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1994 Commercial Law Bar Questions

A)
1) What is your understanding of a “no fault indemnity” clause found in an insurance policy?
2) Distinguish co-insurance from re-insurance.
3) In letters of credit in banking transactions, distinguish the liability of a confirming bank from
a notifying bank."

Answer:

1) Under the “no fault indemnity” clause any claim for death or injury of any passenger or third
party shall be paid without the necessity of proving fault or negligence of any kind. The indemnity in
respect of any one person shall not exceed P5,000.00 provided they are under oath, the following proofs
shall be sufficient:

a) police report of the accident; and

b) death certificate and evidence sufficient to establish the proper payee; or

c) medical report and evidence of medical or hospital disbursement in respect of which refund is
claimed.

Claim may be made against one motor vehicle only.

2) Co-insurance is the percentage in the value of the insured property which the insured himself
assumes or undertakes to act as insurer to the extent of the deficiency in the insurance of the insured
property. In case of loss or damage, the insurer will be liable only for such proportion of the loss or
damage as the amount of insurance bears to the designated percentage of the full value of the property
insured.

Reinsurance is where the insurer procures a third party called the reinsurer to insure him
against liability reason of such original insurance. Basically, a reinsurance is an insurance against liability
which the original insurer may incur in favour of the original insured.

3) In case anything wrong happens to the letter of credit, a confirming bank incurs liability for
the amount of the letter of credit, while a notifying bank does not incur any liability.

B)
1) Give a case where a person who is not an issuing corporation, director or officer thereof, or
a person controlling, controlled by or under common control with the issuing corporation, is
also considered an “insider”.
2) In Security Law, what is “shortswing” transaction?
3) In “insider trading”, what is the “fact of special significance”?"

Answer:

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1) It may be a case where a person, whose relationship or former relationship to the issuer gives
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 insiders, with knowledge that the person from whom he
learns the fact, is such an insider (Sec. 30, par. (b), Revised Securities Act)

2) A shortswing is a transaction where a person buys securities and sells or disposes of the same
within a period of six months.

Alternative Answer:

It is a purchase by any person for the issuer or any person controlling, controlled by, or under
common control with the issuer, or a purchase subject to the control of the issuer or any such person,
resulting in beneficial ownership of more than ten per centum of any class of shares (Sec. 32, Revised
Securities Act.)

3) In insider trading, a fact of special significance is in addition to being material, such fact as
would likely, on being made generally available to affect the market price of a security to a significant
extent, or which a reasonable person would consider as especially important under the circumstances
in determining his course of action in the light of such factors as he degree of its specificity, the extent of
its difference from information generally available previously, and its nature and reliability (Sec. 30, par.
(c) Revised Securities Act)

C) Po press issued in favor of Jose a postdated crossed check, in payment of newsprint, which Jose
promised to deliver. Jose sold and negotiated the check to Excel Inc. at a discount. Excel did not
ask Jose the purpose of crossing the check. Since Jose failed to deliver the newsprint, Po ordered
the drawee bank to stop payment on the check.Efforts to Excel to collect from Po failed. Excel
wants to know from you as counsel:
1) What are the effects of crossing a check?
2) Whether as second indorser and holder of the crossed check, is it a holder in due course?
3) Whether Po’s defense of lack of consideration as against Jose is also available as against
Excel?

Answer:

1) The effects of crossing a check are:

a) The check is for deposit only in the account of the payee.

b) The check may be indorsed only once in favour of a person who has an account with a bank;

c) The check is issued for a specific purpose and the person who takes it not in accordance with
said purpose does not become a holder in due course and is not entitled to payment thereunder.

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2) No. It is a crossed check and Excel did not take it in accordance with the purpose for which
the check was issued. Failure on its part to inquire as to said purpose prevented Excel from becoming a
holder in due course, as such failure or refusal constituted bad faith.

3) Yes. Not being a holder in due course, Excel is subject to the personal defense which Po Press
can set up against Jose (State Investment House vs, IAC, 175 SCRA 310)

D) Gemma drew a check on September 13, 1990. The holder presented the check to the drawee
bank only on March 5, 1994. The bank dishonored the check on the same date. After dishonor
by the drawee bank, the holder gave a formal notice of dishonor to Gemma through a letter
dated April 27, 1994.
1) What is meant by “unreasonable time” as applied to presentment?
2) Is Gemma liable to the holder?"

Answer:

1) As applied to presentment for payment, “reasonable time” is meant not more than six (6)
months from the date of issue. Beyond said period, it is unreasonable time and the check stale.

