Submitted to:

Justice Japar D. Dimaampao

Compiled by:
4-E (2017-2018)

Achas | Bagayao | Belo | Cabatuando | Castaneda | Correa

Francisco Gaspi | Geronimo | James | Labrador | Latorre
Lopez | Luzon | Martinez | Mungcal | Ong | Perez | Plana
Quijano-Manalo | Recinto | Sabulao | Salor | Santos | Tomarong
Tuquero | Turo | Valdeavilla | Valeriano | Yorobe | Zara

CASES IN COMMERCIAL LAW REVIEW (J. Dimaampao) 4E 2017-2018 | 1

 Subject Page No.

Negotiable Instruments Law 3

Corporation Law 17

Law on Insurance 57

Law on Intellectual Property 121

Financial Rehabilitation and Insolvency Act 171

Testimonials by Students 178

CASES IN COMMERCIAL LAW REVIEW (J. Dimaampao) 4E 2017-2018 | 2

 NEGOTIABLE INSTRUMENTS LAW
SECTION 1 OF NIL
PNB v. Rodriguez
GR No. 170325

DOCTRINE: In a fictitious-payee situation, the drawee bank is absolved from liability and
the drawer bears the loss. When faced with a check payable to a fictitious payee, it is
treated as a bearer instrument that can be negotiated by delivery. The underlying theory is
that one cannot expect a fictitious payee to negotiate the check by placing his indorsement
thereon. And since the maker knew this limitation, he must have intended for the
instrument to be negotiated by mere delivery. Thus, in case of controversy, the drawer of
the check will bear the loss. This rule is justified for otherwise, it will be most convenient for
the maker who desires to escape payment of the check to always deny the validity of the
indorsement. This despite the fact that the fictitious payee was purposely named without
any intention that the payee should receive the proceeds of the check.

However, there is a ‘commercial bad faith’ exception to the fictitious-payee rule. A

showing of commercial bad faith on the part of the drawee bank, or any transferee of the
check for that matter, will work to strip it of its defense. The exception will cause it to bear
the loss. Commercial bad faith is present if the transferee of the checks acts dishonestly,
and is a party to the fraudulent scheme.

FACTS: Respondents-Spouses Erlando and Norma Rodriguez were clients of petitioner

Philippine National Bank (PNB), Amelia Avenue Branch, Cebu City. They maintained
savings and demand/checking accounts, namely, PNBig Demand Deposits
(Checking/Current Account No. 810624-6 under the account name Erlando and/or Norma
Rodriguez), and PNBig Demand Deposit (Checking/Current Account No. 810480-4 under
the account name Erlando T. Rodriguez).

The spouses were engaged in the informal lending business. In line with their business,
they had a discounting arrangement with the Philnabank Employees Savings and Loan
Association (PEMSLA), an association of PNB employees. Naturally, PEMSLA was
likewise a client of PNB Amelia Avenue Branch. The association maintained current and
savings accounts with petitioner bank.

PEMSLA regularly granted loans to its members. Spouses Rodriguez would rediscount the
postdated checks issued to members whenever the association was short of funds. As
was customary, the spouses would replace the postdated checks with their own checks
issued in the name of the members.

It was PEMSLA’s policy not to approve applications for loans of members with outstanding
debts. To subvert this policy, some PEMSLA officers devised a scheme to obtain
additional loans despite their outstanding loan accounts. They took out loans in the names
of unknowing members, without the knowledge or consent of the latter. The PEMSLA
checks issued for these loans were then given to the spouses for rediscounting. The
officers carried this out by forging the indorsement of the named payees in the checks. In
return, the spouses issued their personal checks (Rodriguez checks) in the name of the

CASES IN COMMERCIAL LAW REVIEW (J. Dimaampao) 4E 2017-2018 | 3

members and delivered the checks to an officer of PEMSLA. The PEMSLA checks, on the
other hand, were deposited by the spouses to their account.

Meanwhile, the Rodriguez checks were deposited directly by PEMSLA to its savings
account without any indorsement from the named payees. This was an irregular
procedure made possible through the facilitation of Edmundo Palermo, Jr., treasurer of
PEMSLA and bank teller in the PNB Branch. It appears that this became the usual practice
for the parties. For the period November 1998 to February 1999, the spouses issued sixty
nine (69) checks, in the total amount ofP2,345,804.00. These were payable to forty seven
(47) individual payees who were all members of PEMSLA. Petitioner PNB eventually found
out about these fraudulent acts. To put a stop to this scheme, PNB closed the current
account of PEMSLA. As a result, the PEMSLA checks deposited by the spouses were
returned or dishonored for the reason “Account Closed.” The corresponding Rodriguez
checks, however, were deposited as usual to the PEMSLA savings account. The amounts
were duly debited from the Rodriguez account. Thus, because the PEMSLA checks given
as payment were returned, spouses Rodriguez incurred losses from the rediscounting
transactions.

ISSUE: Whether the subject checks are payable to order or to bearer and who bears the
loss?

HELD: In the case at bar, respondents-spouses were the bank’s depositors. The checks
were drawn against respondents-spouses’ accounts. PNB, as the drawee bank, had the
responsibility to ascertain the regularity of the indorsements, and the genuineness of the
signatures on the checks before accepting them for deposit. Lastly, PNB was obligated to
pay the checks in strict accordance with the instructions of the drawers. Petitioner
miserably failed to discharge this burden.

The checks were presented to PNB for deposit by a representative of PEMSLA absent any
type of indorsement, forged or otherwise. The facts clearly show that the bank did not pay
the checks in strict accordance with the instructions of the drawers, respondents-
spouses. Instead, it paid the values of the checks not to the named payees or their order,
but to PEMSLA, a third party to the transaction between the drawers and the payees.

Moreover, PNB was negligent in the selection and supervision of its employees. The
trustworthiness of bank employees is indispensable to maintain the stability of the banking
industry. Thus, banks are enjoined to be extra vigilant in the management and supervision
of their employees.#ACHAS

***

ELEMENTS OF A NEGOTIABLE INSTRUMENT: PAYABLE TO ORDER/BEARER

RODRIGO RIVERA vs SPOUSES CHUA

G.R. No. 184458 January 14, 2015

DOCTRINE: Section 1 of the NIL requires the concurrence of the following elements to be
a negotiable instrument: (a) It must be in writing and signed by the maker or drawer; (b)
Must contain an unconditional promise or order to pay a sum certain in money; (c) Must be
payable on demand, or at a fixed or determinable future time; (d) Must be payable to order
or to bearer; and (e) Where the instrument is addressed to a drawee, he must be named or
otherwise indicated therein with reasonable certainty.

FACTS: On 24 February 1995, Rivera obtained a loan from the Spouses Chua:
“x x x FOR VALUE RECEIVED, I, RODRIGO RIVERA promise to pay spouses SALVADOR
C. CHUA and VIOLETA SY CHUA, the sum of One Hundred Twenty Thousand Philippine
Currency (₱ 120,000.00) on December 31, 1995. x x x”

CASES IN COMMERCIAL LAW REVIEW (J. Dimaampao) 4E 2017-2018 | 4

After three years from the date of payment, two checks were issued for P25,000 and
P133,454. Upon presentment for payment, the checks were dishonored for the reason
"account closed."

In his defense, he stated that there was forgery with the note so he cannot be held liable for
it. The trial courts and the Court of Appeals rendered the decisions holding Rivera liable for
the said promissory note.

ISSUE: Whether or not the promissory note is a negotiable instrument under the
Negotiable Instruments Law.

RULING: NO. The subject promissory note is not a negotiable instrument and the
provisions of the NIL do not apply to this case. Section 1 of the NIL requires the that the
promissory note must be payable to order or to bearer. In this case, the note is not payable
to such order or bearer but payable to Spouses Chua.

On the other hand, Section 184 of the NIL defines what negotiable promissory note is:
SECTION 184. Promissory Note, Defined. – A negotiable promissory note within the
meaning of this Act is an unconditional promise in writing made by one person to another,
signed by the maker, engaging to pay on demand, or at a fixed or determinable future time,
a sum certain in money to order or to bearer. Where a note is drawn to the maker’s own
order, it is not complete until indorsed by him.

The Promissory Note in this case is made out to specific persons, herein respondents, the
Spouses Chua, and not to order or to bearer, or to the order of the Spouses Chua as
payees. However, even if Rivera’s Promissory Note is not a negotiable instrument and
therefore outside the coverage of Section 70 of the NIL which provides that presentment for
payment is not necessary to charge the person liable on the instrument, Rivera is still liable
under the terms of the Promissory Note that he issued.

In addition to this, Rivera cannot raise the defense of forgery that he did not sign the note to
avoid liability which was affirmed by this court. #BELO

***

CROSSED CHECKS

EQUITABLE BANKING CORPORATION vs. SPECIAL STEEL PRODUCTS, INC. and

AUGUSTO L. PRADO
G.R. NO. 175350 June 13, 2012

DOCTRINE: A crossed check with the notation account payee only can only be deposited
in the named payees account. It is gross negligence for a bank to ignore this rule solely on
the basis of a third party’s oral representations of having a good title thereto.

FACTS: Respondent Special Steel Products, Inc. (SSPI) is a private domestic corporation
selling steel products. Its co-respondent Augusto L. Pardo (Pardo) is SSPIs President and
majority stockholder. International Copra Export Corporation (Interco) is its regular
customer. Jose Isidoro Uy, alias Jolly Uy (Uy), is an Interco employee, in charge of the
purchasing department, and the son-in-law of its majority stockholder.Petitioner Equitable
Banking Corporation (Equitable or bank) is a private domestic corporation engaged in
banking and is the depository bank of Interco and of Uy. In 1991, SSPI sold welding
electrodes to Interco wherein payment was made by the latter by issuing three checks
payable to the order of SSPI. Each check was crossed with the notation account payee
only and was drawn against Equitable. The records do not identify the signatory for these
three checks, or explain how Uy, Intercos purchasing officer, came into possession of these
checks. The records only disclose that Uy presented each crossed check to Equitable on
the day of its issuance and claimed that he had good title thereto.He demanded the deposit

CASES IN COMMERCIAL LAW REVIEW (J. Dimaampao) 4E 2017-2018 | 5

of the checks in his personal accounts in Equitable. The latter acceded to Uys demands on
the assumption that Uy, as the son-in-law of Intercos majority stockholder, was acting
pursuant to Intercos orders. The bank also relied on Uys status as a valued client. Thus,
Equitable accepted the checks for deposit in Uys personal accounts and stamped ALL
PRIOR ENDORSEMENT AND/OR LACK OF ENDORSEMENT GUARANTEED on their
dorsal portion. Uy promptly withdrew the proceeds of the checks. As a result thereof, SSPI
was unable to collect. SSPI and its president, Pardo, filed a complaint for damages with
application for a writ of preliminary attachment against Uy and Equitable Bank. The
complaint alleged that the three crossed checks, all payable to the order of SSPI and with
the notation account payee only, could be deposited and encashed by SSPI only.

ISSUE: Is Equitable liable for damages.

RULING: YES. The checks that Interco issued in favor of SSPI were all crossed, made
payable to SSPIs order, and contained the notation account payee only. This creates a
reasonable expectation that the payee alone would receive the proceeds of the checks and
that diversion of the checks would be averted. This expectation arises from the accepted
banking practice that crossed checks are intended for deposit in the named payees
account only and no other.

As repeatedly emphasized, since the banking business is impressed with public interest,
the trust and confidence of the public in it is of paramount importance. Consequently, the
highest degree of diligence is expected, and high standards of integrity and performance
are required of it. The fact that a person, other than the named payee of the crossed check,
was presenting it for deposit should have put the bank on guard. It should have verified if
the payee (SSPI) authorized the holder (Uy) to present the same in its behalf, or indorsed it
to him. Considering however, that the named payee does not have an account with
Equitable, the bank knowingly assumed the risk of relying solely on Uys word that he had a
good title to the three checks.Such misplaced reliance on empty words is tantamount to
gross negligence, which is the absence of or failure to exercise even slight care or
diligence, or the entire absence of care, evincing a thoughtless disregard of consequences
without exerting any effort to avoid them. #CABATUANDO

***

INCOMPLETE BUT DELIVERED INSTRUMENT

ALVIN PATRIMONIO vs. NAPOLEON GUTIERREZ and OCTAVIO MARASIGAN III

724 SCRA 636 June 4, 2014

DOCTRINE: In order that one who is not a holder in due course can enforce the instrument
against a party prior to the instrument's completion, two requisites must exist: (1) that the
blank must be filled strictly in accordance with the authority given; and (2) it must be filled
up within a reasonable time. If it was proven that the instrument had not been filled up
strictly in accordance with the authority given and within a reasonable time, the maker can
set this up as a personal defense and avoid liability.

FACTS: The petitioner Alvin Patrimonio and the respondent Napoleon Gutierrez (Gutierrez)
entered into a business venture under the name of Slam Dunk Corporation (Slum Dunk), a
production outfit that produced mini-concerts and shows related to basketball. In the course
of their business, the petitioner pre-signed several checks to answer for the expenses of
Slam Dunk. Although signed, these checks had no payee's name, date or amount. The
blank checks were entrusted to Gutierrez with the specific instruction not to fill them out
without previous notification to and approval by the petitioner. According to petitioner, the
arrangement was made so that he could verify the validity of the payment and make the
proper arrangements to fund the account. In the middle of 1993, without the petitioner's
knowledge and consent, Gutierrez went to Marasigan to secure a loan in the amount of
P200,000.00 on the excuse that the petitioner needed the money for the construction of his
house. Marasigan acceded to Gutierrez' request and gave him P200,000.00. Gutierrez
simultaneously delivered to Marasigan one of the blank checks the petitioner pre-signed

CASES IN COMMERCIAL LAW REVIEW (J. Dimaampao) 4E 2017-2018 | 6

with the blank portions filled out with the words "Cash" "Two Hundred Thousand Pesos
Only", and the amount of "P200,000.00". The upper right portion of the check
corresponding to the date was also filled out with the words "May 23, 1994" but the
petitioner contended that the same was not written by Gutierrez.
On May 24, 1994, Marasigan deposited the check but it was dishonored for the reason
"ACCOUNT CLOSED." It was later revealed that petitioner's account with the bank had
been closed since May 28, 1993.

Marasigan sought recovery from Gutierrez, to no avail. He thereafter sent several demand
letters to the petitioner asking for the payment of P200,000.00, but his demands likewise
went unheeded. The petitioner completely denied authorizing the loan or the check's
negotiation, and asserted that he was not privy to the parties' loan agreement.

ISSUE: WON petitioner Patrimonio is liable to pay the P200,000 loan.

HELD: No. There is no legal basis to hold Patrimonio liable, both under the contract of loan
and under the check because first, the subject check was not completely filled out strictly
under the authority he has given and second, Marasigan was not a holder in due course.

Sec. 14. Blanks; when may be filled. — Where the instrument is wanting in any material
particular, the person in possession thereof has a prima facie authority to complete it by
filling up the blanks therein. And a signature on a blank paper delivered by the person
making the signature in order that the paper may be converted into a negotiable instrument
operates as a prima facie authority to fill it up as such for any amount. In order, however,
that any such instrument when completed may be enforced against any person who
became a party thereto prior to its completion, it must be filled up strictly in accordance with
the authority given and within a reasonable time. But if any such instrument, after
completion, is negotiated to a holder in due course, it is valid and effectual for all purposes
in his hands, and he may enforce it as if it had been filled up strictly in accordance with the
authority given and within a reasonable time.

In order however that one who is not a holder in due course can enforce the instrument
against a party prior to the instrument's completion, two requisites must exist: (1) that the
blank must be filled strictly in accordance with the authority given; and (2) it must be filled
up within a reasonable time. If it was proven that the instrument had not been filled up
strictly in accordance with the authority given and within a reasonable time, the maker can
set this up as a personal defense and avoid liability. However, if the holder is a holder in
due course, there is a conclusive presumption that authority to fill it up had been given and
that the same was not in excess of authority.

There is no doubt that Gutierrez exceeded his authority in completing the check. Patrimonio
gave Gutierrez the pre-signed checks to be used in their business provided that he could
only use them upo his approval. Gutierrez exceeded his authority when he used the checks
to pay the loan he supposedly contracted for the construction of Patrimonio’s house.
Furthermore, Marasigan is not a holder in due course. Section 52(c) of the NIL states that a
holder in due course is one who takes the instrument “in good faith and for value.” It is
necessary that at the time it was negotiated to him, he had no notice of any infirmity in the
instrument or defect in the title of the person negotiating it.

Marasigan’s knowledge that Patrimonio is not a party or privy to the contract of loan, and
correspondingly had no obligation or liability to him, renders him dishonest, hence, in bad
faith. He knew that the underlying obligation was not actually for Patrimonio. His inaction
and failure to verify, despite knowledge that Patrimonio was not a party to the loan, may be
construes as gross negligence amounting to bad faith.

Considering that Marasigan is not a holder in due course, Patrimonio can validly set up the
personal defense that the blanks were not filled up in accordance with the authority he
gave. Consequently, Marasigan has no right to enforce payment against Patrimonio and
the latter cannot be obliged to pay the face value of the check. #Castaneda

CASES IN COMMERCIAL LAW REVIEW (J. Dimaampao) 4E 2017-2018 | 7

 ***

HOLDER IN DUE COURSE

BPI vs CA
232 SCRA 302

DOCTRINE: Only a negotiation by indorsement could have operated as a valid transfer to

make BPI a holder in due course.

FACTS: Eastern obtained a loan from CBTC through Lim, its President and General
Manager. For this loan, Eastern issued a negotiable promissory note of P73,000 payable
on demand to the order of CBTC with interest at 14% per annum. No reference to any
security for the loan appears on then note. Eastern and Lim signed a “Holdout Agreement”
wherein it was stated that "as security for the Loan [Lim and Eastern] have offered [CBTC]
and the latter accepts a holdout on said [Current Account No. 2310-011-42 in the joint
names of Lim and Velasco] to the full extent of their alleged interests therein as these may
appear as a result of final and definitive judicial action or a settlement between and among
the contesting parties thereto. CBTC merged with BPI. BPI filed with the RTC of Manila
against Lim and Eastern demanding payment for the promissory note of P73,000.

ISSUE: Whether or not BPI can demand payment of the loan despite the existence of the
“Holdout Agreement”.

HELD: NO. BPI is not a holder in due course. It derived its title from CBTC, a mere
transferee. The collection suit of BPI is based on the promissory note for P73,000.00. On
its face, the note is an unconditional promise to pay the said amount, and as stated by the
respondent Court of Appeals, "[t]here is no question that the promissory note is a
negotiable instrument." It further correctly ruled that BPI was not a holder in due course
because the note was not indorsed to BPI by the payee, CBTC. Only a negotiation by
indorsement could have operated as a valid transfer to make BPI a holder in due course. It
acquired the note from CBTC by the contract of merger or sale between the two banks.
BPI, therefore, took the note subject to the Holdout Agreement. #Correa

***

FORGERY AS A REAL DEFENSE

SAMSUNG CONSTRUCTION COMPANY PHILIPPINES, INC. vs. FAR EAST BANK AND
TRUST COMPANY
G.R. No. 129015 13 August 2004

DOCTRINES: (1) The general rule is that a bank is liable, irrespective of its good faith, in
paying a forged check. The exception arises when negligence can be traced on the part of
the drawer whose signature was forged, and the need arises to weigh the comparative
negligence between the drawer and the drawee to determine who should bear the burden
of loss.

(2) The presumption is that every person takes ordinary care of his concerns, and that the
ordinary course of business has been followed. Negligence is not presumed, but must be
proven by him who alleges it.

CASES IN COMMERCIAL LAW REVIEW (J. Dimaampao) 4E 2017-2018 | 8

(3) A forged signature of the drawer differs in treatment than a forged signature of the
indorser.

FACTS: Samsung Construction maintained a current account with defendant FEBTC at the
latter’s Bel-Air, Makati branch. The sole signatory to Samsung Construction’s account was
Jong Kyu Lee ("Jong"), its Project Manager, while the checks remained in the custody of
the company’s accountant, Kyu Yong Lee ("Kyu").

In 1992, a certain Roberto Gonzaga presented for payment FEBTC Check No. 432100 to
the bank’s branch in Bel-Air, Makati. The check, payable to cash and drawn against
Samsung Construction’s current account, was in the amount of P999,500.00. The bank
teller first checked the balance of Samsung Construction’s account. After ascertaining there
were enough funds to cover the check, she compared the signature appearing on the
check with the specimen signature of Jong as contained in the specimen signature card
with the bank. After comparing the two signatures, she was satisfied as to the authenticity
of the signature appearing on the check. She then asked Gonzaga to submit proof of his
identity, and the latter presented three (3) identification cards. She then forwarded the
check to the branch Senior Assistant Cashier Gemma Velez pursuant to bank policy that 2
bank officers must approve checks which exceed P100,000, for payment or encashment.
Velez also counterchecked the signature in the check with the signatures on the signature
card. She concluded that the check was indeed signed by Jong. Velez then forwarded the
check to Shirley Syfu, another bank officer, for approval. Syfu noticed that Jose Sempio,
the assistant accountant of Samsung Construction, was in the bank. She then showed the
check to Sempio who vouched for the genuineness of Jong’s signature. Sempio confirmed
the personality of Gonzaga and said that the check was for the purchase of equipment for
Samsung Construction. Syfu then authorized the bank’s encashment of the check to
Roberto.

The following day, Kyu discovered that a check in the amount P999,500 had been
encashed. Aware that he had not prepared such check for Jong’s signature, Kyu perused
the checkbook and found that the last bank check was missing. Kyu reported the matter to
Jong who then realized that his signature had been forged.

Samsung, through counsel, demanded that FEBTC credit to it the amount of P999,500,
with interest. In response, FEBTC said that it was still conducting an investigation on the
matter. Unsatisfied, Samsung Construction filed a Complaint for violation of Section 23 of
the Negotiable Instruments Law, and prayed for the payment of the amount debited as a
result of the questioned check plus interest, and attorney’s fees.

ISSUE: Whether or not a bank which pays out on a forged check is liable to reimburse the
drawer from whose account the funds were paid out.

RULING: YES.
(1) GR: A forged signature is "wholly inoperative," and payment made "through or
under such signature" is ineffectual or does not discharge the instrument. If payment is
made, the drawee cannot charge it to the drawer’s account. The traditional justification for
the result is that the drawee is in a superior position to detect a forgery because he has the
maker’s signature and is expected to know and compare it.

XPN: When negligence can be traced on the part of the drawer whose signature was
forged, and the need arises to weigh the comparative negligence between the drawer and
the drawee to determine who should bear the burden of loss.

CA: Samsung was negligent. It ruled that the forgery appears to have been made possible
through the acts of Sempio who supposedly stole the blank check and who is presumably
responsible for its encashment through a forged signature of Jong. Sempio was assistant to
the accountant who was in possession of the blank checks and who through negligence,
enabled Sempio to have access to the same; had the accountant been more careful and
prudent in keeping the blank checks, Sempio would not have had the chance to steal a
page thereof and to effect the forgery.

CASES IN COMMERCIAL LAW REVIEW (J. Dimaampao) 4E 2017-2018 | 9

SC: The bare fact that the forgery was committed by an employee of the party whose
signature was forged cannot necessarily imply that such party’s negligence was the cause
for the forgery. Employers do not possess the preternatural gift of cognition as to the evil
that may lurk within the hearts and minds of their employees. Admittedly, the record does
not clearly establish what measures Samsung Construction employed to safeguard its
blank checks. In the absence of evidence to the contrary, we can conclude that there was
no negligence on Samsung Construction’s part. The presumption remains that every
person takes ordinary care of his concerns, and that the ordinary course of business has
been followed. Negligence is not presumed, but must be proven by him who alleges it. Also
a point in fact that Samsung is not negligent is that Samsung reported the forgery almost
immediately upon discovery.

(2) The distinction between forgery of the signature of the drawer and forgery of an
indorsement is that the drawee is in a position to verify the drawer’s signature by
comparison with one in his hands, but has ordinarily no opportunity to verify an
indorsement. Thus, a drawee bank is generally liable to its depositor in paying a check
which bears either a forgery of the drawer’s signature or a forged indorsement. But the
bank may, as a general rule, recover back the money which it has paid on a check bearing
a forged indorsement, whereas it has not this right to the same extent with reference to a
check bearing a forgery of the drawer’s signature.

(3) Even if the bank performed with utmost diligence, the drawer whose signature was
forged may still recover from the bank as long as he or she is not precluded from setting up
the defense of forgery. After all, Sec. 23 of the NIL plainly states that no right to enforce the
payment of a check can arise out of a forged signature. Since the drawer, Samsung
Construction, is not precluded by negligence from setting up the forgery, the general rule
should apply. Consequently, if a bank pays a forged check, it must be considered as paying
out of its funds and cannot charge the amount so paid to the account of the depositor. A
bank is liable, irrespective of its good faith, in paying a forged check. #FRANCISCO

***

CONTRIBUTORY NEGLIGENCE

ASSOCIATED BANK vs HON. COURT OF APPEALS, PROVINCE OF TARLAC and

PHILIPPINE NATIONAL BANK
GR No. 107612 Jan. 31, 29916

DOCTRINE: EFFECT OF CONTRIBUTORY NEGLIGENCE. If both the drawee bank and

the drawer were negligent, the loss should be properly apportioned between them. The loss
of the drawee bank can be passed on the collecting bank which presented and indorsed
the checks to it.

FACTS: Province of Tarlac maintains a current account with PNB Tarlac Branch where the
provincial funds are deposited. A portion of the funds of the province is allocated to the
Concepcion Emergency Hospital. The checks are drawn to the order of the Hospital, or the
Chief of the Hospital. These checks were released by the Office of the Provincial Treasurer
and received for the hospital by its administrative officer and cashier. Upon auditing, it was
discovered that the hospital did not receive several checks drawn by the Province. Thus,
the Provincial Treasurer requested the manager of PNB to return all of its cleared checks
which were issued from 1977 to 1980 in order to verify the regularity of their encashment.
After examining, the Treasurer found out that 30 checks amounting to 203,000 were
encashed by one Fausto Pangilinan, with the Associated Bank acting as collecting bank.

The said Fausto Pangilinan was the administrative officer and cashier of Concepcion
Hospital until his retirement on Feb. 29, 1978 who collected the checks from the Provincial
Treasurer and claimed to be assisting or helping the hospital to follow up the release of the
checks. The manager of the Associated Bank testified that Pangilinan made it appear that
the checks were paid to him for certain projects with the hospital, he did not find as irregular

CASES IN COMMERCIAL LAW REVIEW (J. Dimaampao) 4E 2017-2018 | 10

the fact that the checks were not payable to Pangilinan but to Concepcion Hospital. The
Provincial Treasurer wrote the manager of the PNB seeking the restoration of the amount
debited from the account of the Province, In turn, PNB demanded reimbursement from the
Associated Bank. PNB argued that the Province of Tarlac was negligent because it
delivered and realeased the checks to Pangilinan who was then retired as the hospital’s
cashier and administrative officer. Moreover, argued that Associated Bank to pay the
adjudged liability directly to the Province of Tarlac. On the other hand, Associated Bank
argues that the order of liability should be totally reversed, with the drawee bank PNB
solely and ultimately bearing the loss.

ISSUE: Whether or not the adjudged liability should be shared by the Province, Drawee
Bank and Collecting Bank.
HELD: Yes. In this case, the checks were indorsed by the collecting bank (Associated
Bank) to the drawee bank (PNB). The former will necessarily be liable to the latter for the
checks bearing forged indorsements. If the forgery is that of the payee's or holder's
indorsement, the collecting bank is held liable, without prejudice to the latter proceeding
against the forger.

Since a forged indorsement is inoperative, the collecting bank had no right to be paid by the
drawee bank. The former must necessarily return the money paid by the latter because it
was paid wrongfully.

More importantly, by reason of the statutory warranty of a general indorser in Section 66 of

the Negotiable Instruments Law, a collecting bank which indorses a check bearing a forged
indorsement and presents it to the drawee bank guarantees all prior indorsements,
including the forged indorsement. It warrants that the instrument is genuine, and that it is
valid and subsisting at the time of his indorsement. Because the indorsement is a forgery,
the collecting bank commits a breach of this warranty and will be accountable to the
drawee bank. This liability scheme operates without regard to fault on the part of the
collecting/presenting bank. Even if the latter bank was not negligent, it would still be liable
to the drawee bank because of its indorsement.

The Court has consistently ruled that "the collecting bank or last endorser generally suffers
the loss because it has the duty to ascertain the genuineness of all prior endorsements
considering that the act of presenting the check for payment to the drawee is an assertion
that the party making the presentment has done its duty to ascertain the genuineness of
the endorsements.”

Moreover, the collecting bank is made liable because it is privy to the depositor who
negotiated the check. The bank knows him, his address and history because he is a client.
It has taken a risk on his deposit. The bank is also in a better position to detect forgery,
fraud or irregularity in the indorsement.

Hence, the drawee bank can recover the amount paid on the check bearing a forged
indorsement from the collecting bank. However, a drawee bank has the duty to promptly
inform the presentor of the forgery upon discovery. If the drawee bank delays in informing
the presentor of the forgery, thereby depriving said presentor of the right to recover from
the forger, the former is deemed negligent and can no longer recover from the presentor.

Applying these rules to the case at bench, PNB, the drawee bank, cannot debit the current
account of the Province of Tarlac because it paid checks which bore forged indorsements.
However, if the Province of Tarlac as drawer was negligent to the point of substantially
contributing to the loss, then the drawee bank PNB can charge its account. If both drawee
bank-PNB and drawer-Province of Tarlac were negligent, the loss should be properly
apportioned between them. The loss incurred by drawee bank-PNB can be passed on to
the collecting bank- Associated Bank which presented and indorsed the checks to it.
Associated Bank can, in turn, hold the forger, Fausto Pangilinan, liable. If PNB negligently
delayed in informing Associated Bank of the forgery, thus depriving the latter of the
opportunity to recover from the forger, it forfeits its right to reimbursement and will be made
to bear the loss. After careful examination of the records, the Court finds that the Province

CASES IN COMMERCIAL LAW REVIEW (J. Dimaampao) 4E 2017-2018 | 11

of Tarlac was equally negligent and should, therefore, share the burden of loss from the
checks bearing a forged indorsement.

The Court finds as reasonable, the proportionate sharing of fifty percent-fifty percent (50%-
50%). Due to the negligence of the Province of Tarlac in releasing the checks to an
unauthorized person (Fausto Pangilinan), in allowing the retired hospital cashier to receive
the checks for the payee hospital for a period close to three years and in not properly
ascertaining why the retired hospital cashier was collecting checks for the payee hospital in
addition to the hospital's real cashier, respondent Province contributed to the loss
amounting to P203,300.00 and shall be liable to the PNB for fifty (50%) percent thereof. In
effect, the Province of Tarlac can only recover fifty percent (50%) of P203,300.00 from
PNB.

The collecting bank, Associated Bank, shall be liable to PNB for fifty (50%) percent of
P203,300.00. It is liable on its warranties as indorser of the checks which were deposited
by Fausto Pangilinan, having guaranteed the genuineness of all prior indorsements,
including that of the chief of the payee hospital, Dr. Adena Canlas. Associated Bank was
also remiss in its duty to ascertain the genuineness of the payee's indorsement. #GASPI

***

MATERIAL ALTERATIONS

BANK OF AMERICA NT&SA (BA) v. PHILIPPINE RACING CLUB, INC.(PRCI)

DOCTRINE: Material alterations; 60-40 liability of the bank and drawee

FACTS: PRCI maintained a current account with BA (Paseo de Roxas Branch). The
authorized joint signatories with respect to said account were the President (Antonia
Reyes) and Vice President for Finance (Gregorio Reyes).

On or about the 2nd week of December 1988, the President and Vice President of PRCI
were scheduled to go out of the country in connection with the corporations business. In
order not to disrupt operations in their absence, they pre-signed several checks relating to
the said account. These checks were entrusted to the accountant with instruction to make
use of the same as the need arose.

It turned out that on December 16, 1988, a John Doe presented to BA for encashment a
couple of PRCI checks (Nos. 401116 and 401117) with the indicated value of P110,000.00
each. It is admitted that these 2 checks were among those presigned by PRCI’s authorized
signatories. The 2 checks had similar entries with similar infirmities and irregularities. On
the space where the name of the payee should be indicated (Pay To The Order Of) the
following 2-line entries were instead typewritten: on the upper line was the word CASH
while the lower line had the following typewritten words, viz: ONE HUNDRED TEN
THOUSAND PESOS ONLY. Despite the highly irregular entries on the face of the
checks,BA, without as much as verifying and/or confirming the legitimacy of the checks
considering the substantial amount involved and the obvious infirmity/defect of the checks
on their faces, encashed said checks.

ISSUE: Whether or not PRCI and BA were both negligent and should be held liable for the
loss.

RULING: YES. Although not in the strict sense material alterations, the misplacement of
the typewritten entries for the payee and the amount on the same blank and the repetition
of the amount using a check writer were glaringly obvious irregularities on the face of the
check.Clearly, someone made a mistake in filling up the checks and the repetition of the
entries was possibly an attempt to rectify the mistake.

Also, if the check had been filled up by the person who customarily accomplishes the
checks of respondent, it should have occurred to petitioners employees that it would be

CASES IN COMMERCIAL LAW REVIEW (J. Dimaampao) 4E 2017-2018 | 12

unlikely such mistakes would be made. All these circumstances should have alerted the
bank to the possibility that the holder or the person who is attempting to encash the checks
did not have proper title to the checks or did not have authority to fill up and encash the
same. As noted by the CA, petitioner could have made a simple phone call to its client to
clarify the irregularities and the loss to respondent due to the encashment of the stolen
checks would have been prevented.

In the case at bar, extraordinary diligence demands that petitioner should have ascertained
from respondent the authenticity of the subject checks or the accuracy of the entries therein
not only because of the presence of highly irregular entries on the face of the checks but
also of the decidedly unusual circumstances surrounding their encashment. Respondents
witness testified that for checks in amounts greater than Twenty Thousand Pesos
(P20,000.00) it is the company’s practice to ensure that the payee is indicated by name in
the check. This was not rebutted by petitioner. Indeed, it is highly uncommon for a
corporation to make out checks payable to CASH for substantial amounts such as in this
case.

It is petitioner bank which had the last clear chance to stop the fraudulent encashment of
the subject checks had it exercised due diligence and followed the proper and regular
banking procedures in clearing checks.

However, respondent’s officers practice of pre-signing of blank checks should be deemed

seriously negligent behavior and a highly risky means of purportedly ensuring the efficient
operation of businesses. It should have occurred to respondent’s officers and managers
that the pre-signed blank checks could fall into the wrong hands as they did in this case
where the said checks were stolen from the company accountant to whom the checks were
entrusted.

Following established jurisprudential precedents, the allocation of 60% of the actual

damages involved in this case (represented by the amount of the checks with legal interest)
to petitioner is proper under the premises. Respondent should, in light of its contributory
negligence, bear 40% of its own loss. #GERONIMO

***

60:40 RATIO OF LIABILITY

PHILIPPINE BANK OF COMMERCE vs. CA

DOCTRINE: When the plaintiff's own negligence was the immediate and proximate cause
of his injury, he cannot recover damages. But if his negligence was only contributory, the
immediate and proximate cause of the injury being the defendant's lack of due care, the
plaintiff may recover damages, but the courts shall mitigate the damages to be awarded.

FACTS: On May 5, 1975 to July 16, 1976, businessman Romeo Lipana claims to have
entrusted Rommel’s Marketing Corporation (RMC) funds in the form of cash totalling
P304,979.74 to his secretary, Irene Yabut, for the purpose of depositing said funds in the
current accounts of RMC with Philippine Bank of Commerce (PBCom). However, they were
not credited to RMC's account but were instead deposited to Account No. 53-01734-7 of
Yabut's husband, Bienvenido Cotas. Romeo Lipana never checked their monthly
statements of account reposing complete trust and confidence on Yabut and PBCom.

Irene Yabut's modus operandi was to furnish 2 copies of deposit slip upon and both are
always validated and stamped by the teller Azucena Mabayad. The original showed the
name of her husband as depositor and his current account number, it was the copy
retained by the bank. In the duplicate copy, the account number of her husband was written
but the name of the account holder was left blank. After validation, Yabut would then fill up
the name of RMC in the space left blank in the duplicate copy and change the account
number to RMC's account number.

CASES IN COMMERCIAL LAW REVIEW (J. Dimaampao) 4E 2017-2018 | 13

This went on in a span of more than 1 year without private respondent's knowledge. Upon
discovery of the loss of its funds, RMC demanded from PBCom the return of its money.

ISSUE: Whether or not PBCom should be held solely liable for the loss.

RULING: NO. Both parties must bear the loss on a 60-40 ratio. PBCom must pay RMC
60% of the actual damages without prejudice to recover from its negligent bank teller.
RMC, on the other hand, must bear 40% of the loss.
The proximate cause of the loss is the negligence of the bank teller, coupled by the
negligence of PBCom in the selection and supervision of its employee. Failure to validate
the deposit slips showed total disregard of Bank’s validation procedures.

Lipana was likewise negligent in not checking its monthly statement of account. The
omission amounts to contributory negligence. It cannot be denied that, indeed, private
respondent was likewise negligent in not checking its monthly statements of account. Had it
done so, the company would have been alerted to the series of frauds being committed
against RMC by its secretary. The damage would definitely not have ballooned to such an
amount if only RMC, particularly Romeo Lipana, had exercised even a little vigilance in
their financial affairs. This omission by RMC amounts to contributory negligence which shall
mitigate the damages that may be awarded to the private respondent. #JAMES

***

LIABILITY OF COLLECTING BANK

AREZA vs. EXPRESS SAVINGS BANK, INC.

G.R. No. 176697 September 10, 2014

DOCTRINE: Liability of Collecting Bank; The depositary/collecting bank or last endorser

generally suffers the loss because it has the duty to ascertain the genuineness of all prior
endorsements. A depositary/collecting bank may resist or defend against a claim for breach
of warranty only if the drawer, the payee, or the drawee bank was negligent and such
negligence substantially contributed to the loss from alteration.

FACTS: Petitioners Cesar and Lolita Areza maintained two bank deposits with respondent
Express Savings Bank (ESB). They were engaged in the business of "buy and sell" of
brand new and secondhand motor vehicles. A buyer, Gerry Mambuay, purchased from
them a second-hand Mitsubishi Pajero and a brand-new Honda CRV for which he paid
petitioners with nine (9) Philippine Veterans Affairs Office (PVAO) checks payable to
different payees and drawn against the Philippine Veterans Bank (drawee), each valued
P200,000 for a total of P1,800,000.

Petitioners deposited the said checks in their savings account with ESB, which, in turn,
deposited the checks with its depositary bank, Equitable-PCI Bank. Equitable-PCI Bank
presented the checks to the drawee, the Philippine Veterans Bank, which honored the
checks. The checks were later returned by PVAO to the drawee on the ground that the
amount on the face of the checks was altered from the original amount of P4,000 to
P200,000. The drawee returned the checks to Equitable-PCI Bank by way of Special
Clearing Receipts. Equitable-PCI Bank, in turn, debited the deposit account of ESB. ESB
then withdrew the amount of P1,800,000 representing the returned checks from petitioners'
savings account.

ISSUES: W/N ESB (the collecting bank) had the right to debit the P1.8 M from petitioners’
savings account.

HELD: NO. Since no negligence can be attributed to petitioners, ESB had no right to debit
the account of petitioners. A depositary/collecting bank where a check is deposited, and
which endorses the check upon presentment with the drawee bank, is an endorser. Under
Section 66 of the Negotiable Instruments Law, an endorser warrants "that the instrument is

CASES IN COMMERCIAL LAW REVIEW (J. Dimaampao) 4E 2017-2018 | 14

genuine and in all respects what it purports to be; that he has good title to it; that all prior
parties had capacity to contract; and that the instrument is at the time of his endorsement
valid and subsisting." It has been repeatedly held that in check transactions, the
depositary/collecting bank or last endorser generally suffers the loss because it has the
duty to ascertain the genuineness of all prior endorsements considering that the act of
presenting the check for payment to the drawee is an assertion that the party making the
presentment has done its duty to ascertain the genuineness of the endorsements. If any of
the warranties made by the depositary/collecting bank turns out to be false, then the
drawee bank may recover from it up to the amount of the check.

As collecting banks, ESB and Equitable-PCI Bank are both liable for the amount of the
materially altered checks. The SC also notes that the 24-hour clearing rule does not apply
to altered checks. #LABRADOR

***

ACCOMODATION PARTY

PRUDENCIO v. COURT OF APPEALS

G.R. No. L-34539 July 14, 1986

DOCTRINE: Nature of liability of an accommodation maker; As an accommodation maker,

one is primarily and unconditionally liable on the promissory note to a holder for value,
regardless of whether he stands as a surety or a solidary co-debtor, since such distinction
would be entirely immaterial and inconsequential as far as a holder for value is concerned.

FACTS: Sometime in 1955, the Concepcion & Tamayo Construction Company, needing
funds to push through with its construction project with the Bureau of Public Works,
convinced Eulalio and Elisa Prudencio to mortgage their property with the PNB to secure
the lone of P10,000, which the former was negotiating with the PNB. Eulalio, without
consideration, agreed and thereafter executed a promissory note amounting to P10,000 in
favor of PNB. He also authorized PNB to issue the mortgage price to the construction firm.

