate Veil (1994) 526H526H 39
119H119H Piercing the Corporate Veil (1996) 527H527H 40
120H120H Piercing the Corporate Veil (2001) 528H528H 40
121H121H Piercing the Corporate Veil (2004) 529H529H 40
122H122H Piercing the Corporate Veil (2006) 530H530H 40
123H123H Pre-emptive Right (2001) 531H531H 40
124H124H Pre-Emptive Right vs. Appraisal Right (1999) 532H532H 41
125H125H SEC; Jurisdiction; Transferred Jurisdiction (1996) 533H533H 41
126H126H Stockholder; Delinquent; Unpaid Subscription (1997) 534H534H 41
127H127H Stockholders: Preemptive Right (2004) 535H535H 42
128H128H Stockholders; Appraisal Right (2003) 536H536H 42
129H129H Stockholders; Removal of Officers & BOD (2001) 537H537H 42
130H130H Stockholders; Removal; Minority Director (1991) 538H538H 42
131H131H Stockholders; Rights (1996) 539H539H 42
132H132H Stockholders; Voting Power of Stockholders (1990) 540H540H 42
133H133H Stocks; Increase of Capital Stock (2001) 541H541H 42
134H134H Stocks; Sale, Transfer of Certificates of Stock (1996) 542H542H 43
135H135H Stocks; Sale, Transfer of Certificates of Stock (2001) 543H543H 43
136H136H Stocks; Sale, Transfer of Certificates of Stock (2004) 544H544H 43
137H137H Trust Fund Doctrine (1992) 545H545H 43
Trust Fund Doctrine; Intra-Corporate Controversy (1991)
138H138H 546H546H 43
 139H139H Credit Transactions .............................................................................................................. 44
547H547H

140H140H Chattel Mortgage vs. After-Incurred Obligations (1991) 548H548H 44

141H141H Chattel Mortgage vs. After-Incurred Obligations (1999) 549H549H 44
142H142H Chattel Mortgage; Foreclosure (1997) 550H550H 44
143H143H Chattel Mortgage; Ownership of Thing Mortgaged (1990) 551H551H 45
144H144H Credit Transactions (1999) 552H552H 45
145H145H Mortgage (1999) 553H553H 45
146H146H Mortgage vs. Levy (2003) 554H554H 46
147H147H Mortgage; Extrajudicial Foreclose (2006) 555H555H 46
148H148H Mortgage; Foreclosure (2003) 556H556H 46
149H149H Mortgage; Foreclosure (2003) 557H557H 46
150H150H Mortgage; Foreclosure of Improvements (1999) 558H558H 46
151H151H Mortgage; Foreclosure; Effect of mere taking by creditor-mortgagor of property (1992)

559H559H 47 Mortgage; Redemption Period; Foreclosed Property (2002)

152H152H

560H560H 47
153H153H Mortgage; Remedies (2003) 561H561H 48
154H154H Preference of Credits (2002) 562H562H 48
155H155H Promissory Note: Liability (2001) 563H563H 48
156H156H Remedies; Available to Mortgagee-Creditor (1996) 564H564H 48
157H157H Remedies; Available to Mortgagee-Creditor (2001) 565H565H 49
158H158H Remedies; Secured Debt (1991) 566H566H 49
159H159H Insurance Law........................................................................................................................ 49
567H567H

160H160H Beneficiary: Effects: Irrevocable Beneficiary (2005) 568H568H 49

161H161H Beneficiary: Rights; Irrevocable Beneficiary (2005) 569H569H 50
162H162H Beneficiary; Life Insurance; Prohibited Beneficiaries (1998) 570H570H 50
163H163H Concealment; Material Concealment (2001) 571H571H 50
164H164H Concealment; Material Concealment: Incontestability Clause (1994) 572H572H 50
165H165H Concealment; Material Concealment: Incontestability Clause (1996) 573H573H 50
166H166H Concealment; Material Concealment: Incontestability Clause (1997) 574H574H 51
167H167H Concealment; Material Concealment; Incontestability Clause (1991) 575H575H 51
168H168H Concealment; Material Concealment; Incontestability Clause (1998) 576H576H 51
169H169H Insurable Interest: Bank Deposit (2000) 577H577H 51
170H170H Insurable Interest: Public Enemy (2000) 578H578H 52
171H171H Insurable Interest: Separate Insurable Interest (1999) 579H579H 52
172H172H Insurable Interest; Equitable Interest (1991) 580H580H 52
173H173H Insurable Interest; Life vs. Property Insurance (1997) 581H581H 52
174H174H Insurable Interest; Life vs. Property Insurance (2000) 582H582H 52
175H175H Insurable Interest; Life vs. Property Insurance (2002) 583H583H 53
176H176H Insurable Interest; Property Insurance (1994) 584H584H 53
177H177H Insurable Interest; Property Insurance (2001) 585H585H 53
178H178H Insurance; Cash & Carry Basis (2003) 586H586H 53
179H179H Insurance; Co-Insurance vs. Re-Insurance (1994) 587H587H 53
180H180H Insurance; Double Insurance (2005) 588H588H 54
181H181H Insurance; Double Insurance; effect (1993) 589H589H 54
182H182H Insurance; Effects; Payment of Premiums by Installment (2006) 590H590H 54
183H183H Insurance; Life Insurance; Assignment of Policy (1991) 591H591H 54
184H184H Insurance; Perfection of Insurance Contracts (2003) 592H592H 54
185H185H Insurance; Property Insurance; Prescription of Claims (1996) 593H593H 54
186H186H Insurance; Return of Premiums (2000) 594H594H 55
187H187H Insured; Accident Policy (2004) 595H595H 55
188H188H Insured; Accident vs. Suicide (1990) 596H596H 55
189H189H Insured; Accident vs. Suicide (1993) 597H597H 56
190H190H Insured; Accident vs. Suicide (1995) 598H598H 56
191H191H Insurer: Effects: Several Insurers (2005) 599H599H 56
192H192H Insurer; 3rd Party Liability (1996) 600H600H 56
193H193H Insurer; 3rd Party Liability (2000) 601H601H 57
194H194H Insurer; 3rd Party Liability; No Fault Indemnity (1994) 602H602H 57
195H195H Insurer; 3rd Party Liability; Quitclaim (1994) 603H603H 57
196H196H Insurer; Authorized Driver Clause (1991) 604H604H 57
197H197H Insurer; Authorized Driver Clause (2003) 605H605H 57
198H198H Insurer; Authorized Driver Clause; vehicle is stolen (1993) 606H606H 58
199H199H Insurer; Group Insurance; Employer-Policy Holder (2000) 607H607H 58
200H200H Insurer; Liability of the Insurers (1990) 608H608H 58
201H201H Loss: Actual Total Loss (1996) 609H609H 59
202H202H Loss: Constructive Total Loss (2005) 610H610H 59
203H203H Loss: Total Loss Only (1992) 611H611H 59
204H204H Marine Insurance; Implied Warranties (2000) 612H612H 60
205H205H Marine Insurance; Peril of the Ship vs. Peril of the Sea (1998) 613H613H 60
206H206H Mutual Insurance Company; Nature & Definition (2006) 614H614H 60
207H207H Intellectual Property ............................................................................................................. 60
615H615H

208H208H Copyright (1995) 616H616H 60

209H209H Copyright; Commissioned Artist (1995) 617H617H 60
210H210H Copyright; Commissioned Artist (2004) 618H618H 60
211H211H Copyright; Infringement (1994) 619H619H 60
212H212H Copyright; Infringement (1997) 620H620H 61
213H213H Copyright; Infringement (1998) 621H621H 61
214H214H Copyright; Infringement (2006) 622H622H 61
215H215H Copyright; Photocopy; when allowed (1998) 623H623H 61
216H216H Infringement vs. Unfair Competition (1996) 624H624H 61
217H217H Infringement vs. Unfair Competition (2003) 625H625H 61
218H218H Infringement; Jurisdiction (2003) 626H626H 61
219H219H Patent; Non-Patentable Inventions (2006) 627H627H 61
220H220H Patents: Gas-Saving Device: first to file rule (2005) 628H628H 62
221H221H Patents: Infringement; Remedies & Defenses (1993) 629H629H 62
222H222H Patents; Infringement (1992) 630H630H 62
223H223H Patents; Rights over the Invention (1990) 631H631H 63
224H224H Trademark (1990) 632H632H 63
225H225H Trademark (1994) 633H633H 63
226H226H Trademark, Test of Dominancy (1996) 634H634H 63
227H227H Trademark; Infringement (1991) 635H635H 63
228H228H Trademark; Test of Dominancy (1996) 636H636H 64
229H229H Tradename: International Affiliation (2005) 637H637H 64
230H230H Insolvency & Corporate Recovery ................................................................................... 64 638H638H

231H231H Insolvency vs. Suspension of Payment (1998) 639H639H 64

232H232H Insolvency: Voluntary Insolvency (2005) 640H640H 64
233H233H Insolvency; Assets vs. Liabilities (1998) 641H641H 65
234H234H Insolvency; Assignees (1996) 642H642H 65
235H235H Insolvency; Effect; Declaration of Insolvency (1991) 643H643H 65
236H236H Insolvency; Fraudulent Payment (2002) 644H644H 65
237H237H Insolvency; Jurisdiction; Sole Proprietorship (1990) 645H645H 66
238H238H Insolvency; obligations that survive (1997) 646H646H 66
239H239H Insolvency; Voluntary Insolvency Proceeding (1991) 647H647H 66
240H240H Insolvency; Voluntary vs. Involuntary Solvency (1995) 648H648H 66
241H241H Law on Corporate Recovery (2003) 649H649H 67
242H242H Rehabilitation; Stay Order (2006) 650H650H 67
243H243H Suspension of Payment vs. Insolvency (1995) 651H651H 67
244H244H Suspension of Payments vs. Stay Order (2003) 652H652H 67
245H245H Suspension of Payments; Rehabilitation Receiver (1999) 653H653H 67
246H246H Suspension of Payments; Remedies (2003) 654H654H 68
247H247H Letters of Credit .................................................................................................................... 68
655H655H

248H248H Letter of Credit: Mortgage (2005) 656H656H 68

249H249H Letter of Credit; Certification from Consignee (1993) 657H657H 68
250H250H Letters of Credit; Liability of a confirming and notifying bank (1994) 658H658H 69
251H251H Letters of Credit; Liability of a Notifying Bank (2003) 659H659H 69
252H252H Letters of Credit; Three Distinct Contract Relationships (2002)

660H660H 69 Maritime Commerce

253H253H

............................................................................................................. 69
661H661H

254H254H Average; Particular Average vs. General Average (2003) 662H662H 69

255H255H Bottomry (1994) 663H663H 70
256H256H Carriage of Goods: Deviation: Liability (2005) 664H664H 70
257H257H Carriage of Goods; Deviation; When Proper (2005) 665H665H 70
258H258H Carriage of Goods; Exercise Extraordinary Diligence (2005) 666H666H 70
259H259H Charter Party (1991) 667H667H 70
260H260H Charter Party (2004) 668H668H 71
261H261H COGSA: Prescription of Claims/Actions (2004) 669H669H 71
262H262H COGSA; Prescription of Claims (1992) 670H670H 71
263H263H COGSA; Prescription of Claims (2000) 671H671H 72
264H264H COGSA; Prescriptive Period (1995) 672H672H 72
265H265H Doctrine of Inscrutable Fault (1995) 673H673H 72
266H266H Doctrine of Inscrutable Fault (1997) 674H674H 72
267H267H Doctrine of Inscrutable Fault (1998) 675H675H 72
268H268H Limited Liability Rule (1994) 676H676H 72
269H269H Limited Liability Rule (1997) 677H677H 72
270H270H Limited Liability Rule (1999) 678H678H 72
271H271H Limited Liability Rule (2000) 679H679H 73
272H272H Limited Liability Rule; Doctrine of Inscrutable Fault (1991) 680H680H 73
273H273H Limited Liability Rule; General Average Loss (2000) 681H681H 73
274H274H Limited Liability Rule; General Average Loss (2000)

682H682H 73 Nationalized Activities or Undertakings

275H275H

........................................................................ 74
683H683H
276H276H Nationalized Activities or Undertakings (1993) 684H684H 74
277H277H Nationalized Activities or Undertakings (1994) 685H685H 74
278H278H Nationalized Activities or Undertakings (1995) 686H686H 75
279H279H Retail Trade Law (1990) 687H687H 75
280H280H Retail Trade Law (1991) 688H688H 75
281H281H Retail Trade Law (1992) 689H689H 75
 282H282H Retail Trade Law (1993) 690H690H 76
283H283H Retail Trade Law (1996)
691H691H 76
284H284H Retail Trade Law (1996)
692H692H 76
285H285H Retail Trade Law; Consignment (1991)
693H693H 76
286H286H Negotiable Instruments Law .............................................................................................. 76
694H694H

287H287H Bond: Cash Bond vs. Surety Bond (2004) 695H695H 76

288H288H Checks: Crossed Checks (2005)
696H696H 77
289H289H Checks: Crossed Checks vs. Cancelled Checks (2004)
697H697H 77
290H290H Checks; Crossed Check (1991)
698H698H 77
291H291H Checks; Crossed Check (1994)
699H699H 77
292H292H Checks; Crossed Check (1995)
700H700H 78
293H293H Checks; Crossed Check (1996)
701H701H 78
294H294H Checks; Crossed Check (1996)
702H702H 78
295H295H Checks; Effect; Acceptance by the drawee bank (1998)
703H703H 78
296H296H Checks; Effects; Alterations; Prescriptive Period (1996)
704H704H 78
297H297H Checks; Forged Check; Effects (2006)
705H705H 79
298H298H Checks; Liability; Drawee Bank (1995)
706H706H 80
299H299H Checks; Material Alterations; Liability (1999)
707H707H 80
300H300H Checks; Presentment (1994)
708H708H 80
301H301H Checks; Presentment (2003)
709H709H 80
302H302H Checks; Validity; Waiver of Bank’s liability for negligence (1991)
710H710H 80
303H303H Defenses; Forgery (2004)
711H711H 81
304H304H Forgery; Liabilities; Prior & Subsequent Parties (1990)
712H712H 81
305H305H Forgery; Liabilities; Prior & Subsequent Parties (1995)
713H713H 81
306H306H Incomplete & Delivered (2004)
714H714H 82
307H307H Incomplete and Delivered (2005)
 82
715H715H

Incomplete Instruments; Incomplete Delivered Instruments vs. Incomplete Undelivered Instrument

308H308H

(2006) 82
716H716H Indorser:
309H309H Irregular Indorser vs. General Indorser (2005)
82
717H717H

Negotiability
310H310H (1993)
82
718H718H

Negotiability
311H311H (2002)
83
719H719H

Negotiability;
312H312H Holder in Due Course (1992)
83
720H720H

Negotiability;
313H313H Requisites (2000)
83
721H721H

Negotiable
314H314H Instrument: Ambiguous Instruments (1998)
84
722H722H

Negotiable
315H315H Instrument: Definition & Characteristics (2005)
84
723H723H

Negotiable
316H316H Instrument: Identification (2005)
84
724H724H

Negotiable
317H317H Instrument: Negotiable Document vs. Negotiable Instrument (2005)
85
725H725H

Negotiable
318H318H Instrument; Negotiability (1997)
85
726H726H

Negotiable
319H319H Instruments; Bearer Instrument (1998)
85
727H727H

Negotiable
320H320H Instruments; Bearer Instruments (1997)
85
728H728H

Negotiable Instruments; bearer instruments; liabilities of maker and indorsers (2001)

321H321H 85
729H729H

Negotiable Instruments; incomplete and undelivered instruments; holder in due course (2000)
322H322H 86
730H730H

Negotiable Instruments; Incomplete Delivered Instruments; Comparative Negligence (1997)

323H323H 86
731H731H

Negotiable Instruments; kinds of negotiable instrument; words of negotiability (2002)

324H324H 86
732H732H

Negotiable
325H325H Instruments; Requisites (1996)
87
733H733H

Notice
326H326H Dishonor (1996)
87
734H734H

Parties;
327H327H Accommodation Party (1990)
87
735H735H

Parties;
328H328H Accommodation Party (1991)
87
736H736H

Parties;
329H329H Accommodation Party (1996)
87
737H737H
330H330H Parties; Accommodation Party (1998) 738H738H 87
331H331H Parties; Accommodation Party (2003) 739H739H 88
332H332H Parties; Accommodation Party (2003) 740H740H 88
333H333H Parties; Accommodation Party (2005) 741H741H 88
334H334H Parties; Holder in Due Course (1993) 742H742H 88
335H335H Parties; Holder in Due Course (1996) 743H743H 88
336H336H Parties; Holder in Due Course (1996) 744H744H 88
337H337H Parties; Holder in Due Course (1998) 745H745H 89
338H338H Parties; Holder in Due Course; Indorsement in blank (2002) 746H746H 89
339H339H Place of Payment (2000) 747H747H 89
340H340H Public Service Law ............................................................................................................... 89
748H748H

341H341H Certificate of public Convenience (1998) 749H749H 89

342H342H Certificate of Public Convenience; inseparability of certificate and vessel (1992) 750H750H 90
343H343H Certificate of Public Convenience; Requirements (1995) 751H751H 90
344H344H Powers of the Public Service Commission (1993) 752H752H 90
345H345H Public utilities (2000) 753H753H 90
346H346H Revocation of Certificate (1993) 754H754H 91
347H347H Revocation of Certificate (1993) 755H755H 91
348H348H Securities Regulation .......................................................................................................... 91
756H756H

349H349H Insider (2004) 757H757H 91

350H350H Insider Trading (1995) 758H758H 91
351H351H Insider Trading; Manipulative Practices (1994) 759H759H 92
352H352H Manipulative Practices (2001) 760H760H 92
353H353H Securities Regulation Code; Purpose (1998) 761H761H 92
354H354H Securities; Definition (1996) 762H762H 92
355H355H Securities; Selling of Securities; Meaning (2002) 763H763H 92
356H356H Tender Offer (2002) 764H764H 93
357H357H Transportation Law .............................................................................................................. 93
765H765H

358H358H Boundary System (2005) 766H766H 93

359H359H Carriage; Breach of Contract; Presumption of Negligence (1990) 767H767H 93
360H360H Carriage; Breach of Contract; Presumption of Negligence (1997) 768H768H 93
361H361H Carriage; Fortuitous Event (1995) 769H769H 93
362H362H Carriage; Liability; Lost Baggage or Acts of Passengers (1997) 770H770H 94
363H363H Carriage; Prohibited & Valid Stipulations (2002) 771H771H 94
364H364H Carriage; Valuation of Damaged Cargo (1993) 772H772H 94
365H365H Common Carrier (1996) 773H773H 94
366H366H Common Carrier; Breach of Contract; Damages (2003) 774H774H 94
367H367H Common Carrier; Defenses (2002) 775H775H 95
368H368H Common Carrier; Defenses; Fortuitous Events (1994) 776H776H 95
369H369H Common Carrier; Defenses; Limitation of Liability (1998) 777H777H 95
370H370H Common Carrier; Defenses; Limitation of Liability (2001) 778H778H 95
371H371H Common Carrier; Duration of Liability (1996) 779H779H 95
372H372H Common Carrier; Duty to Examine Baggages; Railway and Airline (1992) 780H780H 96
373H373H Common Carrier; Test (1996) 781H781H 96
374H374H Common Carriers; Defenses (1996) 782H782H 96
375H375H Common Carriers; Liability for Loss (1991) 783H783H 96
376H376H Common vs. Private Carrier; Defenses (2002) 784H784H 97
377H377H Kabit System (2005) 785H785H 97
378H378H Kabit System; Agent of the Registered Owner (2005) 786H786H 97
379H379H Maritime Commerce; Bareboat (2003) 787H787H 97
380H380H Prior Operator Rule (2003) 788H788H 97
381H381H Registered Owner; Conclusive Presumption (1990) 789H789H 98
Trans-Shipment; Bill of Lading; binding contract (1993)
382H382H 790H790H 98
383H383H Trust Receipts Law............................................................................................................... 98 791H791H

384H384H Trust Receipts Law; Acts & Omissions; Covered (2006) 792H792H 98
385H385H Trust Receipts Law; Liability for estafa (1991) 793H793H 99
386H386H Trust Receipts Law; Liability for Estafa (1997) 794H794H 99
387H387H Trusts Receipt Law (2003) 795H795H 99
388H388H Usury Law ............................................................................................................................... 99 796H796H

389H389H Usury Law (199) 797H797H 99

390H390H Warehouse Receipts Law ................................................................................................. 100 798H798H

391H391H Bill of Lading (1998) 799H799H 100

392H392H Delivery of Goods; Requisites (1998) 800H800H 100
393H393H Delivery of the Goods (1991) 801H801H 100
394H394H Garnishment or Attachment of Goods (1999) 802H802H 100
395H395H Negotiable Documents of Title (1992) 803H803H 100
396H396H Ownership of Goods Stored (1992) 804H804H 101
397H397H Right to the Goods (2005) 805H805H 101
398H398H Unpaid Seller; Negotiation of the Receipt (1993) 806H806H 101

399H399H Validity of stipulations excusing warehouseman from negligence (2000) 807H807H 101
400H400H Miscellaneous ...................................................................................................................... 102
808H808H

401H401H Energy Regulatory Commission: Jurisdiction & Power (2004) 809H809H 102
402H402H Four ACID Problems of Philippine Judiciary (2006) 810H810H 102
403H403H Government Deregulation vs. Privatization of an Industry (2004) 811H811H 102
404H404H Political Law; WTO (1999) 812H812H 102
405H405H Power of the State: Regulating of Domestic Trade (2004) 813H813H 103
406H406H Tariff and Customs Code: Violation of Customs Laws (2004) 814H814H 103
...... It is not essential that at least one party
General Principles of
to the commercial transaction be a
Mercantile Law merchant. What is essential is that the
transaction evince an intent to engage in
commerce or trade.
Commercial Transaction (2003)
What do you understand by the term Joint Account (2000)
“commercial transaction”? Is it essential
What is a joint account? (2%)
that at least one party to a contract be a SUGGESTED ANSWER:
merchant in order to consider such a A joint account is a transaction of merchants
commercial transaction? (4%) where other merchants agree to contribute
SUGGESTED ANSWER: the amount of capital agreed upon, and
A “Commercial transaction” is defined as participating in the favorable or unfavorable
 results thereof in the proportion they may
determine.
Banking Law
Banks: Applicability: Foreign Currency Deposit Act &
Secrecy of Bank Deposits (2005)
Joint Account vs. Partnership (2000)
Hi Yielding Corporation filed a complaint
Distinguish joint account from partnership.
against five of its officers for violation of
(3%)
SUGGESTED ANSWER: Section 31 of the Corporation Code. The
The following are the distinctions between corporation claimed that the said officers
joint account and partnership: were guilty of advancing their personal
(1) A partnership has a firm name while a interests to the prejudice of the
joint account has none and is conducted corporation, and that they were grossly
in the name of the ostensible partner. negligent in handling its affairs. Aside from
(2) While a partnership has juridical documents and contracts, the corporation
personality and may sue or be sued also submitted in evidence records of the
under its firm name, a joint account has officers’ U.S. Dollar deposits in several
no juridical personality and can sue or banks overseas - Boston Bank, Bank of
be sued only in the name of the Switzerland, and Bank of New York.
ostensible partner.
(3) While a partnership has a common fund, For their part, the officers filed a criminal
a joint account has none. complaint against the directors of Hi
(4) While in a partnership, all general Yielding Corporation for violation of
partners have the right of management, Republic Act No. 6426, otherwise known as
in a joint account, the ostensible partner the Foreign Currency Deposit Act of the
manages its business operations. Philippines. The officers alleged that their
(5) While liquidations of a partnership may, bank deposits were illegally disclosed for
by agreement, be entrusted to a partner want of a court order, and that such
or partners, in a joint account liquidation deposits were not even the subject of the
thereof can only be done by the case against them.
ostensible partner. a) Will the complaint filed against the
directors of Hi Yielding Corporation
Theory of Cognition vs. Theory of Manifestation prosper? Explain.
(1997) The Civil Code adopts the theory of SUGGESTED ANSWER:
No, because the Foreign Currency Deposit
cognition, while the Code of Commerce
generally recognizes the theory of Act (R.A. No. 6426), including its punitive
manifestation, in the perfection of contracts. provisions, refers to foreign currency
How do these two theories differ? deposits accounts constituted within the
SUGGESTED ANSWER: Philippines. It has no application at all to
Under the theory of cognition, the accounts, even though they are banks,
acceptance is considered to effectively bind opened and constituted abroad.
the offeror only from the time it came to his
knowledge. Under the theory of b) Was there a violation of the Secrecy of
manifestation, the contract is perfected at Bank Deposits Law (Republic Act No.
the moment when the acceptance is 1405)? Explain. (5%)
declared or made by the offeree. SUGGESTED ANSWER:
No, because the punitive provisions of the
Secrecy of Bank Deposits Law (R.A. No.
1405), including the statutory exemptions
provided therein, are not applicable to FCDU
accounts, even when constituted locally.
(Intengan v. Court of Appeals, G.R. No. 128996, February 15,
2002)
 Corporation (the Obligor). The Bank
Banks: Collateral Security (2002) accepted the offer. Accordingly, Andrew
obtained the loan and he executed a
Andrew is engaged in the business of
promissory note undertaking to pay the
building low-cost housing units under
loan in full in one lump sum on September
contracts with real estate developers. He
1, 2002, together with interest thereon at
applied for a loan of P3 Million from
the rate of 20% per annum. At the same
Ready Credit Bank (the Bank), which
time, Andrew executed a Deed of
required Andrew to provide collateral
Assignment in favor of the Bank assigning
security for it. Andrew offered to assign to
to the Bank his receivables from the
the Bank his receivables amounting to P4
Obligor. The deed of assignment read:
million from Home Builders Development
“I, Andrew Lee, hereby assign, transfer and Andrew? Explain (5%)
convey, absolutely and unconditionally, to SUGGESTED ANSWER:
(Since the question is outside the scope of the Bar
Ready Credit Bank (hereinafter called the Examination, it is recommended that the candidate
Bank) all of my right, title and interest in be given full credit of 5%, whatever may be his
and to my accounts receivable from Home answer, and he be given a bonus if he made an answer
in the following manner:)
Builders Development Corporation
The motion to dismiss should be granted.
(hereinafter called the Obligor) arising from
The simple absolute and unconditional
delivery of housing units with a total
conveyance embodied in the deed of
contract price of P4,000,000.00, the
assignment would be operative, and the
description and contract value of which are
assignment would constitute essentially a
attached hereto as Annex A (hereinafter
mode of payment or dacion en pago.
called the Receivables).”
Banks: Secrecy of Bank Deposits; Garnishment (2004)
“In the event that I shall be unable to pay
CDC maintained a savings account with
my outstanding indebtedness owned to the
CBank. On orders of the MM Regional
Bank, the Bank shall have the right, without
Trial Court, the Sheriff garnished P50,000
any further formality or act on its part, to
of his account, to satisfy the judgment in
collect the Receivables from the Obligor
favor of his creditor, MO. CDC complained
and to apply the proceeds thereof toward
that the garnishment violated the Law on
payment of my said indebtedness.”
the Secrecy of Bank Deposits because the
Andrew failed to pay the loan on its due existence of his savings account was
date on September 1, 2002. When the Bank disclosed to the public. (5%)
Is CDC's complaint meritorious or not? Reason
attempted to collect from the Obligor, the
briefly.
Bank discovered that the latter had already SUGGESTED ANSWER:
closed operations and liquidated all its No. CDC's complaint is not meritorious. It
assets. The Bank sued Andrew for was held in China Banking Corporation v.
Ortega, 49 SCRA 355 (1973) that peso
collection, but Andrew moved to dismiss the
deposits may be garnished and the
complaint on the ground that the debt had depositary bank can comply with the order of
already been paid by reason of his execution garnishment without violating the Law on the
of the aforesaid Deed of Assignment which, Secrecy of Bank Deposits. Execution is the
goal of litigation as it is its fruit.
being absolute and unconditional, was in
Garnishment is part of the execution process.
essence a dacion en pago. The Bank Upon service of the notice of garnishment on
opposed the motion, contending that the the bank where the defendant deposited
Deed of Assignment was only a security for funds, such funds become part of the subject
a loan. matter of litigation.
If you were the Judge, how would you
resolve the motion to dismiss filed by
Banks; Classifications of Banks (2002) are organized primarily to extend loans
and other credit facilities to farmers,
There are six (6) classes of banks
fishermen or farm families, as well as
identified in the General Banking Law of cooperatives, merchants, and private
2000. Name at least four (4) of them and and public employees and whose
explain the distinguishing characteristic or operations are primarily governed by the
Rural Banks Act of 1992 (RA 7353).
function of each one. (5%)
SUGGESTED ANSWER:
5. Cooperative Banks – these are those
Any four (4) of the following six (6) which are organized primarily to
provide financial and credit services to
classes of banks identified in the General cooperatives and whose operations are
Banking Law of 2002, to wit: primarily governed by the Cooperative
1. Universal Banks – These are those Code of the Philippines (RA 6938).
which used to be called expanded 6. Islamic Banks – these are those
commercial banks and the operations which are organized primarily to
of which are now primarily governed by provide financial and credit services in
the General Banking Law of 2002. They a manner or transaction consistent with
can exercise the powers of an the Islamic Shari’ah. At present, only the
investment house and invest in non- Al Amanah Islamic Investment Bank of
allied enterprises. They have the the Philippines has been organized as an
highest capitalization requirement. Islamic Bank.
2. Commercial Banks – These are
ordinary or regular commercial banks, Banks; Conservator vs. Receiver (2006)
as distinguished from a universal bank.
They have a lower capitalization Distinguish between the role of a
requirement than universal banks and conservator and that of a receiver of a bank.
cannot exercise the powers of an (2.5%)
investment house and invest in non- SUGGESTED ANSWER:
allied enterprises. The Conservator is appointed for a period
3. Thrift Banks – These banks (such as
not exceeding one (1) year, to take charge
savings and mortgage banks, stock
savings and loan associations, and of the assets, liabilities, and the
private development banks) may management of a bank or a quasi-bank in a
exercise most of the powers and state of continuing inability, or
functions of a commercial bank except
unwillingness to maintain a condition of
that they cannot, among others, open
current or check accounts without prior liquidity deemed adequate to protect the
Monetary Board approval, and they interest of depositors and creditors.
cannot issue letters of credit. Their On the other hand, the Receiver is
operations are governed primarily by appointed to manage a bank or quasi-bank
the Thrift Banks Act of 1995 (RA 7906).
that is unable to pay its liabilities in
4. Rural Banks – these are those which
Mercantile Law Bar Examination Q & A (1990-2006) Page 14 of 103
the ordinary course of business, or has Banks; Insolvency; Prohibited Transactions (2000)
insufficient realizable assets to meet its The Monetary Board of the BSP closed
liabilities, or cannot continue in business Urban Bank after it encountered crippling
without probable losses to its depositors financial difficulties that resulted in a bank
or creditors; or has willfully violated a run. X, one of the members of the BOD of
final cease and desist order, involving acts the bank, attended and stayed throughout
or transactions amounting to fraud or a the entire meeting of the Board that was
dissipation of the assets of the institution. held well in advance of the bank run and
The main purpose of the Receiver is to before news had begun to trickle to the
recommend the rehabilitation or business community about the dire financial
liquidation of the bank. pit the bank had fallen into. Immediately
after the meeting, X caused the preparation
Banks; Diligence Required (1992) and issuance of a manager’s check payable
Placido, a bank depositor, left his to himself in the sum of 5 million pesos
checkbook on his desk at his house. equivalent to the amount placed or
Unknown to him, a visitor at the time, invested in the bank by a business
noticing the same, took a check therefrom, acquaintance. He now claims that he is
filled it up in the amount of P3,000.00 and keeping the funds in trust for the owner
succeeded in encashing the check on the and that he had committed no violation of
same day. Placido’s account was thereby the General Banking Act (RA 337, as
debited in the same amount. amended) for which he should be punished.
Do you agree that there has been no
Discovering the erroneous debit, Placido violation of the statute? (3%)
demanded that the bank credit him with a SUGGESTED ANSWER:
No. I do not agree that there is no violation
like amount. The bank refused on the
of the statute (RA 337, as amended). X
ground that Placido was negligent in
violated Sec 85 when he caused the
leaving his checkbook on his desk so that
preparation and issuance of a
he could not put up the defense of forgery
manager’s check
or want of authority under the NIL.

The Facts disclose that even to the naked

eye, there were marked differences
between Placido’s signature and the one
in the check forged by the visitor. As
between Placido and the bank, who should
bear the loss? Explain.
SUGGESTED ANSWER:
The bank should bear the loss. A drawee
bank must exercise the highest diligence
in safeguarding the accounts of its client-
depositors. The bank is also charged with
genuineness of the signatures of its
current account holders. But what can be
more striking is that there were marked
differences between Placido’s signature
and the one in the check forged by the
visitor. Certainly, Placido was not
negligent in leaving his checkbook in his
own desk (PNB v Quimpo 158 SCRA 582)

Version 1990-2003 Arranged by SULAW Class Version 1990-2006 U pdated by

2005 Dondee
payable to himself in the sum of P5 5. Within 60 days, the Monetary Board
million. This is paying out or permitting shall determine and confirm if the bank
to be paid out funds of the bank after the is insolvent, and public interest
latter became insolvent. This act is requires, to order the liquidation of the
penalized by fine of not less than bank.
P1,000.00 nor more than P10,000.00 and
by imprisonment for not less than two Banks; Restrictions on Loan Accommodations (2002)
nor more than ten years.
As part of the safeguards against
imprudent banking, the General Banking
Banks; Insolvency; Requirements (1997) Law imposes limits or restrictions on
Give the basic requirements to be loans and credit accommodations which
complied with by the BSP before the may be extended by banks. Identify at least
Monetary Board can declare a bank two (2) of these limits or restrictions and
insolvent, order it closed and forbid it explain the rationale of each of them. (5%)
from doing further business in the SUGGESTED ANSWER:

Philippines. Any two (2) of the following limits or

SUGGESTED ANSWER: restrictions on loan and credit transactions
Before the Monetary Board can declare a which may be extended by banks, as part
bank insolvent, order it closed and forbid of the safeguards against imprudent
it from doing further business in the banking, to wit:
Philippines, the following basic 1. SBL Rules – (i.e., Single Borrower’s
requirements must be complied with by Limit) rules are those promulgated by
the BSP, to wit: the Bangko Sentral ng Pilipinas, upon
1. There must be an examination by the the authority of Section 35 of the
head of the Department of General Banking Law of 2000, which
Supervision or his examiners or regulate the total amount of loans,
agents into the condition of the bank. credit accommodations and guarantees
2. The examination discloses that the that may be extended by a bank to
condition of the bank is one of any person, partnership, association,
insolvency, or that its continuance in corporation or other entity. The rules
business would involve probable loss seek to protect a bank from making
to creditors or depositors. excessive loans to a single borrower by
3. The head of said Department shall prohibiting it from lending beyond a
inform in writing the Monetary Board specified ceiling.
of such facts. 2. DOSRI Rules – These rules
4. Upon finding said information or promulgated by the BSP, upon
statement to be true, the Monetary authority of Section 5 of the General
Board shall appoint a receiver to take Banking Law of 2000, which regulate
charge of the assets and liabilities of the amount of credit accommodations
the bank. that a bank may extend to its

Version 1990-2003 Arranged by SULAW Class Version 1990-2006 U pdated by

2005 Dondee
Mercantile Law Bar Examination Q & A (1990-2006) Page 15 of 103
directors, officers, stockholders and Banks; Safety Deposit Box; Liability
their related interests (thus, DOSRI). MN and OP rented a safety deposit box at
Generally, a bank’s credit SIBANK. The parties signed a contract of
accommodations to its DOSRI must be lease with the conditions that: the bank is
in the regular course of business and not a depository of the contents of the safe
on terms not less favorable to the and has neither the possession nor control
bank than those offered to non- of the same; the bank assumed no interest
DOSRI borrowers. in said contents and assumes no liability in
3. No commercial bank shall make any connection therewith. The safety deposit
loan or discount on the security of box had two keyholes: one for the guard
shares of its own capital stock. key which remained with the bank; and
the other for the renters' key. The box can
Banks; Restrictions on Loan Accommodations (2006)
be opened only with the use of both keys.
Pio is the president of Western Bank. His
The renters deposited certificates of title in
wife applied for a loan with the said bank
the box. But later, they discovered that the
to finance an internet cafe. The loan
certificates were gone. MN and OP now
officer told her that her application will
claim for damages from SIBANK. Is the
not be approved because the grant of
bank liable? Explain briefly. (5%)
loans to related interests of bank SUGGESTED ANSWER:
directors, officers, and stockholders is The bank is liable, based on the decisions of
prohibited by the General Banking Law. the Supreme Court in CA Agro-Industrial Development
Explain whether the loan officer is correct. Corp. v. Court of Appeals, 219 SCRA 426 (1993) and Sia v.
(5%) Court of Appeals, 222 SCRA 24 (1993). In those cases,
SUGGESTED ANSWER:
Section 36 of the General Banking Law of the Supreme Court ruled that the renting out
2000 does not entirely prohibit directors or of safety deposit boxes is a "special kind of
officers of the bank, directly or indirectly, deposit" wherein the bank is the depositary. In
from borrowing from the bank. In this case, the absence of any stipulation prescribing the
Pio is the president of Western Bank, degree of diligence required, that of a good
which makes him an officer, director and father of a family is to be
stockholder of the said bank. The General
Banking Law provides for additional
restrictions to the bank before it can lend
to its directors or officers. A written
approval of the majority vote of all the
directors of the bank, excluding the
director concerned, is required.
Furthermore, such dealings must be
upon terms not less favorable to the bank
than those offered to others (Section 1326,
Central Bank's "Manual of Regulations for
Banks and Other Financial Intermediaries,
cited in Ranioso v. CA, G.R. No. 117416,
December 8, 2000). A violation of this
provision will cause his or her position to
be declared vacant and the erring director
or officer subjected to the penal provisions
of the New Central Bank Act.
observed by the depositary. Any separate from the unlawful activity of
stipulation exempting the depositary being a jueteng operator, and requires no
from any liability arising from the loss of previous conviction for the unlawful
the thing deposited would be void for activity (See also Sec. 3, Anti- Money
being contrary to law and public policy. Laundering Act of 2001).
The deposit box is located in the bank
premises and is under the absolute 2. To raise funds for his defense, Rudy
control of the bank. sold the houses and lots to a friend. Can
Luansing Realty, Inc. be compelled to
transfer to the buyer ownership of the
Banks; Secrecy of Bank Deposit; AMLC (2006)
houses and lots? (2.5%)
Rudy is jobless but is reputed to be a SUGGESTED ANSWER:
jueteng operator. He has never been Luansing Realty, Inc. is a real estate
charged or convicted of any crime. He company, hence it is not a covered
maintains several bank accounts and has institution under Section 3 of the Anti-
purchased 5 houses and lots for his Money Laundering Act. Only banking
children from the Luansing Realty, Inc. institutions, insurance companies,
Since he does not have any visible job, securities dealers and brokers, pre- need
the company reported his purchases to companies and other entities
the Anti-Money Laundering Council administering or otherwise dealing in
(AMLC). Thereafter, AMLC charged him currency, commodities or financial
with violation of the Anti-Money derivatives are covered institutions.
Laundering Law. Upon request of the Hence, Luansing Realty, Inc. may not use
AMLC, the bank disclosed to it Rudy's the Anti-Money Laundering Act to refuse
bank deposits amounting to P100 Million. to transfer to the buyer ownership of the
Subsequently, he was charged in court houses and lots.
for violation of the Anti-Money
Laundering Law. 3. In disclosing Rudy's bank accounts to
1. Can Rudy move to dismiss the case on the AMLC, did the bank violate any law?
the ground that he has no criminal (2.5%)
SUGGESTED ANSWER:
record? (2.5%)
No, the bank did not violate any law. The
SUGGESTED ANSWER:
No. Under the Anti-Money Laundering bank being specified as a "covered
Law, Rudy would be guilty of a "money institution" under the Anti- Money
laundering crime" committed when the Laundering Law, is obliged to report to
proceeds of an "unlawful activity," like the AMLC covered and suspicious
jueteng operations, are made to appear transactions, without thereby violating any
as having originated from legitimate law. This is one of the exceptions to the
sources. The money laundering crime is Secrecy of Bank Deposit Act.
Mercantile Law Bar Examination Q & A (1990-2006) Page 16 of 103
4. Supposing the titles of the houses Corrupt Practices Act.
and lots are in possession of the Luansing 6. Coup d' etat Law (RA 6968, Oct
Realty, Inc., is it under obligation to 24,1990).
7. BIR Commissioner's authority to verify
deliver the titles to Rudy? (2.5%)
SUGGESTED ANSWER: a decedent's Gross Estate and a
Yes, it has an obligation to deliver titles taxpayer's request for a compromise
to Rudy. As Luansing Realty, Inc. is not a agreement due to incapacity to pay his
covered institution under Section 3 of the tax liability.
Anti-Money Laundering Act, it may not 8. Foreign Currency Deposits by foreign
invoke this law to refuse delivery of the lenders & investors under PDs 1034.
titles to Rudy. 9. Violations of the Anti-Money
Laundering Law.
Banks; Secrecy of Bank Deposit; Exceptions (2006) 10. When the State exercises/invokes its
Under Republic Act No.1405 (The Bank Police Power. (NOTA BENE: It is suggested
that any 6 of the above be given full credit)
Secrecy Law), bank deposits are
considered absolutely confidential and
may not be examined, inquired or looked Banks; Secrecy of Bank Deposits (1990)
into by any person, government official, Manosa, a newspaper columnist, while
bureau or office. making a deposit in a bank, overheard a
What are the exceptions? (5%) pretty bank teller informing a co- employee
SUGGESTED ANSWER:
that Gigi, a well known public official, has
The exceptions to the Bank Secrecy Law
just a few hundred pesos in her bank
are the following:
account and that her next check will in all
1. Special or general examination of a
probability bounce. Manosa wrote this
bank, authorized by the Bangko
information in his newspaper column.
Sentral ng Pilipinas' Monetary Board,
Thus, Gigi
in connection with a bank fraud or
serious irregularity.
2. Examination by an independent
Auditor, hired by the Bank and for the
Bank's exclusive use.
3. Disclosure with the Depositor's
written permission.
a. In case of Impeachment.
b. In cases of Bribery or dereliction
of duty by a Public Officer,
upon order of a competent
court.
c. In cases of money
deposited/invested which, in
turn, is the subject of Litigation,
upon order of a competent Court.
4. DOSRI Loans: Loans with their
Banks of Bank Directors, Officers,
Stockholders and related interests.
a. Loans in excess of 5% of the
Bank's Capital & Surplus
b. The Borrower waived his right
as regards the Secrecy of Bank
Deposits
5. Violation of the Anti-Graft and
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 filed a complaint with the City Fiscal of the bank records on her.
Manila for unlawfully disclosing
information about her bank account. Banks; Secrecy of Bank Deposits (1991)
a) Will the said suit prosper? Explain
your answer. The law (RA 6832) creating a Commission
to conduct a Thorough Fact-Finding
b) Supposing that Gigi is charged with Investigation of the Failed Coup d’etat of
unlawfully acquiring wealth under RA Dec 1989, Recommend Measures to
1379 and that the fiscal issued a Prevent the Occurrence of Similar
subpoena duces tecum for the records of Attempts At a Violent Seizure of Power
the bank account of Gigi. May Gigi validly and for Other Purposes, provides that
oppose the said issuance on the ground the Commission may ask the Monetary
that the same violates the law on secrecy Board to disclose information on and/or to
of bank deposits? Explain your answer. grant authority to examine any bank
SUGGESTED ANSWER: deposits, trust or investment funds, or
a) The Secrecy of Bank Deposits Act
banking transactions in the name of
prohibits, subject to its exclusionary
and/or utilized by a person, natural or
clauses, any person from examining,
juridical, under investigation by the
inquiring or looking into all deposits of
Commission, in any bank or banking
whatever nature with banks or banking
institution in the Philippines, when the
institutions in the Philippines which by
Commission has reasonable ground to
law are declared “absolutely
believe that said deposits, trust or
confidential” in nature. Manosa who
investment funds, or banking transactions
merely overheard what appeared to be a
have been used in support or in
vague remark of a Bank employee to a co-
furtherance of the objectives of the said
employee and writing the same in his
coup d’etat. Does the above provision not
newspaper column is neither the inquiry
violate the Law on Secrecy of Bank
nor disclosure contemplated by law.
Deposits (RA 1405)?
ALTERNATIVE ANSWER:
SUGGESTED ANSWER:
a) The complaint against Manosa will
The Law on Secrecy of Bank Deposits is
not prosper because merely writing a
itself merely a statutory enactment, and it
vague remark of a Bank employee to a
may, therefore, be modified, or amended
co-employee is not the disclosure
(such as by providing further exceptions
contemplated by law. If anyone should be
therefrom), or even repealed, expressly or
liable, it will be the bank employee who
impliedly, by a subsequent law. The
disclosed the information.
Secrecy of Bank Deposits Act did not
SUGGESTED ANSWER:
b) Among the instances excepted from amount to a contract between the
the coverage of the Secrecy of Bank depositors and depository banks within
Deposits Act are Anti-graft cases. Hence the meaning of the non- impairment
Gigi may not validly oppose the clause of the Constitution. Even if it did,
issuance of a subpoena duces tecum for the police power of the State is
superior to the non-

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Mercantile Law Bar Examination Q & A (1990-2006) Page 17 of 103
impairment clause. RA 6832, creating a having acquired property out of proportion
commission to conduct an investigation of to his salary, in violation of the Anti-Graft
the failed 1989 coup d’etat and to and Corrupt Practices Act. The
recommend measures to prevent similar Ombudsman issued a subpoena duces
attempts to seize power is a valid exercise tecum to the Banco de Cinco commanding
of police power. its representative to furnish the
Ombudsman records of transactions by or
Banks; Secrecy of Bank Deposits (1992) in the name of Miguel, his wife and
children. A second subpoena was issued
Socorro received $10,000 from a foreign
expanding the first by including the
bank although she was entitled only to
production of records of friends of Miguel
$1,000.00. In an apparent plan to conceal
in said bank and in all its branches and
the erroneously sent amount, she opened a
extension offices, specifically naming them.
dollar account with her local bank,
deposited the $10,000 and issued 4 Miguel moved to quash the subpoenas
checks in the amount of $2,000 and 1 arguing that they violate the Secrecy of
check for Bank Deposits Law. In addition, he contends
$1,000 each payable to different that the subpoenas are in the nature of
individuals who deposited the same in “fishing expedition” or “general warrants”
their respective dollar accounts with and are constitutionally impermissible with
different local banks. respect to private individuals who are not
under investigation.
The sender bank then brought a civil suit
Is Miguel’s contention tenable?
before the RTC for the recovery of the SUGGESTED ANSWER:
erroneously sent amount. In the course of No. Miguel’s contention is not tenable. The
the trial, the sender presented testimonies inquiry into illegally acquired property
of bank officials to show that the funds extends to cases where such property is
were, in fact, deposited in a bank by concealed by being held by or recorded in
Socorro and paid out to several persons, the
who participated in the concealment and
dissipation of the amount that Socorro
had erroneously received.

Socorro moved to strike out said

testimonies from the record invoking the
law on secrecy of bank deposits. If you
were the Judge, would you issue an order
to strike them out? Why?
SUGGESTED ANSWER:
I will not strike out the testimonies from
the record. The testimonies of bank
officials indicating where the questioned
dollar accounts were opened in depositing
misappropriated sums must be considered
as likewise involved in litigation – one
which is among the excepted cases under
the Secrecy of Bank Deposits Act (Melon
Bank v Magsino 190 SCRA 633)

Banks; Secrecy of Bank Deposits (1994)

Miguel, a special customs agent is
charged before the Ombudsman with
name of other persons. To sustain Eastern to disclose the bank deposits of
Miguel’s theory and restrict the inquiry Michael? Discuss fully.
only to property held by or in the name SUGGESTED ANSWER:

of the government official would make Yes, as far as the peso account is
available to persons in government who concerned. Sec 2 of RA 1405 allows the
illegally acquire property an easy means disclosure of bank deposits in case where
of evading prosecution. All they have to the money deposited is the subject matter
do would be to simply place the of litigation. Since the case filed against
property in the name of persons other Michael is aimed at recovering the amount
than their spouses and children (Banco he withdrew from the funds of the
Filipino Savings vs. Purisima 161 scra 576; partnership, which amount he allegedly
Sec 8 Anti-Graft Law as amended by BP 195) deposited in his account, a disclosure of
his bank deposits would be proper.
Banks; Secrecy of Bank Deposits (1995)
No, with respect to the foreign currency
Michael withdrew without authority funds account. Under the Foreign Currency Law,
of the partnership in the amounts of the exemption to the prohibition against
P500th and US$50th for services he disclosure of information concerning bank
claims he rendered for the benefit of deposits is the written consent of the
the partnership. He deposited the P500th depositor.
in his personal peso current account
with Prosperity Bank and the US$50th in
Banks; Secrecy of Bank Deposits (1998)
his personal foreign currency savings
account with Eastern Bank. 1998 (20) An insurance company is
deluded into releasing a check to A for
The partnership instituted an action in P35th to pay for Treasury Bills (T-bills)
court against Michael, Prosperity, and which A claims to be en route on board
Eastern to compel Michael to return the an armored truck from a government
subject funds to the partnership and bank. The check is delivered to A who
pending litigation to order both banks to deposits it to his account with XYZ Bank
disallow any withdrawal from his before the insurance company realizes it is
accounts. a scam. Upon such realization, the
insurance company files an action against
At the initial hearing of the case the A for recovery of the amount defrauded
court ordered Prosperity to produce the and obtains a writ of preliminary
records of Michael’s peso current attachment. In addition to the writ, the
account, and Eastern to produce the Bank is also served a subpoena to examine
records of his foreign currency savings the account records of A. The Bank
account. declines to provide any information in
response to the writ and moves to quash
Can the court compel Prosperity and the subpoena invoking secrecy of bank
Mercantile Law Bar Examination Q & A (1990-2006) Page 18 of 103
deposits under RA 1405, as amended. Can the Ombudsman authorized under the law
the Bank justifiably invoke RA 1405 and a) to issue a subpoena for the production of
not respond to the writ and b) quash the the bank record involving such disclosure.
subpoena for examination? (5%)
SUGGESTED ANSWER:
Banks; Secrecy of Bank Deposits; Exceptions (2004)
Yes. Whether the transaction is considered
a sale or money placement does not make The Law on Secrecy of Bank Deposits
the money “subject matter of litigation” provides that all deposits of whatever
within the meaning of Sec 2 of RA 1405 nature with banks or banking institutions
which prohibits the disclosure or inquiry are absolutely confidential in nature and
into bank deposit except “in cases where may not be examined, inquired or looked
the money deposited or invested is the into by any person, government official,
subject matter of litigation” nor will it bureau or office. However, the law
matter whether the money was “swindled.” provides exceptions in certain instances.
Which of the following may not be among
the exceptions:
Banks; Secrecy of Bank Deposits (2000)
1. In cases of impeachment.
GP is a suspected jueteng lord who is 2. In cases involving bribery
rumored to be enjoying police and military 3. In cases involving BIR inquiry.
protection. The envy of many drug lords 4. In cases of anti-graft and corrupt
practices.
who had not escaped the dragnet of the
5. In cases where the money involved is
law, GP was summoned to a hearing of
the subject of litigation.
the Committee on Racketeering and Other Explain your answer or choice briefly. (5%)
Syndicated Crimes of the House of SUGGESTED ANSWER:
Representatives, which was conducting a
congressional investigation “in aid of
legislation” on the involvement of police
and military personnel, and possibly even
of local government officials, in the illegal
activities of suspected gambling and drug
lords. Subpoenaed to attend the
investigation were officers of certain
identified banks with a directive to them to
bring the records and documents of bank
deposits of individuals mentioned in the
subpoenas, among them GP. GP and the
banks opposed the production of the
banks’ records of deposits on the ground
that no such inquiry is allowed under the
Law on Secrecy of Bank Deposits (RA
1405 as amended). Is the opposition of GP
and the banks valid? Explain.
SUGGESTED ANSWER:
Yes. The opposition is valid. GP is not a
public official. The investigation does not
involve one of the exceptions to the
prohibition against disclosure of any
information concerning bank deposits
under the Law on Secrecy of Bank
Deposits. The Committee conducting the
investigation is not a competent court or
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Under Section 6(F) of the National covered by the said law? State the
Internal Revenue Code, the Commissioner reason(s) for your answer. (5%)
of Internal Revenue can inquire into the SUGGESTED ANSWER:

deposits of a decedent for the purpose of No. The notice of garnishment served on a
determining the gross estate of such bank at the instance of a creditor is not
decedent. Apart from this case, a BIR covered by the Law on Secrecy of Bank
inquiry into bank deposits cannot be Deposits. Garnishment is just a part of the
made. Thus, exception 3 may not always process of execution. The moment a
be applicable. notice of garnishment is served on a bank
and there exists a deposit by the judgment
Turning to exception 4, an inquiry into debtor, the bank is directly accountable to
bank deposits is possible only in the sheriff, for the benefit of the
prosecutions for unexplained wealth under judgment creditor, for the whole amount of
the Anti-Graft and Corrupt Practices Act, the deposit. In such event, the amount of
according to the Supreme Court in the cases the deposit becomes, in effect, a subject
of Philippine National Bank v. Gancayco, 15 SCRA 91 of the litigation.
(1965) and Banco Filipino Savings and Mortgage Bank
v. Purisima, 161 SCRA 576 (1988). However, all BSP; Receivership; Jurisdiction (1992)
other cases of anti-graft and corrupt
Family Bank was placed under statutory
practices will not warrant an inquiry into
receivership and subsequently ordered
bank deposits. Thus, exception 4 may not
liquidated by the Central Bank (CB) due
always be applicable. Like any other
to fraud and irregularities in its lending
exception, it must be interpreted strictly.
operations which rendered it insolvent.
Exceptions 1, 2 and 5, on the other Judicial proceedings for liquidation were
hand, are provided expressly in the Law thereafter commenced by the CB before
on Secrecy of Bank Depositors. They are the RTC. Family Bank opposed the
available to depositors at all times. petition.
Shortly thereafter, Family Bank filed in the
Banks; Secrecy of Bank Deposits; Garnishment (2001) same court a special civil action against
The Law on Secrecy of Bank Deposits, the CB seeking to enjoin and dismiss the
otherwise known as RA 1405, is intended liquidation proceeding on the ground of
to encourage people to deposit their grave abuse of discretion by the CB. The
money in banking institutions and court poised to:
also to discourage private hoarding so 1) restrain the CB from closing Family
that the same may be properly utilized Bank; and 2) authorize Family Bank to
by banks to assist in the economic withdraw money from its deposits during
development of the country. Is a notice of the pendency of the case. If you were the
garnishment served on a bank at the Judge, would you issue such orders? Why?
instance of a creditor of a depositor SUGGESTED ANSWER:

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Mercantile Law Bar Examination Q & A (1990-2006) Page 19 of 103
No. The RTC has no authority to restrain covered by the Law on Secrecy of Bank
the monetary board of the BSP from Deposits.
statutory authority to undertake SUGGESTED ANSWER:

receivership and ultimate liquidation of a a) The P10th savings account and the
bank. Any opposition to such an action P20th checking account are deemed
could be made to the court itself where insured by the PDIC.
assistance is sought. The action of the b) The P10th savings account and the
RTC where the proceeding is pending P20th checking account are covered by
appeal have to be made in the Court of the Law on Secrecy of Bank Deposits.
Appeals.
Responsibilities & Objectives of BSP (1998)
Legal Tender (2000) What are the responsibilities and primary
After many years of shopping in the Metro objectives of the BSP? (5%)
SUGGESTED ANSWER:
Manila area, housewife HW has developed
The BSP shall provide policy directions in
the sound habit of making cash purchases
the areas of money, banking and credit. It
only, none on credit. In one shopping trip to
shall have supervision over the operations
Mega Mall, she got the shock of her
of banks and exercise such regulatory
shopping life for the first time, a store’s
powers as provided in the Central Bank
smart salesgirl refused to accept her coins
Act and other pertinent laws over the
in payment for a purchase worth not more
operations of finance companies and non-
than one hundred pesos. HW was paying
bank financial institutions performing quasi-
seventy pesos in 25- centavo coins and
banking functions, such as quasi-banks and
twenty five pesos in 10 centavo coins.
institutions performing similar functions.
Strange as it may seem, the salesgirl told
HW that her coins were not “legal The primary objective of the BSP is to
tender.” Do you agree with the salesgirl maintain price stability conducive to a
in respect of her understanding of “legal balanced and sustainable growth
tender?” Explain (2%)
SUGGESTED ANSWER:
No. The salesgirl’s understanding that
coins are not legal tender is not correct.
Coins are legal tender in amounts not
exceeding fifty pesos for denominations
from twenty five centavos and above, and
in amounts not exceeding twenty pesos for
denominations ten centavos and less.