2) No. Aside from the check being already stale, Gemma is also discharged from liability under
the check, being a drawer and a person whose liability is secondary, this is due to the giving of the notice
of dishonour beyond the period allowed by law. The giving of notice of dishonour on April 27, 1994 is
more than one (1) month from March 5, 1994 when the check was dishonoured. Since it is not shown
that Gemma and the holder resided in the same place, the period with which to give notice of dishonour
must be the same time that the notice would reach Gemma if sent by mail. (NIL SEcs. 103 and 104; Fr
East Realty Inc. vs. CA, 166 SCRA 256)

Alternative Answer:

Gemma can still be liable under the original contract for the consideration of which the check
was issued.

E) Celeste, a domestic corporation wholly owned by Filipino citizens, is engaged in trading and
operates as general contractor. It buys and resells the products of Matilde, a domestic
corporation, 90% of whose capital stock is owned by aliens. All of Matilde’s goods are made in
the Philippines from materials found in the Philippines. On the other hand, ECQ Integrated is
100% Filipino owned corporation and manufacturer of asbestos products.Celeste and ECQ took
part in a public bidding conducted by Metropolitan Water and Sewage System (MWSS) for its
asbestos pipe requirements. Celeste won the bid, having offered 13% lower than that offered by
ECQ; and MWSS awarded the contract to supply its asbestos pipes to Celeste. ECQ sought to
nullify the award in favor of Celeste.

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1) Is Celeste barred under the Flag Law from taking part in biddings to supply the government?
2) Did Celeste and Matildeviolated the Anti-Dummy Law?
3) Did Celeste and Matilde violate the Retail Trade Nationalization Law? Explain.

Answer:

1) No. The materials offered in the bids submitted are made in the Philippines from articles
produced or grown on the Philippines, and the bidder, Celeste, is a domestic entity. The Flag law does
not apply. It can be invoked only against a bidder who is not a domestic entity or against a domestic
entity who offers imported materials.

2) Matilde did not violate the Retail Trade Law since it does not sell its products to consumers,
but to dealers who resell them. Neither did Celeste violate the Retail Trade Law since, in the first place,
it is not prohibited to engage in retail trade. Besides, Matilde’s sale of the asbestos products to Celeste,
beng wholsale,the transaction is not covered by the Retail Trade Law. (Asbestos Integrated v. Peralta,
155 SCRA 213)

Note:

The Flag Law is not included in the coverage of the 1994 Br Examinations. It is recommended
that the examinees should be given full credit for whatever answer which they may or may not give.

F) Stanrus, Inc., a department store with outlets in Makati, Mandaluyong and Quezon City, is
contemplating to refurbish and renovate its Makati store in order to introduce the most
modern and state of the art equipment in merchandise display. To 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."

Answer:

1) yes. The sale involves all fixtures and equipment not in the ordinary course of trade and
regular prosecution of business of Stanrus, Inc. (Sec. 2, Act. No. 3952, as amended)

2) Crossroads should require from Stanrus, Inc. submission of a written waiver of the Bulk Sales
Law by the creditors as shown by the verified statements or to comply with the requirements of the Bulk
Sales law, that is, the seller must notify his creditors of the terms and conditions of the sale, and also,
before receiving from the vendee any part of the purchase price, deliver to such vendee a written sworn
statement of the names and addresses of all his creditors together with the amount of indebtedness
due to each (Sec. 2, Act. 3952, amended)

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G) In a civil suit, the Court ordered Benjie to pay Nat p500, 000.00. To execute the judgment, the
sheriff levied upon Benjie’s registered property (parcel of land and the building thereon), an sold
the same at public auction to Nat,the highest bidder. The latter, on March 18, 1992, registered
with the register of deeds the certificate of sale issued to him by the sheriff. Meanwhile, on
January 27, 1993, Benjie insured with Garapal Insurance for P1, 000,000.00 the same building
that was sold at public auction to Nat. Benjie failed to redeem the property by March 18,
1993.On March 19, 1993, a fire razed the building to the ground. Garapal Insurance refused to
make good its obligation to Benjie under the insurance contract.
1) Is Garapal Insurance legally justified in refusing payment to Benjie?
2) Is Nat entitled to collect on the insurance policy?

Answer:

1) Yes. At the time of the loss, Benjie was no longer the owner of the property insured as he
failed to redeem the property. The law requires in property insurance that a person can recover the
proceeds of the policy if he has insurable interest at the time of the issuance of the policy and also at the
time when the loss occurs. At the time of fire, Benjie no longer had insurable interest in the property
insured.