In December 1955, the firm executed a Deed of Assignment in favor of PNB which provides
that any payment from the Bureau of Public Works in consideration of work done by the
Company so far shall be paid directly to PNB – this will also ensure that the loan gets to be
paid off before maturity.

Notwithstanding the provision in the Deed of Assignment, the Bureau of Public Works
asked PNB if it can make the payments instead to the Company because it needs the
money to buy construction materials to complete the project. PNB agreed. And so the loan
matured without PNB actually receiving any payment from the Bureau of Public Works.

Prudencio, upon learning that no payment was made on the loan, petitioned to have the
mortgage canceled. However, the trial court and, subsequently, the Court of Appeals ruled
against them.

In their appeal, they contend that as accommodation makers, the nature of their liability is
only that of mere sureties instead of solidary co-debtors, such that a material alteration in
the principal contract, effected by the creditor without the knowledge and consent of the
sureties, completely discharges the sureties from all liabilities on the contract of suretyship.

ISSUE: Whether or not petitioners should be held liable from the liabilities incurred by the
Construction Company to PNB.

HELD: No. As a general rule, accommodation makers, petitioners are primarily and
unconditionally liable on the promissory note to a holder for value, regardless of whether
they stand as sureties or solidary co-debtors, since such distinction would be entirely
immaterial and inconsequential as far as a holder for value is concerned. Consequently,
they cannot claim to have been released from their obligation simply because the time of

CASES IN COMMERCIAL LAW REVIEW (J. Dimaampao) 4E 2017-2018 | 15

payment of such obligation was temporarily deferred by PNB without their knowledge and
consent.

However, PNB could not be considered a holder for value. A holder for value is one who
meets the requirement of being a holder in due course, except the notice for want of
consideration. In this case not only was PNB an immediate party or privy to the promissory
note, knowing fully well that petitioners only signed as accommodation parties, but more
importantly, it was the Deed of Assignment which moved petitioners to sign the promissory
note.

Petitioners also relied on the belief that there will be no alterations to the terms of the
agreement. The deed provided that there will be no further conditions which could possibly
alter the agreement without the consent of petitions, such as the grant of greater priority to
obligations other than the payment of the loan. Nevertheless, PNB approved the release of
payments to the Company instead of the same to the bank. This was in violation of the
deed of assignment and prejudiced the rights of petitioners. Certainly, in this case, PNB
was not in good faith, thus ruling out any possibility of being a holder in due course.
#LATORRE

***

CASES IN COMMERCIAL LAW REVIEW (J. Dimaampao) 4E 2017-2018 | 16

 CORPORATION LAW
PRINCIPLE OF LIMITED LIABILITY

PNB vs Hydro Resources Contractors Corp.

G.R. No. 167530 March 13, 2013

DOCTRINE: As a consequence of its status as a distinct legal entity and as a result of a

conscious policy decision to promote capital formation, a corporation incurs its own
liabilities and is legally responsible for payment of its obligations. In other words, by virtue
of the separate juridical personality of a corporation, the corporate debt or credit is not the
debt or credit of the stockholder. This protection from liability for shareholders is the
principle of limited liability.

FACTS: Sometime in 1984, petitioners DBP and PNB foreclosed on certain mortgages
made on the properties of Marinduque Mining and Industrial Corporation (MMIC). As a
result of the foreclosure, DBP and PNB acquired substantially all the assets of MMIC and
resumed the business operations of the defunct MMIC by organizing NMIC. DBP and PNB
owned 57% and 43% of the shares of NMIC, respectively, except for five qualifying
shares.As of September 1984, the members of the Board of Directors of NMIC were either
from DBP or PNB.

Subsequently, NMIC engaged the services of Hercon, Inc., for NMIC’s Mine Stripping and
Road Construction Program in 1985 for. After computing the payments already made by
NMIC under the program and crediting the NMIC’s receivables from Hercon, Inc., the latter
found that NMIC still has an unpaid balance. Hercon, Inc. made several demands on NMIC
and when these were not heeded, a complaint for sum of money was filed in the RTC of
Makati, Branch 136 seeking to hold petitioners NMIC, DBP, and PNB solidarily liable for the
amount owing Hercon, Inc. The case was docketed as Civil Case No. 15375. Subsequent
to the filing of the complaint, Hercon, Inc. was acquired by HRCC in a merger. This
prompted the amendment of the complaint to substitute HRCC for Hercon, Inc.

After trial, the RTC of Makati rendered a Decision dated November 6, 1995 in favor of
HRCC. It pierced the corporate veil of NMIC and held DBP and PNB solidarily liable with
NMIC.

ISSUE : Whether or not DBP and PNB are solidarily liable with NMIC as its shareholders.

RULING: A corporation is an artificial entity created by operation of law. It possesses the

right of succession and such powers, attributes, and properties expressly authorized by law
or incident to its existence. It has a personality separate and distinct from that of its
stockholders and from that of other corporations to which it may be connected. As a
consequence of its status as a distinct legal entity and as a result of a conscious policy
decision to promote capital formation, a corporation incurs its own liabilities and is legally
responsible for payment of its obligations. In other words, by virtue of the separate juridical
personality of a corporation, the corporate debt or credit is not the debt or credit of the
stockholder. This protection from liability for shareholders is the PRINCIPLE OF LIMITED
LIABILITY.

***

CASES IN COMMERCIAL LAW REVIEW (J. Dimaampao) 4E 2017-2018 | 17

TAX EXEMPTION ENJOYED BY A CORPORATION CANNOT EXTEND TO ITS
STOCKHOLDERS

Manila Gas Corporation v. Collector of Internal Revenue

FACTS: Plaintiff Manila Gas Corporation is a corporation organized under the laws of the
Philippine Islands and operates a gas plant in the City of Manila and furnishes gas service
to the people of the metropolis and surrounding municipalities by virtue of a franchise
granted to it by the Philippine Government. Associated with the plaintiff are the Islands Gas
and Electric Company domiciled in New York, United States, and the General Finance
Company domiciled in Zurich, Switzerland. Neither of these last mentioned corporations is
resident in the Philippines.For the years 1930, 1931, and 1932, dividends in the sum of
P1,348,847.50 were paid by the plaintiff to the Islands Gas and Electric Company in the
capacity of stockholders upon which withholding income taxes were paid to the defendant
totalling P40,460.03 For the same years interest on bonds in the sum of P411,600 was paid
by the plaintiff to the Islands Gas and Electric Company upon which withholding income
taxes were paid to the defendant totalling P12,348. Finally for the stated time period,
interest on other indebtedness in the sum of P131,644,90 was paid by the plaintiff to the
Islands Gas and Electric Company and the General Finance Company respectively upon
which withholding income taxes were paid to the defendant totalling P3,949.34. Defendant
Collector of Internal Revenue sought for the recovery of P56,757.37, which the plaintiff was
required by the defendant to deduct and withhold from the various sums paid it to foreign
corporations as dividends and interest on bonds and other indebtedness and which the
plaintiff paid under protest. Such prompted plaintiff to file action against defendant where
the trial court ruled in favor of the defendant. Hence, this appeal alleging that payment of
withholding tax on dividends paid to foreign stockhokders violates plaintiff's franchise and
tax exemption.

ISSUE: Were the dividends paid by plaintiff to its stockholders, the Islands Gas and
Electric Company , not subject to tax because to impose a tax thereon would be to do so
on the plaintiff corporation, in violation of the terms of its franchise?

HELD: NO. As there held and as now confirmed, a corporation has a personality distinct
from that of its stockholders, enabling the taxing power to reach the latter when they
receive dividends from the corporation. It must be considered as settled in this jurisdiction
that dividends of a domestic corporation, which are paid and delivered in cash to foreign
corporations as stockholders, are subject to the payment in the income tax, the exemption
clause in the charter of the corporation notwithstanding. #LUZON

***

CASES IN COMMERCIAL LAW REVIEW (J. Dimaampao) 4E 2017-2018 | 18

CORPORATION CAN VALIDLY COMPLAIN FOR LIBEL OR DEFAMATION AND CLAIM
FOR MORAL DAMAGES

FILIPINAS BROADCASTING NETWORK, INC. vs. AGO MEDICAL AND EDUCATIONAL

CENTER BICOL CHRISTIAN COLLEGE OF MEDICINE, (AMEC-BCCM)
G.R. No. 141994 January 17, 2005

FACTS: "Exposé" is a radio documentary program hosted by Carmelo 'Mel' Rima ("Rima")
and Hermogenes ‘Jun' Alegre ("Alegre"). Exposé is aired every morning over DZRC-AM
which is owned by Filipinas Broadcasting Network, Inc. ("FBNI"). "Exposé" is heard over
Legazpi City, the Albay municipalities and other Bicol areas. Rima and Alegre exposed
various alleged complaints from students, teachers and parents against AMEC and its
administrators. Claiming that the broadcasts were defamatory, AMEC and Angelita Ago
("Ago"), as Dean of AMEC's College of Medicine, filed a complaint for damages against
FBNI, Rima and Alegre.

ISSUE: Whether AMEC is entitled to moral damages

HELD: YES. There is no question that the broadcasts were made public and imputed to
AMEC defects or circumstances tending to cause it dishonor, discredit and contempt. Rima
and Alegre's remarks such as "greed for money on the part of AMEC's administrators";
"AMEC is a dumping ground, garbage of . . . moral and physical misfits"; and AMEC
students who graduate "will be liabilities rather than assets" of the society are libelous per
se. Taken as a whole, the broadcasts suggest that AMEC is a money-making institution
where physically and morally unfit teachers abound.

A juridical person is generally not entitled to moral damages because, unlike a natural
person, it cannot experience physical suffering or such sentiments as wounded feelings,
serious anxiety, mental anguish or moral shock. Nevertheless, AMEC's claim for moral
damages falls under item 7 of Article 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. #MARTINEZ

***

DOCTRINE OF PIERCING THE VEIL OF CORPORATE FICTION

TIMOTEO H. SARONA vs. NLRC and ROYALE SECURITY AGENCY (Formerly

Sceptre) and CESAR S. TAN
G.R. No. 185280, January 18, 2012

FACTS:
Petitioner, a security guard in Sceptre since April 1976, was asked by Sceptre’s operations
manager on June 2003, to submit a resignation letter as a requirement for an application in
Royale and to fill up an employment application form for the said company. He was then
assigned at Highlight Metal Craft Inc. from July 29 to August 8, 2003 and was later
transferred to Wide Wide World Express Inc. On September 2003, he was informed that his
assignment at WWWE Inc. was withdrawn because Royale has been allegedly replaced by
another security agency which he later discovered to be untrue. Nevertheless, he was once
again assigned at Highlight Metal sometime in September 2003 and when he reported at
Royale’s office on October 1, 2003, he was informed that he would no longer be given any
assignment as instructed by Sceptre’s general manager.
He thus filed a complaint for illegal dismissal. The LA ruled in petitioner’s favor as he found
him illegally dismissed and was not convinced by the respondent’s claim on petitioner’s
abandonment.

CASES IN COMMERCIAL LAW REVIEW (J. Dimaampao) 4E 2017-2018 | 19

Respondents were ordered to pay back wages computed from the day he was dismissed
up to the promulgation of his decision on May 11, 2005.The LA also ordered for the
payment of separation pay but refused to pierce Royale’s corporate veil.

Respondents appealed to the NLRC claiming that the LA acted with grave abuse of
discretion upon ruling on the illegal dismissal of petitioner. NLRC partially affirmed the LA’s
decision with regard to petitioner’s illegal dismissal and separation pay but modified the
amount of backwages and limited it to only 3 months of his last month salary reducing P95,
600 to P15, 600 since he worked for Royale for only 1 month and 3 days.

Petitioner did not appeal to LA but raised the validity of LA’s findings on piercing Royale’s
corporate personality and computation of his separation pay and such petition was
dismissed by the NLRC. Petitioner elevated NLRC’s decision to the CA on a petition for
certiorari, and the CA disagreed with the NLRC’s decision of not proceeding to review the
evidence for determining if Royale is Sceptre’s alter ego that would warrant the piercing of
its corporate veil.

ISSUE: Whether Royale’s corporate fiction should be pierced for the purpose of compelling
it to recognize the petitioner’s length of service with Sceptre and for holding it liable for the
benefits that have accrued to him arising from his employment with Sceptre.

RULING: YES. Royale is a continuation or successor of Sceptre.

The doctrine of piercing the corporate veil is applicable on alter ego cases, where a
corporation is merely a farce since it is a mere alter ego or business conduit of a person, or
where the corporation is so organized and controlled and its affairs are so conducted as to
make it merely an instrumentality, agency, conduit or adjunct of another corporation.

The respondents’ scheme reeks of bad faith and fraud and compassionate justice dictates
that Royale and Sceptre be merged as a single entity, compelling Royale to credit and
recognize the petitioner’s length of service with Sceptre.
The respondents cannot use the legal fiction of a separate corporate personality for ends
subversive of the policy and purpose behind its creation or which could not have been
intended by law to which it owed its being.

Also, Sceptre and Royale have the same principal place of business. As early as October
14, 1994, Aida and Wilfredo became the owners of the property used by Sceptre as its
principal place of business by virtue of a Deed of AbsoluteSale they executed with Roso.
Royale, shortly after its incorporation, started to hold office in the same property.These, the
respondents failed to dispute.

Royale also claimed a right to the cash bond which the petitioner posted when he was still
with Sceptre. If Sceptre and Royale are indeed separate entities, Sceptre should have
released the petitioner’s cash bond when he resigned and Royale would have required the
petitioner to post a new cash bond in its favor.

The way on how petitioner was made to resign from Sceptre then later on made an
employee of Royale, reflects the use of the legal fiction of the separate corporate
personality and is an implication of continued employment. Royale is a continuation or
successor or Sceptre since the employees of Sceptre and of Royale are the same and said
companies have the same principal place of business. #PEREZ

***

CASES IN COMMERCIAL LAW REVIEW (J. Dimaampao) 4E 2017-2018 | 20

ALTER-EGO THEORY

PNB vs HYDRO RESOURCES CONTRACTORS CORP.

G.R. No. 167530 March 13, 2013

DOCTRINE: Case law lays down a three-pronged test to determine the application of the
alter ego theory, which is also known as the instrumentality theory, namely:
(1) Control, not mere majority or complete stock control, but complete domination, not only
of finances but of policy and business practice in respect to the transaction attacked so that
the corporate entity as to this transaction had at the time no separate mind, will or
existence of its own;
(2) Such control must have been used by the defendant to commit fraud or wrong, to
perpetuate the violation of a statutory or other positive legal duty, or dishonest and unjust
act in contravention of plaintiff’s legal right; and
(3) The aforesaid control and breach of duty must have proximately caused the injury or
unjust loss complained of.

FACTS: DBP and PNB foreclosed on certain mortgages made on the properties of
Marinduque Mining and Industrial Corporation (MMIC). As a result, DBP and PNB acquired
substantially all the assets of MMIC and resumed the business operations of the defunct
MMIC by organizing NMIC. DBP and PNB owned 57% and 43% of the shares of NMIC,
respectively. The members of the Board of Directors of NMIC were either from DBP or
PNB. NMIC engaged the services of Hercon, Inc., Construction Program for a total contract
price of ₱ 35M. the latter found that NMIC still has an unpaid balance of ₱ 8,370,934.74
made several demands when these were not heeded, a complaint for sum of money
seeking to hold petitioners NMIC, DBP, and PNB solidarily liable.

In its answer, NMIC claimed that HRCC had no cause of action. It also asserted that its
contract with HRCC was entered into by its then President without any authority.

Petitioner asserts that NMIC is a corporate entity with a juridical personality separate and
distinct from both PNB and DBP. They insist that the majority ownership by DBP and PNB
of NMIC is not a sufficient ground for disregarding the separate corporate personality of
NMIC. According to them, the application of the doctrine of piercing the corporate veil is
unwarranted as nothing in the records would show that the ownership and control of the
shareholdings of NMIC by DBP and PNB were used to commit fraud, illegality or injustice.
In the absence of evidence that the stock control by DBP and PNB over NMIC was used to
commit some fraud or a wrong and that said control was the proximate cause of the injury
sustained by HRCC, resort to the doctrine of "piercing the veil of corporate entity" is
misplaced.

ISSUE: Whether or not there is sufficient ground to pierce the veil of corporate fiction, this
Court likewise finds for the plaintiff

HELD: NO. The doctrine of piercing the corporate veil applies only in three (3) basic areas,
namely: 1) defeat of public convenience as when the corporate fiction is used as a vehicle
for the evasion of an existing obligation; 2) fraud cases or when the corporate entity is used
to justify a wrong, protect fraud, or defend a crime; or 3) alter ego cases, where a
corporation is merely a farce since it is a mere alter ego or business conduit of a person, or
where the corporation is so organized and controlled and its affairs are so conducted as to
make it merely an instrumentality, agency, conduit or adjunct of another corporation.

To summarize, piercing the corporate veil based on the alter ego theory requires the
concurrence of three elements: control of the corporation by the stockholder or parent
corporation, fraud or fundamental unfairness imposed on the plaintiff, and harm or damage
caused to the plaintiff by the fraudulent or unfair act of the corporation. The absence of any
of these elements prevents piercing the corporate veil.

This Court finds that none of the tests has been satisfactorily met in this case.

CASES IN COMMERCIAL LAW REVIEW (J. Dimaampao) 4E 2017-2018 | 21

In applying the alter ego doctrine, the courts are concerned with reality and not form, with
how the corporation operated and the individual defendant’s relationship to that operation.
With respect to the control element, it refers not to paper or formal control by majority or
even complete stock control but actual control which amounts to "such domination of
finances, policies and practices that the controlled corporation has, so to speak, no
separate mind, will or existence of its own, and is but a conduit for its ." In addition, the
control must be shown to have been exercised at the time the acts complained of took
place. In this case, nothing in the records shows that the corporate finances, policies and
practices of NMIC were dominated by DBP and PNB in such a way that NMIC could be
considered to have no separate mind, will or existence of its own but a mere conduit for
DBP and PNB. On the contrary, the evidence establishes that HRCC knew and acted on
the knowledge that it was dealing with NMIC, not with NMIC’s stockholders. DBP and PNB
maintain an address different from that of NMIC. There was insufficient proof of interlocking
directorates. There was not even an allegation of similarity of corporate officers. Instead of
evidence that DBP and PNB assumed and controlled the management of NMIC, HRCC’s
evidence shows that NMIC operated as a distinct entity endowed with its own legal
personality.

In relation to the second element, the wrongdoing or unjust act in contravention of a

plaintiff’s legal rights must be clearly and convincingly established; it cannot be presumed.
Without a demonstration that any of the evils sought to be prevented by the doctrine is
present, it does not apply. In this case, the Court of Appeals declared: We are not saying
that PNB and DBP are guilty of fraud in forming NMIC, nor are we implying that NMIC was
used to conceal fraud. x x x. Such a declaration clearly negates the possibility that DBP
and PNB exercised control over NMIC which DBP and PNB used "to commit fraud or
wrong, to perpetuate the violation of a statutory or other positive legal duty, or dishonest
and unjust act in contravention of plaintiff’s legal rights."

As regards the third element, in the absence of both control by DBP and PNB of NMIC and
fraud or fundamental unfairness perpetuated by DBP and PNB through the corporate cover
of NMIC, no harm could be said to have been proximately caused by DBP and PNB on
HRCC for which HRCC could hold DBP and PNB solidarily liable with NMIC. #PLANA

***

SUBSIDIARY COMPANY AS MERE INSTRUMENTALITY

MR HOLDINGS vs. SHERIFF BAJAR

G.R. No. 138104, April 11, 2002

DOCTRINE: The mere fact that a corporation owns all of the stocks of another corporation,
taken alone is not sufficient to justify their being treated as one entity. If used to perform
legitimate functions, a subsidiary's separate existence shall be respected, and the liability of
the parent corporation as well as the subsidiary will be confined to those arising in their
respective businesses

FACTS:
Asian Development Bank (ADB) agreed to extend to Marcopper Mining Corporation
(Marcopper) a loan in the amount of US$40,000,000.00 to finance the latter's mining project
in Marinduque. ADB and Placer Dome, Inc., (Placer Dome), a foreign corporation which
owns 40% of Marcopper, executed a "Support and Standby Credit Agreement" whereby the
latter. agreed to provide Marcopper with cash flow support for the payment of its obligations
to ADB. To secure the loan, Marcopper executed in favor of ADB a "Deed of Real Estate
and Chattel Mortgage" covering substantially all of its (Marcopper's) properties and assets
in Marinduque. When Marcopper defaulted, Placer Dome agreed to have its subsidiary
Corp., MR Holding, Ltd., assumed Marcopper's obligation to ADB for US$ 18,453,450.02.
In an Assignment Agreement, ADB assigned to MR Holdings all its rights under the loan
agreements. Marcopper likewise executed a Deed of Assignment in favor of MR Holdings.

CASES IN COMMERCIAL LAW REVIEW (J. Dimaampao) 4E 2017-2018 | 22

Meanwhile, Solidbank Corporation (Solidbank) obtained a writ of execution from the RTC of
Manila by virtue of a Partial Judgment against Marcopper, requiring the latter to pay the
sum of P52M + 10% attorney's fees. Thereafter, Bajar, the sheriff, issued two notices of
levy and thereafter notices of public auction sale of Marcopper's personal and real
properties. Having learned of the scheduled auction sale, MR Holdings served an "Affidavit
of Third-Party Claim", asserting its ownership over all Marcopper's properties by virtue of
the "Deed of Assignment." Upon the denial of its "Affidavit of Third-Party Claim", MR
Holdings commenced with the RTC of Boac, Marinduque a complaint for reivindication of
properties with prayer for preliminary injunction and temporary restraining order.

The RTC denied MR Holdings' application for a writ of preliminary injunction on the ground
that MR Holdings has no legal capacity to sue, it being a foreign corporation doing business
in the Philippines without license. MR Holdings elevated the matter to the Court of Appeals
which affirmed the trial court's decision.
ISSUE: Whether or not MR Holdings, Placer Dome and Marcopper are one and the same
entity to warrant the application of the doctrine of piercing the veil of corporate fiction

RULING: NO
The mere fact that a corporation owns all of the stocks of another corporation, taken alone
is not sufficient to justify their being treated as one entity. If used to perform legitimate
functions, a subsidiary's separate existence shall be respected, and the liability of the
parent corporation as well as the subsidiary will be confined to those arising in their
respective businesses. The following circumstances are useful in the determination of
whether a subsidiary is but a mere instrumentality of the parent-corporation:

a) The parent corporation owns all or most of the capital stock of the subsidiary.
b) The parent and subsidiary corporations have common directors or officers.
c) The parent corporation finances the subsidiary.
d) The parent corporation subscribes to all the capital stock of the subsidiary or
otherwise causes its incorporation.
e) The subsidiary has grossly inadequate capital.
f) The parent corporation pays the salaries and other expenses or losses of the
subsidiary.
g) The subsidiary has substantially no business except with the parent corporation or
no assets except those conveyed to or by the parent corporation.
h) In the papers of the parent corporation or in the statements of its officers, the subsidiary
is described as a department or division of the parent corporation, or its business or
financial responsibility is referred to as the parent corporations own.
i) The parent corporation uses the property of the subsidiary as its own.
j) The directors or executives of the subsidiary do not act independently in the interest
of the subsidiary, but take their orders from the parent corporation.
k) The formal legal requirements of the subsidiary are not observed.

The mere fact that Placer Dome agreed, under the terms of the Support and Standby
Credit Agreement to provide Marcopper with cash flow support in paying its obligations to
ADB, does not mean that its personality has merged with that of Marcopper. In the absence
of fraud in the transaction of the three foreign corporations, it is improper to pierce the veil
of corporate fiction which addresses situations where the corporate personality of a
corporation is abused or used for wrongful purposes. #QUIJANO-MANALO

***

CASES IN COMMERCIAL LAW REVIEW (J. Dimaampao) 4E 2017-2018 | 23

PIERCING THE VEIL OF CORPORATE FICTION – ALTER EGO OR
INSTRUMENTALITY THEORY

Philippine National Bank vs. Hydro Resources Contractors Corporation

G.R. No. 167530, March 13, 2013

FACTS:
In 1984, petitioners DBP and PNB foreclosed on certain mortgages made on the properties
of Marinduque Mining and Industrial Corporation (MMIC) .As a result of the foreclosure,
DBP and PNB acquired substantially all the assets of MMIC and resumed the business
operations of the defunct MMIC by organizing NMIC. DBP and PNB owned 57% and 43%
of the shares of NMIC, respectively, except for five qualifying shares.

As of September 1984, the members of the Board of Directors of NMIC were either from
DBP or PNB. In 1985, NMIC engaged the services of Hercon, Inc., for its Mine Stripping
and Road Construction Program. As NMIC still had an unpaid balance of P8,370,934.74,
and demands for payment by Hercon went unheeded, the latter filed an action for collection
of sum of money before the RTC of Makati.

Subsequently, the complaint was amended to substitute HRCC for Hercon, Inc., pursuant
to the latter’s acquisition of the former. The complaint was amended for the second time to
implead and include Asset Privatization Trust (APT) as defendant and trustee under a Trust
Agreement.

In its Answer, NMIC claimed, among others, that HRCC had no cause of action and that
the contract was entered into by its President without authority. For its part, DBP’s answer
raised the defense that HRCC had no cause of action against it because DBP was not privy
to HRCC’s contract with NMIC. Moreover, NMIC’s juridical personality is separate from that
of DBP.

In their answers, both APT and PNB invoked lack of cause of action against them. PNB
also invoked the separate juridical personality of NMIC.

The RTC rendered a decision in favor of HRCC. It pierced the corporate veil of NMIC and
held DBP and PNB solidarily liable with NMIC. It held that NMIC is a mere adjunct,
business conduit of alter ego of both DBP and PNB based on the following: NMIC is owned
by defendants DPB and PNB, except for five (5) qualifying shares, and that all the
members of NMIC’s Board of Directors is either from DBP or PNB. Likewise, the business
of NMIC was then also being conducted and controlled by both DBP and PNB, and that it
was the then Governor of DBP who was signing and entering into contracts with third
persons, on behalf of NMIC.

On DBP and PNB’s appeal to the CA, the CA affirmed the piercing of the veil of the
corporate personality of NMIC and held DBP, PNB, and APT solidarily liable with NMIC due
to DBP and PNB’s majority shares in NMIC, and with the presence of interlocking directors
among the corporations. According to the CA, there is justification in the RTC’s ruling that
NMIC is a mere adjunct, business conduit or alter ego of both DBP and PNB.

Thus, consolidated petitions were filed by DBP, PNB and ATP. All of the petitioners assert
that NMIC is a corporate entity with a juridical personality separate and distinct from both
PNB and DBP. They insist that the majority ownership by DBP and PNB of NMIC is not a
sufficient ground for disregarding the separate corporate personality of NMIC because
NMIC was not a mere adjunct, business conduit oralterego of DBP and PNB. According to
them, the application of the doctrine of piercing the corporate veil is unwarranted as nothing
in the records would show that the ownership and control of the shareholdings of NMIC by
DBP and PNB were used to commit fraud, illegality or injustice. In the absence of evidence
that the stock control by DBP and PNB overNMIC was used to commit some fraud or a
wrong and that said control was the proximate cause of the injury sustained by HRCC,
resort to the doctrine of "piercing the veil of corporate entity" is misplaced.

CASES IN COMMERCIAL LAW REVIEW (J. Dimaampao) 4E 2017-2018 | 24

ISSUE: Whether or not the corporate veil of NMIC should be pierced to hold petitioners
liable to HRCC.

HELD: No. According to the Court, piercing the corporate veil based on the alter ego theory
requires the concurrence of three elements: control of the corporation by the stockholder or
parent corporation, fraud or fundamental unfairness imposed on the plaintiff, and harm or
damage caused to the plaintiff by the fraudulent or unfair act of the corporation. The
absence of any of these elements prevents piercing the corporate veil.

This Court found that none of the tests has been satisfactorily met in this case.

In applying the alter ego doctrine, the courts are concerned with reality and not form, with
how the corporation operated and the individual defendant's relationship to that operation.
With respect to the control element, it refers not to paper or formal control by majority or
even complete stock control butactual control which amounts to "such domination of
finances, policies and practices that the controlled corporation has, so to speak, no
separate mind, willor existence of its own, and is but a conduit for its principal."

In addition, the control must be shown to have been exercised at the time the acts
complained of took place.

While ownership by one corporation of all or a great majority of stocks of another

corporation and their interlocking directorates may serve as indicia of control, by
themselves and without more, however, these circumstances are insufficient to establish an
alter ego relationship or connection between DBP and PNB on the one hand and NMIC on
the other hand, that will justify the puncturing of the latter's corporate cover. Mere
ownership by a single stockholder or by another corporation of all or nearly all of the capital
stock of a corporation is not of itself sufficient ground for disregarding
the separate corporate personality.

This Court has likewise ruled that the"existence of interlocking directors, corporate officers
and shareholders is not enough justification to pierce the veil of corporate fiction in the
absence of fraud or other public policy considerations.” In this case, nothing in the records
shows that the corporate finances, policies and practices of NMIC were dominated by DBP
and PNB in such a way that NMIC could be considered to have no separate mind, will or
existence of its own but a mere conduit for DBP and PNB. On the contrary, the evidence
establishes that HRCC knew and acted on the knowledge that it was dealing with NMIC,
not with NMIC's stockholders.

Further, HRCC has presented nothing to show that DBP and PNB had a hand in the act
complained of, the alleged undue disregard by NMIC of the demands of HRCC to satisfy
the unpaid claims for services rendered by HRCC in connection with NMIC's mine stripping
and road construction program in 1985.

In relation to the second element that the wrongdoing or unjust act in contravention of a
plaintiff's legal rights must be clearly and convincingly established; the Court said that it
cannot be presumed. It then ruled that even assuming that DBP and PNB exercised control
over NMIC, there is no evidence that the juridical personality of NMIC was used by DBP
and PNB to commit a fraud or to do a wrong against HRCC.

As regards the third element, in the absence of both control by DBP and PNB ofNMI C and
fraud or fundamental unfairness perpetuated by DBP and PNB through the corporate cover
of NMIC, no harm could be said to have been proximately caused by DBP and PNB on
HRCC for which HRCC could hold DBP and PNB solidarily liable with NMIC.

There is thus no basis to hold that NMIC was a mere alter ego of DBP and PNB to justify
the piercing of the corporate veil.

***

CASES IN COMMERCIAL LAW REVIEW (J. Dimaampao) 4E 2017-2018 | 25

THE VEIL OF CORPORATE FICTION; WHEN OFFICERS MADE LIABLE

ADALIA B. FRANCISCO and MERRYLAND DEVELOPMENT CORPORATION vs. RITA

C. MEJIA
G.R. No. 141617 August 14, 2001

DOCTRINE: Piercing the Veil of Corporate Fiction; When officers made liable; If it is proven
that the officer has used the corporate fiction to defraud a third party, or that he has acted
negligently, maliciously or in bad faith then the corporate veil shall be lifted and he shall be
held personally liable for the particular corporate obligation involved.

FACTS: Gutierrez and Cardale Financing and Realty Corporation (Cardale) executed a
Deed of Sale with Mortgage for the consideration of P800,000.00. Upon the execution of
the deed, Cardale paid Gutierrez P171,000.00. It was agreed that the balance of
P629,000.00 would be paid in several installments within five years from the date of the
deed, at an interest of nine percent per annum based on the successive unpaid principal
balances. Due to Cardales failure to settle its obligations, Gutierrez filed a complaint for
rescission of the contract with the Quezon City RTC. during the pendency of the rescission
case, Gutierrez died and was substituted by her executrix, respondent Rita C. Mejia
(Mejia). Cardale, is represented by petitioner Adalia B. Francisco (Francisco) in her
capacity as Vice-President and Treasurer of Cardale. In the meantime, the mortgaged
parcels of land became delinquent in the payment of real estate taxes, which culminated in
their levy and auction sale The highest bidder for the three parcels of land was petitioner
Merryland Development Corporation (Merryland), whose President and majority
stockholder is actually Francisco also. Subsequently, the redemption period expired and
Merryland, acting through Francisco, filed petitions for consolidation of title which
culminated in the issuance of certain orders decreeing the cancellation of Cardales TCT
and the issuance of new transfer certificates of title free from any encumbrance or third-
party claim whatsoever in favor of Merryland. Pursuant to such orders, the Register of
Deeds of Caloocan City issued new transfer certificates of title in the name of Merryland
which did not bear a memorandum of the mortgage liens in favor of Gutierrez. Thus Mejia,
filed with the RTC of Quezon City a complaint for damages with prayer for preliminary
attachment against Francisco, Merryland and the Register of Deeds of Caloocan City.The
trial court rendered a decision in favor of the defendants It was held that plaintiff failed to
establish by clear and convincing evidence her allegations that Francisco controlled
Cardale and Merryland and that she had employed fraud by intentionally causing Cardale
to default in its payment of real property taxes on the mortgaged properties so that
Merryland could purchase the same by means of a tax delinquency sale.

ISSUE: Whether or not an officer of a corporation may be held liable through piercing the
veil of corporate fiction.

RULING: YES. Under the doctrine of piercing the veil of corporate entity, when valid
grounds therefore exist, the legal fiction that a corporation is an entity with a juridical
personality separate and distinct from its members or stockholders may be disregarded. In
such cases, the corporation will be considered as a mere association of persons. The
members or stockholders of the corporation will be considered as the corporation, that is,
liability will attach directly to the officers and stockholders. The doctrine applies when the
corporate fiction is used to defeat public convenience, justify wrong, protect fraud, or
defend crime, or when it is made as a shield to confuse the legitimate issues, or where a
corporation is the mere alter ego or business conduit of a person, or where the corporation
is so organized and controlled and its affairs are so conducted as to make it merely an
instrumentality, agency, conduit or adjunct of another corporation.

With specific regard to corporate officers, the general rule is that the officer cannot be held
personally liable with the corporation, whether civilly or otherwise, for the consequences of
his acts, if he acted for and in behalf of the corporation, within the scope of his authority
and in good faith. In such cases, the officer’s acts are properly attributed to the corporation.
However, if it is proven that the officer has used the corporate fiction to defraud a third
party, or that he has acted negligently, maliciously or in bad faith then the corporate veil

CASES IN COMMERCIAL LAW REVIEW (J. Dimaampao) 4E 2017-2018 | 26

shall be lifted and he shall be held personally liable for the particular corporate obligation
involved. The Court, after an assiduous study of this case, is convinced that the totality of
the circumstances appertaining conduce to the inevitable conclusion that petitioner
Francisco acted in bad faith.
#SABULAO

***

PIERCING THE VEIL OF CORPORATE FICTION

Development Bank of the Philippines v. Court of Appeals

G. R. No. 126200 / 363 SCRA 307 August 16, 2001

DOCTRINE: When the notion of legal entity is used to defeat public convenience, justify
wrong, protect fraud, or defend crime, the law will regard the corporation as an association
of persons or in case of two corporations, merge them into one (Piercing the veil of
corporate fiction).

FACTS: Marinduque Mining Industrial Corporation (Marinduque Mining), a corporation

engaged in the manufacture of pure and refined nickel, nickel and cobalt in mixed sulfides,
copper ore/concentrates, cement and pyrite conc., obtained from the Philippine National
Bank (PNB) various loan accommodations. To secure the loans, Marinduque Mining
executed a Deed of Real Estate Mortgage and Chattel Mortgage in favor of PNB. The
mortgage covered all of Marinduque Minings real properties, located at Surigao del Norte,
Sipalay, Negros Occidental, and at Antipolo, Rizal, including the improvements thereon. On
July 13, 1981, Marinduque Mining executed in favor of PNB and the Development Bank of
the Philippines (DBP) a second Mortgage Trust Agreement. In said agreement, Marinduque
Mining mortgaged to PNB and DBP all its real properties located at Surigao del Norte,
Sipalay, Negros Occidental, and Antipolo, Rizal, including the improvements thereon. The
mortgage also covered all of Marinduque Minings chattels, as well as assets of whatever
kind, nature and description which Marinduque Mining may subsequently acquire in
substitution or replenishment or in addition to the properties covered by the previous Deed
of Real and Chattel Mortgage. Apparently, Marinduque Mining had also obtained loans
totaling P2 Billion from DBP, exclusive of interest and charges. On April 27, 1984,
Marinduque Mining executed in favor of PNB and DBP an Amendment to Mortgage Trust
Agreement by virtue of which Marinduque Mining mortgaged in favor of PNB and DBP all
other real and personal properties and other real rights subsequently acquired by
Marinduque Mining.

For failure of Marinduque Mining to settle its loan obligations, PNB and DBP instituted
sometime on July and August 1984 extrajudicial foreclosure proceedings over the
mortgaged properties. In the ensuing public auction sales, PNB and DBP emerged and
were declared the highest bidders over the foreclosed real properties. PNB and DBP
thereafter thru a Deed of Transfer, purposely, in order to ensure the continued operation of
the Nickel refinery plant and to prevent the deterioration of the assets foreclosed, assigned
and transferred to Nonoc Mining and Industrial Corporation all their rights, interest and
participation over the foreclosed properties of MMIC located at Nonoc Island, Surigao del
Norte. Likewise, thru a Deed of Transfer, PNB and DBP assigned and transferred in favor
of Maricalum Mining Corp. all its rights, interest and participation over the foreclosed
properties of MMIC at Sipalay, Negros Occidental. Consequently, PNB and DBP, again
assigned, transferred and conveyed to the National Government thru the Asset
Privatization Trust (APT) all its existing rights and interest over the assets of MMIC, earlier
assigned to Nonoc Mining and Industrial Corporation, Maricalum Mining Corporation and
Island Cement Corporation.

In the meantime, Marinduque Mining purchased and caused to be delivered construction

materials from Remington Industrial Sales Corporation (Remington). The purchases were
not paid. Remington then filed a complaint for a sum of money and damages against
Marinduque Mining for the value of the unpaid construction materials and other

CASES IN COMMERCIAL LAW REVIEW (J. Dimaampao) 4E 2017-2018 | 27

merchandise purchased by Marinduque Mining, as well as interest, attorneys fees and the
costs of suit.

Remington amended its complaint and included the PNB, DBP, Nonoc Mining and
Industrial Corporation, Maricalum Mining Corporation and Island Cement Corporation as
co-defendants. Remington asserted that Marinduque Mining, PNB, DBP, Nonoc Mining,
Maricalum Mining and Island Cement must be treated in law as one and the same entity by
disregarding the veil of corporate fiction.

ISSUE: Whether or not Remington has cause of action against DBP, PNB and their
transferees, Nonoc Mining, Island Cement, Maricalum Mining, and the APT.

RULING: NO. Private respondent Remington submits that the transfer of the properties
was made in fraud of creditors. The presence of fraud, according to Remington, warrants
the piercing of the corporate veil such that Marinduque Mining and its transferees could be
considered as one and the same corporation. The transferees, therefore, are also liable for
the value of Marinduque Minings purchases. It is an elementary and fundamental principle
of corporation law that a corporation is an entity separate and distinct from its stockholders
and from other corporations to which it may be connected. However, when the notion of
legal entity is used to defeat public convenience, justify wrong, protect fraud, or defend
crime, the law will regard the corporation as an association of persons or in case of two
corporations, merge them into one. In this case, however, the Court did not find any fraud
on the part of Marinduque Mining and its transferees to warrant the piercing of the
corporate veil. It bears stressing that PNB and DBP are mandated to foreclose on the
mortgage when the past due account had incurred arrearages of more than 20% of the
total outstanding obligation. In this case, Marinduque Mining incurred arrearages of more
than 20%. #SALOR

***

MEANING OF “CAPITAL”

GAMBOA v. TEVES
G.R. No. 176579 June 28, 2011

DOCTRINE: The term “capital” in Section 11, Article XII of the 1987 Constitution refers only
to shares of stock entitled to vote in the election of directors. In the absence of provisions in
the articles of incorporation denying voting rights to preferred shares, preferred shares
have the same voting rights as common shares.

FACTS: On 28 November 1928, the Philippine Legislature enacted Act No. 3436 which
granted PLDT a franchise and the right to engage in telecommunications business. In
1969, General Telephone and Electronics Corporation (GTE), an American company and a
major PLDT stockholder, sold 26% of the outstanding common shares of PLDT to PTIC. In
1977, Prime Holdings, Inc. (PHI) was incorporated by several persons. Subsequently, PHI
became the owner of 111,415 shares of stock of PTIC by virtue of three Deeds of
Assignment executed by PTIC stockholders Ramon Cojuangco and Luis Tirso Rivilla. In
1986, the 111,415 shares of stock of PTIC held by PHI were sequestered by the
Presidential Commission on Good Government (PCGG). The 111,415 PTIC shares, which
represent about 46.125% of the outstanding capital stock of PTIC, were later declared by
the Supreme Court to be owned by the Republic of the Philippines. Since PTIC is a
stockholder of PLDT, the sale by the Philippine Government of 46.125% of PTIC shares is
actually an indirect sale of 12 million shares or about 6.3% of the outstanding common
shares of PLDT. With the sale, First Pacifics common shareholdings in PLDT increased
from 30.7% to 37% , thereby increasing the common shareholdings of foreigners in PLDT
to about 81.47 percent. These series of events allegedly caused a violation of Section 11,
Article XII of the 1987 Philippine Constitution which limits foreign ownership of the capital of
a public utility to not more than 40%.