PDIC Law vs. Secrecy of Bank Deposits Act (1997)

An employee of a large manufacturing firm
earns a salary which is just a bit more
than what he needs for a comfortable
living. He is thus able to still maintain a
P10,000 savings account, a P20,000
checking account, a P30,000 money
market placement and a P40,000 trust
fund in a medium-size commercial bank.
a) State which of the four accounts are
deemed insured by the PDIC.
b) State which of the above accounts are
of the economy. It shall promote and b) A violation of the Truth in Lending
maintain monetary stability and Act will not adversely affect the
convertibility of the Peso. validity of the contract itself.

c) It would allow Dana to refuse payment

Truth in Lending Act (1991)
of financial charges or, if already paid,
Dana Gianina purchased on a 36 month to recover the same. Dana may also
installment basis the latest model of the initiate criminal charges against the
Nissan Sentra Sedan car from the Jobel creditor.
Cars Inc. In addition to the advertised
selling price, the latter imposed finance ALTERNATIVE ANSWER:
charges consisting of interests, fees and c) (Per Atty Jomby Paras if u read the
service charges. It did not, however, provisions closely) Under the Truth in
submit to Dana a written statement Lending Act, said financial charges are
setting forth therein the information valid, and Dana may not refuse payment
required by the Truth in Lending Act thereof. Only criminal charges may be
(RA 3765). Nevertheless, the conditional initiated against the creditor.
deed of sale which the parties executed
mentioned that the total amount indicated Truth in Lending Act (2000)
therein included such finance charges.
Embassy Appliances sells home theater
a. Has there been substantial compliance components that are designed and
of the aforesaid Act?
customized as entertainment centers for
b. If your answer to the foregoing consumers within the medium-to-high
question is in the negative, what is
price bracket. Most, if not all, of these
the effect of the violation on the packages are sold on installment basis,
contract?
usually by means of credit cards allowing
c. In the event of a violation of the Act, a maximum of 36 equal monthly
what remedies may be availed of by
payments. Preferred credit cards of this
Dana? type are those issued by banks, which
SUGGESTED ANSWER:
a) There was no substantial compliance regularly hold mall wide sales blitzes
with the Truth in Lending Act. The participated in by appliance retailers like
law provides that the creditor must Embassy Appliances. You are a buyer of a
make a full disclosure of the credit home theater center at Embassy
lost. The statement that the total Appliances. The salesclerk who is
amount due includes the principal attending to you simply swipes your
and the financial charges, without credit card on the electronic approval
specifying the amounts due on each machine (which momentarily prints out
portion thereof would be insufficient your charge slip since you have unlimited
and unacceptable. credit), tears the slip from the machine,
hands the same over to you for your
signature, and
Mercantile Law Bar Examination Q & A (1990-2006) Page 20 of 103
without more, proceeds to arrange the waiver of the Bulk Sales Law by the
delivery and installation of your new home creditors as shown by verified
theater system. You know you will receive statements or to comply with the
a statement on your credit card purchases requirements of the Bulk Sales Law,
from the bank containing an option to pay that is, the seller must notify his
only a minimum amount, which is usually creditors of the terms and conditions
1/36 of the total price you were charged of the sale, and also, before receiving
for your purchase. Did Embassy from the vendee any part of the
Appliances comply with the provisions of purchase price, deliver to such
the Truth in Lending Act (RA 3765)? vendee a written sworn statement of
SUGGESTED ANSWER: the names and addresses of all his
There is no need for Embassy Appliances to creditors together with the amount of
comply with the Truth in Lending Act. The indebtedness due to each (Sec 2 Act
transaction is not a sale on installment 3952, amended)
basis. Embassy Appliances is a seller on
cash basis. It is the credit card company
Bulk Sales Law; Covered Transactions (2000)
which allows the buyer to enjoy the
privilege of paying the price on installment Company X, engaged in the business of
basis. manufacturing car parts and accessories,
operates a factory with equipment,
machinery and tools for this purpose. The
manufactured goods are sold wholesale to
Bulk Sales Law distributors and dealers throughout the
Bulk Sales Law; Covered Transactions (1994) Philippines. Company X was among the
Stanrus Inc a department store with business entities adversely hit by the
outlets in Makati, Mandaluyong, and 1997 Asian business crisis. Its sales dropped
Quezon City, is contemplating to refurbish with the decline in car sales and its
and renovate its Makati store in order to operating costs escalated, while its creditor
introduce the most modern and state of the banks and other financial institutions
art equipment in merchandise display. To tightened
carry out its plan, it intends to sell ALL of
the existing fixtures and equipment
(display cases, wall decorations, furniture,
counters, etc.) to Crossroads Department
Store. Thereafter, it will buy and install
new fixtures and equipment and continue
operations. Crossroads wants to know from
you as counsel:
1) Whether the intended sale is “bulk
sale.”
2) How can it protect itself from
future claims of creditors of Stanrus.
SUGGESTED ANSWER:
1) Yes. The sale involves all fixtures and
equipment, not in the ordinary course of
trade and the regular prosecution of
business of Stanrus, Inc. (Sec 2 Act 3952,
as amended)

2) Crossroads should require from

Stanrus Inc. submission of a written
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their loan portfolios. Company X was SUGGESTED ANSWER:

faced with the dismal choice of either No. The sale by sheriff at public sale is
suspending its operations or selling its not a sale by a merchant. Section 8 of the
business. It chose the latter. Having Bulk Sales Law itself provides that it has
struck a deal with Company Z, a more no application to executors,
viable entity engaged in the same administrators, receivers, assignees in
business, Company X sold its entire insolvency, or public officers, acting under
business to the former without much process. The Bulk Sales Law only applies
fanfare or any form of publicity. In fact, to the sale or encumbrance of a
evidence exists that the transaction was merchant of goods, merchandise or
furtively entered into to avoid the commodity done "in bulk" as defined by
prying eyes of Company X’s creditors. the Law itself.
The creditor banks and other financial
institutions sued Company X for Bulk Sales Law; Exclusions (1993)
violation of the Bulk Sales Law. Decide. In the annual meeting of XYZ Corporation,
(5%) the stockholders unanimously adopted a
SUGGESTED ANSWER:
resolution proposed by the BOD to sell
Company X violated the Bulk Sales Law
substantially all the fixtures and equipment
when it sold its entire business to
used in and about its business. The
Company Z furtively to avoid the prying
President of the Corporation approached
eyes of its creditors. Its manufactured
you and asked for legal assistance to
goods are sold wholesale to distributors
effect the sale.
and dealers. The sale of all or
1) What steps should you take so that the
substantially all of its stocks, not in the
sale may be valid?
ordinary course of business, constitutes
2) What are the two instances when the
bulk sale. The transaction being a bulk
sale, transfer, mortgage or assignment
sale, entering into such transaction
of stock of goods, wares, merchandise,
without complying with the requirements
provision, or materials otherwise than
of the Bulk Sales Law, Company X
in the ordinary course of trade and the
violated said law.
regular prosecution of the business of
the vendor are not deemed to be a sale
Bulk Sales Law; Covered Transactions (2006) or transfer in bulk?
Pursuant to a writ of execution issued SUGGESTED ANSWER:
by the Regional Trial Court in "Express 1) The requirements of the Bulk Sales Law
Bank v. Don Rubio," the sheriff levied and must be complied with. The seller delivers
sold at public auction 8 photocopying to the purchaser a list of his creditors and
machines of Don Rubio. Is the sheriff's the purchaser in turn notifies such
sale covered by the Bulk Sales Law? (5%) creditors of the proposed sale at a
stipulated time in advance.

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Mercantile Law Bar Examination Q & A (1990-2006) Page 21 of 103
2) If the sale and transfer is made a) by can consummate the transaction without
the vendor, mortgagor, transferor or doing anything.
assignor who produces and delivers a
written waiver of the provisions of the Bulk Sales Law; Obligation of the Vendor (1997)
Bulk Sales Law from his creditors as shown
The sole proprietor of a medium-size grocery
by verified statement; and b) by a vendor,
shop, engaged in both wholesale and retail
mortgagor, transferor or assignor who is an
transactions, sells the entire business “lock,
executor, administrator, receiver, assignee
stock and barrel” because of his plan to
in insolvency, or public officer acting under
emigrate abroad with his family. Is he
judicial process, the sale or transfer is not
covered by the provisions of the Bulk Sales
covered by the Bulk Sales Law.
Law? In the affirmative, what must be done
by the parties so as to comply with the law?
Bulk Sales Law; Obligation of the Vendor (1995) SUGGESTED ANSWER:

House of Pizza (Pizza) is the owner and Yes. This is a sale of the stock of goods,
operator of a nationwide chain of pizza fixtures and entire business, not in the
outlets. House of Liquor (Liquor) is a ordinary course of business or trade of the
retailer of all kinds of liquor. vendor. Before receiving from the vendee
any part of the purchase price, the vendor
House of Foods (Foods) has offered to must deliver to such vendee a written
purchase all of the outlets, equipment, statement, duly sworn, of the names and
fixtures and furniture of Pizza. Foods also addresses of all creditors to whom said
offered to purchase from Liquor all of its vendor may be indebted, together with the
moderately priced stock constituting 50% of amount of
its total inventory.

Both Pizza and Liquor have creditors.

What legal requirements must Pizza and
Liquor comply with in order for Foods to
consummate the transactions? Discuss fully.
SUGGESTED ANSWER:
Pizza and Liquor must prepare an affidavit
stating the names of all their creditors,
their addresses, the amounts of their credits
and their respective maturities. Pizza and
Liquor must submit said affidavit to Foods
which, in turn, should notify the creditors
about the transaction which is about to be
concluded with Pizza and Liquor.
ALTERNATIVE ANSWER:
As far as Liquor is concerned, it must
prepare an affidavit stating the names of all
its creditors, their addresses, the amounts
of their credits and their respective
maturities. It must submit said affidavit to
its buyer, who in turn, should notify the
creditors about the transaction which is
about to be concluded with his seller.

But as far as Pizza is concerned, it is not

covered by the Bulk Sales Law. So Foods
indebtedness due or owing, on account of procedure/steps required by law under
the goods, fixtures or business subject question letter (a) hereof? (1%)
matter of the bulk sale. SUGGESTED ANSWER:
The recourse of X, Y, and Z is to question the
validity of the sale from A to B so as to
Bulk Sales Law; Obligation of the Vendor (2001)
recover the goods and merchandise to
A is a merchant engaged in the sale of a satisfy their credits.
variety of goods and merchandise. Because
of the economic crisis, he incurred
indebtedness to X, Y and Z. Thereafter, A
sold to B all the stock of goods and Consumer Protection Law
merchandise.
a) What steps should A undertake to effect
a valid sale in bulk of his goods to B. Metric System Law (1994)
(2%). Angelene is a customer of Meralco
SUGGESTED ANSWER: Electric Company (MECO). Because of the
A must prepare an affidavit stating the abrupt rise in electricity rates, Angelene
names of all his creditors, in this case, X, complained with MECO insisting that she
Y, and Z, their addresses, the amount of should be charged the former rates.
their credits and their maturity. A should However, Angelene did not tender any
give the affidavit to B who, in turn, should payment.
furnish a copy to each creditor and notify
the creditors that there is a proposed bulk When MECO’s employees served the first
sale in order to enable the latter to protect 48-hour notice of disconnection, Angelene
their interests. protested. MECO, however, did not
implement the 48-hour notice of
b) Suppose A submitted a false statement disconnection. Instead, its employees
on the schedule of his creditors. What examined Angelene’s electric meter,
is the effect of such false statement as changed the same, and installed another.
to Vendee B. (2%) Still, Angelene, made no tender of payment.
SUGGESTED ANSWER:
If the vendee does not have knowledge of
MECO served a second 48-hour notice of
the falsity of the schedule, the sale is valid.
disconnection on June 22, 1984. It gave
However, if the vendee has knowledge of
Angelene until 5 pm of June 25, 1984 within
such falsity, the sale is void because he is in
which to pay. As no payment had been
bad faith.
made, MECO cut Angelene’s electric service
c) What is the right of creditors X, Y, and Z on June 28, 1984. Angelene contends that
if A failed to comply with the the 48-hour written notice of disconnection
rule cannot be invoked by MECO
Mercantile Law Bar Examination Q & A (1990-2006) Page 22 of 103
when there is a bona fide and just P50th. A few days later, the Corporate
dispute as to the amount due as her Secretary of TF informed Gregorio of the
electric consumption rate. decision of their BOD not to ratify the
Is Angelene’s contention valid? letter offer. However, since Gregorio had
SUGGESTED ANSWER:
already paid the down-payment, TF
No. Angelene’s only legal recourse in this
delivered 500 bags of fertilizer which
case was to pay the electric bill under
Gregorio accepted. TF made it clear that
protest. Her failure to do so justified
the delivery should be considered an
MECO to cut the electric service (Ceniza v
entirely new transaction. Thereafter,
CA 218 S 290)
Gregorio sought enforcement of the letter-
offer.
Is there a binding contract for the 5,000
Corporation Law bags of fertilizer? Explain.
SUGGESTED ANSWER:
No, there is no binding contract for the
BOD: Election of Aliens as members (2005) 5,000 bags of fertilizer. First, the facts do
not indicate that Rodman, the President of
A Korean national joined a corporation
TF Co, was authorized by the BOD to enter
which is engaged in the furniture
into the said contract or that he was
manufacturing business. He was elected to
empowered to do so under some provision
the Board of Directors. To complement its
of the by-laws of TF Co. The facts do not
furniture manufacturing business, the
also indicate that Rodman has been clothed
corporation also engaged in the logging
with the apparent power to execute the
business. With the additional logging
contract or agreements similar to it.
activity, can the Korean national still be a
Second, TF Co has specifically informed
member of the Board of Directors?
Gregorio that it has not ratified the contract
Explain. (3%)
SUGGESTED ANSWER:
for the sale of 5,000 bags of fertilizer and
Yes, just as long as sixty percent (60%) of that the delivery to
the Board of Directors are Filipinos.
Corporations that are sixty percent (60%)
owned by Filipinos can engage in the
business of exploration, development and
utilization of natural resources. (Art. XII,
Sec. 2, 1987 Constitution) The election of
aliens as members of the Board Of
Directors engaging in partially-nationalized
activities is allowed in proportion to their
allowable participation or share in the
capital of such entities. (Sec. 2-A, Anti-
Dummy Law) Nothing in the facts shows
that more than forty percent (40%) of the
Board of Directors are foreigners.

BOD; Capacity of Directors (1996)

Rodman, the President of TF Co, wrote a
letter to Gregorio, offering to sell to the
latter 5,000 bags of fertilizer at P100 per
bag. Gregorio signed his conformity to the
letter-offer, and paid a down-payment of

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Gregorio of 500 bags, which Gregorio foreign contact but the pig skins
accepted, is an entirely new transaction. (Yao exported were not sourced from ABC. His
Ka Sin Trading v CA GR 53820 June 15, 1992 209s763) fellow directors in ABC complained that
he should have given this business to
BOD; Compensation (1991) ABC. How would you decide on this
After many difficult years, which called matter?
SUGGESTED ANSWER:
for sacrifices on the part of the
I would decide in favor of Mr De Dios. ABC
company’s directors, ABC Manufacturing
is engaged in raising and selling hogs in
Inc was finally earning substantial profits.
the local market. The company that Mr De
Thus, the President proposed to the
Dios had set up was to engage, as it did, in
BOD that the directors be paid a bonus
the export of pigs skins. There is thus no
equivalent to 15% of the company’s net
conflict of interest between Mr. De Dios
income before tax during the preceding
and ABC Pigger Inc so as to make the
year. The President’s proposal was
case fall within the conflict of interest
unanimously approved by the BOD. A
situation under the law (Sec 34 Corp Code)
stockholder of ABC questioned the bonus.
Observation: The term “conflict of interest” is
Does he have grounds to object? susceptible to varied views and interpretations.
SUGGESTED ANSWER:
Yes, the stockholder as a valid and legal
BOD; Interlocking Directors (1995)
ground to object to the payment to the
directors of a bonus equivalent to 15% of Chito Santos is a director of both Platinum
the company’s net income. The law Corporation and Kwik Silver Corporation.
provides that the total annual He owns 1% of the outstanding capital
compensation of the directors, in the stock of Platinum and 40T of Kwik.
preceding year, cannot exceed 10% of the Platinum plans to enter into a contract
company’s net income before income tax with Kwik that will make both companies
(Sec 30 Corp Code). earn very substantial profits. The contract
is presented at the respective board
meetings of Platinum and Kwik.
BOD; Conflict of Interest (1994)
1. In order that the contract will not be
ABC Pigger Inc is engaged in raising and voidable, what conditions will have to be
selling hogs in the local market. Mr. De complied with? Explain.
Dios, one of its directors while traveling
abroad, met a leather goods 2. If these conditions are not met, how may
manufacturer who was interested in this contract be ratified? Explain.
buying pig skins from the Philippines. Mr SUGGESTED ANSWER:
De Dios set up a separate company and 1. At the meeting of the BOD of Platinum
started exporting pig skins to his to approve the contract, Chito would have
to make sure that

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Mercantile Law Bar Examination Q & A (1990-2006) Page 23 of 103
a) his presence as director at the 2) That the vote of Raphael was not
meeting is not necessary to necessary for the approval of the
constitute a quorum for such agreement;
meeting; 3) That the agreement is fair and
b) his vote is not necessary for the reasonable under the circumstances
approval of the contract; and (Sec 32 Corp Code)
c) the contract is fair and reasonable ALTERNATIVE ANSWER:

under the circumstances. The dealership agreement is valid upon the

assumption that the same was approved
At the meeting of the BOD of Kwik to by the BOD of NT Co before it was
approve the contract, Chito would have to signed and that such approval was made
make sure that - under the following conditions:
a) there is no fraud involved; and 1) That the presence of Raphael, the
b) the contract is fair and reasonable owner of A Ent, in the meeting of the
under the circumstances. BOD at which the agreement was
approved was not necessary to
SUGGESTED ANSWER:
2. If the conditions relating to the quorum constitute a quorum for such meeting;
and required number of votes are not met, 2) That the vote of Raphael was not
the contract must be ratified by the vote necessary for the approval of the
of stockholders representing at least 2/3 agreement;
of the outstanding capital stock in a 3) That the agreement is fair and
meeting called for the purpose. reasonable under the circumstances
Furthermore, the adverse interest of Chito (Sec 32 Corp Code)
in the contract must be disclosed and the
contract is fair and reasonable. (Secs. 32 By-Laws; Validity; limiting qualifications of BOD
and 33, BP 68) members (1998)

BOD; Interlocking Directors (1996)

Leonardo is the Chairman and President,
while Raphael is a Director of NT
Corporation. On one occasion, NT Co,
represented by Leonardo and A Ent, a
single proprietorship owned by Raphael,
entered into a dealership agreement
whereby NT Co appointed A Ent as
exclusive distributor of its products in
Northern Luzon. Is the dealership
agreement valid? Explain.
SUGGESTED ANSWER:
The dealership agreement is voidable at the
option of NT Co inasmuch as the facts do
not indicate that the same was approved
by the BOD of NT Co before it was signed
or, assuming such approval, that it was
approved under the following conditions:
1) That the presence of Raphael, the
owner of A Ent, in the meeting of the
BOD at which the agreement was
approved was not necessary to
constitute a quorum for such meeting;
The BOD of X Co, acting on a standing director or stockholder of a competing
authority of the stockholders to amend business from being elected to the Board
the by-laws, amended its by-laws so as to of Directors of MS Corporation. The by-
disqualify any of its stockholders who is laws were accordingly amended. GK, a
also a stockholder and director of a stockholder of MS Corporation and a
competitor from being elected to its BOD. majority stockholder of a competitor,
sought election to the Board of Directors
Y, a stockholder holding sufficient assets of MS Corporation. His nomination was
to assure him of a seat in the BOD, filed denied on the ground that he was ineligible
a petition with the SEC for a declaration to run for the position. Seeking a
of nullity of the amended by-laws. He nullification of the offending
alleged among other things that as a disqualification provision, GK consults you
stockholder, he had acquired rights about its validity under the Corporation
inherent in stock ownership such as the Code of the Phils. What would your legal
right to vote and be voted upon in the advice be? (3%)
election of directors. Is the stockholder’s SUGGESTED ANSWER:
petition tenable? (5%) The provision in the amended by-laws
SUGGESTED ANSWER: disqualifying any stockholder who is also
No. There is no vested right of a a director or stockholder of a competing
stockholder to be elected as director. business from being elected to the Board
When a person buys stock in a of Directors of MS Corp is valid. The
corporation he does so with the corporation is empowered to adopt a code
knowledge that its affairs are dominated of by-laws for its government not
by a majority of the stockholders. To this inconsistent with the Corp Code. Such
extent, the stockholder parted with his disqualifying provision is not inconsistent
personal right to regulate the disposition with the Corp Code.
of his property which he invested in the
capital stock of the corporation and
surrendered it to the will of the majority
of his fellow incorporators or
stockholders.

Corporations have the power to make by-

laws declaring a person employed in the
service of a rival company to be ineligible
for the Corporation’s BOD. An
amendment which renders a director
ineligible, or if elected, subjects him to
removal, if he is also a director in a
corporation whose business is in
competition with or is antagonistic to the
other corporation is valid.

By-Laws; Validity; limiting qualifications of BOD

members (2000)
At the annual stockholders’ meeting of
MS Corporation, the stockholders
unanimously passed a resolution
authorizing the Board of Directors to
amend the corporate by-laws so as to
disqualify any stockholder who is also a
By-Laws; Validity; limiting qualifications of BOD members (2001)
Mercantile Law Bar Examination Q & A (1990-2006) Page 24 of 103
Is a by-law provision of X Corporation and adopt by- laws was inherent in every
“rendering ineligible or if elected, subject corporation as one of its necessary and
to removal, a director if he is also a inseparable legal incidents. And it is settled
director in a corporation whose business throughout the United States that in the
is in competition with or is antagonistic to absence of positive legislative provisions
said corporation” valid and legal? State limiting it, every private corporation has
your reasons. (5%). this inherent power as one of its
SUGGESTED ANSWER: necessary and inseparable legal incidents,
Yes, the by-law provision is valid. It is independent of any specific enabling
the right of a corporation to protect itself provision in its charter or in general law,
against possible harm and prejudice that such power of self-government being
may be caused by its competitors. The essential to enable the corporation to
position of director is highly sensitive and accomplish the purposes of its creation."
confidential. To say the least, to allow a
person, who is a director in a corporation
Close Corporations; Deadlocks (1995)
whose business is in competition with or
is antagonistic to X Corporation, to become Robert, Rey and Ben executed a joint
also a director in X Corporation would be venture agreement to form a close
harboring a conflict of interest which is corporation under the Corp Code the
harmful to the latter (Gokongwei Jr v SEC outstanding capital stock of which the three
89 S 336 (1979); 97 S 78 (1980)). of them would equally own. They also
provided therein that any corporate act
By-Laws; Validity; limiting qualifications of BOD would need the vote of 70% of the
members (2003) outstanding capital stock. The terms of
the agreement were accordingly
To prevent the entry of Marlo Enriquez,
implemented and the corresponding close
whom it considered as one antagonistic
corporation was incorporated. After 3 years,
to its interests, into its Board of
Robert, Rey and Ben could not agree on the
Directors, Bayan Corporation amended its
business in
articles of incorporation and by-laws to
add certain qualifications of stockholders
to be elected as members of its Board of
Directors. When presented for approval at
a meeting of its stockholders duly called
for the purpose, the amendments were
overwhelmingly ratified. Marlo Enriquez
brought suits against Bayan Corporation to
question the amendments. Would the
action prosper? Why? (4%)
SUGGESTED ANSWER:
(per Dondee) The SC reiterated in the case
of SMC vs. SEC decided in April 11, 1979,
that it is recognized by all authorities that
'every corporation has the inherent power
to adopt by-laws 'for its internal
government, and to regulate the conduct
and prescribe the rights and duties of its
members towards itself and among
themselves in reference to the
management of its affairs.'" At common
law, the rule was "that the power to make
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 which to invest the funds of the fixed by the by-laws or a total price of
corporation. Robert wants the deadlock P125,000 only.
broken.
1. What are the remedies available to While the by-laws of Sta. Ana provides
Robert under the Corp code to break the that the right of first refusal can be
deadlock? Explain. exercised “at a price not exceeding 25%
2. Are there any remedies to prevent the more than the par value of such shares, the
paralyzation of the business available to Articles of Incorporation simply provides
Robert under PD 902-A while the that the stockholders of record “shall
petition to break the deadlock is pending have preferential right to purchase said
litigation? Explain. shares.” It is silent as to pricing.
SUGGESTED ANSWER:
1. Robert can petition the SEC to Is Rafael bound by the pricing proviso
arbitrate the dispute, with such powers under the by-laws of Sta. Ana Corporation?
as provided in Sec 104 of the Corp SUGGESTED ANSWER:
Yes. In a close corporation, the restriction
Code.
as to the transfer of shares has to be
2. The SEC can appoint a rehabilitation
stated/ annotated in the Articles of
receiver or a management committee.
Incorporation, the By-Laws and the
certificate of stock. This serves as notice
Closed Corporation; Restriction; Transfer of shares
to the person dealing with such shares like
(1994)
Rafael in this case. With such notice, he is
Rafael inherited from his uncle 10,000 bound by the pricing stated in the By-laws.
shares of Sta. Ana Corporation, a close ALTERNATIVE ANSWER:
corporation. The shares have a par value No, Rafael is not bound by the pricing
of P10.00 per share. Rafael notified Sta. proviso under the By-laws of Sta Ana
Ana that he was selling his shares at Corporation. Under the corporation law,
P70.00 per share. There being no takers the restrictions on the right to transfer
among the stockholders, Rafael sold the shares must appear in the articles of
same to his cousin Vicente (who is not a incorporation and in the by-laws as well as
stockholder) for P700,000. in the certificate of stock, otherwise, the
same shall not be binding on any
The Corporate Secretary refused to purchaser thereof in good faith. Moreover
transfer the shares in Vicente’s name in the restriction shall not be more onerous
the corporate books because Alberto, one than granting the existing stockholders or
of the stockholders, opposed the the corporation the option to purchase the
transfer on the ground that the same shares of the transferring stockholder
violated the by-laws. Alberto offered to with such reasonable term or period stated
buy the shares at P12.50 per share, as therein.

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Mercantile Law Bar Examination Q & A (1990-2006) Page 25 of 103
Here, limiting the price to be paid, when Accountant. He steadily rose from the ranks
the right of first refusal is exercised, to until he became AMD’s Executive VP.
not more than 25% par value, without Subsequently, however because of his
any qualification whatsoever, is not in the involvement in certain anomalies, the
articles. It is merely stated in the By-laws. AMD BOD considered him resigned from
Therefore such limitation shall not be the company due to loss of confidence.
binding on the purchaser. (GoSock
& Sons & Sy Gui Huat Inc v IAC 19 Feb 87 Min Res) Aggrieved, Magno filed a complaint in the
SEC questioning the validity of his
Controversy; Intra-Corporate (1994) termination, and seeking reinstatement to
his former position, with backwages,
Because of disagreement with the BOD
vacation and sick leave benefits, 13th
and a threat by the BOD to expel her for
month pay and Christmas bonus, plus
misconduct and inefficiency, Carissa
moral and exemplary damages, attorney’s
offered in writing to resign as President
fees and costs. AMD filed a motion to
and member of the BOD, and to sell to the
dismiss, arguing that the SEC has no
company all her shares therein for
jurisdiction over cases of illegal dismissal,
P300,000.00 Her offer to resign was
and has no power to award damages.
“effective as soon as my shares are fully
Should the motion to dismiss be granted?
paid.” At its meeting, the BOD accepted Explain.
Carissa’s resignation, approved her offer SUGGESTED ANSWER:
to sell back her shares of stock to the As of 2006, the applicable rule is that
company, and promised to buy the stocks there is a TRANSFERRED JURISDICTION
on a staggered basis. Carissa was under Sec. 5.2 of
informed of the BOD Resolution in a letter- the SRC, the Commission’s jurisdiction over
agreement to which she affixed her all cases enumerated under PD 902-A sec. 5
consent. The Company’s new President has been transferred to the Courts of
singed the promissory note. After general jurisdiction or the appropriate
payment P100,000 the company defaulted REGIONAL TRIAL COURT.
in paying the balance of P200,000.
Controversy; Intra-Corporate (1996)
Carissa wants to sue the Company to
collect the balance. If you were retained
by Carissa as her lawyer, where will you
file the suit? A) Labor Arbiter; b) RTC; or c)
SEC?
SUGGESTED ANSWER:
The RTC has jurisdiction over this case
which involves intra-corporate controversy.
As of 2006, the applicable rule is that
there is a TRANSFERRED JURISDICTION
under Sec. 5.2 of the SRC, the
Commission’s jurisdiction over all cases
enumerated under PD 902-A sec. 5 has
been transferred to the Courts of general
jurisdiction or the appropriate Regional
Trial Court.

Controversy; Intra-Corporate (1996)

In 1970, Magno joined AMD Co as a Junior
Jennifer and Gabriel owned the controlling association and the State insofar as
stocks in MFF Co and CLO Inc, both it concerns their individual
family corporations. Due to serious franchises. It is further required
disagreements, Jennifer assigned all her that the dispute be intrinsically
shares in MFF to Gabriel, while Gabriel connected with the regulation of
assigned all his shares in CLO to Jennifer. the corporation (Speed Distributing
Subsequently, Jennifer and CLO filed a Corp., et al. v. Court of Appeals, et al, G.R. No.
complaint against Gabriel and MFF in 149351, March 17, 2004; Intestate Estate of
Alexander T.Tyv. Court of Appeals, G.R. No.
the SEC seeking to recover the corporate 112872, April 19, 2001).
records and funds of CLO which Gabriel
allegedly refused to turn over, and which Is the Securities and Exchange
Commission the venue for actions
remained in the offices of MFF. involving intra-corporate controversies?
Is there an intra-corporate controversy in (2%)
this case? SUGGESTED ANSWER:
SUGGESTED ANSWER: No, pursuant to Subsection 5.2 of the
Yes, there is an intra-corporate Securities Regu- lation Code, the quasi-
controversy in this case. The fact that, judicial jurisdiction of the Securities and
when the complaint against Gabriel and Exchange Commission to hear corporate
MFF was filed with the SEC (per 2006, cases, including intra-corporate
RTC’s Jurisdiction), Jennifer and CLO controversies, under Section 5 of Pres.
were no longer stockholders of MFF did Decree No. 902-A, has been expressly
not divest the SEC (per 2006, RTC’s transferred to the designated Regional
Jurisdiction) of its jurisdiction over the Trial Court. Pursuant to a memorandum
case inasmuch as Jennifer was a former circular issued by the Supreme Court,
stockholder of MFF and the controversy only particularly designated RTC special
arose out of this relation. (SEC v CA GR commercial courts in each judicial region
93832 Aug 23 91; 201s124)
have original and exclusive jurisdiction
over such cases (See Intestate Estate of
Controversy; Intra-Corporate (2006) Alexander T. Ty v. Court of Appeals, G.R. No.
What is an intra-corporate controversy? 112872, April 19, 2001).
(8%)
SUGGESTED ANSWER:
Controversy; Intra-corporate; Jurisdiction (1997)
An intra-corporate controversy is a
conflict between stockholders, Juan was a stockholder of X Co. He owned
members or partners and the a total of 500 shares evidenced by Cert of
corporation, association or Stock No 1001. He sold the shares to
partnership regarding the Pedro. After getting paid, Juan indorsed
regulation of the corporation. The and delivered said Certificate of Stock No
controversy must arise out of intra- 1001 to Pedro. The following day, Juan
corporate or partnership relations went to the offices of the corporation and
of the parties; or between such claimed that his Certificate of Stock No
corporation, partnership or 1001 was lost and that, despite diligent
efforts, the certificate could
Mercantile Law Bar Examination Q & A (1990-2006) Page 26 of 103
not be located. The formalities prescribed priest, minister, rabbi or other presiding
by law for the replacement of the “lost” elder of such religious denomination, sect or
certificate were complied with. Eventually church.
X Co issued in substitution of the “lost”
certificate, Cert of Stock No 2002. Juan Corporation: Issuance of shares of stock to pay for the
forthwith transferred for valuable services (2005)
consideration the new certificate to Jose Janice rendered some consultancy work for
who knew nothing of the previous sale to XYZ Corporation. Her compensation
Pedro. In time, the corporation was included shares of stock therein. Can XYZ
confronted with the conflicting claims of Corporation issue shares of stock to pay
Jose and Pedro. The BOD of X Co invited for the services of Janice as its consultant?
you to enlighten them on these questions; Discuss your answer. (2%)
viz: SUGGESTED ANSWER:
a) If a suit were to be initiated in order Yes, provided the approval of stockholders
to resolve the controversy between representing two-thirds (2/3) of the
Pedro and Jose, should the matter be outstanding capital stock is obtained.
submitted to the SEC or to the Although the facts indicate that the
regular courts? consultancy work has already been
b) Between Jose and Pedro, whom "rendered" constituting "previously
should the corporation so recognize contracted debt," under Section 39 of the
as the rightful stockholder? Corporation Code, the pre-emptive rights of
existing stockholders need not be
How would you respond to the above respected "in payment of a previously
queries?
SUGGESTED ANSWER: contracted debt," but only with the
a) The matter should be submitted to the indicated stockholders' approval. Under
regular courts – specifically in the Section 62 of the Corporation Code,
Regional Trial Court where the principal consideration for the issuance of
office of the corporation is located. The
controversy between Pedro and Jose is not
an intra- corporate controversy.

b) If there is no over-issuance of shares

resulting from the two-transactions of
Juan, the corporation should recognize
both Pedro and Jose as rightful
stockholders. This is without prejudice to
the right of the corporation to claim
against Juan for the value of the shares
which Juan sold to Jose.

Corporation Sole; Definition (2004)

What is a corporation sole?
SUGGESTED ANSWER:
Section 110 of the Corporation Code
defines a "corporation sole" as one formed
for the purpose of administering and
managing, as trustee, the affairs,
property and temporalities of any religious
denomination, sect or church. It is
formed by the chief archbishop, bishop,
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stock may include labor performed for that YKS has no personality to sue, not
or services actually rendered to the being incorporated, and that the President
corporation. of PWC was not authorized to enter into
a contract with plaintiff by the PWC
Corporation: Right of Repurchase of Shares; Trust Board of Directors, hence the contract is
Fund Doctrine (2005) ultra vires. YKS Trading replied that it is
Under what conditions may a stock a sole proprietorship owned by YKS, and
corporation acquire its own shares? (2%) that the President of PWC had made it
SUGGESTED ANSWER: appear in several letters presented in
In line with the trust fund doctrine that evidence that he had authority to sign
generally renders it unlawful for the contracts on behalf of the Board of
corporation to return assets to the Directors of PWC. Will the suit prosper or
stockholders representing capital, a not? Reason briefly. (5%)
corporation may acquire its own shares SUGGESTED ANSWER:
Yes the suit will prosper. As a sole
only when there exists in the books
proprietorship, the proprietor of YKS
unrestricted retained earnings to cover the
Trading has the capacity to act and the
repurchase of shares. The purpose of the
personality to sue PWC. It is not necessary
repurchase of shares must be a legitimate
for YKS Trading to be incorporated before
business purpose of the corporation, such as
to: it can sue. On the other hand, PWC is
1. ELIMINATE fractional shares arising estopped from asserting that its President
out of stock dividends; had no authority to enter into the
2. COLLECT or COMPROMISE an contract, considering that, in several of
indebtedness to the corporation PWC's letters, it had clothed its President
arising out of unpaid subscription in a with apparent authority to deal with YKS
delinquency sale; Trading.
3. to PURCHASE delinquent shares sold
during the sale; and Corporation; Articles of Incorporation (1990)
4. to PAY dissenting or withdrawing The articles of incorporation to be
stockholders entitled to such payment registered in the SEC contained the
under the Corporation Code. (Sees. 41 following provisions --
and 82, Corporation Code) a) “First Article. The name of the
corporation shall be Toho Marketing
Corporation: Sole Proprietorship (2004) Company.”
YKS Trading filed a complaint for specific
b) “Third Article. The principal office of
performance with damages against PWC
such corporation shall be located in
Corporation for failure to deliver cement
Region III, in such municipality therein as
ordered by plaintiff. In its answer, PWC
its Board of Directors may designate.”
denied liability on the ground, inter alia,

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Mercantile Law Bar Examination Q & A (1990-2006) Page 27 of 103
stockholders representing at least two-
thirds (2/3) of the
c) “Seventh Article. The capital stock of the transactions not being "in the ordinary
corporation is One Million Pesos course of business," and one "thereby the
(P1,000,000) Philippine Currency.” corporation would be rendered incapable
of continuing the business or accomplishing
What are your comments and suggested the purpose for which it was
changes to the proposed articles? incorporated."
SUGGESTED ANSWER: ALTERNATIVE ANSWER:
a) On the First Article, I would suggest It is a sale and transfer in bulk in
that the corporate name indicate the contemplation of the Bulk Sales Law.
fact of incorporation by using either Under Sec. 2 of the Bulk Sales Law, a bulk
“Toho Marketing Corporation” or “Toh sale includes any sale, transfer, mortgage,
Marketing Company, Incorporated.” or assignment of all, or substantially all, of
the business or trade theretofore
b) The Third Article should indicate the
conducted by the vendor, mortgagor,
City or the Municipality and the
transferor, or assignor. This is exactly what
Province in the Philippines, and not
happened in the case at bar.
merely the region or as its BOD may
later designate, to be its place of 2) Can Divine Corporation sell the
principal office. aforesaid items to its competitor, Top
Grade Fashion Corporation? What are
c) The Seventh Article must additionally
the requirements to validly sell the
point out the number of shares into
items? Explain.
which the capital stock is divided, as SUGGESTED ANSWER:
well as the par value thereof or a For such a transaction to be valid, it
statement that said stock or a portion requires not only the favorable resolution of
thereof are without par value. (Sec 14 the Board of Directors of Divine
& 15 Corp Code) Corporation, but also the ratificatory
vote of
Corporation; Bulk Sales Law (2005)
Divine Corporation is engaged in the
manufacture of garments for export. In the
course of its business, it was able to
obtain loans from individuals and
financing institutions. However, due to the
drop in the demand for garments in the
international market, Divine Corporation
could not meet its obligations. It decided
to sell all its equipment such as sewing
machines, perma-press machines, high
speed sewers, cutting tables, ironing
tables, etc., as well as its supplies and
materials to Top Grade Fashion
Corporation, its competitor. (5%)
1) How would you classify the transaction?
SUGGESTED ANSWER:
The transactions would constitute a sale of
"substantially all of the assets of Divine
Corporation complying with the test under
Sec. 40 of the Corporation Code, the
outstanding capital stock, as mandated ALTERNATIVE ANSWER:
Under the Bulk Sales Law, if the proceeds
under Sec. 40 of the Corporation Code. The are not; applied proportionately towards
sale would be void in case of failure to meet the settlement of the accounts of the
the twin approvals. (Islamic Directorate of the corporate debts, to have the sale of the
Philippines v. Court of Appeals, G.R. No. 117897, May 14, subject matters to Top Grade Fashion
1997) ALTERNATIVE ANSWER: Corp., as being "fraudulent and void" and
Divine Corporation can sell the items to obtain satisfaction from the properties
its competitor, Top Grade Fashion which are deemed to still be owned by
Corporation. However, Divine Corporation Divine Corporation in spite of delivery to
the buyer. The creditors can collect on the
must comply with Sections 3, 4 and 5 of credit against Divine Corporation, and if it
the Bulk Sales Law, namely: (1) deliver cannot pay, the creditors can apply for
sworn statement of the names and attachment on the property fraudulently
addresses of all the creditors to whom the sold. (See People v. Mapoy, G.R. No.
48836, September 21, 1942)
vendor or mortgagor may be indebted
together with the amount of indebtedness 4) In case Divine Corporation violated
due or owing to each of the said creditors; the law, what remedies are available to
(2) apply the purchase or mortgage Top Grade Fashion Corporation against
money to the pro-rata payment of bona Divine Corporation?
fide claims of the creditors; and (3) make SUGGESTED ANSWER:
a full detailed inventory of the stock of If the sale by Divine Corporation did not
goods, wares, merchandise, provisions or obtain the required two-thirds (2/3) vote of
materials, in bulk, and notify every the outstanding capital stock, then the
creditor at least ten (10) days before transaction is void. (Islamic Directorate of the
transferring possession. Philippines v. Court of Appeals, G.R. No, 117897, May 14,
1997) Top Grade Fashion Corporation can
3) How would you protect the interests of have the purchase declared void and recover
the creditors of Divine Corporation? the purchase price paid, as well as damages
SUGGESTED ANSWER: against the directors and officers who
Considering that Divine Corporation has undertook the transaction in violation of the
entered a de facto stage of dissolution law.
with the ceasing of its operations, I ALTERNATIVE ANSWER:
would invoke on behalf of the creditors For violation of the Bulk Sales Law, the
the protection under Sec. 122 of the principal officers of the Divine Corporation
Corporation Code, that the proceeds of can be held criminally liable. In addition,
the sale should first be applied towards Top Grade can sue Divine Corporation for
the settlement of the obligations of the damages. Violation of the Bulk Sales Law
corporation, before any amount can be would render such a sale fraudulent and
paid to the stockholders. void. Since Top Grade would be compelled
to return the goods to Divine Corporation,
Mercantile Law Bar Examination Q & A (1990-2006) Page 28 of 103
Top Grade can compel Divine Corporation to return the
purchase price and pay damages. Corporation; Conversion of Stock Corporation (2001)
X company is a stock corporation composed
Corporation; By-laws (2001) of the Reyes family engaged in the real
Suppose that the by-laws of X Corp, a estate business. Because of the regional
mining firm provides that “The directors crisis, the stockholders decided to convert
shall be relieved from all liability for any their stock corporation into a charitable
contract entered into by the corporation non-stock and non-profit association by
with any firm in which the directors may amending the articles of incorporation.
be interested.” Thus, director A acquired a) Could this be legally done? Why? (3%)
claims which overlapped with X’s claims b) Would your answer be the same if at
and were necessary for the development the inception, X Company is a non-stock
and operation of X’s mining properties. corporation? Why? (2%)
SUGGESTED ANSWER:
a) Is the by-law provision valid? Why? (3%)
a) Yes, it can be legally done. In
b) What happens if director A is able to
converting the stock corporation to a non-
consummate his mining claims over
stock corporation by a mere amendment of
and above that of the corporation’s
the articles of incorporation, the stock
claims? (2%)
SUGGESTED ANSWER: corporation is not distributing any of its
a) No. It is in violation of Section 32 of assets to the stockholders. On the
the Corp Code. contrary, the stockholders are deemed to
have waived their right to share in the
b) A should account to the corporation for profits of the corporation which is a gain not
the profits which he realized from the a loss to the corporation.
transaction. He grabbed the business
opportunity from the corporation. (Section
34, Corp Code)

Corporation; Commencement; Corporate Existence

(2003)
1. When does a corporation acquire
corporate existence?
SUGGESTED ANSWER:

2. CBY & Co., Inc., registered with the

Securities and Exchange Commission
its articles of incorporation. It failed,
however, for one reason or another, to
have its by-laws filed with, and
registered by, the Commission. It
nevertheless transacted and did
business as a corporation for
sometime. A suit was commenced by
its minority stockholders assailing the
continued existence of CBY & Co., Inc.,
because of the non-adoption and
registration of its by-laws. Would the
action prosper? Why? (6%)
SUGGESTED ANSWER:

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 b) No, my answer will not be the same. Corporation; Dissolution; Methods of Liquidation (2001)
In a non-stock corporation, the members X Corporation shortened its corporate life
are not entitled to share in the profits of by amending its Articles of Incorporation.
the corporation because all present and It has no debts but owns a prime property
future profits belong to the corporation. located in Quezon City. How would the
In converting the non- stock corporation said property be liquidated among the five
to a stock corporation by a mere stockholders of said corporation? Discuss
amendment of the Articles of two methods of liquidation. (5%)
Incorporation, the non- stock corporation SUGGESTED ANSWER:
The prime property of X Corporation can
is deemed to have distributed an asset of
the corporation – i.e. its profits, among be liquidated among the five stockholders
after the property has been conveyed by
its members, without a prior dissolution
of the corporation. Under Sec 122, the the corporation to the five stockholders, by
dividing or partitioning it among
non-stock corporation must be dissolved
first. themselves in any two of the following
ways:
(Observation: The question is rather vague more 1) by PHYSICAL DIVISION or PARTITION
particularly question 1b. The question does not specify
that the conversion is from a non- stock corporation
based on the proportion of the values of
to a stock corporation. The candidate is likely to be their stockholdings; or
confused because of the words “if at the inception, X
Co is a nonstock corporation.” Hence, any answer
along the same line should be treated with liberality) 2) SELLING THE PROPERTY to a third
person and dividing the proceeds among
Corporation; De Facto Corporation (1994) the five stockholders in proportion to their
stockholdings; or
A corporation was created by a special
law. Later, the law creating it was 3) after the determination of the value of
declared invalid. May such corporation the property, by ASSIGNING or
claim to be a de facto corporation? TRANSFERRING THE PROPERTY to one
SUGGESTED ANSWER:
No. A private corporation may be created stockholder with the obligation on the part
only under the Corporation Code. Only of said stockholder to pay the other four
public corporations may be created under stockholders the amount/s in proportion to
special law. the value of the stockholding of each.

Where a private corporation is created Corporation; Incorporation; Requirements (2006)

under a special law, there is no attempt
What is the minimum and maximum
at a valid incorporation. Such
number of in- corporators required to
corporation cannot claim a de facto status.
incorporate a stock corporation?

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Mercantile Law Bar Examination Q & A (1990-2006) Page 29 of 103
Is this also the same minimum and Monetary Board of the BSP;
maximum number of directors required in 4) Verification slip from the records of the
a stock corporation? (2.5%) SEC whether or not the proposed name
SUGGESTED ANSWER: has already been adopted by another
Under Section 10 of the Corporation Code, corporation, partnership or association;
any number of natural persons not less 5) Letter undertaking to change the
than five (5) but not more than fifteen proposed name if already adopted by
(15), all of legal age and a majority of another corporation, partnership or
whom are residents of the Philippines, association;
may form a private corporation for any 6) Bank certificate of deposit concerning
lawful purpose. the paid-up capital;
7) Letter authorizing the SEC or Monetary
This is the same minimum and maximum
Board or its duly authorized
number of directors required in a stock
representative to examine the bank
corporation under Section 14(6) of the
records regarding the deposit of the
Corporation Code.
paid-up capital;
8) Registration Sheet;
Corporation; Incorporation; Residency Requirements
(2006) Corporation; Meetings; BOD & Stockholders
Must all incorporators and directors be (1993) Under the Articles of Incorporation of
residents of the Philippines? (2.5%) Manila Industrial Corp, its principal place of
SUGGESTED ANSWER: business shall be in Pasig, MM. The
Not all directors and incorporators need principal corporate offices are at the Ortigas
to be residents of the Philippines. Under
Section 10 of the Corporation Code, only a
majority of the incorporators need to be
residents of the Philippines. As provided in
Section 23 of the same Code, only a
majority of the members of the Board of
Directors need to be residents of the
Philippines.

Corporation; Incorporation; Requisites (2002)

You have been asked to incorporate a new
company to be called FSB Savings &
Mortgage Bank, Inc. List the documents
that you must submit to the Securities
and Exchange Commission (SEC) to
obtain a certificate of incorporation for
FSB Savings & Mortgage Bank, Inc. (5%)
SUGGESTED ANSWER:
The documents to be submitted to the
Securities and Exchange Commission
(SEC) to incorporate a new company to
be called FSB Savings & Mortgage Bank,
Inc., to obtain the certificate of
incorporation for said company, are:
1) Articles of Incorporation
2) Treasurer’s Affidavit;
3) Certificate of Authority from the
Center, Pasig, MM while its factory 3) No. The law allows the BOD to hold
processing leather products, is in Manila. its meeting anywhere in the Philippines.
The corporation holds its annual The holding of the BOD meeting in
stockholders’ meeting at the Manila Hotel Makati was proper and the validity of
in Manila and its BOD meeting at a hotel the resolutions adopted by the Board in
in Makati MM. The by-laws are silent as that meeting cannot be questioned. (Sec
to the place of meetings of the 53 Corp code)
stockholders and directors.
1) Who shall preside at the meeting of the Corporation; Nationality of Corporation (1998)
directors?
2) Can Ting, a stockholder, who did not What is the nationality of a corporation
attend the stockholders’ annual organized and incorporated under the
meeting in Manila, question the laws of a foreign country, but owned
validity of the corporate resolutions 100% by Filipinos? (2%)
passed at such meeting? SUGGESTED ANSWER:
Under the control test of corporate
3) Can the same stockholder question
nationality, this foreign corporation is of
the validity of the resolutions adopted
Filipino Nationality. Where there are
by the BOD at the meeting held in
grounds for piercing the veil of corporate
Makati?
SUGGESTED ANSWER:
entity, that is, disregarding the fiction, the
1) The President presides over the corporation will follow the nationality of
meeting of the directors, if there is no the controlling members or stockholders,
position of Chairman provided in the By- since the corporation will then be
Laws. If there is the position of considered as one and the same.
Chairman provided in the By-Laws, the
Chairman presides over the meeting of Corporation; Non-Stock Corporation (1993)
the Directors (Sec 54 Corp Code)
The AB Memorial Foundation was
incorporated as a non-profit, non-stock
2) No. The law provides that the annual
corporation in order to establish and
stockholders’ meeting shall be held in
maintain a library and museum in honor of
the city or municipality where the
the deceased parents of the incorporators.
principal office of the Corporation is
Its Articles of Incorporation provided for a
located. For this purpose, the law also
board of trustees composed of 5
provides that Metro Manila is considered
incorporators, which authorized to admit
a city or municipality. Since the principal
new members. The Articles of
place of business of MIC is Pasig, MM,
Incorporation also allow the foundation to
the holding of the annual stockholders
receive donations from members. As of
meeting in Manila is proper. (Sec 51
Jan 30, 1993, 60 members had been
Corp)
admitted by the BOT.
Mercantile Law Bar Examination Q & A (1990-2006) Page 30 of 103
1) Can the Foundation use the funds 2) Describe the procedure in securing these
donated to it by its members for purchase approvals.
SUGGESTED ANSWER:
of food and medicine for distribution to the 1. Unless the power plant and the concrete
victims of the Pinatubo eruption? road project are reasonable necessary to
2) Can the Foundation operate a specialty the manufacture of cement by Stikki (and
restaurant that caters to the general public they do not appear to be so), then the
in order to augment its funds? approval of said projects by a majority of
3) One of the original trustees died the BOD and the ratification of such
and the other two resigned because approval by the stockholders representing
they immigrated to the US. How at least 2/3 of the outstanding capital stock
will the vacancies in the BOT be would be necessary.
filled?
SUGGESTED ANSWER: As for the quarry operations for limestone,
1) Yes, (Sec 36(9) of the Corp Code) as
the same is an indispensable ingredient in
long as the amount of donation is
the manufacture of cement and may,
reasonable.
therefore, be considered reasonably
necessary to accomplish the primary
2) If the purposes of the corporation are
purpose of Stikki. In such case, only the
limited to the establishment and
approval of the BOD would be necessary
maintenance of the library and museum as
(Sec 42 BP 68)
stated in the problem, the foundation
ALTERNATIVE ANSWER:
cannot operate a specialty restaurant that 1. The majority vote of the BOD is
caters to the general public. In such case, necessary. The investment in a) a power
the action of the foundation will be ultra plant project, b) a concrete road project,
vires. and c) quarry operations of limestone used
ALTERNATIVE ANSWER:
in the manufacture of cement, is within the
2) If the act of the corporation is justified
express or implied power of the
by the secondary purpose of the
corporation, or at least the same is
corporation which includes the act of
operating a restaurant, the foundation will
be within its power to do so.

3) Since there are only 2 of the members

of the BOT remaining and there is no
quorum, the vacancies will have to be
filled up in a special meeting of the
members (sec 29 Corp)

Corporation; Power to Invest Corporate Funds for other

Purpose (1995)
Stikki Cement Co was organized
primarily for cement manufacturing.
Anticipating substantial profits, its
President proposed that Stikki invest in a)
a power plant project, b) a concrete road
project, and c) quarry operations for
limestone in the manufacture of cement.
1) What corporate approvals or votes are
needed for the proposed investments?
Explain.

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 incidental to, or necessary for the another corporation or business or for any
existence of the corporation. other purpose other than the primary
purpose for which it was organized when
SUGGESTED ANSWER:
the said investment is approved by a
2.a) The procedure in securing the
majority of the BOD and such approval is
approval of the BOD is as follows:
ratified by the stockholders representing
a. a notice of the BOD should be sent to
at least 2/3 of the outstanding capital
all the directors. The notice should
stock. Written notice of the proposed
state the purpose of the meeting.
investment and the date, time and place of
b. At the meeting, each of the project
the stockholders’ meeting at which such
should be approved by a majority of
proposal will be taken up must be sent to
the BOD (not merely a majority of
each stockholder. (Sec 42 Corp Code)
those present at the meeting)

2.b) The procedure in securing the Corporation; Recovery of Moral Damages (1998)
approval of the stockholders is as In a complaint filed against XYZ
follows: Corporation, Luzon Trading Corporation
a. Written notice of the proposed alleged that its President & General
investment and the time and place of Manager, who is also a stockholder,
the stockholders’ meeting should be suffered mental anguish, fright, social
sent to each stockholder at his place humiliation and serious anxiety as a result
of residence as shown on the books of of the tortuous acts of XYZ Corporation.
the corporation and deposited to the
addressee in the post office with In its counterclaim, XYZ Co claimed to
postage prepaid, or served personally. have suffered moral damages due to
b. At the meeting, each of the projects besmirched reputation or goodwill as a
should be approved by the result of Luzon Trading Co’s complaint.
stockholders representing at least 2/3 1) May Luzon Trading Co recover
of the outstanding capital stock. (Sec damages based on the allegations of
42 BP 68) the complaint? (2%)
2) May XYZ Co recover moral damages?
(3%)
Corporation; Power to Invest Corporate Funds in SUGGESTED ANSWER:
another Corporation (1996) No. A corporation, being an artificial
When may a corporation invest its funds person which has no feelings, emotions or
in another corporation or business or for senses, and which cannot experience
any other purposes? physical suffering or mental anguish, is
SUGGESTED ANSWER: not entitled to moral damages.
A corporation may invest its funds in ALTERNATIVE ANSWER:

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Mercantile Law Bar Examination Q & A (1990-2006) Page 31 of 103
Yes. When a juridical person has a good Corporation; Separate Juridical Personality (1995)
reputation that is debased, resulting in Ronald Sham doing business under
social humiliation, moral damages may be the name of SHAMRON Machineries
awarded. Moreover, goodwill can be (Shamron) sold to Turtle Mercantile
considered an asset of the corporation. (Turtle) a diesel farm tractor. In
payment, Turtle’s President and Manager
TAKE NOTE: In the case of FBN Inc. vs AMEC, Dick Seldon issued a check for P50th in
January 17, 2005, the SC ruled that;
favor of Shamron. A week later, Turtle
FBNI contends that AMEC is not entitled
sold the tractor to Briccio Industries
to moral damages because it is a
(Briccio) for P60th. Briccio discovered that
corporation.
the engine of the tractor was
A juridical person is generally not entitled reconditioned so he refused to pay
to moral damages because, unlike a Turtle. As a result, Dick Seldon ordered
natural person, it cannot experience “Stop Payment” of the check issued to
physical suffering or such sentiments as Shamron.
wounded feelings, serious anxiety, mental
Shamron sued Turtle and Dick Seldon.
anguish or moral shock. The Court of
Shamron obtained a favorable judgment
Appeals cites Mambulao Lumber Co. v.
holding co-defendants Turtle and Dick
PNB, et al. to justify the award of moral
Seldon jointly and severally liable.
damages. However, the Court's statement
Comment on the decision of the trial court.
in Mambulao that "a corporation may have Discuss fully.
a good reputation which, if besmirched, SUGGESTED ANSWER:
may also be a ground for the award of The trial court erred in holding Dick
moral damages" is an obiter dictum. Seldon, President and GM of Turtle, jointly
and severally liable with Turtle. In issuing
Nevertheless, AMEC's claim for moral the check issued to Shamron and,
damages falls under item 7 of Article thereafter,
2219 of the Civil Code. This provision
expressly authorizes the recovery of moral
damages in cases of libel, slander or any
other form of defamation. Article 2219(7)
does not qualify whether the plaintiff is a
natural or juridical person. Therefore, a
juridical person such as a corporation can
validly complain for libel or any other
form of defamation and claim for moral
damages.