2) No. While at the time of the loss he had insurable interest in the building, as he ws the owner
thereof. Nat did not have any interest in the policy. There was no automatic transfer clause in the policy
that would give him such interest in the policy.

H) Raul’s truck bumped the car owned by Luz. The car was insured by Cala Insurance. For the
damage caused, Cala paid Luz P5, 000.00 in amicable settlement. Luz executed a release of
claim, subrogating Cala to all her rights against Raul. When Cala demanded reimbursement from
Raul, the latter refused saying that he had already paid Luz P4, 500.00 for the damage to the car
as evidenced by a release of claim executed by Luz discharging Raul. So Cala demanded
reimbursement from Luz, who refused to pay, saying that the total damage to the car was P9,
500.00. Since Cala paid P5, 000.00 only, Luz contends that she was entitled to go after Raul to
claim the additional P4, 500.00.
1) Is Cala, as subrogee of Luz, entitled to reimbursement from Raul?
2) May Cala recover what it has paid Luz?"

Answer:

1) No. Luz executed a release in favour of Raul (Manila Mahogany mfg. Corp. vs. CA, GR No.
52756, 12 October 1987)

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2) Yes, Cala lost its right against Raul because of the release executed by Luz. Since the release
was made without the consent of Cala, Cala may recover the amount of P5,000.00 from Luz. (Manila
Mahogany Mfg. Corp. vs. CA, Gr. No. 52756, 12 October 1987)

I) On September 23, 1990, Tan took a life insurance policy from Philam. The policy was issued on
November 6, 1990. He died on April 26, 1992 of hepatoma. The insurance company denied
beneficiaries’ claim and rescinded the policy by reason of alleged misrepresentation and
concealment of material facts made by Tan in his application. It returned the premium paid.
The beneficiaries contend that the company had no right to rescind the contract as rescission
must be done “during the lifetime” of the insured within two years and prior to the
commencement of the action.Is the contention of the beneficiaries tenable?"

Answer:

No. The incontestability clause does not apply. The insured died within less than two (2) years
from the issuance of the policy on September 23, 1990. The insured died on April 26, 1992 or les than
two (2) years from September 23, 1990.

The right of the insurer to rescind is only lost if the beneficiary has commenced an action on the
policy. There is no such action in this case. (Tan vs. Court of Appeals, 174 SCRA 143)

J) Mariter, 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 Mariter to the provincial hospital where she was confined and
treated. Mariter 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?

Answer:

Mariter can not legally hold the bus company liable. There is no showing that any such incident
previously happened so as to impose an obligation on the part of the personnel of the bus company to
warn the passengers and to take the necessary precaution. Such hurling of a stone constitutes fortuitous
event in this case. The bus company is not an insurer. (Pilapil v. Court of Appeals, 180 SCRA 346)

K) Toni, a copra dealer, loaded 1,000 sacks of copra on board the vessel M/V Tonichi (a common
carrier engaged in coastwise trade owned by Ichi) for shipment from Puerto Galero to
Manila.The cargo did not reach Manila because the vessel capsized and sank with all its cargo.
When Toni sued Ichi for damages based on breach of contract, the latter invoked the “limited
liability rule.
1) What do you understand of the “rule” invoked by Ichi?

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2) Are there exceptions to the “limited liability rule”?

Answer:

1) By limited liability rule is meant that the liability of a shipowner for damages in case of loss is
limited to the value of the vessel involved. His other properties can not be reached by the parties
entitled todamages.

2) Yes. When the ship owner of the vessel involved is guilty off negligence, the ship owner is
liable to the full extent of the damages sustained by the aggrieved parties (Mecenas vs. Court of
Appeals, 180 SCRA 83)

L) Angelene is a customer of Meralco Electric Company (MECO). Because of the abrupt rise in
electricity rates, Angelene complained with MECO insisting that she should be charged the
former rates. However, Angelene did not tender any payment. When MECO’s employees served
the first 48-hournotice of disconnection, Angelene protested. MECO, however, did not
implement the 48-hour notice of disconnection. Instead, its employees examined Angelene’s
electric meter, changed the same, and installed another. Still, Angelene, made no tender of
payment. MECO served a second 48-hour notice of disconnection on June 22, 1984. It gave
Angelene until 5 pm of June 25, 1984 within which to pay. As no payment had been made,
MECO cut Angelene’s electric service on June 28, 1984. Angelene contends that the 48-hour
written notice of disconnection rule cannot be invoked by MECO when there is a bona fide and
just dispute as to the amount due as her electric consumption rate. Is Angelene’s contention
valid?