CASES IN COMMERCIAL LAW REVIEW (J. Dimaampao) 4E 2017-2018 | 28

ISSUE: What kind of shares does the term “capital” in Section 11, Article XII of the
Constitution refer to?

RULING: The term “capital” in Section 11, Article XII of the 1987 Constitution refers only to
shares of stock entitled to vote in the election of directors.

Section 11, Article XII (National Economy and Patrimony) of the 1987 Constitution
mandates the Filipinization of public utilities by stating that “no franchise, certificate, or any
other form of authorization for the operation of a public utility shall be granted except to
citizens of the Philippines or to corporations or associations organized under the laws of the
Philippines, at least sixty per centum of whose capital is owned by such citizens.”

The intent of the framers of the Constitution in imposing limitations and restrictions on fully
nationalized and partially nationalized activities is for Filipino nationals to be always in
control of the corporation undertaking said activities.

One of the rights of a stockholder is the right to participate in the control or management of
the corporation. This is exercised through his vote in the election of directors because it is
the board of directors that controls or manages the corporation. Considering that common
shares have voting rights which translate to control, as opposed to preferred shares which
usually have no voting rights, the term “capital” in Section 11, Article XII of the Constitution
refers only to common shares. However, if the preferred shares also have the right to vote
in the election of directors, then the term “capital” shall include such preferred shares
because the right to participate in the control or management of the corporation is
exercised through the right to vote in the election of directors.

Simply put, in the absence of provisions in the articles of incorporation denying voting rights
to preferred shares, preferred shares have the same voting rights as common shares.
However, preferred shareholders are often excluded from any control, that is, deprived of
the right to vote in the election of directors and on other matters, on the theory that the
preferred shareholders are merely investors in the corporation for income in the same
manner as bondholders.

To construe broadly the term capital as the total outstanding capital stock, including both
common and non-voting preferred shares, grossly contravenes the intent and letter of the
Constitution that the State shall develop a self-reliant and independent national economy
effectively controlled by Filipinos. A broad definition unjustifiably disregards who owns the
all-important voting stock, which necessarily equates to control of the public utility.
#SANTOS

***

TESTS TO DETERMINE THE NATIONALITY OF THE CORPORATION

NARRA NICKEL MINING & DEVELOPMENT CORP. vs. REDMONT CONSOLIDATED

MINES CORP.

DOCTRINE: There are two acknowledged tests in determining the nationality of a

corporation: the control test and the grandfather rule

FACTS: Redmont is a domestic corporation interested in the mining and exploration of

some areas in Palawan. Upon learning that those areas were covered by Mineral
Production Sharing Agreement (MPSA) applications of other three (allegedly Filipino)
corporations – Narra, Tesoro, and MacArthur, it filed a petition before the Panel of
Arbitrators of DENR seeking to deny their permits on the ground that these corporations
are in reality foreign-owned. MBMI, a 100% Canadian corporation, owns 40% of the
shares of PLMC (which owns 5,997 shares of Narra), 40% of the shares of MMC (which
owns 5,997 shares of McArthur) and 40% of the shares of SLMC (which, in turn, owns
5,997 shares of Tesoro). Aside from the MPSA, the 3 corporations also applied for
Financial or Technical Assistance Agreements (FTAA) with the Office of the President.

CASES IN COMMERCIAL LAW REVIEW (J. Dimaampao) 4E 2017-2018 | 29

In their answer, they countered that (1) the liberal Control Test must be used in determining
the nationality of a corporation as based on Sec 3 of the Foreign Investment Act – which
as they claimed admits of corporate layering schemes, and that (2) the nationality question
is no longer material because of their subsequent application for FTAA.

ISSUE: W/N Narra, Tesoro and McArthur are foreign corporations

HELD: YES. Basically, there are two acknowledged tests in determining the nationality of a
corporation: the control test and the grandfather rule. Par. 7 of DOJ Opinion No. 020,
S.2005, provides that: Shares belonging to corporations or partnerships at least 60% of the
capital of which is owned by Filipino citizens shall be considered as of Philippine nationality,
but if the percentage of Filipino ownership in the corporation or partnership is less than
60%, only the number of shares corresponding to such percentage shall be counted as of
Philippine nationality. Thus, if 100,000 shares are registered in the name of a corporation or
partnership at least 60% of the capital stock or capital, respectively, of which belong to
Filipino citizens, all of the shares shall be recorded as owned by Filipinos. But if less than
60%, or say, 50% of the capital stock or capital of the corporation or partnership,
respectively, belongs to Filipino citizens, only 50,000 shares shall be counted as owned by
Filipinos and the other 50,000 shall be recorded as belonging to aliens. The first part
pertains to the control test or the liberal rule. On the other hand, the second part pertains to
the stricter, more stringent grandfather rule.

Applying the Grandfather Rule in the present case, it is not enough that the corporation
does have the required 60% Filipino stockholdings at face value. To determine the
percentage of the ultimate Filipino ownership, it must first be traced to the level of the
investing corporation and added to the shares directly owned in the investee corporation.
Applying this rule, it turns out that the Canadian corporation owns more than 60% of the
equity interests of Narra, Tesoro and MacArthur. Hence, the latter are disqualified to
participate in the exploration, development and utilization of the Philippine’s natural
resources. #TOMARONG

***

CORPORATIONS AS CREATURES OF THE LAW

CAGAYAN FISHING DEVELOPMENT CO., INC. vs. TEODORO SANDIKO

DOCTRINE: Corporations are creatures of the law, and can only come into existence in the
manner prescribed by law.

FACTS: Manuel Tabora is the registered owner of four parcels of land. To guarantee the
payment of a loan, Manuel Tabora executed in favor of the Philippine National Bank a first
mortgage on the four parcels of land above-mentioned. A second mortgage in favor of the
same bank was executed by Tabora over the same lands to guarantee the payment of
another loan. A third mortgage on the same lands was executed in favor of Severina Buzon
to whom Tabora was indebted. These mortgages were registered and annotations thereof
appear at the back of transfer certificate of title No. 217.

Later on, Tabora executed a public document entitled "Escritura de Transpaso de

Propiedad Inmueble" by virtue of which the four parcels of land owned by him was sold to
the plaintiff company, said to under process of incorporation, in consideration of one peso
(P1) subject to the mortgages in favor of the Philippine National Bank and Severina Buzon
and, to the condition that the certificate of title to said lands shall not be transferred to the
name of the plaintiff company until the latter has fully and completely paid Tabora's
indebtedness to the Philippine National Bank.

The plaintiff company filed its article incorporation with the Bureau of Commerce and
Industry on October 22, 1930 . A year later, on October 28, 1931, the board of directors of
said company adopted a resolution authorizing its president, Jose Ventura, to sell the four

CASES IN COMMERCIAL LAW REVIEW (J. Dimaampao) 4E 2017-2018 | 30

parcels of lands in question to Teodoro Sandiko. Exhibits B, C and D were thereafter made
and executed. Exhibit B is a deed of sale executed before a notary public by the terms of
which the plaintiff sold ceded and transferred to the defendant all its right, titles, and
interest in and to the four parcels of land described in transfer certificate in turn obligated
himself to shoulder the three mortgages hereinbefore referred to. Exhibit C is a promisory
note for P25,300. drawn by the defendant in favor of the plaintiff, payable after one year
from the date thereof. Exhibit D is a deed of mortgage executed before a notary public in
accordance with which the four parcels of land were given a security for the payment of the
promissory note, Exhibit C. All these three instrument were dated February 15, 1932.

The defendant having failed to pay the sum stated in the promissory note, plaintiff, brought
this action in the Court of First Instance of Manila praying that judgment be rendered
against the defendant. After trial, the court rendered judgment absolving the defendant,
with costs against the plaintiff. Plaintiff presented a motion for new trial, which motion was
denied. In dismissing the complaint against the defendant, the court reached the
conclusion that Exhibit B is invalid because of vice in consent and repugnancy to law.

ISSUE: WON the Plaintiff is a Corporation?

RULING: No. The transfer made by Tabora to the Cagayan fishing Development Co., Inc.,
plaintiff herein, was affected on May 31, 1930 and the actual incorporation of said company
was affected later on October 22, 1930. In other words, the transfer was made almost five
months before the incorporation of the company. Unquestionably, a duly organized
corporation has the power to purchase and hold such real property as the purposes for
which such corporation was formed may permit and for this purpose may enter into such
contracts as may be necessary (sec. 13, pars. 5 and 9, and sec. 14, Act No. 1459). But
before a corporation may be said to be lawfully organized, many things have to be done.
Among other things, the law requires the filing of articles of incorporation (secs. 6 et seq.,
Act. No. 1459). Although there is a presumption that all the requirements of law have been
complied with (sec. 334, par. 31 Code of Civil Procedure), in the case before us it can not
be denied that the plaintiff was not yet incorporated when it entered into a contract of sale.
The contract itself referred to the plaintiff as "una sociedad en vias de incorporacion." It was
not even a de facto corporation at the time. Not being in legal existence then, it did not
possess juridical capacity to enter into the contract.

Boiled down to its naked reality, the contract here (Exhibit A) was entered into not between
Manuel Tabora and a non-existent corporation but between the Manuel Tabora as owner of
the four parcels of lands on the one hand and the same Manuel Tabora, his wife and
others, as mere promoters of a corporations on the other hand. For reasons that are self-
evident, these promoters could not have acted as agent for a projected corporation since
that which no legal existence could have no agent. A corporation, until organized, has no
life and therefore no faculties. It is, as it were, a child in ventre sa mere. This is not saying
that under no circumstances may the acts of promoters of a corporation be ratified by the
corporation if and when subsequently organized. There are, of course, exceptions, but
under the peculiar facts and circumstances of the present case we decline to extend the
doctrine of ratification which would result in the commission of injustice or fraud to the
candid and unwary. #TUQUERO

***

CASES IN COMMERCIAL LAW REVIEW (J. Dimaampao) 4E 2017-2018 | 31

SECTION 18: CORPORATE NAME; PRINCIPLE OF PRIORITY OF ADOPTION

INDUSTRIAL REFRACTORIES CORPORATION OF THE PHILIPPINES vs. COURT OF

APPEALS, SECURITIES AND EXCHANGE COMMISSION and REFRACTORIES
CORPORATION OF THE PHILIPPINES

DOCTRINE: The policy behind Section 18 is to avoid fraud upon the public that will have
occasion to deal with the entity concerned, the evasion of legal obligations and duties, and
the reduction of difficulties of administration and supervision over corporation.

FACTS: The case is a petition for review on certiorari under Rule 45 of the Rules of Court,
assailing the CA’s decision that the corporate names of Industrial Refractories Corp. of the
Philippines (IRCP) and Refractories Corporation of the Philippines (RCP) are confusingly or
deceptively similar, and that RCP has established its prior right to use the word
"Refractories" as its corporate name.

RCP is a corporation duly organized on October 13, 1976. On June 22, 1977, it registered
its corporate and business name with the Bureau of Domestic Trade. IRCP, on the other
hand, was incorporated on August 23, 1979 originally under the name "Synclaire
Manufacturing Corporation." It amended its Articles of Incorporation on August 23, 1985 to
change its corporate name to "Industrial Refractories Corp. of the Philippines."

Due to this, RCP was constrained to file with the SEC a petition to compel IRCP to change
its corporate name on the ground that its corporate name is confusingly similar with that of
RCP’s such that the public may be confused or deceived into believing that they are one
and the same corporation.

SEC ruled in favor of RCP. IRCP appealed to SEC En Banc on the ground that RCP has
no right to the exclusive use of its corporate name as it is composed of generic or common
words. However, SEC En Banc modified the appealed decision in that petitioner was
ordered to delete or drop from its corporate name only the word "Refractories." Unsatisfied,
IRCP elevated the decision of the SEC En Banc through a petition for review on certiorari
to the Court of Appeals. Hence, the petition.

ISSUE:
(1) Whether or not there is confusing similarity between their corporate names.
(2) Whether or not RCP is entitled to use the generic name "refractories".

RULING:
(1) No. The Court ruled that Section 18 of the Corporation Code expressly prohibits the use
of a corporate name which is "identical or deceptively or confusingly similar to that of any
existing corporation or to any other name already protected by law or is patently deceptive,
confusing or contrary to existing laws." The policy behind the foregoing prohibition is to
avoid fraud upon the public that will have occasion to deal with the entity concerned, the
evasion of legal obligations and duties, and the reduction of difficulties of administration
and supervision over corporation. Pursuant thereto, the Revised Guidelines in the Approval
of Corporate and Partnership Names specifically requires that: (1) a corporate name shall
not be identical, misleading or confusingly similar to one already registered by another
corporation with the Commission; and (2) if the proposed name is similar to the name of a
registered firm, the proposed name must contain at least one distinctive word different from
the name of the company already registered.

As regards the first requisite, it has been held that the right to the exclusive use of a
corporate name with freedom from infringement by similarity is determined by priority of
adoption. In this case, RCP was incorporated on October 13, 1976 and since then has
been using the corporate name "Refractories Corp. of the Philippines." Meanwhile, IRCP
was incorporated on August 23, 1979 originally under the name "Synclaire Manufacturing
Corporation." It only started using the name "Industrial Refractories Corp. of the
Philippines" when it amended its Articles of Incorporation on August 23, 1985, or nine (9)
years after RCP started using its name. Thus, being the prior registrant, RCP has acquired

CASES IN COMMERCIAL LAW REVIEW (J. Dimaampao) 4E 2017-2018 | 32

the right to use the word "Refractories" as part of its corporate name. Anent the second
requisite, in determining the existence of confusing similarity in corporate names, the test is
whether the similarity is such as to mislead a person using ordinary care and discrimination
and the Court must look to the record as well as the names themselves. IRCP’s corporate
name is "Industrial Refractories Corp. of the Phils.," while RCP’s is "Refractories Corp. of
the Phils." Obviously, both names contain the identical words "Refractories," "Corporation"
and "Philippines." The only word that distinguishes IRCP from RCP is the word "Industrial"
which merely identifies a corporation's general field of activities or operations. Even without
such proof of actual confusion between the two corporate names, it suffices that confusion
is probable or likely to occur.

(2) No. The Court ruled that while the word "refractories" is a generic term, its usage is not
widespread and is limited merely to the industry/trade in which it is used, and its continuous
use by respondent RCP for a considerable period has made the term so closely identified
with it. Moreover, as held in the case of Ang Kaanib sa Iglesia ng Dios kay Kristo Hesus,
H.S.K. sa Bansang Pilipinas, Inc. vs. Iglesia ng Dios kay Cristo Jesus, Haligi at Suhay ng
Katotohanan, petitioner's appropriation of respondent's corporate name cannot find
justification under the generic word rule. A contrary ruling would encourage other
corporations to adopt verbatim and register an existing and protected corporate name, to
the detriment of the public.

***

CORPORATE NAME

ANG MGA KAANIB SA IGLESIA NG DIOS KAY KRISTO HESUS, H.S.K. SA BANSANG
PILIPINAS, INC., vs. IGLESIA NG DIOS KAY CRISTO JESUS, HALIGI AT SUHAY NG
KATOTOHANAN

DOCTRINE: Parties organizing a corporation must choose a name at their peril; and the
use of a name similar to one adopted by another corporation, whether a business or a
nonprofit organization, if misleading or likely to injure in the exercise of its corporate
functions, regardless of intent, may be prevented by the corporation having a prior right, by
a suit for injunction against the new corporation to prevent the use of the name.

FACTS: Respondent Iglesia ng Dios Kay Cristo Jesus, Haligi at Suhay ng Katotohanan
(Church of God in Christ Jesus, the Pillar and Ground of Truth), is a non-stock religious
society or corporation registered in 1936.

Sometime in 1976, one Eliseo Soriano and several other members of respondent
corporation disassociated themselves from the latter and succeeded in registering on
March 30, 1977 a new non-stock religious society or corporation, named Iglesia ng Dios
Kay Kristo Hesus, Haligi at Saligan ng Katotohanan.

On July 16, 1979, respondent corporation filed with the SEC a petition to compel the Iglesia
ng Dios Kay Kristo Hesus, Haligi at Saligan ng Katotohanan to change its corporate name.

On May 4, 1988, the SEC rendered judgment in favor of respondent, ordering the Iglesia ng
Dios Kay Kristo Hesus, Haligi at Saligan ng Katotohanan to change its corporate name to
another name that is not similar or identical to any name already used by a corporation,
partnership or association registered with the Commission. No appeal was taken from said
decision.

It appears that during the pendency of the case, Soriano, et al., caused the registration on
April 25, 1980 of petitioner corporation, Ang Mga Kaanib sa Iglesia ng Dios Kay Kristo
Hesus, H.S.K., sa Bansang Pilipinas. The acronym “H.S.K.” stands for Haligi at Saligan ng
Katotohanan.

On March 2, 1994, respondent corporation filed before the SEC a petition praying that
petitioner be compelled to change its corporate name and be barred from using the same

CASES IN COMMERCIAL LAW REVIEW (J. Dimaampao) 4E 2017-2018 | 33

or similar name on the ground that the same causes confusion among their members as
well as the public.

Petitioner filed a motion to dismiss on the ground of lack of cause of action. The motion to
dismiss was denied. Petitionerpetitioner was declared in default for failure to file an answer
and respondent was allowed to present its evidence ex parte.

The SEC rendered a decision ordering petitioner to change its corporate name to another
not deceptively similar or identical to the same already used by the Petitioner, any
corporation, association, and/or partnership presently registered with the Commission. On
appeal, the decision was affirmed.

ISSUE: Whether or not the herein petitioner could use their registered corporate name.

RULING: NO. The SEC has the authority to deregister at all times and under all
circumstances corporate names which in its estimation are likely to spawn confusion. It is
the duty of the SEC to prevent confusion, in the use of corporate names not only for the
protection of the corporations involved but more so for the protection of the public, pursuant
to Sec. 18 of the Corporation Code in relation to the SEC Guidelines on Corporate Names.
Parties organizing a corporation must choose a name at their peril; and the use of a name
similar to one adopted by another corporation, whether a business or a nonprofit
organization, if misleading or likely to injure in the exercise of its corporate functions,
regardless of intent, may be prevented by the corporation having a prior right, by a suit for
injunction against the new corporation to prevent the use of the name.

The additional words "Ang Mga Kaanib "and "Sa Bansang Pilipinas, Inc ." in petitioner's
name are, as correctly observed by the SEC, merely descriptive of and also referring to the
members, or kaanib, of respondent who are likewise residing in the Philippines. These
words can hardly serve as an effective differentiating medium necessary to avoid confusion
or difficulty in distinguishing petitioner from respondent. This is especially so, since both
petitioner and respondent corporations are using the same acronym — H.S.K.; not to
mention the fact that both are espousing religious beliefs and operating in the same place.
Parenthetically, it is well to mention that the acronym H.S.K. used by petitioner stands for
"Haligi at Saligan ng Katotohanan"

The wholesale appropriation by petitioner of respondent's corporate name cannot find

justification under the generic word rule. A contrary ruling would encourage other
corporations to adopt verbatim and register an existing and protected corporate name, to
the detriment of the public. #VALERIANO

***

THIRD PERSONS NOT BOUND BY BY-LAWS

CHINA BANKING CORPORATION, vs. COURT OF APPEALS, and VALLEY GOLF and
COUNTRY CLUB, INC.
270 SCRA 503 G.R. No. 117604. March 26, 1997

DOCTRINE: Third persons are not bound by by-laws, except when they have knowledge
of the provisions either actually or constructively

FACTS: Stock Certificate No. 1219 of Valley Golf & Country Club, Inc. (VGCCI)
owned by Galicano Calapatia, Jr., a stockholder of the former, was subject to two public
auction sales. 1st in an extrajudicial foreclosure sale filed and won by CBC for Calapatia’s
nonpayment of his P20,000 obligation secured by way of pledge of said share, and 2 nd in
an auction sale filed and eventually sold by VGCCI for Calapatia’s overdue membership
account.

The pledge was duly noted under VCGGI’s corporate books, however the CBC won auction
was not noted, and neither did its request to transfer ownership was acceded. VGCCI

CASES IN COMMERCIAL LAW REVIEW (J. Dimaampao) 4E 2017-2018 | 34

claimed a prior right over the subject share anchored mainly on Sec. 3, Art VIII of its by-
laws which provides that "after a member shall have been posted as delinquent, the Board
may order his/her/its share sold to satisfy the claims of the Club...” CBC was only informed
of the by-law after VGCCI’s refusal to take note of the sale and request to transfer shares,
prior the conduct of the 2nd sale by VGCCI.

CBC filed for the nullification of the 2nd sale and for the issuance of a new stock certificate
in its name with the RTC of Makati. The RTC dismissed the complaint for lack of jurisdiction
over the subject matter on the theory that it involves an intra-corporate dispute and later on
denied CBC's motion for reconsideration. CBC then filed a complaint with the SEC again
for the nullification of the 2nd sale; the cancellation of any new stock certificate issued
pursuant thereto; for the issuance of a new certificate in petitioner's name; and for
damages, attorney's fees and costs of litigation. SEC upheld the 2 nd sale, stating in the
main that "(c)onsidering that the said share is delinquent, (VGCCI) had valid reason not to
transfer the share in the name of the petitioner in the books of (VGCCI) until liquidation of
delinquency.” Consequently, the case was dismissed. A subsequent MR of CBC was also
denied.

CBC appealed to the SEC en banc which held CBC having a prior right over the pledged
share and because of pledgor's failure to pay the principal debt upon maturity, appellant-
petitioner can proceed with the foreclosure of the pledged share. VGCCI sought
reconsideration but was denied the same. VGCCI sought redress from the Court of
Appeals which nullified and set aside the orders of the SEC declaring that the controversy
which involves ownership of the stock that used to belong to Calapatia, Jr. is not within the
competence of SEC to decide. CBC moved for reconsideration but the same was denied.

A petition for review on certiorari under Rule 45 of the Revised Rules of Court was filed by
CBC for the reversal of the decision of the Court of Appeals.

ISSUE: Whether CBC is bound by VGCCI's by-laws (pertaining to member’s delinquency)?

HELD: No. In order to be bound, the third party must have acquired knowledge of the
pertinent by-laws at the time the transaction or agreement between said third party and the
shareholder was entered into. Herein, at the time the pledge agreement was executed.
VGCCI could have easily informed CBC of its by-laws when it sent notice formally
recognizing CBC as pledgee of one of its shares registered in Calapatia's name. CBC's
belated notice of said by-laws at the time of foreclosure will not suffice.

By-laws signifies the rules and regulations or private laws enacted by the corporation to
regulate, govern and control its own actions, affairs and concerns and its stockholders or
members and directors and officers with relation thereto and among themselves in their
relation to it. In other words, by-laws are the relatively permanent and continuing rules of
action adopted by the corporation for its own government and that of the individuals
composing it and having the direction, management and control of its affairs, in whole or in
part, in the management and control of its affairs and activities. The purpose of a by-law is
to regulate the conduct and define the duties of the members towards the corporation and
among themselves. They are self-imposed and, although adopted pursuant to statutory
authority, have no status as public law. Therefore, it is the generally accepted rule that third
persons are not bound by by-laws, except when they have knowledge of the provisions
either actually or constructively. For the exception to the general accepted rule that third
persons are not bound by by-laws to be applicable and binding upon the pledgee,
knowledge of the provisions of the VGCCI By-laws must be acquired at the time the pledge
agreement was contracted. Knowledge of said provisions, either actual or constructive, at
the time of foreclosure will not affect pledgee's right over the pledged share. Article 2087 of
the Civil Code provides that it is also of the essence of these contracts that when the
principal obligation becomes due, the things in which the pledge or mortgage consists
maybe alienated for the payment to the creditor.

VGCCI's contention that CBC is duty-bound to know its by-laws because of Article 2099 of
the Civil Code which stipulates that the creditor must take care of the thing pledged with the

CASES IN COMMERCIAL LAW REVIEW (J. Dimaampao) 4E 2017-2018 | 35

diligence of a good father of a family, fails to convince. CBC was never informed of
Calapatia's unpaid accounts and the restrictive provisions in VGCCI's by-laws.
Furthermore, Section 63 of the Corporation Code which provides that "no shares of stock
against which the corporation holds any unpaid claim shall be transferable in the books of
the corporation" cannot be utilized by VGCCI. The term "unpaid claim" refers to "any unpaid
claim arising from unpaid subscription, and not to any indebtedness which a subscriber or
stockholder may owe the corporation arising from any other transaction." Herein, the
subscription for the share in question has been fully paid as evidenced by the issuance of
Membership Certificate 1219. What Calapatia owed the corporation were merely the
monthly dues. Hence, Section 63 does not apply.

***

AMENDMENT OF BY-LAWS

GOKONGWEI, JR. v. SECURITIES AND EXCHANGE COMMISSION

G.R. No. L-45911, April 11, 1979

DOCTRINES: An amendment to the corporation by-law which renders a stockholder

ineligible to be a director, if he be also a director in a corporation whose business is in
competition with that of the other corporation, is valid.

A director stands in a fiduciary relation to the corporation and its shareholders under the
doctrine of corporate opportunity.

FACTS: The case involves a petition with prayer for preliminary injunction to restrain
respondent Securities and Exchange Commission (SEC) and San Miguel Corporation
(SMC) from validly holding the latter’s by-law amendment that disqualifies a competitor
from nomination and election to its Board of Directors.

Petitioner, Gokongwei, owns a total of 4.2344% of the total outstanding capital stock (6,325
shares) of SMC besides being the President and substantial stockholder of Universal
Robina Corporation (URC) and Consolidated Foods Corporation (CFC) ,which he allegedly
controlled with members of his family. He owns 738,647 shares and 658,313 shares in
URC and CFC, respectively.

Gokongwei claims that the amended by-laws are invalid and unreasonable because they
were “tailored to suppress the minority” and prevent its representation in the Board, thereby
depriving him of his "vested right" to be voted for and to vote for a person of his choice as
director. He, likewise, ascribed grave abuse of discretion against SEC for failure to act with
deliberate dispatch his motions to restrain SMC in pushing through with the said amended
by-laws.

For its part, SMC asserts that subject amended by-laws are essentially a preventive
measure to assure its stockholders of reasonable protective from the unrestrained self-
interest of those charged with the promotion of the corporate enterprise. It even went
further by saying that granting petitioner’s prayer would result in violation of laws
prohibiting combinations in restraint of trade or unfair competition. Respondent corporation
pointed that the areas of competition affecting SMC with URC and CFC involved product
sales of over P400 million involving ayer pullets dressed chicken, poultry and hog feeds ice
cream, instant coffee and woven fabrics. Thus, at its annual stockholders’ meeting in 1977,
more than 90% of the outstanding shares rejected petitioner's bid for directorship.

ISSUE: Whether or not the provisions of the amended by-laws of respondent San Miguel
Corporation, disqualifying a competitor from nomination or election to the Board of
Directors are valid and reasonable

HELD: YES. Citing American jurisprudence and pursuant to Section 21 of the Corporation
Code empowering corporations to make by-laws for the qualifications of its directors, the
Supreme Court decreed that an amendment which renders ineligible, or if elected, subjects

CASES IN COMMERCIAL LAW REVIEW (J. Dimaampao) 4E 2017-2018 | 36

to removal, a director if he be also a director in a corporation whose business is in
competition with or is antagonistic to the other corporation is valid.

It has been an established law that a director or officer of a corporation may not enter into a
competing enterprise which cripples or injures the business of the corporation of which he
is an officer or director. Where the director is so employed in the service of a rival company,
he cannot serve both, but must betray one or the other.

A director stands in a fiduciary relation to the corporation and its shareholders since they
have the control and guidance of corporate affairs and property. Under the doctrine of
corporate opportunity, the protection of the corporation is called for whenever an officer or
director takes advantage of an opportunity for his or her own personal profit.

Lastly, any person who buys stock in a corporation does so with the knowledge that its
affairs are dominated by a majority of the stockholders and that he impliedly contracts that
the will of the majority shall govern in all matters within the limits of the act of incorporation
and lawfully enacted by-laws and not forbidden by law. The stockholder may be considered
to have parted with his personal right or privilege to regulate the disposition of his property
which he has invested in the capital stock of the corporation, and surrendered it to the will
of the majority of his fellow incorporators. #ZARA

***

ULTRA VIRES ACTS

Gancayco vs. City Government of Quezon City

658 SCRA 853 11 October 2011

DOCTRINE: Ultra vires acts or acts which are clearly beyond the scope of one's authority
are null and void and cannot be given any effect. The doctrine of estoppel cannot operate
to give effect to an act which is otherwise null and void or ultra vires.

FACTS: Sometime in 1950, retired Justice Emilio A. Gancayco bought a parcel of land
located at 746 EDSA, Quezon City. On 27 March 1956, the Quezon City Council issued
Ordinance No. 2904, entitled An Ordinance Requiring the Construction of Arcades, for
Commercial Buildings to be Constructed in Zones Designated as Business Zones in the
Zoning Plan of Quezon City, which required the relevant property owner to construct an
arcade with a width of 4.50 meters and height of 5.00 meters along EDSA. The regulation
of the construction of buildings was left to the discretion of local government units, as there
was yet no building code passed by the national legislature. Since, the ordinance covered
the property of Justice Gancayco, the latter questioned the constitutionality of the ordinance
on the ground that it takes private property without due process of law and just
compensation. However, the MMDA and the City Government of Quezon City both claim
that Justice Gancayco was estopped from challenging the ordinance, because, in 1965, he
asked for an exemption from the application of the ordinance. According to them, Justice
Gancayco thereby recognized the power of the city government to regulate the construction
of buildings.

ISSUE: Whether or not Justice Gancayco was estopped from assailing the validity of
Ordinance No. 2904.

HELD: NO. Justice Gancayco may still question the constitutionality of the ordinance to
determine whether or not the ordinance constitutes a taking of private property without due
process of law and just compensation. It was only in 2003 when he was allegedly deprived
of his property when the MMDA demolished a portion of the building. Because he was
granted an exemption in 1966, there was no taking yet to speak of.

Moreover, it was held by the Supreme Court in the case of Acebedo Optical
Company, Inc. v. CA that the fact that petitioner acquiesced in the special conditions
imposed by the City Mayor in subject business permit does not preclude it from challenging

CASES IN COMMERCIAL LAW REVIEW (J. Dimaampao) 4E 2017-2018 | 37

the said imposition, which is ultra vires or beyond the ambit of authority of respondent City
Mayor. Ultra vires acts or acts which are clearly beyond the scope of one's authority are
null and void and cannot be given any effect. The doctrine of estoppel cannot operate to
give effect to an act which is otherwise null and void or ultra vires. #ACHAS

***

TRUST FUND DOCTRINE

HALLEY vs. PRINTWELL, INC.

649 SCRA 116 MAY 30, 2011

DOCTRINE: Stockholders of a corporation are liable for the debts of the corporation up to
the extent of their unpaid subscriptions. They cannot invoke the veil of corporate identity as
a shield from liability, because the veil may be lifted to avoid defrauding corporate creditors.
The creditor is allowed to maintain an action upon any unpaid subscription and thereby
steps into the shoes of the corporation for the satisfaction of its debt.

The trust fund doctrine is not limited to reaching the stockholders unpaid subscriptions. The
scope of the doctrine when the corporation is insolvent encompasses not only the capital
stock, but also other property and assets generally regarded in equity as a trust fund for the
payment of corporate debts. All assets and property belonging to the corporation held in
trust for the benefit of creditors that were distributed or in the possession of the
stockholders, regardless of full paymentof their subscriptions, may be reached by the
creditor in satisfaction of its claim.

FACTS: The petitioner was an incorporator and original director of Business Media
Philippines, Inc. (BMPI).Printwell engaged in commercial and industrial printing.BMPI
commissioned Printwell for the printing of the magazine Philippines, Inc. (together with
wrappers and subscription cards) that BMPI published and sold. For that purpose, Printwell
extended 30-day credit accommodations to BMPI.

In the period from October 11, 1988 until July 12, 1989, BMPI placedwith Printwell several
orders on credit, evidenced byinvoices and delivery receipts
totalingP316,342.76.Considering that BMPI paidonlyP25,000.00,Printwell sued BMPI on
January 26, 1990 for the collection of the unpaid balance of P291,342.76 in the RTC. On
February 8, 1990,Printwell amended the complaint in order to implead as defendants all the
original stockholders and incorporators to recover on their unpaid subscriptions To prove
payment of their subscriptions, the defendant stockholders submitted in evidence BMPI
official receipt (OR) no. 217, OR no. 218, OR no. 220,OR no. 221, OR no. 222, OR no.
223, and OR no. 227

RTC rendered a decision in favor of Printwell, rejecting the allegation of payment in full of
the subscriptions in view of an irregularity in the issuance of the ORs and observing that the
defendants had used BMPIs corporate personality to evade payment and create injustice.
Applying the trust fund doctrine, the RTC declared the defendant stockholders liable to
Printwell pro rata. On August 14, 2002, the CA affirmed the RTC, holding that the
defendants resort to the corporate personality would create an injustice because Printwell
would thereby be at a loss against whom it would assert the right to collect.

Further, the CA concurred with the RTC on theapplicability of thetrust fund doctrine, under
which corporate debtors might look to the unpaid subscriptions for the satisfaction of unpaid
corporate debts. The CA declared that the inconsistency in the issuance of the ORs
rendered the claim of full payment of the subscriptions to the capital stock unworthy of
consideration; and held that the veil of corporate fiction could be pierced when it was used
as a shield to perpetrate a fraud or to confuse legitimate issues. Spouses Halley and Vieza
moved for a reconsideration, but the CA denied their motion for reconsideration.

ISSUES:
1. IS PIERCING OF THE VEIL OF CORPORATE FICTION PROPER IN THIS CASE?

CASES IN COMMERCIAL LAW REVIEW (J. Dimaampao) 4E 2017-2018 | 38

2. WHETHER OR NOT THERE IS A PROPER APPLICATION OF TRUST FUND
DOCTRINE?

RULING:
1. YES. Although a corporation has a personality separate and distinct from those of its
stockholders, directors, or officers, such separate and distinct personality is merely a fiction
created by law for the sake of convenience and to promote the ends of justice. The
corporate personality may be disregarded, and the individuals composing the corporation
will be treated as individuals, if the corporate entity is being used as a cloak or cover for
fraud or illegality;as a justification for a wrong; as an alter ego, an adjunct, or a business
conduit for the sole benefit of the stockholders. As a general rule, a corporation is looked
upon as a legal entity, unless and until sufficient reason to the contrary appears. Thus,the
courts always presume good faith, andfor that reason accord prime importance to the
separate personality of the corporation, disregarding the corporate personality only after the
wrongdoing is first clearly and convincingly established. It thus behooves the courts to be
careful in assessing the milieu where the piercing of the corporate veil shall be done.

2. YES. Both the RTC and the CA applied the trust fund doctrineagainst the defendant
stockholders, including the petitioner.

The trust fund doctrine enunciates a rule that the property of a corporation is a trust fund for
the payment of creditors, but such property can be called a trust fund only by way of
analogy or metaphor. As between the corporation itself and its creditors it is a simple
debtor, and as between its creditors and stockholders its assets are in equity a fund for the
payment of its debts.

Also, under the trust fund doctrine,a corporation has no legal capacity to release an original
subscriber to its capital stock from the obligation of paying for his shares, in whole or in
part,[37] without a valuable consideration,[38] or fraudulently, to the prejudice of
creditors.[39]The creditor is allowed to maintain an action upon any unpaid subscriptions
and thereby steps into the shoes of the corporation for the satisfaction of its debt.[40]To
make out a prima facie case in a suit against stockholders of an insolvent corporation to
compel them to contribute to the payment of its debts by making good unpaid balances
upon their subscriptions, it is only necessary to establish that thestockholders have not in
good faith paid the par value of the stocks of the corporation.

To reiterate, the petitionerwas liablepursuant to the trust fund doctrine for the corporate
obligation of BMPI by virtue of her subscription being still unpaid. Printwell, as BMPIs
creditor,had a right to reachher unpaid subscription in satisfaction of its claim.

***

DOCTRINE OF THE PIERCING OF THE CORPORATE VEIL

DONNINA C. HALLEY vs. PRINTWELL, INC.

G.R. No. 157549 May 30, 2011

DOCTRINE: Stockholders of a corporation are liable for the debts of the corporation up to
the extent of their unpaid subscriptions. They cannot invoke the veil of corporate identity as
a shield from liability, because the veil may be lifted to avoid defrauding corporate creditors.

FACTS: The petitioner was an incorporator and original director of Business Media
Philippines, Inc. (BMPI). Printwell engaged in commercial and industrial printing. BMPI
commissioned Printwell for the printing of the magazine Philippines, Inc. (together with
wrappers and subscription cards) that BMPI published and sold. For that purpose, Printwell
extended 30-day credit accommodations to BMPI. BMPI placed with Printwell several
orders on credit, evidenced by invoices and delivery receipts totaling ₱ 316,342.76.
Considering that BMPI paid only ₱ 25,000.00, Printwell sued BMPI for the collection of the
unpaid balance of ₱ 291,342.76 in the RTC. Printwell amended the complaint in order to
implead as defendants all the original stockholders and incorporators to recover on their

CASES IN COMMERCIAL LAW REVIEW (J. Dimaampao) 4E 2017-2018 | 39

unpaid subscriptions. The defendants filed a consolidated answer, averring that they all had
paid their subscriptions in full; that BMPI had a separate personality from those of its
stockholders. To prove payment of their subscriptions, the defendant stockholders
submitted in evidence BMPI official receipt (OR).

The RTC rendered a decision in favor of Printwell, rejecting the allegation of payment in full
of the subscriptions in view of an irregularity in the issuance of the ORs and observing that
the defendants had used BMPI’s corporate personality to evade payment and create
injustice. The Court of Appeals affirmed such judgment.

ISSUE: Whether or not the Court of Appeals erred in affirming RTC’s decision allowing the
piercing of the corporate veil.

RULING: NO. Although a corporation has a personality separate and distinct from those of
its stockholders, directors, or officers, such separate and distinct personality is merely a
fiction created by law for the sake of convenience and to promote the ends of justice. The
corporate personality may be disregarded, and the individuals composing the corporation
will be treated as individuals, if the corporate entity is being used as a cloak or cover for
fraud or illegality; as a justification for a wrong; as an alter ego, an adjunct, or a business
conduit for the sole benefit of the stockholders. As a general rule, a corporation is looked
upon as a legal entity, unless and until sufficient reason to the contrary appears. Thus, the
courts always presume good faith, and for that reason accord prime importance to the
separate personality of the corporation, disregarding the corporate personality only after the
wrongdoing is first clearly and convincingly established.It thus behooves the courts to be
careful in assessing the milieu where the piercing of the corporate veil shall be done.
#BELO

***

REDEMPTION OF SHARES

REPUBLIC PLANTERS BANK, vs. HON. ENRIQUE A. AGANA, SR., ROBES-

FRANCISCO REALTY & DEVELOPMENT CORPORATION and ADALIA F. ROBES

DOCTRINE:
FACTS: Private respondent Corporation secured a loan from petitioner in the amount of
P120,000.00. As part of the proceeds of the loan, preferred shares of stocks were issued to
private respondent Corporation, through its officers then, private respondent Adalia F.
Robes and one Carlos F. Robes. In other words, instead of giving the legal tender totaling
to the full amount of the loan, which is P120,000.00, petitioner lent such amount partially in
the form of money and partially in the form of stock certificates numbered 3204 and 3205,
each for 400 shares with a par value of P10.00 per share, or for P4,000.00 each, for a total
of P8,000.00. Said stock certificates were in the name of private respondent Adalia F.
Robes and Carlos F. Robes, who subsequently, however, endorsed his shares in favor of
Adalia F. Robes.
Said certificates of stock bear the following terms and conditions:

"The Preferred Stock shall have the following rights, preferences, qualifications and
limitations, to wit:
1. Of the right to receive a quarterly dividend of One Per Centum (1%), cumulative and
participating.
2. That such preferred shares may be redeemed, by the system of drawing lots, at any
time after two (2) years from the date of issue at the option of the Corporation. x x x."

On January 31, 1979, private respondents proceeded against petitioner and filed a
Complaint anchored on private respondents' alleged rights to collect dividends under the
preferred shares in question and to have petitioner redeem the same under the terms and
conditions of the stock certificates.

ISSUE: Are private respondents Robes entitled to redeem their share

CASES IN COMMERCIAL LAW REVIEW (J. Dimaampao) 4E 2017-2018 | 40

RULING: NO. While the stock certificate does allow redemption, the option to do so was
clearly vested in the petitioner bank. The redemption therefore is clearly the type known as
"optional". Thus, except as otherwise provided in the stock certificate, the redemption rests
entirely with the corporation and the stockholder is without right to either compel or refuse
the redemption of its stock. Furthermore, the terms and conditions set forth therein use the
word "may". It is a settled doctrine in statutory construction that the word "may" denotes
discretion, and cannot be construed as having a mandatory effect. We fail to see how
respondent judge can ignore what, in his words, are the "very wordings of the terms and
conditions in said stock certificates" and construe what is clearly a mere option to be his
legal basis for compelling the petitioner to redeem the shares in question.