Moreover, where the broadcast is libelous

per se, the law implies damages. In such a
case, evidence of an honest mistake or
the want of character or reputation of
the party libeled goes only in mitigation of
damages. Neither in such a case is the
plaintiff required to introduce evidence of
actual damages as a condition precedent
to the recovery of some damages. In this
case, the broadcasts are libelous per se.
Thus, AMEC is entitled to moral damages.
stopping payment thereof, Seldon was property. (Rebecca Boyer-Roxas v CA GR 100866 Jul
acting in his capacity as an officer of 14, 92 211s470)
Turtle. He was not acting in his personal
Corporation; Separate Juridical Personality (1996)
capacity. Furthermore, no facts have
Richard owns 90% of the shares of the
been provided which would indicate that
capital stock of GOM Co. On one
the action of Seldon was dictated by an
occasion, GOM represented by Richard
intent to defraud Shamron by himself or
as President and General Manager
in collusion with Turtle. Having acted in
executed a contract to sell a subdivision
what he considered as his duty as an
lot in favor of Tomas. For failure of GOM
officer of the corporation, Seldon should
to develop the subdivision, Tomas filed an
not be held personally liable.
action for rescission and damages against
GOM and Richard. Will the action prosper?
Corporation; Separate Juridical Personality (1996) Explain.
PR Co owns a beach resort with several SUGGESTED ANSWER:
cottages. Jaime, the President of PR, The action may prosper against GOM but
occupied one of the cottages for definitely not against Richard. Richard has
residential purposes. After Jaime’s term a legal personality separate and distinct
expired, PR wanted to recover possession from that of GOM. If he singed the contract
of the cottage. Jaime refused to to sell, he did so as the President and
surrender the cottage, contending that General Manager of GOM and not in his
as a stockholder and former President, personal capacity. Mere ownership by
he has a right to possess and enjoy the Richard of 90% of the capital stock of
properties of the corporation. GOM is not of itself sufficient ground to
Is Jaime’s contention correct? Explain. disregard his separate legal personality
SUGGESTED ANSWER: absent a showing, for example that he
Jaime’s contention is not correct. Jaime acted maliciously or in bad faith (EPG
may own shares of stock in PR Corp but Const Co v CA GR 103372 Jn 22,92 210s230)
such ownership does not entitle him to
the possession of any specific property Corporation; Separate Juridical Personality (1999)
of the corporation or a definite portion
As a result of perennial business losses, a
thereof. Neither is he a co-owner of
corporation’s net worth has been wiped
corporate property. Properties registered
out. In fact, it is now in negative territory.
in the name of the corporation are owned
Nonetheless, the stockholders did not like
by it as an entity separate and distinct
to give up. Creditor-banks, however, do
from its stockholders.
not share the confidence of the
Stockholders like Jaime only own shares of stockholders and refuse to grant more
stock in the corporation. Such shares of loans.
stock do not represent specific corporate a) What tools are available to the
stockholders to replenish capital? (3%)
Mercantile Law Bar Examination Q & A (1990-2006) Page 32 of 103
b) Assuming that the corporation put a stop to it and asked Marulas
continues to operate even with president and general manager, Y, who is a
depleted capital, would the stockholder, to pay the back rentals
stockholders or the managers be amounting to a hundred thousand pesos or
solidarily liable for the obligations to vacate the premises at the end of the
incurred by the corporation? Explain. month. Marulas neither paid its debt nor
(3%) vacated the premises. X sued Marulas
SUGGESTED ANSWER: and Y for collection of the unpaid rentals,
a) In the face of the refusal of the creditor- plus interest and costs of litigation. Will the
banks to grant more loans, the following suit prosper against X? Against Y? (5%)
are tools available to the stockholders to SUGGESTED ANSWER:
replenish capital, to wit: Yes, the suit will prosper against Marulas.
1) additional subscription to shares of It is the one renting the office and store
stock of the corporation by space, as lessee, from the owner of the
stockholders or by investors; building, X, as lessor.
2) advancesby the stockholders to
the corporation; But the suit against Y will not prosper. Y,
3) payment of unpaid as president and general manager, and
subscription by the stockholders. also stockholder of Marulas Creative
SUGGESTED ANSWER: Technology, Inc., has a legal personality
b) No. As a general rule, the separate and distinct from that of the
stockholders or the managers corporation. The liability of the corporation
cannot be held solidarily liable for is that of the corporation and not that of its
the obligations incurred by the officers and stockholders who are not liable
corporation. The corporation has a for corporate liabilities.
separate and distinct personality
from that of the stockholders or
Corporation; Separate Juridical Personality (2000)
managers. The latter are presumed
Nine individuals formed a private
to be acting in good faith in
corporation pursuant to the provisions of
continuing the operation of the
the Corporation Code of the
corporation. The obligations incurred
by the corporation are those of the
corporation which alone is liable
therefor. However, when the
corporation is already insolvent, the
directors and officers become
trustees of the business and assets
of the corporation for the benefit of
the creditors and are liable for
negligence or mismanagement.

Corporation; Separate Juridical Personality (2000)

Marulas Creative Technology Inc.,
an e-business enterprise engaged in
the manufacture of computer media
accessories; rents an office and store
space at a commercial building owned
by X. Being a start-up company,
Marulas enjoyed some leniency in its
rent payments; but after three years, X

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 Philippines (BP 68). Incorporator S was payment of the unpaid subscription. Victor
elected director and president – general questioned the set-off.
manager. Part of his emolument is a Ford 1) May MAIA set-off the unpaid
Expedition, which the corporation owns. subscription with victor’s claim for
After a few years, S lost his corporate salaries?
positions but he refused to return the 2) Would your answer be the same if
motor vehicle claiming that as a indeed there had been a call for the unpaid
stockholder with a substantial equity subscription?
share, he owns that portion of the SUGGESTED ANSWER:

corporate assets now in his possession. 1) No. MAIA cannot setoff the unpaid
Is the contention of S valid? Explain (5%) subscription with Victor’s claim for
SUGGESTED ANSWER: salaries. The unpaid subscription is not yet
No. The contention of S is not valid. due as there is no call.
The Ford Expedition is owned by the
corporation. The corporation has a legal 2) Yes. The reason is that Victor is entitled
personality separate and distinct from to the payment of his salaries which MAIA
that of its stockholder. What the has no right to withhold in payment of
corporation owns is its own property unpaid subscription. To do so would
and not the property of any stockholder violate Labor Laws (Apodaco v NLRC 172 S
even how substantial the equity share that 442)
stockholder owns.
Corporation; Stock Corporation (2001)
Corporation; Set-Off; Unpaid Subscription (1994) “XY” is a recreational club which was
Victor was employed in MAIA organized to operate a golf course for its
Corporation. He subscribed to 1,500 members with an original authorized
shares of the corporation at P100 per capital stock of P100M. The articles of
share or a total of P150,000. He made incorporation nor the by-laws did not
an initial down payment of P37,500.00. provide for distribution of dividends
He was appointed President and General although there is a provision that after
Manager. Because of his disagreement its dissolution, the assets shall be given
with the BOD, he resigned and demanded to a charitable corporation. Is “XY” a
payment of his unpaid salaries, his cost of stock corporation? Give reasons for your
living allowance, his bonus, and answer? (5%)
SUGGESTED ANSWER:
reimbursement of his gasoline and XY is a stock corporation because it is
representation expenses. organized as a stock corporation and
there is no prohibition in its Articles of
MAIA Corporation admits that it owed
Incorporation or its by-laws for it to
Victor P40,000. but told him that this will
declare dividends. When a corporation is
be applied to the unpaid balance of his
organized as a stock corporation and its
subscription in the amount of P100,000.00
articles of Incorporation or By-Laws
There was no call or notice for the

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Mercantile Law Bar Examination Q & A (1990-2006) Page 33 of 103
are silent, the corporation is deemed to Corporation; Validity of Corporate Acts (2002)
have the power to declare dividends under Which of the following corporate acts are
Sec 43. Since it has the power to declare valid, void, or voidable? Indicate your
dividends, XY is a stock corporation. answer by writing the paragraph number
of the query, followed by your
The provision of the Articles of
corresponding answer as “Valid,” “Void,”
Incorporation that at dissolution the
or “Voidable,” as the case may be. If your
assets of the corporation shall be given to
answer is “Void,” explain your answer. In
a charitable corporation does not prohibit
case of a “Voidable” answer, specify what
the corporation from declaring dividends
conditions must be present or complied
before dissolution.
with to make the corporate act valid. (5%)
1) XL Foods Corporation, which is engaged
Corporation; Validity of Corporate Acts (1998) in the fast- food business, entered into
The stockholders of People Power Inc a contract with its President Jose Cruz,
(PPI) approved two resolutions in a special whereby the latter would supply the
stockholders’ meeting: corporation with its meat and poultry
a) Resolution increasing the authorized requirements.
capital stock of PPI; and SUGGESTED ANSWER:
Voidable – A contract of the corporation
b) Resolution authorizing the BOD to
with one or more of its directors or trustees
issue, for cash payment, the new shares
or officers is voidable, at the option of such
from the proposed capital stock
corporation (Sec 32, Corporation Code).
increase in favor of outside investors
who are non-stockholders.
2) The Board of Directors of XL Foods
Corporation declared and paid cash
The foregoing resolutions were approved
dividends without approval of the
by stockholders representing 99% of the
stockholders.
total outstanding capital stock. The sole
dissenter was Jimmy Morato who owned
1% of the stock.
1. Are the resolutions binding on the
corporation and its stockholders including
Jimmy Morato, the dissenting
stockholder? (3%)
2. What remedies, if any, are available to
Morato? (2%)
SUGGESTED ANSWER:
1. No. The resolutions are not binding on
the corporation and its stockholders
including Jimmy Morato. While these
resolutions were approved by the
stockholders, the directors’ approval,
which is required by law in such case,
does not exist.

2. Jimmy Morato can petition the SEC

(Now RTC) to declare the 2 resolutions,
as well as any and all actions taken by
the BOD thereunder, null and void.
SUGGESTED ANSWER: amendment of the articles of
Valid incorporation.

3) XL Foods Corporation guaranteed the

loan of its sister company XL Meat Corporation; Voting Trust Agreement (1992)
Products, Inc. A distressed company executed a voting
SUGGESTED ANSWER: trust agreement for a period of three
Void – This is an ultra vires act on part
years over 60% of its outstanding paid up
of XL Foods Corporation, and is not one
shares in favor of a bank to whom it was
of the powers provided for in Sec. 36 of
indebted, with the Bank named as trustee.
the Corporation Code.
Additionally, the Company mortgaged all
its properties to the Bank. Because of the
Corporation; Voluntary Dissolution (2002) insolvency of the Company, the Bank
Name three (3) methods by which a foreclosed the mortgaged properties, and
stock corporation may be voluntarily as the highest bidder, acquired said
dissolved. Explain each method. (5%) properties and assets of the Company.
SUGGESTED ANSWER:
The three (3) methods by which a stock The three-year period prescribed in the
corporation may be voluntarily dissolved Voting Trust Agreement having expired,
are: the company demanded the turn-over and
1) Voluntary Dissolution where no transfer of all its assets and properties,
creditors are affected. This is done by including the management and operation
a majority vote of the directors, and of the Company, claiming that under the
resolution of at least 2/3 vote of Voting Trust Agreement, the Bank was
stockholders, submitted to the constituted as trustee of the management
Securities and Exchange Commission. and operations of the Company.
2) Voluntary dissolution where creditors
are affected. This is done by a petition Does the demand of the Company tally
for dissolution which must be filed with the concept of a Voting Trust
with the Securities and Exchange Agreement? Explain briefly.
SUGGESTED ANSWER:
Commission, signed by a majority of
The demand of the company does not
the members of the board of directors,
tally with the concept of a Voting Trust
verified by the president or secretary,
Agreement. The Voting Trust Agreement
and upon affirmative vote of
merely conveys to the trustee the right
stockholders representing at least 2/3
to vote the shares of grantor/s. The
of the outstanding capital stock.
consequence of foreclosure of the
3) Dissolution by shortening of the
mortgaged properties would be alien to
corporate term. This is done by
the Voting Trust Agreement and its effects.
Mercantile Law Bar Examination Q & A (1990-2006) Page 34 of 103
committed the breach of trust against the
interests of the
NOTE: (per D ondee) The law sim ply provides that a of Directors for the latter to sue. Here,
voting trust agreem ent is an agreem ent in writing
whereby one or m ore stockholders of a corporation such a demand would be futile, since the
consentto transfer his or theirshares to a trustee in directors who comprise the majority
orderto vestin the lattervoting or other rights
pertaining to said shares for a period not (namely, BB, CC, DD and EE) are the ones
exceeding five years upon the fulfillm entofstatutory guilty of the wrong complained of.
conditions and such other term s and conditions
specified in the agreem ent. The five year-period m ay
be extended in cases where the voting trust is Second, AA appears to be stockholder at
executed pursuant to a loan agreem ent whereby
the period is m ade contingent upon full paym
the time the alleged misappropriation of
entofthe loan. corporate funds.
U ndersection 59 ofthe C orporation C ode, supra, a
voting trust agreem ent m ay confer upon a Third, the suit is brought on behalf and for the
trustee not only the stockholder's voting rights
butalso otherrights pertaining to his shares as long
benefit of MOP Corporation. In this
as the voting trustagreem entis notentered "for the connection, it was held in Conmart (Phils.) Inc. v.
purpose of circum venting the law againstm Securities and Exchange Commission, 198 SCRA 73 (1991)
onopolies and illegalcom binations in restraintof
trade or used for purposes offraud." (section 59, 5th that to grant to the corporation concerned the
paragraph ofthe C orporation C ode). Thus, the right of withdrawing or dismissing the suit, at
traditional concept of a voting trust agreem ent
prim arily intended to single out a stockholder's the instance of the majority stockholders and
right to vote from his other rights as such and m directors who themselves are the persons
ade irrevocable for a lim ited duration m ay in
practice becom e a legal device whereby a transfer alleged to have
of the stockholders shares is effected subjectto the
specific provision ofthe voting trustagreem ent.

The execution of a voting trust agreem ent, therefore,

m ay create a dichotom y between the equitable or
beneficial ownership ofthe corporate shares ofa
stockholder, on the one hand, and the legal title
thereto on the other hand. (Lee vs. CA, Feb. 4, 1992)

Derivative Suit: Requisites (2004)

AA, a minority stockholder, filed a suit
against BB, CC, DD, and EE, the holders
of majority shares of MOP Corporation,
for alleged misappropriation of corporate
funds. The complaint averred, inter alia,
that MOP Corporation is the corporation
in whose behalf and for whose benefit the
derivative suit is brought. In their capacity
as members of the Board of Directors, the
majority stockholders adopted a
resolution authorizing MOP Corporation to
withdraw the suit. Pursuant to said
resolution, the corporate counsel filed a
Motion to Dismiss in the name of the
MOP Corporation. Should the motion be
granted or denied? Reason briefly. (5%)
SUGGESTED ANSWER:
No. All the requisites for a valid
derivative suit exist in this case.
First, AA was exempt from exhausting his
remedies within the corporation, and did
not have to make a demand on the Board
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corporation would be to emasculate the place before he became a stockholder.
right of minority stockholders to seek However, if the act complained of is a
redress for the corporation. Filing such continuing one, A may do so.
action as a derivative suit even by a lone
stockholder is one of the protections 2) No. In a derivative suit, the action is
extended by law to minority stockholders instituted/ brought in the name of a
against abuses of the majority. corporation and reliefs are prayed for
therein for the corporation, by a minority
stockholder. The law does not qualify the
Derivative Suit: Watered Stock (1993)
term “minority” in terms of the number of
A became a stockholder of Prime Real shares owned by a stockholder bringing
Estate Corporation (PREC) on July 10, the action in behalf of the corporation.
1991, when he was given one share by (SMC v Khan 176 SCRA 448)
another stockholder to qualify him as a
director. A was not re-elected director in 3) No. WATERED SHARES are those sold
the July 1, 1992 annual meeting but he by the corporation for less than the
continued to be a registered shareholder par/book value. In the instant case, it will
of PREC. depend upon the value of services
rendered in relation to the total par value
When he was still a director, A discovered of the shares.
that on Jan 5, 1991, PREC issued free of
charge 10,000 shares to X a lawyer who
Derivative Suit; Close Corporation; Corporate
assisted in a court case involving PREC. Opportunity (2005)
1) Can A now bring an action in the name
Malyn, Schiera and Jaz are the directors
of the corporation to question the
of Patio Investments, a close corporation
issuance of the shares to X without
formed to run the Patio Cafe, an al fresco
receiving any payment?
coffee shop in Makati City. In 2000, Patio
2) Can X question the right of A to sue Cafe began experiencing financial
him in behalf of the corporation on reverses, consequently, some of the checks
the ground that A has only one share it issued to its beverage distributors and
in his name? employees bounced.

3) Cannot the shares issued to X be In October 2003, Schiera informed Malyn

considered as watered stock? that she found a location for a second cafe
SUGGESTED ANSWER: in Taguig City. Malyn objected because of
1) As a general rule, A cannot bring a the dire financial condition of the
derivative suit in the name of the corporation.
corporation concerning an act that took

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Mercantile Law Bar Examination Q & A (1990-2006) Page 35 of 103
nullify the questioned investments. Would
her action
Sometime in April 2004, Malyn learned pertain to the close corporation, the
about Fort Patio Cafe located in Taguig standing to sue and to recover remains with
City and that its development was the close corporation and not with Malyn.
undertaken by a new corporation known Therefore, it is still necessary to file a
as Fort Patio, Inc., where both Schiera and derivative suit on behalf of the close
Jaz are directors. Malyn also found that corporation, although the proceedings
Schiera and Jaz, on behalf of Patio would be governed under the Interim Rules
Investments, had obtained a loan of of Procedure for Intra- Corporate Disputes.
P500,000.00 from PBCom Bank, for the
purpose of opening Fort Patio Cafe. This 3) Assuming that a derivative suit is
loan was secured by the assets of Patio proper; may the action continue if the
Investments and personally guaranteed corporation is dissolved during the
by Schiera and Jaz. pendency of the suit? Explain.
SUGGESTED ANSWER:

Malyn then filed a corporate derivative Yes, for in spite of the dissolution of any
action before the Regional Trial Court of corporation, it remains a juridical person
Makati City against Schiera and Jaz, for purpose of dissolution for three years
alleging that the two directors had from the date of dissolution, precisely one
breached their fiduciary duties by of the purposes is to allow the winding-up
misappropriating money and assets of of its affairs, including the termination of
Patio Investments in the operation of Fort pending suits.
Patio Cafe. (5%)
1) Did Schiera and Jaz violate the Derivative Suit; Minority Stockholder (2003)
principle of corporate opportunity? Gina Sevilla, a minority stockholder of
Explain. Bayan Corporation, felt that various
SUGGESTED ANSWER:
investments of the company’s capital were
Yes. Although Malyn refused the business
ultra vires if not, indeed, made in violation
before, nevertheless, using the resources
of law. She filed a derivative suit seeking
and credit standing of the company,
to
Schiera and Jaz clearly demonstrated that
the business could have been successfully
pursued in the name of the close
corporation. More importantly, Schiera and
Jaz are guilty of diverting the resources of
the close corporation to another entity,
equivalent to fraud and bad faith.

2) Was it proper for Malyn to file a

derivative suit with a prayer for
injunctive relief? Explain.
SUGGESTED ANSWER:
Although it is a close corporation,
nevertheless the principles of separate
juridical personality still apply. The
business of the corporation is still
separate and distinct from the proprietary
interests of its stockholders and directors.
Consequently, since the business
opportunity and the resource's used
prosper? Why? partners for all debts, liabilities and
SUGGESTED ANSWER:
damages incurred or arising as a result of
Yes, she is already a stockholder at the
their actions.
time the alleged misappropriation of
corporate funds. And that filing such
action as a derivative suit even by a lone Distinction: Dividends vs. Profit: Cash Dividend vs.
Stock Dividend (2005)
stockholder is one of the protections
extended by law to minority stockholders Distinguish dividend from profit; cash
against abuses of the majority. dividend from stock dividend. (2%)
SUGGESTED ANSWER:
Nevertheless, Gina must first exhaust
PROFITS are residual amounts
any administrative remedies before her
representing return of capital after
suit be consider in court.
deducting all corporate costs and
expenses from revenues. The
Distinction: De facto Corporation vs. Corporation by accumulated profits, from year to year,
Estoppel (2004)
represent the corporate retained earnings
Is there a difference between a de facto from which the dividends can be declared.
corporation and a corporation by
estoppel? Explain briefly. (2%) CASH DIVIDENDS represent an actual
SUGGESTED ANSWER: distribution of accumulated profits to the
A DE FACTO CORPORATION is one stockholders as a return on their
which actually exists for all practical investments. Declaration of cash dividends
purposes as a corporation but which has requires only the approval of the majority
no legal right to corporate existence as of the Board of Directors in a proper
against the State. It is essential to the resolution.
existence of a de facto corporation that
there be (1) a valid law under which a STOCK DIVIDENDS are simply transfers
corporation might be incorporated, (2) a of retained earnings to capital stock,
bona fide attempt to organize as a thereby increasing the number of shares
corporation under such law, and of stocks of each stockholder with no
(3) actual use or exercise in good faith of required cash contribution. A two-thirds
corporate powers conferred upon it by vote of the stockholders, coupled with a
law. majority vote of the Board of Directors, is
needed to declare stock dividends.
A CORPORATION BY ESTOPPEL exists
when persons assume to act as a Distinction; Private vs. Public Corporation
corporation knowing it to be without (2004) Distinguish clearly a private
authority to do so. In this case, those corporation from a public corporation
persons will be liable as general SUGGESTED ANSWER:
Mercantile Law Bar Examination Q & A (1990-2006) Page 36 of 103
A PRIVATE CORPORATION is one formed for some
private purpose, benefit or end, while a in a meeting duly called for the purpose.
PUBLIC CORPORATION is formed for the (Sec. 43, Corporation Code)
government of a portion of the State for
the general good or welfare. The true test Dividends: Sources of Dividends; Trust Fund Doctrine
is the purpose of the corporation. If the (2005)
corporation is created for political or From what funds are cash and stock
public purpose connected with the dividends sourced? Explain why. (2%)
administration of government, then it is a SUGGESTED ANSWER:
public corporation. If not, it is a private All cash and stock dividends are always paid
corporation although the whole or out of the unrestricted retained earnings (also
substantially the whole interest in the called surplus profit) of the corporation. If the
corporation belongs to the State. A public corporation has no unrestricted retained
corporation is created by special legislation earnings, the dividends would have to be
or act of Congress. A private corporation sourced from the capital stock. This is illegal.
must be organized under the Corporation It violates the "TRUST FUND DOCTRINE"
Code. that provides that the capital stock of the
corporation is a trust fund to be kept intact
Distinction; Stock vs. Non-Stock Corporation during the life of the corporation for the benefit
(2004) Distinguish clearly a stock corporation of the creditors of the corporation. (Commissioner
from a non-stock corporation. of Internal- Revenue v. Court of Appeal®, G.R. No. 108576,
SUGGESTED ANSWER: January 20, 1999; Boman Environmental Development Corp.
A stock corporation is one that has capital v. Court of Appeals,
G.R. No. 77860, November 22, 1988; and Steinberg v. Velasco,
stock divided into shares and is authorized G.R. No. 30460, March 12,1929)
to distribute to the holders of such shares
dividends or allotments of the surplus
profits on the basis of the shares held.
All other corporations are non-stock
corporations.

Dividends: Declaration of Dividends (2005)

Under what circumstances may a
corporation declare dividends? (2%)'
SUGGESTED ANSWER:
No form of dividends can be declared and
paid by the corporation except from
unrestricted retained earnings appearing
on its books. Dividends must be paid in
amounts proportional to all stockholders
on the basis of outstanding stock held by
them. Cash or property dividends, can be
declared from such unrestricted retained
earnings by a proper resolution of the
Board of Directors. Stock dividends,
however, must be declared by a proper
resolution of the Board of Directors from
existing unrestricted retained earnings and
ratified by stockholders representing at
least two-thirds (2/8) of the outstanding
capital stock of the corporation, obtained
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 Dividends; Declaration of Dividends (1990) Dividends; Declaration of Dividends (1991)
At least 2/3 of the stockholders of Solar During the annual stockholders meeting,
Corporation, meeting upon the Riza, a stockholder proposed to the body
recommendation of the BOD, declared a that a part of the corporation’s unreserved
50% stock dividend during their annual earned surplus be capitalized and stock
meeting. The notice of the annual dividends be distributed to the
stockholders’ meeting did not mention stockholders, arguing that as owners of
anything about a stock dividend the company, the stockholders, by a
declaration. The matter was taken up majority vote, can do anything. As
only under the item “other business” in chairman of the meeting, how would you
the agenda of the meeting. C.K. Senwa, rule on the motion to declare stock
a stockholder, who received his copy of dividends?
the notice but did not attend the SUGGESTED ANSWER:

meeting, subsequently learned about the As the chairman of the meeting, I would
50% stock dividend declaration. He rule against the motion considering that a
desires to have the stock dividend declaration of stock dividends should
declaration cancelled and set aside, and initially be taken by the BOD and
wishes to retain your services as a lawyer thereafter to be concurred in by a 2/3
for the purpose. Will you accept the case? vote of the stockholders (Sec 43 Corp
Discuss with reasons. Code). There is no prohibition, however,
SUGGESTED ANSWER: against the stockholders’ resolving to
I will not accept the case. Sec 43 of the recommend to the BOD that it consider a
Corp Code states that no stock dividend declaration of stock dividends for
shall be issued without the approval of concurrence thereafter by the stockholders.
the stockholders representing not less
than 2/3 of the outstanding capital stock Dividends; Declaration of Dividends (2001)
at a regular or special meeting duly
For the past three years of its commercial
called for that purpose. Conformably with
operation, X, an oil company, has been
Sec 50 of the Corp Code, a written notice
earning tremendously in excess of 100% of
of the holding of the regular meeting
the corporation’s paid-in capital. All of the
sent to the shareholders will suffice. The
stockholders have been claiming that they
notice itself specified the said subject
share in the profits of the corporation by
matter.
way of dividends but the Board of
ALTERNATIVE ANSWER:
Yes, I will accept the case. The problem Directors failed to lift its finger.
does not indicate that there is action by a) Is Corporation X guilty of violating a
the BOD which is also necessary for the law? If in the affirmative, state the basis
declaration of 50% stock dividend. (2%)
SUGGESTED ANSWER:
Corporation X is guilty of violating
Section 43 of the Corp Code. This
provision prohibits stock corporations

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Mercantile Law Bar Examination Q & A (1990-2006) Page 37 of 103
from retaining surplus profits in excess of capital stock of a corporation may only be
100% of their paid-in capital. issued for cash or property or for services
already rendered constituting a demandable
b) Are there instances when a corporation debt (Sec 62 Corp Code). As an alternative,
shall not be held liable for not declaring I would suggest that the managing
dividends? (3%) corporation should instead be given a net
SUGGESTED ANSWER:
profit participation and, if it later so desires,
The instances when a corporation shall not
to then convert the amount that may be due
be held liable for not declaring dividends
thereby to equity or shares of stock at no
are:
less than the par value thereof.
1) when justified by definite corporate
expansion projects or programs
approved by the BOD; or Doctrine of Corporate Opportunity (2005)
Briefly discuss the doctrine of corporate
2) when the corporation is prohibited opportunity. (2%)
under any loan agreement with any SUGGESTED ANSWER:
financial institution or creditor, In brief, the doctrine disqualifies a
whether local or foreign, from director, trustee or officer from
declaring dividends without its or his appropriating for his personal benefit a
consent, and such consent has not yet transaction or opportunity that pertains to
been secured; or the corporation, and which under the duty
of loyalty he should first bring to the
3) when it can be clearly shown that such corporation for its use or exploitation.
retention is necessary under special
circumstances obtaining in the The doctrine of corporate opportunity is an
corporation, such as when there is need enforcement of the duty of loyalty of
for special reserve for probable corporate directors and officers. When a
contingencies. director, trustee or officer attempts to
acquire or
Dividends; Right; Managing Corporation (1991)
ABC Management Inc. presented to the
DEF Mining Co, the draft of its proposed
Management Contract. As an incentive,
ABC included in the terms of compensation
that ABC would be entitled to 10% of any
stock dividend which DEF may declare
during the lifetime of the Management
Contract. Would you approve of such
provision? If not, what would you suggest
as an alternative?
SUGGESTED ANSWER:
I would not approve a proposed
stipulation in the management contract
that the managing corporation, as an
additional compensation to it, should be
entitled to 10% of any stock dividend
that may be declared. Stockholders are
the only ones entitled to receive stock
dividends (Nielsen & Co v Lepanto Mining 26
s 569) I would add that the unsubscribed
acquires, in violation of his duty, an the lease. XYZ Corp. countered that
interest adverse to the corporation in withstanding the lapse of its corporate
respect of any matter which has been term it still has the right to renew the
reposed in him in confidence, he shall be lease because no quo warranto
liable as a trustee for the corporation proceedings for involuntary dissolution of
and must account for the profits which XYZ Corp. has been instituted by the Office
otherwise would have accrued to the of the Solicitor General.
corporation. Equity imposes liability Is the contention of XYZ Corp.
upon him not to deal for his own benefit. meritorious? Explain briefly. (5%)
(Sec. 31, Corporation Code) SUGGESTED ANSWER:
XYZ Corporation's contention is not
Under Sec. 34 of the Corporation Code meritorious. Based on the ruling of the
where a director, by virtue of his office, Supreme Court in Philippine National Bank
acquires for himself a business vs. CFI of Rizal, 209 SCRA (1992). XYZ
opportunity which should belong to the Corp. was dissolved ipso facto upon the
corporation, thereby obtaining profits to expiration of its original term. It ceased to
the prejudice of such corporation, he be a body corporate for the purpose of
must account to the latter for all such continuing the business for which it was
profits by refunding the same, unless his organized, except only for purposes
act has been ratified by a vote of the connected with its winding up or
stockholders owning or representing at liquidation. Extending the lease is not an
least two-thirds (2/8) of the outstanding act to wind up or liquidate XYZ Corp.'s
capital stock. affairs. It is contrary to the idea of winding
up the affairs of the corporation.
Effect: Expiration of Corporate Term (2004)
Effects; Merger of Corporations (1999)
XYZ Corporation entered into a contract
of lease with ABC, Inc., over a piece of Two corporations agreed to merge. They
real estate for a term of 20 years, then executed an agreement specifying
renewable for another 20 years, provided the surviving corporation and the
that XYZ's corporate term is extended absorbed corporation. Under the
in accordance with law. Four years after agreement of merger dated November 5,
the term of XYZ Corporation expired, but 1998, the surviving corporation acquired
still within the period allowed by the all the rights, properties and liabilities of
lease contract for the extension of the the absorbed corporation.
lease period, XYZ Corp. notified ABC, 1) What would happen to the absorbed
Inc., that it is exercising the option to corporation? Must the absorbed
extend the lease. ABC, Inc., objected to corporation undertake dissolution and
the proposed extension, arguing that the winding up procedures? Explain
since the corporate life of XYZ Corp. had your answer. (3%)
SUGGESTED ANSWER:
expired, it could no longer opt to renew
Mercantile Law Bar Examination Q & A (1990-2006) Page 38 of 103
No. There is no need for the absorbed
corporation to undertake dissolution and Effects; Winding Up Period of a Corporation (1997)
winding up procedure. As a result of the
The corporation, once dissolved, thereafter
merger, the absorbed corporation is
continues to be a body corporate for three
automatically dissolved and its assets and
years for purposes of prosecuting and
liabilities are acquired and assumed by the
defending suits by and against it and of
surviving corporation.
enabling it to settle and close its affairs,
2) Pending approval of the merger by the culminating in the final disposition and
SEC, may the surviving corporation distribution of its remaining assets. If the 3
already institute suits to collect all year extended life expires without a trustee
receivables due to the absorbed or receiver being designated by the
corporation from its customers? corporation within that period and by that
Explain your answer. (3%) time (expiry of the 3 year extended term),
SUGGESTED ANSWER: the corporate liquidation is not yet over,
No. The merger does not become how, if at all, can a final settlement of
effective until and unless approved by the the corporate affairs be made?
SEC. Before approval by the SEC of the SUGGESTED ANSWER:
merger, the surviving corporation has no The liquidation can continue with the
legal personality with respect to winding up. The members of the BOD can
receivables due to the absorbed continue with the winding of the corporate
corporation. affairs until final liquidation. They can act
as trustees or receivers for this purpose.
3) A case was filed against a customer to
collect on the promissory note issued Effects; Winding Up Period of a Corporation (2000)
by him after the date of the merger The SEC approved the amendment of the
agreement. The customer raised the Articles of Incorporation of GHQ Corp
defense that while the receivables as shortening its corporate life to only 25 years
of the date of the merger agreement in accordance with Sec 120 of the Corp
was transferred to the surviving
corporation, those receivables which
were created after the merger
agreement remained to be owned by
the absorbed corporation. These
receivables would be distributed
to the stockholders conformably with
the dissolution and liquidation
procedures under the New
Corporation Code? Discuss the merits
of this argument. (3%)
SUGGESTED ANSWER:
Whether the receivable was incurred by
the absorbed corporation before or after
the merger agreement, or before or after
the approval thereof by the SEC, the said
receivable would still belong to the
surviving corporation under Sec 80 of the
Corp. Code which does not make any
distinction as to the assets and liabilities of
the absorbed corporation that the
surviving corporation would inherit.
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 Code. As shortened, the corporation directors (or trustees) itself, m ay be perm itted to so
continue as "trustees" by legal im plication to com
continued its business operations until plete the corporate liquidation. (PEPSI-COLA
May 30, 1997, the last day of its PHILIPPINES, INC., vs. THE COURT OF APPEALS,
[G.R. No. 145855. November 24, 2004.])
corporate existence. Prior to said date,
there were a number of pending civil
Foreign Corporation; “Doing Business” in the
actions, of varying nature but mostly
Philippines (1998)
money claims filed by creditors, none of
When is a foreign corporation deemed to
which was expected to be completed or
be “doing business in the Philippines?”
resolved within five years from May 30,
(3%)
1997.
SUGGESTED ANSWER:
A foreign corporation is deemed to be
If the creditors had sought your
“doing business in the Philippines” if it is
professional help at that time about
continuing the body or substance of the
whether or not their cases could be
business or enterprise for which it was
pursued beyond May 30, 1997, what
organized. It is the intention of an entity to
would have been your advice? (2%)
continue the body of its business in the
SUGGESTED ANSWER:
The cases can be pursued even beyond country. The grant and extension of 90-
May 30, 1997, the last day of the day credit terms of a foreign corporation
corporate existence of GHQ Corp. The to a domestic corporation for every
Corporation is not actually dissolved upon purchase shows an intention to continue
the expiration of its corporate term. transacting with the latter.
There is still the period for liquidation or
winding up. Foreign Corporation; “Doing Business” in the
Philippines; Acts or Activities (2002)
NOTE: U nder Section 122 of the C orporation C
ode, a corporation whose corporate existence is Give at least three (3) examples of the
term inated in any m anner continues to be a body acts or activities that are specifically
corporate for three (3) years afterits dissolution
forpurposes of prosecuting and defending suits by identified under our foreign investment
and againstitand to enable itto settle and close its laws as constituting “doing business” in
affairs, culm inating in the disposition and
distribution of its rem aining assets. Itm ay, during the Philippines (3%)
the three-yearterm , appointa trustee ora SUGGESTED ANSWER:
receiverwho m ay actbeyond thatperiod. Any three (3) of the following acts or
The term ination of the life of a corporate entity activities constitute “doing business” in
does notby itself cause the extinction or dim inution the Philippines under our foreign
of the rights and liabilities of such entity. 27 If the
three-yearextended life has expired without a investment laws:
trustee or receiver having been expressly designated 1. Soliciting orders
by the corporation, within thatperiod, the board of

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Mercantile Law Bar Examination Q & A (1990-2006) Page 39 of 103
2. Opening offices by whatever name Liabilities; BOD; Corporate Acts (1996)
3. Participating in the management,
When may a corporate director, trustee,
supervision or control of any domestic
or officer be held personally liable with the
entity
corporation?
4. Entering into service contracts SUGGESTED ANSWER:
5. Appointing representatives or A corporate director, trustee or officer may
distributors, operating under the be held personally liable with the
control of the foreign entity, who is corporation under the following
domiciled in the Philippines or who circumstances:
stays in the country for a period or 1) When he assents to a patently unlawful
periods totaling at least 180 days in act of the corporation;
any calendar year. 2) When he acts in bad faith or with gross
negligence in directing the affairs of the
Foreign Corporation; “Doing Business” in the corporation, or in conflict with the
Philippines; Test (2002) interest of the corporation resulting in
What is the legal test for determining if damages to the corporation, its
an unlicensed foreign corporation is doing stockholders or other persons;
business in the Philippines? (2%) 3) When he consents to the issuance of
SUGGESTED ANSWER: watered stocks or who, having
The test is whether or not the unlicensed knowledge thereof, does not forthwith
foreign corporation has performed an act file with the corporate secretary his
or acts that imply a continuity of written objection thereto;
commercial dealings or arrangements, and 4) When he agrees to hold himself
contemplate to that extent the personally and solidarily liable with the
performance of acts or works, or the corporation; or
exercise of some of the functions normally
incident to, and in progressive prosecution
of, commercial gain or of the purpose
and object of the business corporation.

Joint Venture; Corporation (1996)

May a corporation enter into a joint
venture?
SUGGESTED ANSWER:
A corporation may enter into a joint
venture. However, inasmuch as the term
‘joint venture’ has no precise legal
definition, it may take various forms. It
could take the form of a simple pooling
of resources (not involving incorporation)
between two or more corporations for a
specific project, purpose or undertaking, or
for a limited time. It may involve the
creation of a more formal structure and,
hence, the formation of a corporation. If
the joint venture would involve the
creation of a partnership, as the term is
understood under the Civil Code, then a
corporation cannot be a party to it.
5) When he is made, by a specific jointly and severally for damages
provision of law, to personally answer sustained by the corporation, stockholders
for the corporate action. (Tramat Mercantile or other persons resulting from gross
Inc v CA GR 111008, Nov 7, 94 238s14) negligence or bad faith in directing the
affairs of the corporation. (Sec 31 Corp
Liabilities; Stockholders, Directors, Officers (1997) Code)
A, B, and C are shareholders of XYZ
Co. A has an unpaid subscription of Piercing the Corporate Veil (1994)
P100th, B’s shares are fully paid up, Mr. Pablo, a rich merchant in his early
while C owns only nominal but fully paid forties, was a defendant in a lawsuit
up shares and is a director and officer. which could subject him to substantial
XYZ becomes insolvent, and it is damages. A year before the court
established that the insolvency is the rendered judgment, Pablo sought his
result of fraudulent practices within the lawyer’s advice on how to plan his estate
company. If you were counsel for a to avoid taxes. His lawyer suggested that
creditor of XYZ, would you advise legal he should form a corporation with himself,
action against A, B, and C? his wife and his children (all students
SUGGESTED ANSWER:
and still unemployed) as stockholders and
a) As to A—an action can be brought
then transfer all his assets and liabilities to
against A for P100th which is the amount
this corporation. Mr Pablo followed the
of unpaid subscription. Since the
recommendation of his lawyer. 1 year
corporation is insolvent, the limit of the
later, the court rendered judgment against
stockholder’s liability to the creditor is
Pablo and the plaintiff sought to enforce
only up to the extent of his unpaid
this judgment. The sheriff, however, could
subscription.
not locate any property in the name of
b) As to B—there is no cause of action Pablo and therefore returned the writ of
against B because he has already fully execution unsatisfied. What remedy, if any,
paid for his subscription. As stated is available to the plaintiff?
SUGGESTED ANSWER:
earlier, the limit of the stockholder’s
The plaintiff can avail himself of the
liability to the creditor of the corporation,
doctrine of piercing the veil of corporate
when the latter becomes insolvent, is the
fiction which can be invoked when a
extent of his subscription.
corporation is formed or used in avoiding
c) As to C—an action can be filed a just obligation. While it is true that a
against C, not as stockholder because he family corporation may be organized to
has already paid up the shares, but in pursue an estate tax; planning, which is
his capacity as director and officer not per se illegal or unlawful (Delpher
Trades Corp v IAC 157 SCRA 349) the factual
because of the corporation’s insolvency
being the result of fraudulent practices settings, however, indicate the existence
within the company. Directors are liable of a lawsuit that could subject Pablo
to a
Mercantile Law Bar Examination Q & A (1990-2006) Page 40 of 103
substantial amount of damages. It would the debts of X Corporation. The doctrine of
thus be difficult for Pablo to convincingly piercing the veil of corporation fiction
assert that the incorporation of the family applies to this case. The two corporations
corporation was intended merely as a case have the same board of directors and Y
of “estate tax planning.” (Tan Boon Bee v Corporation owned substantially all of the
Jarencio 41337 30June88) stocks of X Corporation, which facts justify
the conclusion that the latter is merely an
Piercing the Corporate Veil (1996) extension of the personality of the former,
and that the former controls the policies of
E Co sold its assets to M Inc after
the latter. Added to this is the fact that Y
complying with the requirements of the
Corporation controls the finances of X
Bulk Sales Law. Subsequently, one of the
Corporation which is merely an adjunct,
creditors of E Co tried to collect the
business conduit or alter ego of Y
amount due it, but found out that E Co
Corporation (CIR v Norton & Harrison Co 11 S
had no more assets left. The creditor then
714 (1964))
sued M Inc on the theory that M Inc is a
mere alter ego of E Co.
Will the suit prosper? Explain. Piercing the Corporate Veil (2004)
SUGGESTED ANSWER:
How does one pierce the veil of corporate
The suit will not prosper. The sale by E Co fiction?
of its assets to M Inc does not result in SUGGESTED ANSWER:
the transfer of the liabilities of the latter The veil of corporate fiction may be pierced
to, nor in the assumption thereof by, the by proving in court that the notion of legal
former. The facts given do not indicate that entity is being used to defeat public
such transfer or assumption took place or convenience, justify wrong, protect fraud,
was stipulated upon by the parties in their or defend crime or the entity is just an
agreement. Furthermore, the sale by E Co instrument or alter ego or adjunct of
of its assets is a sale of its property. It another entity or person.
does not involve the sale of the shares of
stock of the corporation belonging to its 407H407H Piercing the Corporate Veil (2006)
stockholders. There is therefore no merger
or consolidation that took place. E Co
continues to exist and remains liable to the
creditor.

Piercing the Corporate Veil (2001)

Plaintiffs filed a collection action against X
Corporation. Upon execution of the
court’s decision, X Corporation was found
to be without assets. Thereafter plaintiffs
filed an action against its present and past
stockholder Y Corporation which owned
substantially all of the stocks of X
Corporation. The two corporations have
the same board of directors and Y
Corporation financed the operations of X
Corporation. May Y Corporation be held
liable for the debts of X Corporation? Why?
(5%)
SUGGESTED ANSWER:
Yes, Y Corporation may be held liable for
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 What is the doctrine of "piercing the veil corporation like a judgment credit
of corporate entity?" Explain. (Sibagat Timber Corp. v. Garcia, G.R. No. 112546,
SUGGESTED ANSWER: December 11, 1992).
The doctrine of "piercing the veil of 8) Escape liability arising from a debt
corporate entity," is the doctrine that (Arcilla v. Court of Appeals, G.R. No. 88113, October
23, 1992).
allows the courts to look behind the
9) Avoid inclusion of corporate assets as
separate juridical personality of a
part of the estate of the decedent (Cease
corporation and treat the corporation as v. Court of Appeals, G.R. No. L-35861, October 18,
an association of persons and thereby 1979).
make the individual actors personally 10) To promote or to shield unfair
liable for corporate liabilities. The fiction objectives
of corporate identity is disregarded and (Villanueva v. Adre, G.R. No. 80863, April 27,
1989).
the individuals comprising it can be
treated identically. The stockholders can
be held directly liable for corporate Pre-emptive Right (2001)
obligations, even to the extent of their Suppose that X Corporation has already
personal assets (Concept Builders v. issued the 1000 originally authorized
NLRC, Marabe, et al, G.R. No. 108734, shares of the corporation so that its BOD
May 29, 1996). and stockholders wish to increase X’s
authorized capital stock. After complying
To what circumstances will the with the requirements of the law on
doctrine apply? (2.5%) increase of capital stock, X issued an
additional 1000 shares of the same value.
The doctrine is applicable when the
a) Assume that the stockholder A presently
notion of legal entity is used to —
holds 200 out of the 1000 original shares.
1) Defeat public convenience.
2) Justify wrong. Would A have a pre-emptive right to 200 of
3) Protect fraud. the new issue of 1000 shares? Why? (3%)
4) Defend crime (PNB v. Andrada Electric, G.R.
No. 142936, April 17, 2002). b) When should stockholder A exercise the
5) Shield a violation of the proscription pre-emptive right? (2%)
against forum shopping (First Philippine SUGGESTED ANSWER:
International Bank v. Court of Appeals, G.R. No. a) Yes, A would have a pre-emptive right to
137537, January 24, 1996). 200 of the new issue of 1000 shares. A is
6) Work inequities among members of a stockholder of record holding 200
the corporation internally, involving shares in X Corpo. According to the Corp
no rights of the public or third Code, each stockholder has the pre-
persons (Secosa v. Heirs ofErwin Suarez emptive right to all issues of shares made
Francisco, G.R. No. 156104, June 29, 2004). by the corporation in proportion to
7) Evade the lawful obligations of the

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Mercantile Law Bar Examination Q & A (1990-2006) Page 41 of 103
the number of shares he holds on record offered at incorporation and he chose not to
in the corporation. subscribe to them. He, therefore, has
waived his right thereto and the
b) Pre-emptive right must be exercised in corporation may offer them to anyone.
accordance with the Articles of
Incorporation or the By-Laws. When the SUGGESTED ANSWER:
Articles of Incorporation and the By-Laws b. Yes. Mr. X would have pre-emptive rights
are silent, the BOD may fix a reasonable to the 50,000 preferred shares. All
time within which the stockholders may stockholders of a stock corporation shall
exercise the right. enjoy pre-emptive right to subscribe to all
issues or disposition of shares of any class,
in proportion to their respective
Pre-Emptive Right vs. Appraisal Right (1999)
shareholdings.
ABC Corporation has an authorized capital ALTERNATIVE ANSWER:
stock of P1M divided into 50,000 common b. Yes, Mr. X has preemptive right over the
shares and 50,000 preferred shares. At its 50,000 preferred shares because they were
inception, the Corporation offered for not offered before by the corporation for
subscription all the common shares. subscription.
However, only 40,000 shares were
SUGGESTED ANSWER:
subscribed. Recently, the directors thought c. The shares will be offered to existing
of raising additional capital and decided to stockholders, who are entitled to
offer to the public all the authorized shares preemptive right, at a price fixed by the
of the Corporation at their market value. BOD, which shall not be less than the par
a) Would Mr. X, a stockholder holding value of such shares.
4,000 shares, have pre-emptive rights
to the remaining 10,000 shares? (2%)
b) Would Mr. X have pre-emptive rights to
the 50,000 preferred shares? (2%)
c) Assuming that the existing
stockholders are entitled to pre-
emptive rights, at what price will the
shares be offered? (2%)
d) Assuming a stockholder disagrees with
the issuance of new shares and the
pricing for the shares, may the
stockholder invoke his appraisal rights
and demand payment for his
shareholdings? (2%)
SUGGESTED ANSWER:
a. Yes. Mr. X, a stockholder holding 4,000
shares, has pre-emptive right to the
remaining 10,000 shares. All stockholders
of a stock corporation shall enjoy pre-
emptive right to subscribe to all issues or
disposition of shares of any class, in
proportion to their respective
shareholdings.
ALTERNATIVE ANSWER.
a. No, Mr X does not have pre-emptive
right over the remaining 10,000 shares
because these shares have already been
SUGGESTED ANSWER: Stockholder; Delinquent; Unpaid Subscription (1997)
d. No, the stockholder may not exercise The BOD of a corporation, by a vote of ten
appraisal right because the matter that in favor of one against, declared due
he dissented from is not one of those and payable all unpaid subscription to
where right of appraisal is available the capital stock. The lone dissenting
under the corporation code. director failed to pay on due date, i.e., 19
Sept 1997, his unpaid subscription. Other
SEC; Jurisdiction; Transferred Jurisdiction (1996) than the shares wherein he was unable
What is the original and exclusive to complete payment, he did not own
jurisdiction of the SEC? any share in the corporation. On 23
SUGGESTED ANSWER: Sept 1997, he was informed by the
The SEC has original and exclusive BOD that, unless due payment is
jurisdiction over cases involving: meanwhile received, he:
a) Devices or schemes amounting to a) could no longer serve as a
fraud and misrepresentation; director of the corporation forthwith:
b) Controversies arising out of intra- b) would not be entitled to the cash and
corporate or partnership relations; stock dividends which were declared
c) Controversies in the election or and payable on 24 Sep 1997; and
appointment of directors, officers, etc; c) could not vote in the
d) Petitions to be declared in a state of stockholders meeting scheduled to
suspension of payments (Sec 5 PD take place on 26 Sept 1997.
902-A)
Was the action of the BOD on each of
TAKE NOTE:The RTC has jurisdiction over the foregoing matters valid?
the cases which involves intra-corporate SUGGESTED ANSWER:
controversy. As of 2006, the applicable a) No. The period of 30 days within
rule is that there is a TRANSFERRED which the stockholder can pay the unpaid
JURISDICTION under Sec. 5.2 of the SRC, subscription had not yet expired.
the Commission’s jurisdiction over all
b) No. The delinquency did not deprive the
cases enumerated under PD 902-A sec. 5
stockholder of his right to receive
has been transferred to the Courts of
dividends declared. However, the cash
general jurisdiction or the appropriate
dividend declared may be applied by the
Regional Trial Court.
corporation to the unpaid subscription.
(Sec 71 Corp Code)
Mercantile Law Bar Examination Q & A (1990-2006) Page 42 of 103
c) No. The period of 30 days within
which the stockholder can pay the unpaid Stockholders; Removal of Officers & BOD (2001)
subscription had not yet expired.
In 1999, Corporation A passed a board
resolution removing X from his position as
Stockholders: Preemptive Right (2004) manager of said corporation. The by-laws
The Board of Directors of ABC, Inc., a of A corporation provides that the officers
domestic corporation, passed a resolution are the president, vice-president, treasurer
authorizing additional issuance of shares and secretary. Upon complaint filed with the
of stocks without notice nor approval of SEC, it held that a manager could be
the stockholders. DX, a stockholder, removed by mere resolution of the board of
objected to the issuance, contending that it directors. On motion for reconsideration, X
violated his right of pre- emption to the alleged that he could only be removed by
unissued shares. Is his contention the affirmative vote of the stockholders
tenable? Explain briefly. (5%) representing 2/3 of the outstanding capital
SUGGESTED ANSWER: stock. Is X’s contention legally tenable.
Yes. DX's contention is tenable. Under Why? (5%)
Section 39 of the Corporation Code, all SUGGESTED ANSWER:
stockholders of ABC, Inc. enjoy No. Stockholders’ approval is necessary only
preemptive right to subscribe to all issues for the removal of the members of the BOD.
of shares of any class, including the For the removal of a corporate officer or
reissuance of treasury shares in employee, the vote of the BOD is sufficient
proportion to their respective for the purpose.
shareholdings.
Stockholders; Removal; Minority Director (1991)
Stockholders; Appraisal Right (2003)
Assuming that the minority block of
the XYZ Corporation is able to elect only 1
In what instances may the right of director and therefore,
appraisal be availed of under the
Corporation Code?
SUGGESTED ANSWER:
SECTION 81. Instances of Appraisal
Right. — Any stockholder of a corporation
shall have the right to dissent and demand
payment of the fair value of his shares in
the following instances:
1. In case any amendment to the articles
of incorporation has the effect of
changing or restricting the rights of
any stockholders or class of shares, or
of authorizing preferences in any
respect superior to those of
outstanding shares of any class, or of
extending or shortening the term of
corporate existence;
2. In case of sale, lease, exchange,
transfer, mortgage, pledge or other
disposition of all or substantially all of
the corporate property and assets as
provided in the Code; and
3. In case of merger or consolidation. (n)
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 the majority stockholders can always of stock of Rosario Corporation. She paid
muster a 2/3 vote, would you allow the 25% of said subscription. During the
majority stockholders to remove the one stockholders’ meeting, can Mercy vote
director representing the minority? all her subscribed shares? Explain.
SUGGESTED ANSWER: SUGGESTED ANSWER:
No. I will not allow the majority Yes, Mercy can vote all her subscribed
stockholders to remove the director. shares. Section 72 of the Corporation
While the stockholders may, by a 2/3 Code states that holders of subscribed
vote, remove a director, the law also shares not fully paid which are not
provides, however, that his right may delinquent shall have all the rights of a
not, without just cause, be exercised so stockholder.
as to deprive the minority of
representation in the BOD (Sec 28 Corp Stocks; Increase of Capital Stock (2001)
code; Gov’t vs Agoncillo 50p348)
Suppose X Corporation has an authorized
capital stock of P1M divided into 100,000
Stockholders; Rights (1996) shares of stock with par value of P10
What are the rights of a stockholder? each.
SUGGESTED ANSWER:
a) Give two ways whereby said authorized
The rights of a stockholder are as follows:
1) The right to vote, including the right capital stock may be increased to about
to appoint a proxy; P1.5M. (3%)
2) The right to share in the profits of the b) Give three practical reasons for a
corporation, including the right to corporation to increase its capital stock
declare stock dividends; (2%)
SUGGESTED ANSWER:
3) The right to a proportionate share of
a) Two ways of increasing the Authorized
the assets of the corporation upon
Capital Stock of X corporation to P1.5M
liquidation;
are:
4) The right of appraisal;
5) The pre-emptive right to shares; 1) Increase the number of shares from
6) The right to inspect corporate books 100,000 to 150,000 shares with the
and records; same par value of P10.00 each.
7) The right to elect directors; 2) Increase par value of 100,000
8) Such other rights as may contractually
shares to P15.00 each.
be granted to the stockholders by
the corporation or by special law. b) Three practical reasons for a
corporation to increase its capital stock
Stockholders; Voting Power of Stockholders are:
(1990) Mercy subscribed to 1,000 shares 1) to generate more working capital;

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Mercantile Law Bar Examination Q & A (1990-2006) Page 43 of 103
2) to have more shares with which to Explain (3%)
pay for the acquisition of more b) Would your answer be the same if A lost
assets like acquisition of company the stock certificate in question or if it was
car, stocks, house, machinery or stolen from him? (2%)
SUGGESTED ANSWER:
business; and
a) No. Assuming that the shares were
3) to have extra share with which to
already transferred to B, A cannot claim
cover or meet the requirement for
the shares of stock from X. The certificate
declaration of stock dividend.
of stock covering said shares have been
Stocks; Sale, Transfer of Certificates of Stock (1996) duly endorsed by A and entrusted by him
Arnold has in his name 1,000 shares of the to B. By his said acts, A is now estopped
capital stock of ABC Co as evidenced by a from claiming said shares from X, a bona
stock certificate. Arnold delivered the fide purchaser who relied on the
stock certificate to Steven who now claims endorsement by A of the certificate of stock.
to be the real owner of the shares,
b) Yes. In the case where the certificate of
having paid for Arnold’s subscription.
stock was lost or stole from A, A has a
ABC refused to recognize and register
right to claim the certificate of stock from
Steven’s ownership.
the thief who has no right or title to the
Is the refusal justified? Explain.
SUGGESTED ANSWER: same. “One who has lost any movable or
ABC’s refusal to recognize and register has been unlawfully deprived thereof, may
Steven’s ownership is justified. The facts recover it from the person in possession of
indicate that the stock certificate for the the same.” (Art 559 NCC)
1,000 shares in question is in the name of
Arnold. Although the certificate was Stocks; Sale, Transfer of Certificates of Stock
delivered by Arnold to Steven, the facts do (2004) Four months before his death, PX
not indicate that the certificate was duly assigned 100 shares of stock registered in his
endorsed by Arnold at the time it was name in favor of his wife and his
delivered to Steven or that the procedure
for the effective transfer of shares of stock
set out in the by-laws of ABC Co, if any,
was observed. Since the certificate was
not endorsed in favor of Steven (or
anybody else for that matter), the only
conclusion could be no other than that the
shares in question still belong to Arnold.
(Razon v IAC GR 74306 Mar 16,92 207s234)

Stocks; Sale, Transfer of Certificates of Stock (2001)

A is the registered owner of Stock
Certificate No. 000011. He entrusted the
possession of said certificate to his best
friend B who borrowed the said endorsed
certificate to support B’s application for
passport (or for a purpose other than
transfer). But B sold the certificate to X, a
bona fide purchaser who relied on the
endorsed certificates and believed him to
be the owner thereof.
a) Can A claim the shares of stock from X?
children. They then brought the deed of company. The corporation defaulted in
assignment to the proper corporate paying the full amount so that said former
officers for registration with the request President filed suit for collection of the
for the transfer in the corporation's balance before the SEC.
stock and transfer books of the assigned a) Under what conditions is a stock
shares, the cancellation of the stock corporation empowered to acquire its own
certificates in PX's name, and the shares?
issuance of new stock certificates in the b) Is the arrangement between the
names of his wife and his children as corporation and its President covered by
the new owners. The officers of the the trust fund doctrine? Explain your
Corporation denied the request on the answers briefly.
ground that another heir is contesting SUGGESTED ANSWER:

the validity of the deed of assignment. a) A stock corporation may only acquire
May the Corporation be compelled by its own shares of stock if the trust fund
mandamus to register the shares of stock doctrine is not impaired. This is to say, for
in the names of the assignees? Explain instance, that it may purchase its own
briefly. (5%) shares of stock by utilizing merely its
SUGGESTED ANSWER: surplus profits over and above the
Yes. The corporation may be compelled by subscribed capital of the corporation.
mandamus to register the shares of stock ALTERNATIVE ANSWER:

in the name of the assignee. The only a) (an answer enumerating the instances
legal limitation imposed by Section 63 of or cases under the Corporation Code
the Corporation Code is when the where the Corp allows the acquisition of
Corporation holds any unpaid claim shares such as in the stockholder’s
against the shares intended to be exercise of appraisal right, failure of bids
transferred. The alleged claim of another in the sale of delinquent shares, etc.)
heir of PX is not sufficient to deny the SUGGESTED ANSWER:
issuance of new certificates of stock to b) The arrangement between the
his wife and children. It would be corporation and its President to the extent
otherwise if the transferee's title to the that it calls for the payment of the latter’s
shares has no prima facie validity or is shares is covered by the trust fund
uncertain. doctrine. The only exceptions from the
trust fund doctrine are the redemption of
Trust Fund Doctrine (1992) redeemable shares and, in the case of
close corporation, when there should be a
A Corporation executed a promissory note
deadlock and the SEC orders the payment
binding itself to pay its
of the appraised value of a stockholder’s
President/Director, who had tendered his
share.
resignation, a certain sum in payment of
the latter’s shares and interests in the
Trust Fund Doctrine; Intra-Corporate Controversy (1991)
Mercantile Law Bar Examination Q & A (1990-2006) Page 44 of 103
On December 6, 1988, A, an incorporator and the
General Manager of the Paje Multi Farms
Credit Transactions
Co, resigned as GM and sold to the
corporation his shares of stocks in the
corporation for P300th, the book value Chattel Mortgage vs. After-Incurred Obligations (1991) To
thereof, payable as follows: a) P100th as secure the payment of an earlier loan of
P20,000 as well as subsequent loans which
down payment; b) P100th on or before 31
her friend Noreen, would extend to her,
July1989; and c) the remaining balance of Karen executed in favor of Noreen a
P100th on or before 30 Sep 1989. A chattel mortgage over her (Karen) car.
promissory note, with an acceleration Is the mortgage valid?
SUGGESTED ANSWER:
clause, was executed by the corporation for
A chattel mortgage cannot effectively
the unpaid balance.
secure after- incurred obligations. While a
stipulation to include after- incurred
The corporation failed to pay the first
obligations in a chattel mortgage is itself
installment on due date. A then sued Paje
not invalid, the obligation cannot, however,
on the promissory note in the RTC.
a) Does the court have jurisdiction over be deemed automatically secured by that
the case? mortgage until after a new chattel
b) Would your answer be the same if A mortgage or an addendum to the original
instead sold his shares to his friend chattel mortgage is executed to cover the
Mabel and the latter filed a case obligation after it has been actually
with the RTC against the corporation incurred. Accordingly, unless such
to compel it to register the sale and supplements are made, the chattel
to issue new certificates of stock in mortgage in the problem given would be
her name? deemed to secure only the loan of P20,000
SUGGESTED ANSWER: (Sec 5 Act 1505; Belgian Catholic Missionaries v
a) The RTC has jurisdiction over the case. Magallanes Press 49p647)
The SC said that a corporation may only
buy its own shares of stock if it has enough
surplus profits therefore.

b) My answer would be the same. An action

to compel a corporation to register a sale
and to issue new certificates of stock is
itself an intra-corporate matter that
exclusively lies with the RTC.