Answer:

No. Angelene’s only legal recourse in this case was to pay the electric bill under protest. Her
failure to do so justified Meralco to cut the electric service (Ceniza vs. Court of Appeals, 218 SCRA 290)

M) A corporation was created by a special law. Later, the law creating it was declared invalid. May such
corporation claim to be a de facto corporation?

Answer:

No. A private corporation may be created only under the Corporation Code. Only public
corporations may be created under a special law.

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Where a private corporation is created under a special law, there is no attempt at a valid
incorporation. Such corporation cannot claim a de facto status.

N) Victor was employed in MAIA Corporation. He subscribed to 1,500 shares of the corporation at P100
per share or a total of P150,000. He made an initial down payment of P37,500.00. He was appointed
President and General Manager. Because of his disagreement with the BOD, he resigned and
demanded payment of his unpaid salaries, his cost of living allowance, his bonus, and
reimbursement of his gasoline and representation expenses. MAIA Corporation admits that it owed
Victor P40,000, but told him that this will be applied to the unpaid balance of his subscription in the
amount of P100,000.00 There was no call or notice for the payment of the unpaid subscription.
Victor questioned the set-off.
1) May MAIA set-off the unpaid subscription with Victor’s claim for salaries?
2) Would your answer be the same if indeed there had been a call for the unpaid subscription?

Answer:

1) No. MAIA cannot set-off the unpaid subscription with Victor’s claim for salaries. The unpaid
subscription is not yet due as there is no call.

2) Yes. The reason is that Victor is entitled to the payment of his salaries which MAIA has no
right to withhold in payment of unpaid subscription. To do so would violate Labor Laws (Apodaco v.
NLRC, 172 SCRA 442)

O) Because of disagreement with the BOD and a threat by the BOD to expel her for misconduct and
inefficiency, Carissa offered in writing to resign as President and member of the BOD, and to sell to
the company all her shares therein for P300,000.00 Her offer to resign was “effective as soon as my
shares are fully paid.” At its meeting, the BOD accepted Carissa’s resignation, approved her offer to
sell back her shares of stock to the company, and promised to buy the stocks on a staggered basis.
Carissa was informed of the BOD Resolution in a letter-agreement to which she affixed her consent.
The Company’s new President singed the promissory note. After payment P100,000 the company
defaulted in paying the balance of P200,000.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?

Answer:

a) No. The Labor Arbiter has no jurisdiction. This is not a labor case involving employer-
employee relationship.

b) No. The Regional Trial Court has no jurisdiction over this case which involves intra-corporate
controversy.

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c) Yes. The Securities and Exchange Commission has jurisdiction over this case. The case is
between a stockholder and a corporation of which he is a stockholder, and the dispute arose out of such
relationship. Moreover, the question whether or not the transaction falls under the right of appraisal so
as to make the withdrawal legal, properly falls under the SEC jurisdiction (Sec. 5, P.D. 902-A; Bowman vs.
CA 167 SCRA 79)

P) Rafael inherited from his uncle 10,000 shares of Sta. Ana Corporation, a close corporation. The
shares have a par value of P10.00 per share. Rafael notified Sta. Ana that he was selling his shares at
P70.00 per share. There being no takers among the stockholders, Rafael sold the same to his cousin
Vicente (who is not a stockholder) for P700,000. The Corporate Secretary refused to transfer the
shares in Vicente’s name in the corporate books because Alberto, one of the stockholders, opposed
the transfer on the ground that the same violated the by-laws. Alberto offered to buy the shares at
P12.50 per share, as fixed by the by-laws or a total price of P125,000 only. While the by-laws of Sta.
Ana provides that the right of first refusal can be exercised “at a price not exceeding 25% more than
the par value of such shares, the Articles of Incorporation simply provides that the stockholders of
record “shall have preferential right to purchase said shares.” It is silent as to pricing. Is Rafael
bound by the pricing proviso under the by-laws of Sta. Ana Corporation?

Answer:

Yes. In a close corporation, the restriction s to the transfer of shares has to be stated/annotated
in the Articles of Incorporation, the By-Laws and the certificate of Stock. This serves as notice to the
person dealing with such shares like Rafael in this case. With such notice, he is bound by the pricing
stated in the By-Laws.