Moreover, the claim of private respondent is already barred by prescription as well as

laches. Art. 1144 of the New Civil Code provides that a right of action that is founded upon
a written contract prescribes in ten (10) years. The letter-demand made by the private
respondents to the petitioner was made only on January 5, 1979, or almost eighteen years
after receipt of the written contract in the form of the stock certificate. Had the private
respondents been vigilant in asserting their rights, the redemption could have been effected
at a time when the petitioner bank was not suffering from any financial crisis.
#CABATUANDO

***

OFFICERS ARE NOT GENERALLY LIABLE

LABORTE vs PAGSANJAN TOURISM CONSUMERS’ COOPERATIVE

713 SCRA 536 January 15, 2014

DOCTRINE: As a general rule, the officer cannot be held personally liable with the
corporation, whether civilly or otherwise, for the consequences of his acts, if he acted for
and in behalf of the corporation, within the scope of his authority and in good faith.

FACTS: Petitioner Philippine Tourism Authority (PTA) is a government-owned and

controlled corporation that administers tourism zones. It used to operate the Philippine
Gorge Tourist Zone Administration Complex, a declared tourist zone in Pagsanjan, Laguna.
Respondent Pagsanjan Tourism Consumers Cooperative (PTCC) is a cooperative
organized since 1988 under the Cooperative Code of the Philippines. The other individual
respondents are PTCC employees, consisting of restaurant staff and boatmen at the PTA
Complex.

In 1989, PTA allowed PTTC to operate a restaurant business located at the main building
of the PTA Complex and the boat ride services to ferry guest and tourists to and from the
Pagsanjan Falls, paying a certain percentage of its earning to the PTA.

In 1993, the PTA implemented a reorganization and reshuffling in its top level
management. Petitioner Rodolfo Laborte (Laborte) was designated as Area Manager with
direct supervision over the PTA Complex and other entities at the Southern Luzon. Laborte
served a written notice upon respondents to cease the operation of the latters restaurant
business and boat ride services in view of the rehabilitation, facelifting and upgrading
project of the PTA Complex.
PTCC filed with the RTC a Compaint for Prohibition, Injunction and Damages with
Temporary Restraining Order (TRO) and Preliminary Injunction against Laborte. RTC then
issued the TRO prayed for, prohibiting Laborte from causing PTCC to cease operations,
closing the operation of the PTCCs restaurant and other activities, evicting PTCC and
demolishing the building.

ISSUE: WON the closure of PTCCs restaurant and boat ride business was a valid and
lawful exercise of PTAs management prerogative?

HELD: YES. It was a valid exercise of management prerogative.

CASES IN COMMERCIAL LAW REVIEW (J. Dimaampao) 4E 2017-2018 | 41

The PTA is a government owned and controlled corporation which was mandated to
administer tourism zones. Based on this mandate, it was the PTAs obligation to adopt a
comprehensive program and project to rehabilitate and upgrade the facilities of the PTA
Complex. The Court finds that there was indeed a renovation of the Pagsanjan
Administration Complex which was sanctioned by the PTA main office and such renovation
was done in good faith in performance of its mandated duties as tourism administrator. In
the exercise of its management prerogative to determine what is best for the said agency,
the PTA had the right to terminate t any moment the PTCCs operations of the restaurant
and the boat ride services since the PTCC has no contract, concession or franchise from
the PTA to operate the above-mentioned businesses. As shown by the records, the
operation of the restaurant and the boat ride services was merely tolerated, in order to
extend financial assistance to its PTA employee-members who are members of the then
fledging PTCC.

Except for receipts for rents paid by the PTCC to the PTA, the respondents failed to show
any contract, concession agreement or franchise to operate the restaurant and boat ride
services. In fact, the PTCC initially did not implead the PTA in its Complaint since it was
well aware that there was no contract executed between the PTCC and the PTA. While the
PTCC has been operating the restaurant and boat ride services for almost ten (10) years
until its closure, the same was by mere tolerance of the PTA.

In one case, the Court upheld the authority of government agencies to terminate at any
time hold-over permits. Thus, considering that the PTCCs operation of the restaurant and
the boat ride services was by mere tolerance, the PTA can, at any time, terminate such
operation.

With respect to Laborte's liability in his official and personal capacity, the Court finds that
Laborte was simply implementing the lawful order of the PTA Management. As a general
rule "the officer cannot be held personally liable with the corporation, whether civilly or
otherwise, for the consequences of his acts, if acted for and in behalf of the corporation,
within the scope of his authority and in good faith." Furthermore, the Court also notes that
the charges against petitioners Laborte and the PTA for grave coercion and for the violation
of R.A. 6713 have all been dismissed. Thus, the Court finds no basis to hold petitioner
Laborte liable. #Castaneda

***

CORPORATION AS A JURIDICAL ENTITY

MAM REALTY DEVELOPMENT CORP. VS NLRC

DOCTRINE: A corporation, being a juridical entity, may act only through its directors,
officers and employees. Obligations incurred by them, acting as such corporate agents, are
not theirs but the direct accountabilities of the corporation they represent.

FACTS:
Respondent Balbastro filed a complaint with the Labor Arbiter. Balbastro alleged that he
was employed by MAM as a pump operator in 1982 and had since performed such work at
its Rancho Estate, Marikina, Metro Manila. MAM countered that Balbastro had previously
been employed by Francisco Cacho and Co., Inc., the developer of Rancho Estates. He
was engaged, however, not as an employee, but as a service contractor, at an agreed fee
of P1,590.00 a month. Labor Arbiter dismissed the complaint for lack of merit. On appeal,
NLRC reversed its decision. However, the Supreme Court ruled that NLRC erred in holding
Centeno jointly and severally liable with MAM.
ISSUE: Whether or not Manuel Centeno, Vice President of MAM, is personally liable.

HELD: NO. A corporation, being a juridical entity, may act only through its directors,
officers and employees. Obligations incurred by them, acting as such corporate agents, are

CASES IN COMMERCIAL LAW REVIEW (J. Dimaampao) 4E 2017-2018 | 42

not theirs but the direct accountabilities of the corporation they represent. True, solidary
liabilities may at times be incurred but only when exceptional circumstances warrant such
as, generally, in the following cases:
1. When directors and trustees or, in appropriate cases, the officers of a corporation —
(a) vote for or assent to patently unlawful acts of the corporation;
(b) act in bad faith or with gross negligence in directing the corporate affairs;
(c) are guilty of conflict of interest to the prejudice of the corporation, its stockholders or
members, and other persons.
2. When a director or officer has consented to the issuance of watered stocks or who,
having knowledge thereof, did not forthwith file with the corporate secretary his written
objection thereto.
3. When a director, trustee or officer has contractually agreed or stipulated to hold himself
personally and solidarily liable with the Corporation.
4. When a director, trustee or officer is made, by specific provision of law, personally liable
for his corporate action.
In labor cases, for instance, the Court has held corporate directors and officers solidarily
liable with the corporation for the termination of employment of employees done with malice
or in bad faith.
In the case at Bench, there is nothing substantial on record that can justify, prescinding
from the foregoing, petitioner Centeno's solidary liability with the corporation. #Correa

***

TERM vs TENURE

VALLE VERDE COUNTRY CLUB, INC. (VVCC) VS. VICTOR AFRICA

598 SCRA 195, 4 September 2009

DOCTRINE: The holdover period is not part of the term of office of a member of the board
of directors. The vacancy referred to in Sec. 29 contemplates a vacancy (other than by
removal by the stockholders) occurring within the director’s term of office and the successor
so elected to fill in a vacancy shall be elected only for the unexpired term of the his
predecessor in office.

FACTS: During the annual stockholders meeting of VVC, Jaime Dinglasan, Eduardo
Makalintal and 7 others were elected as members of the Board of Directors (BOD). From
1997-2001, the requisite quorum for holding the stockholders meeting were not obtained
thus these directors continued to serve in the VVCC Board in a hold-over capacity. On
1998, Dinglasan resigned from his position as member of the Board. In a meeting held by
the BOD thereafter, the remaining directors, still constituting a quorum, elected Eric Roxas
to fill in the vacancy. A year later, Makalintal also resigned and he was replaced by Jose
Ramirez who was elected by the remaining members of the board in 2001.

Africa, a member of VVCC, questioned the election of Roxas and Ramirez as members of
the Board with the SEC questioning the validity of Roxas appointment and with the RTC
questioning the validity of Ramirez appointment. He alleged that the appointment of Roxas
is contrary to the provisions of Sec. 29 in relation to Sec. 23 of the CCP. He claimed that a
year after Makalintal’s election in 1996, his term as well as those of the other members of
the VVCC Board should be considered to have already expired. Thus, the resulting
vacancy should have been filled by the stockholders in a regular or special meeting called
for that purpose, and not by the remaining members of the VVCC Board, as was done in
this case. He further contended that for the members to exercise the authority to fill in
vacancies in the board of directors, Section 29 requires, among others, that there should be
an unexpired term during which the successor-member shall serve. Since Makalintal’s term
had already expired with the lapse of the one-year term provided in Section 23, there is no
more unexpired term during which Ramirez could serve.

The RTC, through a partial decision, ruled in favor of Africa and declared the election of
Ramirez as null and void. The SEC issued a similar ruling regarding the election of Roxas.

CASES IN COMMERCIAL LAW REVIEW (J. Dimaampao) 4E 2017-2018 | 43

VVCC filed a petition for review on certiorari. VVCC alleges that a member’s term shall be
for one year and until his successor is elected and qualified; otherwise stated, a member’s
term expires only when his successor to the Board is elected and qualified. Thus, until such
time as [a successor is] elected or qualified in an annual election where a quorum is
present, VVCC contends that the term of a member of BOD has yet not expired. As the
vacancy in this case was caused by Makalintal’s resignation, not by the expiration of his
term, VVCC insists that the board rightfully appointed Ramirez to fill in the vacancy.

ISSUE: Whether or not the remaining directors of the corporation’s Board, still constituting
a quorum, can elect another director to fill in a vacancy caused by the resignation of a hold-
over director.

RULING: NO. The resolution of this legal issue is significantly hinged on the determination
of what constitutes a directors term of office. The “term” is defined as the time during which
the officer may claim to hold the office as of right. It is distinguished from “tenure” in that the
officer’s “tenure” represents the term during which the incumbent actually holds office. The
tenure may be shorter (or in case of holdover, longer) than the term for reasons within or
beyond the power of the incumbent. When Sec. 23 of the CCP declares that the board of
directors shall hold office for 1 year until their successors are elected and qualified, it
means that the term of the members of the board of directors shall be only for one year;
their term expires one year after election to the office. The holdover period - the lapse of
one year from a member’s election to the Board and until his successor’s election and
qualification – is not part of the director’s original term of office, nor is it a new term. It
constitutes part of his tenure.

After the lapse of 1 year from Makalintal’s election as member of the VVCC Board in 1996,
his term of office is deemed to have already expired. That he continued to serve in the
Board in a holdover capacity cannot be considered as extending his term. His term of office
began in 1996 and expired in 1997, but, by virtue of the holdover doctrine, he continued to
hold office until his resignation on 1998. This holdover period, however, is not to be
considered as part of his term, which, as declared, had already expired. With the expiration
of his term of office, a vacancy resulted which, by the terms of Sec. 29, must be filled by the
stockholders of VVCC in a regular or special meeting called for the purpose.

Under Sec. 29, in cases where the vacancy in the corporation’s board of directors is
caused not by the expiration of a members term, the successor so elected to fill in a
vacancy shall be elected only for the unexpired term of the his predecessor in office. The
law has authorized the remaining members of the board to fill in a vacancy only in specified
instances, so as not to retard or impair the corporations operations; yet, in recognition of
the stockholders right to elect the members of the board, it limited the period during which
the successor shall serve only to the unexpired term of his predecessor in office. The
vacancy referred to contemplates a vacancy occurring within the director’s term of office.
When a vacancy is created by the expiration of a term, logically, there is no more unexpired
term to speak of. Hence, Section 29 declares that it shall be the corporation’s stockholders
who shall possess the authority to fill in a vacancy caused by the expiration of a member’s
term. As correctly pointed out by the RTC, when remaining members of the VVCC Board
elected Ramirez to replace Makalintal, there was no more unexpired term to speak of, as
Makalintal’s one-year term had already expired. #FRANCISCO

***

CASES IN COMMERCIAL LAW REVIEW (J. Dimaampao) 4E 2017-2018 | 44

DERIVATIVE SUIT

OSCAR REYES vs HON. REGIONAL TRIAL COURT OF MAKATI

GR No. 165744; Aug. 11, 2008

DOCTRINE: REQUISITES OF DERIVATIVE SUIT: a) the party bringing suit should be a

shareholder during the time of the act or transaction complained of, the number of shares
not being material; b) the party tried to exhaust intra-corporate remedies, i.e., has made a
demand on the board of directors for the appropriate relief, but the latter has failed or
refused to heed his plea; and c) the cause of action actually devolves on the corporation
and not to the particular stockholder bringing the suit.

FACTS: Oscar and Rodrigo Reyes are two of the 4 children of spouses Pedro and
Anastacia Reyes. Pedro, Anastacia, Oscar and Rodrigo each owned shares of stock of
Zenith Insurance Corporation, a corporation established by their family. Spouses Pedro and
Anastacia later died and the former’s estate was partitioned among his estates, while no
settlement and partition have been made with regard to the estate of Anastacia. Zenith
Corporation and Oscar filed a complaint with the SEC (later transferred to RTC by virtue of
PD No. 902-A) against Oscar, the complaint stated that it is a derivative suit initiated and
filed by Rodrigo to obtain an accounting of the funds and assets of Zenith Insurance
Corporation which are now or formerly in the control, custody and/or possession of Oscar
and to determine the shares of stock of deceased spouses Pedro and Anastacia hat were
arbitrarily and fraudulently appropriated by Oscar for himself which were not collated and
taken into account in the partition, distribution, and/or settlement of the estate of deceased
spouses, which should now be delivered to his brothers and sisters.

Oscar denied the charge that he illegally acquired the shares of Anastacia Reyes. He
further alleged that he purchased the subject shares with his own funds from the unissued
stocks of Zenith, and that the suit is not a bona fide derivative suit because the requisites
have not been complied with.

ISSUE: Whether or not the complaint is a bona fide derivative suit.

HELD: No. Rodrigo’s bare claim that the complaint is a derivative suit will not suffice to
confer jurisdiction on the RTC (as a special commercial court) if he cannot comply with the
requisites for the existence of a derivative suit. These requisites are: a) the party bringing
suit should be a shareholder during the time of the act or transaction complained of, the
number of shares not being material; b) the party tried to exhaust intra-corporate remedies,
i.e., has made a demand on the board of directors for the appropriate relief, but the latter
has failed or refused to heed his plea; and c) the cause of action actually devolves on the
corporation and not to the particular stockholder bringing the suit.

Based on these standards, the Court holds that the allegations of the present complaint do
not amount to derivative suit.

First, Rodrigo is not a shareholder with respect to the shareholdings originally belonging to
Anastacia; he only stands as a transferee-heir whose rights to the share are inchoate and
unrecorded, With respect to his own individually-held shareholdings, Rodrigo has not
alleged any individual cause or basis as a shareholder on record to proceed against Oscar.

Second, in order that a stockholder may show a right to sue on behalf of the corporation, he
must allege with some particularity in his complaint that he has exhausted his remedies
within the corporation by making a sufficient demand upon the directors or other officers for
appropriate relief with the expressed intent to sue if relief is denied.

Lastly, we find no injury, actual or threatened, alleged to have been done to the corporation
due to Oscar’s acts. If indeed he illegally and fraudulently transferred Anastacia’s shares in
his own name, then the damage is not to the corporation but to his co-heirs; the wrongful
transfer did not affect the capital stock or the assets of Zenith. As already mentioned,

CASES IN COMMERCIAL LAW REVIEW (J. Dimaampao) 4E 2017-2018 | 45

neither has Rodrigo alleged any particular cause or wrongdoing against the corporation that
he can champion in his capacity as a shareholder on record.

In summary, whether as an individual or as a derivative suit, the RTC – sitting as special

commercial court- has no jurisdiction to hear Rodrigo’s complaint since what is involved is
the determination and distribution of successional rights to the shareholdings of Anastacia
Reyes. Rodrigo’s proper remedy, under the circumstances, is to institute a special
proceeding for the settlement of the estate of the deceased Anastacia Reyes, a move that
is not foreclosed by the dismissal of this present complaint. #GASPI

***

DOCTRINE OF APPARENT AUTHORITY

PHILIPPINE REALTY AND HOLDINGS CORP. v. LEY CONSTRUCTION

AND DEV’T. CORP.

FACTS: Ley Construction and Development Corporation (LCDC) was the project
contractor for the construction of several buildings for Philippine Realty & Holdings
Corporation (PRHC), the project owner. Engineer Dennis Abcede (Abcede) was the project
construction manager of PRHC, while Joselito Santos (Santos) was its general manager
and vice-president for operations.The two corporations entered into four major construction
projects, one of them is the Tektite Building. In the course of its construction, it became
evident to both parties that LCDC would not be able to finish the project within the agreed
period. To ensure that the project would be completed, they entered into another
agreement. Abcede asked LCDC to advance the amount necessary to complete
construction. Its president acceded, on the absolute condition that it be allowed to escalate
the contract price. Abcede replied that he would take this matter up with the board of
directors of PRHC. The board of directors turned down the request for an escalation
agreement. Neither PRHC nor Abcede gave notice to LCDC of the alleged denial of the
proposal. However, Abcede sent a formal letter to LCDC, asking for its conformity, to the
effect that should it infuse P36 million into the project, a contract price escalation for the
same amount would be granted in its favor by PRHC. Notwithstanding the absence of a
signature above PRHC's name in the said letter, LCDC proceeded with the construction of
the Tektite Building, expending the entire amount necessary to complete the project. It
infused amounts totaling P38,248,463.92.

In a letter, LCDC, through counsel, demanded payment of the agreed escalation price of
P36 million. In its reply, PRHC suddenly denied any liability for the escalation price.

ISSUE: Whether or not a valid escalation agreement was entered into by the parties.

HELD: YES. It is true that no representative of PRHC signed under its typewritten name,
where a signature should traditionally appear, to show the company's acceptance and
approval of the contents of the letter-agreement. This Court, however, finds that the
signature of Abcede is sufficient to bind PRHC.

As its construction manager, his very act of signing a letter embodying the P36 million
escalation agreement produced legal effect, even if there was a blank space for a higher
officer of PRHC to indicate approval thereof. At the very least, he indicated authority to
make such representation on behalf of PRHC.

In Yao Ka Sin Trading v. Court of Appeals, et al., this Court discussed the applicable rules
on the doctrine of apparent authority, to wit: The rule is of course settled that "[a]lthough an
officer or agent acts without, or in excess of, his actual authority if he acts within the scope
of an apparent authority with which the corporation has clothed him by holding him out or
permitting him to appear as having such authority, the corporation is bound thereby in favor
of a person who deals with him in good faith in reliance on such apparent authority, as
where an officer is allowed to exercise a particular authority with respect to the business, or
a particular branch of it, continuously and publicly, for a considerable time." Also, "if a

CASES IN COMMERCIAL LAW REVIEW (J. Dimaampao) 4E 2017-2018 | 46

private corporation intentionally or negligently clothes its officers or agents with apparent
power to perform acts for it, the corporation will be estopped to deny that such apparent
authority is real, as to innocent third persons dealing in good faith with such officers or
agents."

In People's Aircargo and Warehousing Co. Inc. v. Court of Appeals, et al., the SC held that
apparent authority is derived not merely from practice: Its existence may be ascertained
through (1) the general manner in which the corporation holds out an officer or agent as
having the power to act or, in other words, the apparent authority to act in general, with
which it clothes him; or (2) the acquiescence in his acts of a particular nature, with actual or
constructive knowledge thereof, whether within or beyond the scope of his ordinary powers.

Santos and Abcede held themselves out as possessing the authority to act, negotiate and
sign documents on behalf of PRHC; and that PRHC sanctioned these acts. It would be the
height of incongruity to now allow PRHC to deny the extent of the authority with which it
had clothed both individuals. We find that Abcede's role as construction manager, with
regard to the construction projects, was akin to that of a general manager with regard to the
general operations of the corporation he or she is representing.

Consequently, the escalation agreement entered into by LCDC and Abcede is a valid
agreement that PRHC is obligated to comply with. This escalation agreement — whether
written or verbal — has lifted, through novation, the prohibition contained in the Tektite
Building Agreement. #GERONIMO

***

DOCTRINE OF APPARENT AUTHORITY

ADVANCE PAPER CORPORATION vs. ARMA TRADERS CORPORATION

DOCTRINE: A corporate officer or agent may represent and bind the corporation in
transactions with third persons to the extent that the authority to do so has been conferred
upon him, and this includes powers as, in the usual course of the particular business, are
incidental to, or may be implied from, the powers intentionally conferred, powers added by
custom and usage, as usually pertaining to the particular officer or agent, and such
apparent powers as the corporation has caused person dealing with the officer or agent to
believe that it has conferred. - on Doctrine of Apparent Authority

FACTS: On various dates from September to December 2013, Arma Traders purchased on
credit notebooks and other paper products amounting to Php 7,000,000 from Advance
Paper. The President and Treasurer of Arma Traders also obtained loans from Advance
Paper. Arma Traders needed the loan to settle its obligations to other suppliers because its
own collectibles did not arrive on time. Because of its good business relations with Arma
Traders, Advance Paper extended the loans.

As payment for the purchases on credit and the loan transactions, Arma Traders issued 82
postdated checks payable to cash, with the President and Treasurer signing as authorized
bank signatories. On maturity date, the checks were dishonored. Despite repeated
demands, Arma Traders refused to pay claiming that the loans were the personal
obligations of its President and Treasurer. Arma Traders theorized that the loan
transactions were ultra vires because its board of directors did not issue a board resolution
authorizing its officers to obtain the loans. Advance Paper counters that the Articles of
Incorporation of Arma Traders provides that the corporation may borrow or raise money to
meet the financial requirements of its business, and that the President and Treasurer
exercised sole management and control over the corporation.

ISSUE: Whether or not Arma Traders is liable to pay the loans.

RULING: YES. Arma Traders is liable to pay the loans on the basis of the doctrine of
apparent authority.

CASES IN COMMERCIAL LAW REVIEW (J. Dimaampao) 4E 2017-2018 | 47

The doctrine of apparent authority provides that a corporation will be estopped from
denying the agent’s authority if it knowingly permits one of its officers or any other agent to
act within the scope of an apparent authority, and it holds him out to the public as
possessing the power to do those acts. The doctrine of apparent authority does not apply if
the principal did not commit any act or conduct which a third party knew and relied upon in
good faith as a result of the exercise of reasonable prudence. Moreover, the agent’s act or
conduct must have produced a change of position to the third party’s detriment.

Under Section 23 of the Corporation Code, the power and responsibility to decide whether
the corporation should enter into a contract that will bind the corporation is lodged in the
board, subject to the articles of incorporation, bylaws, or relevant provisions of law.
However, the board of directors may validly delegate some of its functions and powers to
officers, committees or agents. A corporate officer or agent may represent and bind the
corporation in transactions with third persons to the extent that the authority to do so has
been conferred upon him, and this includes powers as, in the usual course of the particular
business, are incidental to, or may be implied from, the powers intentionally conferred,
powers added by custom and usage, as usually pertaining to the particular officer or agent,
and such apparent powers as the corporation has caused person dealing with the officer or
agent to believe that it has conferred.

Arma Traders is liable to pay despite the lack of board resolution authorizing the Preident
and Treasurer to obtain the loans. Arma Trader’s Articles of Incorporation provides that the
corporation may borrow or raise money to meet the financial requirements of its business
by the issuance of bonds, promissory notes and other evidence of indebtedness. Likewise,
the sole management of Arma Traders was left to the President and Treasurer. Thus, Arma
Traders bestowed upon these officers the power to transact with third person without the
necessary written authority from its non-performing board of directors. Arma Traders failed
to take precautions to prevent its own laxity in its business dealings, Arma Traders is now
estopped from denying the officers’ authority to obtain loan from Advance Paper. (copied
as is in Justice D’s book) #JAMES

***

DOCTRINE OF APPARENT AUTHORITY

PHILIPPINE REALTY AND HOLDINGS CORPORATION vs. LEY CONSTRUCTION AND

DEVELOPMENT CORPORATION
G.R. No. 165548, June 13, 2011

DOCTRINE: Doctrine of Apparent Authority; Although an officer or agent acts without, or in

excess of, his actual authority if he acts within the scope of an apparent authority with
which the corporation has clothed him by holding him out or permitting him to appear as
having such authority, the corporation is bound thereby in favor of a person who deals with
him in good faith in reliance on such apparent authority, as where an officer is allowed to
exercise a particular authority with respect to the business, or a particular branch of it,
continuously and publicly, for a considerable time.

FACTS: Ley Construction and Development Corporation (LCDC) and Philippine Realty &
Holdings Corporation (PRHC) entered into four major construction projects, one of which is
the construction of the Tektite Building. The agreement contained a fixed price which shall
not be subject to escalation. This was signed by a Mr. Campos under the words "Phil.
Realty & Holdings Corp." and by Joselito Santos (its general manager and vice-president
for operations) as a witness. Manuel Ley, the president of LCDC, signed under the words
"Ley Const. & Dev. Corp."

In the course of the construction, it became evident to both parties that LCDC would not be
able to finish the project within the agreed period due to the sudden, unexpected hike in the
prices of cement and other construction materials. It appeared that even if LCDC were able
to collect the entire balance from the contract, the collected amount would still be

CASES IN COMMERCIAL LAW REVIEW (J. Dimaampao) 4E 2017-2018 | 48

insufficient to purchase all the materials needed to complete the construction of the
building. LCDC undertook to advance the amount necessary to complete construction on
the absolute condition that it be allowed to escalate the contract price. Engineer Dennis
Abcede, the project construction manager of PRHC, promised to take the matter up with
the board of directors of PRHC. However, the Board turned down the request. Abcede did
not inform LCDC, instead, he sent a formal letter to LCDC, asking for its conformity, to the
effect that should it infuse P36 million into the project, a contract price escalation for the
same amount would be granted in its favor by PRHC. The blank above the words "PHIL.
REALTY & HOLDINGS CORP." was never signed.

After the construction, LCDC demanded payment but PRHC denied any liability claiming
that LCDC had incurred delay and that the Board denied the proposal for an escalation
price.

ISSUE: W/N a valid escalation agreement was entered into by the parties.

HELD: YES. The formal letter sent by Abcede to LCDC is not a simple letter, but rather a
letter-agreement — a contract — which because of the existence of the consent of both
parties become valid and binding. The signature of Abcede, alone, is sufficient to bind
PRHC. As its construction manager, his very act of signing a letter embodying the P36
million escalation agreement produced legal effect, even if there was a blank space for a
higher officer of PRHC to indicate approval thereof. At the very least, he indicated authority
to make such representation on behalf of PRHC. Also, Santos and Abcede held
themselves out as possessing the authority to act, negotiate and sign documents on behalf
of PRHC; and that PRHC sanctioned these acts. It would be the height of incongruity to
now allow PRHC to deny the extent of the authority with which it had clothed both
individuals. Abcede's role as construction manager, with regard to the construction projects,
was akin to that of a general manager with regard to the general operations of the
corporation he or she is representing. Consequently, the escalation agreement entered into
by LCDC and Abcede is a valid agreement that PRHC is obligated to comply with.
#LABRADOR

***

KINDS OF SHARES; DOCTRINE OF EQUALITY OF SHARES

COMMISSIONER OF INTERNAL REVENUE v. COURT OF APPEALS

G.R. No. 108576; January 20, 1999

DOCTRINE: A common stock represents the residual ownership interest in the corporation.
It is a basic class of stock ordinarily and usually issued without extraordinary rights or
privileges, and entitles the shareholder to a pro rata division of profits. Preferred stocks, on
the other hand, are those which entitle the shareholder to some priority on dividends and
asset distribution. Both shares are part of the corporation’s capital stock.

Doctrine of equality of shares – all stocks issued by the corporation are presumed equal
with the same privileges and liabilities, provided that the Articles of Incorporation is silent on
such differences.

FACTS: Don Andres Soriano, formed in the 1930’s the corporation “A Soriano Y Cia,”
predecessor of ANSCOR. On December 30, 1964, he died. In 1968, pursuant to a Board
Resolution, ANSCOR redeemed 28,000 common shares from Don Andres’ estate. On the
same year, the Board further increased ANSCOR’s capital stock to P75M divided into
150,000 preferred shares and 600,000 common shares. About a year later, ANSCOR again
redeemed 80,000 common shares from Don Andres’ estate, further reducing the latter’s
common shareholdings.

ANSCOR’s business purpose for both redemptions of stock is to partially retire said stocks
as treasury shares in order to reduce the company’s foreign exchange remittances in case
cash dividends are declared.

CASES IN COMMERCIAL LAW REVIEW (J. Dimaampao) 4E 2017-2018 | 49

In 1973, after examining ANSCOR’s books of account and records, Revenue Examiners
issued a report proposing that ANSCOR be assessed for deficiency withholding tax-at-
source, pursuant to the 1939 Revenue Code, for the year 1968 and the second quarter of
1969 based on the transactions of exchange and redemptions of stocks. Subsequently,
ANSCOR filed a petition for review with the CTA assailing the tax assessments on the
redemptions and exchange of stocks. The CTA reversed the BIR’s ruling after finding
sufficient evidence to overcome the prima facie correctness of the questioned
assessments. The CA affirmed the ruling of the CTA. Hence, the present petition.

ISSUE: Whether or not petitioner’s contention as regard ANSCOR’s tax liability is correct.

RULING: No. The exchange of common with preferred shares in this case is not taxable. It
produced no realized income to the subscriber, but only a modification of the subscriber’s
rights and privileges, which is not a flow of wealth for tax purposes.

Both the CTA and the CA found that ANSCOR reclassified its shares into common and
preferred, and that parts of the common shares of the Don Andres estate and all of Doña
Carmen shares were exchanged for the whole 150,000 preferred shares. Thereafter, both
remained as corporate subscribers except that their subscriptions now included preferred
shares. There was no change in their proportional interest after the exchange. There was
no cash flow. Both stocks had the same par value. Needless to say, it was a mere
corporate paper transaction.

It would have been different if the exchange transaction resulted into a flow of wealth, in
which case income tax may be imposed. Reclassification of shares does not always bring
any substantial alteration in the subscriber’s proportional interest. But the exchange is
different – there would be a shifting of the balance of stock features, like priority in dividend
declarations or absence of voting rights. Yet, neither the reclassification nor exchange per
se yields realized income for tax purposes.

A common stock represents the residual ownership interest in the corporation. It is a basic
class of stock ordinarily and usually issued without extraordinary rights or privileges, and
entitles the shareholder to a pro rata division of profits. Preferred stocks, on the other hand,
are those which entitle the shareholder to some priority on dividends and asset distribution.
Both shares are part of the corporation’s capital stock. Both stockholders are no different
from ordinary investors who take on the same investment risks. Preferred and common
shareholders participate in the same venture, willing to share in the profits and losses of the
enterprise.

Moreover, under the doctrine of equality of shares, all stocks issued by the corporation are
presumed equal with the same privileges and liabilities, provided that the Articles of
Incorporation is silent on such differences.

Here, the exchange of share, without more, produces no realized income to the subscriber.
There is only a modification of the subscriber’s rights and privileges – which is not a flow of
wealth for tax purposes. The issue of taxable dividend may arise only once a subscriber
disposes of his interest and not when there is still maintenance of proprietary interest.
#LATORRE

***

CASES IN COMMERCIAL LAW REVIEW (J. Dimaampao) 4E 2017-2018 | 50

REDEEMABLE SHARES

Republic Planters Bank v. Agana

G.R. No. 51765 March 3, 1997

DOCTRINE: While redeemable shares may be redeemed regardless of the existence of

unrestricted retained earnings, this is subject to the condition that the corporation has, after
such redemption, assets in its books to cover debts and liabilities inclusive of capital stock.
Redemption, therefore, may not be made where the corporation is insolvent or if such
redemption will cause insolvency or inability of the corporation to meet its debts as they
mature.

FACTS: On September 18, 1961, private respondent Robes-Francisco Realty and

Development Corporation (Corporation) secured a loan from petitioner Republic Planters
Bank (RPB) in the amount of P120,000.00. As part of the proceeds of the loan, preferred
shares of stocks were issued to private respondent Corporation, through its officers then,
private respondent Adalia F. Robes and one Carlos F. Robes. In other words, instead of
giving the legal tender totaling to the full amount of the loan, petitioner lent such amount
partially in the form of money and partially in the form of stock certificates numbered 3204
and 3205. Said stock certificates were in the name of private respondent Adalia F. Robes
and Carlos F. Robes, who subsequently, however, endorsed his shares in favor of Adalia
F. Robes.

Said certificates of stock bear the following terms and conditions:

"The Preferred Stock shall have the following rights, preferences, qualifications and
limitations, to wit:
1. Of the right to receive a quarterly dividend of One Per Centum (1%), cumulative and
participating. xxx
2. That such preferred shares may be redeemed, by the system of drawing lots, at any
time after two (2) years from the date of issue at the option of the Corporation. x x x."

On January 31, 1979, private respondents proceeded against petitioner and filed a
Complaint anchored on private respondents' alleged rights to collect dividends under the
preferred shares in question and to have petitioner redeem the same under the terms and
conditions of the stock certificates.
The trial court rendered the herein assailed decision in favor of private respondents
ordering petitioner to pay private respondents the face value of the stock certificates as
redemption price, plus 1% quarterly interest thereon until full payment.

ISSUE: Whether or not RPB may be compelled to redeem the preferred shares issued to
Agana

RULING: Redeemable shares, on the other hand, are shares usually preferred, which by
their terms are redeemable at a fixed date, or at the option of either issuing corporation, or
the stockholder, or both at a certain redemption price.[17] A redemption by the corporation of
its stock is, in a sense, a repurchase of it for cancellation. [18] The present Code allows
redemption of shares even if there are no unrestricted retained earnings on the books of
the corporation. This is a new provision which in effect qualifies the general rule that the
corporation cannot purchase its own shares except out of current retained
earnings.[19] However, while redeemable shares may be redeemed regardless of the
existence of unrestricted retained earnings, this is subject to the condition that the
corporation has, after such redemption, assets in its books to cover debts and liabilities
inclusive of capital stock. Redemption, therefore, may not be made where the corporation is
insolvent or if such redemption will cause insolvency or inability of the corporation to meet
its debts as they mature.

What respondent Judge failed to recognize was that while the stock certificate does allow
redemption, the option to do so was clearly vested in the petitioner bank. The redemption
therefore is clearly the type known as "optional". Thus, except as otherwise provided in the

CASES IN COMMERCIAL LAW REVIEW (J. Dimaampao) 4E 2017-2018 | 51

stock certificate, the redemption rests entirely with the corporation and the stockholder is
without right to either compel or refuse the redemption of its stock.

***

MANDAMUS NOT A REMEDY

Ponce vs Alsons Cement Corporation

G.R. No. 139802 December 10, 2002

DOCTRINE: A mandamus should not issue to compel the secretary of a corporation to

make a transfer of the stock on the books of the company, unless it affirmatively appears
that he has failed or refused so to do, upon the demand either of the person in whose name
the stock is registered, or of some person holding a power of attorney for that purpose from
the registered owner of the stock.

FACTS: The late Fausto G. Gaid was an incorporator of Victory Cement Corporation
(VCC), having subscribed to and fully paid 239,500 shares of said corporation. On
February 8, 1968, plaintiff and Fausto Gaid executed a Deed of Undertaking and
Indorsement whereby the latter acknowledges that the former is the owner of said shares
and he was therefore assigning/endorsing the same to the plaintiff. VCC was renamed
Floro Cement Corporation (FCC for brevity). On October 22, 1990, FCC was renamed
Alsons Cement Corporation (ACC for brevity) as shown by the Amended Articles of
Incorporation of ACC. From the time of incorporation of VCC up to the present, no
certificates of stock corresponding to the 239,500 subscribed and fully paid shares of Gaid
were issued in the name of Fausto G. Gaid and/or the plaintiff. Despite repeated demands,
the defendants refused and continue to refuse without any justifiable reason to issue to
plaintiff the certificates of stocks corresponding to the 239,500 shares of Gaid, in violation
of plaintiffs right to secure the corresponding certificate of stock in his name. For this
reason, petitioner Vicente C. Ponce, filed a complaint with the SEC for mandamus and
damages against respondents Alsons Cement Corporation and its corporate secretary
Francisco M. Giron, Jr. to compel the latter to transfer the said shares to his name and
issue the corresponding stock certificates. Respondent filed motion to dismiss on the
ground of absence of cause of action. The SEC Hearing Officer granted the motion to
dismiss which was reversed by SEC En Banc. Upon appeal, the Court of Appeals turned
over the decision of SEC En Banc and upheld the Hearing Officer's decision. Hence, this
appeal.

Issue: Should CA's decision be upheld dismissing the petition for mandamus?

Held: YES. Pursuant to Section 63 of the Corporation Code, a transfer of shares of stock
not recorded in the stock and transfer book of the corporation is non-existent as far as the
corporation is concerned. As between the corporation on the one hand, and its
shareholders and third persons on the other, the corporation looks only to its books for the
purpose of determining who its shareholders are. It is only when the transfer has been
recorded in the stock and transfer book that a corporation may rightfully regard the
transferee as one of its stockholders. From this time, the consequent obligation on the part
of the corporation to recognize such rights as it is mandated by law to recognize arises.
Absent an allegation that the transfer of shares is recorded in the stock and transfer book of
respondent ALSONS, there appears no basis for a clear and indisputable duty or clear
legal obligation that can be imposed upon the respondent corporate secretary, so as to
justify the issuance of the writ of mandamus to compel him to perform the transfer of the
shares to petitioner. In sum, a mandamus should not issue to compel the secretary of a
corporation to make a transfer of the stock on the books of the company, unless it
affirmatively appears that he has failed or refused so to do, upon the demand either of the
person in whose name the stock is registered, or of some person holding a power of
attorney for that purpose from the registered owner of the stock. #LUZON

***

CASES IN COMMERCIAL LAW REVIEW (J. Dimaampao) 4E 2017-2018 | 52

DE FACTO MERGER

BANK OF COMMERCE vs. RADIO PHILIPPINES NETWORK, INC.

G.R. No. 195615 April 21, 2014

DOCTRINE: De Facto Merger can be pursued by acquiring all or substantially all of the
properties of another corporation in exchange of shares of stock.

FACTS: Traders Royal Bank (TRB) proposed to sell to petitioner Bank of Commerce
(Bancommerce) its banking business consisting of specified assets and liabilities.
Bancommerce agreed subject to prior BSP's approval of their Purchase and Assumption (P
& A) Agreement. BSP approved that agreement subject to the condition that Bancommerce
and TRB would set up an escrow fund with another bank to cover TRB liabilities for
contingent claims that may subsequently be adjudged against it, which liabilities were
excluded from the purchase. In G.R. 138510, Traders Royal Bank v. Radio Philippines
Network (RPN), Inc., this Court ordered TRB to pay respondents RPN, et al. actual
damages plus legal interest and some amounts. Based on this decision, RPN, et al. filed a
motion for execution against TRB before the RTC. But rather than pursue a levy in
execution of the corresponding amounts on escrow with Metrobank, RPN, et al. filed a
Supplemental Motion for Execution where they described TRB as "now Bank of
Commerce" based on the assumption that TRB had been merged into Bancommerce.

ISSUE: Whether or not merger took place between Bancommerce and TRB

HELD: NO. Merger is a re-organization of two or more corporations that results in their
consolidating into a single corporation, which is one of the constituent corporations, one
disappearing or dissolving and the other surviving. To put it another way, merger is the
absorption of one or more corporations by another existing corporation, which retains its
identity and takes over the rights, privileges, franchises, properties, claims, liabilities and
obligations of the absorbed corporation(s). The absorbing corporation continues its
existence while the life or lives of the other corporation(s) is or are terminated. No merger
took place between Bancommerce and TRB as the requirements and procedures for a
merger were absent. A merger does not become effective upon the mere agreement of the
constituent corporations. All the requirements specified in the law must be complied with in
order for merger to take effect. Section 79 of the Corporation Code further provides that the
merger shall be effective only upon the issuance by the SEC of a certificate of merger.
Here, Bancommerce and TRB remained separate corporations with distinct corporate
personalities. What happened is that TRB sold and Bancommerce purchased identified
recorded assets of TRB in consideration of Bancommerce's assumption of identified
recorded liabilities of TRB including booked contingent accounts. There is no law that
prohibits this kind of transaction especially when it is done openly and with appropriate
government approval.

A de facto merger can be pursued by one corporation acquiring all or substantially all of the
properties of another corporation in exchange of shares of stock of the acquiring
corporation. The acquiring corporation would end up with the business enterprise of the
target corporation; whereas, the target corporation would end up with basically its only
remaining assets being the shares of stock of the acquiring corporation."#MARTINEZ

***

REQUIREMENT FOR FOREIGN CORPORATION TO OBTAIN LICENSE TO DO

BUSINESS IN THE PHILIPPINES

Agilent Technologies Singapore (Pte) Ltd. Vs. Integrated Silicon Technology

Philippines Corporation
G.R. No. 154618 April 14,2004

FACTS: Petitioner Agilent Technologies Singapore (Pte.), Ltd. (Agilent) is a foreign

corporation, which, by its own admission, is not licensed to do business in the Philippines.