TAKE NOTE: The RTC has jurisdiction over

the cases which involves intra-corporate
controversy. As of 2006, the applicable
rule is that there is a TRANSFERRED
JURISDICTION under Sec. 5.2 of the SRC,
the Commission’s jurisdiction over all
cases enumerated under PD 902-A sec. 5
has been transferred to the Courts of
general jurisdiction or the appropriate
Regional Trial Court.

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Chattel Mortgage vs. After-Incurred Obligations b) Suppose the chattel mortgage was not
(1999) On December 1, 1996, Borrower registered, would its validity and
executed a chattel mortgage in favor of the effectiveness be impaired? Explain.
Bank to secure a loan of P3M. In due time (4%)
the loan was paid. SUGGESTED ANSWER:
On December 1, 1997, Borrower obtained a. The foreclosure of the chattel mortgage
another loan for P2M which the Bank regarding the second loan is not valid. A
granted under the same security as that chattel mortgage cannot validly secure
which secured the first loan. after incurred obligations. The affidavit of
good faith required under the chattel
For the second loan, Borrower merely mortgage law expressly provides that “the
delivered a promissory note; no new foregoing mortgage is made for securing
chattel mortgage agreement was the obligation specified in the conditions
executed as the parties relied on a hereof, and for no other purpose.” The
provision in the 1996 chattel mortgage after-incurred obligation not being
agreement which included future debts specified in the affidavit, is not secured by
as among the obligations secured by the mortgage.
mortgage. The provision reads:
“In case the Mortgagor executes b. Yes. The chattel mortgage is not valid
subsequent promissory note or notes as against any person, except the
either as a renewal, as an extension, mortgagor, his executors and
or as a new loan, this mortgage shall administrators.
also stand as security for the payment
of said promissory note or notes Chattel Mortgage; Foreclosure (1997)
without necessity of executing a new Ritz bought a new car on installments
contract and this mortgage shall have which provided for an acceleration clause
the same force and effect as if the said in the event of default. To secure
promissory note or notes were existing payment of the unpaid installments, as and
on date hereof.” when due, he constituted two chattel
mortgages, i.e., one over his very old car
As Borrower failed to pay the second
and the other covering the new car that
loan, the Bank proceeded to foreclose
he had just bought as aforesaid, on
the Chattel Mortgage.Borrower sued the
installments. After Ritz defaulted on three
Bank claiming that the mortgage was no
installments, the seller-mortgagee
longer in force. Borrower claimed that a
foreclosed on the old car. The proceeds of
fresh chattel mortgage should have been
the foreclosure were not enough to satisfy
executed when the second loan was
the due obligation; hence, he similarly
granted.
sought to foreclose on the new car.
a) Decide the case and ratiocinate. (4%)

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Mercantile Law Bar Examination Q & A (1990-2006) Page 45 of 103
Would the seller-mortgagee be legally of the car. Is the said argument
justified in foreclosing on this second meritorious? Explain your answer.
chattel mortgage?
SUGGESTED ANSWER: b) Jimbo also argued that even if the chattel
No. The two mortgages were executed to mortgage is valid, it cannot affect him
secure the payment of the unpaid because it was not properly registered
installments for the purchase of a new car. with the government offices where it should
When the mortgage on the old car was be registered. What government office is
foreclosed, the seller-mortgagee is Jimbo referring to?
deemed to have renounced all other
rights. A foreclosure of additional SUGGESTED ANSWER:
a) Jimbo’s argument is not meritorious.
property, that is, the new car covered by
Zonee became the owner of the property
the second mortgage would be a nullity.
upon delivery; registration is not essential
Chattel Mortgage; Ownership of Thing Mortgaged (1990) to vest that ownership in the buyer. The
Zonee, who lives in Bulacan, bought a execution of the chattel mortgage by the
1988 model Toyota Corolla sedan on July buyer in favor of the seller, in fact, can
1, 1989 from Anadelaida, who lives in demonstrate the vesting of such ownership
Quezon City, for P300th, paying P150th as to the mortgagor.
downpayment and promising to pay the
b) Jimbo was referring to the Register of
balance in 3 equal quarterly installments
Deeds of Bulacan where Zonee was a
beginning October 1, 1989. Anadelaida
resident. The Chattel Mortgage Law
executed a deed of sale of the vehicle in
requires the registration to be made in the
favor of Zonee and, to secure the
Office of the Register of Deeds of the
unpaid balance of the purchase price,
province where the mortgagor resides and
had Zonee execute a deed of chattel
also in which the property is
mortgage on the vehicle in Anadelaida’s
favor.

Ten days after the execution of the

abovementioned documents, Zonee had the
car transferred and registered in her
name. Contemporaneously, Anadelaida had
the chattel mortgage on the car registered
in the Chattel Mortgage Registry of the
Office of the Register of Deeds of Quezon
City.

In Sep 1989, Zonee sold the sedan to

Jimbo without telling the latter that the
car was mortgaged to Anadelaida. When
Zonee failed to pay the first installment
on October 1, 1989, Anadelaida went to
see Zonee and discovered that the latter
had sold the car to Jimbo.
a) Jimbo refused to give up the car on the
ground that the chattel mortgage executed
by Zonee in favor of Anadelaida is not
valid because it was executed before the
car was registered in Zonee’s name, i.e.,
before Zonee became the registered owner
situated as well as the LTO where the Bar Questions in Mercantile Law, as it
vehicle is registered. (Sec 4 Chattel is within Civil Law, it is suggested
Mortgage Law) that whatever answer is given by the
examinee, or the lack of answer should
Credit Transactions (1999) be given full credit. If the examinee
gives a good answer, he should be
Various buyers of lots in a subdivision
given additional credit.
brought actions to compel either or both
the developer and the bank to lease and SUGGESTED ANSWER:
deliver free and clear the titles to their a. No. The bank may not dispossess the
respective lots. prior purchasers of the individual lots,
much less require them to pay for the said
The problem arose because lots. The bank has to respect the rights of
notwithstanding prior sales mostly on the prior purchasers of the individual
installments – made by the developer to lots. The purchasers have the option to
buyers, developer had mortgaged the pay the installments of the mortgagee.
whole subdivision to a commercial bank.
The mortgage was duly executed and b. The bank has to respect the rights of
registered with the appropriate the buyers with remaining unpaid
governmental agencies. However, as the installments. The purchaser has the option
lot buyers were completely unaware of to pay the installments to the mortgagee
the mortgage lien of the bank, they who should apply the payments to the
religiously paid the installments due mortgage indebtedness.
under their sale contracts.
Mortgage (1999)
As the developer failed to pay its loan, the
mortgage was foreclosed and the whole Debtor purchased a parcel of land from a
subdivision was acquired by the bank as realty company payable in five yearly
the highest bidder. installments. Under the contract of sale,
a) May the bank dispossess prior title to the lot would be transferred upon
purchasers of individual lots or, full payment of the purchase price.
alternatively, require them to pay
But even before full payment, debtor
again for the paid lots? Discuss (3%)
constructed a house on the lot. Sometime
b) What are the rights of the bank vis-à-
thereafter, debtor mortgaged the house to
vis those buyers with remaining
secure his obligation arising from the
unpaid installments? Discuss. (3%)
issuance of a bond needed in the conduct
Recommendation: Since the subject
of his business. The mortgage was duly
matter of these two (2) questions is
registered with the proper chattel
not included within the scope of the
mortgage registry.
Mercantile Law Bar Examination Q & A (1990-2006) Page 46 of 103
Five years later after completing payment parties may treat it as a personal property
of the purchase price, debtor obtained and constitute a chattel mortgage thereon.
title to the lot. And even as the chattel Such mortgage shall be valid and binding
mortgage on the house was still subsisting, but only on the parties. It will not bind or
debtor mortgaged to a bank the lot and affect third parties.
improvement thereon to secure a loan.
This real estate mortgage was duly b) The lending investor has a better claim
registered and annotated at the back of the to the house. The real estate mortgage
title. covering the house and lot was duly
registered and binds the parties and third
Due to business reverses, debtor failed to persons. On the other hand, the chattel
pay his creditors. The chattel mortgage mortgage on the house securing the credit
was foreclosed when the debtor failed to of the surety company did not affect the
reimburse the surety company for rights of third parties such as the lending
payments made on the bond. In the investor despite registration of the chattel
foreclosure sale, the surety company was mortgage.
awarded the house as the highest bidder.
c) No. The chattel mortgage over the house
Only after the foreclosure sale did the which was foreclosed did not affect the
surety company learn of the real estate rights of third parties like the lending
mortgage in favor of the lending investor investor. Since the third parties are not
on the lot and the improvement thereon. bound by the chattel mortgage, they are
Immediately, it filed a complaint praying not also bound by any enforcement of its
for the exclusion of the house from the provisions. The foreclosure of such chattel
real estate mortgage. It was submitted mortgage did not bolster or add anything to
that as the chattel mortgage was executed the position of the surety company.
and registered ahead, it was superior to
the real estate mortgage. Mortgage vs. Levy (2003)

On the suggestion that a chattel mortgage

on a house- a real property- was a nullity,
the surety company countered that when
the chattel mortgage was executed, debtor
was not yet the owner of the lot on
which the house was built. Accordingly,
the house was a personal property and a
proper subject of a chattel mortgage.
a. Discuss the validity of the position taken
by the surety company. (3%)
b. Who has a better claim to the house, the
surety company or the lending investor?
Explain (3%)
c. Would the position of the surety
company be bolstered by the fact
that it acquired title in a foreclosure
sale conducted by the Provincial
Sheriff. Explain (3%)
SUGGESTED ANSWER:
a) The house is always a real property even
though it was constructed on a land not
belonging to the builder. However, the
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 To pay for her loan obtained from Stela, liquidate the obligation. The bank sued for
Liza constituted in Stela’s favor a chattel deficiency. In their answer, Janette and
mortgage over an electric generator. Jeanne did not deny the existence of the
Cecil, a creditor of Liza, levied on loan nor the fact of their default. They,
attachment the generator. Stela filed a however, interposed the defenses that the
third party claim. Cecil opposed the price at the auction was extremely low
claim. Rule on their conflicting claims. and that their loan, despite the loan
SUGGESTED ANSWER: documents, was a long-term loan which
had not yet matured. If you were the
Mortgage; Extrajudicial Foreclose (2006) judge, how would you rule on the case?
A real estate mortgage may be Why? (6%)
SUGGESTED ANSWER:
foreclosed judicially or extrajudicially. In
what instance may a mortgagee
extrajudicially foreclose a real estate Mortgage; Foreclosure of Improvements (1999)
mortgage? (5%) Borrower obtained a loan against the
SUGGESTED ANSWER: security of a mortgage on a parcel of
When a sale is made under a special land. While the mortgage was subsisting,
power inserted or attached to any real- borrower leased for fifty years the
estate mortgage, thereafter given as mortgaged property to Land Development
security for the payment of money or the Company (LDC). The mortgagee was duly
fulfillment of any other obligation, then advised of the lease. Thereafter, LDC
the mortgagee may extrajudicially constructed on the mortgaged property
foreclose the real estate mortgage (Sec. an office condominium.
1, Act No. 3135, as amended).

Mortgage; Foreclosure (2003) Borrower defaulted on his loan and

mortgagee foreclosed the mortgage. At the
May the sale at public auction by a bank
foreclosure sale, the mortgagee was
of a property mortgaged to it be nullified
awarded the property as the highest
because the price was extremely low?
bidder. The corresponding Certificate of
Why?
Sale was executed and after the lapse of
SUGGESTED ANSWER:
one year, title was consolidated in the
name of mortgagee.
Mortgage; Foreclosure (2003)
Because of failure of Janette and Jeanne Mortgagee then applied with the RTC for
to pay their loan to X Bank, the latter the issuance of a writ of possession not
foreclosed on the mortgage constituted only over the land but also the
on their property which was put up by condominium building. The mortgagee
them as security for the payment of the contended that the mortgage included all
loan. The price paid for the property at accessions, improvements and accessories
the foreclosure sale was not enough to found on the mortgaged property.

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Mercantile Law Bar Examination Q & A (1990-2006) Page 47 of 103
b. The lease rentals belong to the
mortgagor. However,
LDC countered that it had built on the a. The mortgagee has a better right to the
mortgaged property with the prior building. Under Art 2127 of the NCC, the
knowledge of mortgagee which had mortgage extends to all improvements on
received formal notice of the lease. the mortgaged property regardless of who
a) How would you resolve the dispute and when the improvements were
between the mortgagee and LDC? (3%) introduced. LDC cannot complain
b) Is the mortgagee entitled to the lease otherwise, because it knew that the
rentals due from LDC under the lease property it was leasing was mortgaged
agreement? (3%) when it built the condominium.
Recommendation: Since the subject matter of 2nd alternative Answer:
these two a. Assuming that the office condominium
(2) questions is not included within the scope of was duly constituted under the
the Bar Questions in Mercantile Law, as it is
within Civil Law, it is suggested that whatever Condominium Law, before LDC could
answer is given by the examinee, or the lack of validly constitute the same as a
answer should be given full credit. If the examinee condominium, it should cause to be
gives a good answer, he should be given additional
credit. recorded in the register of deeds of the
province or city where the land is situated
SUGGESTED ANSWER:
an enabling or master deed showing,
a. The mortgagee has a better right than
among others, a certificate of the
LDC. The mortgage extends to the
registered owner and of all registered
improvements introduced on the land,
holders of any lien or encumbrance on the
with the declarations, amplifications, and
property that they consent to the
limitations established by law, whether the
registration of the deed. (Sec 4. RA
estate remains in the possession of the
4726). If the mortgagee gave its consent
mortgagor or passes into the hands of a
thereto, then LDC should prevail. If no
third person (Art 2127 NCC). The notice
consent was given, the condominium was
given by LDC to the mortgagee was not
included in the mortgage.
enough to remove the building from
coverage of the mortgage considering that SUGGESTED ANSWER:
the building was built after the mortgage
was constituted and the notice was only
as regards the lease and not as to the
construction of the building. Since the
mortgagee was informed of the lease and
did not object to it, the mortgagee became
bound by the terms of the lease when it
acquired the property as the highest
bidder. Hence, the mortgagee steps into
the shoes of the mortgagor and acquires
the rights of the lessor under Art 1768 of
the NCC. This provision gives the lessor
the right to appropriate the condominium
building but after paying the lessee half of
the value of the building at that time.
Should the lessor refuse to reimburse said
amount, the lessee may remove the
improvement even though the land will
suffer damage thereby.
1st Alternative Answer:
the mortgage extends to rentals not yet 1) The taking of possession of the
received when the obligation becomes machinery by the bank did not result in
due and the mortgagee may ran after the full payment of the obligations owing
said rentals for the payment of the from the company and its officers. The
mortgage debt. taking of such possession must be
considered merely as a measure in order
Mortgage; Foreclosure; Effect of mere taking by to protect or further safeguard the bank’s
creditor- mortgagor of property (1992) security interest. Dacion en pago can only
X & Co obtained a loan from a local bank be considered as having taken place when
in the amount of P500th, mortgaging as a creditor accepts and appropriates the
security therefore its real property. ownership of the goods in payment of a
Subsequently, the company applied with due obligation. (PNB v Pineda 197 s 1)
the same bank for a Letter of Credit (LC)
2) The mere taking of possession of
for $200th in favor of a foreign bank to
mortgaged assets does not amount to
cover the importation of machinery. To
foreclosure. Foreclosure requires a sale at
guarantee payment of the obligation
public auction. The foreclosure, therefore,
under the LC, the company and its
has not as yet been effected.
President and Treasurer executed a
surety agreement in the local bank’s favor.
Mortgage; Redemption Period; Foreclosed Property
The machinery arrived and was released (2002)
to the company under a trust receipt Primetime Corporation (the Borrower)
agreement. As the company defaulted in obtained a P10 Million, five-year term
the payment of its obligations, the bank loan from Universal Bank (the Bank) in
took possession of the imported 1996. As security for the loan and as
machinery. At the same time, it sought to required by the Bank, the Borrower gave
foreclose the mortgaged property and to the following collateral security in favor of
hold the company as well as its President the Bank:
and Treasurer, liable under the Surety 1) a real estate mortgage over the land
Agreement. and building owned by the Borrower
and located in Quezon City;
Did the taking of possession of the 2) the joint and several promissory note
machinery by the bank result in the 1) of Pr. Primo Timbol, the President of
full payment of the obligations of the the Borrower; and
company and its officers, and 2) 3) a real estate mortgage over the
foreclosure of the mortgage? residential house and lot owned by Mr.
SUGGESTED ANSWER:
Timbol, also located in Quezon City.
Mercantile Law Bar Examination Q & A (1990-2006) Page 48 of 103
Because of business reverses, neither the mortgage deed, Carmakers, Inc., assigned
Borrower nor Mr. Timbol was able to pay the instruments sans recourse to
the loan. In June 2001, the Bank Adelantado Finance Corporation. Chari
extrajudicially foreclosed the two real defaulted in her obligations. Could
estate mortgages, with the Bank as the Adelantado Finance corporation take action
only bidder in the foreclosure sale. On against both Carmakers Inc., and Chari?
September 16, 2001, the certificates of Why? (6%)
sale of the two properties in favor of the SUGGESTED ANSWER:

Bank were registered with the Register of Preference of Credits (2002)

Deeds of Quezon City. As of June 1, 2002, Edzo Systems
Corporation (Edzo) was indebted to the
Ten months later, both the Borrower and following creditors:
Mr. Timbol were able to raise sufficient (1) Ace Equipment Supplies – for various
funds to redeem their respective personal computers and accessories
properties from the Bank, but the Bank sold to Edzo on credit amounting to
refused to permit redemption on the P300,000.
ground that the period for redemption (2) Handyman Garage – for mechanical
had already expired, so that the Bank repairs (parts and service) performed
now has absolute ownership of both on Edzo’s company car amounting to
properties. The Borrower and Mr. Timbol P10,000.
came to you today, September 15, 2002, (3) Joselyn Reyes – former employee of Edzo
to find out if the position of the Bank is who sued Edzo for unlawful termination
correct. What would be your answer? of employment and was able to obtain a
State your reasons (5%). final judgment against Edzo for
P100,000.
SUGGESTED ANSWER:
(4) Bureau of Internal Revenue – for unpaid
1. With respect to the real estate
value- added taxes amounting to
mortgage over the land and building
P30,000.
owned by the Borrower, Primetime
Corporation, a juridical body, the
period of redemption is only three (3)
months, which period already expired.

2. As to the real estate mortgage over

the residential house and lot owned by
Mr. Timbol, the period of redemption
is one (1) year from the date of
registration of the certificate of sale,
which period has not yet expired in this
case.

Mortgage; Remedies (2003)

Carmakers, Inc., sold a motor vehicle on
installment basis to Chari Paredes. The
transaction was reflected on a promissory
note executed by Chari in favor of
Carmakers. The note was secured by a
mortgage over the car. Contemporaneous
with the execution of the note and the
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 (5) Integrity Bank – which granted Edzo a in the following order:
loan in 2001 in the amount of (1) No. 4 – claim of the BIR for unpaid
P500,000. The loan was not secured value added taxes
by any asset of Edzo, but it was (2) No. 3 – claim of Joselyn Reyes for
guaranteed unconditionally and Unlawful termination
solidarily by Edzo’s President and (3) No. 1 – claim of Ace equipment
controlling stockholder, Eduardo Z. Supplies as an unpaid seller; and
Ong, as accommodation surety. (4) No. 5 – claim of Integrity Bank.

The loan due to Integrity Bank fell due on

June 15, 2002. Despite pleas for Promissory Note: Liability (2001)
extension of payment by Edzo, the bank
X, Y and Z signed a promissory note in
demanded immediate payment. Because
favor of A stating: “We promise to pay A
the bank threatened to proceed against
on December 31, 2001 the sum of
the surety, Eduardo Z. Ong, Edzo
P5,000.00” When the note fell due, A sued
decided to pay up all its obligations to
X and Y who put up the defense that A
Integrity Bank. On June 20, 2002, Edzo
should have impleaded
paid to Integrity Bank the full principal
Z. Is the defense valid? Why? (5%)
amount of P500,000, plus accrued SUGGESTED ANSWER:
interests amounting to P55,000. As a The defense is not valid. The liability of
result, Edzo had hardly any cash left for X, Y, and Z under the promissory note is
operations and decided to close its joint. Such being the case, Z is not an
business. After paying the unpaid indispensable party. The fact that A did
salaries of its employees, Edzo filed a not implead Z will not prevent A from
petition for insolvency on July 1, 2002. collecting the proportionate share of X
and Y in the payment of the loan.
How would you, as judge in the (Observation: Even if the liability of
insolvency proceedings, rank the X, Y, and Z is solidary, the defense
respective credits or claims of the five (5) would still not be valid)
creditors mentioned above in terms of
preference or priority against each other?
(5%) Remedies; Available to Mortgagee-Creditor (1996)
SUGGESTED ANSWER: Finding a 24-month payment plan
The claim of Handyman Garage for attractive, Anjo purchased a Tamaraw FX
P10,000 has a specific lien on the car from Toyota QC. He paid a down-payment
repaired. of P100th and obtained financing for the
balance from IOU Co. He executed a
The remaining four (4) claims have chattel mortgage
preference or priority against each other

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Mercantile Law Bar Examination Q & A (1990-2006) Page 49 of 103
over the vehicle in favor of IOU. When the P10M account. Subsequently, bank Y
Anjo defaulted, IOU foreclosed the chattel also filed foreclosure proceedings against A
mortgage, and sought to recover the for security given for the account. If you
deficiency. were the judge, how would you resolve the
May IOU still recover the deficiency? two cases? (5%)
Explain. SUGGESTED ANSWER:
SUGGESTED ANSWER: The case for collection will be allowed to
IOU may no longer recover the
proceed. But the foreclosure proceedings
deficiency. Under Art 1484 of the NCC, in
have to be dismissed. In instituting
a contract of sale of personal property the
foreclosure proceedings, after filing a
price of which is payable in installments,
collection case involving the same account
the vendor may, among several options,
or transaction, bank Y is guilty of splitting a
foreclose the chattel mortgage on the
cause of action. The loan of P10M is the
thing sold, if one has been constituted,
principal obligation while the mortgage
should the vendee’s failure to pay cover
securing the same is merely an accessory
two or more installments. In such case,
to said loan obligation. The collection of
however, the vendor shall have no further
the loan and the foreclosure of the
action against the purchaser to recover
mortgage securing said loan constitute one
any unpaid balance of the price and any
and the same cause of action. The filing of
agreement to the contrary is void. While
the collection case bars the subsequent
the given facts did not explicitly state that
filing of the foreclosure proceedings.
Anjo’s failure to pay covered 2 or more
installments, this may safely be
Remedies; Secured Debt (1991)
presumed because the right of IOU Co to
foreclose the chattel mortgage under the To secure the payment of his loan of P200th,
circumstances is premised on Anjo’s A executed in favor of the Angeles Banking
failure to pay 2 or more installments. The Co in 1 document, a real estate mortgage
foreclosure would not have been valid if it over 3 lots registered in his name and a
were not so. (The given facts did not also chattel mortgage over his 3 cars and 1 Isuzu
state explicitly whether Anjo’s default was cargo truck.
a payment default or a default arising
from a breach of a negative pledge or
breach of a warranty. In such case,
however, IOU Company would not have
been able to foreclose the chattel
mortgage validly as such foreclosure,
under the circumstances contemplated by
the law, could only be effected for a
payment default covering two or more
installments) (Luis Ridad v Filipinas
Investment and Finance Co GR L-39806
Jan27,83 120s246)

Remedies; Available to Mortgagee-Creditor (2001)

Debtor “A” issued a promissory note in the
amount of P10M in favor of commercial
bank Y secured by mortgage of his
properties worth P30M. When A failed to
pay his indebtedness, despite demands
made by bank Y, the latter instituted a
collection suit to enforce payment of
Upon his failure to pay the loan on due The indivisibility of a contract of real
date, the bank foreclosed the mortgage security, such as a real estate mortgage
on the 3 lots, which were subsequently or a chattel mortgage, only means that a
sold for only P99th at the foreclosure division or a partial payment of a
sale. Thereafter, the bank filed an secured obligation does not warrant a
ordinary action for the collection of the corresponding division or proportionate
deficiency. A contended that the reduction of the security given. A creditor
mortgage contract he executed was in such secured debts may pursue the
indivisible and consequently, the bank remedy of foreclosure, in part or in full,
had no legal right to foreclose only the or file an ordinary action for collection on
real estate mortgage and leave out the any amount due. A favorable judgment can
chattel mortgage, and then sue him for warrant an issuance of a writ of
a supposed deficiency judgment. execution on any property, not exempt
If you were the Judge, would you sustain from execution, belonging to the
the contention of A? judgment debtor. There should be no legal
SUGGESTED ANSWER: obstacle for a creditor to waive, in full or
If I were the Judge, I would dismiss the in part, his right to foreclosure on
action as being premature since the contracts of real security.
proper remedy would be to complete the
foreclosure of the mortgages and only
thereafter can there by an action for
collection of any deficiency. In Caltex v Insurance Law
IAC (GR 74730, 25 Aug 89), the remedies
on a secured debt, said the court, are
either an action to collect or to foreclose a Beneficiary: Effects: Irrevocable Beneficiary (2005)
contract of real security. These remedies What are the effects of an irrevocable
are alternative remedies, although an designation of a beneficiary under the
action for any deficiency is not Insurance Code? Explain. (2%)
precluded, subject to certain exceptions SUGGESTED ANSWER:
such as those stated in Art 1484 of the The irrevocable designation gives the
Civil Code, by a foreclosure on the beneficiary a vested right over Life
mortgages. While the factual settings in Insurance. The Insured cannot act to divest
the case of Suria v IAC (30 June 87) are not the irrevocable beneficiary, in whole or in
similar to the facts given in the problem, part, without the beneficiary's consent.
the SC implied that foreclosure as a To be specific:
remedy in secured obligations must first (1) The beneficiary designated in a life
be availed of by a creditor in preference insurance contract cannot be changed
to other remedies that might also be without the consent of the beneficiary
invoked by him. because he has a vested interest in the
ALTERNATIVE ANSWER: policy (Philamlife v. Pineda, G.R. No. 54216, July
19,
Mercantile Law Bar Examination Q & A (1990-2006) Page 50 of 103
1989, citing Gcrcio v. Sun Life, G.R. No. 23703, Beneficiary; Life Insurance; Prohibited Beneficiaries
September 28, 1925; and Go v. Redfern, G.R. No. (1998)
47705, April 25, 1841);
Juan de la Cruz was issued Policy No. 8888
(2) Neither can the Insured take the cash of the Midland Life Insurance Co on a whole
surrender value, assign or even borrow life plan for P20,000 on August 19, 1989.
on said policy without the beneficiary's Juan is married to Cynthia with whom he
consent (Nario v. Philamlife, G.R. No. 22796, June has three legitimate children. He, however,
26, 1967); designated Purita, his common-law wife, as
the revocable beneficiary. Juan referred to
(3) The Insured cannot add another Purita in his application and policy as the
beneficiary because that would reduce legal wife.
the amount which the first beneficiary 3 years later, Juan died. Purita filed her
may recover and therefore adversely claim for the proceeds of the policy as the
affect his vested right (Go v. Redfem, G.R. designated beneficiary therein. The widow,
No. 47705, April 25, 1941);
Cynthia, also filed a claim as the legal
(4) Unless the policy allows, the Insured wife. To whom should the proceeds of the
cannot even designate another insurance policy be awarded? (5%)
beneficiary should the original SUGGESTED ANSWER:
beneficiary predecease him. His estate The proceeds of the insurance policy shall
acquires the beneficiary's vested right be awarded to the ESTATE of Juan de la
upon his death; and Cruz. Purita, the common- law-wife, is
disqualified as the beneficiary of the
(5) The Insured cannot allow his creditors to deceased because of illicit relation between
attach or execute on the policy. (Philamlife v. the deceased and Purita, the designated
Pineda, G.R. No. 54216, July 19, 1989) beneficiary. Due to such illicit

Beneficiary: Rights; Irrevocable Beneficiary (2005)

Jacob obtained a life insurance policy for
P1 Million designating irrevocably Diwata,
a friend, as his beneficiary. Jacob,
however, changed his mind and wants Yob
and Jojo, his other friends, to be included
as beneficiaries considering that the
proceeds of the policy are sufficient for
the three friends. Can Jacob still add Yob
and Jojo as his beneficiaries? Explain. (2%)
SUGGESTED ANSWER:
No, Jacob can no longer add Yob and Jojo
as his beneficiaries in addition to Diwata.
As the irrevocable beneficiary, Diwata has
acquired a-vested right over Jacob's life
insurance policy. Any additional
beneficiaries will reduce the amount
which Diwata, as the first beneficiary,
may recover, which will adversely affect
her vested right. (Go v. Redfern, G.R.
No. 47705, April 25, 1941)

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relation, Purita cannot be a donee of the
deceased. Hence, she cannot also be his The beneficiaries contend that the
beneficiary. company had no right to rescind the
contract as rescission must be done
“during the lifetime” of the insured within
Concealment; Material Concealment (2001)
two years and prior to the commencement
A applied for a non-medical life of the action.
insurance. The insured did not inform Is the contention of the beneficiaries
the insurer that one week prior to his tenable?
application for insurance, he was SUGGESTED ANSWER:
No. The incontestability clause does not
examined and confined at St. Luke’s
apply. The insured dies within less than
Hospital where he was diagnosed for
two years from the issuance of the policy
lung cancer. The insured soon thereafter
on September 23, 1990. The insured died
died in a plane crash. Is the insurer
on April 26, 1992, or less than 2 years
liable considering that the fact concealed
from September 23, 1990.
had no bearing with the cause of death
of the insured? Why? (5%) The right of the insurer to rescind is
SUGGESTED ANSWER:
No. The concealed fact is material to the only lost if the beneficiary has
approval and issuance of the insurance commenced an action on the policy. There
policy. It is well settled that the insured is no such action in this case. (Tan v CA 174 s
143)
need not die of the disease he failed to
disclose to the insurer. It is sufficient
that his nondisclosure misled the insurer Concealment; Material Concealment: Incontestability
in forming his estimate of the risks of Clause (1996)
the proposed insurance policy or in Juan procured a “non-medical” life
making inquiries. insurance from Good Life Insurance. He
designated his wife, Petra, as the
Concealment; Material Concealment: Incontestability beneficiary. Earlier, in his application in
Clause (1994) response to the question as to whether or
not he had ever been hospitalized, he
On September 23, 1990, Tan took a life
answered in the negative. He forgot to
insurance policy from Philam. The policy
mention his confinement at the Kidney
was issued on November 6, 1990. He
Hospital.
died on April 26, 1992 of hepatoma. The
insurance company denied the
After Juan died in a plane crash, Petra
beneficiaries’ claim and rescinded the
filed a claim with Good Life. Discovering
policy by reason of alleged
Juan’s previous hospitalization, Good Life
misrepresentation and concealment of
rejected Petra’s claim on the ground of
material facts made by Tan in his
concealment and misrepresentation. Petra
application. It returned the premiums
sued Good Life, invoking good faith on part
paid.
of Juan.

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Mercantile Law Bar Examination Q & A (1990-2006) Page 51 of 103
Will Petra’s suit prosper? Explain.
SUGGESTED ANSWER: the premiums paid.
No, Petra’s suit will not prosper (assuming Is the decision of the insurance company
that the policy of life insurance has been justified?
in force for a period of less than 2 years SUGGESTED ANSWER:
Assuming that the incontestability clause
from the date of its issue). The matters
does not apply because the policy has not
which Juan failed to disclose was material
been in force for 2 years, from the date of
and relevant to the approval and issuance
issue, during the lifetime of the insured,
of the insurance policy. They would have
the decision of the insurance company not
affected Good Life’s action on his
to pay is justified. There was fraudulent
application, either by approving it with the
concealment. It is not material that the
corresponding adjustment for a higher
insured died of a different cause than the
premium or rejecting the same. Moreover,
fact concealed. The fact concealed, that is
a disclosure may have warranted a
heart ailment, is material to the
medical examination of Juan by Good Life
determination by the insurance company
in order for it to reasonably assess the
whether or not to accept the application
risk involved in accepting the application.
for insurance and to require the medical
In any case, good faith is no defense in
examination of the insured.
concealment. The waiver of a medical
examination in the ‘non-medical’ life
However, if the incontestability clause
insurance from Good Life makes it even
which applies to the insurance policy
more necessary that Juan supply complete
covering the life of the insured had been in
information about his previous
force for 2 years from issuance thereof, the
hospitalization for such information
insurance company would not be justified in
constitutes an important factor which Good
denying the claim for proceeds of the
Life takes into consideration in deciding
insurance and in returning the premium
whether to issue the policy or not. (See
paid. In that case, the insurer cannot prove
Sunlife Assurance Co of Canada v CA GR
the policy void ab initio or rescindible by
105135, June 22, 1995 245 s 268)
reason of fraudulent concealment or
If the policy of life insurance has been in misrepresentation of the insured.
force for a period of 2 years or more from
the date of its issue (on which point the
given facts are vague) then Good Life can
no longer prove that the policy is void ab
initio or is rescindible by reason of the
fraudulent concealment or
misrepresentation of Juan ( Sec 48 Ins
Code)

Concealment; Material Concealment: Incontestability

Clause (1997)
The assured answers “No” to the
question in the application for a life
policy: “Are you suffering from any form of
heart illness?” In fact, the assured has
been a heart patient for many years. On 7
Sep 1991, the assured is killed in a plane
crash. The insurance company denies the
claim for insurance proceeds and returns
Concealment; Material Concealment; Incontestability on January 2, 1990. He concealed the
Clause (1991) fact that 3 years prior to the issuance of
Atty Roberto took out a life insurance his life insurance policy, he had been
policy from the Dana Ins Co (DIC) on 1 seeing a doctor about his heart ailment.
Sep 1989. On 31 Aug 1990, Roberto
died. DIC refused to pay his On March 1, 1992, Renato died of heart
beneficiaries because it discovered that failure. May the heirs file a claim on the
Robert had misrepresented certain proceeds of the life insurance policy of
material facts in his application. The Renato? (5%)
SUGGESTED ANSWER:
beneficiaries sued on the basis that DIC
Yes. The life insurance policy in question
can contest the validity of the insurance
was issued on January 9, 1990. More
policy only within 2 years from the date
than 2 years had elapsed when Renato,
of issue and during the lifetime of the
the insured, died on March 1, 1992. The
insured. Decide the case.
incontestability clause applies.
SUGGESTED ANSWER:
I would rule in favor of the insurance
INCONTESTABILITY CLAUSE
company. The incontestability clause, The insurer has two years from the date
applies only if the policy had been in of issuance of the insurance contract or of
effect for at least 2 years. The 2 year its last reinstatement within which to
period is counted from the time the contest the policy, whether or not, the
insurance becomes effective until the insured still lives within such period.
death of the insured and not thereafter After two years, the defenses of
(Tan v CA GR 48044 29Jun1989)
concealment or misrepresentation, no
ALTERNATIVE ANSWER:
I would rule in favor of the insurance matter how patent or well founded, no
company. Although an insurer may not longer lie.
rescind the contract on ground of
misrepresentation after an action is Insurable Interest: Bank Deposit (2000)
commenced for recovery under the policy, BD has a bank deposit of half a million
the insurer is not precluded from pesos. Since the limit of the insurance
invoking the ground of misrepresentation coverage of the Philippine Deposit
as a defense in the action for recovery. Insurance Corp (PDIC) (RA 3591) is only
This is alright since the bar problem is not one tenth of BD’s deposit, he would like
covered yet by the incontestability clause. some protection for the excess by taking
out an insurance against all risks or
Concealment; Material Concealment; Incontestability contingencies of loss arising from any
Clause (1998) unsound or unsafe banking practices
Renato was issued a life insurance policy including unforeseen adverse effects of
Mercantile Law Bar Examination Q & A (1990-2006) Page 52 of 103
the continuing crisis involving the banking it discovered that at the time of the loss,
and financial sector in the Asian region. the stocks-in-trade were mortgaged to a
Does BD have an insurable interest within creditor who likewise obtained from Second
the meaning of the Insurance Code of the Insurance Company fire insurance coverage
Philippines (PD1460)? (2%) for the stocks at their full value of P5M.
SUGGESTED ANSWER: a) May the businessman and the creditor
Yes. BD has insurable interest in his obtain separate insurance coverages
bank deposit. In case of loss of said over the same stocks- in-trade? Explain
deposit, more particularly to the extent of (3%)
the amount in excess of the limit covered b) First Insurance refused to pay claiming
by the PDIC Act, PBD will be damnified. that double insurance is contrary to
He will suffer pecuniary loss of law. Is this contention tenable? (3%)
P300,000.00, that is, his bank deposit of c) Suppose you are the Judge, how much
half a million pesos minus P200,000.00 would you allow the businessman and
which is the maximum amount recoverable the creditor to recover from their
from the PDIC. respective insurers. Explain (3%)
SUGGESTED ANSWER:
Insurable Interest: Public Enemy (2000) a) Yes. The businessman, as owner, and the
creditor, as mortgagee, have separate
May a member of the MILF or its
insurable interests in the same stocks-in-
breakaway group, the Abu Sayyaf, be
trade. Each may insure such interest to
insured with a company licensed to do
protect his own separate interest.
business under the Insurance Code of the
b) The contention of First Insurance that
Phils (PD 1460)? Explain. (3%)
SUGGESTED ANSWER:
double insurance is contrary to law is
A member of the MILF or the Abu Sayyaf untenable. There is no law providing that
may be insured with a company licensed double insurance is illegal per se.
to do business under the Insurance Code
of the Phils. What is prohibited to be
insured is a public enemy. A public enemy
is a citizen or national of a country with
which the Philippines is at war. Such
member of the MILF or the Abu Sayyaf is
not a citizen or national of another
country, but of the Philippines.

Insurable Interest: Separate Insurable Interest (1999)

A businessman in the grocery business
obtained from First Insurance an
insurance policy for P5M to fully cover his
stocks-in-trade from the risk of fire.

Three months thereafter, a fire of

accidental origin broke out and completely
destroyed the grocery including his
stocks-in-trade. This prompted the
businessman to file with First Insurance a
claim for five million pesos representing
the full value of his goods.

First Insurance denied the claim because

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 Moreover, in the problem at hand, there Insurable Interest; Life vs. Property Insurance (1997)
is no double insurance because the a) A obtains a fire insurance on his
insured with the First Insurance is house and as a generous gesture
different from the insured with the names his neighbor as the beneficiary.
Second Insurance Company. The same is If A’s house is destroyed by fire, can B
true with respect to the interests insured successfully claim against the policy?
in the two policies. b) A obtains insurance over his life and
names his neighbor B the beneficiary
c) As Judge, I would allow the
because of A’s secret love for B. If A
businessman to recover his total loss of
dies, can B successfully claim against
P5M representing the full value of his
the policy?
goods which were lost through fire. As to SUGGESTED ANSWER:
the creditor, I would allow him to recover a) No. In property insurance, the
the amount to the extent of or equivalent beneficiary must have insurable interest
to the value of the credit he extended to in the property insured. (Sec 18 Ins
the businessman for the stocks-in-trade Code). B does not have insurable interest
which were mortgaged by the in the house insured.
businessman.
b) Yes. In life insurance, it is not required
Insurable Interest; Equitable Interest (1991) that the beneficiary must have insurable
interest in the life of the insured. It was
A piece of machinery was shipped to Mr
the insured himself who took the policy on
Pablo on the basis of C&F Manila. Pablo
his own life.
insured said machinery with the Talaga
Merchants Ins Co (Tamic) for loss or
damage during the voyage. The vessel Insurable Interest; Life vs. Property Insurance (2000)
sank en route to Manila. Pablo then filed IS, an elderly bachelor with no known
a claim with Tamic which was denied for relatives, obtained life insurance coverage
the reason that prior to deliver, Pablo for P250,000.00 from Starbrite Insurance
had no insurable interest. Decide the Corporation, an entity licensed to engage
case. in the insurable business under the
SUGGESTED ANSWER: Insurance Code of the Philippines
Pablo had an existing insurable interest (PD1460). He also insured his residential
on the piece of machinery he bought. house for twice that amount within the
The purchase of goods under a same corporation. He immediately
perfected contract of sale already vests assigned all his rights to the insurance
equitable interest on the property in proceeds to BX, a friend-companion living
favor of the buyer even while it is with him. Three years later, IS died in a
pending delivery (Filipino Merchants Ins fire that gutted his insured house two
Co v CA GR 85144 28Nov1989)
days after he had sold it. There is

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Mercantile Law Bar Examination Q & A (1990-2006) Page 53 of 103
no evidence of suicide or arson or insured must exist when the insurance
involvement of BX in these events. BX takes effect and when the loss occurs
demanded payment of the insurance but need not exist in the meantime. In
proceeds from the two policies, the life insurance, it is enough that
premiums for which IS had been faithfully insurable interest exists at the time
paying during all the time he was alive. when the contract is made but it need
Starbrite refused payment, contending that not exist at the time of loss.
BX had no insurable interest and
therefore was not entitled to receive the Insurable Interest; Property Insurance (1994)
proceeds from IS’s insurance coverage on
In a civil suit, the Court ordered Benjie to
his life and also on his property. Is
pay Nat P500,000.00. To execute the
Starbrite’s contention valid? Explain? (5%)
judgment, the sheriff levied upon Benjie’s
SUGGESTED ANSWER:
Starbrite is correct with respect to the registered property (a parcel of land and
insurance coverage on the property of IS. the building thereon),and sold the same at
The beneficiary in the property insurance public auction to Nat, the highest bidder.
policy or the assignee thereof must have The latter, on March 18, 1992, registered
insurable interest in the property with the Register of Deeds the certificate
insured. BX, a mere friend-companion of of sale issued to him by the sheriff.
IS, has no insurable interest in the Meanwhile, on January 27, 1993, Benjie
residential house of IS. BX is not entitled insured with Garapal Insurance for
to receive the proceeds from IS’s P1,000,000.00 the same building that was
insurance on his property. sold at public auction to Nat. Benjie failed
to redeem the property by March 18, 1993.
As to the insurance coverage on the life
of IS, BX is entitled to receive the
proceeds. There is no requirement that BX
should have insurable interest in the life of
IS. It was IS himself who took the
insurance on his own life.

Insurable Interest; Life vs. Property Insurance

(2002) Distinguish insurable interest in
property insurance from insurable interest in
life insurance. (5%)
SUGGESTED ANSWER:
a) In property insurance, the expectation
of benefit must have a legal basis. In
life insurance, the expectation of
benefit to be derived from the
continued existence of a life need not
have any legal basis.

b) In property insurance, the actual value

of the interest therein is the limit of
the insurance that can validly be
placed thereon. In life insurance, there
is no limit to the amount of insurance
that may be taken upon life.

c) In property insurance, an interest

On March 19, 1993, a fire razed the JQ can recover on the fire insurance policy
building to the ground. Garapal Insurance for the loss of said condominium unit. He
refused to make good its obligation to has the insurable interest as owner-
Benjie under the insurance contract. insured. As beneficiary in the fire insurance
1) Is Garapal Insurance legally justified policy, MLQ cannot recover on the fire
in refusing payment to Benjie? insurance policy. For the beneficiary to
2) Is Nat entitled to collect on the insurance recover on the fire or property insurance
policy? policy, it is required that he must have
SUGGESTED ANSWER:
1) Yes. At the time of the loss, Benjie insurable interest in the property insured.
was no longer the owner of the property In this case, MLQ does not have
insured as he failed to redeem the insurable interest in the condominium
property. The law requires in property unit.
insurance that a person can recover the
proceeds of the policy if he has insurable Insurance; Cash & Carry Basis (2003)
interest at the time of the issuance of the What is meant by “cash and carry” in the
policy and also at the time when the loss business of insurance?
occurs. At the time of fire, Benjie no SUGGESTED ANSWER:
longer had insurable interest in the
property insured. Insurance; Co-Insurance vs. Re-Insurance (1994)
Distinguish co-insurance from re-insurance.
2) No. While at the time of the loss he SUGGESTED ANSWER:
had insurable interest in the building, as CO-INSURANCE is the percentage in the
he was the owner thereof, Nat did not value of the insured property which the
have any interest in the policy. There insured himself assumes or undertakes to
was no automatic transfer clause in the act as insurer to the extent of the
policy that would give him such interest deficiency in the insurance of the insured
in the policy. property. In case of loss or damage, the
insurer will be liable only for such
Insurable Interest; Property Insurance (2001) proportion of the loss or damage as the
amount of insurance bears to the
JQ, owner of a condominium unit, insured
designated percentage of the full value of
the same against fire with the XYZ
the property insured.
Insurance Co., and made the loss payable
to his brother, MLQ. In case of loss by REINSURANCE is where the insurer
fire of the said condominium unit, who procures a third party, called the
may recover on the fire insurance policy? reinsurer, to insure him against liability by
State the reason(s) for your answer. (5%) reason of such original insurance.
SUGGESTED ANSWER:
Basically, a
Mercantile Law Bar Examination Q & A (1990-2006) Page 54 of 103
reinsurance is an insurance against liability matter of the insurance being applied for.
which the original insurer may incur in (New Life Ent v CA 207 s 669)
favor of the original insured.
2) No, because she is guilty of violation of a
warranty/ condition.
Insurance; Double Insurance (2005)
When does double insurance exist? (2%)
SUGGESTED ANSWER: Insurance; Effects; Payment of Premiums by Installment
Under Section 93 of the Insurance Code, (2006)
there is double insurance when there is The Peninsula Insurance Company offered
over-insurance with two or more to insure Francis' brand new car against all
companies, covering the same property, the risks in the sum of PI Million for 1 year.
same insurable interest and the same The policy was issued with the premium
risk. Double insurance exists where the fixed at 160,000.00 payable in 6 months.
same person is insured by several Francis only paid the first two months
insurers separately in respect of the same installments. Despite demands, he failed to
subject matter and interests. (Geagonia v. pay the subsequent installments. Five
Court of Appeals, G.R. No. 114427, February months after the issuance of the policy, the
6, 1995)
vehicle was carnapped. Francis filed with
the insurance company a claim for its
Insurance; Double Insurance; effect (1993) value. However, the company denied his
Julie and Alma formed a business claim on the ground that he failed to pay
partnership. Under the business name the premium resulting in the cancellation of
Pino Shop, the partnership engaged in a the policy.
sale of construction materials. Julie Can Francis recover from the Peninsula
insured the stocks in trade of Pino Shop Insurance Company? (5%)
with WGC Insurance Co for P350th. SUGGESTED ANSWER:

Subsequently, she again got an insurance

contract with RSI for P1m and then from
EIC for P200th. A fire of unknown origin
gutted the store of the partnership. Julie
filed her claims with the three insurance
companies. However, her claims were
denied separately for breach of policy
condition which required the insured to
give notice of any insurance effected
covering the stocks in trade. Julie went to
court and contended that she should not
be blamed for the omission, alleging that
the insurance agents for WGC, RSI and
EIC knew of the existence of the
additional insurance coverages and that
she was not informed about the
requirement that such other or additional
insurance should be stated in the policy.
Is the contention of Julie tenable? Explain.
May she recover on her fire insurance
policies? Explain.
SUGGESTED ANSWER:
1) No. An insured is required to disclose
the other insurances covering the subject
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Yes, when insured and insurer have preclude the assignee from claiming
agreed to the payment of premium by rights under the policy. The failure of
installments and partial payment has been notice did not, however, avoid the policy;
made at the time of loss, then the insurer hence, upon the death of Jose, the
becomes liable. When the car loss proceeds would, in the absence of a
happened on the 5th month, the six designated beneficiary, go to the estate of
months agreed period of payment had not the insured. The estate, in turn, would be
yet elapsed (UCPB General Insurance v. liable for the loan of P50,000 owing in
Masagana Telamart, G.R. No. 137172, April favor of Y.
4, 2001). Francis can recover from
Peninsula Insurance Company, but the Insurance; Perfection of Insurance Contracts (2003)
latter has the right to deduct the amount
Josie Gatbonton obtained from Warranty
of unpaid premium from the insurance
Insurance Corporation a comprehensive
proceeds.
motor vehicle insurance to cover her brand
Insurance; Life Insurance; Assignment of Policy (1991) new automobile. She paid, and the insurer
The policy of insurance upon his life, with accepted payment in check. Before the
a face value of P100th was assigned by check could be encashed, Josie was
Jose, a married man with 2 legitimate involved in a motor vehicle accident where
children, to his nephew Y as security for a her car became a total wreck. She sought
loan of P50th. He did not give the insurer payment from the insurer. Could the
any written notice of such assignment insurer be made liable under the
despite the explicit provision to that insurance coverage? (6%)
SUGGESTED ANSWER:
effect in the policy. Jose died. Upon the
(per Dondee) Yes, because there was a
claim on the policy by the assignee, the
perfected contract of insurance the
insurer refused to pay on the ground that
moment there is a meeting of the minds
it was not notified of the assignment.
with respect to the object and the cause of
Upon the other hand, the heirs of Jose
payment. The payment of check is a valid
contended that Y is not entitled to any
payment unless upon encashment the
amount under the policy because the
check bounced.
assignment without due notice to the
insurer was void. Resolve the issues.
SUGGESTED ANSWER: Insurance; Property Insurance; Prescription of Claims
A life insurance is assignable. A (1996)
provision, however, in the policy stating Robin insured his building against fire
that written notice of such an assignment with EFG Assurance. The insurance policy
should be given to the insurer is valid contained the usual stipulation that any
(Secs 181-182 Ins Code). The failure of action or suit must be filed within one
the notice of assignment would thus year after the rejection of the claim.

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Mercantile Law Bar Examination Q & A (1990-2006) Page 55 of 103
After his building burned down, Robin filed the policy, after deducting from the
his claim for fire loss with EFG. On Feb 28, whole premium any claim for loss or
1994, EFG denied Robin’s claim. On April damage under the policy which has
3, 1994, Robin sought reconsideration of previously accrued.
the denial, but EFG reiterated its position.
On March 20, 1995, Robin commenced 3. When the contract is voidable on
judicial action against EFG. account of the fraud or
Should Robin’s action be given due course? misrepresentation of the insurer or of
Explain. his agent or on account of facts the
SUGGESTED ANSWER:
existence of which the insured was
No, Robin’s action should not be given
ignorant without his fault; or when, by
due course. Is filing of the request for
any default of the insured other than
reconsideration did not suspend the
actual fraud, the insurer never incurred
running of the prescriptive period of one
any liability under the policy.
year stipulated in the insurance policy.
Thus, when robin commenced judicial ALTERNATIVE INSTANCE:
action against EFG Assurance on March In case of an over insurance by several
20, 1995, his ability to do so had already insurers, the insured is entitled to a
prescribed. The one-year period is counted ratable return of the premium,
from Feb 28, 1994 when EFG denied proportioned to the amount by which the
Robin’s claim, not from the date aggregate sum insured in all the policies
(presumably after April 3, 1994) when EFG exceeds the insurable value of the thing at
reiterated its position denying Robin’s risk.
claim. The reason for this rule is to insure
that claims against insurance companies Insured; Accident Policy (2004)
are promptly settled and that insurance
CNI insure SAM under a homeowner's
suits are brought by the insured while the
policy against claims for accidental injuries
evidence as to the origin and cause of the
by neighbors. SAM's minor
destruction has not yet disappeared. (See
Sun Ins Office Ltd v CA gr 89741, Mar 13 91
195s193)

Insurance; Return of Premiums (2000)

Name at least three instances when an
insured is entitled to a return of the
premium paid.
SUGGESTED ANSWER:
Three instances when an insured is entitled
to a return of premium paid are:
1. To the WHOLE PREMIUM, if no part of
his interest in the thing insured be
exposed to any of the perils insured
against.