Alternative Answer:

No. Rafael is not bound by the pricing proviso under the By-Laws of Sta. Ana Corporation. Under
the corporation law the restrictions on the right to transfer shares must appear in the articles of
incorporation and in the By-Laws as well as in the certificate of stock, otherwise, the same shall not be
binding on any purchaser thereof in good faith. Moreover the restriction shall not be more onerous than
granting the existing stockholders or the corporation the option to purchase the shares of the
transferring stockholder with such reasonable term or period stated therein.

Here, limiting the price to be paid, when the right of first refusal is exercised, to not more than
25% par value, without any qualification whatsoever is not in the articles. It is merely stated in the By-
Laws. Therefore, such limitation shall not be binding on the purchaser (Go Sock & Sons v. Sy Gui Huat,
Inc. v. Intermediate Appellate Court, 19 Feb. 87, Minute Resolution)

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Q) Miguel, a special customs agent is charged before the Ombudsman with having acquired
property out of proportion to his salary, in violation of the Anti-Graft and Corrupt Practices Act. The
Ombudsman issued a subpoena duces tecum to the Banco de Cinco commanding its representative
to furnish the Ombudsman records of transactions by or in the name of Miguel, his wife and
children. A second subpoena was issued expanding the first by including the production of records
of friends of Miguel in said bank and in all its branches and extension offices, specifically naming
them.

Miguel moved to quash the subpoenas arguing that they violate the Secrecy of Bank Deposits Law.
In addition, he contends that the subpoenas are in the nature of “fishing expedition” or “general
warrants” and are constitutionally impermissible with respect to private individuals who are not
under investigation. Is Miguel’s contention tenable?

Answer:

No. Miguel’s contention is not tenable. The inquiry into illegally acquired property extends to
cases where such property is concealed by being held by or recorded in the name of other persons. To
sustain Miguel’s theory and restrict the inquiry only to property held by or in the name of the
government official would make available to persons in government who illegally acquire property an
easy means of evading prosecution. All they have to do would be to simply place the property in the
name of persons other than their spouses and children. (Banco Filipino Savings v. Purisima, 161 SCRA
576, Sec. 8, Anti-Graft law as amended by B.P. 195)

R) The Victoria Hotel chain reproduces videotapes, distributes the copies thereof to its hotels
and makes them available to hotel guests for viewing in the hotel guest rooms. It charges a
separate nominal fee for the use of the videotape player.
1) Can the Victoria Hotel be enjoined for infringing copyrights and held liable for damages?
2) Would it make any difference if Victoria Hotel does not charge any fee for the use of the
videotape?

Answer:

1) Yes. Victoria Hotel has no right to use such video tapes in its hotel business without the
consent of the creator/owner of the copyright.

2) No. The use of the videotapes is for business and not merely for home consumption (Filipino
Society of Composers, Authors & Publishers, Inc. v. Tan, 148 SCRA 461; PD 1988)

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S) 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 xxx 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.
Whose lien should be given preference, that of Jojo or former failed to present a bill of lading.
Resolve with Lutang?"

Answer:

Lutang Corporation’s lien should be given preference. The lien of JOJO by virtue of a loan on
bottomry was extinguished when the vessel sank. Under such loan on bottomry JOJO acted not only as
creditor but also as insurer. JOJO’s right to recover the amount of the loan is predicated on the safe
arrival of the vessel at the port of destination. The right was lost when the vessel sank (Sec. 17, PD No.
1521)

NOTE:

Since PD No. 1521 or the Ship Mortgage Decree of 1978 is not included in the coverage of the
1994 Bar Examinations, it is recommended that examinees should be given full credit for whatever
answer they may or may not give.

U) Laberge, Inc., manufactures and markets after-shave lotion, shaving cream, deodorant,
talcum powder and toilet soap, using the trademark “PRUT”, which is registered with the Phil
Patent Office. Laberge does not manufacture briefs and underwear and these items are not
specified in the certificate of registration.JG who manufactures briefs and underwear, wants to
know whether, under our laws, he can use and register the trademark “PRUTE” for his
merchandise. What is your advice?

Answer:

Yes. The trademark registered in the name of Laberge, Inc. covers only after shave lotion,
shaving cream, deodorant, talcum powder and toilet soap. It does not cover briefs and underwear.

The limit of the trademark is stated in the certificate issued to Laberge, Inc. It does include briefs
and underwear which are different products protected by Laberge’s trademark.

JG can register the trademark “FRUTE” to cover its briefs and underwear (Fanerge, Inc. v. IAC,
215 SCRA 316)

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