CASES IN COMMERCIAL LAW REVIEW (J. Dimaampao) 4E 2017-2018 | 53

Respondent, Integrated Silicon Technology Philippines Corporation (Integrated Silicon) is a
private domestic corporation, 100% foreign owned, which is engaged in the business of
manufacturing and assembling electronics components.

The juridical relation among the various parties in this case can be traced to a 5-year Value
Added Assembly Services Agreement (VAASA), entered into between Integrated Silicon
and the Hewlett-Packard Singapore (Pte.) Ltd., Singapore Components Operation (HP-
Singapore). Under its terms, Integrated Silicon was to locally manufacture and assemble
fiber optics for export to HP-Singapore. HP-Singapore, for its part, was to consign raw
materials to Integrated Silicon; transport machinery to the plant of Integrated Silicon; and
pay Integrated Silicon the purchase price of the finished products. The VAASA had a five-
year term with a provision for annual renewal by mutual written consent. With the consent
of Integrated Silicon, HP-Singapore assigned all its rights and obligations in the VAASA to
Agilent.

On May 25, 2001, Integrated Silicon filed a complaint for Specific Performance and
Damages against Agilent and its officers in which it alleged that Agilent breached the
parties oral agreement to extend the VAASA. Integrated Silicon thus prayed that defendant
be ordered to execute a written extension of the VAASA for a period of five years as earlier
assured and promised; to comply with the extended VAASA; and to pay actual, moral,
exemplary damages and attorneys fees.
Respondents filed a Motion to Dismiss on the grounds of lack of Agilent’s legal capacity to
sue; litis pendentia; forum shopping; and failure to state a cause of action.

ISSUE: Whether or not an unlicensed foreign corporation not doing business in the
Philippines lacks the legal capacity to file suit

RULING: NO. A foreign corporation without a license is not ipso facto incapacitated from
bringing an action in Philippine courts. A license is necessary only if a foreign corporation is
“transacting” or “doing business” in the country.

The purpose of the law is to subject the foreign corporation doing business in the
Philippines to the jurisdiction of the courts.

A foreign corporation doing business in the Philippines with a license may sue and can be
sued in the Philippines. If it is doing business without a license, it cannot sue but may be
sued in the Philippines.

A foreign corporation not doing business, but merely transacts in an isolated transaction or
on a cause of action entirely independent of its business transaction, need not obtain a
license and may sue and be sued in our courts.

If a foreign corporation does business in the Philippines without a license, a Philippine

citizen or entity which has contracted with said corporation may be estopped from
challenging the foreign corporation’s corporate personality in a suit brought before
Philippine courts. #ONG

***

DOCTRINE: ISOLATED TRANSACTIONS

ERIKS PTE. LTD., petitioner, vs. COURT OF APPEALS and DELFIN F. ENRIQUEZ,
JR., respondents.
G.R. No. 118843 February 6, 1997

FACTS: Eriks Pte. Ltd., a non-resident foreign corporation engaged in the manufacture and
sale of products for industrial purposes. It is organized and existing under the laws, and
with address, in the Singapore. It is not licensed to do business in the Philippines.

CASES IN COMMERCIAL LAW REVIEW (J. Dimaampao) 4E 2017-2018 | 54

From January 17 to August 16, 1989, respondent Delfin Enriquez, Jr., doing business
under Delrene EB Controls Center and/or EB Karmine Commercial, ordered and received
from petitioner various products. It was perfected in Singapore, for private respondents
account, F.O.B. Singapore, with a 90-day credit term. Respondent failed/refused to pay.

In 1991, petitioner filed with the RTC of Makati for the recovery of S$41,939.63.
Respondent contended that petitioner corporation had no legal capacity to sue. The trial
court dismissed the action on the ground that petitioner is a foreign corporation doing
business in the Philippines without a license. CA affirmed.

ISSUE: Is a foreign corporation which sold its products sixteen times over a five-month
period to the same Filipino buyer without first obtaining a license to do business in the
Philippines, prohibited from maintaining an action to collect payment therefor in Philippine
courts?

RULING:
YES. The series of transactions is NOT an isolated or casual transactions. What is
determinative of doing business is not really the number or the quantity of the transactions,
but more importantly, the intention of an entity to continue the body of its business in the
country. The phrase isolated transaction has a definite and fixed meaning, i.e. a
transaction or series of transactions set apart from the common business of a foreign
enterprise in the sense that there is no intention to engage in a progressive pursuit of the
purpose and object of the business organization. Whether a foreign corporation is doing
business does not necessarily depend upon the frequency of its transactions, but more
upon the nature and character of the transactions.

It is incapacitated to Maintain Suit. Courts cannot allow foreign entities which conduct
regular business any access to courts without the fulfillment of the necessary requisites to
be subjected to our governments regulation and authority. By securing a license, the
foreign entity would be giving assurance that it will abide by the decisions of our courts,
even if adverse to it.

By this judgment, we are not foreclosing petitioners right to collect payment. Res judicata
does not set in a case dismissed for lack of capacity to sue, because there has been no
determination on the merits. Moreover, this Court has ruled that subsequent acquisition of
the license will cure the lack of capacity at the time of the execution of the contract.
#PEREZ

***

FOREIGN CORPORATION NOT DOING BUSINESS IN THE PHILIPPINES

CARGILL, INC. vs. INTRA STRATA ASSURANCE CORPORATION

G.R. No. 168266, March 15, 2010

DOCTRINE: A foreign company that merely imports goods from a Philippine exporter,
without opening an office or appointing an agent in the Philippines, is not doing business in
the Philippines. Actual transaction of business within the Philippine territory is an essential
requisite for the Philippines to acquire jurisdiction over a foreign corporation and thus
require the foreign corporation to secure a Philippine business license.

FACTS:
Cargill, Inc. is a corporation organized and existing under the laws of the State of Delaware,
USA. Cargill and Northern Mindanao Corporation (NMC) executed a contract whereby
NMC agreed to sell to petitioner 20,000 to 24,000 metric tons of molasses, to be delivered
from 1 January to 30 June 1990 at the price of $44 per metric ton. The contract required
NMC to put up a performance bond which was intended to guarantee NMC’s performance
to deliver the molasses during the prescribed shipment periods. NMC was only able to
deliver 219.551 metric tons out of the agreed 10,500.Thus, Cargill sent demand letters to
Intra Strata Assurance Corporation (Intra) claiming payment under the performance and

CASES IN COMMERCIAL LAW REVIEW (J. Dimaampao) 4E 2017-2018 | 55

surety bonds. When Intra failed to pay, Cargill filed a complaint against NMC and Intra. The
trial court ruled in favor of Cargill. On appeal, the CA reversed the trial court's decision,
asserting that petitioner does not have the capacity to file the suit since it is a foreign
corporation doing business in the Philippines without the requisite license.

ISSUE: Whether or not Cargill was doing business in the Philippines

RULING: NO
To constitute doing business, the activity undertaken in the Philippines should involve
profit-making. In this case, the contract between Cargill and NMC involved the purchase of
molasses by Cargill from NMC. It was NMC, the domestic corporation, which derived
income from the transaction and not petitioner. Also, a foreign company that merely imports
goods from a Philippine exporter, without opening an office or appointing an agent in the
Philippines, is not doing business in the Philippines. Cargill does not have an office in the
Philippines and merely imports products from the Philippines through its non-exclusive local
broker.

An exporter in one country may export its products to many foreign importing countries
without performing in the importing countries specific commercial acts that would constitute
doing business in the importing countries. The mere act of exporting from ones own
country, without doing any specific commercial act within the territory of the importing
country, cannot be deemed as doing business in the importing country. The importing
country does not require jurisdiction over the foreign exporter who has not yet performed
any specific commercial act within the territory of the importing country.

To be doing or transacting business in the Philippines, the foreign corporation must actually
transact business in the Philippines, that is, perform specific business transactions within
the Philippine territory on a continuing basis in its own name and for its own account. Actual
transaction of business within the Philippine territory is an essential requisite for the
Philippines to acquire jurisdiction over a foreign corporation and thus require the foreign
corporation to secure a Philippine business license. If a foreign corporation does not
transact such kind of business in the Philippines, even if it exports its products to the
Philippines, the Philippines has no jurisdiction to require such foreign corporation to secure
a Philippine business license. #QUIJANO-MANALO

***

CASES IN COMMERCIAL LAW REVIEW (J. Dimaampao) 4E 2017-2018 | 56

 LAW ON INSURANCE
INSURANCE: Nature, Characteristics, Elements, Perfection, Kinds, Risk that may be
Insured Against; Parties; Business of Insurance

NATIONAL DEVELOPMENT COMPANY VS. MADRIGAL WAN HAI LINES

CORPORATION
GR No. 148332; September 30, 2003

DOCTRINE: A contract of adhesion is one in which one of the parties imposes a ready-
made form of contract, which the other party may accept or reject, but which the latter
cannot modify. In other words, in such contract, the terms therein are fixed by one party,
and the other party has merely “to take it, or leave it.” Thus, it can be struck down as void
and unenforceable for being subversive of public policy, especially when the will of the
dominant party is imposed upon the weaker party and the latter is denied the opportunity to
bargain on equal footing.

FACTS: Petitioner National Development Company is a government-owned and controlled

corporation which has as its subsidiary the National Shipping Corporation of the Philippines
(NSCP) offering shipping services for containerized cargo between the Far East ports and
the U.S. West Coast.

Petitioner offered for sale to the public its one hundred percent (100%) stock ownership in
NSCP worth P150,000.00, as well as its three (3) ocean-going vessels. It then released to
the public an Information Package containing NSCP’s background, assets, operational and
financial status. The Information Package likewise contained the Negotiated Sale
Guidelines which embodied the terms and conditions of the proposed sale.

As there was failure in the public bidding, petitioner entered into a negotiated sale with
respondent wherein the latter’s offer off $18.5 million was accepted by petitioner. The
negotiated sale was correspondingly approved and a Notice of Award was issued in favor
of petitioner. Petitioner and respondent executed the corresponding Contract of Sale, and
the latter acquired NSCP, its assets, personnel, records and its three (3) vessels.

Subsequently, respondent received from the US Department of Treasury, Internal Revenue

Service (US IRS), a notice of final assessment against NSCP for deficiency taxes on gross
transportation income derived from US sources. Anxious that the delay in the payment of
the deficiency taxes may hamper its shipping operations overseas, respondent assumed
and paid petitioner’s tax liabilities. For petitioner’s refusal to reimburse respondent of the
amount it paid to the US IRS, the latter field a complaint against the latter for
reimbursement and damages.

The trial court ruled in favor of respondent, and found, among others, that even before the
sale, petitioner knew that NSCP had tax liabilities with the US IRS, yet it did not inform
respondent about it. On appeal, the Court of Appeals (CA) affirmed the trial court’s decision
with modification. It found that the contracts which form part of NSCP’s Negotiated Sale
Guidelines are ready-made form of contracts, the preparation of which was left entirely to
the NSCP as a contract of adhesion. Thus, the acceptance of the Negotiated Sale
Guidelines and submission thereof together with the Proposal Letter Form by a prospective
buyer is a required formality of the bidding and under the circumstance, the plaintiff may not
deemed to have been given the opportunity to bargain on equal footing.

ISSUE: whether the Negotiated Sale Guidelines and the Proposal Letter Form constitute a
contract of adhesion

HELD: YES. The Court agreed with the CA and trial court that the Negotiated Sale
Guidelines and the Proposal Letter Form constitute a contract of adhesion.

CASES IN COMMERCIAL LAW REVIEW (J. Dimaampao) 4E 2017-2018 | 57

A contract of adhesion is one in which one of the parties imposes a ready-made form of
contract, which the other party may accept or reject, but which the latter cannot modify. In
other words, in such contract, the terms therein are fixed by one party, and the other party
has merely “to take it, or leave it.” Thus, it can be struck down as void and unenforceable
for being subversive of public policy, especially when the will of the dominant party is
imposed upon the weaker party and the latter is denied the opportunity to bargain on equal
footing.

It must be stressed, however, that contracts of adhesion are not strictly against the law. In
Ong Ku vs. CA and Pan American World Airways, Inc. vs. IAC, the SC held that contracts
of adhesion – wherein one party imposes a ready-made form of contract on the other – are
not entirely prohibited. The other party is free to reject it entirely; if he adheres, he gives his
consent.

Nevertheless, the inequality of bargaining positions and the resulting impairment of the
other party’s freedom to contract necessarily call upon the Court to exercise its mandate as
a court of justice and equity. Indeed, the Court have ruled that contract of such nature
“obviously call for greater strictness and vigilance on the part of the courts of justice with a
view to protecting the weaker party from abuses and imposition and prevent their becoming
traps for the unwary”.

In this case, the Negotiated Sale Guidelines and Proposal Letter Form fit the characteristics
of a contract of adhesion. On their very face, the documents show that petitioner NDC had
control over the terms and conditions of the sale. Clearly, respondent had hardly any say in
the terms and conditions expressed in said Guidelines. Other than the price of the offer,
respondent was left with little or no alternative at all but to comply with its terms.#RECINTO

***

KEPPEL CEBU SHIPYARD, INC. vs. PIONEER INSURANCE AND SURETY

CORPORATION
G.R. Nos. 180880-81, September 25, 2009

DOCTRINES:
1. In case of conflict between a reference to a foreign clause and the Old insurance code,
the Insurance Code should govern
2. The right of subrogation is not dependent upon, nor does it grow out of, any privity of
contract. It accrues simply upon payment by the insurance company of the insurance
claim.
3. Although not invalid, per se, a contract of adhesion is void when the weaker party is
imposed upon in dealing with the dominant bargaining party, and its option is reduced to
the alternative of taking it or leaving it, completely depriving such party of the
opportunity to bargain on equal footing.

FACTS: Petitioner KCSI and Insured WG&A Jebsens Shipmanagement, Inc. (WG&A)
executed a Shiprepair Agreement wherein KCSI would renovate and reconstruct WG&As
M/V Superferry 3 using its dry docking facilities. Prior to the execution of the Shiprepair
Agreement, Superferry 3 was already insured by WG&A with Insurer Pioneer.

M/V Superferry 3 was gutted by fire. Claiming that the extent of the damage was pervasive,
WG&A declared the vessels damage as a total constructive loss and, hence, filed an
insurance claim with Pioneer.

Armed with the subrogation receipt, defendant Pioneer tried to collect from KCSI, but the
latter denied any responsibility for the loss of the subject vessel. As KCSI continuously
refused to pay despite repeated demands, Pioneer, filed a Request for Arbitration before
the Construction Industry Arbitration Commission (CIAC).

Holding that the liability for damages was limited to P50,000,000.00, the CIAC ordered
KCSI to pay Pioneer the amount of P25,000,000.00, with interest at 6% per annum from

CASES IN COMMERCIAL LAW REVIEW (J. Dimaampao) 4E 2017-2018 | 58

the time of the filing of the case up to the time the decision is promulgated, and 12%
interest per annum added to the award, or any balance thereof, after it becomes final and
executory.

An Amended Decision was promulgated by the Special Division of Five Former Fifteenth
Division of the CA in light of the dissent of Associate Justice Lucas P. Bersamin, joined by
Associate Justice Japar B. Dimaampao partially granted Pioneer’s MR thus the resort to
the SC through Rule 45.

Pioneer asseverates that there existed a total constructive loss so that it had to pay WG&A
the full amount of the insurance coverage and, by operation of law, it was entitled to be
subrogated to the rights of WG&A to claim the amount of the loss. It further argues that the
limitation of liability clause found in the Shiprepair Agreement is null and void for being
iniquitous and against public policy.

KCSI counters that a total constructive loss was not adequately proven by Pioneer, and
that there is no proof of payment of the insurance proceeds. KCSI insists on the validity of
the limited-liability clause up to P50,000,000.00, because WG&A acceded to the provision
when it executed the Shiprepair Agreement. KCSI also claims that the salvage value of the
vessel should be deducted from whatever amount it will be made to pay to Pioneer.

ISSUES:
1. Whether or not there is a Constructive Total loss
2. Whether section 139 of the Old Insurance Code as opposed to the American clause
stated in the insurance policy should govern.
3. Whether or not there pioneer is entitled to subrogation.
4. Whether or not the insured WG&A is bound by clauses 20 and 22(a) of the
shiprepair agreement which provides that the limit of its liability is only up to
P50,000,000.00; nor of Clause 22(a), that KCSI stands as a co-assured in the
insurance policies.

RULING:
1) YES. SC ruled that it cannot be denied that M/V Superferry 3 suffered widespread
damage from the fire, a covered peril under the marine insurance policies obtained by
WG&A from Pioneer. The estimates given by the three disinterested and qualified
shipyards show that the damage to the ship would exceed P270,000,000.00, or of the total
value of the policies P360,000,000.00. These estimates constituted credible and
acceptable proof of the extent of the damage sustained by the vessel based on Sec 139 of
the old Insurance Code.

2) YES. The SC ruled that in the execution of the insurance policies over M/V Superferry 3,
WG&A and Pioneer incorporated by reference an American Total loss provision but still
Sec 139 of the Old Insurance law is deemed in force, thus it was erroneous for the CA to
state that Sec. 139 is merely permissive. Properly considered, the word may in the
provision is intended to grant the insured (WG&A) the option or discretion to choose the
abandonment of the thing insured or any particular portion thereof separately valued by the
policy, or otherwise separately insured, and recover for a total loss when the cause of the
loss is a peril insured against. Section 139 of the Insurance Code should govern, because
(a) Philippine law is deemed incorporated in every locally executed contract; and
(b) the marine insurance policies in question expressly provided the following: This
insurance is subject to English jurisdiction, except in the event that loss or losses are
payable in the Philippines, in which case if the said laws and customs of England shall be
in conflict with the laws of the Republic of the Philippines, then the laws of the Republic of
the Philippines shall govern.

3) YES. Payment by the insurer to the insured operates as an equitable assignment to the
insurer of all the remedies that the insured may have against the third party whose
negligence or wrongful act caused the loss. The right of subrogation is not dependent upon,
nor does it grow out of, any privity of contract. It accrues simply upon payment by the
insurance company of the insurance claim. The doctrine of subrogation has its roots in

CASES IN COMMERCIAL LAW REVIEW (J. Dimaampao) 4E 2017-2018 | 59

equity. It is designed to promote and to accomplish justice; and is the mode that equity
adopts to compel the ultimate payment of a debt by one who, in justice, equity, and good
conscience, ought to pay.

Considering the extent of the damage, WG&A opted to abandon the ship and claimed the
value of its policies. The Loss and Subrogation Receipt issued by WG&A to Pioneer is the
best evidence of payment of the insurance proceeds to the former, and no controverting
evidence was presented by KCSI to rebut the presumed authority of the signatory to
receive such payment.

4) NO. Indeed, the assailed clauses amount to a contract of adhesion imposed on WG&A
on a take-it-or-leave-it basis. A contract of adhesion is so-called because its terms are
prepared by only one party, while the other party merely affixes his signature signifying his
adhesion thereto. Although not invalid, per se, a contract of adhesion is void when the
weaker party is imposed upon in dealing with the dominant bargaining party, and its option
is reduced to the alternative of taking it or leaving it, completely depriving such party of the
opportunity to bargain on equal footing. Clause 20 is also a void and ineffectual waiver of
the right of WG&A to be compensated for the full insured value of the vessel or, at the very
least, for its actual market value. Likewise, Clause 20 is a stipulation that may be
considered contrary to public policy. To allow KCSI to limit its liability to only
P50,000,000.00, notwithstanding the fact that there was a constructive total loss in the
amount of P360,000,000.00, would sanction the exercise of a degree of diligence short of
what is ordinarily required. It would not be difficult for a negligent party to escape liability by
the simple expedient of paying an amount very much lower than the actual damage or loss
sustained by the other.

Along the same vein, Clause 22(a) cannot be upheld. The intention of the parties to make
each other a co-assured under an insurance policy is to be gleaned principally from the
insurance contract or policy itself and not from any other contract or agreement, because
the insurance policy denominates the assured and the beneficiaries of the insurance
contract.#SABULAO

***

FIELDMEN'S INSURANCE CO., INC. v. MERCEDES VARGAS VDA. DE SONGCO, ET

AL. and COURT OF APPEALS
G.R. No. L-24833; September 23, 1968

DOCTRINE: An insurance firm is not allowed to escape liability under a common carrier
insurance policy on the pretext that what was insured was a private vehicle and not a
common carrier if the policy was being issued upon the insistence of its agent who
discounted fears of the insured that his privately owned vehicle might not fall within its
terms, the insured moreover being "a man of scant education," finishing only the first grade.

FACTS: In 1960, Sambat, an agent of Fieldman’s Insurance, induced Songco, a man

of scant education to enter into a common carrier insurance contract with Fieldman. During
the inducement, a son of Songco butted in and said that they could not accept the type of
insurance offered because theirs was an owner-type jeepney and not a common carrier.
Sambat answered that it did not matter because the insurance company was not owned by
the government and therefore had nothing to do with rules and regulations of the latter
(Fieldman). The insurance was executed and approved for a year from Sept. 1960-1961.
It was renewed in 1961 for another year. In Oct. 1961, the jeepney collided with a car in
Bulacan and as a result, Sonco died. The remaining members of the family claimed the
proceeds of the insurance with the company but it refused to pay on the ground that the
vehicle was not a common carrier.

ISSUE: Whether or not the Songcos’ can claim the insurance proceeds despite the fact that
the vehicle concerned was an owner and not a common carrier.

CASES IN COMMERCIAL LAW REVIEW (J. Dimaampao) 4E 2017-2018 | 60

HELD: YES.The company is estopped from asserting that the vehicle was not covered.
After it had led Federico Songco to believe that he could qualify under the common carrier
liability insurance policy, and to enter into a contract of insurance paying the premiums due,
it could not thereafter be permitted to change its stand to the detriment of the heirs of the
insured. It knew all along that Frederico owned a private vehicle. Its agent Sambat twice
exerted the utmost pressure on the insured, a man of scant education, and the company
did not object to this.#SALOR

***

MALAYAN INSURANCE CO., INC. v. PHILIPPINES FIRST INSURANCE CO., INC. and
REPUTABLE FORWARDER SERVICES, INC.
G.R. No. 184300; July 11, 2012

DOCTRINE: Indemnity and liability insurance policies are construed in accordance with the
general rule of resolving any ambiguity therein in favor of the insured, where the contract or
policy is prepared by the insurer.

FACTS: Since 1989, Wyeth Philippines, Inc. and respondent Reputable Forwarder
Services, Inc. had been annually executing a contract of carriage, whereby the latter
undertook to transport and deliver the former’s products to its customers, dealers or
salesmen. On 1993, Wyeth procured Marine Policy from Philippines First Insurance Co.,
Inc. to secure its interest over its own products. The policy covers all risks of direct physical
loss or damage from any external cause, if by land, and provides a limit of P6,000,000 per
any one land vehicle. On the same year, Wyeth executed its annual Contract of Carriage
with Reputable wherein the latter undertook to answer for "all risks with respect to the
goods and shall be liable to Wyeth, for the loss, destruction, or damage of the
goods/products due to any and all causes whatsoever, including theft, robbery, flood,
storm, earthquakes, lightning, and other force majeure while the goods/products are in
transit and until actual delivery to the customers, salesmen, and dealers of the Wyeth ".
The contract also required Reputable to secure an insurance policy on Wyeth’s goods.
Thus, Reputable signed a Special Risk Insurance Policy (SR Policy) with petitioner
Malayan for the amount of P1,000,000.00.

During the effectivity of the Marine Policy and SR Policy, Reputable received from Wyeth
1,000 boxes of Promil infant formula worth P2,357,582.70 to be delivered by Reputable to
Mercury Drug Corporation in Libis, Quezon City. Unfortunately, on the same date, the truck
carrying Wyeth’s products was hijacked by about 10 armed men. They threatened to kill the
truck driver and two of his helpers should they refuse to turn over the truck and its contents
to the said highway robbers. The hijacked truck was recovered two weeks later without its
cargo.

On 1995, Philippines First paid Wyeth P2,133,257.00 as indemnity. Philippines First then
demanded reimbursement from Reputable, having been subrogated to the rights of Wyeth
by virtue of the payment. The latter, however, ignored the demand. Consequently,
Philippines First instituted an action for sum of money against Reputable. In its complaint,
Philippines First stated that Reputable is a "private corporation engaged in the business of
a common carrier." In its answer, Reputable claimed that it is a private carrier. It also
claimed that it cannot be made liable under the contract of carriage with Wyeth since the
contract was not signed by Wyeth’s representative and that the cause of the loss was force
majeure, i.e., the hijacking incident. Subsequently, Reputable impleaded Malayan as third-
party defendant in an effort to collect the amount covered in the SR Policy. Disclaiming any
liability, Malayan invoked Sections 5 and 12 of the SR Policy.

ISSUE/S:
1. Whether or not there is double insurance.
2. Whether or not Malayan is liable despite the presence of Sections 5 and 12 of the
SR Policy.
3. Whether or not Sections 5 and 12 of the SR Policy should be construed strictly
against Malayan.

CASES IN COMMERCIAL LAW REVIEW (J. Dimaampao) 4E 2017-2018 | 61

 4. Whether or not Reputable should be held solidarily liable with Malayan for the
amount of P998,000.00 due to Philippines First.

HELD:
1. NO. By the express provision of Section 93 of the Insurance Code, double insurance
exists where the same person is insured by several insurers separately in respect to the
same subject and interest. The requisites in order for double insurance to arise are as
follows: (i) The person insured is the same; (ii) Two or more insurers insuring separately;
(iii) There is identity of subject matter; (iv) There is identity of interest insured; and (v)
There is identity of the risk or peril insured against.

In the present case, while it is true that the Marine Policy and the SR Policy were both
issued over the same subject matter, i.e. goods belonging to Wyeth, and both covered the
same peril insured against, it is, however, beyond cavil that the said policies were issued to
two different persons or entities. It is undisputed that Wyeth is the recognized insured of
Philippines First under its Marine Policy, while Reputable is the recognized insured of
Malayan under the SR Policy. The fact that Reputable procured Malayan’s SR Policy over
the goods of Wyeth pursuant merely to the stipulated requirement under its contract of
carriage with the latter does not make Reputable a mere agent of Wyeth in obtaining the
said SR Policy.

The interest of Wyeth over the property subject matter of both insurance contracts is also
different and distinct from that of Reputable’s. The policy issued by Philippines First was in
consideration of the legal and/or equitable interest of Wyeth over its own goods. On the
other hand, what was issued by Malayan to Reputable was over the latter’s insurable
interest over the safety of the goods, which may become the basis of the latter’s liability in
case of loss or damage to the property and falls within the contemplation of Section 15 of
the Insurance Code.

Therefore, even though the two concerned insurance policies were issued over the same
goods and cover the same risk, there arises no double insurance since they were issued to
two different persons/entities having distinct insurable interests.

2. YES. Section 5 is the other insurance clause (also called "additional insurance" and
"double insurance"), one akin to Condition No. 3 in issue in Geagonia v. CA, which validity
was upheld by the Court as a warranty that no other insurance exists. The Court ruled that
Condition No. 3 is a condition which is not proscribed by law as its incorporation in the
policy is allowed by Section 75 of the Insurance Code. It was also the Court’s finding that
unlike the other insurance clauses, Condition No. 3 does not absolutely declare void any
violation thereof but expressly provides that the condition "shall not apply when the total
insurance or insurances in force at the time of the loss or damage is not more than
P200,000.00."

In this case, similar to Condition No. 3 in Geagonia, Section 5 does not provide for the
nullity of the SR Policy but simply limits the liability of Malayan only up to the excess of the
amount that was not covered by the other insurance policy. In interpreting the "other
insurance clause" in Geagonia, the Court ruled that the prohibition applies only in case of
double insurance. The Court ruled that in order to constitute a violation of the clause, the
other insurance must be upon same subject matter, the same interest therein, and the
same risk. Thus, even though the multiple insurance policies involved were all issued in the
name of the same assured, over the same subject matter and covering the same risk, it
was ruled that there was no violation of the "other insurance clause" since there was no
double insurance.

Section 12 of the SR Policy, on the other hand, is the over insurance clause. More
particularly, it covers the situation where there is over insurance due to double insurance.
In such case, Section 15 provides that Malayan shall "not be liable to pay or contribute
more than its ratable proportion of such loss or damage." This is in accord with the principle
of contribution provided under Section 94(e) of the Insurance Code,37 which states that
"where the insured is over insured by double insurance, each insurer is bound, as between

CASES IN COMMERCIAL LAW REVIEW (J. Dimaampao) 4E 2017-2018 | 62

himself and the other insurers, to contribute ratably to the loss in proportion to the amount
for which he is liable under his contract."

Clearly, both Sections 5 and 12 presuppose the existence of a double insurance. Since it is
already settled that there is no double insurance in the present case, over insurance by
double insurance cannot likewise exist. Hence, neither Section 5 nor Section 12 of the SR
Policy can be applied so as to free Malayan from its liability.

3. YES. The controversial provisions of the SR Policy should be strictly construed against
Malayan. This is in keeping with the rule that: "Indemnity and liability insurance policies are
construed in accordance with the general rule of resolving any ambiguity therein in favor of
the insured, where the contract or policy is prepared by the insurer. A contract of insurance,
being a contract of adhesion, par excellence, any ambiguity therein should be resolved
against the insurer; in other words, it should be construed liberally in favor of the insured
and strictly against the insurer. Limitations of liability should be regarded with extreme
jealousy and must be construed in such a way as to preclude the insurer from
noncompliance with its obligations."

4. NO. There is solidary liability only when the obligation expressly so states, when the law
so provides or when the nature of the obligation so requires.

In Heirs of George Y. Poe v. Malayan lnsurance Company., lnc., the Court ruled that where
the insurance contract provides for indemnity against liability to third persons, the liability of
the insurer is direct and such third persons can directly sue the insurer. The direct liability of
the insurer under indemnity contracts against third-party liability does not mean, however,
that the insurer can be held solidarily liable with the insured and/or the other parties found
at fault, since they are being held liable under different obligations. The liability of the
insured carrier or vehicle owner is based on tort, in accordance with the provisions of the
Civil Code; while that of the insurer arises from contract, particularly, the insurance policy.

Suffice it to say that Malayan's and Reputable's respective liabilities arose from different
obligations- Malayan's is based on the SR Policy while Reputable's is based on the
contract of carriage. #SANTOS

***

ETERNAL GARDENS MEMORIAL PARK CORPORATION vs. THE PHILIPPINE

AMERICAN LIFE INSURANCE COMPANY
G.R. No. 166245; April 9, 2008

DOCTRINE: It must be remembered that an insurance contract is a contract of adhesion

which must be construed liberally in favor of the insured and strictly against the insurer in
order to safeguard the latter’s interest

FACTS: Respondent Philamlife entered into an agreement denominated as Creditor Group

Life Policy with petitioner Eternal Gardens Memorial Park Corporation (Eternal). Under the
policy, the clients of Eternal who purchased burial lots from it on installment basis would be
insured by Philamlife. The amount of insurance coverage depended upon the existing
balance of the purchased burial lots. The insurance of any eligible Lot Purchaser shall be
effective on the date he contracts a loan with the Assured. However, there shall be no
insurance if the application of the Lot Purchaser is not approved by the Company. Eternal
was required under the policy to submit to Philamlife a list of all new lot purchasers,
together with a copy of the application of each purchaser, and the amounts of the
respective unpaid balances of all insured lot purchasers. Eternal complied by submitting a
letter dated December 29, 1982, containing a list of insurable balances of its lot buyers for
October 1982. One of those included in the list as “new business” was a certain John
Chuang. His balance of payments was Php 100,000. On August 2, 1984, Chuang died.

CASES IN COMMERCIAL LAW REVIEW (J. Dimaampao) 4E 2017-2018 | 63

Eternal sent a letter dated to Philamlife, which served as an insurance claim for Chuang’s
death. Attached to the claim were certain documents. In reply, Philamlife wrote Eternal a
letter requiring Eternal to submit the additional documents relative to its insurance claim for
Chuang’s death. Eternal transmitted the required documents through a letter which was
received by Philamlife.

After more than a year, Philamlife had not furnished Eternal with any reply to the latter’s
insurance claim. This prompted Eternal to demand from Philamlife the payment of the claim
for Php 100,000. Eternal filed a case with the RTC for a sum of money against Philamlife,
which decided in favor of Eternal, ordering Philamlife to pay the former Php 100,000
representing the proceeds of the policy. The CA reversed. Hence, this petition.

ISSUE: Whether or not Philamlife should pay the Php 100,000 insurance proceeds

HELD: YES. An examination of the provision of the POLICY under effective date of benefit,
would show ambiguity between its two sentences. The first sentence appears to state that
the insurance coverage of the clients of Eternal already became effective upon contracting
a loan with Eternal while the second sentence appears to require Philamlife to approve the
insurance contract before the same can become effective. It must be remembered that an
insurance contract is a contract of adhesion which must be construed liberally in favor of
the insured and strictly against the insurer in order to safeguard the latter’s interest.

On the other hand, the seemingly conflicting provisions must be harmonized to mean that
upon a party’s purchase of a memorial lot on installment from Eternal, an insurance
contract covering the lot purchaser is created and the same is effective, valid, and binding
until terminated by Philamlife by disapproving the insurance application. The second
sentence of the Creditor Group Life Policy on the Effective Date of Benefit is in the nature
of a resolutory condition which would lead to the cessation of the insurance contract.
Moreover, the mere inaction of the insurer on the insurance application must not work to
prejudice the insured; it cannot be interpreted as a termination of the insurance contract.
The termination of the insurance contract by the insurer must be explicit and unambiguous.
#TOMARONG

***

PHILIPPINE HEALTH CARE PROVIDERS, INC, vs. CIR

G.R. No. 167330. September 18, 2009

DOCTRINE: Health Maintenance Organizations are not engaged in the Insurance

Business.

FACTS: Respondent Commissioner of Internal Revenue [CIR] sent petitioner a formal

demand letter and the corresponding assessment notices demanding the payment of
deficiency taxes, including surcharges and interest, for the taxable years 1996 and 1997.
The deficiency [documentary stamp tax (DST)] assessment was imposed on petitioner's
health care agreement with the members of its health care program pursuant to Section
185 of the 1997 Tax Code.

Petitioner protested the assessment. As respondent did not act on the protest, petitioner
filed a petition for review in the Court of Tax Appeals (CTA) seeking the cancellation of the
deficiency VAT and DST assessments. The CTA rendered a decision which cancelled and
set aside the 1996 and 1997 deficiency DST assessment against petitioner.

Respondent appealed the CTA decision to the [Court of Appeals (CA)] insofar as it
cancelled the DST assessment. He claimed that petitioner's health care agreement was a
contract of insurance subject to DST under Section 185 of the 1997 Tax Code. The CA
held that petitioner's health care agreement was in the nature of a non-life insurance
contract subject to DST. Petitioner moved for reconsideration but the CA denied it. Hence,
petitioner filed this case.

CASES IN COMMERCIAL LAW REVIEW (J. Dimaampao) 4E 2017-2018 | 64

In a decision dated June 12, 2008, the Court denied the petition and affirmed the CA's
decision. We held that petitioner's health care agreement during the pertinent period was in
the nature of non-life insurance which is a contract of indemnity. We also ruled that
petitioner's contention that it is a health maintenance organization (HMO) and not an
insurance company is irrelevant because contracts between companies like petitioner and
the beneficiaries under their plans are treated as insurance contracts. Moreover, DST is not
a tax on the business transacted but an excise on the privilege, opportunity or facility
offered at exchanges for the transaction of the business.

Unable to accept our verdict, petitioner filed the present motion for reconsideration and
supplemental motion for reconsideration. In its motion for reconsideration, petitioner reveals
for the first time that it availed of a tax amnesty under RA 9480 (also known as the "Tax
Amnesty Act of 2007")

ISSUE: Was petitioner, as an HMO, engaged in the business of insurance during the
pertinent taxable years?

HELD: NO. Section 2 (2) of PD 20 1460 (otherwise known as the Insurance Code)
enumerates what constitutes "doing an insurance business" or "transacting an insurance
business":
a) making or proposing to make, as insurer, any insurance contract;
b) making or proposing to make, as surety, any contract of suretyship as a vocation and not
as merely incidental to any other legitimate business or activity of the surety;
c) doing any kind of business, including a reinsurance business, specifically recognized as
constituting the doing of an insurance business within the meaning of this Code;
d) doing or proposing to do any business in substance equivalent to any of the foregoing in
a manner designed to evade the provisions of this Code.

In the application of the provisions of this Code, the fact that no profit is derived from the
making of insurance contracts, agreements or transactions or that no separate or direct
consideration is received therefore, shall not be deemed conclusive to show that the
making thereof does not constitute the doing or transacting of an insurance business.

Various courts in the United States, whose jurisprudence has a persuasive effect on our
decisions, have determined that HMOs are not in the insurance business. One test that
they have applied is whether the assumption of risk and indemnification of loss (which are
elements of an insurance business) are the principal object and purpose of the organization
or whether they are merely incidental to its business. If these are the principal objectives,
the business is that of insurance. But if they are merely incidental and service is the
principal purpose, then the business is not insurance.

Applying the "principal objects and purpose test", there is significant American case law
supporting the argument that a corporation (such as an HMO, whether or not organized for
profit), whose main object is to provide the members of a group with health services, is not
engaged in the insurance business.

The basic distinction between medical service corporations and ordinary health and
accident insurers is that the former undertake to provide prepaid medical services through
participating physicians, thus relieving subscribers of any further financial burden, while the
latter only undertake to indemnify an insured for medical expenses up to, but not beyond,
the schedule of rates contained in the policy.

Overall, petitioner appears to provide insurance-type benefits to its members (with respect
to its curative medical services), but these are incidental to the principal activity of providing
them medical care. The "insurance-like" aspect of petitioner's business is miniscule
compared to its non-insurance activities. Therefore, since it substantially provides health
care services rather than insurance services, it cannot be considered as being in the
insurance business.

CASES IN COMMERCIAL LAW REVIEW (J. Dimaampao) 4E 2017-2018 | 65

Lastly, it is significant that petitioner, as an HMO, is not part of the insurance industry. This
is evident from the fact that it is not supervised by the Insurance Commission but by the
Department of Health. In fact, in a letter dated September 3, 2000, the Insurance
Commissioner confirmed that petitioner is not engaged in the insurance business. This
determination of the commissioner must be accorded great weight. It is well-settled that the
interpretation of an administrative agency which is tasked to implement a statute is
accorded great respect and ordinarily controls the interpretation of laws by the courts.
#TUQUERO

***

RAFAEL ENRIQUEZ vs SUN LIFE ASSURANCE COMPANY OF CANADA

G.R. No. 15895; November 29, 1920

DOCTRINE: An acceptance of an offer of insurance not actually or constructively

communicated to the proposer does not make a contract. Only the mailing of acceptance
completes the contract of insurance, as the locus poenitentiae is ended when the
acceptance has passed beyond the control of the party.

FACTS: On September 24, 1917, Joaquin Herrer made application to the Sun Life
Assurance Company of Canada through its office in Manila for a life annuity. The
application was immediately forwarded to the head office of the company at Montreal,
Canada. On November 26, 1917, the head office gave notice of acceptance by cable to
Manila. On December 4, 1917, the policy was issued at Montreal. On December 18, 1917,
attorney Aurelio A. Torres wrote to the Manila office of the company stating that Herrer
desired to withdraw his application. Mr. Torres received the notice of acceptance on the
morning of December 21, 1917. Mr. Herrer died on December 20, 1917.

ISSUE: Whether or not there was a perfected contract of insurance.

HELD: NO. The Court ruled that the letter of November 26, 1917, notifying Mr. Ferrer that
his application had been accepted, was prepared and signed in the local office of the
insurance company, was placed in the ordinary channels for transmission, but as far as we
know, was never actually mailed and thus was never received by the applicant. It has been
held that an acceptance of an offer of insurance not actually or constructively
communicated to the proposer does not make a contract. Only the mailing of acceptance, it
has been said, completes the contract of insurance, as the locus poienitentise is ended
when the acceptance has passed beyond the control of the party.

The fact as to the letter of notification thus fails to concur with the essential elements of the
general rule pertaining to the mailing and delivery of mail matter as announced by the
American courts, namely, when a letter or other mail matter is addressed and mailed with
postage prepaid there is a rebuttable presumption of fact that it was received by the
addressee as soon as it could have been transmitted to him in the ordinary course of the
mails.

Therefore, the contract for a life annuity in the case at bar was not perfected because it has
not been proved satisfactorily that the acceptance of the application ever came to the
knowledge of the applicant. #TURO

***

CASES IN COMMERCIAL LAW REVIEW (J. Dimaampao) 4E 2017-2018 | 66

INSURABLE INTEREST: Life and Property Insurance, Distinctions BENEFICIARY:
When Insurable Interest is Necessary; Disqualified Beneficiary;Irrevocable
Designation of Beneficiary

HEIRS OF LORETO C. MARAMAG vs. EVA VERNA DE GUZMAN MARAMAG, et al.

G.R.No.18113; June5,2009

DOCTRINE: The Insurance Code, as amended, contains a provision regarding to whom

the insurance proceeds shall be paid. It is very clear under Sec. 53 thereof that the
insurance proceeds shall be applied exclusively to the proper interest of the person in
whose name or for whose benefit it is made, unless otherwise specified in the policy. This
is because the beneficiary has a vested right to the indemnity, unless the insured reserves
the right to change the beneficiary.