2. Where the insurance is made for a

definite period of time and the insured
surrenders his policy, to such portion
of the premium as corresponds with the
unexpired time at a pro rata rate,
unless a short period rate has been
agreed upon and appears on the face of
son, BOY, injured 3 children of POS, a policy, if it is the natural result of the
neighbor, who sued SAM for damages. insured's voluntary act, unaccompanied by
SAM's lawyer was ATT, who was paid anything unforeseen except the injury.
for his services by the insurer for There is no accident when a deliberate act
reporting periodically on the case to is performed, unless some additional and
CNI. In one report, ATT disclosed to unforeseen happening occurs that brings
CNI that after his investigations, he about the injury. This element of
found the injuries to the 3 children not deliberateness is not clearly shown from
accidental but intentional. the facts of the case, especially
considering the fact that BOY is a minor,
SAM lost the case in court, and POS was and the injured parties are also children.
awarded one million pesos in damages Accordingly, it is possible that CNI may
which he sought to collect from the not prosper. ATT's report is not conclusive
insurer. But CNI used ATTs report to deny on POS or the court.
the claim on the ground that the injuries
to POS's 3 children were intentional,
Insured; Accident vs. Suicide (1990)
hence excluded from the policy's
coverage. POS countered that CNI was Luis was the holder of an accident
estopped from using ATTs report because insurance policy effective Nov 1, 1988 to
it was unethical for ATT to provide Oct 31, 1989. At a boxing contest held on
prejudicial information against his client Jan 1, 1989 and sponsored by his
to the insurer, CNI. employer, he slipped and was hit on the
Who should prevail: the claimant, POS; fact by his opponent so he fell and his
or the insurer, CNI? Decide with reasons head hit one of the posts of the boxing
briefly. (5%) ring. He was rendered unconscious and
SUGGESTED ANSWER: was dead on arrival at the hospital due to
CNI is not estopped from using ATT's “intra-cranial hemorrhage.”
report, because CNI, in the first place,
commissioned it and paid ATT for it. On Can his father who is a beneficiary under
the other hand, ATT has no conflict of said insurance policy successfully claim
interest because SAM and CNI are on indemnity from the insurance company?
the same side — their interests being Explain.
SUGGESTED ANSWER:
congruent with each other, namely, to
Yes, the father who is a beneficiary under
oppose POS's claim. It cannot be said that
the accidental insurance can successfully
ATT has used the information to the
claim indemnity for the death of the
disadvantage or prejudice of SAM.
insured. Clearly, the proximate cause of
However, in Finman General Assurance death was the boxing contest. Death
Corp. v. Court of Appeals, 213 SCRA 493 sustained in a boxing contest is an
(1992), it was explained that there is no accident. (De la Cruz v Capital Ins & Surety Co
"accident" in the context of an accident 17s559)
Mercantile Law Bar Examination Q & A (1990-2006) Page 56 of 103
or willful exposure to needless peril which
are excepted

Insured; Accident vs. Suicide (1993) value of P500th. A provision in the policy
S Insurance Co issued a personal accident states that “the company shall not be liable
policy to Bob Tan with a face value of in respect of “bodily injury’ consequent
P500th. In the evening of Sep 5, 1992, upon the insured person attempting to
after his birthday party, Tan was in a commit suicide or willfully exposing himself
happy mood but not drunk. He was to needless peril except in an attempt to
playing with his hand gun, from which he save human life.” Six months later Henry
previously removed the magazine. As his Dy died of a bullet wound in his head.
secretary was watching television, he Investigation showed that one evening
stood in front of her and pointed the gun Henry was in a happy mood although he was
at her. She pushed it aside and said that it not drunk. He was playing with his
may be loaded. He assured her that it was handgun from which he had previously
not and then pointed it at his temple. removed its magazine. He pointed the gun
The next moment, there was an explosion at his sister who got scared. He assured
and Tan slumped to the floor lifeless. her it was not loaded. He then pointed the
gun at his temple and pulled the trigger.
The wife of the deceased sought payment The gun fired and Henry slumped on the
on the policy but her claim was rejected. floor.
The insurance company agreed that there
was no suicide. However, it was the Henry’s wife Beverly, as the designated
submission of the insurance company that beneficiary, sought to collect under the
there was no accident. In support thereof, policy. Sun-Moon Insurance rejected her
it contended a) that there was no claim on the ground that the death of Henry
accident when a deliberate act was was not accidental. Beverly sued the insurer.
performed unless some additional, Decide and Discuss fully.
SUGGESTED ANSWER:
unexpected, independent and unforeseen Beverly can recover the proceeds of the
happening occur which produces or policy from the insurer. The death of the
brings about the injury or death; and b) insured was not due to suicide
that the insured willfully exposed himself
to needless peril and thus removed himself
from the coverage of the insurance policy.
Are the two contentions of the insurance
company tenable? Explain.
SUGGESTED ANSWER:
No. These two contentions are not tenable.
The insurer is liable for injury or death
even due to the insured’s gross
negligence. The fact that the insured
removed the magazine from the hand gun
means that the insured did not willfully
expose himself to needless peril. At most,
the insured is only guilty of negligence
(Sun Ins v CA 211 s 554)

Insured; Accident vs. Suicide (1995)

Sun-Moon Insurance issued a Personal
Accident Policy to Henry Dy with a face
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 risks. The insured’s act was purely an sideswiped Roberto, causing injuries to
act of negligence which is covered by the the latter, Roberto sued Cesar and the
policy and for which the insured got the third party liability insurer for damages
insurance for his protection. In fact, he and/or insurance proceeds. The insurance
removed the magazine from the gun and company moved to dismiss the complaint,
when he pointed the gun to his temple he contending that the liability of Cesar has
did so because he thought that it was not yet been determined with finality.
safe for him to do so. He did so to assure a) Is the contention of the insurer correct?
his sister that the gun was harmless. Explain.
b) May the insurer be held liable with
There is none in the policy that would
Cesar?
relieve the insurer of liability for the SUGGESTED ANSWER:
death of the insured since the death was No, the contention of the insurer is not
an accident. correct. There is no need to wait for the
decision of the court determining Cesar’s
liability with finality before the third party
Insurer: Effects: Several Insurers (2005)
liability insurer could be sued. The
What is the nature of the liability of the
occurrence of the injury to Roberto
several insurers in double insurance?
immediately gave rise to the liability of the
Explain. (2%)
insurer under its policy. In other words,
SUGGESTED ANSWER:
The nature of the liability of the several where an insurance policy insures directly
insurers in double insurance is that against liability, the insurer’s liability
each insurer is bound to the contribute accrues immediately upon the occurrence
ratably to the loss in proportion to the of the injury or event upon which the
amount for which he is liable under his liability depends (Sherman Shafer v Judge
RTC Olongapo City Branch 75 GR l-78848, Nov
contract as provided for by Sec 94 of ICP
14 88 167s386)
par. The ratable contribution of each of
each insurer will be determined based The insurer cannot be held solidarily
on the following formula: AMOUNT OF liable with Cesar. The liability of the
POLICY divided by TOTAL INSURANCE insurer is based on contract while that of
TAKEN multiplied by LOSS = LIABILITY Cesar is based on tort. If the insurer
OF THE INSURER. were solidarily liable with Cesar, it could
ALTERNATIVE ANSWER:
Each insurer is bound, as between be made to pay more than the amount
himself and other insurers, to contribute stated in the policy. This would, however,
ratably to the loss in proportion to the be contrary to the principles underlying
amount for which he is liable under his insurance contracts. On the other hand, if
contract. (Sec. 94, Insurance Code) the insurer were solidarily liable with
Cesar and it is made to pay only up to the
amount
Insurer; 3rd Party Liability (1996)
While driving his car along EDSA, Cesar

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Mercantile Law Bar Examination Q & A (1990-2006) Page 57 of 103
stated in the insurance policy, the principles clause, any claim for death or injury of any
underlying solidary obligations would be passenger or third party shall be paid
violated. (Malayan Ins Co v CA GR L-36413 Sep 26, 88 without the necessity of proving fault or
165s536; Figuracion vda de Maglana v Consolacion GR negligence of any kind. The indemnity in
60506 Aug 6, 92 212s268)
respect of any one person shall not exceed
P5,000.00, provided they are under oath,
Insurer; 3rd Party Liability (2000) the following proofs shall be sufficient:
X was riding a suburban utility vehicle 1. police report of the accident; and
(SUV) covered by a comprehensive motor 2. death certificate and evidence sufficient
vehicle liability insurance (CMVLI) to establish the proper payee; or
underwritten by FastPay Insurance 3. medical report and evidence of medical
Company when it collided with a speeding or hospital disbursement in respect of
bus owned by RM Travel Inc. The collision which refund is claimed.
resulted in serious injuries to X; Y, a 4. Claim may be made against one motor
vehicle only.
passenger of the bus; and Z, a pedestrian
waiting for a ride at the scene of the
collision. The police report established Insurer; 3rd Party Liability; Quitclaim (1994)
that the bus was the offending vehicle. Raul’s truck bumped the car owned by Luz.
The bus had CMVLI policy issued by The car was insured by Cala Insurance. For
Dragon Ins Co. X, Y, and Z jointly sued the damage caused, Cala paid Luz
RM Travel and Dragon Ins for indemnity P5,000.00 in amicable settlement. Luz
under the Insurance Code of the Phils executed a release of claim, subrogating
(PD1460). The lower court applied the Cala to all her rights against Raul. When
“no fault” indemnity policy of the statute, Cala demanded reimbursement from Raul,
dismissed the suit against RM Travel, and the latter refused saying that he had
ordered Dragon Ins to pay indemnity to all already paid
three plaintiffs. Do you agree with the
court’s judgment? Explain (2%)
SUGGESTED ANSWER:
No. The cause of action of Y is based on
the contract of carriage, while that of X
and Z is based on torts. The court should
not have dismissed the suit against RM
Travel. The court should have ordered
Dragon Ins to pay each of X, Y , and Z to
the extent of the insurance coverage, but
whatever amount is agreed upon in the
policy should be answered first by RM
Travel and the succeeding amount should
be paid by Dragon Insurance up to the
amount of the insurance coverage. The
excess of the claims of X, Y, and Z, over
and above such insurance coverage, if any,
should be answered or paid by RM Travel.

Insurer; 3rd Party Liability; No Fault Indemnity

(1994) What is your understanding of a “no
fault indemnity” clause found in an insurance
policy?
SUGGESTED ANSWER:
Under the “NO FAULT INDEMNITY”
Luz P4,500 for the damage to the car as vehicle by order of a court.
evidenced by a release of claim executed
by Luz discharging Raul. During the effectivity of the policy, the car,
then driven by Sheryl herself, who had
So Cala demanded reimbursement from no driver’s license, met an accident and
Luz, who refused to pay, saying that the was extensively damaged. The estimated
total damage to the car was P9,500.00 cost of repair was P40th. Sheryl
Since Cala paid P5,000 only, Luz contends immediately notified XYZ, but the latter
that she was entitled to go after Raul to refused to pay on the policy alleging that
claim the additional P4,500.00 Sheryl violated the terms thereof when
1) Is Cala, as subrogee of Luz, entitled to she drove it without a driver’s license. Is
reimbursement from Raul? the insurer correct?
2) May Cala recover what it has paid Luz? SUGGESTED ANSWER:
SUGGESTED ANSWER: The insurer was not correct in denying
1) No. Luz executed a release in favor of the claim since the proviso “that the
Raul (Manila Mahogany Mfg Corp v CA GR 52756, 12 person driving is permitted in accordance
Oct 1987) with the licensing, etc.” qualified only a
person driving the vehicle other than the
2) Yes. Cala lost its right against Raul
insured at the time of the accident
because of the release executed by Luz.
(Palermo v Pyramid Ins Co GR 36480 31 May
Since the release was made without the 88)
consent of Cala, Cala may recover the ALTERNATIVE ANSWER:
amount of P5,000 form Luz (Manila Mahogany The insurer is correct. The clause
Mfg Corp v CA GR 52756, 12 Oct 1987). “authorized driver” in the policy evidently
applies to both the insured and any other
Insurer; Authorized Driver Clause (1991) person driving the vehicle at the time of
Sheryl insured her newly acquired car, a the accident. The term “authorized driver”
Nissan Maxima against any loss or should be construed as a person who is
damage for P50th and against 3rd party authorized by law to driver the vehicle
liability for P20th with the XYZ Ins Co. (Peza v Alikpala 160s31)
Under the policy, the car must be driven
only by an authorized driver who is Insurer; Authorized Driver Clause (2003)
either: 1) the insured, or 2) any person Rick de la Cruz insured his passenger
driving on the insured’s order or with jeepney with Asiatic Insurers, Inc. The
his permission: provided that the person policy provided that the authorized driver
driving is permitted in accordance with of the vehicle should have a valid and
the licensing or other laws or regulations existing driver’s license. The passenger
to drive the motor vehicle and is not jeepney of Rick de la Cruz which was at
disqualified from driving such motor the time driven by Jay Cruz,
Mercantile Law Bar Examination Q & A (1990-2006) Page 58 of 103
figured in an accident resulting in the company.
death of a passenger. At the time of the 1) May the insurance company be held
accident, Jay Cruz was licensed to drive liable to indemnify HL for the loss of
but it was confiscated by an LTO agent the insured vehicle? Explain.
who issued him a Traffic Violation Report 2) Supposing that the car was brought by
(TVR) just minutes before the accident. HL on installment basis and there were
Could Asiatic Insurers, Inc., be made liable installments due and payable before
under its policy? Why? (6%) the loss of the car as well as
SUGGESTED ANSWER: installments not yet payable. Because of
Asiatic Insurers, Inc., should be made the loss of the car, the vendor
liable under the policy. The fact that the demanded from HL the unpaid balance
driver was merely holding a TVR does not of the promissory note. HL resisted the
violate the condition that the driver should demand and claimed that he was only
have a valid and existing driver’s license. liable for the installments due and
payable before the loss of the car but
Besides, such a condition should be
no longer liable for other installments
disregarded because what is involved is a
not yet due at the time of the loss of the
passenger jeepney, and what is involved
car. Decide.
here is not own damage insurance but
SUGGESTED ANSWER:
third party liability where the injured 1) Yes. The car was lost due to theft. What
party is a third party not privy to the applies in this case is the “theft” clause, and
contract of insurance. not the “authorized driver” clause. It is
immaterial that HL’s wife was driving the
Insurer; Authorized Driver Clause; vehicle is stolen car with an expired driver’s license at the
(1993) time it was carnapped. (Perla Compania de
HL insured his brand new car with P Ins Seguros v CA 208 s 487)
Co for comprehensive coverage wherein
2) The promissory note is not affected by
the insurance company undertook to
whatever befalls the subject matter of the
indemnify him against loss or damage to
accessory contract. The
the car a) by accidental collision ... b) by
fire, external explosion, burglary, or theft,
and c) malicious act.

After a month, the car was carnapped while

parked in the parking space in front of
the Intercontinental Hotel in Makati. HL’s
wife who was driving said car before it was
carnapped reported immediately the
incident to various government agencies
in compliance with the insurance
requirements.

Because the car could not be recovered,

HL filed a claim for the loss of the car
with the insurance company but it was
denied on the ground that his wife who
was driving the car when it was
carnapped was in the possession of an
expired driver’s license, a violation of the
“authorized driver” clause of the insurance
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 unpaid balance on the promissory note group insurance business that the
should be paid and not only the employer-policy holder is the agent of the
installments due and payable before the insurer.
loss of the car.
Insurer; Liability of the Insurers (1990)
Insurer; Group Insurance; Employer-Policy Holder
(2000) X company procured a group a) Suppose that Fortune owns a house
accident insurance policy for its valued at P600th and insured the same
construction employees variously against fire with 3 insurance companies
assigned to its provincial infrastructure as follows:
projects. Y Insurance Company X –
underwrote the coverage, the premiums P400th
of which were paid for entirely by X Y –
Company without any employee P200th
contributions. While the policy was in Z –
effect, five of the covered employees P600th
perished at sea on their way to their
In the absence of any stipulation in the
provincial assignments. Their wives sued
policies from which insurance company or
Y Insurance Company for payment of
companies may Fortune recover in case
death benefits under the policy. While the
fire should destroy his house completely?
suit was pending, the wives signed a SUGGESTED ANSWER:
power of attorney designating X Fortune may recover from the insurers in
Company executive, PJ, as their such order as he may select up to their
authorized representative to enter into a concurrent liability (Sec 94 Ins Code)
settlement with the insurance company.
When a settlement was reached, PJ
Valued Policy
instructed the insurance company to
b) If each of the fire insurance policies
issue the settlement check to the order of
obtained by Fortune in the problem (a) is
X Company, which will undertake the
a valued policy and the value of his
payment to the individual claimants of
house was fixed in each of the policies at
their respective shares. PJ
P1m, how much would Fortune recover
misappropriated the settlement amount
from X if he has already obtained full
and the wives pursued their case against
payment on the insurance policies issued
Y Insurance Co. Will the suit prosper?
by Y and Z?
Explain (3%)
SUGGESTED ANSWER:
SUGGESTED ANSWER:
Fortune may still recover only the balance
Yes. The suit will prosper. Y Ins Co is
of P200,000 from X insurance company
liable. X Co, through its executive, PJ,
since the insured may only recover up to
acted as agent of Y Ins Co. The latter is
the extent of his loss.
thus bound by the misconduct of its
ALTERNATIVE:
agent. It is the usual practice in the

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Mercantile Law Bar Examination Q & A (1990-2006) Page 59 of 103
Having already obtained full payment on rice was no longer fit for human
the insurance policies issued by Y and Z, consumption. Admittedly, the rice could still
Fortune may no longer recover from X be used as animal feed. Is RC’s claim for
insurance policy. total loss justified? Explain.
SUGGESTED ANSWER:
Yes, RC’s claim for total loss is justified. The
Open Policy
rice, which was imported from Thailand for
c) If each of the policies obtained by sale locally, is obviously intended for
Fortune in the problem (a) above is an consumption by the public. The complete
open policy and it was immediately physical destruction of the rice is not
determined after the fire that the value essential to constitute an actual total loss.
of Fortune’s house was P2.4m, how much Such a loss exists in this case since the
may he collect from X,Y and Z? rice, having been soaked in sea water and
SUGGESTED ANSWER:
thereby rendered unfit for human
In an open policy, the insured may recover
consumption, has become totally useless
his total loss up to the amount of the
for the purpose for which it was imported
insurance cover. Thus, the extent of
(Pan Malayan Ins Co v CA gr 95070 Sep 5, 1991)
recovery would be P400th from X, P200th
from Y, and P600th from Z.
Loss: Constructive Total Loss (2005)
d) In problem (a), what is the extent of the M/V Pearly Shells, a passenger and cargo
liability of the insurance companies among vessel, was insured for P40,000,000.00
themselves? against “constructive total loss.” Due to a
SUGGESTED ANSWER: typhoon, it sank near Palawan. Luckily,
In problem (a), the insurance companies
there were no casualties, only injured
among themselves would be liable, viz:
passengers. The ship owner sent a notice
X – 4/12 of P600th =
of abandonment of his interest over the
P200th Y – 2/12 of
vessel to the insurance company which
P600th = P100th Z –
then
6/12 of P600th =
P300th

e) Supposing in problem (a) above, Fortune

was able to collect from both Y and Z, may
he keep the entire amount he was able to
collect from the said 2 insurance
companies?
SUGGESTED ANSWER:
No, he can only be indemnified for his
loss, not profit thereby; hence he must
return P200th of the P800th he was able
to collect.

Loss: Actual Total Loss (1996)

RC Corporation purchased rice from
Thailand, which it intended to sell locally.
Due to stormy weather, the ship carrying
the rice became submerged in sea water,
and with it the rice cargo. When the cargo
arrived in Manila, RC filed a claim for
total loss with the insurer, because the
hired professionals to afloat the vessel send a notice of abandonment to the
for P900,000.00. When re-floated, the insurance company because abandonment
vessel needed repairs estimated at can only be availed of when, in a marine
P2,000,000.00. The insurance company insurance contract, the amount to be
refused to pay the claim of the ship expended to recover the vessel would
owner, stating that there was “no have been more than three- fourths of its
constructive total loss.” value. Vessel MN Pearly Shells needed only
a) Was there “constructive total loss” to P2.9 Million, which does not meet the
entitle the ship owner to recover from required three- fourths of its value to
the insurance company? Explain. merit abandonment. (Section 139,
b) Was it proper for the ship owner to Insurance Code, cited in Oriental Assurance
send a notice of abandonment to the v. Court of Appeals and Panama Saiv Mill, G.R.
insurance company? Explain. (5%) No. 94052, August 9, 1991)
SUGGESTED ANSWER:
No, there was no "constructive total
Loss: Total Loss Only (1992)
loss" because the vessel was refloated
An insurance company issued a marine
and the costs of refloating plus the
insurance policy covering a shipment by
needed repairs (P 2.9 Million) will not be
sea from Mindoro to Batangas of 1,000
more than three-fourths of the value of
pieces of Mindoro garden stones against
the vessel. A constructive total loss is
“total loss only.” The stones were loaded
one which gives to a person insured a
in two lighters, the first with 600 pieces
right to abandon. (Sec, 131, Insurance
and the second with 400 pieces. Because
Code) There would have been a
of rough seas, damage was caused the
constructive total loss had the vessel MN
second lighter resulting in the loss of 325
Pearly Shells suffer loss or needed
out of the 400 pieces. The owner of the
refloating and repairs of more than the
shipment filed claims against the
required three-fourths of its value, i.e.,
insurance company on the ground of
more than P30.0 Million (Sec. 139,
Insurance Code, cited in Oriental Assurance v. constructive total loss inasmuch as more
Court of Appeals and Panama Saw Mill, G.R. than ¾ of the value of the stones had been
No. 94052, August 9, 1991) lost in one of the lighters.
Is the insurance company liable under its
However, the insurance company shall policy? Why?
SUGGESTED ANSWER:
pay for the total costs of refloating and
The insurance company is not liable under
needed repairs (P2.9 Million).
its policy covering against “total loss only”
the shipment of 1,000 pieces of Mindoro
c) Was it proper for the ship owner to
garden stones. There is no constructive
send a notice of abandonment to the
total loss that can claimed since the ¾ rule
insurance company? Explain.
SUGGESTED ANSWER: is to be computed on the total 1,000
No, it was not proper for the ship owner to pieces of Mindoro
Mercantile Law Bar Examination Q & A (1990-2006) Page 60 of 103
garden stones covered by the single policy A mutual life insurance corporation is a
coverage (see Oriental Assurance Co v CA 200 s 459) cooperative that promotes the welfare of its
own members, with the money collected
Marine Insurance; Implied Warranties (2000) from among themselves and solely for their
own protection and not for profit.
What warranties are implied in marine
insurance? Members are both the insurer and
SUGGESTED ANSWER: insured. A mutual life insurance company
The following warranties are implied in has no capital stock and relies solely upon
marine insurance: its contributions or premiums to meet
1) That the ship is seaworthy to make unexpected losses, contingencies and
the voyage and/or to take in certain expenses (Republic v. Sunlife, G.R. No
cargoes 158085, October 14, 2005).
2) That the ship shall not deviate from
the voyage insured;
3) That the ship shall carry the necessary
documents to show nationality or Intellectual Property
neutrality and that it will not carry
any document which will cast
reasonable suspicion thereon; Copyright (1995)
4) That the ship shall not carry What intellectual property rights are
contraband, especially if it is making a protected by copyright?
voyage through belligerent waters. SUGGESTED ANSWER:
Sec 5 of PD 49 provides that Copyright
shall consist in the exclusive right:
Marine Insurance; Peril of the Ship vs. Peril of the Sea
(1998)
A marine insurance policy on a cargo
states that “the insurer shall be liable for
losses incident to perils of the sea.”
During the voyage, seawater entered the
compartment where the cargo was stored
due to the defective drainpipe of the ship.
The insured filed an action on the policy
for recovery of the damages caused to the
cargo. May the insured recover damages?
(5%)
SUGGESTED ANSWER:
No. The proximate cause of the damage
to the cargo insured was the defective
drainpipe of the ship. This is peril of the
ship, and not peril of the sea. The defect
in the drainpipe was the result of the
ordinary use of the ship. To recover
under a marine insurance policy, the
proximate cause of the loss or damage
must be peril of the sea.

Mutual Insurance Company; Nature & Definition (2006)

What is a mutual insurance company or
association?
SUGGESTED ANSWER:
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 a. to print, reprint, publish, copy, b) Unless there is a stipulation to the
distribute, multiply, sell and make contrary in the contract, the copyright
photographs, photo engravings, and shall belong in joint ownership to Solid and
pictorial illustrations of the works; Mon and Steve.

b. to make any translation or other

Copyright; Commissioned Artist (2004)
version or extracts or arrangements
or adaptation thereof; to dramatize if BR and CT are noted artists whose
it be a non-dramatic work; to paintings are highly prized by collectors.
convert it into a non-dramatic work if Dr. DL commissioned them to paint a mural
it be a drama; to complete or execute at the main lobby of his new hospital for
it if it be a model or design; children. Both agreed to collaborate on the
project for a total fee of two million pesos
c. to exhibit, perform, represent, produce to be equally divided between them. It
or reproduce the work in any manner was also agreed that Dr. DL had to
or by any method whatever for profit provide all the materials for the painting
or otherwise; if not reproduced in and pay for the wages of technicians and
copies for sale, to sell any laborers needed for the work on the
manuscripts or any record project.
whatsoever thereof;
Assume that the project is completed and
d. to make any other use or disposition both BR and CT are fully paid the amount
of the work consistent with the laws of P2M as artists' fee by DL. Under the
of the land law on intellectual property, who will own
the mural? Who will own the copyright
in the mural? Why? Explain. (5%)
Copyright; Commissioned Artist (1995)
SUGGESTED ANSWER:
Solid Investment House commissioned Under Section 178.4 of the Intellectual
Mon Blanco and his son Steve, both noted Property Code, in case of commissioned
artists, to paint a mural for the Main work, the creator (in the absence of a
Lobby of the new building of Solid for a written stipulation to the contrary) owns
contract price of P2m. the copyright, but the work itself belongs
a) who owns the mural? Explain to the person who commissioned its
b) Who owns the copyright of the mural? creation. Accordingly, the mural belongs to
Explain.
SUGGESTED ANSWER: DL. However, BR and CT own the
a) Solid owns the mural. Solid was the copyright, since there is no stipulation to
one who commissioned the artists to do the contrary.
the work and paid for the work in the sum
of P2m Copyright; Infringement (1994)

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The Victoria Hotel chain reproduces Xavier was not aware that the story of
videotapes, distributes the copies thereof Manoling Santiago was protected by
to its hotels and makes them available to copyright. Manoling Santiago sued Juan
hotel guests for viewing in the hotel Xavier for infringement of copyright. Is Juan
guest rooms. It charges a separate nominal Xavier liable? (2%)
fee for the use of the videotape player. SUGGESTED ANSWER:

1) Can the Victoria Hotel be enjoined for Yes. Juan Xavier is liable for infringement
infringing copyrights and held liable for of copyright. It is not necessary that Juan
damages? Xavier is aware that the story of Manoling
2) Would it make any difference if Victoria Santiago was protected by copyright. The
Hotel does not charge any fee for the use work of Manoling Santiago is protected at
of the videotape? the time of its creation.
SUGGESTED ANSWER:
1) Yes. Victoria Hotel has no right to use Copyright; Infringement (2006)
such video tapes in its hotel business
In a written legal opinion for a client on
without the consent of the creator/ owner
the difference between apprenticeship and
of the copyright.
learnership, Liza quoted without permission
a labor law expert's comment appearing in
2)No. The use of the videotapes is for
his book entitled "Annotations on the Labor
business and not merely for home
Code."
consumption. (Filipino Society of Composers, Authors
Publishers v Tan 148 s 461; pd 1988) Can the labor law expert hold Liza liable for
infringement of copyright for quoting a
Copyright; Infringement (1997) portion of his book without his permission?
(5%)
In an action for damages on account of an SUGGESTED ANSWER:
infringement of a copyright, the
defendant (the alleged pirate) raised the
defense that he was unaware that what he
had copied was a copyright material. Would
this defense be valid?
SUGGESTED ANSWER:
No. An intention to pirate is not an
element of infringement. Hence, an
honest intention is no defense to an action
for infringement.
ALTERNATIVE ANSWER:
Yes. The owner of the copyright must make
others aware that the material in question
is under or covered by a copyright. This
is done by the giving of such notice at a
prominent portion of the copyright
material. When the alleged pirate is thus
made aware thereof, his act of pirating the
copy material will constitute infringement.

Copyright; Infringement (1998)

Juan Xavier wrote and published a story
similar to an unpublished copyrighted
story of Manoling Santiago. It was,
however, conclusively proven that Juan
Liza cannot be held liable for
infringement of copyright since under 2) Fraudulent intent is unnecessary in
the Intellectual Property Code, one of infringement of trademark, whereas
the limitations to the copyright is the fraudulent intent is essential in unfair
making of quotations from a published competition;
work for purpose of any judicial
proceedings or for giving of professorial 3) The prior registration of the trademark is
advice by legal practitioner, provided a prerequisite to an action for
that the source and name of the author infringement of trademark, whereas
are identified (See Section 184.1[k] of the registration of the trademark is not
Intellectual Property Code of the necessary in unfair competition. (Del Monte
Corp v CA 78325 Jan 25,90 181s410)
Philippines).

Infringement vs. Unfair Competition (2003)

Copyright; Photocopy; when allowed (1998)
In what way is an infringement of a
May a person have photocopies of some trademark similar to that which pertains to
pages of the book of Professor Rosario unfair competition?
made without violating the copyright SUGGESTED ANSWER:
law? (3%)
SUGGESTED ANSWER:
Infringement; Jurisdiction (2003)
Yes. The private reproduction of a
published work in a single copy, where K-9 Corporation, a foreign corporation
the reproduction is made by a natural alleging itself to be the registered owner
person exclusively for research and of trademark “K-9” and logo “K”, filed an
private study, is permitted, without the Inter Partes case with the Intellectual
authorization of the owner of the Property Office against Kanin Corporation
copyright in the work. for the cancellation of the latter’s mark
“K-9” and logo “K.” During the pendency
of the case before the IPO, Kanin
Infringement vs. Unfair Competition (1996)
Corporation brought suit against K-9
What is the distinction between Corporation before the RTC for
infringement and unfair competition? infringement and damages. Could the
SUGGESTED ANSWER:
action before the RTC prosper? Why?
The distinction between infringement
SUGGESTED ANSWER:
(presumably trademark) and unfair
competition are as follows:
Patent; Non-Patentable Inventions (2006)
1) Infringement of trademark is the
unauthorized use of a trademark, Supposing Albert Einstein were alive
whereas unfair competition is the today and he filed with the Intellectual
passing off of one’s goods as those of Property Office (IPO) an application for
another; patent for his theory of relativity
expressed in the
Mercantile Law Bar Examination Q & A (1990-2006) Page 62 of 103
formula E=mc2. The IPO disapproved must possess essential elements of novelty,
Einstein's application on the ground that originality and precedence to be entitled to
his theory of relativity is not patentable. protection. Nevertheless, under the "first
Is the IPO's action correct? (5%) to file rule," Francis application would
SUGGESTED ANSWER:
have to be given priority. Cezar, however,
Yes, the IPO is correct because under
has within three months from the decision,
the Intellectual Property Code,
to have it cancelled as the rightful
discoveries, scientific theories and
inventor; or within one year from
mathematical methods, are classified to be
publication, to file an action to prove his
as "non- patentable inventions." Eintein's
priority to the invention, which has been
theory of relativity falls within the
taken from him and fraudulently registered
category of being a non-patentable
by Francis.
"scientific theory."
3) Supposing Joab got wind of the
Patents: Gas-Saving Device: first to file rule (2005) inventions of his employees and also
Cezar works in a car manufacturing laid claim to the patents, asserting that
company owned by Joab. Cezar is quite Cezar and Francis were using his
innovative and loves to tinker with things. materials and company time in making
With the materials and parts of the car, the devices, will his claim prevail over
he was able to invent a gas-saving device those of his employees? Explain.
SUGGESTED ANSWER:
that will enable cars to consume less gas.
No, Joab's claim cannot prevail over those
Francis, a co-worker, saw how Cezar
of his employees. In the first place, Joab
created the device and likewise, came up
did not commission any of the two
with a similar gadget, also using scrap
employees to invent the device, and its
materials and spare parts of the company.
Thereafter, Francis filed an application for
registration of his device with the Bureau
of Patents. Eighteen months later, Cezar
filed his application for the registration of
his device with the Bureau of Patents.

1) Is the gas-saving device patentable?

Explain.
SUGGESTED ANSWER:
Yes, the gas-saving device is patentable
because it provides a technical solution to
a problem in a field of human activity. It
is new and involves an inventive step, and
certainly industrially applicable. It
therefore fulfills the requisites mandated
by the intellectual Property Code for what
is patentable.

2) Assuming that it is patentable, who is

entitled to the patent? What, if any, is
the remedy of the losing party?
SUGGESTED ANSWER:
Cezar is entitled to the patent because he
was the real inventor. Francis, copying
from the work of Cezar, cannot claim the
essential criteria of an inventor, who
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 invention did not fall within their d. Patent was issued not to the true
regular duties. What prevails is the and actual inventor, designer or
provision of the Intellectual Property Code author of the utility model or the
that holds that the invention belongs to plaintiff did not derive his rights
the employee, if the inventive activity is from the true and actual inventor,
not a part of his regular duties, even if designer or author of the utility
he uses the time, facilities and materials model (Sec 28 RA 165 as amended)
of the employer.
Patents; Infringement (1992)
Patents: Infringement; Remedies & Defenses
In an action for infringement of patent, the
(1993) Ferdie is a patent owner of a
alleged infringer defended himself by
certain invention. He discovered that his
stating 1) that the patent issued by the
invention is being infringed by Johann.
1) What are the remedies available to Patent Office was not really an invention
Ferdie against Johann? which was patentable; 2) that he had no
2) If you were the lawyer of Johann in the intent to infringe so that there was no
infringement suit, what are the defenses actionable case for infringement; and 3)
that your client can assert? that there was no exact duplication of the
SUGGESTED ANSWER: patentee’s existing patent but only a minor
1) The following remedies are available to improvement. With those defenses, would
Ferdie against Johann. you exempt the alleged violator from
a. seize and destroy liability? Why?
b. injunction SUGGESTED ANSWER:
c. damages in such amount may have I would not exempt the alleged violator
been obtained from the use of the from liability for the following reasons:
invention if properly transacted 1) A patent once issued by the Patent
which can be more than what the Office raises a presumption that the
infringer (Johann ) received. article is patentable; it can, however be
d. Attorney’s fees and cost shown otherwise (Sec 45 RA 165). A
mere statement or allegation is not
2) These are the defenses that can be
enough to destroy that presumption.
asserted in an infringement suit:
(Aquas v de Leon 30 Jan 82 L- 32160)
a. Patent is invalid (Sec 45 RA 165, as
amended)
b. Patent is not new or patentable 2) An intention to infringe is not necessary
c. Specification of the invention does nor an element in a case for
not comply with Sec 14 infringement of a patent.

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Mercantile Law Bar Examination Q & A (1990-2006) Page 63 of 103
3) There is no need of exact duplication new drug brand name, “Axilon.” Turbo is
of the patentee’s existing patent such now applying with the Bureau of Patents,
as when the improvement made by Trademarks and Technology Transfer for
another is merely minor (Frank v the registration of said brand name. It was
Benito, 51p713). To be independently subsequently confirmed that “Accilonne” is
patentable, an improvement of an a generic term for a class of anti-fungal
existing patented invention must be a drugs and is used as such by the medical
major improvement (Aquas v de Leon L- profession and the pharmaceutical industry,
32160 30Jan82) and that it is used as a generic chemical
name in various scientific and professional
Patents; Rights over the Invention (1990) publications. A competing drug
manufacturer asks you to contest the
Cheche invented a device that can convert
registration of the brand name “Axilon” by
rainwater into automobile fuel. She asked
Turbo.
Macon, a lawyer, to assist in getting her
What will you advice be?
invention patented. Macon suggested that SUGGESTED ANSWER:
they form a corporation with other friends The application for registration by Turbo
and have the corporation apply for the Corporation may be contested. The
patent, 80% of the shares of stock thereof Trademark Law would not allow the
to be subscribed by Cheche and 5% by registration of a trademark which, when
Macon. The corporation was formed and applied to or used in connection with his
the patent application was filed. However, products, is merely descriptive or
Cheche died 3 months later of a heart deceptively misdescriptive of them.
attack. Confusion can result from the use of
“Axilon” as the generic product itself.
Franco, the estranged husband of Cheche, ALTERNATIVE ANSWER:
contested the application of the Medical drugs may be procured only upon
corporation and filed his own patent prescription made by a duly licensed
application as the sole surviving heir of physician. The possibility of
Cheche. Decide the issue with reasons.
SUGGESTED ANSWER:
The estranged husband of Checke cannot
successfully contest the application. The
right over inventions accrue from the
moment of creation and as a right it can
lawfully be assigned. Once the title
thereto is vested in the transferee, the
latter has the right to apply for its
registration. The estranged husband of
Cheche, if not disqualified to inherit,
merely would succeed to the interest of
Cheche.
Note: An examinee who answers on the basis of
the issue of validity of the transfer of patent as a
valid consideration for subscription of the shares
of stocks should be given due credit.

Trademark (1990)
In 1988, the Food and Drug
Administration approved the labels
submitted by Turbo Corporation for its
deception could be rather remote. Since which are different products protected by
it cannot really be said that physicians Larberge’s trademark.
can be so easily deceived by such
trademark as “Axilon,” it may be hard to JG can register the trademark “PRUTE” to
expect an opposition thereto to succeed. cover its briefs and underwear (Faberge Inc v IAC
ANOTHER ANSWER: 215 s 316)
The application for registration of Turbo
Corporation may be contested. The Trademark, Test of Dominancy (1996)
factual settings do not indicate that What is the “test of dominancy?”
there had been prior use for at least 2 SUGGESTED ANSWER:
months of the trademark “Axilon.” The test of dominancy requires that if
the competing trademark contains the
main or essential features of another and
Trademark (1994)
confusion and deception is likely to result,
Laberge, Inc., manufactures and markets infringement takes place. Duplication or
after-shave lotion, shaving cream, imitation is not necessary; not is it
deodorant, talcum powder and toilet necessary that the infringing label should
soap, using the trademark “PRUT”, suggest an effort to imitate. Similarity in
which is registered with the Phil Patent size, form and color, while relevant, is
Office. Laberge does not manufacture not conclusive. (Asia Brewery v CA GR
briefs and underwear and these items 103543 Jul5,93 224s437)
are not specified in the certificate of
registration.
Trademark; Infringement (1991)
JG who manufactures briefs and Sony is a registered trademark for TV,
underwear, wants to know whether, stereo, radio, cameras, betamax and other
under our laws, he can use and register electronic products. A local company, Best
the trademark “PRUTE” for his Manufacturing Inc produced electric fans
merchandise. What is your advice? which it sold under the trademark Sony
SUGGESTED ANSWER: without the consent of Sony. Sony sued
Yes. The trademark registered in the Best Manufacturing for infringement.
name of Laberge Inc covers only after- Decide the case.
shave lotion, shaving cream, deodorant, SUGGESTED ANSWER:
talcum powder and toilet soap. It does There is no infringement. In order that a
not cover briefs and underwear. case for infringement of trademark can
prosper, the products on which the
The limit of the trademark is stated in trademark is used must be of the same
the certificate issued to Laberge Inc. It kind. The electric fans produced by Best
does not include briefs and underwear Manufacturing cannot
Mercantile Law Bar Examination Q & A (1990-2006) Page 64 of 103
be said to be similar to such products as misleading similarity in general
TV, stereo and radio sets or cameras or appearance, not similarity of trademarks
betamax products of Sony. (Converse Rubber Co v Jacinto Rubber &
ALTERNATIVE ANSWER: Plastics Co GR 27425 and 30505, Apr28,80
There is infringement. If the owner of a 97s158)
trademark which manufactures certain
types of goods could reasonably be Tradename: International Affiliation (2005)
expected to engage in the manufacture of
S Development Corporation sued Shangrila
another product using the same
Corporation for using the “S” logo and the
trademark, another party who uses the
tradename “Shangrila”. The former claims
trademark for that product can be held
that it was the first to register the logo and
liable for using that trademark. Using this
the tradename in the Philippines and that it
standard, infringement exists because
had been using the same in its restaurant
Sony can be reasonably expected to use
business. Shangrila Corporation counters
such trademark on electric fans.
that it is an affiliate of an international
organization which has been using such
Trademark; Test of Dominancy (1996) logo and tradename “Shangrila” for over
N Corporation manufactures rubber shoes 20 years. However, Shangrila Corporation
under the trademark “Jordann” which hit registered the tradename and logo in the
the Phil market in 1985, and registered its Philippines only after the suit was filed.
trademark with the Bureau of Patents,
Trademarks and Technology (BPTTT) in Which of the two corporations has a better
1990. PK Company also manufactures right to use the logo and the tradename?
rubber shoes with the trademark Explain.
SUGGESTED ANSWER:
“Javorski” which it registered with BPTTT
S Development Corporation has a better
in 1978.
right to use the logo and the tradename,
In 1992, PK Co adopted and copied the since the protective benefits of
design of N Corporation’s “Jordann”
rubber shoes, both as to shape and color,
but retained the trademark “Javorski” on
its products.

May PK Company be held liable to N Co?

Explain.
SUGGESTED ANSWER:
PK Co may be liable for unfairly
competing against N Co. By copying the
design, shape and color of N
Corporation’s “Jordann” rubber shoes and
using the same in its rubber shoes
trademarked “Javorski,” PK is obviously
trying to pass off its shoes for those of N. It
is of no moment that he trademark
“Javorski” was registered ahead of the
trademark “Jordann.” Priority in
registration is not material in an action
for unfair competition as distinguished
from an action for infringement of
trademark. The basis of an action for
unfair competition is confusing and
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 the law are conferred by the fact of liabilities.
registration and not by use. Although
Shangrila Corporation's parent had used b) In insolvency, the assets of the debtor
the tradename and logo long before, the are to be converted into cash for
protection of the laws will be for S distribution among his creditors, while
Development Corporation because it was in suspension of payments, the debtor
the first entity to register the intellectual is only asking for time within which to
properties. convert his frozen assets into liquid
cash with which to pay his obligations
How does the international affiliation of when the latter fall due.
Shangrila Corporation affect the outcome of the
dispute? Explain. (5%)
SUGGESTED ANSWER: Insolvency: Voluntary Insolvency (2005)
The international affiliation of Shangrila
Aaron, a well-known architect, is suffering
Corporation may be critical in the event
from financial reverses. He has four
that its affiliates or parent company
creditors with a total claim of P26 Million.
abroad had registered in a foreign
Despite his intention to pay these
jurisdiction the tradename and the logo.
obligations, his current assets are
A well-known mark and tradename is
insufficient to cover all of them. His
subject to protection under Treaty of
creditors are about to sue him.
Paris for the Protection of Intellectual
Consequently, he was constrained to file a
Property to which the Philippines is a
petition for insolvency. (5%)
member.
a) Since Aaron was merely forced by
circumstances to petition the court to
declare him insolvent, can the judge
Insolvency & Corporate properly treat the petition as one for
Recovery involuntary insolvency? Explain.
SUGGESTED ANSWER:
No. This is a case for voluntary insolvency
Insolvency vs. Suspension of Payment (1998) because this was filed by an insolvent
Distinguish insolvency from suspension debtor owing debts exceeding the amount
of payments. (3%) of P1,000.00 under Section 14 of the
SUGGESTED ANSWER:
Insolvency Law. Under Section 20 of the
a) In insolvency, the liabilities of the
Insolvency Law, the petition must be filed
debtor are more than his assets,
by three or more creditors. In the case at
while in suspension of payments,
bar, it is Aaron, the debtor, who filed the
assets of the debtor are more than his
insolvency proceedings.

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Mercantile Law Bar Examination Q & A (1990-2006) Page 65 of 103
b) If Aaron is declared an insolvent by the that pertain to the principal debtor. The
court, what would be the effect, if any, discharge obtained by Aaron on the
of such declaration on his creditors? principal obligation can now be used as a
Explain. defense by the guarantors against the
SUGGESTED ANSWER: creditors. The guarantors are also entitled
A declaration by the court that the to indemnity under Article 2066 of the Civil
petitioner is insolvent will have the Code.
following effects: Insolvency; Assets vs. Liabilities (1998)
1) The sheriff shall take possession of
Horacio opened a coffee shop using
all assets of the debtor until the
money borrowed from financial institutions.
appointment of a receiver or
After 3 months, Horacio left for the US
assignee;
with the intent of defrauding his creditors.
2) Payment to the debtor of any debts
While his liabilities are worth P1.2m, his
due to him and the delivery to the
assets, however are worth P1.5m. May
debtor of any property belonging
Horacio be declared insolvent? (2%)
to him, and the transfer of any
SUGGESTED ANSWER:
property by him are forbidden; No. Horacio may not be declared
3) All civil proceedings pending insolvent. His assets worth P1.5m are more
against the insolvent shall be than his liabilities worth P1.2m.
stayed; and
4) Mortgages and pledges are not
Insolvency; Assignees (1996)
affected by the order declaring a
person insolvent. (Sec. 59, On June 16, 1995, Vicente obtained a writ of
Insolvency Law) preliminary attachment against Carlito. The
levy on Carlito’s property occurred on June
c) Assuming that, Aaron has guarantors 25, 1995. On July 29, 1995, another
for his debts, are the guarantors creditor filed a petition for involuntary
released from their obligations once insolvency against Carlito. The insolvency
Aaron is discharged from his debts? court gave due course to the
Explain.
SUGGESTED ANSWER:
No, precisely under the principle of
excussion, the liability of the guarantors
arises only after the exhaustion of the
assets of the principal obligor. The effect of
discharge merely confirms exhaustion of
the assets of the obligor available to his
creditors.
ALTERNATIVE ANSWER:
Yes. Article 2076 of the Civil Code
provides: The obligation of the guarantor
is extinguished at the same time as that
of the debtor, and for the same causes as
all other obligations.

d) What remedies are available to the

guarantors in case they are made to pay
the creditors? Explain.
SUGGESTED ANSWER:
Under Article 2081, the guarantor may set
up against the creditor all the defenses
petition. In the meantime, the case filed to him of any property belonging to
by Vicente proceeded and resulted in a him;
judgment award in favor of Vicente. b) Forbid the transfer of any property by
May the judgment obtained by Vicente be him; and
c) Stay of all civil proceedings against the
enforced independently of the insolvency
insolvent but foreclosure may be
proceedings? Explain.
SUGGESTED ANSWER: allowed (Secs 18 & 24 Insolvency Law)
The judgment obtained by Vicente can be
enforced independently of the insolvency Insolvency; Fraudulent Payment (2002)
proceedings. Under Sec 32 of the
As of June 1, 2002, Edzo Systems
Insolvency Law, the assignment to the
Corporation (Edzo) was indebted to the
assignee of all the real and personal
following creditors:
property, estate and effects of the debtor
a) Ace Equipment Supplies – for various
made by the clerk of the court shall vacate
personal computers and accessories
and set aside any judgment entered in
sold to Edzo on credit amounting to
any action commenced with 30 days
P300,000.
immediately prior to the commencement
b) Handyman Garage – for mechanical
of insolvency proceedings. In this case,
repairs (parts and service) performed
however, the action filed by Vicente
on Edzo’s company car amounting to
against Carlito was commenced by
P10,000.
Vicente not later than June 16, 1995
c) Joselyn Reyes – former employee of
(the facts on this point are not clear)
Edzo who sued Edzo for unlawful
when Vicente obtained a writ of
termination of employment and was
preliminary attachment against Carlito or
able to obtain a final judgment against
more than 30 days before the petition
Edzo for P100,000.
for involuntary insolvency was filed
d) Bureau of Internal Revenue – for
against Carlito by his other creditors. (i.e.
unpaid value- added taxes amounting to
on July 29, 1995) (Radiola-Toshiba Phil v IAC
P30,000.
GR 75222 July18,91 199s373)
e) Integrity Bank – which granted Edzo a
loan in 2001 in the amount of
Insolvency; Effect; Declaration of Insolvency
P500,000. The loan was not secured by
(1991) What are the effects of a
any asset of Edzo, but it was
judgment in insolvency in Voluntary
Insolvency cases? guaranteed unconditionally and
SUGGESTED ANSWER: solidarily by Edzo’s President and
The adjudication or declaration of controlling stockholder, Eduardo Z.
insolvency by the court, after hearing or Ong, as accommodation surety.
default, shall have the following effects:
a) Forbid the payment to the debtor of The loan due to Integrity Bank fell due on
any debt due to him and the delivery June 15, 2002. Despite pleas for extension
of payment by Edzo, the
Mercantile Law Bar Examination Q & A (1990-2006) Page 66 of 103
bank demanded immediate payment. payments in view of the said financial
Because the bank threatened to proceed condition he faces? Explain your answer.
against the surety, Eduardo Z. Ong, Edzo b) Should he sell profit participation
decided to pay up all its obligations to certificates to his 10 brothers and sisters in
Integrity Bank. On June 20, 2002, Edzo order to raise cash for his business?
paid to Integrity Bank the full principal Explain.
amount of P500,000, plus accrued interests SUGGESTED ANSWER:

amounting to P55,000. As a result, Edzo a) I would counsel Jerry to file the

had hardly any cash left for operations Petition for Suspension of Payment with
and decided to close its business. After the ordinary courts, rather than the SEC.
paying the unpaid salaries of its SEC’s jurisdiction over such cases is
employees, Edzo filed a petition for confined only to petitions filed by
insolvency on July 1, 2002. corporations and partnerships under its
regulatory powers.
In the insolvency proceedings in court,
the assignee in insolvency sought to b) Instead of selling profit participation
invalidate the payment made by Edzo to certificates, I would urge Jerry to enter into
Integrity Bank for being a fraudulent a partnership or to incorporate in order to
transfer because it was made within 30 raise cash for his business.
ALTERNATIVE ANSWER:
days before the filing of the insolvency b) Jerry may sell profit participation
petition. In defense, Integrity Bank certificates to his brothers and sisters
asserted that the payment to it was for a without registering the same with the SEC
legitimate debt that was not covered by because his sale is an exempted
the prohibition because it was “a valuable transaction being isolated and not a sale to
pecuniary consideration made in good the public.
faith,” thus falling within the exception
specified in the Insolvency Law.
Insolvency; obligations that survive (1997)
As judge in the pending insolvency case,
how would you decide the respective
contentions of the assignee in insolvency
and of Integrity Bank? Explain (5%)
SUGGESTED ANSWER:
The contention of the assignee in
insolvency is correct. The payment made
by Edzo to Integrity Bank was a
fraudulent preference or payment, being
made within thirty (30) days before the
filing of the insolvency petition.

Insolvency; Jurisdiction; Sole Proprietorship (1990)

One day Jerry Haw, doing business under
the name Starlight Enterprise, a sole
proprietorship, finds himself short on cash
and unable to pay his debts as they fall due
although he has sufficient property to
cover such debts. He asks you, as his
retained counsel, for advice on the
following queries:
a) Should he file a petition with the SEC to
be declared in a state of suspension of
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 An insolvent debtor, after lawful (1995) Distinguish between voluntary
discharge following an adjudication of insolvency and
insolvency, is released from, generally, all involuntary insolvency.
debts, claims, liabilities and demands SUGGESTED ANSWER:
In voluntary insolvency, it is the debtor
which are or have been proved against
himself who files the petition for
his estate. Give 5 obligations of the
insolvency, while in involuntary insolvency,
insolvent debtor to survive.
SUGGESTED ANSWER: at least 3 creditors are the ones who file
The 5 obligations of the insolvent debtor the petition for insolvency against the
that survive are as follows: insolvent debtor.
1. Taxes and assessments due the ALTERNATIVE ANSWER:
The following are the distinctions:
government, national or local;
1. In involuntary insolvency, 3 or more
2. Obligations arising from embezzlement
or fraud; creditors are required, whereas in
3. Obligation of any person liable with voluntary insolvency, one creditor may
the insolvent debtor for the same be sufficient;
debt, either as a solidary co- debtor, 2. In involuntary insolvency, the creditors
surety, guarantor, partner, indorser or must be residents of the Philippines,
otherwise. whose credits or demand accrued in
4. Alimony or claim for support; and the Philippines, and none of the
5. Debts not provable against the estate creditors has become a creditor by
(such as after- incurred obligations) assignment within 30 days prior to
of, or not included in the schedule the filing of the petition, whereas in
submitted by, the insolvent debtor. voluntary insolvency, these are not
required.
Insolvency; Voluntary Insolvency Proceeding (1991) 3. In involuntary insolvency, the debtor
must have done any of the acts of
Is the issuance of an order, declaring a
insolvency as enumerated by Sec 20,
petition in a Voluntary Insolvency
whereas in voluntary insolvency, the
proceeding insolvent, mandatory upon the
debtor must not have done any of said
court?
SUGGESTED ANSWER:
acts.
Assuming that the petition was in due 4. In involuntary insolvency, the amount
form and substance and that the assets of indebtedness must not be less than
of the petitioner are less than his P1,000 whereas in voluntary insolvency,
liabilities, the court must adjudicate the it must exceed P1,000.
insolvency (Sec 18 Insolvency Law) 5. In involuntary insolvency, the petition
must be accompanied by a bond,
Insolvency; Voluntary vs. Involuntary Solvency whereas such is not required in
voluntary insolvency.

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Mercantile Law Bar Examination Q & A (1990-2006) Page 67 of 103
Law on Corporate Recovery (2003) G.R. Nos. 76879 & 77143, October 3, 1990; Rubberworld
[Phils.] Inc. v. NLRC, G.R. No. 126773, April 14, 1999;
X Corporation applied for its rehabilitation Sobrejuanite v. ASB Dev. Corp., G.R. No. 165675, September
and submitted a rehabilitation plan which 30, 2005). It also prevents a creditor from
called for the entry by it into a joint venture obtaining an advantage or preference over
agreement with Y Corporation. Under the another with respect to actions against the
agreement, Y Corporation was to lend to X corporation (Finasia Investments and Finance Corp v.
Corporation its credit facilities with certain Court of Appeals, G. R. No. 107002, October 7,1994).
banks to obtain funds not only to operate X
Corporation but also for a part thereof in
the amount of P1 million as initial deposit Suspension of Payment vs. Insolvency (1995)
in a sinking fund to be augmented Distinguish between suspension of
annually in amounts equivalent to 10% of payments and insolvency.
SUGGESTED ANSWER:
the yearly income from its operation of the In suspension of payments, the debtor is not
business of X Corporation. From this fund insolvent. He only needs time within which
the creditors of X Corporation were to be to convert his asset/s into cash with which to
paid annually, starting from the second pay his obligations when they fall due. In the
year of operations, with the entire case of insolvency, the debtor is insolvent,
indebtedness to be liquidated in 15 years. that is, his assets are less than his liabilities.
The creditors of X Corporation objected to ALTERNATIVE ANSWER:
the plan because Y Corporation would be The following are the distinctions:
taking over the business and assets of X
Corporation. Could the court approve the
plan despite the objections of the creditors
of X Corporation and could the creditors be
compelled to follow the plan? Could Y
Corporation, in managing the business of X
Corporation in the meantime, be deemed to
have taken-over X Corporation itself? (6%)
SUGGESTED ANSWER:

Rehabilitation; Stay Order (2006)

The Blue Star Corporation filed with the
Regional Trial Court a petition for
rehabilitation on the ground that it foresaw
the impossibility of paying its obligations as
they fall due. Finding the petition sufficient
in form and substance, the court issued an
Order appointing a rehabilitation receiver
and staying the enforcement of all claims
against the corporation.
What is the rationale for the Stay Order? (5%)
SUGGESTED ANSWER:
The purpose of the stay order is intended to
give the management committee or
rehabilitation receiver the leeway to make the
business viable again, without having to divert
attention and resources to litigation in various
fora (Philippine Airlines v. Spouses Kurangking, et al, G.R.
No. 146698, September 24, 2002; BF Homes, Inc. v. Court
of Appeals,
1. In suspension of payments, the debtor of the corporation and all its assets and
has sufficient property to cover all his liabilities, earnings and operations, and
debts but foresees the impossibility of to determine the feasibility of continuing
meeting them when they respectively operations and rehabilitating the company
fall due, whereas, in insolvency, the for the benefit of investors and creditors.
debtor does not have sufficient
property to pay all his debts in full; Generally, the unsecured creditors had
2. In suspension of payments, the manifested willingness to cooperate with
purpose is to suspend or delay Debtor Corporation. The secured creditors,
payment of debts which remain however, expressed serious objections and
unaffected although a postponement of reservations.
payment is declared, whereas, in
First Bank had already initiated judicial
insolvency, the object is to obtain
foreclosure proceedings on the mortgage
discharge from all debts and liability;
constituted on the factory of Debtor
3. In suspension of payments, no limit for
Corporation.
the amount of indebtedness is
required, whereas, in insolvency, the
Second Bank had already initiated
debts must exceed P1,000 in case of
foreclosure proceedings on a third-party
voluntary insolvency, or must not be
mortgage constituted on certain assets of
less than P1,000 in case of involuntary
the principal stockholders.
insolvency.
Third Bank had already filed a suit against
Suspension of Payments vs. Stay Order (2003) the principal stockholders who had held
Distinguish the stay order in corporate themselves liable jointly and severally for
rehabilitation from a declaration in a state of the loans of Debtor Corporation with said
suspension of payments? (4%) Bank.
SUGGESTED ANSWER:

Suspension of Payments; Rehabilitation Receiver (1999) After hearing, the SEC directed the
Debtor Corporation and its principal appointment of a rehabilitation receiver
stockholders filed with the Securities and and ordered the suspension of all actions
Exchange Commission (SEC) a petition for and claims against the Debtor corporation as
rehabilitation and declaration of a state of well as against the principal stockholders.
suspension of payments under PD 902-A. a) Discuss the validity of the SEC order or
The objective was for SEC to take control suspension? (2%)
Mercantile Law Bar Examination Q & A (1990-2006) Page 68 of 103
b) Discuss the effects of the SEC order of security, whether owned by the debtor-
suspension on the judicial foreclosure corporation or of a third party, has not yet
proceedings initiated by First Bank. arisen.
(2%) ALTERNATIVE ANSWER:

c) Would the order of suspension have c. The suspension order does not apply to a
any effect on the foreclosure third party mortgage because in such a
proceedings initiated by Second Bank? case, the credit is not yet being enforced
Explain (2%) against the corporation but against the
d) Would the order of suspension have third party mortgagor’s property.
any effect on the suit filed by Third SUGGESTED ANSWER:
Bank? Explain. (2%) d. For the same reason as in (c), the order of
e) What are the legal consequences of a suspension of payments suspended the suit
rehabilitation receivership? (2%) filed by Third Bank against the principal
f) What measures may the receiver take stockholders.
to preserve the assets of Debtor ALTERNATIVE ANSWER:
Corporation? (2%) d. The action against the principal
stockholders’ surety in favor of the
SUGGESTED ANSWER: corporation is not suspended as it is not an
a. The SEC order of suspension of payment action against the corporation but against
is valid with respect to the debtor the stockholders whose personality is
corporation, but not with respect to the separate from that of the corporation.
principal stockholders. The SEC has
jurisdiction to declare suspension of SUGGESTED ANSWER:
payments with respect to corporations, e. Under PD 902A, the appointment of a
partnership or associations, but not with rehabilitation receiver will suspend all
respect to individuals. actions for claims against the corporation
and the corporation will be placed under
SUGGESTED ANSWER:
b. The SEC order of suspension of
payment suspended the judicial
proceedings initiated by the First
Bank. According to the Supreme
Court in a line of cases, the
suspension order applies to secured
creditors and to the action to
enforce the security against the
corporation regardless of the stage
thereof.

SUGGESTED ANSWER:
c. The order of suspension of payments
suspended the foreclosure proceedings
initiated by the Second Bank. While the
foreclosure is against the property of a
third party, it is in reality an action to
collect the principal obligation owned by
the corporation. During the time that the
payment of the principal obligation is
suspended, the debtor corporation is
considered to be not in default and,
therefore, even the right to enforce the

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 rehabilitation in accordance with a
Letters of Credit
rehabilitation plan approved by the SEC.

SUGGESTED ANSWER:
f. To preserve the assets of the Debtor Letter of Credit: Mortgage (2005)
Corporation, the receiver may take Ricardo mortgaged his fishpond to AC
custody of, and control over, all the Bank to secure a P1 Million loan. In a
existing assets and property of the separate transaction, he opened a letter
corporation; evaluate existing assets and of credit with the same bank for
liabilities, earnings and operations of the $500,000.00 in favor of HS Bank, a
corporation; and determine the best way foreign bank, to purchase outboard
to salvage and protect the interest of the motors. Likewise, Ricardo executed a
investors and creditors. Surety Agreement in favor of AC Bank.

Suspension of Payments; Remedies (2003) The outboard motors arrived and were
delivered to Ricardo, but he was not able
When is the remedy of declaration in a
to pay the purchase price thereof.
state of suspension of payments available
a) Can AC Bank take possession of the
to a corporation?
SUGGESTED ANSWER: outboard motors? Why?
(per dondee) This remedy is available to b) Can AC Bank also foreclose the
a corporation when it experiences mortgage over the fishpond? Explain. (5%)
inability to pay one's debts and liabilities, SUGGESTED ANSWER:
a) No, for AC Bank has no legal standing,
and where the petitioning corporation
much less a lien, on the outboard
either:
motors. Insofar as AC Bank is
1. has sufficient property to cover all its
concerned, it has privity with the
debts but foresees the impossibility of
person of Ricardo under the Surety
meeting them when they fall due
Agreement, and a lien on the fishpond
(solvent but illiquid) or
based on the real estate mortgage
2. has no sufficient property (insolvent)
constituted therein.
but is under the management of a
rehabilitation receiver or a
b) Yes, but only to enforce payment of
management committee, the
the principal loan of P1million secured
applicable law is P.D. No. 902-A
by the real estate mortgage on the
pursuant to Sec. 5 par.
fishpond

Letter of Credit; Certification from Consignee (1993)

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Mercantile Law Bar Examination Q & A (1990-2006) Page 69 of 103
BV agreed to sell to AC, a Ship and on the part of FE Bank to advance
Merchandise Broker, 2,500 cubic meters of payment of the letter of credit. (Feati Bank v
logs at $27 per cubic meter FOB. After CA 196 S 576)
inspecting the logs, CD issued a purchase
order. 2) No. FE Bank may have confirmed the
letter of credit when it notified BV, that an
On the arrangements made upon irrevocable letter of credit has been
instruction of the consignee, H&T transmitted to it on its behalf. But the
Corporation of LA, California, the SP conditions in the letter of credit must first
Bank of LA issued an irrevocable letter of be complied with, namely that the draft
credit available at sight in favor of BV for be accompanied by a certification from AC.
the total purchase price of the logs. The Further, confirmation of a letter of credit
letter of credit was mailed to FE Bank with must be expressed. (Feati Bank v CA 196 s
the instruction “to forward it to the 576)
beneficiary.” The letter of credit provided
that the draft to be drawn is on SP Bank Letters of Credit; Liability of a confirming and notifying
and that it be accompanied by, among bank (1994)
other things, a certification from AC, In letters of credit in banking transactions,
stating that the logs have been approved distinguish the liability of a confirming bank
prior shipment in accordance with the from a notifying bank.
terms and conditions of the purchase order. SUGGESTED ANSWER:
In case anything wrong happens to the
Before loading on the vessel chartered by letter of credit, a confirming bank incurs
AC, the logs were inspected by custom liability for the amount of the letter of
inspectors and representatives of the credit, while a notifying bank does not incur
Bureau of Forestry, who certified to the any liability.
good condition and exportability of the
logs. After the loading was completed, the Letters of Credit; Liability of a Notifying Bank (2003)
Chief Mate of the vessel issued a mate
a) What liability, if any is incurred by an
receipt of the cargo which stated that the
advising or notifying bank in a letter of
logs are in good condition. However, AC
credit transaction?
refused to issue the required certification
in the letter of credit. Because of the
absence of certification, FE Bank refused
to advance payment on the letter of credit.
1) May Fe Bank be held liable under the
letter of credit? Explain.
2) Under the facts above, the seller, BV,
argued that FE Bank, by accepting the
obligation to notify him that the
irrevocable letter of credit has been
transmitted to it on his behalf, has
confirmed the letter of credit.
Consequently, FE Bank is liable under the
letter of credit. Is the argument tenable?
Explain.
SUGGESTED ANSWER:
1) No. The letter of credit provides as a
condition a certification of AC. Without
such certification, there is no obligation
SUGGESTED ANSWER: 1) Between the applicant/buyer/importer
It incurs no liability unless it is also the and the beneficiary/seller/exporter –
negotiating bank The applicant/buyer/importer is the
one who procures the letter of credit
b) Bravo Bank received from Cisco Bank
and obliges himself to reimburse the
by registered mail an irrevocable
issuing bank upon receipt of the
letter of credit issued by Delta Bank
documents of title, while the
for the account of Y Company in the
beneficiary/seller/exporter is the one
amount of US$10,000,000 to cover
who in compliance with the contract
the sale of canned fruit juices. The
of sale ships the goods to the buyer
beneficiary of the letter of credit was
and delivers the documents of title and
X Corporation which later on partially
draft to the issuing bank to recover
availed itself of the letter of credit by
payment for the goods. Their
submitting to Bravo Bank all
relationship is governed by the contract
documents relative to the shipment of
of sale.
the cans of fruit juices. Bravo Bank
paid X Corporation for its partial 2) Between the issuing bank and the
availment. Later, however, it refused beneficiary/seller/exporter – The issuing
further availment because of bank is the one that issues the letter of
suspicions of fraud being practiced credit and undertakes to pay the seller
upon it and, instead , sued X upon receipt of the draft and proper
Corporation to recover what it had documents of title and to surrender
paid the latter. How would you rule if the documents to the buyer upon
you were the judge to decide the reimbursement. Their relationship is
controversy? (6%) governed by the terms of the letter of
SUGGESTED ANSWER:
credit issued by the bank.

Letters of Credit; Three Distinct Contract Relationships 3) Between the issuing bank and the
(2002)
applicant/buyer/importer – Their
Explain the three (3) distinct but relationship is governed by the terms
intertwined contract relationships that of the application and agreement for
are indispensable in a letter of credit the issuance of the letter of credit by
transaction. the bank.
SUGGESTED ANSWER:
The three (3) distinct but intertwined
contract relationships that are
indispensable in a letter of credit Maritime Commerce
transaction are:
Average; Particular Average vs. General Average (2003)
Mercantile Law Bar Examination Q & A (1990-2006) Page 70 of 103
M/V Ilog de Manila with a cargo of 500 Whose lien should be given preference,
tons of iron ore left the Port of Zamboanga that of Jojo or Lutang?
City bound for Manila. For one reason or SUGGESTED ANSWER:

another, M/V Ilog de Manila hit a Lutang Corporation’s lien should be given
submerged obstacle causing it to sink preference. The lien of Jojo by virtue of a
along with its cargo. A salvor, Salvador, loan of bottomry was extinguished when
Inc., was contracted to refloat the vessel the vessel sank. Under such loan on
for P1 Million. What kind of average was bottomry Jojo acted not only as creditor but
the refloating fee of P1 million, and for also as insurer. Jojo’s right to recover the
whose account should it be? Why? (4%) amount of the loan is predicated on the
SUGGESTED ANSWER: safe arrival of the vessel at the port of
Particular Average. The owner of the destination. The right was lost when the
vessel shall shoulder the average. vessel sank (Sec 17 PD 1521)
Generally speaking, simple or particular
averages include all expenses and Carriage of Goods: Deviation: Liability (2005)
damages caused to the vessel or cargo
On a clear weather, M/V Sundo, carrying
which have not inured to the common
insured cargo, left the port of Manila bound
benefit (Art. 809, and are, therefore, to be
for Cebu. While at sea, the vessel
borne only by the owner of the property
encountered a strong typhoon forcing the
which gave rise to the same (Art. 810)
captain to steer the vessel to the nearest
while general or gross averages include
island where it stayed for seven days. The
"all the damages and expenses which are
vessel ran out of provisions for its
deliberately caused in order to save the
passengers. Consequently, the vessel
vessel, its cargo, or both at the same
proceeded to Leyte to replenish its
time, from a real and known risk" (Art.
supplies.
811). Being for the common benefit, gross
averages are to be borne by the owners of Assuming that the cargo was damaged
the articles saved (Art. 812). In the because of such deviation, who between
present case there is no proof that the the insurance company and the owner of
vessel had to be put afloat to save it from the cargo bears the loss? Explain.
an imminent danger. SUGGESTED ANSWER:

Bottomry (1994)
Gigi obtained a loan from Jojo
Corporation, payable in installments. Gigi
executed a chattel mortgage in favor of
Jojo whereby she transferred “in favor of
Jojo, its successors and assigns, all her
title, rights ... to a vessel of which Gigi is
the absolute owner.” The chattel mortgage
was registered with the Philippine Coast
Guard pursuant to PD 1521. Gigi defaulted
and had a total accountability of P3M. But
Jojo could not foreclose the mortgage on
the vessel because it sank during a
typhoon.
Meanwhile, Lutang Corporation which
rendered salvage services for refloating the
vessel sued Gigi.

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 The insurance company should bear the of sardines from Master to be delivered to
loss to the cargo because the deviation of 555 Company in Manila. Only 88 cartons
the vessel was proper in order to avoid a were delivered, however, these were in
peril, which was the strong typhoon. The bad condition. 555 Company claimed from
running out of provisions was a direct Star Shipping Lines the value of the
consequence of the proper deviation in missing goods, as well as the damaged
order to avoid the peril of the typhoon. goods. Star Shipping Lines refused
ALTERNATIVE ANSWER: because the former failed to present a bill
The owner of the cargo bears the loss of lading. Resolve with reasons the claim
because in the case at bar, they stayed of 555 Company. (4%)
too long at the island, making it an SUGGESTED ANSWER:
improper deviation. Every deviation not The claim of 555 Company is meritorious,
specified in Sec. 124 is improper. (Sec. even if it fails to present a bill of lading.
125, Insurance Code) Although a bill of lading is the best
evidence of the contract of carriage for
cargo, nevertheless such contract can exist
Carriage of Goods; Deviation; When Proper (2005) even without a bill of lading. Like any
Under what circumstances can a vessel other contract, a contract of carriage is a
properly proceed to a port other than its meeting of minds that gives rise to an
port of destination? Explain. (4%) obligation on the part of the carrier to
SUGGESTED ANSWER: transport the goods. Jurisprudence has
Deviation is proper: held that the moment the carrier receives
a) when caused by circumstances over the cargo for transport, then its duty to
which neither the master nor the exercise extraordinary diligence arises.
owner of the ship has any control; (Cia. Maritima v. Insurance Co. of North
b) when necessary to comply with a America,
warranty or avoid a peril, whether or G.R. No. L-18965, October 30, 1964; Negre v. Cabahug
not the peril is insured against; Shipping & Co., G.R. No. L-19609, April 29, 1966)
ALTERNATIVE ANSWER:
c) when made in good faith, and upon Star Shipping Lines can refuse to honor 555
reasonable grounds of belief in its Company's claim for the missing and
necessity to avoid a peril; or damaged goods. The Bill of Lading is the
d) when in good faith, for the purpose of document of title that legally establishes the
saving human life, or relieving ownership of 555 Company over said goods.
another vessel in distress. (Sec. 124, 555 needs to present the Bill of Lading to
Insurance Code) legally claim said goods. (National Union Fire
Insurance of Pittsburg v. Stolt-Nielaen, G.R. No. 87958, April
26, 1990)
Carriage of Goods; Exercise Extraordinary Diligence
(2005)
Charter Party (1991)
Star Shipping Lines accepted 100 cartons

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Mercantile Law Bar Examination Q & A (1990-2006) Page 71 of 103
The Saad Dev Co enters into a voyage liable for damages in favor of third persons
charter with XYZ over the latter’s vessel, due to the conduct of the carrier's captain,
the MV LadyLove. Before the Saad could and the stipulation in the charter party
load it, XYZ sold Lady Love to Oslob exempting the owner from liability is not
Maritime Co which decided to load it for against public policy. Coca-Cola appealed.
its own account. Will its appeal prosper? Reason briefly. (5%)
a) May XYZ Shipping Co validly ask for the SUGGESTED ANSWER:

rescission of the charter party? If so, can No. The appeal of Coca-Cola will not
Saad recover damages? To what extent? prosper. Under Article 587 of the Code of
b) If Oslob did not load it for its own Commerce, the shipping agent is civilly
account, is it bound by the charter party? liable for damages in favor of third persons
c) Explain the meaning of “owner pro hac due to the conduct of the carrier's captain,
vice of the vessel.” In what kind of charter and the shipping agent can exempt himself
party does this obtain? therefrom only by abandoning the vessel
with all his equipment and the freight he
SUGGESTED ANSWER: may have earned during the voyage. On the
a) XYZ may ask for the rescission of the other hand, assuming there is bareboat
charter party if, as in this case, it sold the charter, the stipulation in the charter party
vessel before the charterer has begun to exempting the owner from liability is not
load the vessel and the purchaser loads it against public policy because the public at
for his own account. Saad may recover large is not involved (Home Insurance Co. v.
damages to the extent of its losses (Art 689 American Steamship Agencies, Inc., 23 SCRA25
Code of Commerce) (1968).

b) If Oslob did not load Lady Love for its

COGSA: Prescription of Claims/Actions (2004)
own account, it would be bound by the
charter party, but XYZ would have to
indemnify Oslob if it was not informed of
the Charter Party at the time of sale. (Art
689 Code of Commerce)

c) The term “Owner Pro Hac Vice of the

Vessel,” is generally understood to be the
charterer of the vessel in the case of bareboat
or demise charter (Litonjua Shipping Co v National
Seamen’s Board GR 51910 10Aug1989)

Charter Party (2004)

Under a charter party, XXO Trading
Company shipped sugar to Coca-Cola
Company through SS Negros Shipping
Corp., insured by Capitol Insurance
Company. The cargo arrived but with
shortages. Coca-Cola demanded from
Capitol Insurance Co. P500.000 in
settlement for XXO Trading. The MM
Regional Trial Court, where the civil suit
was filed, "absolved the insurance
company, declaring that under the Code of
Commerce, the shipping agent is civilly
AA entered into a contract with BB thru Carriage of Goods by Sea Act (COGSA)
CC to transport ladies' wear from Manila after the carrier had rejected its demand.
to France with transhipment at Taiwan. The carrier pleaded in its Answer the
Somehow the goods were not loaded at affirmative defense of prescription under
Taiwan on time. Hence, when the goods the provisions of said Act inasmuch as
arrived in France, they arrived "off- the suit was brought by the consignee
season" and AA was paid only for one- after one (1) year from the delivery of
half the value by the buyer. AA claimed the goods. In turn, the consignee
damages from the shipping company and contended that the period of prescription
its agent. The defense of the respondents was suspended by the written extrajudicial
was prescription. Considering that the demand it had made against the carrier
ladies' wear suffered "loss of value," as within the one- year period, pursuant to
claimed by AA, should the prescriptive Article 1155 of the Civil Code providing
period be one year under the Carriage of that the prescription of actions is
Goods by Sea Act, or ten years under interrupted when there is a written
the Civil Code? Explain briefly. (5%) extrajudicial demand by the creditors.
SUGGESTED ANSWER: a) Has the action in fact prescribed? Why?
The applicable prescriptive period is ten b) If the consignee’s action were
years under the Civil Code. The one-year predicated on misdelivery or conversion of
prescriptive period under the Carriage of the goods, would your answer be the
Goods by Sea Act applies in cases of loss same? Explain briefly.
or damages to the cargo. The term "loss" SUGGESTED ANSWER:
as interpreted by the Supreme Court in a) The action taken by the local consignee
Mitsui O.S.K. Lines Ltd. v. Court of Appeals, has, in fact, prescribed. The period of one
287 SCRA 366 (1998), contemplates a year under the Carriage of Goods by Sea
situation where no delivery at all was Act (COGSA) is not interrupted by a
made by the carrier of the goods written extrajudicial demand. The
because the same had perished or gone provisions of Art 1155 of the NCC merely
out of commerce deteriorated or decayed apply to prescriptive periods provided for
while in transit. In the present case, the in said Code and not to special laws such
shipment of ladies' wear was actually as COGSA except when otherwise
delivered. The "loss of value" is not the provided. (Dole v Maritime Co 148 s 118).
total loss contemplated by the Carriage of
Goods by Sea Act. b) If the consignee’s action were
predicated on misdelivery or conversion of
goods, the provisions of the COGSA would
COGSA; Prescription of Claims (1992)
be inapplicable. In these cases, the NCC
A local consignee sought to enforce prescriptive periods, including Art 1155 of
judicially a claim against the carrier for the NCC will apply (Ang v Compania
loss of a shipment of drums of Maritama 133 s 600)
lubricating oil from Japan under the
Mercantile Law Bar Examination Q & A (1990-2006) Page 72 of 103
SUGGESTED ANSWER:
COGSA; Prescription of Claims (2000) the vessels and the cargoes? Explain.
RC imported computer motherboards from
3. Which party should bear the damage to
the United States and had them shipped
the vessels and the cargoes if the cause of
to Manila aboard an ocean- going cargo
the collision was a fortuitous event?
ship owned by BC Shipping Company.
Explain.
When the cargo arrived at Manila seaport
and delivered to RC, the crate appeared SUGGESTED ANSWER:
intact; but upon inspection of the contents, 1. Each vessel must bear its own damage.
RC discovered that the items inside had all Both of them were at fault. (Art 827, Code
been badly damaged. He did not file any of Commerce)
notice of damage or anything with
anyone, least of all with BC Shipping 2. Each of them should bear their
Company. What he did was to proceed respective damages. Since it cannot be
directly to your office to consult you determined as to which vessel is at fault.
about whether he should have given a This is the doctrine of “inscrutable fault.”
notice of damage and how long a time he
3. No party shall be held liable since the
had to initiate a suit under the provisions
cause of the collision is fortuitous event.
of the Carriage of Goods by Sea Act (CA
The carrier is not an insurer.
65). What would your advice be? (2%)
SUGGESTED ANSWER:
My advice would be that RC should give Doctrine of Inscrutable Fault (1997)
notice of the damage sustained by the
Explain the doctrine in Maritime accidents –
cargo within 3 days and that he has to file
Doctrine of Inscrutable Fault
the suit to recover the damage sustained by
the cargo within one year from the date of
the delivery of the cargo to him.

COGSA; Prescriptive Period (1995)

What is the prescriptive period for actions
involving lost or damaged cargo under the
Carriage of Goods by Sea Act?
SUGGESTED ANSWER:
ONE YEAR after the delivery of the goods
or the date when the goods should have
been delivered (Sec 3(6), COGSA)

Doctrine of Inscrutable Fault (1995)

1. 2 vessels coming from the opposite
directions collided with each other
due to fault imputable to both. What
are the liabilities of the two vessels
with respect to the damage caused
to them and their cargoes? Explain.

2. If it cannot be determined which of

the two vessels was at fault
resulting in the collision, which party
should bear the damage caused to

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 Under the “doctrine of inscrutable fault,” invoked by Ichi?
where fault is established but it cannot 2) Are there exceptions to the “limited
be determined which of the two vessels liability rule”?
SUGGESTED ANSWER:
were at fault, both shall be deemed to 1) By “limited liability rule” is meant that
have been at fault. the liability of a shipowner for damages in
case of loss is limited to the value of the
Doctrine of Inscrutable Fault (1998) vessel involved. His other properties
A severe typhoon was raging when the cannot be reached by the parties entitled to
vessel SS Masdaam collided with MV damages.
Princes. It is conceded that the typhoon
2) Yes. When the ship owner of the vessel
was the major cause of the collision,
involved is guilty of negligence, the
although there was a very strong
“limited liability rule” does not apply. In
possibility that it could have been avoided
such case, the ship owner is liable to the
if the captain of SS Masdaam was not
full extent of the damages sustained by
drunk and the captain of the MV Princes
the aggrieved parties (Mecenas v CA 180 s
was not asleep at the time of collisions.
83)
Who should bear the damages to the
vessels and their cargoes? (5%)
SUGGESTED ANSWER: Limited Liability Rule (1997)
The shipowners of SS Masdaam and MV Explain the doctrine in Maritime
Princess shall each bear their respective accidents – The Doctrine of Limited
loss of vessels. For the losses and Liability
damages suffered by their cargoes both SUGGESTED ANSWER:
shipowners are solidarily liable. Under the “doctrine of limited liability”
the exclusively real and hypothecary
Limited Liability Rule (1994) nature of maritime law operates to limit
the liability of the shipowner to the value
Toni, a copra dealer, loaded 1000 sacks of
of the vessel, earned freightage and
copra on board the vessel MV Tonichi (a
proceeds of the insurance. However, such
common carrier engaged in coastwise
doctrine does not apply if the shipowner
trade owned by Ichi) for shipment from
and the captain are guilty of negligence.
Puerto Galera to Manila. The cargo did
not reach Manila because the vessel
capsized and sank with all its cargo. Limited Liability Rule (1999)
Thinking that the impending typhoon was
When Toni sued Ichi for damages based still 24 hours away, MV Pioneer left port
on breach of contract, the latter invoked to sail for Leyte. That was a miscalculation
the “limited liability rule.” of the typhoon signals by both the ship-
1) What do you understand of the “rule”

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Mercantile Law Bar Examination Q & A (1990-2006) Page 73 of 103
owner and the captain as the typhoon ship’s rated capacity. Sued for damages by
came earlier and overtook the vessel. The the victim’s surviving relatives, Marina
vessel sank and a number of passengers Nav Co contended 1) that its liability, if
disappeared with it. any, had been extinguished with the
sinking of MV Mariposa; and 2) that
Relatives of the missing passengers assuming it had not been so extinguished,
claimed damages against the shipowner. such liability should be limited to the loss
The shipowner set up the defense that of the cargo. Are these contentions
under the doctrine of limited liability, his meritorious in the context of applicable
liability was co-extensive with his interest provisions of the Code of Commerce? (3%)
in the vessel. As the vessel was totally SUGGESTED ANSWER:
lost, his liability had also been Yes. The contentions of Marina Nav Co are
extinguished. meritorious. The captain of MV Mariposa
a. How will you advice the claimants? is guilty of negligence in ignoring the
Discuss the doctrine of limited liability in typhoon bulletins issued by PAGASA and in
maritime law. (3%) overloading the vessel. But only the captain
b. Assuming that the vessel was insured, of the vessel MV Mariposa is guilty of
may the claimants go after the insurance negligence. The ship owner is not.
proceeds? (3%) Therefore, the ship owner can invoke the
SUGGESTED ANSWER: doctrine of limited liability.
a. Under the doctrine of limited liability in
maritime law, the liability of the
Limited Liability Rule; Doctrine of Inscrutable Fault
shipowner arising from the operation of a (1991)
ship is confined to the vessel, equipment,
In a collision between M/T Manila, a
and freight, or insurance, if any, so that if
tanker, and M/V Don Claro, an inter-island
the shipowner abandoned the ship,
vessel, Don Claro sank and many of its
equipment, and freight, his liability is
passengers drowned and died. All its
extinguished. However, the doctrine of
cargoes were lost. The collision occurred at
limited liability does not apply when the
nighttime but the sea was calm, the
shipowner or captain is guilty of
weather fair and visibility was good. Prior
negligence.
to the collision and while still 4 nautical
b. Yes. In case of a lost vessel, the claimants miles apart, Don
may go after the proceeds of the insurance
covering the vessel.

Limited Liability Rule (2000)

MV Mariposa, one of five passenger ships
owned by Marina Navigation Co, sank off
the coast of Mindoro while en route to
Iloilo City. More than 200 passengers
perished in the disaster. Evidence showed
that the ship captain ignored typhoon
bulletins issued by Pag-asa during the 24-
hour period immediately prior to the
vessel’s departure from Manila. The
bulletins warned all types of sea crafts to
avoid the typhoon’s expected path near
Mindoro. To make matters worse, he
took more load than was allowed for the
Claro already sighted Manila on its radar SUGGESTED ANSWER:

screen. Manila had no radar equipment. Yes, but subject to the doctrine of limited
As for speed, Don Claro was twice as liability. The doctrine is to the effect that
fast as Manila. the liability of the shipowners would only
be to the extent of any remaining value of
At the time of the collision, Manila failed the vessel, proceeds of insurance, if any,
to follow Rule 19 of the International and earned freightage. Given the factual
Rules of the Road which requires 2 settings, the shipowner himself was not
vessels meeting head on to change their guilty of negligence and, therefore, the
course by each vessel steering to doctrine can well apply (Amparo de los
starboard (right) so that each vessel Santos v CA 186 s 69)
may pass on the port side (left) of the
other. Manila signaled that it would turn Limited Liability Rule; General Average Loss (2000)
to the port side and steered accordingly, X Shipping Company spent almost a
thus resulting in the collision. Don fortune in refitting and repairing its luxury
Claro’s captain was off-duty and was passenger vessel, the MV Marina, which
having a drink at the ship’s bar at the plied the inter-island routes of the
time of the collision. company from La Union in the north to
a) Who would you hold liable for the Davao City in the south. The MV Marina
collision?
met an untimely fate during its post-
b) If Don Claro was at fault, may the
repair voyage. It sank off the coast of
heirs of the passengers who died and
Zambales while en route to La Union from
the owners of the cargoes recover
Manila. The investigation showed that the
damages from the owner of said
captain alone was negligent. There were
vessel?
SUGGESTED ANSWER: no casualties in that disaster. Faced with
I can hold the 2 vessels liable. In the a claim for the payment of the refitting
problem given, whether on the basis of and repair, X Shipping company asserted
the factual settings or under the doctrine exemption from liability on the basis of the
of inscrutable fault, both vessels can be hypothecary or limited liability rule under
said to have been guilty of negligence. Article 587 of the Code of Commerce. Is X
The liability of the 2 carriers for the death Shipping Company’s assertion valid?
or injury of passengers and for the loss of Explain (3%).
or damage to the goods arising from the SUGGESTED ANSWER:
No. The assertion of X Shipping Company
collision is solidary. Neither carrier may
is not valid. The total destruction of the
invoke the doctrine of last clear chance
vessel does not affect the liability of the
which can only be relevant, if at all,
ship owner for repairs on the vessel
between the two vessels but not on the
completed before its loss.
claims made by passengers or shippers
(Litonjua Shipping v National Seamen Board
GR 51910 10Aug1989) Limited Liability Rule; General Average Loss (2000)
Mercantile Law Bar Examination Q & A (1990-2006) Page 74 of 103
MV SuperFast, a passenger-cargo vessel Nationalized Activities or Undertakings (1993)
owned by SF Shipping Company plying 1) A invested P500th in a security agency on
the inter-island routes, was on its way to October 30, 1990. He was charged with
Zamboanga City from the Manila port being a dummy of his friend, a foreigner. If
when it accidentally, and without fault or you were the prosecutor, what evidence
negligence of anyone on the ship, hit a can you present to prove violation of the
huge floating object. The accident caused Anti-Dummy Law?
damage to the vessel and loss of an 2) Juana de la Cruz, a common law wife of
accompanying crated cargo of passenger a foreigner wrested the control of a
PR. In order to lighten the vessel and television firm. At the instance of the
save it from sinking and in order to avoid minority group of the firm, she was
risk of damage to or loss of the rest of charged with violation of the Anti-Dummy
the shipped items (none of which was Law. May she be convicted by the mere
located on the deck), some had to be fact that she is a common law wife of a
jettisoned. SF Shipping had the vessel foreigner? Explain.
repaired at its port of destination. SF SUGGESTED ANSWER:
Shipping thereafter filed a complaint 1) A allows or permits the use or
demanding all the other cargo owners to exploitation or enjoyment of a right,
share in the total repair costs incurred privilege or business, the exercise or
by the company and in the value of the enjoyment of which is expressly reserved by
lost and jettisoned cargoes. In answer to the Constitution or the laws to citizens of
the complaint, the shippers’ sole the Philippines, by the foreigner not
contention was that, under the Code of possessing the requisites prescribed by the
Commerce, each damaged party should Constitution or the laws of the Philippines.
bear its or his own damage and those that The prosecutor should prove the above
did not suffer any loss or damage were not elements of the crime
obligated to make any contribution in favor
of those who did. Is the shippers’
contention valid? Explain (2%)
SUGGESTED ANSWER:
No. The shippers’ contention is not valid.
The owners of the cargo jettisoned, to save
the vessel from sinking and to save the
rest of the cargoes, are entitled to
contribution. The jettisoning of said
cargoes constitute general average loss
which entitles the owners thereof to
contribution from the owner of the vessel
and also from the owners of the cargoes
saved.

SF Shipping is not entitled to

contribution/ reimbursement for the costs
of repairs on the vessel from the shippers.

Nationalized Activities or
Undertakings

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 and also the fact that A does not have manufacturer of asbestos products.
the means and resources to invest P500th Celeste and ECQ took part in a public
in the security agency. bidding conducted by MWSS for its
ALTERNATIVE ANSWER: asbestos pipe requirements. Celeste won
1) The prosecutor may establish the fact the bid, having offered 13% lower than
that the P500th would constitute a major that offered by ECQ; and MWSS awarded
investment and yet A is not even elected the contract to supply its asbestos pipes
member of the BOD or one of the officers. to Celeste. ECQ sought to nullify the award
Furthermore, it may also be shown that A in favor of Celeste.
does not even have the means to raise
the amount of P500th and that the 1) Is Celeste barred under the Flag Law
officers or majority of the directors are from taking part in biddings to supply the
foreigners. government?
2) Did Celeste and Matilde violate the Anti-
SUGGESTED ANSWER:
2) No. The mere fact of being a common Dummy Law?
law wife of a foreigner does not bring 3) Did Celeste and Matilde violate the
her within the ambit of the Anti-Dummy Retail Trade Nationalization Law? Explain.
Law. SUGGESTED ANSWER:
ALTERNATIVE ANSWER:
1) No. The materials offered in the bids
2) Yes. Being a common law wife, it can
submitted are made in the Philippines
be presumed that she is the one running
from articles produced or grown in the
the business, which raises a prima facie
Philippines, and the bidder, Celeste, is a
presumption of violation of the Anti-
domestic entity. The Flag Law does not
dummy Law, (RA 6084).
apply. It can be invoked only against a
bidder who is not a domestic entity, or
Nationalized Activities or Undertakings (1994) against a domestic entity who offers
Celeste, a domestic corporation wholly imported materials.
owned by Filipino citizens, is engaged in
trading and operates as general 2) No, since Celeste is merely a dealer of
contractor. It buys and resells the Matilde and not an alter ego of the latter.
products of Matilde, a domestic Celeste buys and sells on its own account
corporation, 90% of whose capital stock is the products of Matilde.
owned by aliens. All of Matilde’s goods
3) Matilde did not violate the Retail Trade
are made in the Philippines from
Law since it does not sell its products to
materials found or produced in the
consumers, but to dealers who resell
Philippines.
them. Neither did Celeste violate the
On the other hand, ECQ Integrated is a
Retail Trade Law since, in the first place,
100% Filipino owned corporation and
it is not prohibited to

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Mercantile Law Bar Examination Q & A (1990-2006) Page 75 of 103
engage in retail trade. Besides, Matilde’s sale “realty corporation”).
of the asbestos products to Celeste, being a) May Acme invest in the said
wholesale, the transaction is not covered by department store corporation? Explain
the Retail Trade Law (Asbestos Integrated v Peralta your answer.
155 S 213) b) May Acme invest in the realty
corporation? Discuss.
Nationalized Activities or Undertakings (1995) c) May the President of Acme, a foreigner,
sit in the BOD of the said department
Global KL Malaysia, a 100% Malaysian
store corporation? May he be a director
owned corporation, desires to build a hotel
of the realty corporation? Discuss.
beach resort in Samal Island, Davao City,
d) May the Treasurer of Acme, another
to take advantage of the increased traffic
foreigner, occupy the same position in
of tourists and boost the tourism industry
the said department store corporation?
of the Philippines.
May he be the treasurer of the said
1. Assuming that Global has US$100M to
realty corporation? Explain.
invest in a hotel beach resort in the SUGGESTED ANSWER:
Philippines, may it be allowed to acquire a) Acme may not invest in the department
the land on which to build the resort? If store corporation since the Retail Trade Act
so, under what terms and conditions may allows, in the case of corporations, only
Global acquire the land? Discuss fully. 100% Filipino owned companies to engage
2. May Global be allowed to manage the in retail trade.
hotel beach resort? Explain.
3. May Global be allowed to operate b) Acme may invest in the realty
restaurants within the hotel beach resort? corporation, on the assumption that the
Explain. balance of 60% of ownership of the latter
SUGGESTED ANSWER: corporation, is Filipino owned since the law
1. Global can secure a lease on the land. As merely
a corporation with a Malaysian nationality,
Global cannot own the land.

2. Yes, Global can manage the hotel beach

resort. There is no law prohibiting it from
managing the resort.

3. Global may be allowed to operate

restaurants within the beach resort. This
is part of the operation of the resort.

Retail Trade Law (1990)

Acme Trading Co Inc, a trading company
wholly owned by foreign stockholders, was
persuaded by Paulo Alva, a Filipino, to
invest in 20% of the outstanding shares
of stock of a corporation he is forming
which will engage in the department store
business (the “department store
corporation”). Paulo also urged Acme to
invest in 40% of the outstanding shares of
stock of the realty corporation he is
putting up to own the land on which the
department store will be built (the
requires 60% Filipino holding in land presumption that she has violated the
corporate ownership. Anti- Dummy Law. Hence, the wife is
barred from engaging in the retail trade
c) The Anti-dummy Law allows board business.
representation to the extent of actual and
permissible foreign investments in
Retail Trade Law (1992)
corporations. Accordingly, the President of
Acme may no sit in the BOD of the A Cooperative purchased from Y Co on
department store corporation but can do installments a rice mill and made a down
so in the realty corporation. payment therefore. As security for the
payment of the balance, the Cooperative
d) The Treasurer of Acme may not hold executed a chattel mortgage in favor of Y
that position either in the department Corporation. Y Co in turn assigned its
store corporation or in the realty rights to the chattel mortgage to Z Co a
corporation since the Anti-Dummy Law 5% foreign owned company doing
prohibits the employment of aliens in business in the Philippines. The
such nationalized areas of business cooperative thereafter made installment
except those that call for highly payments to Z Co.
technical qualifications.
Because the Cooperative was unable to
meet its obligations in full, Z Co filed
against it a court suit for collection. The
Retail Trade Law (1991)
Coop resisted contending that Z Co was
Is the Filipino common-law wife of a
illegally engaged in the retail trade
foreigner barred from engaging in the
business for having sold a consumer good
retail business?
as opposed to a producer item. The Coop
SUGGESTED ANSWER:
A Filipino common-law wife of a foreigner also alleged that Z had violated the Anti-
is not barred from engaging in retail Dummy Law.
business. On the assumption that she acts Is Z guilty of violating the Retail Trade
for and in her own behalf, and absent a Law and the Anti-Dummy Law? Why?
SUGGESTED ANSWER:
violation of the Anti-Dummy Law which
Z Co is not guilty of violating the Retail
prohibits a foreigner from being either
Trade Law and the Anti-Dummy Law. The
the real proprietor or an employee of a
term RETAIL under the Retail Trade Act
person engaged in the retail trade, she
requires that the seller must be
would be violating the Retail Trade Act.
habitually engaged in selling to the
ALTERNATIVE ANSWER:
An engagement by a wife (including general public consumption goods. By
common-law relationships) of a foreigner consumption goods are meant “personal,
in the retail trade business, raises the family and household” purposes. A Rice
Mill
Mercantile Law Bar Examination Q & A (1990-2006) Page 76 of 103
does not fall under the category. Neither Trade Law. Maria is a manufacturer who
does it appear that Z is habitually engaged sells to the general public, through her stall
in selling to the general public that in the public market, the soap which she
commodity. Since there is no violation of manufactures. Inasmuch as her capital
the Retail Trade Law, there would likewise does not exceed P5th (it is only P2th) then
by no violation of the Anti-Dummy Law. she is considered under Sec 4a of the
Retail Trade Law as not engaged in the
Retail Trade Law (1993) “retail business.” Inasmuch as Maria’s
business is not a “retail business,” then
A foreign firm is engaged in the business
the requirement in Sec 1 of the Retail
of manufacturing and selling rubber
Trade Law that only Philippine nationals
products to dealers who in turn sell them
shall engage, directly, or indirectly, in the
to others. It also sells directly to
retail business is inapplicable. For this
agricultural enterprises, automotive
reason, the participation of Ma Lee, Maria’s
assembly plants, public utilities which buy
common Law husband, in the management
them in large bulk, and to its officers and
of the business would not be a violation of
employees.
the Retail Trade Law in relation to the Anti-
1) Is there violation of the Retail Trade
Law? Explain. Dummy Law.
2) May said firm operate a canteen inside
the premises of its plant exclusively for its Retail Trade Law (1996)
officials and employees without violating
EL Inc, a domestic corporation with foreign
the Retail Trade Act? Explain.
equity, manufactures electric generators,
SUGGESTED ANSWER:
1) On the assumption that the foreign firm and sells them to the following customers:
is doing business in the Philippines, the a) government offices which use the
sale to the dealers of agricultural generators during brownouts to render
enterprises, automotive assembly plants, public service,
and public utilities is wholesale and, b) agricultural enterprises which utilize the
therefore, not in violation of the Retail generators as
Trade Act (BF Goodrich v Reyes 121 s 363)

2) Yes. The operation of the canteen inside

the premises exclusively for its officers and
employees, would amount to an input in
the manufacturing process and, therefore,
does not violate the Retail Trade Act.

Retail Trade Law (1996)

With a capital of P2th Maria operates a
stall at a public market. She manufactures
soap that she sells to the general public.
Her common law husband, MaLee, who
has a pending petition for naturalization,
occasionally finances the purchase of
goods for resale, and assists in the
management of the business.
Is there a violation of the Retail Trade Law?
Explain.
SUGGESTED ANSWER:
No, there is no violation of the Retail
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 backup in the processing of goods, c) a) The first arrangement would not be in
factories, and d) its own employees. violation of the Retail Trade Law. The law
Is EL engaged in retail trade? Explain. applies only when the sale is direct to the
SUGGESTED ANSWER:
general public. A dealer buys and sells for
The sale by EL of generators to
and in his own behalf and, therefore, the
government offices, agricultural
sale to the general public is made by the
enterprises and factories are outside the
dealer and not by the manufacturer
scope of the term “retail business” and
(Marsman & Co v First Coconut Control Co
may, therefore, be made by the said
GR39841 20June1988)
corporation. However, sales of generators ALTERNATIVE ANSWER:
by EL to its own employees constitute a) The first arrangement violates the
retail sales and are proscribed. Under Retail Trade Law because when ABC
the amendment to the Retail Trade Law “consigned” the typewriters, the
introduced by PD 714, the term “retail transaction was one of consignment sale.
business” shall not include a In consignment sale, an agency
manufacturer (such as EL) selling to relationship is created so it is as if ABC
industrial and commercial users or sells directly to the public through its
consumers who use the products bought agents.
by them to render service to the general
SUGGESTED ANSWER:
public (eg government offices) and/or to b) The second arrangement would be
produce or manufacture goods which are violative of the Retail Trade Law, since
in turn sold by them (eg agricultural the sale is done through individuals being
enterprises and factories). (Goodyear Tires paid strictly on a commission basis. The
v Reyes Sr Gr 30063, Jly 2, 83 123s273).
said individuals would then be acting
merely as agents of the manufacturer.
Retail Trade Law; Consignment (1991) Sales, therefore, made by such agents are
ABC Manufacturing Inc, a company deemed direct sales by the manufacturer.
wholly owned by foreign nationals, ALTERNATIVE ANSWER:
b) The 2nd arrangement is not violative
manufactures typewriters which ABC
of the Retail Trade Law because
distributes to the general public in 2 ways:
typewriters are not consumption goods or
1. ABC consigns its typewriters to
goods for personal, household and family
independent dealers who in turn sell
use.
them to the public; and,
2. Through individuals, who are not
employees of ABC, and who are paid
strictly on a commission basis for Negotiable Instruments Law
each sale.
Bond: Cash Bond vs. Surety Bond (2004)
Do these arrangements violate the Retail
Trade Law? Distinguish clearly cash bond from surety
bond.
SUGGESTED ANSWER:

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Mercantile Law Bar Examination Q & A (1990-2006) Page 77 of 103
SUGGESTED ANSWER: Checks; Crossed Check (1991)
A SURETY BOND is issued by a surety
Mr Pablo sought to borrow P200th from Mr
or insurance company in favor of a
Carlos. Carlos agreed to loan the amount in
designated beneficiary, pursuant to which
the form of a post- dated check which was
such company acts as a surety to the
crossed (i.e. 2 parallel lines diagonally
debtor or obligor of such beneficiary. A
drawn on the top left portion of the
CASH BOND is a security in the form of
check). Before the due date of the check,
cash established by a guarantor or surety
Pablo discounted it with Noble On due
to secure the obligation of another.
date, Noble deposited the check with his
bank. The check was dishonored. Noble
Checks: Crossed Checks (2005) sued Pablo. The court dismissed Noble’s
What is a crossed check? What are the complaint. Was the court’s decision
effects of crossing a check? Explain. correct?
SUGGESTED ANSWER: SUGGESTED ANSWER:
A Crossed Check under accepted banking The court’s decision was incorrect. Pablo
practice, crossing a check is done by and Carlos, being immediate parties to the
writing two parallel lines diagonally on instrument, are governed by the rules of
the left top portion of the checks. The privity. Given the factual circumstances of
crossing is special where the name of the the problem, Pablo has no valid excuse
bank or a business institution is written from denying liability, (State investment
between the two parallel lines, which House v IAC GR 72764 13July1989). Pablo
means that the drawee should pay only undoubtedly had benefited in the
with the intervention of that company. transaction. To hold otherwise would also
contravene the basic rules of unjust
Effects of Crossed Checks enrichment. Even in negotiable
1) The check may not be encashed but
instruments, the
only deposited in the bank.
2) The check may be negotiated only
once—to one who has an account with
a bank.
3) The act of crossing the check serves as
a warning to the holder that the check
has been issued for a definite purpose,
so that he must inquire if he has
received the check pursuant to that
purpose; otherwise, he is not a holder
in due course.

Checks: Crossed Checks vs. Cancelled Checks

(2004) Distinguish clearly (1) crossed
checks from cancelled checks;
SUGGESTED ANSWER:
A crossed check is one with two parallel
lines drawn diagonally across its face or
across a corner thereof. On the other
hand, a cancelled check is one marked or
stamped "paid" and/or "cancelled" by or on
behalf of a drawee bank to indicate
payment thereof.
Civil Code and other laws of general Checks; Crossed Check (1994)
application can still apply suppletorily. Po Press issued in favor of Jose a
ALTERNATIVE ANSWER:
postdated crossed check, in payment of
The dismissal by the court was correct. A
newsprint which Jose promised to deliver.
check whether or not post-dated or
Jose sold and negotiated the check to
crossed, is still a negotiable instrument
Excel Inc. at a discount. Excel did not
and unless Pablo is a general indorser,
ask Jose the purpose of crossing the
which is not expressed in the factual
check. Since Jose failed to deliver the
settings, he cannot be held liable for the
newsprint, Po ordered the drawee bank to
dishonor of the instrument. In State
Investment House v IAC (GR 72764 stop payment on the check.
13Jul1989), the court did not go so far as Efforts of Excel to collect from Po failed.
to hold that the fact of crossing would Excel wants to know from you as counsel:
render the instrument non-negotiable. 1) What are the effects of crossing a check?
ALTERNATIVE ANSWER:
2) Whether as second indorser and
In State Investment House v IAC (GR 72764 holder of the crossed check, is it a
13Jul1989), the SC considered a crossed holder in due course?
check as subjecting a subsequent holder 3) Whether Po’s defense of lack of
thereof to the contractual covenants of consideration as against Jose is also
the payor and the payee. If such were the available as against Excel?
case, then the instrument is not one
SUGGESTED ANSWER:
which can still be said to contain an 1) The effects of crossing a check are:
unconditional promise to pay or order a a. The check is for deposit only in the
sum certain in money. In the transfer of account of the payee
non-negotiable credits by assignment, the b. The check may be indorsed only
transferor does not assume liability for once in favor of a person who has
the fault of the debtor or obligor. an account with a bank
Accordingly the court’s decision was c. The check is issued for a specific
correct. purpose and the person who takes
ALTERNATIVE ANSWER:
it not in accordance with said
Yes. The check is crossed. It should have
forewarned Mr. Noble that it was issued purpose does not become a holder
in due course and is not entitled
for a specific purpose. Hence, Mr Noble
could not be a holder in due course. He to payment thereunder.
is subject to the personal defense of
2) No. It is a crossed check and Excel did
breach of trust/ agreement by Mr. Pablo.
not take it in accordance with the
Such defense is available in favor of Mr
purpose for which the check was issued.
Carlos against Mr Noble.
Failure on its part to inquire as to said
purpose,
Mercantile Law Bar Examination Q & A (1990-2006) Page 78 of 103
prevented Excel from becoming a holder in due course,
as such failure or refusal constituted bad Checks; Crossed Check (1996)
faith.
What are the effects of crossing a check?
SUGGESTED ANSWER:
3) Yes. Not being a holder in due course, The effects of crossing a check are as
Excel is subject to the personal defense which follows:
Po Press can set up against Jose (State Investment a. The check may not be encashed but
House v IAC 175 S 310)
only deposited in a bank;
b. The check may be negotiated only once
Checks; Crossed Check (1995) to one who has an account with a bank;
On Oct 12, 1993, Chelsea Straights, a c. The act of crossing a check serves as a
corp engaged in the manufacture of warning to the holder thereof that the
cigarettes, ordered from Moises 2,000 check has been issued for a definite
bales of tobacco. Chelsea issued to Moises purpose so that the holder must inquire if
two crossed checks postdated 15 Mar 94 he has received the check pursuant to that
and 15 Apr 94 in full payment therefor. On purpose, otherwise he is not a holder in
19 Jan 94 Moises sold to Dragon due course (See Bataan Cigar and Cigarette Factory,
Investment House at a discount the two Inc. v CA GR 93048, Mar 3, 1994; 230 s 643)
checks drawn by Chelsea in his favor.
Moises failed to deliver the bales of Checks; Crossed Check (1996)
tobacco as agreed despite Chelsea’s On March 1, 1996, Pentium Company
demand. Consequently, on 1 Mar 94 ordered a computer from CD Bytes, and
Chelsea issued a “stop payment” order on issued a crossed check in the amount of
the 2 checks issued to Moises. Dragon, P30,000 post-dated Mar 31, 1996. Upon
claiming to be a holder in due course, filed receipt of the check, CD Bytes discounted
a complaint for collection against Chelsea the check with Fund House.
for the value of the checks.
Rule on the complaint of Dragon. Give your
legal basis.
SUGGESTED ANSWER:
Dragon cannot collect from Chelsea. The
instruments are crossed checks which
were intended to pay for the 2,000 bales
of tobacco to be delivered to Moises. It
was therefore the obligation of Dragon to
inquire as to the purpose of the issuance
of the 2 crossed checks before causing
them to be discounted. Failure on its
part to make such inquiry, which resulted
in its bad faith, Dragon cannot claim to be
a holder in due course. Moreover, the
checks were sold, not endorsed, by him to
Dragon which did not become a holder in
due course. Not being a holder in due
course, Dragon is subject to the personal
defense on the part of Chelsea concerning
the breach of trust on the part of Moises
Lim in not complying with his obligation to
deliver the 2000 bales of tobacco.

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 On April 1, 1996, Pentium stopped account with the Ortigas branch of
payment of the check for failure of CD Bonifacio Bank in favor of B. Although X
Bytes to deliver the computer. Thus, does not have sufficient funds, the bank
when Fund House deposited the check, honors the check when it is presented for
the drawee bank dishonored it. payment. Apparently, X has conspired with
the bank’s bookkeeper so that his ledger
If Fund House files a complaint against card would show that he still has sufficient
Pentium and CD Bytes for the payment of funds.
the dishonored check, will the complaint
prosper? Explain. The bank files an action for recovery of the
SUGGESTED ANSWER:: amount paid to B because the check
The complaint filed by Fund House presented has no sufficient funds. Decide
against Pentium will not prosper but the the case (5%)
one against CD Bytes will. Fund House SUGGESTED ANSWER:
is not a holder in due course and, The bank cannot recover the amount paid
therefore, Pentium can raise the defense to B for the check. When the bank
of failure of consideration against it. The honored the check, it became an acceptor.
check in question was issued by Pentium As acceptor, the bank became primarily
to pay for a computer that it ordered and directly liable to the payee/holder B.
from CD Bytes. The computer not
having been delivered, there was a The recourse of the bank should be
failure of consideration. The check against X and its bookkeeper who
discounted with Fund House by CD Bytes conspired to make X’s ledger show that he
is a crossed check and this should have has sufficient funds.
ALTERNATIVE ANSWER:
put Fund House on inquiry. It should The bank can recover from B. This is
have ascertained the title of CD Bytes solutio indebiti because there is payment
to the check or the nature of the by the bank to B when such payment is
latter’s possession. Failing in this not due. The check issued by X to B as
respect, Fund House is deemed guilty of payee had no sufficient funds.
gross negligence amounting to legal
absence of good faith and, thus, not a Checks; Effects; Alterations; Prescriptive Period
holder in due course. Fund House can (1996) William issued to Albert a check for
collect from CD Bytes as the latter was P10,000 drawn on XM Bank. Albert altered
the immediate indorser of the check. the amount of the check to P210,000 and
(See Bataan Cigar and Cigarette Factory v CA deposited the check to his account with ND
et al 230 s 643 GR 93048 Mar 3, 94)
Bank. When ND Bank presented the check
for
Checks; Effect; Acceptance by the drawee bank (1998)
X draws a check against his current

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Mercantile Law Bar Examination Q & A (1990-2006) 79 of 103
Page
payment through the Clearing House, XM altered check to the collecting bank (ND Bank)
Bank honored it. Thereafter, Albert within the 24 hour clearing period provided in
withdrew the P210,000 and closed his Sec 4c of CB Circular 9, dated Feb 17, 1949,
account. the latter is absolved from liability. (See HSBC v
PB&T Co GR L-28226 Sep 30 1970; 35 s 140; also Rep Bank
When the check was returned to him after v CA GR 42725 Apr 22, 1991 196 s 100)
a month, William discovered the alteration.
XM Bank recredited P210,000 to William’s Checks; Forged Check; Effects (2006)
current account, and sought Discuss the legal consequences when a
reimbursement from ND Bank. ND Bank bank honors a forged check. (5%)
refused, claiming that XM Bank failed to SUGGESTED ANSWER:
return the altered check to it within 24 hour The legal consequences when a bank
clearing period. honors a forged check are as follows:
Who, as between, XM Bank and ND Bank, (a) When Drawer's Signature is Forged:
should bear the loss? Explain. Drawee-bank by accepting the check cannot set
SUGGESTED ANSWER: up the defense of forgery, because by accepting
ND Bank should bear the loss if XM Bank the instrument, the drawee bank admits the
returned the altered check to ND Bank genuineness of signature of drawer (BPI Family
within twenty four hours after its discovery Bank vs. Buenaventura G.R. No. 148196, September 30, 2005;
of the alteration. Under the given facts, Section 23, Negotiable Instruments Law).
William discovered the alteration when the Unless a forgery is attributable to the fault
altered check was returned to him after a or negligence of the drawer himself, the
month. It may safely be assumed that remedy of the drawee-bank is against the
William immediately advised XM Bank of party responsible for the forgery. Otherwise,
such fact and that the latter promptly
notified ND Bank thereafter. Central Bank
Circular No. 9, as amended, on which the
decisions of the Supreme Court in Hongkong
& Shanghai Banking Corp v People’s Bank
& Trust Co and Republic Bank vs CA were
based was expressly cancelled and
superseded by CB No 317 dated Dec 23
1970. The latter was in turn amended by CB
Circular No 580, dated Sept 19, 1977. As to
altered checks, the new rules provide that
the drawee bank can still return them even
after 4:00 pm of the next day provided it
does so within 24 hours from discovery of
the alteration but in no event beyond the
period fixed or provided by law for filing of
a legal action by the returning bank against
the bank sending the same. Assuming that
the relationship between the drawee bank
and the collecting bank is evidenced by
some written document, the prescriptive
period would be 10 years. (Campos, NIL
5th ed 454-455)
ALTERNATIVE ANSWER:
XM Bank should bear the loss. When the
drawee bank (XM Bank) failed to return the
drawee-bank bears the loss (BPI Family Bank v. drawee-bank pays the forged check, it must be
Buenaventura,
considered as paying out of its funds and
G.R. No. 148196, September 30, 2005). A drawee-bank
cannot charge the amount so paid to the
paying on a forged check must be considered account of the depositor. In such case, the bank
as paying out of its funds and cannot charge becomes liable since its primary duty is to
the amount to the drawer (Samsung Construction verify the authenticity of the payee's signature
Co. Phils, v. Far East Bank, G.R. No. 129015, August 13,
(Traders Royal Bank v. Radio Philippines Network, G.R. No.
2004). If the drawee-bank has charged drawer's 138510, October 10, 2002; Westmont Bank v. Ong, G.R. No.
account, the latter can recover such amount 132560, January 30, 2002).
from the drawee-bank (Associated Bank v. Court
of Appeals, • Forged Indorsement:
G.R. No. 107382, January 31, 1996; Bank of P. I. v. Case
Montessori Internationale, G.R. No. 149454, May 28, 2004).  Drawer's account cannot be
charged, and if charged, he
However, the drawer may be precluded or
can recover from the drawee-
estopped from setting up the defense of
bank (Associated Bank v. Court of
forgery as against the drawee- bank, when it Appeals, G.R. No. 107382 January
is shown that the drawer himself had been 31,1996).
guilty of gross negligence as to have  Drawer has no cause of action against
facilitated the forgery (Metropolitan Waterworks v. collecting bank, since the duty of
Court of Appeals, G.R. No. L- 62943, 143 SCRA 20, July 14, collecting bank is only to the payee.
1986). A collecting bank is not guilty of
(NOTA BENE: The question does not qualify the
term "forged check". An answer addressing the negligence over a forged indorsement
liabilities of a drawer should be deemed on checks for it has no way of
sufficient. Answers addressing liabilities of parties ascertaining the authority of the
should likewise be given full credit)
endorsement and when it caused the
Drawee Bank versus Collecting Bank — checks to pass through the clearing
When the signature of the drawer is forged, as house before allowing withdrawal of
between the drawee- bank and collecting the proceeds thereof (Manila Lighter
bank, the drawee-bank sustains the loss, Transportation, Inc. v. Court of Appeals,

since the collecting bank does not guarantee G.R. No. 50373, February 15, 1990). On

the signature of the drawer. The payment of the other hand, a collecting bank
the check by the drawee bank constitutes the which endorses a check bearing a
proximate negligence since it has the duty to forged endorsement and presents it
know the signature of its client-drawer. to the drawee bank
(Philippine National Bank v. Court of Appeals, G.R. No. L- guarantees all prior endorsements
26001, October 29, 1968). including the forged endorsement
itself and should be held liable
(b) Forged Payee's Signature: When
Mercantile Law Bar Examination Q & A (1990-2006) Page 80 of 103
therefor (Traders Royal Bank v. RPN, G.R. Shure Bank that there was something
No. 138510, October 10, 2002). wrong with the check within the clearing
 Drawee-bank can recover from the hour rule of 24 hours.
collecting bank (Great Eastern Life Ins. Co.
v. Hongkong & Shanghai Bank, G.R. No. 18657,
Checks; Material Alterations; Liability (1999)
August 23,1922) because even if the
indorsement on the check deposited A check for P50,000.00 was drawn against
by the bank's client is forged, drawee bank and made payable to XYZ
collecting bank is bound by its Marketing or order. The check was
warranties as an indorser and cannot deposited with payee’s account at ABC
set up defense of forgery as against Bank which then sent the check for clearing
drawee bank (Associated Bank v. Court of to drawee bank.
Appeals, G.R. No. 107382, January 31, 1996). Drawee bank refused to honor the check on
ground that the serial number thereof had
Checks; Liability; Drawee Bank (1995) been altered.
XYZ marketing sued drawee bank.
Mario Guzman issued to Honesto Santos
a. Is it proper for the drawee bank to
a check for P50th as payment for a 2nd
dishonor the check for the reason that
hand car. Without the knowledge of
it had been altered? Explain (2%)
Mario, Honesto changed the amount to
b. In instant suit, drawee bank contended
P150th which alteration could not be
that XYZ Marketing as payee could not
detected by the naked eye. Honesto
sue the drawee bank as there was no
deposited the altered check with Shure
privity between then. Drawee theorized
Bank which forwarded the same to
that there was no basis to make it
Progressive Bank for payment. Progressive
liable for the check. Is this contention
Bank without noticing the alteration paid
correct? Explain. (3%)
the check, debiting P150th from the SUGGESTED ANSWER:
account of Mario. Honesto withdrew the a. No. The serial number is not a
amount of P15th from Shure Bank and material particular of the check. Its
disappeared. After receiving his bank alteration does not constitute
statement, Mario discovered the alteration material
and demanded restitution from Progressive
Bank.
Discuss fully the rights and the liabilities
of the parties concerned.
SUGGESTED ANSWER:
The demand of Mario for restitution of
the amount of P150,000 to his account is
tenable. Progressive Bank has no right to
deduct said amount from Mario’s account
since the order of Mario is different.
Moreover, Progressive Bank is liable for
the negligence of its employees in not
noticing the alteration which, though it
cannot be detected by the naked eye,
could be detected by a magnifying
instrument used by tellers.