FACTS: The petitioners were the legitimate wife and children of Loreto Maramag (Loreto),
while respondents were Loreto's illegitimate family, Eva de Guzman Maramag (Eva) was a
concubine of Loreto and a suspect in the killing of the latter, thus, she is disqualified to
receive any proceeds from his insurance policies from Insular Life Assurance Company,
Ltd. (Insular) and Great Pacific Life Assurance Corporation (Grepalife); while the illegitimate
children of Loreto namely: Odessa, Karl Brian, and Trisha Angelie were entitled only to
one-half of the legitime of the legitimate children, thus, the proceeds released to Odessa
and those to be released to Karl Brian and Trisha Angelie were inofficious and should be
reduced.

Both Insular and Grepalife countered that the insurance proceeds belong exclusively to the
designated beneficiaries in the policies, not to the estate or to the heirs of the insured.
Grepalife also reiterated that it had disqualified Eva as a beneficiary when it ascertained
that Loreto was legally married to Vicenta Pangilinan Maramag. The trial court ratiocinated
thus Art. 2011 of the Civil Code provides that the contract of insurance is governed by the
special laws. Matters not expressly provided for in such special laws shall be regulated by
this Code. The principal law on insurance is the Insurance Code, as amended. Only in case
of deficiency in the Insurance Code that the Civil Code may be resorted to.

Petitioners appealed the June 16, 2005 Resolution to the CA, but it dismissed the appeal
for lack of jurisdiction, holding that the decision of the trial court dismissing the complaint for
failure to state a cause of action involved a pure question of law. Hence, this petition.

ISSUE: Whether or not the illegitimate children, which a named beneficiaries in the policy,
are entitled to the proceeds of the thereof.

HELD: YES. The Insurance Code, as amended, contains a provision regarding to whom
the insurance proceeds shall be paid. It is very clear under Sec. 53 thereof that the
insurance proceeds shall be applied exclusively to the proper interest of the person in
whose name or for whose benefit it is made, unless otherwise specified in the policy. Since
the defendants are the ones named as the primary beneficiary in the insurances taken by
the deceased Loreto C. Maramag and there is no showing that herein plaintiffs were also
included as beneficiary therein the insurance proceeds shall exclusively be paid to them.
This is because the beneficiary has a vested right to the indemnity, unless the insured
reserves the right to change the beneficiary.

Neither could the plaintiffs invoked the law on donations or the rules on testamentary
succession in order to defeat the right of herein defendants to collect the insurance
indemnity. The beneficiary in a contract of insurance is not the donee spoken in the law of
donation. The rules on testamentary succession cannot apply here, for the insurance
indemnity does not partake of a donation. As such, the insurance indemnity cannot be
considered as an advance of the inheritance which can be subject to collation.

It is evident from the face of the complaint that petitioners are not entitled to a favorable
judgment in light of Article 2011 of the Civil Code which expressly provides that insurance

CASES IN COMMERCIAL LAW REVIEW (J. Dimaampao) 4E 2017-2018 | 67

contracts shall be governed by special laws, i.e., the Insurance Code. Section 53 of the
Insurance Code states under Section 53, provides that "The insurance proceeds shall be
applied exclusively to the proper interest of the person in whose name or for whose benefit
it is made unless otherwise specified in the policy."

Petitioners are third parties to the insurance contracts with Insular and Grepalife and, thus,
are not entitled to the proceeds thereof. Accordingly, respondents Insular and Grepalife
have no legal obligation to turn over the insurance proceeds to petitioners. The revocation
of Eva as a beneficiary in one policy and her disqualification as such in another are of no
moment considering that the designation of the illegitimate children as beneficiaries in
Loretos insurance policies remains valid. Because no legal proscription exists in naming as
beneficiaries the children of illicit relationships. The insurance proceeds, whether forfeited
by the court in view of the prohibition on donations under Article 739 of the Civil Code or by
the insurers themselves for reasons based on the insurance contracts, must be awarded to
the said illegitimate children, the designated beneficiaries, to the exclusion of petitioners. It
is only in cases where the insured has not designated any beneficiary, or when the
designated beneficiary is disqualified by law to receive the proceeds, that the insurance
policy proceeds shall redound to the benefit of the estate of the insured.#VALDEAVILLA

***

THE INSULAR LIFE ASSURANCE COMPANY, LTD. vs. CARPONIA T. EBRADO and
PASCUALA VDA. DE EBRADO
G.R. No. L-44059 October 28, 1977

DOCTRINE: A life insurance policy is no different from a civil donation insofar as the
beneficiary is concerned. Both are founded upon the same consideration: liberality. As a
consequence, the proscription in Article 739 of the new Civil Code should equally operate
in life insurance contracts.

FACTS: On September 1, 1968, Buenaventura Cristor Ebrado was issued by petitioner,

Policy No. 009929 on a whole-life for P5,882.00 with a, rider for Accidental Death for the
same amount Buenaventura designated respondent Carponia Ebrado as the revocable
beneficiary in his policy. He to her as his wife.

On October 21, 1969, Buenaventura died as a result of an accident when he was hit by a
failing branch of a tree. As the policy was in force, petitioner was liable to pay the coverage
in the total amount of P11,745.73.

Carponia filed with the insurer a claim for the proceeds of the Policy as the designated
beneficiary therein, although she admits that she and the insured Buenaventura were
merely living as husband and wife without the benefit of marriage. Respondent Pascuala
Vda. de Ebrado also filed her claim as the widow of the deceased insured. She asserts that
she is the one entitled to the insurance proceeds, not the common-law wife, Carponia.

In doubt as to whom the insurance proceeds shall be paid, the insurer commenced an
action for Interpleader before the Rizal CFI. The trial court rendered judgment declaring
among others, Carponia disqualified from becoming beneficiary and directing the payment
of the proceeds to the estate of the deceased. Carponia appealed to the CA, but the
Appellate Court certified the case to the SC for involving only questions of law.

ISSUE: Whether or not a common-law wife named as beneficiary in the life insurance
policy of a legally married man may claim the proceeds in case of death of the latter.

HELD: NO. Section 50 of the Insurance Act which provides that "(t)he insurance shall be
applied exclusively to the proper interest of the person in whose name it is made" cannot
be validly seized upon to hold that the same includes the beneficiary. The word "interest"
highly suggests that the provision refers only to the "insured" and not to the beneficiary,
since a contract of insurance is personal in character. Otherwise, the prohibitory laws

CASES IN COMMERCIAL LAW REVIEW (J. Dimaampao) 4E 2017-2018 | 68

against illicit relationships especially on property and descent will be rendered nugatory, as
the same could easily be circumvented by modes of insurance.

Rather, the general rules of civil law should be applied to resolve this void. Article 2011 of
the New Civil Code states: "The contract of insurance is governed by special laws. Matters
not expressly provided for in such special laws shall be regulated by this Code." And under
Article 2012 of the same Code, "any person who is forbidden from receiving any donation
under Article 739 cannot be named beneficiary of a fife insurance policy by the person who
cannot make a donation to him. Common-law spouses are, definitely, barred from receiving
donations from each other.

In essence, a life insurance policy is no different from a civil donation insofar as the
beneficiary is concerned. Both are founded upon the same consideration: liberality. A
beneficiary is like a donee, because from the premiums of the policy which the insured
pays out of liberality, the beneficiary will receive the proceeds or profits of said insurance.
As a consequence, the proscription in Article 739 of the new Civil Code should equally
operate in life insurance contracts.

A conviction for adultery or concubinage need not be exacted before the disabilities
mentioned in Article 739 may effectuate. The law plainly states that the guilt of the party
may be proved "in the same action” for declaration of nullity of donation. And, it would be
sufficient if evidence preponderates upon the guilt of the consort for the offense indicated.
The quantum of proof in criminal cases is not demanded.#VALERIANO

***
GERCIO vs. SUN LIFE ASSURANCE CO. OF CANADA ET AL.,
G.R. No. 23703; September 28, 1925.

DOCTRINE: The beneficiary has an absolute vested interest in the policy from the date of
its issuance and delivery; If the policy contains no provision authorizing a change of
beneficiary without the beneficiary's consent, the insured cannot make such change; and in
the absence of a statute to the contrary, a subsequent divorce does not destroy a spouse-
beneficiary’s rights under the policy.|||

FACTS: in 1910, Hilario Gercio, had insured his life under a 20 year endowment policy with
Sun Life Assurance Co. of Canada, assigning his then wife, Andrea Zialcita as beneficiary.
The policy did not include any provision reserving to the insured the right to change the
beneficiary.|||

Prior to the maturity of the policy, in 1920, Andrea was convicted of the crime of Adultery
and the couple eventually obtained a decree of divorce, enabling Gercio to contract a
second marriage, with Adela Garcia. In 1922, Gercio formally notified and requested Sun
Life to eliminate Andrea as beneficiary, and to designate Adela instead. Sun life refused to
do so, hence a petition for mandamus was filed by Gercio, to w/c the lower court decided in
his favor. Sun Life appealed and continued to refuse the change.

ISSUE: Whether or not an insured husband has the power to change the beneficiary
originally designated as his 1st wife to his present 2nd wife, where the insured and the
beneficiary have been divorced, and where the policy of insurance does not expressly
reserve to the insured the right to change the beneficiary.

HELD: NO, if the policy contains no provision authorizing a change of beneficiary without
the beneficiary's consent, the insured cannot make such change.

Citing several American Jurisprudence, a policy taken out in good faith and valid at its
inception, is not avoided by the cessation of the insurable interest, unless such be the
necessary effect of the provisions of the policy itself… a life policy, originally valid, does not
cease to be so by the cessation of the assured party's interest in the life insured… The
benefit accruing from a policy of life insurance upon the life of a married man, payable upon
his death to his wife, naming her, is payable to the surviving beneficiary named, although

CASES IN COMMERCIAL LAW REVIEW (J. Dimaampao) 4E 2017-2018 | 69

she may have years thereafter secured a divorce from her husband, and he was thereafter
again married to one who sustained the relation of wife to him at the time of his death
(because) the rights of a beneficiary in an ordinary life insurance policy become vested
upon the issuance of the policy, and can thereafter, during the life of the beneficiary, be
defeated only as provided by the terms of the policy...
The wife has an insurable interest in the life of her husband. As the beneficiary, she has an
absolute vested interest in the policy from the date of its issuance and delivery. So when a
policy of life insurance is taken out by the husband in which the wife is named as
beneficiary, she has a subsisting interest in the policy.

A life insurance policy of a husband made payable to the wife as beneficiary, is the
separate property of the beneficiary and beyond the control of the husband. The decree of
divorce merely dissolved the community property of spouses. The fact that his wife at the
time the policy was issued may have been, and undoubtedly was, the reason why she was
named as beneficiary in the event of his death, but her property interest in the policy after it
was issued did not in any reasonable sense arise out of the marriage relation. There being
no provision in the Philippine Law permitting the beneficiary in a policy for the benefit of the
wife of the husband to be changed after a divorce, it must follow that in the absence of a
statute to the contrary, when a policy is taken out upon a husband's life and the wife is
named as beneficiary therein, a subsequent divorce does not destroy her rights under the
policy.#YOROBE

***

CONCORDIA GO vs. ANGELA REDFERN and INTERNATIONAL ASSURANCE CO.

G.R. No. L-47705 April 25, 1941

DOCTRINE: Unless the insured has expressly reserved the right to change or modify the
policy, with respect to the beneficiary thereof, said policy constitutes an acquired right of
the beneficiary, which cannot be modified except with the consent of the same.

FACTS: The case involves an accident insurance policy of deceased Edward K. Redfern,
son of the respondent who was named as beneficiary therein. Nevertheless, International
Assurance refused payment to Angela Redfern and contended that, subsequent to the
death of the insured, the policy had been amended with the addition of appellant Concordia
Go as co-beneficiary. While respondent averred that the addition of appellant as co-
beneficiary was illegal, the latter maintained that her addition did not constitute change in
the policy since it did not involve any alteration therein.

ISSUE: WON the addition of co-beneficiary after the death of the insured is legal to bar full
payment of the policy in favor of the designated beneficiary

HELD: NO. Citing Wallace vs. Mutual Benefit Life Insurance Co., the Supreme Court held
that when a policy is issued, the beneficiary or beneficiary acquires a right from which it
cannot be deprived without his consent, unless it has been reserved expressly the insured
the right to modify the policy. And, the case falls squarely within this instance.

Unless the insured has expressly reserved the right to change or modify the policy, with
respect to the beneficiary thereof, said policy constitutes an acquired right of the
beneficiary, which cannot be modified except with the consent of the same.

The addition of appellant as co-beneficiary, in fact, amounted to a change in the policy

where the original beneficiary would no longer receive the full amount thereof. #ZARA

***

CASES IN COMMERCIAL LAW REVIEW (J. Dimaampao) 4E 2017-2018 | 70

RIGHT OF MORTGAGOR AND MORTGAGEE TO INSURE: Insurable Interest; Double
Insurance; Standard or Union Mortgage Clause, Open or Loss Payable Mortgage
Clause

RCBC VS. CA
G.R. Nos. 128833. April 20, 1998; 289 SCRA 292 (1998)

DOCTRINE: The mortgagor and mortgagee have separate and distinct insurable interests
in the same mortgaged property, such that each one of them may insure the same property
for his own sole benefit. The insurance taken by one does not inure to the benefit of the
other.

FACTS: Goyu & Sons, Inc. (GOYU) applied for credit facilities and accommodations with
RCBC at its Binondo Branch. After due evaluation, RCBC Binondo Branch, through its key
officers, petitioners Chun Bing and Lao, recommended GOYU’s application for approval by
RCBCs executive committee. A credit facility in the amount of P30 million was initially
granted. Upon GOYU’s application and Uy’s and Lao’s recommendation, RCBC’s executive
committee increased GOYU’s credit facility to P50 million, then to P90 million, and finally to
P117 million. As security for its credit facilities with RCBC, GOYU executed two real estate
mortgages and two chattel mortgages in favor of RCBC. Under each of these four
mortgage contracts, GOYU committed itself to insure the mortgaged property with an
insurance company approved by RCBC, and subsequently, to endorse and deliver the
insurance policies to RCBC. GOYU obtained in its name a total of ten insurance policies
from Malayan Insurance Company, Inc. (MICO). Alchester Insurance Agency, Inc., MICO’s
underwriter, prepared the nine endorsements, copies of which were delivered to GOYU,
RCBC, and MICO. On April 27, 1992, one of GOYU's factory buildings in Valenzuela was
gutted by fire. Consequently, GOYU submitted its claim for indemnity. MICO denied the
claim on the ground that the insurance policies were either attached pursuant to writs of
attachments/garnishments issued by various courts or that the insurance proceeds were
also claimed by other creditors of GOYU alleging better rights to the proceeds than the
insured. GOYU filed a complaint for specific performance and damages. RCBC, one of
GOYU's creditors, also filed with MICO its formal claim over the proceeds of the insurance
policies, but said claims were also denied for the same reasons that AGCO denied GOYU's
claims. However, because the endorsements do not bear the signature of any officer of
GOYU, the trial court, as well as the Court of Appeals, concluded that the endorsements
are defective and held that RCBC has no right over the insurance proceeds

ISSUE: Whether or not RCBC, as mortgagee, has any right over the insurance policies
taken by GOYU, the mortgagor, in case of the occurrence of loss.

HELD: YES.It is settled that a mortgagor and a mortgagee have separate and distinct
insurable interests in the same mortgaged property, such that each one of them may insure
the same property for his own sole benefit. There is no question that GOYU could insure
the mortgaged property for its own exclusive benefit. In the present case, although it
appears that GOYU obtained the subject insurance policies naming itself as the sole
payee, the intentions of the parties as shown by their contemporaneous acts, must be
given due consideration in order to better serve the interest of justice and equity.

On equitable principles, particularly on the ground of estoppel, the Court is constrained to

rule in favor of mortgagor RCBC. RCBC, in good faith, relied upon the endorsement
documents sent to it as this was only pursuant to the stipulation in the mortgage contracts.
We find such reliance to be justified under the circumstances of the case. GOYU failed to
seasonably repudiate the authority of the person or persons who prepared such
endorsements. Over and above this, GOYU continued, in the meantime, to enjoy the
benefits of the credit facilities extended to it by RCBC. After the occurrence of the loss
insured against, it was too late for GOYU to disown the endorsements for any imagined or
contrived lack of authority of Alchester to prepare and issue said endorsements. If there
had not been actually an implied ratification of said endorsements by virtue of GOYU's

CASES IN COMMERCIAL LAW REVIEW (J. Dimaampao) 4E 2017-2018 | 71

inaction in this case, GOYU is at the very least estopped from assailing their operative
effects.#ACHAS

***

GAISANO CAGAYAN, INC. vs.INSURANCE COMPANY OF NORTH AMERICA

G.R. No. 147839, June 8, 2006

DOCTRINE: An insurable interest in property does not necessarily imply a property interest
in, or a lien upon, or possession of, the subject matter of the insurance, and neither the title
nor a beneficial interest is requisite to the existence of such an interest, it is sufficient that
the insured is so situated with reference to the property that he would be liable to loss
should it be injured or destroyed by the peril against which it is insured.

FACTS: Intercapitol Marketing Corporation (IMC) is the maker of Wrangler Blue Jeans.
Levi Strauss (Phils.) Inc. (LSPI) is the local distributor of products bearing trademarks
owned by Levi Strauss & Co. IMC and LSPI separately obtained from respondent fire
insurance policies with book debt endorsements. The insurance policies provide for
coverage on "book debts in connection with ready-made clothing materials which have
been sold or delivered to various customers and dealers of the Insured anywhere in the
Philippines." The policies defined book debts as the "unpaid account still appearing in the
Book of Account of the Insured 45 days after the time of the loss covered under this Policy."
Petitioner is a customer and dealer of the products of IMC and LSPI. Gaisano Superstore
Complex in Cagayan de Oro City, owned by petitioner, was consumed by fire. Included in
the items lost or destroyed in the fire were stocks of ready-made clothing materials sold
and delivered by IMC and LSPI. Respondent filed a complaint for damages against
petitioner. It alleges that IMC and LSPI filed with respondent their claims under their
respective fire insurance policies with book debt endorsements; that as of February 25,
1991, the unpaid accounts of petitioner on the sale and delivery of ready-made clothing
materials with IMC was P2,119,205.00 while with LSPI it was P535,613.00; that respondent
paid the claims of IMC and LSPI and, by virtue thereof, respondent was subrogated to their
rights against petitioner; that respondent made several demands for payment upon
petitioner but these went unheeded.

In its Answer with Counter Claim, petitioner contends that it could not be held liable
because the property covered by the insurance policies were destroyed due to fortuities
event or force majeure; that respondent's right of subrogation has no basis inasmuch as
there was no breach of contract committed by it since the loss was due to fire which it could
not prevent or foresee; that IMC and LSPI never communicated to it that they insured their
properties; that it never consented to paying the claim of the insured. One of the arguments
raised by petitioner is that IMC bears the risk of loss because it expressly reserved
ownership of the goods by stipulating in the sales invoices that it is further agreed that
merely for purpose of securing the payment of the purchase price the above described
merchandise remains the property of the vendor until the purchase price thereof is fully
paid.

ISSUE: Whether or not IMC and LSPI has insurable interest over the goods.

HELD: YES.IMC and LSPI did not lose complete interest over the goods. They have an
insurable interest until full payment of the value of the delivered goods. Unlike the civil law
concept of res perit domino, where ownership is the basis for consideration of who bears
the risk of loss, in property insurance, one's interest is not determined by concept of title,
but whether insured has substantial economic interest in the property.

Section 13 of our Insurance Code defines insurable interest as "every interest in property,
whether real or personal, or any relation thereto, or liability in respect thereof, of such
nature that a contemplated peril might directly damnify the insured." Parenthetically, under
Section 14 of the same Code, an insurable interest in property may consist in: (a) an
existing interest; (b) an inchoate interest founded on existing interest; or (c) an expectancy,
coupled with an existing interest in that out of which the expectancy arises.

CASES IN COMMERCIAL LAW REVIEW (J. Dimaampao) 4E 2017-2018 | 72

Therefore, an insurable interest in property does not necessarily imply a property interest
in, or a lien upon, or possession of, the subject matter of the insurance, and neither the title
nor a beneficial interest is requisite to the existence of such an interest, it is sufficient that
the insured is so situated with reference to the property that he would be liable to loss
should it be injured or destroyed by the peril against which it is insured. Anyone has an
insurable interest in property who derives a benefit from its existence or would suffer loss
from its destruction. Indeed, a vendor or seller retains an insurable interest in the property
sold so long as he has any interest therein, in other words, so long as he would suffer by its
destruction, as where he has a vendor's lien. In this case, the insurable interest of IMC and
LSPI pertain to the unpaid accounts appearing in their Books of Account 45 days after the
time of the loss covered by the policies.#ACHAS

***

GEAGONIA vs. CA and COUNTRY BANKERS INSURANCE CORPORATION

G.R. No. 114427; Feb. 6, 1995

DOCTRINE: The rationale behind the incorporation of "other insurance" clause in fire
policies is to prevent over-insurance and thus avert the perpetration of fraud. When a
property owner obtains insurance policies from two or more insurers in a total amount that
exceeds the property's value, the insured may have an inducement to destroy the property
for the purpose of collecting the insurance. The public as well as the insurer is interested in
preventing a situation in which a fire would be profitable to the insured.

A double insurance exists where the same person is insured by several insurers separately
in respect of the same subject and interest. As earlier stated, the insurable interests of a
mortgagor and a mortgagee on the mortgaged property are distinct and separate. Since the
two policies of the PFIC do not cover the same interest as that covered by the policy of the
private respondent, no double insurance exists. The non-disclosure then of the former
policies was not fatal to the petitioner's right to recover on the private respondent's policy.
FACTS: Geagonia, owner of a store, obtained from Country Bankers fire insurance policy
for P100,000.00. The 1 year policy covered the stock trading of dry goods.

The policy noted the requirement that

"3. The insured shall give notice to the Company of any insurance or insurances already
effected, or which may subsequently be effected, covering any of the property or properties
consisting of stocks in trade, goods in process and/or inventories only hereby insured, and
unless notice be given and the particulars of such insurance or insurances be stated
therein or endorsed in this policy pursuant to Section 50 of the Insurance Code, by or on
behalf of the Company before the occurrence of any loss or damage, all benefits under this
policy shall be deemed forfeited, provided however, that this condition shall not apply when
the total insurance or insurances in force at the time of the loss or damage is not more than
P200,000.00."

The petitioners’ stocks were destroyed by fire. He then filed a claim which was
subsequently denied because the petitioner’s stocks were covered by two other fire
insurance policies for Php 200,000 issued by PFIC. The basis of the private respondent's
denial was the petitioner's alleged violation of Condition 3 of the policy.

Geagonia then filed a complaint against the private respondent in the Insurance
Commission for the recovery of P100,000.00 under fire insurance policy and damages. He
claimed that he knew the existence of the other two policies. But, he said that he had no
knowledge of the provision in the private respondent's policy requiring him to inform it of the
prior policies and this requirement was not mentioned to him by the private respondent's
agent.

The Insurance Commission found that the petitioner did not violate Condition 3 as he had
no knowledge of the existence of the two fire insurance policies obtained from the PFIC;
that it was Cebu Tesing Textiles w/c procured the PFIC policies w/o informing him or

CASES IN COMMERCIAL LAW REVIEW (J. Dimaampao) 4E 2017-2018 | 73

securing his consent; and that Cebu Tesing Textile, as his creditor, had insurable interest
on the stocks.

The Insurance Commission then ordered the respondent company to pay complainant the
sum of P100,000.00 with interest and attorney’s fees.

CA reversed the decision of the Insurance Commission because it found that the petitioner
knew of the existence of the two other policies issued by the PFIC.

ISSUES:
1. WON the petitioner had not disclosed the two insurance policies when he obtained the
fire insurance and thereby violated Condition 3 of the policy.
2. WON he is prohibited from recovering

HELD:
1.YES. The court agreed with the CA that the petitioner knew of the prior policies issued by
the PFIC. His letter of 18 January 1991 to the private respondent conclusively proves this
knowledge. His testimony to the contrary before the Insurance Commissioner and which
the latter relied upon cannot prevail over a written admission made ante litem motam. It
was, indeed, incredible that he did not know about the prior policies since these policies
were not new or original.

2. NO. Petition Granted

Stated differently, provisions, conditions or exceptions in policies which tend to work a
forfeiture of insurance policies should be construed most strictly against those for whose
benefits they are inserted, and most favorably toward those against whom they are
intended to operate.

With these principles in mind, Condition 3 of the subject policy is not totally free from
ambiguity and must be meticulously analyzed. Such analysis leads us to conclude that (a)
the prohibition applies only to double insurance, and (b) the nullity of the policy shall only
be to the extent exceeding P200,000.00 of the total policies obtained.

Furthermore, by stating within Condition 3 itself that such condition shall not apply if the
total insurance in force at the time of loss does not exceed P200,000.00, the private
respondent was amenable to assume a co-insurer's liability up to a loss not exceeding
P200,000.00. What it had in mind was to discourage over-insurance.

Condition 3 of the private respondent's Policy No. F-14622 is a condition which is not
proscribed by law. Its incorporation in the policy is allowed by Section 75 of the Insurance
Code which provides that "[a] policy may declare that a violation of specified provisions
thereof shall avoid it, otherwise the breach of an immaterial provision does not avoid the
policy." Such a condition is a provision which invariably appears in fire insurance policies
and is intended to prevent an increase in the moral hazard. It is commonly known as the
additional or "other insurance" clause and has been upheld as valid and as a warranty that
no other insurance exists. Its violation would thus avoid the policy. However, in order to
constitute a violation, the other insurance must be upon same subject matter, the same
interest therein, and the same risk. #BAGAYAO

***

PREMIUM: Effect of Non-Payment; General Rules and Exceptions

SOUTH SEA SURETY AND INSURANCE COMPANY, INC. vs. HON. COURT OF
APPEALS and VALENZUELA HARDWOOD AND INDUSTRIAL SUPPLY, INC.,
G.R. No. 102253 June 2, 1995

DOCTRINE: Sec. 306. …Any insurance company which delivers to an insurance agent or
insurance broker a policy or contract of insurance shall be deemed to have authorized such
agent or broker to receive on its behalf payment of any premium which is due on such

CASES IN COMMERCIAL LAW REVIEW (J. Dimaampao) 4E 2017-2018 | 74

policy of contract of insurance at the time of its issuance or delivery or which becomes due
thereon.

FACTS:Valenzuela Hardwood and Industrial Supply, Inc. [Hardwoord] entered into an

agreement with the defendant Seven Brothers whereby the latter undertook to load on
board its vessel M/V Seven Ambassador the former's 940 lauan round logs at the port of
Maconacon, Isabela for shipment to Manila. Hardwood nsured the logs, against loss
and/or, damage with defendant South Sea Surety and Insurance Co., Inc. for
P2,000,000.00 end the latter issued its Marine Cargo Insurance Policy No. 84/24229 for
P2,000,000.00 on said date then gave the check in payment of the premium on the
insurance policy to Mr. Victorio Chua. The vessel sank resulting in the loss of the plaintiffs
insured logs.

A check for P5,625.00 to cover payment of the premium and documentary stamps due on
the policy was tendered to the insurer but was not accepted. Instead, the South Sea Surety
and Insurance Co., Inc. cancelled the insurance policy it issued as of the date of inception
for non-payment of the premium due in accordance with Section 77 of the Insurance Code.

Plaintiff demanded from defendant South Sea Surety and Insurance Co., Inc. the payment
of the proceeds of the policy but the latter denied liability under the policy. Plaintiff likewise
filed a formal claim with defendant Seven Brothers Shipping Corporation for the value of
the lost logs but the latter denied the claim.

ISSUE: Whether or not Victorio Chua, in receiving the check for the insurance premium
prior to the occurrence of the risk insured against has so acted as an agent of petitioner.

HELD: YES. The payment of the premium is a condition precedent to, and essential for, the
efficaciousness of the contract. The only two statutorily provided exceptions are (a) in case
the insurance coverage relates to life or industrial life (health) insurance when a grace
period applies and (b) when the insurer makes a written acknowledgment of the receipt of
premium, this acknowledgment being declared by law to be then conclusive evidence of the
premium payment.

However in this case, the Marine Cargo Insurance Policy was issued by defendant
insurance company on 20 January 1984. At the time the vessel sank on 25 January 1984
resulting in the loss of the insured logs, the insured had already delivered to Victorio Chua
the check in payment of premium. But, as Victorio Chua testified, it was only in the morning
of 30 January 1984 or 5 days after the vessel sank when his messenger tendered the
check to defendant South Sea Surety and Insurance Co., Inc.
On cross-examination in behalf of South Sea Surety and Insurance Co., Inc. Mr. Chua
testified that the marine cargo insurance policy for the plaintiff's logs was delivered to him
on 21 January 1984 at his office to be delivered to the plaintiff.

When the appellant South Sea Surety and Insurance Co., Inc. delivered to Mr. Chua the
marine cargo insurance policy for the plaintiff’s logs, he is deemed to have been authorized
by the South Sea Surety and Insurance Co., Inc. to receive the premium which is due on its
behalf.

When therefore the insured logs were lost, the insured had already paid the premium to an
agent of the South Sea Surety and Insurance Co., Inc., which is consequently liable to pay
the insurance proceeds under the policy it issued to the insured. #BELO

***

CASES IN COMMERCIAL LAW REVIEW (J. Dimaampao) 4E 2017-2018 | 75

 MAKATI TUSCANY CONDOMINIUM CORPORATION vs. THE COURT OF APPEALS
G.R. No. 95546 November 6, 1992

DOCTRINE: Section 78 of the Insurance Code allows waiver by the insurer of the condition
of prepayment by making an acknowledgment in the insurance policy of receipt of premium
as conclusive evidence of payment so far as to make the policy binding despite the fact that
premium is actually unpaid. Section 77 merely precludes the parties from stipulating that
the policy is valid even if premiums are not paid, but does not expressly prohibit an
agreement granting credit extension, and such an agreement is not contrary to morals,
good customs, public order or public policy.

FACTS: Private respondent American Home Assurance Co. (AHAC), represented by

American International Underwriters (Phils.), Inc., issued in favor of petitioner Makati
Tuscany Condominium Corporation (TUSCANY) an Insurance Policy on the latter's building
and premises, for a period of one year, with a total premium of P466,103.05. The premium
was paid on installments, all of which were accepted by private respondent. The same
arrangement was continued for the year 1983. On 20 January 1984, the policy was again
renewed and private respondent issued to petitioner Insurance Policy No. AH-CPP-
9210651. On this renewed policy, petitioner made two installment payments, both accepted
by private respondent, the first on 6 February 1984 for P52,000.00 and the second, on 6
June 1984 for P100,000.00. Thereafter, petitioner refused to pay the balance of the
premium. Consequently, private respondent filed an action to recover the unpaid balance of
P314,103.05 for Insurance Policy No. AH-CPP-9210651.

Petitioner now asserts that its payment by installment of the premiums for the insurance
policies for 1982, 1983 and 1984 invalidated said policies because of the provisions of Sec.
77 of the Insurance Code, as amended, and by the conditions stipulated by the insurer in
its receipts, disclaiming liability for loss occurring before payment of premiums.
It argues that where the premium is not actually paid in full, the policy would only be
effective if there is an acknowledgment in the policy of the receipt of premium pursuant to
Sec. 78 of the Insurance Code. The absence of an express acknowledgment in the policies
of such receipt of the corresponding premium payments, and petitioner's failure to pay said
premiums on or before the effective dates of said policies rendered them invalid. Petitioner
thus concludes that there cannot be a perfected contract of insurance upon mere partial
payment of the premiums because under Sec. 77 of the Insurance Code, no contract of
insurance is valid and binding unless the premium thereof has been paid, notwithstanding
any agreement to the contrary. As a consequence, petitioner seeks a refund of all premium
payments made on the alleged invalid insurance policies.

ISSUE: Whether or not payment by installment of the premiums due on an insurance

policy invalidates the contract of insurance.

HELD: NO, the subject policies are valid even if the premiums were paid on installments.
The records clearly show that petitioner and private respondent intended subject insurance
policies to be binding and effective notwithstanding the staggered payment of the
premiums. Such acceptance of payments speaks loudly of the insurer's intention to honor
the policies it issued to petitioner. Certainly, basic principles of equity and fairness would
not allow the insurer to continue collecting and accepting the premiums, although paid on
installments, and later deny liability on the lame excuse that the premiums were not
prepared in full. #CABATUANDO

***

UCPB GENERAL INSURANCE CO., INC. vs. MASAGANA TELAMART, INC.

CASES IN COMMERCIAL LAW REVIEW (J. Dimaampao) 4E 2017-2018 | 76

 G.R. No. 137172. June 15, 1999.

DOCTRINE: An insurance policy, other than life, issued originally or on renewal, is not valid
and binding until actual payment of the premium. Any agreement to the contrary is void.
The parties may not agree expressly or impliedly on the extension of credit or time to pay
the premium and consider the policy binding before actual payment.

FACTS: On April 15, 1991, petitioner issued five (5) insurance policies covering
respondent's various properties against fire. On April 6, 1992, petitioner gave written notice
to respondent of the non-renewal of the policies. On June 13, 1992, fire razed respondent's
property covered by three of the insurance policies petitioner issued. On July 13, 1992,
respondent presented to petitioner's cashier five (5) manager's checks representing
premium for the renewal of the policies from May 22, 1992 to May 22, 1993. No notice of
loss was filed by respondent under the policies prior to July 14, 1992. On July 14, 1992,
respondent filed with petitioner its claim for indemnification of the insured property razed by
fire. On the same day, petitioner returned to respondent the manager's checks it tendered
and at the same time rejected its claim. Respondent thus filed a civil complaint against
petitioner with the Regional Trial Court (RTC) for recovery of the face value of the policies
(P18,645,000.00). The RTC rendered judgment in favor of the plaintiff. The Court of
Appeals affirmed the decision rendered by the RTC. Hence, this appeal.

ISSUE: WON the fire insurance policies had expired on 22 May 1992, or had been
extended or renewed by an implied credit arrangement though actual payment of premium
was tendered on a later date after the occurrence of the risk insured against fire.

HELD: The fire insurance had expired. The Court reversed the decision of the Court of
Appeals. It held that under section 77 of the Insurance Code, an insurance policy, other
than life, issued originally or on renewal, is not valid and binding until actual payment of the
premium. Any agreement to the contrary is void. The parties may not agree expressly or
impliedly on the extension of credit or time to pay the premium and consider the policy
binding before actual payment.

The case of Malayan Insurance Co., Inc. vs. Cruz-Arnaldo, cited by the Court of Appeals, is
not applicable. In that case, payment of the premium was in fact actually made on
December 24, 1981, and the fire occurred on January 18, 1982. Here, the payment of the
premium for renewal of the policies was tendered on July 13, 1992, a month after the fire
occurred on June 13, 1992. The assured did not even give the insurer a notice of loss
within a reasonable time after occurrence of the fire.#CASTANEDA

***

AMERICAN HOME ASSURANCE COMPANY VS. ANTONIO CHUA

G.R. No. 130421 June 28, 1999

DOCTRINE: A postdated check bearing a date prior to the loss, which remains unencashed
at the time of loss, constitutes valid payment of premium.

FACTS: Petitioner is a domestic corporation engaged in the insurance business.

Respondent obtained from petitioner a fire insurance covering the stock-in-trade of his
business. The insurance was due to expire on 25 March 1990. Respondent issued
PCIBank Check No. 352123 in the amount of P2,983.50 to petitioners agent, James Uy, as
payment for the renewal of the policy. In turn, the latter delivered Renewal Certificate No.
00099047 to respondent. The check was drawn against a Manila bank and deposited in
petitioners bank account in Cagayan de Oro City. The corresponding official receipt was
issued on. Subsequently, a new insurance policy, Policy No. 206-4234498-7, was issued,
whereby petitioner undertook to indemnify respondent for any damage or loss arising from
fire up to P200,000 for the period 25 March 1990 to 25 March 1991.

CASES IN COMMERCIAL LAW REVIEW (J. Dimaampao) 4E 2017-2018 | 77

Moonlight Enterprises was completely razed by fire. Petitioner refused to honor the claim
notwithstanding several demands by respondent, thus, the latter filed an action against
petitioner before the trial court. In its defense, petitioner claimed there was no existing
insurance contract when the fire occurred since respondent did not pay the premium.
Petitioner emphasizes that when the fire occurred on 6 April 1990 the insurance contract
was not yet subsisting pursuant to Article 1249 of the Civil Code, which recognizes that a
check can only effect payment once it has been cashed. Although respondent testified that
he gave the check on 5 April to a certain James Uy, the check, drawn against a Manila
bank and deposited in a Cagayan de Oro City bank, could not have been cleared by 6
April, the date of the fire. In fact, the official receipt issued for respondents check payment
was dated 10 April 1990, four days after the fire occurred. The trial court ruled in favor of
respondent. It found that respondent paid by way of check a day before the fire occurred.
The check, which was deposited in petitioners bank account, was even acknowledged in
the renewal certificate issued by petitioners agent. On appeal, the assailed decision was
affirmed in toto by the Court of Appeals.

ISSUE: Whether or not a postdated check will produce the effect of valid payment if it
remains unencashed at the time of the loss.

HELD: YES. The general rule in insurance laws is that unless the premium is paid the
insurance policy is not valid and binding. The only exceptions are life and industrial life
insurance. The renewal certificate issued to respondent contained the acknowledgment
that premium had been paid. It is not disputed that the check drawn by respondent in favor
of petitioner and delivered to its agent was honored when presented and petitioner forthwith
issued its official receipt to respondent on 10 April 1990. Section 306 of the Insurance Code
provides that any insurance company which delivers a policy or contract of insurance to an
insurance agent or insurance broker shall be deemed to have authorized such agent or
broker to receive on its behalf payment of any premium which is due on such policy or
contract of insurance at the time of its issuance or delivery or which becomes due thereon.
In the instant case, the best evidence of such authority is the fact that petitioner accepted
the check and issued the official receipt for the payment. It is, as well, bound by its agents
acknowledgment of receipt of payment.

Section 78 of the Insurance Code explicitly provides: An acknowledgment in a policy or

contract of insurance of the receipt of premium is conclusive evidence of its payment, so far
as to make the policy binding, notwithstanding any stipulation therein that it shall not be
binding until the premium is actually paid.

This Section establishes a legal fiction of payment and should be interpreted as an

exception to Section 77. #CORREA

***

POLICY: Kinds; Interpretation; Validity of Cover Notes

PACIFIC TIMBER EXPORT CORPORATION VS. COURT OF APPEALS and

WORKMEN’S INSURANCE COMPANY, INC.
112 SCRA 199, G.R. No. L – 38613 : 25 February 1982

DOCTRINE: A cover note is a temporary insurance coverage. The fact that no payment of
premium was paid on the cover note before the loss insured against occurred will not
hinder the insured from recovering the proceeds. This is how the cover note as a “binder”
should legally operate. Otherwise, it would serve no practical purpose in the realm of
commerce. It is supported by the doctrine that where a policy is delivered without requiring
payment of the premium, the presumption is that a credit was intended and policy is valid.

FACTS: Pacific Timber secured temporary insurance from Workmen’s Insurance

Company, Inc. (Workmen’s Insurance) for its exportation of board feet of Philippine Lauan
and Apitong logs to be shipped from the Diapitan Bay, Quezon Province to Okinawa and
Tokyo, Japan. Workmen’s Insurance issued Cover Note No. 1010 on March 19, 1963,

CASES IN COMMERCIAL LAW REVIEW (J. Dimaampao) 4E 2017-2018 | 78

insuring the said cargo of the plaintiff "Subject to the Terms and Conditions of the
WORKMEN'S INSURANCE COMPANY, INC. printed Marine Policy form as filed with and
approved by the Office of the Insurance Commissioner. On April 2, 1963, the regular
marine cargoes were issued. After the issuance of Cover Note No. 1010 but before the
issuance of the two marine policies Nos. 53 HO 1032 and 53 HO 1033, some of the logs
intended to be exported were lost during loading operations in the Diapitan Bay. At about
10:00 o'clock a. m. on March 29, 1963, while the logs were alongside the vessel, bad
weather developed resulting in 75 pieces of logs which were rafted together co-break loose
from each other. 45 pieces of logs were salvaged, but 30 pieces were verified to have been
lost or washed away as a result of the accident. Pacific Timber informed the defendant
about the loss of 'appropriately 32 pieces of logs on April 4, 1963.

Workmen’s Insurance wrote Pacific Timber denying its claim, on the ground they
defendant's investigation revealed that the entire shipment of logs covered by the two
marines policies No. 53 110 1032 and 713 HO 1033 were received in good order at their
point of destination; that the said loss may be considered as covered under Cover Note No.
1010 because the said Note had become 'null and void by virtue of the issuance of Marine
Policy Nos. 53 HO 1032 and 1033. The denial of the claim by Workmen’s Insurance was
brought by Pacific Timber to the attention of the Insurance Commissioner by means of a
letter and the latter observed that 'it is only fair and equitable to indemnify the insured under
Cover Note No. 1010', and advised early settlement of the said marine loss and salvage
claim. However, Workmen’s Insurance informed the Insurance Commissioner that, on
advice of their attorneys, the claim of the plaintiff is being denied on the ground that the
cover note is null and void for lack of valuable consideration.