As between Progressive Bank and Shure

Bank, it is the former that should bear the
loss. Progressive Bank failed to notify
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alteration of the instrument. The serial this is due to the giving of the notice of
number is not material to the dishonor beyond the period allowed by
negotiability of the instrument. law. The giving of notice of dishonor on
April 27, 1994 is more than one (1)
b. Yes. As a general rule, the drawee is month from March 5, 1994 when the check
not liable under the check because there was dishonored. Since it is not shown that
is no privity of contract between XYZ Gemma and the holder resided in the
Marketing, as payee, and ABC Bank as same place, the period within which to
the drawee bank. However, if the action give notice of dishonor must be the same
taken by the bank is an abuse of right time that the notice would reach Gemma
which caused damage not only to the if sent by mail. (NIL Sec 103 & 104; Far
issuer of the check but also to the payee, East Realty Investment Inc v CA 166 S 256)
the payee has a cause of action under ALTERNATIVE ANSWER:
quasi-delict. 2) Gemma can still be liable under the
original contract for the consideration of
which the check was issued.
Checks; Presentment (1994)
Gemma drew a check on September 13,
Checks; Presentment (2003)
1990. The holder presented the check to
the drawee bank only on March 5, 1994. A bank issues its own check. May the
The bank dishonored the check on the holder hold the bank liable thereunder if
same date. After dishonor by the drawee he fails to –
bank, the holder gave a formal notice of prove presentment for payment, or
dishonor to Gemma through a letter  present the bill to the drawee for
dated April 27, 1994. acceptance? Explain your answers.
1) What is meant by “unreasonable time” (4%)
SUGGESTED ANSWER:
as applied to presentment?
2) Is Gemma liable to the holder?
SUGGESTED ANSWER:
1) As applied to presentment for
payment, “reasonable time: is meant not Checks; Validity; Waiver of Bank’s liability for
more than 6 months from the date of negligence (1991)
issue. Beyond said period, it is Mr. Lim issued a check drawn against BPI
“unreasonable time” and the check Bank in favor of Mr Yu as payment of
becomes stale. certain shares of stock which he
purchased. On the same day that he
2) No. Aside form the check being already
issued the check to Yu, Lim ordered BPI to
stale, Gemma is also discharged form
stop payment. Per standard banking
liability under the check, being a drawer
practice, Lim was made to sign a waiver of
and a person whose liability is secondary,
BPI’s

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Mercantile Law Bar Examination Q & A (1990-2006) Page 81 of 103
liability in the event that it should pay Yu in due course. Under a forged signature
through oversight or inadvertence. Despite of the drawer, there is no valid
the stop order by Lim, BPI nevertheless instrument that would give rise to a
paid Yu upon presentation of the check. contract which can be the basis or source
Lim sued BPI for paying against his order. of liability on the part of the drawer. The
Decide the case. drawee bank has no right or authority to
SUGGESTED ANSWER: touch the drawer's funds deposited with the
In the event that Mr. Lim, in fact, had drawee bank.
sufficient legal reasons to issue the stop
payment order, he may sue BPI for paying Forgery; Liabilities; Prior & Subsequent Parties
against his order. The waiver executed by (1990) Jose loaned Mario some money and,
Mr Lim did not mean that it need not to evidence his indebtedness, Mario
exercise due diligence to protect the executed and delivered to Jose a promissory
interest of its account holder. It is not note payable to his order.
amiss to state that the drawee, unless the
instrument has earlier been accepted by Jose endorsed the note to Pablo. Bert
it, is not bound to honor payment to the fraudulently obtained the note from Pablo
holder of the check that thereby excludes and endorsed it to Julian by forging Pablo’s
it from any liability if it were to comply signature. Julian endorsed the note to
with its stop payment order (Sec 61 NIL) Camilo.
ALTERNATIVE ANSWER: a) May Camilo enforce the said promissory
1991 6b) BPI would not be liable to Mr note against Mario and Jose?
Lim. Mr Lim and BPI are governed by b) May Camilo go against Pablo?
their own agreement. The waiver c) May Camilo enforce said note against
executed by Mr Lim, neither being one of Julian?
future fraud or gross negligence, would be d) Against whom can Julian have the right of
valid. The problem does not indicate the recourse?
existence of fraud or gross negligence on
the part of BPI so as to warrant liability on
its part.

Defenses; Forgery (2004)

CX maintained a checking account with
UBANK, Makati Branch. One of his checks
in a stub of fifty was missing. Later, he
discovered that Ms. DY forged his
signature and succeeded to encash
P15,000 from another branch of the bank.
DY was able to encash the check when ET,
a friend, guaranteed due execution, saying
that she was a holder in due course.
Can CX recover the money from the bank?
Reason briefly. (5%)
SUGGESTED ANSWER:
Yes, CX can recover from the bank. Under
Section 23 of the Negotiable Instruments
Law, forgery is a real defense. The
forged check is wholly inoperative in
relation to CX. CX cannot be held liable
thereon by anyone, not even by a holder
e) May Pablo recover from either Mario or which can thereby materially alter
Jose? the above suggested answers. The
problem did not clearly indicate the
SUGGESTED ANSWER:
a) Camilo may not enforce said kind of indorsements made.
promissory note against Mario and Jose. Forgery; Liabilities; Prior & Subsequent Parties (1995)
The promissory note at the time of forgery Alex issued a negotiable PN (promissory
being payable to order, the signature of note) payable to Benito or order in
Pablo was essential for the instrument to payment of certain goods. Benito
pass title to subsequent parties. A forged indorsed the PN to Celso in payment of
signature was inoperative (Sec 23 NIL). an existing obligation. Later Alex found
Accordingly, the parties before the forgery the goods to be defective. While in Celso’s
are not juridically related to parties after possession the PN was stolen by Dennis
the forgery to allow such enforcement. who forged Celso’s signature and
discounted it with Edgar, a money lender
b) Camilo may not go against Pablo, the
who did not make inquiries about the PN.
latter not having indorsed the instrument.
Edgar indorsed the PN to Felix, a holder in
c) Camilo may enforce the instrument due course. When Felix demanded
against Julian because of his special payment of the PN from Alex the latter
indorsement to Camilo, thereby making refused to pay. Dennis could no longer be
him secondarily liable, both being located.
parties after the forgery. 1. What are the rights of Felix, if any,
against Alex, Benito, Celso and Edgar?
d) Julian, in turn, may enforce the Explain
instrument against Bert who, by his 2. Does Celso have any right against Alex,
forgery, has rendered himself primarily Benito and Felix? Explain.
liable. SUGGESTED ANSWER:
1. Felix has no right to claim against Alex,
e) Pablo preserves his right to recover Benito and Celso who are parties prior
from either Mario or Jose who remain to the forgery of Celso’s signature by
parties juridically related to him. Mario is Dennis. Parties to an instrument who are
still considered primarily liable to Pablo. such prior to the forgery cannot be held
Pablo may, in case of dishonor, go after liable by any party who became such at
Jose who, by his special indorsement, is or subsequent to the forgery. However,
secondarily liable. Edgar, who became a party to the
instrument subsequent to the forgery and
Note: It is possible that an answer
who indorsed the same to Felix, can be
might distinguish between blank and
held liable by the latter.
special indorsements of prior parties
Mercantile Law Bar Examination Q & A (1990-2006) Page 82 of 103
2. Celso has the right to collect from Alex note for the amount of P100,000.00. He
and Benito. Celso is a party subsequent to then indorsed and delivered the same to
the two. However, Celso has no right to Pete, who accepted the note as payment of
claim against Felix who is a party the debt.
subsequent to Celso (Sec 60 and 66 NIL)
What defense or defenses can Señorita
Isobel set up against Pete? Explain. (3%)
Incomplete & Delivered (2004)
SUGGESTED ANSWER:
AX, a businessman, was preparing for a The defense (personal defense) which
business trip abroad. As he usually did in Señorita Isobel can set up against Pete is
the past, he signed several checks in that the amount of P100,000.00 is not in
blank and entrusted them to his secretary accordance with the authority given to her
with instruction to safeguard them and fill to Brad (in the presence of Pete) and that
them out only when required to pay Pete was not a holder in due course for
accounts during his absence. OB, his acting in bad faith when accepted the note
secretary, filled out one of the checks by as payment despite his knowledge that it
placing her name as the payee. She filled was only 10,000.00 that was allowed by
out the amount, endorsed and delivered Señorita Isobel during their meeting with
the check to KC, who accepted it in good Brad.
faith for payment of gems that KC sold to
OB. Later, OB told AX of what she did Incomplete Instruments; Incomplete Delivered
with regrets. AX timely directed the bank Instruments vs. Incomplete Undelivered Instrument (2006)
to dishonor the check. Could AX be held Jun was about to leave for a business trip.
liable to KC? Answer and reason briefly. As his usual practice, he signed several
(5%) blank checks. He instructed Ruth, his
SUGGESTED ANSWER:
secretary, to fill them as payment for his
Yes. AX could be held liable to KC. This is
obligations. Ruth filled one check with her
a case of an incomplete check, which has
name as payee, placed P30,000.00
been delivered. Under Section 14 of the
thereon, endorsed and
Negotiable Instruments Law, KC, as a
holder in due course, can enforce payment
of the check as if it had been filled up
strictly in accordance with the authority
given by AX to OB and within a
reasonable time.

Incomplete and Delivered (2005)

Brad was in desperate need of money to
pay his debt to Pete, a loan shark. Pete
threatened to take Brad’s life if he failed to
pay. Brad and Pete went to see Señorita
Isobel, Brad’s rich cousin, and asked her
if she could sign a promissory note in his
favor in the amount of P10,000.00 to pay
Pete. Fearing that Pete would kill Brad,
Señorita Isobel acceded to the request.
She affixed her signature on a piece of
paper with the assurance of Brad that he
will just fill it up later. Brad then filled
up the blank paper, making a promissory
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 delivered it to Marie. She accepted the authority, be a valid contract in the hands
check in good faith as payment for of any holder, as against any person,
goods she delivered to Ruth. Eventually, including Jun, whose signature was
Ruth regretted what she did and placed thereon before delivery. Such
apologized to Jun. Immediately he defense is a real defense even against a
directed the drawee bank to dishonor the holder in due course, available to a party
check. When Marie encashed the check, like Jun whose signature appeared prior to
it was dishonored. delivery.
1. Is Jun liable to Marie? (5%)
SUGGESTED ANSWER:
Indorser: Irregular Indorser vs. General Indorser
Yes. This covers the delivery of an
(2005) Distinguish an irregular indorser from a
incomplete instru- ment, under Section
general indorser. (3%)
14 of the Negotiable Instruments Law, SUGGESTED ANSWER:
which provides that there was prima facie Irregular Indorser is not a party to the
authority on the part of Ruth to fill-up instrument but he places his signature in
any of the material particulars thereof. blank before delivery. He is not a party but
Having done so, and when it is first he becomes one because of his signature in
completed before it is negotiated to a the instrument. Because his signature he is
holder in due course like Marie, it is considered an indorser and he is liable to
valid for all purposes, and Marie may the parties in the instrument.
enforce it within a reasonable time, as if
it had been filled up strictly in accordance While, a General Indorser warrants that the
with the authority given. instrument is genuine, that he has a good
title to it, that all prior parties had capacity
2. Supposing the check was stolen while to contract; that the instrument at the
in Ruth's pos- session and a thief filled time of the indorsement is valid and
the blank check, endorsed and delivered subsisting; and that on due presentment,
it to Marie in payment for the goods he the instrument will be accepted or paid or
purchased from her, is Jun liable to Marie both accepted and paid according to its
if the check is dishonored? (5%) tenor, and that if it is dishonored, he will
pay if the necessary proceedings for
SUGGESTED ANSWER:
dishonor are made.
No. Even though Marie is a holder in due
course, this is an incomplete and
undelivered instrument, covered by Negotiability (1993)
Section 15 of the Negotiable Instruments Discuss the negotiability or non-
Law. Where an incomplete instrument has negotiability of the following notes
not been delivered, it will not, if
completed and negotiated without 1) Manila, September 1, 1993

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Mercantile Law Bar Examination Q & A (1990-2006) Page 83 of 103
P2,500.00 the then prevailing 91-day Treasury Bill
I promise to pay Pedro San Juan or order rate as published at the beginning of
the sum of P2,500. such calendar quarter.
c) The PN gives the maker the option to
(Sgd.) Noel Castro
make payment either in money or in
quantity of palay or equivalent value.
2) Manila, June 3,
d) The PN gives the holder the option either
1993 P10,000.00 to require payment in money or to
For value received, I promise to pay Sergio require the maker to serve as the
Dee or order the sum of P10,000.00 in five bodyguard or escort of the holder for 30
(5) installments, with the first installment days.
payable on October 5, 1993 and the other
installments on or before the fifth day of the SUGGESTED ANSWER:
a) Paragraph 1 – negotiability is “NOT
succeeding month or thereafter.
AFFECTED.” The date is not one of the
(Sgd.) Lito Villa requirements for negotiability.

SUGGESTED ANSWER:
The promissory note is negotiable as it
complies with Sec 1, NIL.
 Firstly, it is in writing and signed by the
maker, Noel Castro.
 Secondly, the promise is unconditional to
pay a sum certain in money, that is,
P2,500.00
 Thirdly, it is payable on demand as no
date of maturity is specified.
 Fourth, it is payable to order.

The promissory note is negotiable. All the

requirements of Sec 1 NIL are complied
with. The sum to be paid is still certain
despite that the sum is to be paid by
installments (Sec 2b NIL)

Negotiability (2002)
Which of the following stipulations or
features of a promissory note (PN) affect
or do not affect its negotiability, assuming
that the PN is otherwise negotiable?
Indicate your answer by writing the
paragraph number of the stipulation or
feature of the PN as shown below and your
corresponding answer, either “Affected” or
“Not affected.” Explain (5%).

a) The date of the PN is “February 30,

2002.”
b) The PN bears interest payable on the
last day of each calendar quarter at a
rate equal to five percent (5%) above
b) Paragraph 2 – negotiability is “NOT Pay to the order of Reliable Finance
AFFECTED” The interest is to be Corporation.
Automotive
computed at a particular time and is
determinable. It does not make the sum Company By: (Sgd) Manager
uncertain or the promise conditional.
c) Paragraph 3 – negotiability is Because Perla defaulted in the payment of
“AFFECTED.” Giving the maker the her installments, Reliable Finance
option renders the promise conditional Corporation initiated a case against her for
d) Paragraph 4 – negotiability is “NOT a sum of money. Perla argued that the
AFFECTED.” Giving the option to the promissory note is merely an assignment of
holder does not make the promise credit, a non-negotiable instrument open to
conditional. all defenses available to the assignor and,
therefore, Reliable Finance Corporation is
Negotiability; Holder in Due Course (1992) not a holder in due course.
a) Is the promissory note a mere assignment
Perla brought a motor car payable on
of credit or a negotiable instrument? Why?
installments from Automotive Company for
b) Is Reliable Finance Corp a holder in due
P250th. She made a down payment of
course? Explain briefly.
P50th and executed a promissory note for SUGGESTED ANSWER:
the balance. The company subsequently a) The promissory note in the problem is a
indorsed the note to Reliable Finance negotiable instrument, being in compliance
Corporation which financed the purchase. with the provisions of Sec 1 NIL. Neither
The promissory note read: the fact that the payable sum is to be paid
“For value received, I promised to pay with interest nor that the maturities are in
Automotive Company or order at its office stated installments renders uncertain the
in Legaspi City, the sum of P200,000.00 amount payable (Sec 2 NIL)
with interest at twelve (12%) percent per
annum, payable in equal installments of b) Yes, Reliable Finance Corporation is a
P20,000.00 monthly for ten (10) months holder in due course given the factual
starting October 21, 1991. settings. Said corporation apparently took
the promissory note for value, and there are
Manila September 21, 1991. no indications that it acquired it in bad
faith (Sec 52 NIL see Salas v CA 181 s 296)
(sgd) Perla

Negotiability; Requisites (2000)

Mercantile Law Bar Examination Q & A (1990-2006) Page 84 of 103
a) MP bought a used cell phone from JR. SUGGESTED ANSWER:
JR preferred cash but MP is a friend so JR a) KR is right. The promissory note is not
accepted MR’s promissory note for negotiable. It is not issued to order or
P10,000. JR thought of converting the note bearer. There is no word of negotiability
into cash by endorsing it to his brother containing therein. It is not issued in
KR. The promissory note is a piece of accordance with Section 1 of the Negotiable
paper with the following hand-printed Instruments Law
notation: “MP WILL PAY JR TEN
b) The fact that the instrument is undated
THOUSAND PESOS IN PAYMENT FOR
and does not mention the place of payment
HIS CELLPHONE 1 WEEK FROM TODAY.”
does not militate against its being
Below this notation MP’s signature with
negotiable. The date and place of payment
“8/1/00” next to it, indicating the date of
are not material particulars required to
the promissory note. When JR presented
make an instrument negotiable.
MP’s note to KR, the latter said it was
not a negotiable instrument under the law The fact that no mention is made of any
and so could not be a valid substitute for consideration is not material. Consideration
cash. JR took the opposite view, insisting is presumed.
on the note’s negotiability. You are asked
to referee. Which of the opposing views is Negotiable Instrument: Ambiguous Instruments
correct? (1998) How do you treat a negotiable
instrument that is so ambiguous that there is
b) TH is an indorsee of a promissory
doubt whether it is a bill or a note? (5%)
note that simply states: “PAY TO SUGGESTED ANSWER:
JUAN TAN OR ORDER 400 PESOS.” 1. Where a negotiable instrument is so
The note has no date, no place of ambiguous that there is doubt whether it
payment and no consideration is a bill or a note, the holder may treat it
mentioned. It was signed by MK either as a bill of exchange or a promissory
and written under his letterhead note at his election.
specifying the address, which
happens to be his residence. TH
accepted the promissory note as
payment for services rendered to SH,
who in turn received the note from
Juan Tan as payment for a prepaid
cell phone card worth 450 pesos. The
payee acknowledged having received
the note on August 1, 2000. A Bar
reviewee had told TH, who happens
to be your friend, that TH is not a
holder in due course under Article
52 of the Negotiable Instruments
Law (Act 2031) and therefore does
not enjoy the rights and protection
under the statute. TH asks for our
advice specifically in connection
with the note being undated and not
mentioning a place of payment and
any consideration. What would your
advice be? (2%).

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 Negotiable Instrument: Definition & Characteristics Negotiable Instruments Law: (5%)
(2005) 1) Postal Money Order;
What is a negotiable instrument? Give the 2) A certificate of time deposit which
characteristics of a negotiable instrument. states “This is to certify that bearer has
(2%) deposited in this bank the sum of
SUGGESTED ANSWER: FOUR THOUSAND PESOS (P4,000.00)
Negotiable Instrument is a written only, repayable to the depositor 200
contract for the payment of money which days after date.”
is intended as a substitute for money and 3) Letters of credit;
passes from one person to another as 4) Warehouse receipts;
money, in such a manner as to give a 5) Treasury warrants payable from a
specific fund.
holder in due course the right to hold the
instrument free from defenses available SUGGESTED ANSWER:
to prior parties. Such instrument must 1) Postal Money Order – Non-Negotiable
comply with Sec. 1 of the Negotiable as it is governed by postal rules and
Instrument Law to be considered regulation which may be inconsistent
negotiable. with the NIL and it can only be
negotiated once.
The characteristics of a negotiable
instrument are; 2) A certificate of time deposit which
1) Negotiability - That quality or states “This is to certify that bearer has
attribute whereby a bill, note or deposited in this bank the sum of
check passes or may pass from hand FOUR THOUSAND PESOS (P4,000.00)
to hand, similar to money, so as to only, repayable to the depositor 200
give the holder in due course the days after date.” – Non-Negotiable as
right to hold the instrument and it does not comply with the requisites
collect the sum payable for himself of Sec. 1 of NIL
free from defenses.
3) Letters of credit - Non-Negotiable
2) Accumulation of Secondary Contracts
as they are transferred from one 4) Warehouse receipts - Non-Negotiable
person to another. for the same as Bill of Lading it merely
represents good, not money.
Negotiable Instrument: Identification (2005)
5) Treasury warrants payable from a
State and explain whether the following specific fund - Non-Negotiable being
are negotiable instruments under the payable out of a particular fund.

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Mercantile Law Bar Examination Q & A (1990-2006) Page 85 of 103
Negotiable Instrument: Negotiable Document vs. Negotiable Instruments; Bearer Instrument (1998)
Negotiable Instrument (2005) Richard Clinton makes a promissory note
Distinguish a negotiable document from a payable to bearer and delivers the same to
negotiable instrument. (2%) Aurora Page. Aurora Page, however, endorses
SUGGESTED ANSWER: it to X in this manner:
Negotiable Instrument have requisites of “Payable to X. Signed: Aurora Page.”
Sec. 1 of the NIL, a holder of this
instrument have right of recourse against Later, X, without endorsing the promissory
intermediate parties who are secondarily note, transfers and delivers the same to
liable, Holder in due course may have Napoleon. The note is subsequently
rights better than transferor, its subject is dishonored by Richard Clinton. May
money and the Instrument itself is property Napoleon proceed against Richard Clinton for
of value. the note? (5%)
SUGGESTED ANSWER:
On the other hand, negotiable document Yes. Richard Clinton is liable to Napoleon
does not contain requisites of Sec. 1 of under the promissory note. The note made
NIL, it has no secondary liability of by Richard Clinton is a bearer instrument.
intermediate parties, transferee merely Despite special indorsement made by Aurora
steps into the shoes of the transferor, its Page thereon, the note remained a bearer
subject are goods and the instrument is instrument and can be negotiated by mere
merely evidence of title; thing of value are delivery. When X delivered and transferred
the goods mentioned in the document. the note to Napoleon, the

Negotiable Instrument; Negotiability (1997)

Can a bill of exchange or a promissory note
qualify as a negotiable instrument if –
a. it is not dated; or
b. the day and the month, but not the
year of its maturity, is given; or
c. it is payable to “cash”’ or
d. it names two alternative drawees

SUGGESTED ANSWER:
a) Yes. Date is not a material particular
required by Sec 1 NIL for the negotiability
of an instrument.

b) No. The time for payment is not

determinable in this case. The year is not
stated.

c) Yes. Sec 9d NIL makes the instrument

payable to bearer because the name of the
payee does not purport to be the name of
any person.

d) A bill may not be addressed to two or more

drawees in the alternative or in succession,
to be negotiable (Sec 128 NIL). To do so
makes the order conditional.
latter became a holder thereof. As such liable by F.
holder, Napoleon can proceed against
Richard Clinton. Negotiable Instruments; bearer instruments; liabilities of
maker and indorsers (2001)
Negotiable Instruments; Bearer Instruments (1997) A issued a promissory note payable to B
A delivers a bearer instrument to B. B or bearer. A delivered the note to B. B
then specially indorses it to C and C later indorsed the note to C. C placed the note
indorses it in blank to D. E steals the in his drawer, which was stolen by the
instrument from D and, forging the janitor X. X indorsed the note to D by
signature of D, succeeds in “negotiating” it forging C’s signature. D indorsed the note to
to F who acquires the instrument in good E who in turn delivered the note to F, a
faith and for value. holder in due course, without indorsement.
a) If, for any reason, the drawee bank Discuss the individual liabilities to F of A, B
refuses to honor the check, can F enforce and C. (5%)
SUGGESTED ANSWER:
the instrument against the drawer?
A is liable to F. As the maker of the
b) In case of the dishonor of the check
promissory note, A is directly or primarily
by both the drawee and the drawer, can F
liable to F, who is a holder in due course.
hold any of B, C and D liable secondarily
Despite the presence of the special
on the instrument?
indorsements on the note, these do not
SUGGESTED ANSWER:
a) Yes. The instrument was payable to detract from the fact that a bearer
bearer as it was a bearer instrument. It instrument, like the promissory note in
could be negotiated by mere delivery question, is always negotiable by mere
despite the presence of special delivery, until it is indorsed restrictively
indorsements. The forged signature is “For Deposit Only.”
unnecessary to presume the juridical
B, as a general indorser, is liable to F
relation between or among the parties
secondarily, and warrants that the
prior to the forgery and the parties after
instrument is genuine and in all respects
the forgery. The only party who can raise
what it purports to be; that he has good title
the defense of forgery against a holder in
to it; that all prior parties had capacity to
due course is the person whose signature
contract; that he has no knowledge of any
is forged.
fact which would impair the validity of the
b) Only B and C can be held liable by F. The instrument or render it valueless; that at
instrument at the time of the forgery was the time of his indorsement, the instrument
payable to bearer, being a bearer is valid and subsisting; and that on due
instrument. Moreover, the instrument was presentment, it shall be accepted or paid, or
indorsed in blank by C to D. D, whose both, according to its tenor, and that if it
signature was forged by E cannot be held be dishonored and the necessary
proceedings on dishonor
Mercantile Law Bar Examination Q & A (1990-2006) Page 86 of 103
be duly taken, he will pay the amount Law (Act 2031)? Explain your answer. (2%)
thereof to the holder, or to any
SUGGESTED ANSWER:
subsequent indorser who may be
a) PN is right. The instrument is
compelled to pay.
incomplete and undelivered. It did not
C is not liable to F since the latter cannot create any contract that would bind PN to
trace his title to the former. The signature an obligation to pay the amount thereof.
of C in the supposed indorsement by him
b) A payee in a promissory note cannot
to D was forged by X. C can raise the
be a “holder in due course” within
defense of forgery since it was his
the meaning of the Negotiable
signature that was forged.
Instruments Law, because a payee is
ALTERNATIVE ANSWER:
As a general endorser, B is secondarily an immediate party in relation to the
liable to F. C is liable to F since it is due to maker. The payee is subject to
the negligence of C in placing the note in whatever defenses, real of personal,
his drawer that enabled X to steal the available to the maker of the
same and forge the signature of C relative promissory note.
ALTERNATIVE ANSWER:
to the indorsement in favor of D. As
b) A payee can be a “holder in due course.”
between C and F who are both innocent
A holder is defined as the payee or indorsee
parties, it is C whose negligence is the
of the instrument who is in possession of it.
proximate cause of the loss. Hence C
Every holder is deemed prima facie to be a
should suffer the loss.
holder in due course.

Negotiable Instruments; incomplete and undelivered

Negotiable Instruments; Incomplete Delivered Instruments;
instruments; holder in due course (2000)
Comparative Negligence (1997)
PN makes a promissory note for
P5,000.00, but leaves the name of the
payee in blank because he wanted to
verify its correct spelling first. He
mindlessly left the note on top of his desk
at the end of the workday. When he
returned the following morning, the note
was missing. It turned up later when X
presented it to PN for payment. Before X,
T, who turned out to have filched the
note from PN’s office, had endorsed the
note after inserting his own name in the
blank space as the payee. PN dishonored
the note, contending that he did not
authorize its completion and delivery. But
X said he had no participation in, or
knowledge about, the pilferage and
alteration of the note and therefore he
enjoys the rights of a holder in due course
under the Negotiable Instruments Law.
Who is correct and why? (3%)

b) Can the payee in a promissory note be

a “holder in due course” within the
meaning of the Negotiable Instruments
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 A, single proprietor of a business your negotiable promissory note and (2)
concern, is about to leave for a business your check, each containing the essential
trip and, as he so often does on these elements of a negotiable instrument (2%)
occasions, signs several checks in blank.
SUGGESTED ANSWER:
He instructs B, his secretary, to safekeep
A. (1) A negotiable promissory note is an
the checks and fill them out when and
unconditional promise in writing made by
as required to pay accounts during his
one person to another, signed by the
absence. B fills out one of the checks
maker, engaging to pay on demand or at a
by placing her name as payee, fills in
fixed or determinable future time, a sum
the amount, endorses and delivers the
certain in money to order or bearer.
check to C who accepts it in good faith
as payment for goods sold to B. B regrets (2) A bill of exchange is an unconditional
her action and tells A what she did. A order in writing addressed by one person
directs the Bank in time to dishonor the to another, signed by the person giving it,
check. When C encashes the check, it is requiring the person to whom it is
dishonored. addressed to pay on demand or at a fixed
Can A be held liable to C? or determinable future time a sum certain
SUGGESTED ANSWER:
Yes, A can be held liable to C, assuming in money to order or to bearer.
that the latter gave notice of dishonor to
(3) A check is a bill of exchange drawn on a
A. This is a case of an incomplete
bank payable on demand.
instrument but delivered as it was
entrusted to B, the secretary of A.
B. (1) Negotiable promissory note -
Moreover, under the doctrine of
comparative negligence, as between A
and C, both innocent parties, it was the “September 15, 2002
negligence of A in entrusting the check to
B which is the proximate cause of the loss. “For value received, I hereby promise to
pay Juan Santos or order the sum of TEN
THOUSAND PESOS (P10,000) thirty (30)
Negotiable Instruments; kinds of negotiable instrument;
words of negotiability (2002) days from date hereof.

A. Define the following: (1) a negotiable

promissory note, (2) a bill of exchange and (Signed) Pedro
(3) a check. (3%)
Cruz to: Philippine
B. You are Pedro Cruz. Draft the
National Bank
appropriate contract language for (1) Escolta, Manila Branch”

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Mercantile Law Bar Examination Q & A (1990-2006) Page 87 of 103
Commercial Banking Co. The By-laws of Saad
requires
Negotiable Instruments; Requisites (1996) sued Jorge. Jorge pleads in defense the fact
What are the requisites of a negotiable that he had endorsed the instrument without
instrument? receiving value therefor, and the further fact
SUGGESTED ANSWER:
that Raffy knew that at the time he took the
The requisites of a negotiable instrument are
instrument Jorge had not received any value
as follows:
or consideration of any kind for his
a) It must be in writing and signed by the
indorsement.
maker or drawer;
Is Jorge liable? Discuss.
b) It must contain an unconditional SUGGESTED ANSWER:
promise or order to pay a sum certain in Yes. Jorge is liable. Sec 29 of the NIL
money; provides that an accommodation party is
c) It must be payable to order or to bearer; liable on the instrument to a holder for
and value, notwithstanding the holder at the time
d) Where the instrument is addressed to a of taking said instrument knew him to be
drawee, he must be named or otherwise only an accommodation party. This is the
indicated therein with reasonable nature or the essence of accommodation.
certainty. (Sec 1 NIL)

Parties; Accommodation Party (1991)

Notice Dishonor (1996)
On June 1, 1990, A obtained a loan of
When is notice of dishonor not required to P100th from B, payable not later than
be given to the drawer? 20Dec1990. B required A to issue him a
SUGGESTED ANSWER:
Notice of dishonor is not required to be check for that amount to be dated
given to the drawer in any of the following 20Dec1990. Since he does not have any
cases: checking account, A, with the knowledge of
a) Where the drawer and drawee are the B, requested his friend, C, President of
same person; Saad Banking Corp (Saad) to accommodate
b) When the drawee is a fictitious person him. C agreed, he signed a check for the
or a person not having capacity to aforesaid amount dated 20Dec 1990, drawn
contract; against Saad’s account with the ABC
c) When the drawer is the person to
whom the instrument is presented for
payment;
d) Where the drawer has no right to expect
or require that the drawee or acceptor
will honor the instrument;
e) Where the drawer has countermanded
payment (Sec 114 NIL)

Parties; Accommodation Party (1990)

To accommodate Carmen, maker of a
promissory note, Jorge signed as indorser
thereon, and the instrument was negotiated
to Raffy, a holder for value. At the time Raffy
took the instrument, he knew Jorge to be
an accomodation party only. When the
promissory note was not paid, and Raffy
discovered that Carmen had no funds, he
that checks issued by it must be signed by Nora’s sister, Vilma, executed a promissory
the President and the Treasurer or the note in favor of BUR Bank. When Nora
Vice-President. Since the Treasurer was defaulted, BUR Bank sued Vilma, despite its
absent, C requested the Vice-President to knowledge that Vilma received no part of
co-sign the check, which the latter the loan.
reluctantly did. The check was delivered May Vilma be held liable? Explain.
SUGGESTED ANSWER:
to B. The check was dishonored upon
Yes, Vilma may be held liable. Vilma is an
presentment on due date for insufficiency of
accommodation party. As such, she is liable
funds.
on the instrument to a holder for value such
a) Is Saad liable on the check as an
as BUR Bank. This is true even if BUR Bank
accommodation party?
was aware at the time it took the
b) If it is not, who then, under the above
instrument that Vilma is merely an
facts, is/are the accommodation party?
accommodation party and received no part
SUGGESTED ANSWER:
a.) Saad is not liable on the check as an of the loan (See Sec 29, NIL; Eulalio
accommodation party. The act of the Prudencio v CA GR L-34539, Jul 14, 86 143 s 7)
corporation in accommodating a friend of
the President, is ultra vires (Crisologo-Jose v Parties; Accommodation Party (1998)
CA GR 80599, 15Sep1989). While it may be For the purpose of lending his name
legally possible for the corporation, whose without receiving value therefore, Pedro
business is to provide financial makes a note for P20,000 payable to the
accommodations in the ordinary course of order of X who in turn negotiates it to Y, the
business, such as one given by a financing latter knowing that Pedro is not a party for
company to be an accommodation party, value.
this situation, however, is not the case in 1. May Y recover from Pedro if the latter
the bar problem. interposes the absence of consideration?
(3%)
b) Considering that both the President
2. Supposing under the same facts, Pedro
and Vice- President were signatories to
pays the said P20,000 may he recover the
the accommodation, they themselves can
same amount from X? (2%)
be subject to the liabilities of
accommodation parties to the instrument in SUGGESTED ANSWER:
their personal capacity (Crisologo-Jose v CA 1. Yes. Y can recover from Pedro. Pedro is
15Sep1989) an accommodation party. Absence of
consideration is in the nature of an
Parties; Accommodation Party (1996) accommodation. Defense of absence of
consideration cannot be validly interposed
Nora applied for a loan of P100th with
by accommodation party against a holder in
BUR Bank. By way of accommodation,
due course.
Mercantile Law Bar Examination Q & A (1990-2006) Page 88 of 103
2. If Pedro pays the said P20,000 to Y, sum of P5,000 even if he did not receive
Pedro can recover the amount from any consideration for the promissory note.
X. X is the accommodated party or This is the nature of accommodation. But
the party ultimately liable for the Ben Lopez can ask for reimbursement from
instrument. Pedro is only an Juan Sy, the accommodation party.
accommodation party. Otherwise, it
would be unjust enrichment on the 2) Juan Sy is liable to the extent of P5,000 in
part of X if he is not to pay Pedro. the hands of a holder in due course (Sec 14
NIL). If Ben Lopez paid the promissory
note, Juan Sy has the obligation to
Parties; Accommodation Party (2003)
reimburse Ben Lopez for the amount paid.
Susan Kawada borrowed P500,000 from If Juan Sy pays directly to the holder of the
XYZ Bank which required her, together promissory note, or he pays Ben Lopez for
with Rose Reyes who did not receive any the reimbursement of the payment by the
amount from the bank, to execute a latter to the holder, the instrument is
promissory note payable to the bank, or discharged.
its order on stated maturities. The note
was executed as so agreed. What kind of
Parties; Accommodation Party (2005)
liability was incurred by Rose, that of an
accommodation party or that of a solidary Dagul has a business arrangement with
debtor? Explain. (4%) Facundo. The latter would lend money to
SUGGESTED ANSWER: another, through Dagul, whose name would
(per Dondee) Rose may be held liable. appear in the promissory note as the lender.
Rose is an accommodation party. Absence Dagul would then immediately indorse the
of consideration is in the nature of an note to Facundo. Is Dagul an
accommodation. Defense of absence of accommodation party? Explain. (2%)
consideration cannot be validly SUGGESTED ANSWER:
interposed by accommodation party
against a holder in due course.

Parties; Accommodation Party (2003)

Juan Sy purchased from “A” Appliance
Center one generator set on installment
with chattel mortgage in favor of the
vendor. After getting hold of the generator
set, Juan Sy immediately sold it without
consent of the vendor. Juan Sy was
criminally charged with estafa.

To settle the case extra judicially, Juan Sy

paid the sum of P20,000 and for the
balance of P5,000.00 he executed a
promissory note for said amount with Ben
Lopez as an accommodation party. Juan Sy
failed to pay the balance.
1) What is the liability of Ben Lopez as
an accommodation party? Explain.
2) What is the liability of Juan Sy?
SUGGESTED ANSWER:
1) Ben Lopez, as an accommodation party,
is liable as maker to the holder up to the
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 YES! Dagul is an accommodation party of trust committed by Evelyn against Larry
because in the case at bar, he is which is just a personal defense. But
essentially, a person who signs as maker having taken the instrument from Devi, a
without receiving any consideration, holder in due course, Baby has all the
signs as an accommodation party merely rights of a holder in due course. Baby did
for the purpose of lending the credit of not participate in the breach of trust
his name. And as an accommodation committed by Evelyn who filled the blank
party he cannot set up lack of but filled up the instrument with P5,000
consideration against any holder, even as instead of P1,000 as instructed by Larry
to one who is not a holder in due course. (Sec 58 NIL)

Parties; Holder in Due Course (1993) Parties; Holder in Due Course (1996)
Larry issued a negotiable promissory note What constitutes a holder in due course?
SUGGESTED ANSWER:
to Evelyn and authorized the latter to fill
A holder in due course is one who has
up the amount in blank with his loan
taken the instrument under the following
account in the sum of P1,000. However,
conditions:
Evelyn inserted P5,000 in violation of
1. That it is complete and regular upon its
the instruction. She negotiated the note face;
to Julie who had knowledge of the 2. That he became holder of it before it
infirmity. Julie in turn negotiated said was overdue and without notice that it
note to Devi for value and who had no had been previously dishonored, if
knowledge of the infirmity. such was the fact;
1) Can Devi enforce the note against 3. That he took it in good faith and for
Larry and if she can, for how much? value;
Explain. 4. That at the time it was negotiated to
2) Supposing Devi endorses the note to him, he had no notice of any infirmity
Baby for value but who has knowledge in the instrument or defect in the title
of the infirmity, can the latter enforce of the person negotiating it. (Sec 52,
the note against Larry? NIL)
SUGGESTED ANSWER:
1) Yes, Devi can enforce the negotiable Parties; Holder in Due Course (1996)
promissory note against Larry in the
1996 2.2) Eva issued to Imelda a check in
amount of P5,000. Devi is a holder in due
the amount of P50th post-dated Sep 30,
course and the breach of trust committed
1995, as security for a diamond ring to be
by Evelyn cannot be set up by Larry
sold on commission. On Sep 15, 1995,
against Devi because it is a personal
Imelda negotiated the check to MT
defense. As a holder in due course, Devi
investment which paid the amount of
is not subject to such personal defense.
P40th to her.
2) Yes. Baby is not a holder in due course Eva failed to sell the ring, so she returned
because she has knowledge of the breach it to Imelda on Sep 19, 1995. Unable to
retrieve her check, Eva withdrew

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Mercantile Law Bar Examination Q & A (1990-2006) Page 89 of 103
her funds from the drawee bank. Thus, of consideration. C is a mere assignee who
when MT Investment presented the check is subject to all defenses.
for payment, the drawee bank dishonored it. ALTERNATIVE ANSWER:

Later on, when MT Investment sued her, X cannot set up the defense of the minority
Eva raised the defense of absence of of A. Defense of minority is available to the
consideration, the check having been minor only. Such defense is not available to X.
issued merely as security for the ring that
X cannot set up the defense against C.
she could not sell.
Lack of consideration is a personal defense
Does Eva have a valid defense? Explain.
SUGGESTED ANSWER: which is only available between immediate
No. Eva does not have a valid defense. parties or against parties who are not
First, MT Investment is a holder in due holders in due course. C’s knowledge that A
course and, as such, holds the postdated is a minor does not prevent C from being a
check free from any defect of title of prior holder in due course. C took the promissory
parties and from defenses available to prior note from a holder for value, B.
parties among themselves. Eva can invoke
the defense of absence of consideration Parties; Holder in Due Course; Indorsement in blank (2002)
against MT Investment only if the latter
A. AB issued a promissory note for P1,000
was privy to the purpose for which the
payable to CD or his order on September
checks were issued and, therefore, not a
15, 2002. CD indorsed the note in blank and
holder in due course. Second, it is not a
delivered the same to EF. GH stole the note
ground for the discharge of the post- dated
from EF and on September 14, 2002
check as against a holder in due course that
presented it to AB for payment. When asked
it was issued merely as security. The only
by AB, GH said CD
grounds for the discharge of negotiable
instruments are those set forth in Sec 119 of
the NIL and none of those grounds are
available to Eva. The latter may not
unilaterally discharge herself from her
liability by the mere expediency of
withdrawing her funds from the drawee
bank. (State Investments v CA GR 101163,
Jan 11, 93 217s32).

Parties; Holder in Due Course (1998)

X makes a promissory note for P10,000
payable to A, a minor, to help him buy
school books. A endorses the note to B for
value, who in turn endorses the note to C. C
knows A is a minor. If C sues X on the note,
can X set up the defenses of minority and
lack of consideration? (3%)
SUGGESTED ANSWER:
Yes. C is not a holder in due course. The
promissory note is not a negotiable
instrument as it does not contain any word
of negotiability, that is, order or bear, or
words of similar meaning or import. Not
being a holder in due course, C is to subject
such personal defenses of minority and lack
gave him the note in payment for two ON maturity date, RP was at the aforesaid
cavans of rice. AB therefore paid GH P1,00 office ready to pay the note but PN did not
on the same date. On September 15, 2002, show up. What PN later did was to sue XL
EF discovered that the note of AB was not for the face value of the note, plus interest
in his possession and he went to AB. It was and costs. Will the suit prosper? Explain.
then that EF found out that AB had already (5%)
made payment on the note. Can EF still SUGGESTED ANSWER:

claim payment from AB? Why? (3%) Yes. The suit will prosper as far as the face
B. As a sequel to the same facts narrated value of the note is concerned, but not
above, EF, out of pity for AB who had with respect to the interest due subsequent
already paid P1,000.00 to GH, decided to to the maturity of the note and the costs of
forgive AB and instead go after CD who collection. RP was ready and willing to pay
indorsed the note in blank to him. Is CD still the note at the specified place of payment
liable to EF by virtue of the indorsement in on the specified maturity date, but PN did
blank? Why? (2%) not show up. PN lost his right to recover the
interest due subsequent to the maturity of
SUGGESTED ANSWER: the note and the costs of collection.
A. No. EF cannot claim payment from AB.
EF is not a holder of the promissory note.
To make the presentment for payment, it
is necessary to exhibit the instrument, Public Service Law
which EF cannot do because he is not in Certificate of public Convenience (1998)
possession thereof. The Batong Bakal Corporation filed with
the Board of Energy an application for a
B. No, because CD negotiated the
Certificate of Public Convenience for the
instrument by delivery.
purpose of supplying electric power and
lights to the factory and its employees
Place of Payment (2000) living within the compound. The application
PN is the holder of a negotiable promissory was opposed by the Bulacan Electric
note within the meaning of the Negotiable Corporation contending that the Batong
Instruments Law (Act 2031). The note Bakal Corporation has not secured a
was originally issued by RP to XL as franchise to operate and maintain an electric
payee. XL indorsed the note to PN for plant.
goods bought by XL. The note mentions Is the opposition’s contention correct? (5%)
SUGGESTED ANSWER:
the place of payment on the specified
No. A certificate of public convenience may
maturity date as the office of the corporate
be granted to Batong Bakal Corporation,
secretary of PX Bank during banking hours.
though not possessing a
Mercantile Law Bar Examination Q & A (1990-2006) Page 90 of 103
legislative franchise, if it meets all the Public Service Act?
other requirements. There is nothing in SUGGESTED ANSWER:
The following are the requirements for the
the law nor the Constitution, which
granting of a certificate of public
indicates that a legislative franchise is
convenience, to wit:
necessary or required for an entity to
a) The applicant must be a citizen of the
operate as supplier of electric power and
Philippines, or acorporation, co-
light to its factory and its employees
partnership or association organized
living within the compound.
under the laws of the Philippines and
at least 60% of the stock of paid-up
Certificate of Public Convenience; inseparability of
capital of which must belong to citizens
certificate and vessel (1992)
of the Philippines. (Sec 16a, CA 146, as
Antonio was granted a Certificate of Public amended)
Convenience (CPC) in 1986 to operate a b) The applicant must prove public
ferry between Mindoro and Batangas necessity.
using the motor vessel “MV Lotus.” He c) The applicant must prove that the
stopped operations in 1988 due to operation of the public service proposed
unserviceability of the vessel. and the authorization to do business will
In 1989, Basilio was granted a CPC for promote the public interest in a proper
the same route. After a few months, he and suitable manner. (Sec 16a CA 146 as
discovered that Carlos was operating on amended)
his route under Antonio’s CPC. Because d) The applicant must be financially
Basilio filed a complaint for illegal capable of undertaking the proposed
operations with the Maritime Industry service and meeting the responsibilities
Authority, Antonio and Carlos jointly filed incident to its operation.
an application for sale and transfer of
Antonio’s CPC and substitution of the Powers of the Public Service Commission (1993)
vessel “MV Lotus” with another owned by
The City of Manila passed an ordinance
Carlos.
banning provincial buses from the city. The
Should Antonio’s and Carlos’ joint
ordinance was challenged as invalid under
application be approved? Giver your
the Public Service Act by X
reasons.
SUGGESTED ANSWER:
The joint application of Antonio and Carlos
for the sale and transfer of Antonio’s CPC
and substitution of the vessel MV Lotus
with another vessel owned by the
transferee should not be approved. The
certificate of public convenience and MV
Lotus are inseparable. The
unserviceability of the vessel covered by
the certificate had likewise rendered
ineffective the certificate itself, and the
holder thereof may not legally transfer
the same to another. (Cohon v CA 188 s
719).

Certificate of Public Convenience;

Requirements (1995) What requirements must
be met before a certificate of public
convenience may be granted under the
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2005 Dondee
who had a certificate of public upon the Public Service Commission were
convenience to operate auto-trucks with not designed to deny or supersede the
fixed routes from certain towns in regulatory power of local governments
Bulacan and Rizal to Manila and within over motor traffic in the streets subject to
Manila. Firstly, he claimed that the their control. (Lagman v City of Manila 17
ordinance was null and void because, s 579)
among other things, it in effect amends
his certificate of public convenience, a Public utilities (2000)
thing which only the Public Service
WWW Communications Inc. is an e-
Commission can do under Sec 16 (m) of
commerce company whose present
the Public Service Act. Under said
business activity is limited to providing its
section, the Commission is empowered to
clients with all types of information
amend, modify, or revoke a certificate of
technology hardware. It plans to re-focus
public convenience after notice and
its corporate direction of gradually
hearing. Secondly, he contended that even
converting itself into a full convergence
if the ordinance was valid, it is only the
organization. Towards this objective, the
Commission which can require
company has been aggressively acquiring
compliance with its provisions under Sec
telecommunications businesses and
17 (j) of said Act and since the
broadcast media enterprises, and
implementation of the ordinance was
consolidating their corporate structures.
without sanction or approval of the
The ultimate plan is to have only two
Commission, its enforcement was
organizations: one to own the facilities of
unauthorized and illegal.
the combined businesses and to develop
1) May the reliance of X on Section 16 (m)
and produce content materials, and
of the Public Service Act be sustained?
another to operate the facilities and
Explain.
provide mass media and commercial
2) Was X correct in his contention that
under Section 17 telecommunications services. WWW
(j) of the Public Service Act it is only the Communications will be the flagship entity
Commissioner which can require which will own the facilities of the
compliance with the provisions of the conglomerate and provide content to the
ordinance? Explain. other new corporation which, in turn, will
SUGGESTED ANSWER: operate those facilities and provide the
1) No. The power vested in the Public services. WWW Communications seeks
Service Commission under Sec 16m is your professional advice on whether or
subordinate to the authority of the City not its reorganized business activity would
of Manila under Sec 18 (hh) of its be considered a public utility requiring a
revised charter to superintend, regulate franchise or certificate or any other form
or control the streets of the city of of authorization from the government.
Manila. (Lagman v City of Manila 17 s What will be your advice? Explain (5%)
579)
2) No. The powers conferred by law SUGGESTED ANSWER:

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Mercantile Law Bar Examination Q & A (1990-2006) Page 91 of 103
The reorganized business activity of WWW shocked and burdened by the successive
Communications Inc. would not be accidents and misfortunes that she did not
considered a public utility requiring a know what she was doing, she was confused
franchise or certificate or any other form and thrown off tangent momentarily,
of authorization from the government. It although she always had the money and
owns the facilities, but does not operate financial ability to buy new trucks and repair
them. the destroyed one. Are the reasons given by
Pepay sufficient grounds to excuse her from
Revocation of Certificate (1993) completing units? Explain.
SUGGESTED ANSWER:
1) Robert is a holder of a certificate of No. The reasons given by Pepay are not
public convenience to operate a taxicab sufficient grounds to excuse her from
service in Manila and suburbs. One completing her units. The same could be
evening, one of his taxicab units was undertaken by her children or by other
boarded by three robbers as they escaped authorized representatives (Sec 16n Pub
after staging a hold-up. Because of said Serv Act; Halili v Herras 10 s 769)
incident, the LTFRB revoked the certificate
of public convenience of Robert on the
ground that said operator failed to render
safe, proper and adequate service as Securities Regulation
required under Sec 19a of the Public Insider (2004)
Service Act. Ms. OB was employed in MAS Investment
a) Was the revocation of the certificate of Bank. WIC, a medical drug company,
public convenience of Robert justified? retained the Bank to assess whether it is
Explain. desirable to make a tender offer for DOP
b) When can the Commission (Board) company, a drug manufacturer. OB
exercise its power to suspend or revoke overheard in the
certificate of public convenience?
SUGGESTED ANSWER:
1a) No. A single hold-up incident which
does not link Robert’s taxicab cannot be
construed that he rendered a service that is
unsafe, inadequate and improper (Manzanal
v Ausejo 164 s 36)

1b) Under Sec 19a of the Public Service

Act, the Commission (Board) can suspend
or revoke a certificate of public convenience
when the operator fails to provide a service
that is safe, proper or adequate, and
refuses to render any service which can be
reasonably demanded and furnished.