ISSUES:
(1) Whether or not the cover note was null and void for lack of valuable consideration as
no separate premiums were collected on all its cover notes
(2) Whether or not Workmen’s Insurance waived its right under Sec. 85 of the Insurance
Act for failure to object on the ground of unreasonable delay in giving notice of loss , hence
was not released from liability

HELD:(1) NO. The fact that no separate premium was paid on the Cover Note before
the loss insured against occurred, does not militate against the validity of petitioner's
contention, for no such premium could have been paid, since by the nature of the Cover
Note, it did not contain, as all Cover Notes do not contain particulars of the shipment that
would serve as basis for the computation of the premiums. As a logical consequence, no
separate premiums are intended or required to be paid on a Cover Note. At any rate, it is
not disputed that petitioner paid in full all the premiums as called for by the statement
issued by private respondent after the issuance of the two regular marine insurance
policies, thereby leaving no account unpaid by petitioner due on the insurance coverage,
which must be deemed to include the Cover Note. If the Note is to be treated as a separate
policy instead of integrating it to the regular policies subsequently issued, the purpose and
function of the Cover Note would be set at naught or rendered meaningless, for it is in a
real sense a contract, not a mere application for insurance which is a mere offer.

For obvious reasons, it was not necessary to ask petitioner to pay premium on the Cover
Note, for the loss insured against having already occurred, the more practical procedure is
simply to deduct the premium from the amount due the petitioner on the Cover Note. The
non-payment of premium on the Cover Note is, therefore, no cause for the petitioner to lose
what is due it as if there had been payment of premium, for non-payment by it was not
chargeable against its fault. Had all the logs been lost during the loading operations, but
after the issuance of the Cover Note, liability on the note would have already arisen even
before payment of premium. This is how the cover note as a "binder" should legally operate
otherwise, it would serve no practical purpose in the realm of commerce, and is supported
by the doctrine that where a policy is delivered without requiring payment of the premium,
the presumption is that a credit was intended and policy is valid.

(2) YES. The defense of delay as raised by private respondent in resisting the claim
cannot be sustained. The law requires this ground of delay to be promptly and specifically

CASES IN COMMERCIAL LAW REVIEW (J. Dimaampao) 4E 2017-2018 | 79

asserted when a claim on the insurance agreement is made. The undisputed facts show
that instead of invoking the ground of delay in objecting to petitioner's claim of recovery on
the cover note, it took steps clearly indicative that this particular ground for objection to the
claim was never in its mind. In the proceedings that took place later in the Office of the
Insurance Commissioner, private respondent should then have raised this ground of delay
to avoid liability. It did not do so. It must be because it did not find any delay, as this Court
fails to find a real and substantial sign thereof. But even on the assumption that there was
delay, this Court is satisfied and convinced that as expressly provided by law, waiver under
Sec. 85 can successfully be raised against private respondent. #FRANCISCO

***
COMMISSIONER OF INTERNAL REVENUE vs LINCOLN PHILIPPINE LIFE
INSURANCE COMPANY, INC. and THE COURT OF APPEALS
GR. No. 119176; Mar 19, 2002

DOCTRINE: The subject insurance policy at the time it was issued contained an
“automatic increase clause.” Although the clause was to take effect only in 1984, it was
written into the policy at the time of its issuance. The distinctive feature of the “junior estate
builder policy” called the “automatic increase clause” already formed part and parcel of the
insurance contract, hence, there was no need for an execution of a separate agreement for
the increase in the coverage that took effect in 1984 when the assured reached a certain
age.

FACTS: Lincoln Philippine Life Insurance Co, Inc. is engaged in life insurance business.
Prior to 1984, Lincoln issued a special kind of life insurance policy known as Junior Estate
Builder Policy, wherein a clause therein provides an automatic increase in the amount of
life insurance coverage upon attainment of a certain age by the insured without the need of
issuing a new policy. The clause was to take effect in year 1984. Documentary stamp taxes
due on the policy were paid by petitioner only on the initial sum assured. Subsequently,
CIR issued a deficiency documentary stamps tax assessment for year 1984 in the amount
of 464, 898.75 for the increase of the sum assured on the policy issued by Lincoln. CTA
found no valid basis for the deficiency tax assessment on the insurance policy. CIR
appealed to the CA, the latter affirmed the CTA’s decision. CIR appealed to the SC
contending that the CA erred when it ruled that there is a single agreement embodied in the
policy and that the automatic increase clause is not a separate agreement, contrary to Sec
49 of the Insurance Code. Further, that the Court of Appeals erred in not computing the
amount of tax on the total value of the insurance assured in the policy including the
additional increase assured by the automatic increase clause.

ISSUE: Whether or not the “automatic increase clause” in the policy is separate and distinct
from the main agreement and involves another transaction.

HELD: NO. Sec 49, Title VI of the Insurance Code defines an insurance policy as the
written instrument in which a contract of insurance is set forth. Sec 50 of the same Code
provides that the policy, which is required to be in printed form, may contain any word,
phrase, clause, mark, sign, symbol, signature, number, or word necessary to complete the
contract of insurance. It is thus clear that any rider, clause, warranty, or endorsement
pasted or attached to the policy is considered part of such policy or contract of insurance.

The subject insurance policy at the time it was issued contain an “automatic increase
clause.” Although the clause was to take effect only in 1984, it was written into the policy at
the time of its issuance. The distinctive feature of the “junior estate builder policy” called the
“automatic increase clause” already formed part and parcel of the insurance contract,
hence, there was no need for an execution of a separate agreement for the increase in the
coverage that took effect in 1984 when the assured reached a certain age.

Here, although the automatic increase in the amount of life insurance coverage was to take
effect later on, the date of its effectivity, as well as the amount of the increase, was already
definite at the time of the issuance of the policy. Thus, the amount insured by the policy at
the time of its issuance necessarily included the additional sum covered by the automatic

CASES IN COMMERCIAL LAW REVIEW (J. Dimaampao) 4E 2017-2018 | 80

increase clause because it was already determinable at the time the transaction was
entered into and formed part of the policy. #GASPI

***

DEVICES TO DELIMIT OR CONTROL RISK AND LOSS; Concealment;

Representation; Warranty; Exception, Condition, and Incontestability Clause

NG GAN ZEE vs.ASIAN CRUSADER LIFE ASSURANCE CORPORATION

G.R. No. L-30685; May 30, 1983

DOCTRINE: Concealment exists where the assured had knowledge of a fact material to
the risk, and honesty, good faith, and fair dealing requires that he should communicate it to
the assurer, but he designedly and intentionally withholds the same.

FACTS: In 1962, Kwong Nam applied for a 20-year endowment insurance on his life for the
sum of P20,000.00, with his wife, appellee Ng Gan Zee as beneficiary. On the same date,
appellant, upon receipt of the required premium from the insured, approved the application
and issued the corresponding policy. In 1963, Kwong Nam died of cancer of the liver with
metastasis. All premiums had been religiously paid at the time of his death.
His widow Ng Gan Zee presented a claim in due form to appellant for payment of the face
value of the policy. Appellant denied the claim on the ground that the answers given by the
insured to the questions appealing in his application for life insurance were untrue.

Appellant maintained that when Kwong was examined in connection with his application, he
gave the appellant's medical examiner false and misleading information that he was
operated on for a tumor [mayoma] of the stomach; that the tumor has been associated with
ulcer of stomach; that the tumor taken out was hard and of a hen's egg size, constituted
material concealment.

It was found that prior to his application, Kwong was diagnosed to have peptic ulcers, and
that during the operation what was removed from Kwong’s body was actually a portion of
the stomach and not tumor.

ISSUE: Whether or not the insured was guilty of concealment

HELD: NO. Section 27 of the Insurance Law [Act 2427] provides: Sec. 27. Such party a
contract of insurance must communicate to the other, in good faith, all facts within his
knowledge which are material to the contract, and which the other has not the means of
ascertaining, and as to which he makes no warranty.

Thus, "concealment exists where the assured had knowledge of a fact material to the risk,
and honesty, good faith, and fair dealing requires that he should communicate it to the
assurer, but he designedly and intentionally withholds the same."

It has also been held "that the concealment must, in the absence of inquiries, be not only
material, but fraudulent, or the fact must have been intentionally withheld."

It bears emphasis that Kwong Nam had informed the appellant's medical examiner that the
tumor for which he was operated on was "associated with ulcer of the stomach." In the
absence of evidence that the insured had sufficient medical knowledge as to enable him to
distinguish between "peptic ulcer" and "a tumor", his statement that said tumor was
"associated with ulcer of the stomach, " should be construed as an expression made in
good faith of his belief as to the nature of his ailment and operation. Indeed, such statement
must be presumed to have been made by him without knowledge of its incorrectness and
without any deliberate intent on his part to mislead the appellant.#GERONIMO

***

CASES IN COMMERCIAL LAW REVIEW (J. Dimaampao) 4E 2017-2018 | 81

 ALPHA INSURANCE AND SURETY CO. vs. ARSENIA SONIA CASTOR
G.R. No. 198174, September 2, 2013

DOCTRINE: The burden to prove that the loss was caused by an excepted peril lies with
the insurer.

FACTS: Arsenia Sonia Castor (Castor) obtained a Motor Car Policy for her Toyota Revo
DLX DSL with Alpha Insurance and Surety Co (Alpha). The contract of insurance obligates
the petitioner to pay the respondent the amount of P630,000 in case of loss or damage to
said vehicle during the period covered.

On April 16, 2007, respondent instructed her driver, Jose Joel Salazar Lanuza to bring the
vehicle to nearby auto-shop for a tune up. However, Lanuza no longer returned the motor
vehicle and despite diligent efforts to locate the same, said efforts proved futile. Resultantly,
respondent promptly reported the incident to the police and concomitantly notified petitioner
of the said loss and demanded payment of the insurance proceeds.

Alpha, however, denied the demand of Castor claiming that they are not liable since the
culprit who stole the vehicle is employed with Castor. Under the Exceptions to Section III of
the Policy, the Company shall not be liable for (4) any malicious damage caused by the
insured, any member of his family or by “A PERSON IN THE INSURED’S SERVICE”.

Castor filed a Complaint for Sum of Money with Damages against Alpha before the
Regional Trial Court of Quezon City. The trial court rendered its decision in favor of Castor
which decision is affirmed in toto by the Court of Appeals. Hence, this Petition for Review
on Certiorari.

ISSUE: Whether or not the loss of respondent’s vehicle is excluded under the insurance
policy.

HELD: NO. The words “loss” and “damage” mean different things in common ordinary
usage. The word “loss” refers to the act or fact of losing, or failure to keep possession,
while the word “damage” means deterioration or injury to property. Therefore, petitioner
cannot exclude the loss of Castor’s vehicle under the insurance policy under paragraph 4 of
“Exceptions to Section III”, since the same refers only to “malicious damage”, or more
specifically, “injury” to the motor vehicle caused by a person under the insured’s service.
Paragraph 4 clearly does not contemplate “loss of property”.

The burden to prove that the loss was caused by an excepted peril lies with the insurer.
The theft perpetrated by Jose, the driver of the insured is not an exception to the coverage.
The policy does not qualify as to who would commit the theft. Thus, even if the same is
committed by the driver of the insured, there being no categorical declaration of exception,
the same must be covered.

The policy clearly excludes malicious damage which is the direct result of the deliberate or
willful act of the insured, members of his family, annd any person in the insured’s service,
whose clear plan or purpose was to cause damage to the insured vehicle for purposes of
defrauding the insurer. This is not a case of malicious damage but a theft. Limitations of
liability should be regarded with extreme jealousy and must be construed in such a way as
to preclude the insurer from non- compliance with its obligations. #JAMES

***

CASES IN COMMERCIAL LAW REVIEW (J. Dimaampao) 4E 2017-2018 | 82

 SUNLIFE ASSURANCE COMPANY OF CANADA vs. COURT OF APPEALS and
Spouses ROLANDO and BERNARDA BACANI
G.R.No.105135; June22,1995

DOCTRINE: Materiality is to be determined not by the event, but solely by the probable and
reasonable influence of the facts upon the party to whom communication is due, in forming
his estimate of the disadvantages of the proposed contract or in making his inquiries.

FACTS: Robert John B. Bacani procured a life insurance contract for himself from
petitioner SUNLIFE designating his mother, Bernarda Bacani as beneficiary. He was issued
a policy valued at P100,000.00, with double indemnity in case of accidental death. The
insured died in a plane crash. Bernarda filed a claim seeking benefits of the insurance
policy but SUNLIFE rejected it. SUNLIFE informed Bernarda that the insured did not
disclose material facts relevant to the issuance of the policy, thus rendering the contract of
insurance voidable. SUNLIFE claimed that the insured gave false statements in his
application when he answered the following questions:

The deceased answered question No. 5(a) in the affirmative but limited his answer to a
consultation with a Dr. Reinaldo D. Raymundo of the Chinese General Hospital on Feb
1986, for cough and flu complications. The other questions were answered in the negative.
SUNLIFE also discovered that two weeks prior to his application, the insured was
examined and confined at the Lung Center of the Philippines, where he was diagnosed for
renal failure. The deceased was subjected to urinalysis, ultra-sonography and hematology
tests.

The trial court concluded that while there was concealment and misrepresentation, the
same was made in "good faith" and the facts concealed or misrepresented were irrelevant
since the policy was "non-medical”. The CA affirmed and held that SUNLIFE cannot avoid
its obligation by claiming concealment because the cause of death was unrelated to the
facts concealed by the insured. It also sustained the ruling of the trial court that the matters
relating to the health history of the insured were irrelevant since the petitioner waived the
medical examination prior to the approval and issuance of the insurancepolicy.

ISSUE: Whether or not the facts concealed are material which would render the insurance
contract voidable.

HELD: YES. Section 26 of the Insurance Code is explicit in requiring a party to a contract
of insurance to communicate to the other, in good faith, all facts within his knowledge which
are material to the contract and as to which he makes no warranty, and which the other has
no means of ascertaining. Materiality is to be determined not by the event, but solely by the
probable and reasonable influence of the facts upon the party to whom communication is
due, in forming his estimate of the disadvantages of the proposed contract or in making his
inquiries.

In this case, the matters concealed would have definitely affected petitioner's action on his
application, either by approving it with the corresponding adjustment for a higher premium
or rejecting the same. Moreover, a disclosure may have warranted a medical examination
of the insured by petitioner in order for it to reasonably assess the risk involved in accepting
the application. In Vda. de Canilang v. Court of Appeals, the SC held that materiality of the
information withheld does not depend on the state of mind of the insured. Neither does it
depend on the actual or physical events which ensue. Thus, "good faith" is no defense in
concealment. The insured's failure to disclose the fact that he was hospitalized for two
weeks prior to filing his application for insurance, raises grave doubts about his bonafides.
It appears that such concealment was deliberate on his part.

Rule in case there is waiver of medical examination:

In Saturnino vs. Philippine American Life Insurance Company, the SC held that "…the
waiver of a medical examination [in a non-medical insurance contract] renders even more
material the information required of the applicant concerning previous condition of health
and diseases suffered, for such information necessarily constitutes an important factor

CASES IN COMMERCIAL LAW REVIEW (J. Dimaampao) 4E 2017-2018 | 83

which the insurer takes into consideration in deciding whether to issue the policy or not…”
Moreover, such argument would make Section 27 of the Insurance Code, which allows the
injured party to rescind a contract of insurance where there is concealment, ineffective.

Rule in case the facts concealed had no bearing to the cause of death:
Anent the finding that the facts concealed had no bearing to the cause of death of the
insured, it is well settled that the insured need not die of the disease he had failed to
disclose to the insurer. It is sufficient that his non-disclosure misled the insurer in forming
his estimates of the risks of the proposed insurance policy or in making inquiries.
#LABRADOR

***

EMILIO TAN, JUANITO TAN, ALBERTO TAN, AND ARTURO TAN vs. THE COURT OF
APPEALS and THE PHILIPPINE AMERICAN LIFE INSURANCE COMPANY
G.R. No. L-48049 : June 29, 1989

DOCTRINE: “Incontestability clause” precludes the insurer from raising the defenses of
false representations or concealment of material facts insofar as health and previous
diseases are concerned, if the insurance has been in force for at least two years during the
insured’s lifetime. The phrase “during the lifetime” found in Section 48 simply means that
the policy is no longer considered in force after the insured has died.

The insurer has two years from the date of issuance of the insurance contract or of its last
reinstatement within which to contest the policy, whether or not, the insured still lives within
such period. After two years, the defenses of concealment or misrepresentation, no matter
how patent or well founded, no longer lie.

FACTS: Tan Lee Siong, father of petitioners, applied for life insurance in the amount of
P80,000.00 with respondent company. Said application was approved and was issued
effective November 6, 1973, with petitioners as beneficiaries. On April 26, 1975, Tan Lee
Siong died of hepatoma. Petitioners then filed with respondent company their claim for the
proceeds of the life insurance policy. However, the latter denied their claim and rescinded
the policy by reason of the alleged misrepresentation and concealment of material facts
made by the deceased in his application for insurance. The premiums paid on the policy
were thereupon refunded.

Petitioners, alleging that respondent company’s refusal to pay them the proceeds of the
policy was unjustified and unreasonable, filed on November 27, 1975 a complaint against
respondent company with the Office of the Insurance Commissioner. The Insurance
Commissioner, however, dismissed their complaint. The Court of Appeals then dismissed
the petitioners’ appeal for lack of merit.

ISSUE: Whether or not the respondent company had the right to rescind the contract of
insurance of the deceased.

HELD: YES. The pertinent section in the Insurance Code provides:

Section 48. Whenever a right to rescind a contract of insurance is given to the insurer by
any provision of this chapter, such right must be exercised previous to the commencement
of an action on the contract.

After a policy of life insurance made payable on the death of the insured shall have been in
force during the lifetime of the insured for a period of two years from the date of its issue or
of its last reinstatement, the insurer cannot prove that the policy is void ab initio or is
rescindable by reason of the fraudulent concealment or misrepresentation of the insured or
his agent.

The so-called “incontestability clause” precludes the insurer from raising the defenses of
false representations or concealment of material facts insofar as health and previous

CASES IN COMMERCIAL LAW REVIEW (J. Dimaampao) 4E 2017-2018 | 84

diseases are concerned if the insurance has been in force for at least two years during the
insured’s lifetime. The phrase “during the lifetime” found in Section 48 simply means that
the policy is no longer considered in force after the insured has died. The key phrase in the
second paragraph of Section 48 is “for a period of two years.”

As noted by the Court of Appeals, the policy was issued on November 6, 1973 and the
insured died on April 26, 1975. The policy was thus in force for a period of only one year
and five months. Considering that the insured died before the two-year period had lapsed,
respondent company is not, therefore, barred from proving that the policy is void ab initio by
reason of the insured's fraudulent concealment or misrepresentation. Moreover, respondent
company rescinded the contract of insurance and refunded the premiums paid on
September 11, 1975, previous to the commencement of this action on November 27,
1975."

Further, because of Tan Lee Siong’s statement that he does not have any health issues,
the insurance company was misled into believing that he was healthy and so it did not
deem a medical checkup to be necessary and that ultimately led to the issuance of the life
insurance policy.

Therefore, respondent company can validly rescind the insurance policy of Tan Lee Siong.
#LATORRE

***

THELMA VDA. DE CANILANG vs.HON. COURT OF APPEALS and GREAT PACIFIC

LIFE ASSURANCE CORPORATION
G.R. No. 92492 June 17, 1993

DOCTRINE: Good faith is not a defense in concealment. The materiality of the facts
concealed does not depend on the state of mind of the insured but rather on the probable
and reasonable influence of the facts upon the party to whom communication should have
been made.

FACTS: On 18 June 1982, Jaime Canilang consulted Dr. Wilfredo B. Claudio and was
diagnosed as suffering from "sinus tachycardia." Mr. Canilang consulted the same doctor
again on 3 August 1982 and this time was found to have "acute bronchitis."

On 4 August 1982, Jaime Canilang applied for a "non-medical" insurance policy with
respondent Great Pacific Life Assurance Company ("Great Pacific") naming his wife,
Thelma Canilang, as his beneficiary.1 Jaime Canilang was issued ordinary life insurance
Policy No. 345163, with the face value of P19,700, effective as of 9 August 1982.

On 5 August 1983, Jaime Canilang died of "congestive heart failure," "anemia," and
"chronic anemia."2 Petitioner, widow and beneficiary of the insured, filed a claim with Great
Pacific which the insurer denied on 5 December 1983 upon the ground that the insured had
concealed material information from it.
Petitioner then filed a complaint against Great Pacific with the Insurance Commission for
recovery of the insurance proceeds. Commissioner Armando Ansaldo ordered Great
Pacific to pay P19,700 plus legal interest and P2,000.00 as attorney's fees. On appeal by
Great Pacific, the Court of Appeals reversed and found that the failure of Jaime Canilang to
disclose previous medical consultation and treatment constituted material information which
should have been communicated to Great Pacific to enable the latter to make proper
inquiries.

ISSUES:
1. WON Jaime Canilang "intentionally" made material concealment in stating his state
of health;
2. WON the non-disclosure of certain facts about his previous health conditions does
not amount to fraud and private respondent is deemed to have waived inquiry
thereto.

CASES IN COMMERCIAL LAW REVIEW (J. Dimaampao) 4E 2017-2018 | 85

RULING: The information which Jaime Canilang failed to disclose was material to the
ability of Great Pacific to estimate the probable risk he presented as a subject of life
insurance. Had Canilang disclosed his visits to his doctor, the diagnosis made and
medicines prescribed by such doctor, in the insurance application, it may be reasonably
assumed that Great Pacific would have made further inquiries and would have probably
refused to issue a non-medical insurance policy or, at the very least, required a higher
premium for the same coverage. Materiality relates rather to the "probable and reasonable
influence of the facts" upon the party to whom the communication should have been made,
in assessing the risk involved in making or omitting to make further inquiries and in
accepting the application for insurance; that "probable and reasonable influence of the
facts" concealed must, of course, be determined objectively, by the judge ultimately.

In any case, in the case at bar, the nature of the facts not conveyed to the insurer was such
that the failure to communicate must have been intentional rather than merely inadvertent.
For Jaime Canilang could not have been unaware that his heart beat would at times rise to
high and alarming levels and that he had consulted a doctor twice in the two (2) months
before applying for non-medical insurance. Indeed, the last medical consultation took place
just the day before the insurance application was filed. In all probability, Jaime Canilang
went to visit his doctor precisely because of the discomfort and concern brought about by
his experiencing "sinus tachycardia."

2. We find it difficult to take seriously the argument that Great Pacific had waived inquiry
into the concealment by issuing the insurance policy notwithstanding Canilang's failure to
set out answers to some of the questions in the insurance application. Such failure
precisely constituted concealment on the part of Canilang. Petitioner's argument, if
accepted, would obviously erase Section 27 from the Insurance Code of 1978.

WHEREFORE, the Petition for Review is DENIED for lack of merit and the Decision of the
Court of Appeals is hereby AFFIRMED. No pronouncement as to the costs. #LOPEZ

***

MANILA BANKERS LIFE INSURANCE CORPORATIONvs. CRESENCIA P. ABAN

G.R. No. 175666, July 29, 2013

DOCTRINE: INCONTESTABILITY CLAUSE. The ultimate aim of Section 48 of the

Insurance Code is to compel insurers to solicit business from or provide insurance
coverage only to legitimate and bona fide clients, by requiring them to thoroughly
investigate those they insure within two years from effectivity of the policy and while the
insured is still alive. On the other hand, it forewarns scheming individuals that their attempts
at insurance fraud would be timely uncovered — thus deterring them from venturing into
such nefarious enterprise

FACTS: On July 3, 1993, Delia Sotero (Sotero) took out a life insurance policy from Manila
Bankers Life Insurance Corporation (Bankers Life), designating respondent Cresencia P.
Aban (Aban), her niece,as her beneficiary. Petitioner issued Insurance Policy No. 747411
(the policy), with a face value of P100,000.00, in Sotero's favor on August 30, 1993, after
the requisite medical examination and payment of the insurance premium. On April 10,
1996,when the insurance policy had been in force for more than two years and seven
months, Sotero died. Respondent filed a claim for the insurance proceeds on July 9, 1996.
Petitioner conducted an investigation into the claim, and came out that Sotero did not
personally apply for insurance coverage, as she was illiterate; that she was sickly since
1990; that she did not have the financial capability to pay the insurance premiums on
Insurance Policy No. 747411; that she did not sign the July 3, 1993 application for
insurance; and that respondent was the one who filed the insurance application, and
designated herself as the beneficiary. Petitioner denied respondent's claim on April 16,
1997 and refunded the premiums paid on the policy. Thereafter, petitioner filed a civil case
for rescission and/or annulment of the policy on the grounds of fraud, misrepresentation
and/or concealment. The trial court ruled in favor of the petitioner as it found that it was

CASES IN COMMERCIAL LAW REVIEW (J. Dimaampao) 4E 2017-2018 | 86

Sotero who was the one who procured the insurance and that under Section 48, petitioner
had only two years from the effectivity of the policy to question the same; since the policy
had been in force for more than two years, petitioner is now barred from contesting the
same or seeking a rescission or annulment thereof. Petitioner filed motion for
reconsideration but denied. Then, petitioner appealed before Court of Appeals but denied
again. Hence this petition.

ISSUE: Is the incontestability provision in the Insurance Code applicable in the case at
bar?

HELD: YES. Section 48 regulates both the actions of the insurers and prospective takers of
life insurance. It gives insurers enough time to inquire whether the policy was obtained by
fraud, concealment, or misrepresentation; on the other hand, it forewarns scheming
individuals that their attempts at insurance fraud would be timely uncovered — thus
deterring them from venturing into such nefarious enterprise. At the same time, legitimate
policy holders are absolutely protected from unwarranted denial of their claims or delay in
the collection of insurance proceeds occasioned by allegations of fraud, concealment, or
misrepresentation by insurers, claims which may no longer be set up after the two-year
period expires as ordained under the law. In this case, allegations of fraud, which are
predicated on respondent's alleged posing as Sotero and forgery of her signature in the
insurance application, are at once belied by the trial and appellate courts' finding that
Sotero herself took out the insurance for herself. Petitioner claims that its insurance agent,
who solicited the Sotero account, happens to be the cousin of respondent's husband, and
thus insinuates that both connived to commit insurance fraud. If this were truly the case,
then petitioner would have discovered the scheme earlier if it had in earnest conducted an
investigation into the circumstances surrounding the Sotero policy. But because it did not
and it investigated the Sotero account only after a claim was filed thereon more than two
years later, naturally it was unable to detect the scheme. For its negligence and inaction,
the Court cannot sympathize with its plight. Instead, its case precisely provides the strong
argument for requiring insurers to diligently conduct investigations on each policy they
issue within the two-year period mandated under Section 48, and not after claims for
insurance proceeds are filed with them. #LUZON

***

FLORENDO vs. PHILAM PLANS, INC.

G.R. No. 186983; February 22, 2012

DOCTRINE: Pursuant to Section 27 of the Insurance Code, Manuel’s concealment entitles

Philam Plans to rescind its contract of insurance with him.

FACTS: Manuel Florendo filed an application for comprehensive pension plan with
respondent Philam Plans after some convincing by respondent Perla Abcede. Manuel
signed the application and left to Perla the task of supplying the information needed in the
application. Respondent Ma. Celeste Abcede, Perla’s daughter, signed the application as
sales counselor. Philam Plans issued Pension Plan Agreement to Manuel, with petitioner
Ma. Lourdes S. Florendo, his wife, as beneficiary. Manuel died of blood poisoning.
Subsequently, Lourdes filed a claim with Philam Plans for the payment of the benefits
under her husband’s plan. Philam Plans wrote Lourdes a letter, declining her claim. Philam
Life found that Manuel was on maintenance medicine for his heart and had an implanted
pacemaker. Further, he suffered from diabetes mellitus and was taking insulin. Lourdes
renewed her demand for payment under the plan but Philam Plans rejected it, prompting
her to file the present action against the pension plan company before the RTC.

ISSUE: Whether or not Manuel was guilty of concealing his illness (chronic heart ailment
and diabetes) when he kept blank and did not answer questions in his pension plan
application regarding the ailments he suffered from

HELD: YES. Lourdes points out that, seeing the unfilled spaces in Manuel’s pension plan
application relating to his medical history, Philam Plans should have returned it to him for

CASES IN COMMERCIAL LAW REVIEW (J. Dimaampao) 4E 2017-2018 | 87

completion. Lourdes is shifting to Philam Plans the burden of putting on the pension plan
application the true state of Manuel’s health. She forgets that since Philam Plans waived
medical examination for Manuel, it had to rely largely on his stating the truth regarding his
health in his application. For, after all, he knew more than anyone that he had been under
treatment for heart condition and diabetes for more than five years preceding his
submission of that application. But he kept those crucial facts from Philam Plans. Since
Manuel signed the application without filling in the details regarding his continuing
treatments for heart condition and diabetes, the assumption is that he has never been
treated for the said illnesses in the last five years preceding his application. This is implicit
from the phrase If your answer to any of the statements above (specifically, the statement: I
have never been treated for heart condition or diabetes) reveal otherwise, please give
details in the space provided for. Pursuant to Section 27 of the Insurance Code, Manuel’s
concealment entitles Philam Plans to rescind its contract of insurance with him.

Lourdes contends that the mere fact that Manuel signed the application in blank and let
Perla fill in the required details did not make her his agent and bind him to her concealment
of his true state of health. But Manuel forgot that in signing the pension plan application, he
certified that he wrote all the information stated in it or had someone do it under his
direction. Manuel is still bound by what it contains since he certified that he authorized her
action. Philam Plans had every right to act on the faith of that certification.

Lourdes points out that any defect or insufficiency in the information provided by his
pension plan application should be deemed waived after the same has been approved, the
policy has been issued, and the premiums have been collected. The Court cannot agree.
The comprehensive pension plan that Philam Plans issued contains a one-year
incontestability period. The incontestability clause precludes the insurer from disowning
liability under the policy it issued on the ground of concealment or misrepresentation
regarding the health of the insured after a year of its issuance. #MARTINEZ

***

OTHER INSURANCE CLAUSE; DOUBLE INSURANCE; OVER INSURANCE;

REINSURANCE; BANCASSURANCE

MALAYAN INSURANCE CO., INC. v. PHILIPPINES FIRST INSURANCE CO., INC. and
REPUTABLE FORWARDER SERVICES, INC.
G.R. NO. 184300 July 11, 2012

DOCTRINE:Double insurance exists where the same person is insured by several insurers
separately in respect to the same subject and interest.

FACTS: Since 1989, Wyeth Philippines, Inc. (Wyeth) and respondent Reputable Forwarder
Services, Inc. (Reputable) had been annually executing a contract of carriage, whereby the
latter undertook to transport and deliver the former s products to its customers, dealers or
salesmen.

Wyeth procured Marine Policy No. MAR 13797 (Marine Policy) from respondent Philippines
First Insurance Co., Inc. (Philippines First) to secure its interest over its own products.
Philippines First thereby insured Wyeth’s nutritional, pharmaceutical and other products
usual or incidental to the insured’s business while the same were being transported or
shipped in the Philippines. The policy covers all risks of direct physical loss or damage from
any external cause, if by land, and provides a limit of P 6,000,000.00 per any one land
vehicle.

Wyeth executed its annual contract of carriage with Reputable. It turned out, however, that
the contract was not signed by Wyeth s representatives. Nevertheless, it was admittedly
signed by Reputable’s representatives, the terms thereof faithfully observed by the parties
and, as previously stated.

CASES IN COMMERCIAL LAW REVIEW (J. Dimaampao) 4E 2017-2018 | 88

Under the contract, Reputable undertook to answer for "all risks with respect to the goods
and shall be liable to the COMPANY (Wyeth), for the loss, destruction, or damage of the
goods/products due to any and all causes whatsoever, including theft, robbery, flood,
storm, earthquakes, lightning, and other force majeure while the goods/products are in
transit and until actual delivery to the customers, salesmen, and dealers of the COMPANY".

The contract also required Reputable to secure an insurance policy on Wyeth s goods.
Thus, Reputable signed a Special Risk Insurance Policy (SR Policy) with petitioner
Malayan.

During the effectivity of the Marine Policy and SR Policy, Reputable received from Wyeth
1,000 boxes of Promil infant formula to be delivered by Reputable to Mercury Drug
Corporation in Libis, Quezon City. Unfortunately, on the same date, the truck carrying
Wyeth’s products was hijacked by about 10 armed men.

Philippines First, after due investigation and adjustment, and pursuant to the Marine Policy,
paid Wyeth P2,133,257.00 as indemnity. Philippines First then demanded reimbursement
from Reputable, having been subrogated to the rights of Wyeth by virtue of the payment.
The latter, however, ignored the demand.

ISSUES:
1. Whether or not Reputable is a private carrier;
2. Whether or not Reputable is strictly bound by the stipulations in its contract of carriage
with Wyeth, such that it should be liable for any risk of loss or damage, for any cause
whatsoever, including that due to theft or robbery and other force majeure;
3. Whether or not there is double insurance, in such that either Section 5 or Section 12 of
the SR Policy may be applied.

HELD: 1) NO. Records show that the alleged judicial admission of Philippines First was
essentially disputed by Reputable when it stated in paragraphs 2, 4, and 11of its answer
that it is actually a private or special carrier. In addition, Reputable stated in paragraph 2 of
its third-party complaint that it is "a private carrier engaged in the carriage of goods.

The rule on judicial admission states that allegation, statement, or admission is conclusive
as against the pleader and that the facts alleged in the complaint are deemed admissions
of the plaintiff and binding upon him. In this case, the pleader or the plaintiff who alleged
that Reputable is a common carrier was Philippines First. It cannot, by any stretch of
imagination, be made conclusive as against Reputable whose nature of business is in
question. Philippines First is not in any position to make any admission, much more a
definitive pronouncement, as to the nature of Reputable’s business and there appears no
other connection between Philippines First and Reputable which suggests mutual familiarity
between them

Under Article 1732 of the Civil Code, common carriers are persons, corporations, firms, or
associations engaged in the business of carrying or transporting passenger or goods, or
both by land, water or air for compensation, offering their services to the public. On the
other hand, a private carrier is one wherein the carriage is generally undertaken by special
agreement and it does not hold itself out to carry goods for the general public. A common
carrier becomes a private carrier when it undertakes to carry a special cargo or chartered to
a special person only. Reputable operated as a private/special carrier with regard to its
contract of carriage with Wyeth.

2) YES. The extent of a private carrier’s obligation is dictated by the stipulations of a

contract it entered into, provided its stipulations, clauses, terms and conditions are not
contrary to law, morals, good customs, public order, or public policy. "The Civil Code
provisions on common carriers should not be applied where the carrier is not acting as
such but as a private carrier. Public policy governing common carriers has no force where
the public at large is not involved." Thus, being a private carrier, the extent of Reputable’s
liability is fully governed by the stipulations of the contract of carriage, one of which is that it
shall be liable to Wyeth for the loss of the goods/products due to any and all causes

CASES IN COMMERCIAL LAW REVIEW (J. Dimaampao) 4E 2017-2018 | 89

whatsoever, including theft, robbery and other force majeure while the goods/products are
in transit and until actual delivery to Wyeth’s customers, salesmen and dealers.

3) NO. Section 93 of the Insurance Code states that double insurance exists where the
same person is insured by several insurers separately in respect to the same subject and
interest. The requisites in order for double insurance to arise are as follows:
i. The person insured is the same;
ii. Two or more insurers insuring separately;
iii. There is identity of subject matter;
iv. There is identity of interest insured; and
v. There is identity of the risk or peril insured against.

The interest of Wyeth over the property subject matter of both insurance contracts is also
different and distinct from that of Reputable’s. The policy issued by Philippines First was in
consideration of the legal and/or equitable interest of Wyeth over its own goods. On the
other hand, what was issued by Malayan to Reputable was over the latter’s insurable
interest over the safety of the goods, which may become the basis of the latter’s liability in
case of loss or damage to the property and falls within the contemplation of Section 15 of
the Insurance Code.

Therefore, even though the two concerned insurance policies were issued over the same
goods and cover the same risk, there arises no double insurance since they were issued to
two different persons/entities having distinct insurable interests. Necessarily, over
insurance by double insurance cannot likewise exist. Hence, neither Section 5 nor Section
12 of the SR Policy can be applied. #ONG

***

LOSS AND LIABILITY OF INSURER; PERIOD OF PRESCRIPTION; RIGHT OF

SUBROGATION

SUN INSURANCE OFFICE, LTD. vs. CA and EMILIO TAN

G.R. No. 89741 March 13, 1991

DOCTRINE: MR does not interrupt the prescriptive period to contest the denial of the
insurance claim.

FACTS: On August 15, 1983, respondent Tan took from petitioner a P300,000.00 property
insurance policy to cover his interest in the electrical supply store of his brother in a building
in Iloilo City. 4 days after the issuance, the building was burned. On August 20, 1983, Tan
filed his claim for fire loss, but on February 29, 1984, petitioner wrote Tan denying it’s
claim. On April 3, 1984, Tan wrote petitioner, seeking reconsideration of the denial of his
claim. On September 3, 1985, Tan's counsel wrote the Insurer inquiring about the status of
his reconsideration. Petitioner answered the letter on October 11, 1985, advising Tan's
counsel that the Insurer's denial of Tan's claim remained unchanged. On November 20,
1985, Tan filed Civil Case with the RTC of Iloilo but petitioner filed a motion to dismiss- due
to Prescription. Said motion was denied in an order dated November 3, 1987; and
petitioner's MR was also denied.

The CA held that the court a quo may continue until its final termination.

ISSUE: WON the filing of a mr interrupts the twelve (12) months prescriptive period to
contest the denial of the insurance claim?

HELD: NO. Condition 27 of their Insurance Policy, which is the subject of the conflicting
contentions of the parties, reads:
“27. Action or suit clause — If a claim be made and rejected and an action or suit be not
commenced either in the Insurance Commission or in any court of competent jurisdiction
within twelve (12) months from receipt of notice of such rejection, or in case of arbitration
taking place as provided herein, within twelve (12) months after due notice of the award

CASES IN COMMERCIAL LAW REVIEW (J. Dimaampao) 4E 2017-2018 | 90

made by the arbitrator or arbitrators or umpire, then the claim shall for all purposes be
deemed to have been abandoned and shall not thereafter be recoverable hereunder.”

As the terms are very clear and free from any doubt or ambiguity whatsoever, it must be
taken and understood in its plain, ordinary and popular sense.
In Ang vs. Fulton: “The condition contained in an insurance policy that claims must be
presented within one year after rejection is not merely a procedural requirement but an
important matter essential to a prompt settlement of claims against insurance companies
as it demands that insurance suits be brought by the insured while the evidence as to the
origin and cause of destruction have not yet disappeared.”

The insured's cause of action either in the Insurance Commission or in a court commences
from the time of the denial of his claim by the Insurer, either expressly or impliedly. The
"final rejection" being referred to in said case is the rejection by the insurance company.
#PEREZ

***

LOADMASTERS CUSTOMS SERVICES, INC.vs. GLODEL BROKERAGE

CORPORATION
G.R. No. 179446. January 10, 2011.

DOCTRINE: Subrogation is the substitution of one person in the place of another with
reference to a lawful claim or right, so that he who is substituted succeeds to the rights of
the other in relation to a debt or claim, including its remedies or securities. Doubtless, R&B
Insurance is subrogated to the rights of the insured to the extent of the amount it paid the
consignee under the marine insurance, as provided under Article 2207 of the Civil Code. As
subrogee of the rights and interest of the consignee, R&B Insurance has the right to seek
reimbursement from either Loadmasters or Glodel or both for breach of contract and/or tort.

FACTS: R&B Insurance issued Marine Policy No. MN-00105/2001 in favor of Columbia to
insure the shipment of 132 bundles of electric copper cathodes against All Risks. The
cargoes were shipped on board the vessel "Richard Rey" from Isabela, Leyte, to Pier 10,
North Harbor, Manila. They arrived on the same date.Columbia engaged the services of
Glodel for the release and withdrawal of the cargoes from the pier and the subsequent
delivery to its warehouses/plants. Glodel, in turn, engaged the services of Loadmasters for
the use of its delivery trucks to transport the cargoes to Columbia's warehouses/plants in
Bulacan and Valenzuela City.

The goods were loaded on board twelve (12) trucks owned by Loadmasters, driven by its
employed drivers and accompanied by its employed truck helpers. Of the six (6) trucks en
route to Balagtas, Bulacan, however, only five (5) reached the destination. One (1) truck,
loaded with 11 bundles or 232 pieces of copper cathodes, failed to deliver its cargo. Later
on, the said truck, an Isuzu with Plate No. NSD-117, was recovered but without the copper
cathodes. Because of this incident, Columbia filed with R&B Insurance a claim for
insurance indemnity in the amount of P1,903,335.39. After the requisite investigation and
adjustment, R&B Insurance paid Columbia the amount of P1,896,789.62 as insurance
indemnity.R&B Insurance, thereafter, filed a complaint for damages against both
Loadmasters and Glodel Manila (RTC),. It sought reimbursement of the amount it had paid
to Columbia for the loss of the subject cargo. It claimed that it had been subrogated "to the
right of the consignee to recover from the party/parties who may be held legally liable for
the loss."