Revocation of Certificate (1993)

Pepay, a holder of a certificate of public
convenience, failed to register to the
complete number of units required by her
certificate. However, she tried to justify
such failure by the accidents that allegedly
befell her, claiming that she was so
course of her work the plans of WIC. By exceeding 30% of the award.
herself and thru associates, she purchased
DOP stocks available at the stock
exchange priced at P20 per share. When Insider Trading (1995)
WIC's tender offer was announced, DOP Under the Revised Securities Act, it is
stocks jumped to P30 per share. Thus OB unlawful for an insider to sell or buy a
earned a sizable profit. Is OB liable for security of the issuer if he knows a fact of
breach and misuse of confidential or special significance with respect to the
insider information gained from her issuer or the security that is not generally
employment? Is she also liable for available, without disclosing such fact to the
damages to sellers or buyers with whom other party.
she traded? If so, what is the measure of 3.a) What does the term “insider” mean as
such damages? Explain briefly. (5%) used in the Revised Securities act?
SUGGESTED ANSWER:
3.b) When is a fact considered to be “of
OB is an insider (as defined in Subsection
special significance” under the same Act?
3.8(3) of the Securities Regulation Code)
3.c) What are the liabilities of a person who
since she is an employee of the Bank, the
violates the pertinent provisions of the
financial adviser of DOP, and this
Revised Securities Act regarding the unfair
relationship gives her access to material
use of inside information?
information about the issuer (DOP) and the
SUGGESTED ANSWER:
latter's securities (shares), which 3a. “Insider” means 1) the issuer, 2) a
information is not generally available to the director or officer of, or a person
public. Accordingly, OB is guilty of insider controlling, controlled by, or under common
trading under Section control with, the issuer, 3) a person whose
27 of the Securities Regulation Code, which relationship or former relationship to the
requires disclosure when trading in issuer gives or gave him access to a fact of
securities. special significance about the issuer or the
security that is not generally available, or 4)
OB is also liable for damages to sellers or
a person who learns such a fact from any of
buyers with whom she traded. Under
the foregoing insiders with knowledge that
Subsection 63.1 of the Securities
the person from whom he learns the fact is
Regulation Code, the damages awarded
such an insider (Sec 30b, RSA)
could be an amount not exceeding triple
the amount of the transaction plus actual 3b. It is one which, in addition to being
damages. Exemplary damages may also be material, would be likely to affect the
awarded in case of bad faith, fraud, market price of a security to a significant
malevolence or wantonness in the violation extent on being made generally available,
of the Securities Regulation Code or its or one which a reasonable person would
implementing rules. The court is also consider especially
authorized to award attorney's fees not
Mercantile Law Bar Examination Q & A (1990-2006) Page 92 of 103
important under the circumstances in person buys securities and sells or disposes
determining his course of action in the of the same within a period of six (6)
light of such factors as the degree of its months.
specificity, the extent of its difference ALTERNATIVE ANSWER:

from information generally available 2) It is a purchase by any person for the

previously, and its nature and reliability. issuer or any person controlling, controlled
(Sec. 30c, RSA) by, or under common control with the
issuer, or a purchase subject to the
3c. The person may be liable to 1) a fine of control of the issuer or any such person,
not less than P5th nor more than P500th resulting in beneficial ownership of more
or 2) imprisonment of not less than 7 than 10% of any class of shares (Sec 32 R
years nor more than 21 years, 3) or both Sec Act)
such fine and imprisonment in the
discretion of the court. 3) In “insider trading,” a “fact of special
significance” is, in addition to being
If the person is a corporation, partnership, material, such fact as would likely, on being
association or other juridical entity, the made generally available, to affect the
penalty shall be imposed upon the officers market price of a security to a significant
of the corporation, etc. responsible for the extent, or which a reasonable person would
violation. And if such an officer is an consider as especially important under the
alien, he shall, in addition to the penalties circumstances in determining his course of
prescribed, be deported without further action in the light of such factors as the
proceedings after service of sentence. (Sec degree of its specificity, the extent of its
56 RSA) difference from information generally
available previously, and its nature and
reliability (Sec 30 par c RSecAct)
Insider Trading; Manipulative Practices (1994)
1) Give a case where a person who is
Manipulative Practices (2001)
not an issuing corporation, director
or officer thereof, or a person Suppose A is the owner of several inactive
controlling, controlled by or under securities. To create an appearance of
common control with the issuing active trading for such securities,
corporation, is also considered an
“insider.”
2) In Securities Law, what is a “shortswing”
transaction.
3) In “insider trading,” what is a “fact of
special significance”?
SUGGESTED ANSWER:
1) It may be a case where a person, whose
relationship or former relationship to the
issuer gives or gave him access to a fact
of special significance about the issuer or
the security that is not generally available,
or a person, who learns such a fact from
any of the insiders, with knowledge that
the person from whom he learns the fact, is
such an insider (Sec 30, par (b) Rev
Securities Act)

2) A “shortswing” is a transaction where a

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 A connives with B by which A will offer for holders rights to money or other property;
sale some of his securities and B will buy they are therefore instruments which have
them at a certain fixed price, with the intrinsic value and are recognized and
understanding that although there would used as such in the regular channels of
be an apparent sale, A will retain the commerce.
beneficial ownership thereof. (Note: Sec 2a of the Revised Securities Act does
a) Is the arrangement lawful? (3%) not really define the term ‘securities.’)
b) If the sale materializes, what is it called?
(2%) Securities; Selling of Securities; Meaning (2002)
SUGGESTED ANSWER:
a) No. The arrangement is not lawful. It 2002 (18) Equity Online Corporation (EOL),
is an artificial manipulation of the price a New York corporation, has a securities
of securities. This is prohibited by the brokerage service on the Internet after
Securities Regulation Code. obtaining all requisite U.S. licenses and
b) If the sale materializes, it is called a permits to do so. EOL’s website
wash sale or simulated sale. (www.eonline..com), which is hosted by a
server in Florida, enables Internet users
Securities Regulation Code; Purpose (1998) to trade on-line in securities listed in the
various stock exchanges in the U.S. EOL
What is the principal purpose of laws
buys and sells U.S. listed securities for
and regulations governing securities in
the accounts of its clients all over the
the Philippines? (2%)
world, who convey their buy and sell
SUGGESTED ANSWER:
The principal purpose of laws and instructions to EOL through the Internet.
regulations governing securities in the EOL has no offices, employees or
Philippines is to protect the public representatives outside the U.S. The
against the nefarious practices of website has icons for many countries,
unscrupulous brokers and salesmen in including an icon “For Filipino Traders”
selling securities. containing the day’s prices of U.S. listed
securities expressed in U.S. dollars and
their Philippine peso equivalent. Grace
Securities; Definition (1996)
Gonzales, a resident of Makati, is a regular
Define securities customer of the website and has been
SUGGESTED ANSWER:
Stocks, bonds notes, convertible purchasing and selling securities through
debentures, warrants or other documents EOL with the use of her American Express
that represent a share in a company or a credit card. Grace has never traveled
debt owned by a company or government outside the Philippines. After a series of
entity. Evidences of obligations to pay erroneous stock picks, she had incurred a
money or of rights to participate in net indebtedness of US$30,000. with EOL,
earnings and distribution of corporate at which time she cancelled her American
assets. Instruments giving to their legal Express credit card. After a

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Mercantile Law Bar Examination Q & A (1990-2006) Page 93 of 103
number of demand letters sent to Grace,
all of them unanswered, EOL, through a B. Instances where tender offer is required to
Makati law firm, filed a complaint for be made:
collection against Grace with the Regional a) The person intends to acquire 15% or
Trial Court of Makati. Grace, through her more of the equity share of a public
lawyer, filed a motion to dismiss on the company pursuant to an agreement
ground that EOL (a) was doing business in made between or among the person
the Philippines without a license and was and one or more sellers.
therefore barred from bringing suit and (b) b) The person intends to acquire 30% or
violated the Securities Regulation Code by more of the equity shares of a public
selling or offering to sell securities within company within a period of 12
the Philippines without registering the months.
securities with the Philippine SEC and thus c) The person intends to acquire equity
came to court “with unclean hands.” EOL shares of a public company that would
opposed the motion to dismiss, contending result in ownership of more than 50%
that it had never established a physical of the said shares.
presence in the Philippines, and that all of
the activities related to plaintiffs trading in
U.S. securities all transpired outside the Transportation Law
Philippines. If you are the judge, decide the
motion to dismiss by ruling on the
respective contentions of the parties on the Boundary System (2005)
basis of the facts presented above. (10%)
SUGGESTED ANSWER: Baldo is a driver of Yellow Cab Company
The grounds of the motion to dismiss are under the boundary system. While cruising
both untenable. EOL is not doing business along the South Expressway, Baldo’s cab
in the Philippines, and it did not violate the figured in a collision, killing his
Securites Act, because it was not selling
securities in the country.

The contention of EOL is correct, because

it never did any business in the
Philippines. All its transactions in question
were consummated outside the Philippines.

Tender Offer (2002)

2002 (6)
A. What is a tender offer?
B. In what instances is a tender offer
required to be made?
SUGGESTED ANSWER:
A. Tender offer is a publicly announced
intention of a person acting alone or in
concert with other persons to acquire
equity securities of a public company. It may
also be defined as a method of taking over
a company by asking stockholders to sell
their shares at a price higher than the
current market price and on a particular
date.
passenger, Pietro. The heirs of Pietro sued Peter being based on culpa contractual, the
Yellow Cab Company for damages, but the carrier’s negligence is presumed upon the
latter refused to pay the heirs, insisting breach of contract. The burden of proof
that it is not liable because Baldo is not its instead would lie on Jimmy to establish that
employee. Resolve with reasons. (2%) despite an exercise of utmost diligence the
SUGGESTED ANSWER: collision could not have been avoided.
Yellow Cab Company shall be liable with
Baldo, on a solidary basis, for the death of
Carriage; Breach of Contract; Presumption of
passenger Pietro. Baldo is an employee of
Negligence (1997)
Yellow Cab under the boundary system. As
such, the death of passenger Pietro is In a court case involving claims for damages
breach of contract of carriage, making arising from death and injury of bus
both the common carrier Yellow Cab and passengers, counsel for the bus operator
its employee, Baldo, solidarily liable. files a demurrer to evidence arguing that
(Hernandez v. Dolor, G.R, No. 160286, July 30, the complaint should be dismissed because
2004) the plaintiffs did not submit any evidence
that the operator or its employees were
negligent. If you were the judge, would you
Carriage; Breach of Contract; Presumption of
Negligence (1990) dismiss the complaint?
SUGGESTED ANSWER:
Peter so hailed a taxicab owned and No. In the carriage of passengers, the failure
operated by Jimmy Cheng and driven by of the common carrier to bring the
Hermie Cortez. Peter asked Cortez to take passengers safely to their destination
him to his office in Malate. On the way to immediately raises the presumption that
Malate, the taxicab collided with a such failure is attributable to the carrier’s
passenger jeepney, as a result of which fault or negligence. In the case at bar, the
Peter was injured, i.e., he fractured his left fact of death and injury of the bus
leg. Peter sued Jimmy for damages, based passengers raises the presumption of fault
upon a contract of carriage, and Peter or negligence on the part of the carrier.
won. Jimmy wanted to challenge the The carrier must rebut such presumption.
decision before the SC on the ground that Otherwise, the conclusion can be properly
the trial court erred in not making an made that the carrier failed to exercise
express finding as to whether or not Jimmy extraordinary diligence as required by law.
was responsible for the collision and,
hence, civilly liable to Peter. He went to
Carriage; Fortuitous Event (1995)
see you for advice. What will you tell him?
Explain. M. Dizon Trucking entered into a hauling
SUGGESTED ANSWER: contract with Fairgoods Co whereby the
I will counsel Jimmy to desist from former bound itself to haul the latter’s
challenging the decision. The action of 2000 sacks of Soya bean meal from Manila
Mercantile Law Bar Examination Q & A (1990-2006) Page 94 of 103
Port Area to Calamba, Laguna. To carry liable for acts of other passengers. But the
out faithfully its obligation Dizon common carrier cannot relieve itself from
subcontracted with Enrico Reyes the liability if the common carrier’s employees
delivery of 400 sacks of the Soya bean could have prevented the act or omission
meal. Aside from the driver, three male by exercising due diligence. In this case, the
employees of Reyes rode on the truck passenger asked the driver to keep an eye
with the cargo. While the truck was on its on the bag which was placed beside the
way to Laguna two strangers suddenly driver’s seat. If the driver exercised due
stopped the truck and hijacked the cargo. diligence, he could have prevented the loss
Investigation by the police disclosed that of the bag.
one of the hijackers was armed with a
bladed weapon while the other was Carriage; Prohibited & Valid Stipulations (2002)
unarmed. For failure to deliver the 400
Discuss whether or not the following
sacks, Fairgoods sued Dizon for damages.
stipulations in a contract of carriage of a
Dizon in turn set up a 3rd party complaint
common carrier are valid:
against Reyes which the latter registered
1. a stipulation limiting the sum that may
on the ground that the loss was due to
be recovered by the shipper or owner to
force majeure.
90% of the value of the goods in case of
Did the hijacking constitute force majeure
loss due to theft.
to exculpate Reyes from any liability to
2. a stipulation that in the event of loss,
Dizon? Discuss fully.
SUGGESTED ANSWER:
destruction or deterioration of goods on
No. The hijacking in this case cannot be account of the defective condition of the
considered force majeure. Only one of the vehicle used in the contract of carriage,
two hijackers was armed with a bladed the carrier’s liability is limited to the
weapon. As against the 4 male employees value of the goods appearing in the bill
of Reyes, 2 hijackers, with only one of of lading unless the shipper or owner
them being armed with a bladed weapon, declares a higher value (5%)
SUGGESTED ANSWER:
cannot be considered force majeure. The
hijackers did not act with grave or
irresistible threat, violence or force.

Carriage; Liability; Lost Baggage or Acts of Passengers

(1997)
1997 (15) Antonio, a paying passenger,
boarded a bus bound for Batangas City.
He chose a seat at the front row, near
the bus driver, and told the bus driver that
he had valuable items in his hand carried
bag which he then placed beside the
driver’s seat. Not having slept for 24
hours, he requested the driver to keep an
eye on the bag should he doze off during
the trip. While Antonio was asleep,
another passenger took the bag away and
alighted at Calamba, Laguna. Could the
common carrier be held liable by Antonio
for the loss?
SUGGESTED ANSWER:
Yes. Ordinarily, the common carrier is not
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1. The stipulation is considered contract of the carriage of cargo to the
unreasonable, unjust and contrary to Warsaw Convention. May the allegation of
public policy under Article 1745 of LG Airlines be sustained? Explain.
the Civil Code. SUGGESTED ANSWER:

2. The stipulation limiting the carrier’s Yes. Unless the contents of a cargo are
liability to the value of the goods declared or the contents of a lost luggage
appearing in the bill of lading unless are proved by the satisfactory evidence
the shipper or owner declares a other than the self-serving declaration of
higher value, is expressly recognized one party, the contract should be
in Article 1749 of the Civil Code. enforced as it is the only reasonable basis
to arrive at a just award. The passenger
or shipper is bound by the terms of the
Carriage; Valuation of Damaged Cargo (1993)
passenger ticket or the waybill. (Panama v
A shipped thirteen pieces of luggage Rapadas 209 s 67)
through LG Airlines from Teheran to
Manila as evidenced by LG Air Waybill Common Carrier (1996)
which disclosed that the actual gross
Define a common carrier?
weight of the luggage was 180 kg. Z did SUGGESTED ANSWER:
not declare an inventory of the contents A common carrier is a person, corporation,
or the value of the 13 pieces of luggage. firm or association engaged in the
After the said pieces of luggage arrived in business of carrying or transporting
Manila, the consignee was able to claim passengers or goods or both, by land,
from the cargo broker only 12 pieces, water or air for compensation, offering its
with a total weight of 174 kg. X advised services to the public (Art 1732, Civil
the airline of the loss of one of the 13 Code)
pieces of luggage and of the contents
thereof. Efforts of the airline to trace the Common Carrier; Breach of Contract; Damages (2003)
missing luggage were fruitless. Since the Vivian Martin was booked by PAL, which
airline failed to comply with the demand acted as a ticketing agent of Far East
of X to produce the missing luggage, X Airlines, for a round trip flight on the
filed an action for breach of contract latter’s aircraft, from Manila-Hongkong-
with damages against LG Airlines. In its Manila. The ticket was cut by an
answer, LG Airlines alleged that the employee of PAL. The ticket showed that
Warsaw Convention which limits the Vivian was scheduled to leave Manila at
liability of the carrier, if any, with 5:30
respect to cargo to a sum of $20 per kilo p.m. on 05 January 2002 aboard Far East’s
or $9.07 per pound, unless a higher value Flight F007. Vivian arrived at the Ninoy
is declared in advance and additional Aquino International Airport an hour
charges are paid by the passenger and before the time scheduled in her ticket,
the conditions of the contract as set forth but was told that Far East’s Flight F007
in the air waybill, expressly subject the had left at 12:10 p.m. It

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Mercantile Law Bar Examination Q & A (1990-2006) Page 95 of 103
turned out that the ticket was inadvertently as to impose an obligation on part of the
cut and wrongly worded. PAL employees personnel of the bus company to warn the
manning the airport’s ground services passengers and to take the necessary
nevertheless scheduled her to fly two precaution. Such hurling of a stone
hours later aboard their plane. She agreed constitutes fortuitous event in this case. The
and arrived in Hongkong safely. The aircraft bus company is not an insurer. (Pilapil v CA
used by Far East Airlines developed engine 180 s 346)
trouble, and did not make it to Hongkong
but returned to Manila. Vivian sued both Common Carrier; Defenses; Limitation of Liability (1998) X
airlines, PAL and Far East, for damages took a plane from Manila bound for Davao
because of her having unable to take the via Cebu where there was a change of
Far East flight. Could either or both airlines planes. X arrived in Davao safely but to his
be held liable to Vivian? Why? (6%) dismay, his two suitcases were left behind
SUGGESTED ANSWER: in Cebu. The airline company assured X that
(per dondee) No, there was breach of the suitcases would come in the next flight
contract and that she was accommodated but they never did.
well with the assistance of PAL employees X claimed P2,000 for the loss of both
to take the flight without undue delay. suitcases, but the airline was willing to pay
only P500 because the airline ticket
Common Carrier; Defenses (2002) stipulated that unless a higher value was
Why is the defense of due diligence in the declared, any claim for loss cannot exceed
selection and supervision of an employee P250 for each piece of luggage. X reasoned
not available to a common carrier? (2%) out that he did not sign the stipulation and
SUGGESTED ANSWER: in fact had not even read it.
The defense of due diligence in the
selection and supervision of an employee is
not available to a common carrier because
the degree of diligence required of a
common carrier is not the diligence of a
good father of a family but extraordinary
diligence, i.e., diligence of the greatest
skill and utmost foresight.

Common Carrier; Defenses; Fortuitous Events (1994)

Marites, a paying bus passenger, was hit
above her left eye by a stone hurled at
the bus by an unidentified bystander as
the bus was speeding through the National
Highway. The bus owner’s personnel lost
no time in bringing Marites to the
provincial hospital where she was confined
and treated.
Marites wants to sue the bus company for
damages and seeks your advice whether
she can legally hold the bus company
liable. What will you advise her?
SUGGESTED ANSWER:
Marites can not legally hold the bus
company liable. There is no showing that
any such incident previously happened so
X did not declare a greater value despite carrier to limit or exempt it from liability
the fact that the clerk had called his are:
attention to the stipulation in the ticket. 1. observance of extraordinary diligence,
Decide the case (5%) 2. or the proximate cause of the
SUGGESTED ANSWER: incident is a fortuitous event or force
Even if he did not sign the ticket, X is majeure,
bound by the stipulation that any claim for 3. act or omission of the shipper or
loss cannot exceed P250 for each luggage. owner of the goods,
He did not declare a higher value. X is 4. the character of the goods or defects
entitled to P500 for the two luggages lost. in the packing or in the containers,
and
Common Carrier; Defenses; Limitation of 5. order or act of competent public
Liability (2001) Suppose A was riding on an authority, without the common
airplane of a common carrier when the carrier being guilty of even simple
accident happened and A suffered serious negligence (Article 1734, NCC).
injuries. In an action by A against the
common carrier, the latter claimed that
Common Carrier; Duration of Liability (1996)
1) there was a stipulation in the ticket
issued to A absolutely exempting the A bus of GL Transit on its way to Davao
carrier from liability from the passenger’s stopped to enable a passenger to alight. At
death or injuries ad notices were posted that moment, Santiago, who had been
by the common carrier dispensing with waiting for a ride, boarded the bus.
the extraordinary diligence of the carrier, However, the bus driver failed to notice
and Santiago who was still standing on the bus
2) A was given a discount on his plane fare platform, and stepped on the accelerator.
thereby reducing the liability of the Because of the sudden motion, Santiago
common carrier with respect to A in slipped and fell down suffering serious
particular. injuries.
a) Are those valid defenses? (1%) May Santiago hold GL Transit liable for
b) What are the defenses available to any breach of contract of carriage? Explain.
common carrier to limit or exempt it from SUGGESTED ANSWER:
liability? (4%) Santiago may hold GL Transit liable for
SUGGESTED ANSWER: breach of contract of carriage. It was the
a) No. These are not valid defenses duty of the driver, when he stopped the
because they are contrary to law as they bus, to do no act that would have the
are in violation of the extraordinary effect of increasing the peril to a passenger
diligence required of common carriers. such as Santiago while he was attempting
(Article 1757, 1758 New Civil Code) to board the same. When a bus is not in
motion there is no necessity for a
b) The defenses available to any common
Mercantile Law Bar Examination Q & A (1990-2006) Page 96 of 103
person who wants to ride the same to b) If it were an airline company, the
signal his intention to board. A public common carrier should be made liable. In
utility bus, once it stops, is in effect case of air carriers, it is not lawful to
making a continuous offer to bus riders. It carry flammable materials in passenger
is the duty of common carriers of aircrafts, and airline companies may open
passengers to stop their conveyances for a and investigate suspicious packages and
reasonable length of time in order to cargoes (RA 6235)
afford passengers an opportunity to board
and enter, and they are liable for injuries Common Carrier; Test (1996)
suffered by boarding passengers resulting
What is the test for determining whether or
from the sudden starting up or jerking of
not one is a common carrier?
their conveyances while they are doing SUGGESTED ANSWER:
so. Santiago, by stepping and standing on The test for determining whether or not
the platform of the bus, is already one is a common carrier is whether the
considered a passenger and is entitled to person or entity, for some business purpose
all the rights and protection pertaining to and with general or limited clientele,
a contract of carriage. (Dangwa Trans Co v offers the service of carrying or
CA 95582 Oct 7,91 202s574) transporting passengers or goods or both
for compensation.
Common Carrier; Duty to Examine Baggages; Railway
and Airline (1992) Common Carriers; Defenses (1996)
Marino was a passenger on a train. 1) AM Trucking, a small company, operates
Another passenger, Juancho, had taken a two trucks for hire on selective basis. It
gallon of gasoline placed in a plastic bag caters only to a few customers, and its
into the same coach where Marino was trucks do not make regular or scheduled
riding. The gasoline ignited and exploded trips. It does not even have a certificate
causing injury to Marino who filed a civil of public convenience.
suit for damages against the railway
company claiming that Juancho should
have been subjected to inspection by its
conductor.
The railway company disclaimed liability
resulting from the explosion contending
that it was unaware of the contents of the
plastic bag and invoking the right of
Juancho to privacy.
a) Should the railway company be held
liable for damages?
b) If it were an airline company involved,
would your answer be the same? Explain
briefly.
SUGGESTED ANSWER:
a) No. The railway company is not liable for
damages. In overland transportation, the
common carrier is not bound nor
empowered to make an examination on
the contents of packages or bags,
particularly those handcarried by
passengers.

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 On one occasion, Reynaldo contracted (Pedro de Guzman v CA L-47822 Dec 22,88
AM to transport for a fee, 100 sacks of 168s612)
rice from Manila to Tarlac. However, AM
SUGGESTED ANSWER:
failed to deliver the cargo, because its b) AM Trucking may not set up the
truck was hijacked when the driver hijacking as a defense to defeat
stopped in Bulacan to visit his girlfriend. Reynaldo’s claim as the facts given do not
a) May Reynaldo hold AM liable as indicate that the same was attended by
a common carrier? the use of grave or irresistible threat,
b) May AM set up the hijacking as violence, or force. It would appear that
a defense to defeat Reynaldo’s the truck was left unattended by its
claim? driver and was taken while he was visiting
SUGGESTED ANSWER:
his girlfriend. (Pedro de Guzman v CA L-47822
a) Reynaldo may hold AM Trucking liable
Dec 22,88 168 scra 612).
as a common carrier. The facts that AM
Trucking operates only two trucks for
hire on a selective basis, caters only to a Common Carriers; Liability for Loss (1991)
few customers, does not make regular or Alejandor Camaling of Alegria, Cebu, is
scheduled trips, and does not have a engaged in buying copra, charcoal,
certificate of public convenience are of firewood, and used bottles and in reselling
no moment as them in Cebu City. He uses 2 big Isuzu
 the law does not distinguish between trucks for the purpose; however, he has no
one whose principal business activity certificate of public convenience or
is the carrying of persons or goods or franchise to do business as a common
both and anyone who does such carrier. On the return trips to Alegria, he
carrying only as an ancillary activity, loads his trucks with various merchandise
of other merchants in Alegria and the
 the law avoids making any distinction neighboring municipalities of Badian and
between a person or enterprise Ginatilan. He charges them freight rates
offering transportation service on a much lower than the regular rates. In one
regular or scheduled basis and one of the return trips, which left Cebu City
offering such service on an at 8:30 p.m. 1 cargo truck was loaded
occasional, episodic or unscheduled with several boxes of sardines, valued at
basis, and P100th, belonging to one of his
customers, Pedro Rabor. While passing
 the law refrains from making a the zigzag road between Carcar and
distinction between a carrier offering Barili, Cebu, which is midway between
its services to the general public and Cebu City and Alegria, the truck was
one who offers services or solicits hijacked by 3 armed men who took all
business only from a narrow the boxes of
segment of the general population

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Mercantile Law Bar Examination Q & A (1990-2006) Page 97 of 103
sardines and kidnapped the driver and
his helper, releasing them in Cebu City 2. A common carrier is required to observe
only 2 days later. extraordinary diligence; a private
carrier is not so required.
Pedro Rabor sought to recover from
Alejandro the value of the sardines. The Kabit System (2005)
latter contends that he is not liable
Discuss the “kabit system” in land
therefore because he is not a common
transportation and its legal consequences.
carrier under the Civil Code and, even
(2%)
granting for the sake of argument that he SUGGESTED ANSWER:
is, he is not liable for the occurrence of the The kabit system is an arrangement where a
loss as it was due to a cause beyond his person granted a certificate of public
control. convenience allows other persons to operate
If you were the judge, would you sustain their motor vehicles under his license, for a
the contention of Alejandro? fee or percentage of their earnings (Lim v. Court
SUGGESTED ANSWER: of Appeals and Gonzalez, G.R, No. 125817, January 16,
If I were the Judge, I would hold 2002, citing Baliwag Trannit v. Court of Appeals, G.R. No.
Alejandro as having engaged as a 57493, January 7, 1987) The law enjoining the
common carrier. A person who offers his kabit system aims to identify the person
services to carry passengers or goods for a responsible for an accident in order to protect
fee is a common carrier regardless of the riding public. The policy has no force when
whether he has a certificate of public the public at large is neither deceived nor
convenience or not, whether it is his main involved.
business or incidental to such business,
whether it is scheduled or unscheduled The law does not penalize the parties to a
service, and whether he offers his services kabit agreement. But the kabit system is
to the general public or to a limited few contrary to public
(De Guzman v CA GR 47822 27Dec1988)

I will however, sustain the contention of

Alejandro that he is not liable for the
loss of the goods. A common carrier is
not an insurer of the cargo. If it can be
established that the loss, despite the
exercise of extraordinary diligence, could
not have been avoided, liability does not
ensue against the carrier. The hijacking by
3 armed men of the truck used by
Alejandro is one of such cases (De Guzman v
CA GR 47822 27Dec1988).

Common vs. Private Carrier; Defenses (2002)

Name two (2) characteristics which
differentiate a common carrier from a
private carrier. (3%).
SUGGESTED ANSWER:
Two (2) characteristics that differentiate a
common carrier from a private carrier are:
1. A common carrier offers its service to
the public; a private carrier does not.
policy and therefore void and inexistent. nor involved. (Lim v. Court of Appeals, G.R.
(Art. 1409[1], Civil Code) No. 125817, January 16, 2002, citing
Baliwag Transit v. Court of Appeals, G.R. No.
Kabit System; Agent of the Registered Owner (2005) 57493, January 7, 1987)
Procopio purchased an Isuzu passenger
jeepney from Enteng, a holder of a In any event, Procoprio is deemed to be "the
certificate of public convenience for the agent" of the registered owner. (First
operation of public utility vehicle Malayan Leasing v. Court of Appeals, G.R.
plying the Calamba-Los Baños route. No. 91378, June 9,1992; and "F" Transit
While Procopio continued offering the Co., Inc. v. NLRC, G.R. Nos, 88195-96,
jeepney for public transport services, he January 27, 1994)
did not have the registration of the
vehicle transferred in his name. Neither Maritime Commerce; Bareboat (2003)
did he secure for himself a certificate of
For the transportation of its cargo from the
public convenience for its operation.
Port of Manila to the Port of Kobe, Japan,
Thus, per the records of the Land
Osawa & Co., chartered “bareboat” M/V
Transportation Franchising and
Ilog of Karagatan Corporation. M/V Ilog
Regulatory Board, Enteng remained its
met a sea accident resulting in the loss of
registered owner and operator. One day,
the cargo and the death of some of the
while the jeepney was traveling
seamen manning the vessel. Who should
southbound, it collided with a ten-
bear the loss of the cargo and the death of
wheeler truck owned by Emmanuel.
the seamen? Why? (4%)
The driver of the truck admitted SUGGESTED ANSWER:
responsibility for the accident, explaining (per Dondee) Osawa and Co. shall bear the
that the truck lost its brakes. loss because under a demise or bareboat
charter, the charterer (Osawa
Procopio sued Emmanuel for damages, & Co.) mans the vessel with his own
but the latter moved to dismiss the case people and becomes, in effect, the owner
on the ground that Procopio is not the for the voyage or service stipulated,
real party in interest since he is not the subject to liability for damages caused by
registered owner of the jeepney. negligence.
Resolve the motion with reasons. (3%)
SUGGESTED ANSWER:
The motion to dismiss should be denied Prior Operator Rule (2003)
because Procopio, as the real owner of the Bayan Bus Lines had been operating
jeepney, is the real party in interest. satisfactorily a bus service over the route
Procopio falls under the Kabit system. Manila to Tarlac and vice versa via the
However, the legal restriction as regards the McArthur Highway. With the upgrading of
Kabit system does not apply in this case the new North Expressway, Bayan Bus
because the public at large is not deceived Lines service became
Mercantile Law Bar Examination Q & A (1990-2006) Page 98 of 103
seemingly inadequate despite its efforts of The Sheriff levied on the jeepney
improving the same. Pasok belonging to Johnny but registered in the
Transportation, Inc., now applies for the name of Van. Johnny filed a 3rd party
issuance to it by the Land Transportation claim with the Sheriff alleging ownership
Franchising and Regulatory Board of a of the jeepney levied upon and stating that
certificate of public convenience for the the jeepney was registered in the name of
same Manila-Tarlac-Manila route. Could Van merely to enable Johnny to make use of
Bayan Bus Lines, Inc., invoke the “prior Van’s certificate of public convenience.
operator” rules against Pasok May the Sheriff proceed with the public
Transportation, Inc.? Why? (6%) auction of Johnny’s jeepney. Discuss with
SUGGESTED ANSWER: reasons.
(per Dondee) No, Bayan Bus Lines, Inc., SUGGESTED ANSWER:
cannot invoke the “prior operator” rules Yes, the Sheriff may proceed with the
against Pasok Transportation, Inc. because auction sale of Johnny’s jeepney. In
such “Prior or Old Operator Rule” under contemplation of law as regards the public
the Public Service Act only applies as a and third persons, the vehicle is
policy of the law of the Public Service considered the property of the registered
Commission to issue a certificate of public operator (Santos v Sibug 104 S 520)
convenience to a second operator when
prior operator is rendering sufficient, Trans-Shipment; Bill of Lading; binding contract (1993)
adequate and satisfactory service, and JRT Inc entered into a contract with C Co
who in all things and respects is of Japan to export anahaw fans valued at
complying with the rule and regulation of $23,000. As payment thereof, a letter of
the Commission. In the facts of the case credit was issued to JRT by the buyer. The
at bar, Bayan Bus Lines service became letter of credit required the issuance of an
seemingly inadequate despite its efforts of on-board bill of lading and prohibited
improving the same. Hence, in the interest the transshipment. The President of JRT
of providing efficient public transport then contracted a shipping agent to ship the
services, the use of the 'prior operator' and anahaw fans through O Containers Lines,
the 'priority of filing' rules shall is specifying the requirements of the letter of
untenable n this case. credit. However, the bill of lading issued by
the shipping lines bore the notation
Registered Owner; Conclusive Presumption (1990)
Johnny owns a Sarao jeepney. He asked his
neighbor Van if he could operate the
said jeepney under Van’s certificate of
public convenience. Van agreed and,
accordingly, Johnny registered his
jeepney under Van name.
On June 10, 1990, one of the passenger
jeepneys operated by Van bumped Tomas.
Tomas was injured and in due time, he filed
a complaint for damages against Van and
his driver for the injuries he suffered.
The court rendered judgment in favor of
Tomas and ordered Van and his driver,
jointly and severally, to pay Tomas actual
and moral damages, attorney’s fees, and
costs.

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 “received for shipment” and contained bill of lading when it accepted the bill of
an entry indicating transshipment in lading with full knowledge of its contents
Hongkong. The President of JRT which included transshipment in
personally received and signed the bill of Hongkong. Acceptance under such
lading and despite the entries, he circumstances makes the bill of lading a
delivered the corresponding check in binding contract. (Magellan v Ca 201 s 102)
payment of the freight.
The shipment was delivered at the port of
discharge but the buyer refused to accept Trust Receipts Law
the anahaw fans because there was no
on-board bill of lading, and there was Trust Receipts Law; Acts & Omissions; Covered (2006)
What acts or omissions are penalized
transshipment since the goods were under the Trust Receipts Law? (2.5%)
transferred in Hongkong from MV SUGGESTED ANSWER:
Pacific, the feeder vessel, to MV The Trust Receipts Law (P.D. No. 115)
Oriental, a mother vessel. JRT argued that declares the fail- ure to turn over goods
the same cannot be considered or proceeds realized from sale thereof, as
transshipment because both vessels a criminal offense under Art. 315(l)(b) of
belong to the same shipping company. Revised Penal Code. The law is violated
1) Was there transshipment? Explain whenever the entrustee or person to
2) JRT further argued that assuming that whom trust receipts were issued fails to:
there was transshipment, it cannot be (a) return the goods covered by the trust
deemed to have agreed thereto even if it receipts; or (b) return the proceeds of the
signed the bill of lading containing such sale of said goods (Metropolitan Bank v.
entry because it was made known to the Tonda, G.R. No. 134436, August 16, 2000).
shipping lines from the start that
transshipment was prohibited under the Is lack of intent to defraud a bar to
letter of credit and that, therefore, it had the prosecution of these acts or
no intention to allow transshipment of omissions? (2.5%)
the subject cargo. Is the argument SUGGESTED ANSWER:
No. The Trust Receipts Law is violated whenever
tenable? Reason.
the entrustee fails to: (1) turn over the proceeds of the
SUGGESTED ANSWER:
sale of the goods, or (2) return the goods covered by
1) Yes. Transshipment is the act of taking
the trust receipts if the goods are not sold. The mere
cargo out of one ship and loading it in failure to account or return gives rise to the crime
another. It is immaterial whether or not which is malum prohibitum. There is no requirement
the same person, firm, or entity owns the to prove intent to defraud (Ching v. Secretary of Justice,
two vessels. (Magellan v CA 201 s 102) G.R. No. 164317, February 6, 2006; Colinares v. Court of
Appeals, G.R. No. 90828, September 5, 2000; Ong v. Court
of Appeals, G.R. No. 119858, April 29, 2003).
2) No. JRT is bound by the terms of the

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Trusts Receipt Law (2003)
Trust Receipts Law; Liability for estafa (1991) his credit line with a bank to pay for the
Mr. Noble, as the President of ABC goods. Upon arrival of the goods at the
Trading Inc executed a trust receipt in pier, the bank requires A to sign a trust
favor of BPI Bank to secure the receipt before A is allowed to take delivery
importation by his company of certain of the goods. The trust receipt contains the
goods. After release and sale of the usual language. A disposes of the goods
imported goods, the proceeds from the and receives payment but does not pay the
sale were not turned over to BPI. Would bank. The bank files a criminal action
BPI be justified in filing a case for estafa against A for violation of the Trust
against Noble? Receipts Law. A asserts that the trust
SUGGESTED ANSWER:
receipt is only to secure his debt and that a
BPI would be justified in filing a case for
criminal action cannot lie against him
estafa under PD 115 against Noble. The
because that would be violative of his
fact that the trust receipt was issued in
constitutional right against “imprisonment
favor of a bank, instead of a seller, to
for nonpayment of a debt.” Is he correct?
secure the importation of the goods did not
SUGGESTED ANSWER:
preclude the application of the Trust No. Violation of a trust receipt is criminal
Receipt Law. (PD 115) Under the law, any as it is punished as estafa under Art 315 of
officer or employee of a corporation the RPC. There is a public policy involved
responsible for the violation of a trust which is to assure the entruster the
receipt is subject to the penal liability reimbursement of the amount advanced or
thereunder (Sia v People 166s655) the balance thereof for the goods subject
ALTERNATIVE ANSWER:
of the trust receipt. The execution of the
The filing of a case for estafa under the
trust receipt or the use thereof promotes
penal provisions of the RPC would not be
the smooth flow of commerce as it helps the
justified. It has been held in Sia v People
importer or buyer of the goods covered
(161 s 655) that corporate officers and
thereby.
directors are not criminally liable for a
violation of said Code. 2 conditions are
required before a corporate officer may be
criminally liable for an offense committed
by the corporation; viz:
1. There must be a specific provision
of law mandating a corporation to
act or not to act; and

2. There must be an explicit

statement in the law itself that, in
case of such violation by a
corporation, the officers and
directors thereof are to be
personally and criminally liable
therefore.

These conditions are not met in the penal

provisions of the RPC on trust receipts.

Trust Receipts Law; Liability for Estafa (1997)

A buys goods from a foreign supplier using
PB & Co., Inc., a manufacturer of steel aren’t sold but are used in the
and steel products, imported certain raw manufacture of its products is immaterial
materials for use by it in the because a violation of the trust receipts
manufacture of its products. The law happened when it failed to account for
importation was effected through a trust the goods or return them to the Bank
receipt arrangement with AB Banking upon demand.
corporation. When it applied for the
issuance by AB Banking Corporation of a Usury Law
letter of credit, PB & Co., Inc., did not Usury Law (199)
make any representation to the bank that
Borrower obtained a loan from a money
it would be selling what it had imported.
lending enterprise for which he issued a
It failed to pay the bank. When demand
promissory note undertaking to pay at the
was made upon it to account for the
end of a period of 30 days the principal
importation, to return the articles, or to
plus interest at the rate 5.5% per month
turn-over the proceeds of the sale thereof
plus 2% per annum as service charge.
to the bank, PB & Co., Inc., also failed.
The bank sued PB & Co.’s President who On maturity of the loan, borrower failed to
was the signatory of the trust receipt for pay the principal debt as well as the
estafa. The President put up the defense stipulated interest and service charge.
that he could not be made liable Hence, he was sued.
because there was no deceit resulting in 1. How would you dispose of the
the violation of the trust receipt. He also issues raised by the borrower?
submitted that there was no violation of 2. That the stipulated interest rate is
the trust receipt because the raw excessive and unconscionable? (3%)
materials were not sold but used by the 3. Is the interest rate usurious? (3%)
corporation in the manufacture of its
products. Would those defenses be Recommendation: Since the subject matter of these two
(2) questions is not included within the scope of the
sustainable? Why? (6%) Bar Questions in Mercantile Law, it is suggested that
SUGGESTED ANSWER: whatever answer is given by the examinee, or the lack
No, the defenses are not sustainable. The of answer should be given full credit. If the examinee
lack of deceit should not be sustained gives a good answer, he should be given additional
credit.
because the mere failure to account for
the importation, or return the articles SUGGESTED ANSWER:
constitutes the abuse of confidence in the a. The rate of interest of 5.5% per month is
crime of estafa. The fact that the goods excessive and unconscionable.
Mercantile Law Bar Examination Q & A (1990-2006) Page 100 of 103
b. The interest cannot be considered 1. surrender the receipt of which he is a
usurious. The Usury Law has been holder;
2. willing to sign a receipt for the
suspended in its application, and the
delivery of the goods; and
interest rates are made “floating.”
3. pays the warehouseman’s liens that
is, his fees and advances, if any.

Warehouse Receipts Law The sheriff cannot comply with these

requisites especially the first, as he is not
the holder of the receipt.
Bill of Lading (1998)
1.What do you understand by a “bill Delivery of the Goods (1991)
of lading?” (2%)
When is a warehouseman bound to deliver
2. Explain the two-fold character of a “bill
the goods, upon a demand made either by
of lading.” (3%)
SUGGESTED ANSWER:
the holder of a receipt for the goods or by
1. A bill of lading may be defined as the depositor?
a written acknowledgement of the SUGGESTED ANSWER:
The warehouseman is bound to deliver the
receipt of goods and an agreement
goods upon demand made either by the
to transport and to deliver them at a
holder of the receipt for the goods or by
specified place to a person named
the depositor if the demand is accompanied
therein or on his order.
by
2. A bill of lading has a two-fold 1. an offer to satisfy the warehouseman’s
lien,
character, namely, a) it is a receipt of 2. an offer to surrender the receipt, if
the goods to be transported; and b) negotiable, with such indorsements as
it constitutes a contract of carriage would be necessary for the negotiation
of the goods. thereof,

Delivery of Goods; Requisites (1998)

Luzon Warehousing Co received from
Pedro 200 cavans of rice for deposit in
its warehouse for which a negotiable
receipt was issued. While the goods were
stored in said warehouse, Cicero
obtained a judgment against Pedro for
the recover of a sum of money. The
sheriff proceeded to levy upon the goods
on a writ of execution and directed the
warehouseman to deliver the goods. Is the
warehouseman under obligation to comply
with the sheriffs order? (5%)
SUGGESTED ANSWER:
No. There was a valid negotiable receipt
as there was a valid delivery of 200
cavans of rice for deposit. In such case,
the warehouseman (LWC) is not obliged to
deliver the 200 cavans of rice deposited to
any person, except to the one who can
comply with sec 8 of the Warehouse
Receipts Law, namely:
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 3. and readiness and willingness to sign Company cannot be compelled to deliver
when the goods are delivered if so the actual possession of the rice until the
requested by the warehouseman (Sec receipt is surrendered to it or impounded
8 Warehouse Receipts Law). by the court.

b. Yes. The rice mill, as a holder for value

Garnishment or Attachment of Goods (1999)
of the receipt, has a better right to the
A Warehouse Company received for rice than the creditor. It is the rice mill
safekeeping 1000 bags of rice from a that can surrender the receipt which is
merchant. To evidence the transaction, in its possession and can comply with the
the Warehouse Company issued a receipt other requirements which will oblige the
expressly providing that the goods be warehouseman to deliver the rice, namely,
delivered to the order of said merchant. to sign a receipt for the delivery of the
A month after, a creditor obtained rice, and to pay the warehouseman’s liens
judgment against the said merchant for a and fees and other charges.
sum of money. The sheriff proceeded to
levy on the rice and directed the
Negotiable Documents of Title (1992)
Warehouse Company to deliver to him the
deposited rice. For a cargo of machinery shipped from
abroad to a sugar central in Dumaguete,
a. What advice will you give the Negros Oriental, the Bill of Lading (B/L)
Warehouse Company? Explain (2%) stipulated “to shipper’s order,” with notice
b. Assuming that a week prior to the levy, of arrival to be addressed to the Central.
the receipt was sold to a rice mill on the The cargo arrived at its destination and
basis of which it filed a claim with the was released to the Central without
sheriff. Would the rice mill have better surrender of the B/L on the basis of the
rights to the rice than the creditor? latter’s undertaking to hold the carrier
Explain your answer. (2%) free and harmless from any liability.
SUGGESTED ANSWER:
a. The 1000 bags of rice were delivered to Subsequently, a Bank to whom the central
the Warehouse Company by a merchant, was indebted, claimed the cargo and
and a negotiable receipt was issued presented the original of the B/L stating
therefor. The rice cannot thereafter, that the Central had failed to settle its
while in the possession of the Warehouse obligations with the Bank.
Company, be attached by garnishment or
otherwise, or be levied upon under an Was there misdelivery by the carrier to the
execution unless the receipt be first sugar central considering the non-
surrendered to the warehouseman, or its surrender of the B/L? Why?
negotiation enjoined. The Warehouse SUGGESTED ANSWER:

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Mercantile Law Bar Examination Q & A (1990-2006) Page 101 of 103
There was no misdelivery by the carrier Why?
since the cargo was considered consigned SUGGESTED ANSWER:
EJ has a better right to the goods, being
to the Sugar central per the “Shipper’s
covered by a negotiable document of title,
Order” (Eastern Shipping Lines v CA 190 s
namely the warehouse receipts issued to
512)
ALTERNATIVE ANSWER: the "order of Jojo." Under the Sales
There was misdelivery. The B/L was a provisions of the Civil Code on negotiable
negotiable document of title because it was documents of title, and under the provisions
to the “Shipper’s Order.” Hence, the of the Warehouse Receipts Law, when goods
common carrier should have delivered the deposited with the bailee are covered by a
cargo to the Central only upon surrender of negotiable document of title, the
the B/L. The non-surrender of the B/L will endorsement and delivery of the document
make it liable to holders in due course. transfers ownership of the goods to the
transferee. By operation of law, the
Ownership of Goods Stored (1992) transferee obtains the direct obligation of
the bailee to hold the goods in his name."
To guarantee the payment of a loan
(Art. 1513, Civil Code; Section 41,
obtained from a bank, Raul pledged 500
Warehouse Receipts Law) Since EJ is the
bales of tobacco deposited in a warehouse
holder of the warehouse receipt, he has the
to said bank and endorsed in blank the
better right to the goods. SN Warehouse is
warehouse receipt. Before Raul could pay
obliged to hold the goods in his name.
for the loan, the tobacco disappeared from
the warehouse.  If SN Warehouse Corporation is uncertain
Who should bear the loss – the pledgor or as to who is entitled to the property,
the bank? Why? what is the proper recourse of the
SUGGESTED ANSWER:
The pledgor should bear the loss. In the corporation? Explain.
SUGGESTED ANSWER:
pledge of a warehouse receipt the
ownership of the goods remain with
depositor or his transferee. Any contract
or real security, among them a pledge,
does not amount to or result in an
assumption of risk of loss by the creditor.
The Warehouse Receipts Law did not
deviate from this rule.

Right to the Goods (2005)

Jojo deposited several cartons of goods with
SN Warehouse Corporation. The
corresponding warehouse receipt was
issued to the order of Jojo. He endorsed the
warehouse receipt to EJ who paid the value
of the goods deposited. Before EJ could
withdraw the goods, Melchor informed SN
Warehouse Corporation that the goods
belonged to him and were taken by Jojo
without his consent. Melchor wants to get
the goods, but EJ also wants to withdraw
the same. (5%)
 Who has a better right to the goods?
SN Warehouse can file an INTERPLEADER
to compel EJ and Melchor to litigate Validity of stipulations excusing warehouseman from
against each other for the ownership of negligence (2000)
the goods. Sec. 17 of the Warehouse S stored hardware materials in the bonded
Receipts Law states, "If more than one warehouse of W, a licensed warehouseman
person claims the title or possession of the under the General Bonded Warehouse Law
goods, the warehouse may, either as a (Act 3893 as amended). W issued the
defense to an action brought against him corresponding warehouse receipt in the
for non-delivery of the goods or as an form he ordinarily uses for such purpose in
original suit, whichever is appropriate, the course of his business. All the essential
require all known claimants to interplead." terms required under Section 2 of the
Warehouse Receipts Law (Act 2137 as
Unpaid Seller; Negotiation of the Receipt (1993) amended) are embodied in the form. In
A purchased from S 150 cavans of palay addition, the receipt issued to S contains a
on credit. A deposited the palay in W’s stipulation that W would not be
warehouse. W issued to A a negotiable responsible for the loss of all or any portion
warehouse receipt in the name of A. of the hardware materials covered by the
Thereafter, A negotiated the receipt to B receipt even if such loss is caused by the
who purchased the said receipt for value negligence of W or his representatives or
and in good faith. employees. S endorsed and negotiated the
1) Who has a better right to the deposit, warehouse receipt to B, who demanded
S, the unpaid vendor or b, the purchaser of delivery of the goods. W could not deliver
the receipt for value and in good faith? because the goods were nowhere to be
Why? found in his warehouse. He claims he is not
2) When can the warehouseman be obliged liable because of the free-from-liability
to deliver the palay to A? clause stipulated in the receipt. Do you
SUGGESTED ANSWER: agree with W’s contention? Explain. (5%)
1) B has a better right than S. The right SUGGESTED ANSWER:
of the unpaid seller, S, to the goods was No. I do not agree with the contention of W.
defeated by the act of A in endorsing the The stipulation that W would not be
receipt to B. responsible for the loss of all or any portion
of the hardware materials covered by the
2) The warehouseman can be obliged to receipt even if such loss is caused by the
deliver the palay to A if B negotiates back negligence of W or his representative or
the receipt to A. In that case, A becomes a employees is void. The law requires that a
holder again of the receipt, and A can warehouseman should exercise due
comply with Sec 8 of the Warehouse diligence in the care and custody of the
Receipts Law. things deposited in his warehouse.
Mercantile Law Bar Examination Q & A (1990-2006) Page 102 of 103
2. The Chief Justice also said that the
judiciary must "safeguard the liberty"
and "nurture the prosperity" of

Miscellaneous problems that corrode the administration

of justice in our country.
Explain this "four Ins" and "four ACID"
Energy Regulatory Commission: Jurisdiction & Power problems.
SUGGESTED ANSWER:
(2004) Upon assuming his office, Chief Justice
CG, acustomer, sued MERALCO in the Panganiban vowed to lead a judiciary
MM Regional Trial Court to disclose the characterized by the "four Ins:" Integrity,
basis of the computation of the purchased Independence, Industry and Intelligence;
power adjustment (PPA). The trial court one that is morally courageous to resist
ruled it had no jurisdiction over the case influence, interference, indifference and
because, as contended by the defendant, insolence. He envisions a judiciary that is
the customer not only demanded a impervious to the plague of undue
breakdown of MERALCO's bill with respect influence brought about by kinship,
to PPA but questioned as well the relationship, friendship and fellowship. He
imposition of the PPA, a matter to be calls on the judiciary to battle the "Four
decided by the Board of Energy, the ACID" problems corroding our justice
regulatory agency which should also have system: (1) limited access to justice by the
jurisdiction over the instant suit. Is the poor; (2) corruption; (3) incompetence; and
trial court's ruling correct or not? Reason (4) delay in the delivery of quality
briefly. (5%) judgments. The judicial department should
SUGGESTED ANSWER: discharge its functions with transparency,
The trial court's ruling is correct. As held
accountability and dignity.
in Manila Electric Company v. Court of
(NOTA BENE: It is respectfully
Appeals, 271SCRA 417 (1997), the Board suggested that all Bar
of Energy had the power to regulate and Candidates receive a 2.5%
bonus for the above question
fix power rates to be charged by regardless of the answer)
franchised electric utilities like
MERALCO. In fact pursuant to Executive
Order No. 478 (April 17, 1998), this
power has been transferred to the Energy
Regulatory Board (now the Energy
Regulatory Commission). Under Section
43(u) of the Electric Power Industry
Reform Act of 2001, the Energy
Regulatory Commission has original and
exclusive jurisdiction over all cases
contesting power rates.

Four ACID Problems of Philippine Judiciary (2006)

In several policy addresses extensively
covered by media since his appointment
on December 21, 2005, Chief Justice
Artemio V. Panganiban vowed to leave a
judiciary characterized by "four Ins" and
to focus in solving the "four ACID"

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 our people. Explain this philosophy. Cite and the President's exercise of Execu- tive
Decisions of the Supreme Court Privilege (Senate of the Philippines v.
implementing each of these twin beacons Ermita, G.R. No. 169777, April 20, 2006).
of the Chief Justice. (2.5%)
SUGGESTED ANSWER: On the other hand, cases that relate to
The Chief Justice's philosophy "nurturing the prosperity" of the people
"Safeguarding Liberty, Nurturing include the question the constitutionality of
Prosperity" embodies the Supreme the Mining Law (La Bugal-B'Laan v. Ramos,
Court's approach in decision-making in G.R. No. 127882, Dec. 1, 2004) and the
the exercise of its constitutional power WTO Agreement (Tanada v. Angara, G.R.
of judicial review which provides: In cases 118295, May 2,1997). Government Deregulation
involving liberty, the scales of justice vs. Privatization of an Industry (2004)
should weight heavily against government What is the difference between
and in favor of the poor, the oppressed, government deregulation and the
the marginalized, the dispossessed and privatization of an industry? Explain briefly.
the weak; and that laws and action that (2%)
restrict fundamental rights come to the SUGGESTED ANSWER:
court "with a heavy presumption against Government deregulation is the relaxation
their constitutional validity. On the other or removal of regulatory constraints on
hand, as a general rule, the Supreme firms or individuals, with a view to
Court must adopt a deferential or promoting competition and market-oriented
respectful attitude towards actions taken approaches toward pricing, output, entry,
by the governmental agencies that have and other related economic decisions.
primary responsibility for the economic
Privatization of an industry refers to the
development of the country; and only
transfer of ownership and control by the
when an act has been clearly made or
government of assets, firms and operations
executed with grave abuse of discretion
in an industry to private investors.
does the Court get involved in policy
issues.
Political Law; WTO (1999)
Decisions implementing the "safeguarding of Government plans to impose an additional
liberty" in- clude those involving the duty on imported sugar on top of the
constitutionality of Presidential Proclamation current tariff rate. The intent is to ensure
No. 1017 (David v. Arroyo, G.R. No. 171390, that the landed cost of sugar shall not be
May 3, 2006); the validity of Calibrated lower than P800 per bag. This is the
Pre-emptive Response (CPR) and B.P. Big. price at which locally produced sugar
880 or the Public Assembly Act (Bayan v. would be sold in order to enable sugar
Ermita, G.R. No. 169848, April 25, 2006); producers to realize reasonable profits.
and the legality of Executive Order No. 464 Without

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Mercantile Law Bar Examination Q & A (1990-2006) Page 103 of 103
this additional duty, the current low price of United Nations, of which LVM is a member,
sugar in the world market will surely pull she said, as well as the reciprocity
the domestic price to levels lower than the provisions of the World Trade Organization
cost to producer domestic sugar – a (WTO) Agreement of 1994, of which PNG
situation that could spell the demise of the and LVM are parties. Aside from denying
Phil sugar industry. them equal protection, according to BC, the
a) Discuss the validity of this proposal to law will also deprive her family their
impose an additional levy on imported sugar livelihood without due process nor just
(3%) compensation. Assuming that the legal system
b) Would the proposal be consistent with of LVM is similar to ours, would Mrs. BC's
the tenets of the World Trade Organization contention be tenable or not? Reason briefly.
(WTO)? (3%) (5%)
SUGGESTED ANSWER:
Recommendation: Since the subject matter of these Mrs. BC's contention is not tenable. First,
two (2) questions is not included within the scope of the UDHR does not purport to limit the right
the Bar Questions in Mercantile Law, it is suggested
that whatever answer is given by the examinee, or the
of states (like LVM) to regulate domestic
lack of answer should be given full credit. If the trade. Second, the WTO Agreement involves
examinee gives a good answer, he should be given international trade between states or
additional credit.
governments, not domestic trade in timber or
SUGGESTED ANSWER: other commodities. Third, nationality is an
a) The proposal to impose an additional accepted norm for making classifications
duty on imported sugar on top of the that do not run counter to the
current tariff rate is valid, not being
prohibited by the Constitution. It would
enable producers to realize reasonable
profits, and would allow the sugar industry
of the country to survive.

b) No. The proposal would not be

consistent with the tenets of the WTO
which call for the liberalization of trade.
However, such proposal may be acceptable
within the allowable period under the WTO
for adjustment of the local industry

Power of the State: Regulating of Domestic Trade (2004) In

its exercise of police power and business
regulation, the legislature of LVM State
passed a law prohibiting aliens from
engaging in domestic timber trade. Violators
including dummies would, after proper trial,
be fined and imprisoned or deported. Mrs.
BC, a citizen of LVM but married to ZC, an
alien merchant of PNG, filed suit to
invalidate the law or exempt from its
coverage their timber business.

She contended that the law is, inter alia,

gravely oppressive and discriminatory. It
violated the Universal Declaration of Human
Rights (UDHR) passed in 1948 by the
equal protection of law clause of the purposes of customs duties. TON filed a
Constitution. Fourth, there is no complaint before the MM Regional Trial
impairment of due process here because Court for replevin, alleging that the
violators of the law will be punished only Customs officials erred in the classification
after "proper trial." Fifth, the issue of and valuation of its shipment, as well as in
"just compensation" does not arise, the issuance of the warrant of seizure. The
because the property of Mrs. BC is not Collector moved to dismiss the suit for lack
being expropriated. On the contrary, as a of jurisdiction on the part of the trial court.
citizen of LVM, Mrs. BC is freely allowed Should the Collector's motion be granted or
to engage in domestic timber trade in denied? Reason briefly. (5%)
LVM. SUGGESTED ANSWER:
The Collector's motion should be granted.
Under Section 602(g) of the Tariff and
Tariff and Customs Code: Violation of Customs Laws
Customs Code, the Bureau of Customs has
(2004)
exclusive original jurisdiction over seizure
The Collector of Customs ordered the and forfeiture cases under the tariff and
seizure and forfeiture of new electronic customs laws.
appliances shipped by TON Corp. from NOTE: (This question is outside the coverage of the
Hongkong for violation of customs laws Bar Examinations. It is therefore recommended that
because they were falsely declared as used whatever answer made by the candidate should be
given full credit.)
office equipment and then undervalued for