The RTC holds Glodel liable for damages for the loss of the subject cargo and dismissing
Loadmasters' counterclaim for damages and attorney's fees against R&B Insurance. Both
R&B Insurance and Glodel appealed the RTC decision to the CA which held appellee is an
agent of appellant Glodel, whatever liability the latter owes to appellant R&B Insurance
Corporation as insurance indemnity must likewise be the amount it shall be paid by
appellee Loadmasters. Hence, this petition.

CASES IN COMMERCIAL LAW REVIEW (J. Dimaampao) 4E 2017-2018 | 91

ISSUES:
1. Who, between Glodel and Loadmasters, is liable to pay R&B Insurance for the amount
of the indemnity it paid Columbia.
2. What then is the extent of the respective liabilities of Loadmasters and Glodel?
3. Whether Glodel can collect from Loadmasters, it having failed to file a cross-claim
against the latter

HELD:
1. JOINTLY AND SOLIDARY. Court is of the view that both Loadmasters and Glodel are
jointly and severally liable to R & B Insurance for the loss of the subject cargo. Under
Article 2194 of the New Civil Code, "the responsibility of two or more persons who are liable
for a quasi-delict is solidary."Loadmasters' claim that it was never privy to the contract
entered into by Glodel with the consignee Columbia or R&B Insurance as subrogee, is not
a valid defense. It may not have a direct contractual relation with Columbia, but it is liable
for tort under the provisions of Article 2176 of the Civil Code on quasi-delicts in connection
therewith, Article 2180, the obligation imposed by Article 2176 is demandable not only for
one's own acts or omissions, but also for those of persons for whom one is responsible.It is
not disputed that the subject cargo was lost while in the custody of Loadmasters whose
employees (truck driver and helper) were instrumental in the hijacking or robbery of the
shipment. As employer, Loadmasters should be made answerable for the damages caused
by its employees who acted within the scope of their assigned task of delivering the goods
safely to the warehouse.

Glodel is also liable because of its failure to exercise extraordinary diligence. It failed to
ensure that Loadmasters would fully comply with the undertaking to safely transport the
subject cargo to the designated destination. It should have been more prudent in entrusting
the goods to Loadmasters by taking precautionary measures, such as providing escorts to
accompany the trucks in delivering the cargoes. Glodel should, therefore, be held liable
with Loadmasters. Its defense of force majeure is unavailing.

Petitioner Loadmasters Customs Services, Inc. and respondent Glodel Brokerage

Corporation jointly and severally liable to respondent R&B Insurance Corporation for the
insurance indemnity it paid to consignee Columbia Wire & Cable Corporation and ordering
both parties to pay, jointly and severally, R&B Insurance Corporation a] the amount of
P1,896,789.62 representing the insurance indemnity; b] the amount equivalent to ten (10%)
percent thereof for attorney's fees; and c] the amount of P22,427.18 for litigation expenses.

2. Each wrongdoer is liable for the total damage suffered by R&B Insurance. Where
there are several causes for the resulting damages, a party is not relieved from liability,
even partially. It is sufficient that the negligence of a party is an efficient cause without
which the damage would not have resulted. It is no defense to one of the concurrent
tortfeasors that the damage would not have resulted from his negligence alone, without the
negligence or wrongful acts of the other concurrent tortfeasor.

3. NO. Undoubtedly, Glodel has a definite cause of action against Loadmasters for breach
of contract of service as the latter is primarily liable for the loss of the subject cargo. In this
case, however, it cannot succeed in seeking judicial sanction against Loadmasters
because the records disclose that it did not properly interpose a cross-claim against the
latter. Glodel did not even pray that Loadmasters be liable for any and all claims that it may
be adjudged liable in favor of R&B Insurance. Under the Rules, a compulsory counterclaim,
or a cross-claim, not set up shall be barred. Thus, a cross-claim cannot be set up for the
first time on appeal.

For the consequence, Glodel has no one to blame but itself. The Court cannot come to its
aid on equitable grounds. "Equity, which has been aptly described as 'a justice outside
legality,' is applied only in the absence of, and never against, statutory law or judicial rules
of procedure." The Court cannot be a lawyer and take the cudgels for a party who has been
at fault or negligent. #PLANA

***

CASES IN COMMERCIAL LAW REVIEW (J. Dimaampao) 4E 2017-2018 | 92

 ABOITIZ SHIPPING CORP.,vs. INSURANCE CO. OF NORTH AMERICA,
G.R. No. 168402. August 6, 2008.

DOCTRINE: THE RIGHT of subrogation attaches upon payment by the insurer of the
insurance claims by the assured. As subrogee, the insurer steps into the shoes of the
assured and may exercise only those rights that the assured may have against the
wrongdoer who caused the damage.

FACTS: On June 20, 1993, MSAS Cargo International Ltd. and/or Associated and/or
Subsidiary Companies (MSAS) procured a marine insurance policy from respondent ICNA
UK Ltd. of London. The insurance was for a transshipment of certain wooden work tools
and workbenches purchased for the consignee Science Teaching Improvement Project
(STIP), Ecotech Center, Sudlon Lahug, Cebu City, Phil. ICNA issued an "all-risk" open
marine policy, stating: This Company, in consideration of a premium as agreed and subject
to the terms and conditions printed hereon, does insure for MSAS Cargo International Ltd.
&/or Associated &/or Subsidiary Companies on behalf of the title holder: — Loss, if any,
payable to the Assured or order.

The shipment arrived in the port of Manila and was received by petitioner for carriage on
July 26, 1993. On the same day, it was stripped from the container van. Five days later, on
July 31, 1993, it was re-stuffed inside another container van. On August 1, 1993, it was
loaded onto another vessel bound for Cebu. A clean bill of lading(BOL) was issued by
Hapag-Lloyd which stated the consignee to be STIP. The BOL issued by petitioner contains
the notation "grounded outside warehouse".

On August 3, 1993, the shipment arrived in Cebu City and discharged onto a receiving
apron of the Cebu International Port, brought to the Cebu Bonded Warehousing
Corporation pending customs’ clearance. In the Stripping Report dated August 5,
petitioner's checker noted that the crates were slightly broken or cracked at the bottom. On
August 11, the cargo was withdrawn by the representative of the consignee, STIP and
delivered to Don Bosco Technical High School. It was received by Mr. Bernhard Willig. On
August 13, Mayo B. Perez, then Claims Head of petitioner, received a telephone call from
Willig informing him that the cargo sustained water damage. Perez, upon receiving the call,
immediately went to the bonded warehouse and checked the condition of the container and
other cargoes stuffed in the same container. Perez found that except for the bottom of the
crate which was slightly broken, the crate itself appeared to be completely dry and had no
water marks. He further explained that the "grounded outside warehouse" notation in the
bill of lading referred only to the container van bearing the cargo. In a letter dated August
15, Willig informed Aboitiz of the damage noticed upon opening of the cargo, that the
damage was caused by water entering through the broken parts of the crate.

The consignee contacted the Phil. office of ICNA for insurance claims. On August 21, the
Claimsmen Adjustment Corporation (CAC) conducted an ocular inspection and survey of
the damage, reported to ICNA that the goods sustained water damage, molds, and
corrosion which were discovered upon delivery to consignee.

On September 21, the consignee filed a formal claim with Aboitiz in the amount of
P276,540.00 for the damaged condition goods. In a Supplemental Report dated October
20, CAC reported to ICNA that based on official weather report from the PAG-ASA, it would
appear that heavy rains on July 28 and 29, 1993 caused water damage to the shipment
and noted that the shipment was placed outside the warehouse of Pier No. 4, North Harbor,
Manila when it was delivered on July 26, 1993 as can be gleaned from the bill of lading
which contained the notation "grounded outside warehouse". It was only on July 31, 1993
when the shipment was stuffed inside another container van for shipment to Cebu.

Aboitiz refused to settle the claim. On October 4, 1993, ICNA paid the amount of
P280,176.92 to consignee. A subrogation receipt was duly signed by Willig. ICNA formally
advised Aboitiz of the claim and subrogation receipt executed in its favor. Despite follow-
ups, however, no reply was received from Aboitiz.

CASES IN COMMERCIAL LAW REVIEW (J. Dimaampao) 4E 2017-2018 | 93

ISSUES:
1. Is respondent ICNA the real party-in-interest that possesses the right of subrogation
to claim reimbursement from petitioner Aboitiz?
2. Was there a timely filing of the notice of claim as required under Article 366 of the
Code of Commerce?
3. If so, can petitioner be held liable on the claim for damages?

HELD:
1. YES. The present suit was filed by the said company's authorized agent in Manila. The
terms of the Open Policy authorize the filing of any claim on the insured goods, to be
brought against ICNA UK, the company who issued the insurance, or against any of its
listed agents worldwide. MSAS accepted said provision when it signed and accepted the
policy. The acceptance operated as an acceptance of the authority of the agents. Hence, a
formal indorsement of the policy to the agent in the Philippines was unnecessary for the
latter to exercise the rights of the insurer. Likewise, the Open Policy expressly provides.
The policy benefits any subsequent assignee, or holder, including the consignee, who may
file claims on behalf of the assured. This is in keeping with Section 57 of the Insurance
Code.

Respondent's cause of action is founded on it being subrogated to the rights of the

consignee of the damaged shipment. The right of subrogation springs from Article 2207
of the Civil Code. Upon payment to the consignee of indemnity for damage to the insured
goods, ICNA's entitlement to subrogation equipped it with a cause of action against
petitioner in case of a contractual breach or negligence. This right of subrogation, however,
has its limitations. First, both the insurer and the consignee are bound by the contractual
stipulations under the bill of lading. Second, the insurer can be subrogated only to the rights
as the insured may have against the wrongdoer. If by its own acts after receiving payment
from the insurer, the insured releases the wrongdoer who caused the loss from liability, the
insurer loses its claim against the latter.

To recapitulate, We have found that respondent, as subrogee of the consignee, is the real
party in interest to institute the claim for damages against petitioner; and pro hac vice, that
a valid notice of claim was made by respondent.

2. YES. The giving of notice of loss or injury is a condition precedent to the action for loss
or injury or the right to enforce the carrier's liability. Under the Code of Commerce, the
notice of claim must be made within twenty four (24) hours from receipt of the cargo if the
damage is not apparent from the outside of the package. For damages that are visible from
the outside of the package, the claim must be made immediately. The periods above, as
well as the manner of giving notice may be modified in the terms of the bill of lading, which
is the contract between the parties. Notably, neither of the parties in this case presented
the terms for giving notices of claim under the bill of lading issued by petitioner for the
goods.

Stipulations requiring notice of loss or claim for damage as a condition precedent to the
right of recovery from a carrier must be given a reasonable and practical construction,
adapted to the circumstances of the case under adjudication, and their application is limited
to cases falling fairly within their object and purpose. Provisions specifying a time to give
notice of damage to common carriers are ordinarily to be given a reasonable and practical,
rather than a strict construction. We give due consideration to the fact that the final
destination of the damaged cargo was a school institution where authorities are bound by
rules and regulations governing their actions. Understandably, when the goods were
delivered, the necessary clearance had to be made before the package was opened. Upon
opening and discovery of the damaged condition of the goods, a report to this effect had to
pass through the proper channels before it could be finalized and endorsed by the
institution to the claims department of the shipping company.

The call to petitioner was made two days from delivery, a reasonable period considering
that the goods could not have corroded instantly overnight such that it could only have

CASES IN COMMERCIAL LAW REVIEW (J. Dimaampao) 4E 2017-2018 | 94

sustained the damage during transit. Moreover, petitioner was able to immediately inspect
the damage while the matter was still fresh. In so doing, the main objective of the
prescribed time period was fulfilled. Thus, there was substantial compliance with the notice
requirement in this case.

3. YES. The rule as stated in Article 1735 of the Civil Code is that in cases where the goods
are lost, destroyed or deteriorated, common carriers are presumed to have been at fault or
to have acted negligently, unless they prove that they observed extraordinary diligence
required by law. This standard is intended to grant favor to the shipper who is at the mercy
of the common carrier once the goods have been entrusted to the latter for shipment.
Here, the shipment delivered to the consignee sustained water damage. We agree with the
findings of the CA that petitioner failed to overturn this presumption of negligence.

Extraordinary diligence must include safeguarding the shipment from damage coming from
natural elements such as rainfall. Aside from denying that the "grounded outside
warehouse" notation referred not to the crate for shipment but only to the carrier van,
petitioner failed to mention where exactly the goods were stored during the period in
question. It failed to show that the crate was properly stored indoors during the time when it
exercised custody before shipment to Cebu.

Petitioner is thus liable for the water damage sustained by the goods due to its failure to
satisfactorily prove that it exercised the extraordinary diligence required of common
carriers. #PLANA

***

PAN MALAYAN INSURANCE CORPORATION vs. COURT OF APPEALS

G.R. No. 81026 : April 3, 1990

DOCTRINE: If the insured property is destroyed or damaged through the fault or

negligence of a party other than the assured, then the insurer, upon payment to the
assured, will be subrogated to the rights of the assured to recover from the wrongdoer to
the extent that the insurer has been obligated to pay. Payment by the insurer to the
assured operates as an equitable assignment to the former of all remedies which the latter
may have against the third party whose negligence or wrongful act caused the loss. The
right of subrogation is not dependent upon, nor does it grow out of, any privity of contract or
upon written assignment of claim. It accrues simply upon payment of the insurance claim
by the insurer.

FACTS: On December 10, 1985, Pan Malayan Insurance Corp. (PANMALAY) filed a
complaint for damages with the RTC of Makati against private respondents Erlinda Fabie
and her driver. PANMALAY averred the following: that it insured a Mitsubishi Colt Lancer
car with plate No. DDZ-431 and registered in the name of Canlubang Automotive
Resources Corporation (CANLUBANG); that on May 26, 1985, due to the "carelessness,
recklessness, and imprudence" of the unknown driver of a pick-up with plate no. PCR-220,
the insured car was hit and suffered damages in the amount of P42,052.00; that
PANMALAY defrayed the cost of repair of the insured car and, therefore, was subrogated
to the rights of CANLUBANG against the driver of the pick-up and his employer, Erlinda
Fabie; and that, despite repeated demands, defendants, failed and refused to pay the claim
of PANMALAY. Private respondents filed a Motion to Dismiss alleging that PANMALAY had
no cause of action against them. They argued that payment under the "own damage"
clause of the insurance policy precluded subrogation under Article 2207 of the Civil Code,
since indemnification thereunder was made on the assumption that there was no
wrongdoer or no third party at fault. The trial court dismissed the complaint for no cause of
action. CA affirmed.

ISSUE: Whether or not PANMALAY may institute an action to recover the amount it had
paid its assured in settlement of an insurance claim against private respondents as the
parties allegedly responsible for the damage caused to the insured vehicle

CASES IN COMMERCIAL LAW REVIEW (J. Dimaampao) 4E 2017-2018 | 95

HELD: YES. Article 2207 of the Civil Code is founded on the well-settled principle of
subrogation. If the insured property is destroyed or damaged through the fault or
negligence of a party other than the assured, then the insurer, upon payment to the
assured, will be subrogated to the rights of the assured to recover from the wrongdoer to
the extent that the insurer has been obligated to pay. Payment by the insurer to the
assured operates as an equitable that the insurer has been obligated to pay. The right of
subrogation is not dependent upon, nor does it grow out of, any privity of contract or upon
written assignment of claim. It accrues simply upon payment of the insurance claim by the
insurer.

The exceptions are:

i. if the assured by his own act releases the wrongdoer or third party liable for the
loss or damage, from liability, the insurer's right of subrogation is defeated
ii. where the insurer pays the assured the value of the lost goods without notifying
the carrier who has in good faith settled the assured's claim for loss, the
settlement is binding on both the assured and the insurer, and the latter cannot
bring an action against the carrier on his right of subrogation
iii. where the insurer pays the assured for a loss which is not a risk covered by the
policy, thereby effecting "voluntary payment", the former has no right of
subrogation against the third party liable for the loss

None of the exceptions are availing in the present case. Having thus shown that
PANMALAY has a cause of action against third parties whose negligence may have
caused damage to CANLUBANG's car, theCourt holds that there is no legal obstacle to the
filing by PANMALAY of a complaint for damages against private respondents as the third
parties allegedly responsible for the damage. Also, even if under the above circumstances
PANMALAY could not be deemed subrogated to the rights of its assured under Article 2207
of the Civil Code, PANMALAY would still have a cause of action against private
respondents. In the pertinent case of Sveriges Angfartygs Assurans Forening v. Qua Chee
Gan, the Court ruled that the insurer who may have no rights of subrogation due to
"voluntary" payment may nevertheless recover from the third party responsible for the
damage to the insured property under Article 1236 of the Civil Code. #QUIJANO-MANALO

***

HOME INSURANCE CORPORATION VS.THE HON. COURT OF APPEALS, FORMER

7th DIVISION AND MABUHAY BROKERAGE CO., INC.
GR No. 109293, August 18, 1993.

DOCTRINE: COMMERCIAL LAW; INSURANCE; RIGHT OF SUBROGATION; MUST BE

SUPPORTED BY INSURANCE CONTRACT – The insurance contract has not been
presented. It may be assumed for the sake of argument that the subrogation receipt may
nevertheless be used to establish the relationship between the petitioner and the consignee
and the amount paid to settle the claim. But that is all the document can do. By itself alone,
the subrogation receipt is not sufficient to prove the petitioner’s claim holding the
respondent liable for the damage to the engine.

FACTS: Filipro Phil., now known as Nestle Phil., was the consignee of two hydraulic
engines shipped by INREDECO from the US. Upon arrival in Manila, the cargo was turned
over to E. Razon Arrastre, and was later hauled by Mabuhay Brokerage Co. to its
warehouse. Upon delivery to Nestle, it was found that one of the engines was found to be
damages. Accordingly,Nestle refused to accept the unit and filed a claim against E. Razon,
Mabuhay, the Port Authority, and its insurer, the Home Insurance Corp., for P49,170.00
When the other companies denied liability. Home Insurance paid the claim and was issued
a subrogation receipt of $6,070.00.

Home Insurance sued Mabuhay for the recovery of the amount it paid to Nestle, but the
latter denied liability. The RTC of Manila dismissed the complaint, noting that the insurance
contract between the corporation and consignee was not presented. No explanation was

CASES IN COMMERCIAL LAW REVIEW (J. Dimaampao) 4E 2017-2018 | 96

given for the failure of the plaintiffs to submit the originals, as the other supporting
documents were all only photocopies.

The judgment was affirmed on appeal, with the CA holding that the appellant failed to
establish a valid subrogation, which could not be presumed, and to prove the amount
Home had paid to Nestle. The CA stressed that petitioner could be excused from
presenting the original of the insurance contract only if there was proof that this had been
lost. However, the unrebutted claim is that the original was in its possession all the time.

ISSUE: Whether or not the subrogation receipt proves the existence of the insurance
contract between Nestle and petitioner Home Insurance and the amount paid by the latter
to the former

HELD: NO, the Court held that while it may be assumed for the sake of argument that the
subrogation receipt may nevertheless be used to establish the relationship between the
petitioner and the consignee and the amount paid to settle the claim, that is all the
document can do. By itself alone, the subrogation receipt is not sufficient to prove the
petitioner’s claim holding respondent liable for the damage to the engine.

The shipment of the cargo passed through several changes: first, from the shipper to the
port of departure; second, from the port of departure to the M/S Oriental Statesman; third;
from the M/S Oriental Statesman to the M/S Pacific Conveyor; fourth, from the M/S Pacific
Conveyor to the port of arrival; fifth, from the port of arrival to the arrastre operator; sixth,
from the arrastre operator to the hauler; and lastly, from the hauler to the consignee.

In the absence of proof of stipulations to the contrary, the hauler can be liable only for any
damage that occurred from the time it received the cargo until it finally delivered it to the
consignee. It cannot be held responsible for the handling of the cargo before it actually
received it, particularly since there was no indication from the external appearance of the
crates, which Mabuhay did not open, that the engine was damaged.

As a mere subrogee of Nestle, Home can exercise only such rights against the parties
handling the cargo as were granted to Nestle under the insurance contract. The insurance
contract would have clearly indicated the scope of the coverage but there is no evidence of
this. It cannot be simply be supposed that the hauling was included in the coverage; it is
possible that the coverage ended with the arrastre. In other words, the rights transferred to
Home by Nestle – still assuming there was valid subrogation – might not include the right to
sue Mabuhay.

The insurance contract might have proved that it covered the hauling portion of the
shipment and was not limited to the transport of the cargo while at sea, if that were really
the case. It could have shown that the agreement was not only a marine transportation
insurance but covered all phases of the cargo’s shipment, from the time the cargo was
loaded on the vessel in the US until it was delivered to the consignee in the Philippines. But
there is no acceptable evidence of these stipulations because the original contract of
insurance has not been presented.#RECINTO

***

Wallem Philippines Shipping, Inc. v. Prudential Guarantee & Assurance, Inc.,

G.R. No. 152158, February 7, 2003

DOCTRINE: The contract of insurance must be presented in evidence to indicate the

extent of its coverage.

FACTS: Private respondent Prudential sought the recovery of the sum of P995,677.00,
representing the amount it had paid to its insured, General Milling Corporation (GMC), for
alleged shortage incurred in its shipment with 6% legal interest thereon from the date of
filing of the complaint up to and until the same is fully paid, and 25% of the claim as
attorneys fees. To prove its claim for indemnity, Prudential presented two

CASES IN COMMERCIAL LAW REVIEW (J. Dimaampao) 4E 2017-2018 | 97

witnesses: Josephine Suarez and Alfredo Cunanan. Suarez admitted that she had no
participation in the preparation of the documents (Exhs. A to G) submitted to her, and that
she had based her recommendation to pay GMCs claim on said documents. She also
admitted that she did not do anything to verify the genuineness of Bill of Lading
BEDI/1(Exh. B) and Commercial Invoice No. 1401 (Exh. C). She said that GMC had been
paid 20% more than its alleged loss. On the other hand, Cunanan was present during the
unloading of the shipment. He saw the cargo discharged from the vessel by the use of a
suction device, wherein the cargo passed into a conveyor and weighed unto GMCs
automatic scale. The quantity recorded on GMCs scale was thereafter compared with that
indicated in the bill of lading. At that point a shortage was discovered.

The trial court resolved whether there was indeed a shortage in the shipment and whether
Wallem could be held liable for the shortage.[18] The trial court ruled that private respondent
Prudential failed to prove by clear, convincing, and competent evidence that there was a
shortage in the shipment. The trial court said that private respondent Prudential failed to
establish by competent evidence the genuineness and due execution of the bill of lading
and, therefore, the true and exact weight of the shipment when it was loaded unto the
vessel. Hence, there was no way by which a shortage could be determined. The trial court
ruled that the shortage, if any, could only have been incurred either before the loading of
the shipment.

ISSUE: Whether or not Wallem can be held liable for the loss

HELD: NO. Even if the shortage can be definitively determined, Wallem still cannot be held
liable because of the failure of Prudential to present the contract of insurance or a copy
thereof.Prudential claims that it is subrogated to the rights of GMC pursuant to their
insurance contract. For this purpose, it submitted a subrogation receipt (Exh. J) and a
marine cargo risk note (Exh. D). However, as the trial court pointed out, this is not
sufficient. As GMCs subrogee, Prudential can exercise only those rights granted to GMC
under the insurance contract. The contract of insurance must be presented in evidence to
indicate the extent of its coverage. As there was no determination of rights under the
insurance contract, this Courts ruling in Home Insurance Corporation v. Court of Appeal is
applicable:The insurance contract has not been presented. It may be assumed for the sake
of argument that the subrogation receipt may nevertheless be used to establish the
relationship between the petitioner [Home Insurance Corporation] and the consignee [Nestl
Phil.] and the amount paid to settle the claim. But that is all the document can do. By itself
alone, the subrogation receipt is not sufficient to prove the petitioners claim holding the
respondent [Mabuhay Brokerage Co., Inc.] liable for the damage to the engine.#SABULAO

***

ASIAN TERMINALS, INC. v. MALAYAN INSURANCE, CO., INC.

G.R. No. 171406; April 4, 2011

FACTS: On November 14, 1995, Shandong Weifang Soda Ash Plant shipped on
board the vessel MV "Jinlian I" 60,000 plastic bags of soda ash dense from China to
Manila. The shipment, with an invoice value of US$456,000.00, was insured with
respondent Malayan Insurance Company, Inc.,and covered by a Bill of Lading issued by
Tianjin Navigation Company with Philippine Banking Corporation as the consignee and
ChemphilAlbright and Wilson Corporation as the notify party. On November 21, 1995, upon
arrival of the vessel in Manila, the stevedores of petitioner AsianTerminals, Inc., a duly
registered domestic corporation engaged in providing arrastre and stevedoring services,
unloaded the 60,000 bags of soda ashdense from the vessel and brought them to the open
storage area of petitioner for temporary storage and safekeeping. When the unloading of
the bagswas completed on November 28, 1995, 2,702 bags were found to be in bad order
condition. On November 29, 1995, the stevedores of petitioner began loading the bags in
the trucks of MEC Customs Brokerage for transport and delivery to the consignee. On
December 28, 1995, after all the bags were unloaded in the warehouses of the consignee,
a total of 2,881 bags were in bad order condition due to spillage, caking, and hardening of
the contents. On April 19, 1996, respondent, as insurer, paid the value of the lost/ damaged

CASES IN COMMERCIAL LAW REVIEW (J. Dimaampao) 4E 2017-2018 | 98

cargoes to the consignee in the amount of P643,600.25.On November 20, 1996,
respondent, as subrogee of the consignee, filed before the RTC of Manila a complaint for
damages against petitioner (Asian Terminals, Inc.), the shipper (Inchcape Shipping
Services), and the cargo broker (MEC Customs Brokerage). The RTC rendered adecision
finding petitioner liable for the damage/loss sustained by the shipment but absolving the
other defendants - Inchcape Shipping Services andMEC Customs Brokerage. The RTC
found that the proximate cause of the damage/loss was the negligence of petitioner’s
stevedores who handled theunloading of the cargoes from the vessel. The RTC
emphasized that despite the admonitions of Marine Cargo Surveyors not to use steel hooks
inretrieving and picking-up the bags, petitioner’s stevedores continued to use such tools,
which pierced the bags and caused the spillage. The RTC,thus, ruled that petitioner, as
employer, is liable for the acts and omissions of its stevedores and is ordered to pay
plaintiff Malayan InsuranceCompany, Inc.Aggrieved, petitioner appealed to the CA but the
appeal was denied. The CA agreed with the RTC that the damage/loss was caused by
thenegligence of petitioner’s stevedores in handling and storing the subject shipment. The
CA likewise rejected petitioner’s assertion that it received thesubject shipment in bad order
condition as this was disproved by the Marine Cargo Surveyors who testified that the actual
counting of bad order bagswas done only after all the bags were unloaded from the vessel
and that the Turn Over Survey of Bad Order Cargoes (TOSBOC) upon which petitioner
anchors its defense was prepared only on November 28, 1995 or after the unloading of the
bags was completed. Petitioner moved for reconsideration but the CA denied the same in a
Resolution for lack of merit.

ISSUE/S:
(1) Whether the non-presentation of the insurance contract or policy is fatal to respondent’s
cause of action;
(2) Whether the proximate cause of the damage/loss to the shipment was the negligence of
petitioner’s stevedores; and
(3) Whether the court can take judicial notice of the Management Contract between
petitioner and the Philippine Ports Authority (PPA) indetermining petitioner’s liability

HELD:
The petition is bereft of merit.

(1)Whether or not the respondent’s non-presentation of the insurance contract or policy

between the respondent and the consignee isfatal to its cause of action. – NO.

• Non-presentation of the insurance contract or policy is not fatal in the instant case.

First of all, this was never raised as an issue before the RTC. Basic is the rule that "issues
or grounds not raised below cannot be resolved onreview by the Supreme Court, for to
allow the parties to raise new issues is antithetical to the sporting idea of fair play, justice
and due process."Besides, non-presentation of the insurance contract or policy is not
necessarily fatal.

• In Delsan Transport Lines, Inc. v. Court of Appeals, the presentation in evidence of the
marine insurance policy is not indispensable before the insurer may recover from the
common carrier the insured value of the lost cargo in the exercise of its subrogatory right.
Thesubrogation receipt, by itself, is sufficient to establish not only the relationship of the
insurer and the assured shipper of the lost cargo of industrial fuel oil, but also the amount
paid to settle the insurance claim. The right of subrogation accrues simply upon payment
by theinsurance company of the insurance claim.

• In Home Insurance Corporation v. CA, the presentation of the insurance policy was
necessary because the shipment therein (hydraulicengines) passed through several stages
with different parties involved in each stage. In the absence of proof of stipulations to the
contrary,the hauler can be liable only for any damage that occurred from the time it
received the cargo until it finally delivered it to the consignee.Ordinarily, it cannot be held
responsible for the handling of the cargo before it actually received it.However, as in every
general rule, there are admitted exceptions. In Delsan Transport Lines, Inc. v. Court of

CASES IN COMMERCIAL LAW REVIEW (J. Dimaampao) 4E 2017-2018 | 99

Appeals, the Court stated that the presentation of the insurance policy was not fatal
because the loss of the cargo undoubtedly occurred while on board the petitioner’s vessel,
unlike inHome Insurance in which the cargo passed through several stages with different
parties and it could not be determined when the damage to the cargooccurred, such that
the insurer should be liable for it. As in Delsan, there is no doubt that the loss of the cargo
in the present case occurred while in petitioner’s custody.

Similarly, in this case, the presentation of the insurance contract or policy was not
necessary. Although petitioner objected tothe admission of the Subrogation Receipt in its
Comment to respondent’s formal offer of evidence on the ground that respondent failed to
present theinsurance contract or policy, a perusal of petitioner’s Answer and Pre-Trial Brief
shows that petitioner never questioned respondent’s right tosubrogation, nor did it dispute
the coverage of the insurance contract or policy. Since there was no issue regarding the
validity of the insurancecontract or policy, or any provision thereof, respondent had no
reason to present the insurance contract or policy as evidence during the trial. Hence,the
factual findings of the CA, affirming the RTC, are binding and conclusive.

(2)Whether or not the proximate cause of the damage/loss to the shipment was the
negligence of petitioner’s stevedores. – YES.

Both the RTC and the CA found the negligence of petitioner’s stevedores to be the
proximate cause of the damage/loss to the shipment. Indisregarding the contention of
petitioner that such finding is contrary to the documentary evidence, the CA had this to say:
ATI, however, contendsthat the finding of the trial court was contrary to the documentary
evidence of record, particularly, the Turn Over Survey of Bad Order Cargoes dated
November 28, 1995, which was executed prior to the turn-over of the cargo by the carrier to
the arrastre operator ATI, and which showed that theshipment already contained 2,702
damaged bags. However, contrary to ATI’s assertion, the witnesses – marine cargo
surveyors of Inchcape for thevessel Jinlian I which arrived on November 21, 1995 and up to
completion of discharging on November 28, 1995, testified that it was only after allthe bags
were unloaded from the vessel that the actual counting of bad order bags was made.

There is no cogent reason to depart from the ruling of the trial court that ATI should be
made liable for the 2,702 bags of damaged shipment. Needless to state, it is hornbook
doctrine that the assessment of witnesses and their testimonies is a matter best undertaken
by the trial court, whichhad the opportunity to observe the demeanor, conduct or attitude of
the witnesses. The findings of the trial court on this point are accorded greatrespect and will
not be reversed on appeal, unless it overlooked substantial facts and circumstances which,
if considered, would materially affect theresult of the case. The proximate cause of the
damage (i.e., torn bags, spillage of contents and caked/hardened portions of the contents)
was theimproper handling of the cargoes by ATI’s stevedores; and ATI has not
satisfactorily rebutted plaintiff-appellee’s evidence on the negligence of ATI’s stevedores in
the handling and safekeeping of the cargoes.Indeed, from the nature of the damage
caused to the shipment, i.e., torn bags, spillage of contents and hardened or caked portions
of thecontents, it is not difficult to see that the damage caused was due to the negligence of
ATI’s stevedores who used steel hooks to retrieve the bagsfrom the higher portions of the
piles thereby piercing the bags and spilling their contents, and who piled the bags in the
open storage area of ATI withinsufficient cover thereby exposing them to the elements and
[causing] the contents to cake or harden. Clearly, the finding of negligence on the partof
petitioner’s stevedores is supported by both testimonial and documentary evidence. Hence,
we see no reason to disturb the same.

(3)Whether the court can take judicial notice of the Management Contract between
petitioner and the Philippine Ports Authority(PPA) in determining petitioner’s liability. – NO.

Finally, petitioner implores us to take judicial notice of Section 7.01, Article VII of the
Management Contract for cargo handling services itentered with the PPA, which limits
petitioner’s liability to P5,000.00 per package. Unfortunately for the petitioner, it cannot
avail of judicial notice.

CASES IN COMMERCIAL LAW REVIEW (J. Dimaampao) 4E 2017-2018 | 100

The Management Contract entered into by petitioner and the PPA is not among the matters
which the courts can take judicial notice of. It cannot be considered an official act of the
executive department. The PPA, which was created by virtue of Presidential Decree No.
857, as amended, is agovernment-owned and controlled corporation in charge of
administering the ports in the country. Obviously, the PPA was only performing a
proprietary function when it entered into a Management Contract with petitioner. As such,
judicial notice cannot be applied. #SALOR

***

LOADSTAR SHIPPING COMPANY, INCORPORATED and LOADSTAR

INTERNATIONAL SHIPPING COMPANY, INCORPORATED v. MALAYAN INSURANCE
COMPANY, INCORPORATED
G.R. No. 185565; November 26, 2014

DOCTRINE: A subrogee cannot succeed to a right not possessed by the subrogor. A

subrogee in effect steps into the shoes of the insured and can recover only if the insured
likewise could have recovered.

FACTS: Loadstar International Shipping, Inc. (Loadstar Shipping) and Philippine

Associated Smelting and Refining Corporation (PASAR) entered into a Contract of
Affreightment for domestic bulk transport of the latter’s copper concentrates. On 2000,
5,065.47 wet metric tons of copper concentrates were loaded in Cargo Hold Nos. 1 and 2
of MV "Bobcat", a marine vessel owned by Loadstar International Shipping Co., Inc.
(Loadstar International) and operated by Loadstar Shipping under a charter party
agreement. The shipper and consignee under the Bill of Lading are Philex Mining
Corporation (Philex) and PASAR, respectively. The cargo was insured with Malayan
Insurance Company, Inc. (Malayan) under Open Policy No. M/OP/2000/001-582. P&I
Association is the third party liability insurer of Loadstar Shipping. On the said date, MV
"Bobcat" sailed from Poro Point, San Fernando, La Union bound for Isabel, Leyte. While in
the vicinity of Cresta de Gallo, the vessel’s chief officer on routine inspection found a crack
on starboard side of the main deck which caused seawater to enter and wet the cargo
inside Cargo Hold No. 2 forward/aft. Immediately after the vessel arrived at Isabel, Leyte
anchorage area, PASAR and Philex’s representatives boarded and inspected the vessel
and undertook sampling of the copper concentrates. In its preliminary report, Elite Adjusters
and Surveyor, Inc. (Elite Surveyor) confirmed that samples of copper concentrates from
Cargo Hold No. 2 were contaminated by seawater. Consequently, PASAR rejected 750 MT
of the 2,300 MT cargo discharged from Cargo Hold No. 2.

PASAR sent a formal notice of claim in the amount of P37,477,361.31 to Loadstar

Shipping. In its final report, Elite Surveyor recommended payment to the assured the
amount of P32,351,102.32 as adjusted. On the basis of such recommendation, Malayan
paid PASAR the amount of P32,351,102.32. Meanwhile, Malayan wrote Loadstar Shipping
informing the latter of a prospective buyer for the damaged copper concentrates and the
opportunity to nominate/refer other salvage buyers to PASAR. Malayan wrote Loadstar
Shipping informing the latter of the acceptance of PASAR’s proposal to take the damaged
copper concentrates at a residual value of US$90,000.00. Loadstar Shipping wrote
Malayan requesting for the reversal of its decision to accept PASAR’s proposal and the
conduct of a public bidding to allow Loadstar Shipping to match or top PASAR’s bid by
10%. PASAR signed a subrogation receipt in favor of Malayan. To recover the amount paid
and in the exercise of its right of subrogation, Malayan demanded reimbursement from
Loadstar Shipping, which refused to comply. Consequently, Malayan instituted with the
RTC a complaint for damages. The complaint was later amended to include Loadstar
International as party defendant.

Malayan mainly alleged that as a direct and natural consequence of the unseaworthiness of
the vessel, PASAR suffered loss of the cargo. It prayed for the amount of P33,934,948.75,
representing actual damages plus legal interest from date of filing of the complaint until fully
paid, and attorney’s fees in the amount of not less than P500,000.00. It also sought to

CASES IN COMMERCIAL LAW REVIEW (J. Dimaampao) 4E 2017-2018 | 101

declare the bill of lading as void since it violates the provisions of Articles 1734 and 1745 of
the Civil Code.

ISSUE: Whether or not Malayan is entitled to the right of recovery by virtue of subrogation
against Loadstar Shipping and Loadstar International, on the basis of PASAR’s claim as
consignee of the allegedly damaged goods.

HELD: NO. The right of subrogation stems from Article 2207 of the New Civil Code. As
previously held by the Supreme Court, “the right of subrogation is not dependent upon, nor
does it grow out of, any privity of contract or upon written assignment of claim. It accrues
simply upon payment of the insurance claim by the insurer.”

The right of subrogation is however, not absolute. There are a few recognized exceptions
to this rule. For instance, if the assured by his own act releases the wrongdoer or third party
liable for the loss or damage, from liability, the insurer’s right of subrogation is defeated.
Similarly, where the insurer pays the assured the value of the lostgoods without notifying
the carrier who has in good faith settled the assured’s claim for loss, the settlement is
binding on both the assured and the insurer, and the latter cannot bring an action against
the carrier on his right of subrogation. And where the insurer pays the assured for a loss
which is not a risk covered by the policy, thereby effecting ‘voluntary payment,’ the former
has no right of subrogation against the third party liable for the loss.

The rights of a subrogee cannot be superior to the rights possessed by a subrogor.

Subrogation is the substitution of one person in the place of another with reference to a
lawful claim or right, so that he who is substituted succeeds to the rights of the other in
relation to a debt or claim, including its remedies or securities. The rights to which the
subrogee succeeds are the same as, but not greater than, those of the person for whom he
is substituted, that is, he cannot acquire any claim, security or remedy the subrogor did not
have. In other words, a subrogee cannot succeed to a right not possessed by the subrogor.
A subrogee in effect steps into the shoes of the insured and can recover only if the insured
likewise could have recovered.

Consequently, an insurer indemnifies the insured based on the loss or injury the latter
actually suffered from. If there is no loss or injury, then there is no obligation on the part of
the insurer to indemnify the insured. Should the insurer pay the insured and it turns out that
indemnification is not due, or if due, the amount paid is excessive, the insurer takes the risk
of not being able to seek recompense from the alleged wrongdoer. This is because the
supposed subrogor did not possess the right to be indemnified and therefore, no right to
collect is passed on to the subrogee. #SANTOS

***

MARINE INSURANCE

NEW WORLD INTERNATIONAL PHILIPPINES INC vs. NYK-FILJAPAN SHIPPING

CORP.
G.R. No. 171468; August 24, 2011

DOCTRINE: Section 244 of the Insurance Code also provides for an award of attorney’s
fees and other expenses incurred by the assured due to the unreasonable withholding of
payment of his claim.

FACTS: Petitioner New World International Development, Inc. bought from DMT
Corporation through its agent, Advatech Industries, Inc three emergency generator sets
worth US$721,500.00. DMT shipped the generator sets by truck from Wisconsin, United
States, to LEP Profit International, Inc in Chicago, Illinois. From there, the shipment went by
train to Oakland, California, where it was loaded on S/S California Luna V59, owned and
operated by NYK Fil-Japan Shipping Corporation for delivery to petitioner New World in
Manila. NYK issued a bill of lading, declaring that it received the goods in good condition.
NYK unloaded the shipment in Hong Kong and transshipped it to S/S ACX Ruby V/72 that

CASES IN COMMERCIAL LAW REVIEW (J. Dimaampao) 4E 2017-2018 | 102

it also owned and operated. On its journey to Manila, however, ACX Ruby encountered
typhoon Kadiang whose captain filed a sea protest on arrival at the Manila South Harbor on
October 5, 1993 respecting the loss and damage that the goods on board his vessel
suffered. Marina Port Services, Inc, the Manila South Harbor ‘arrastre’ or cargo-handling
operator, received the shipment on October 7, 1993. Upon inspection of the three container
vans separately carrying the generator sets, two vans bore signs of external damage while
the third van appeared unscathed. The shipment remained at Pier 3s Container Yard under
Marinas care pending clearance from the Bureau of Customs. Eventually, on October 20,
1993 customs authorities allowed petitioners customs broker, Serbros Carrier Corp, to
withdraw the shipment and deliver the same to petitioner New Worlds job site in Makati
City. An examination of the three generator sets in the presence of petitioner New Worlds
representatives, Federal Builders (the project contractor) and surveyors of petitioner New
Worlds insurer, Seaboard Eastern Insurance Company, revealed that all three sets suffered
extensive damage and could no longer be repaired. For these reasons, New World
demanded recompense for its loss from respondents NYK, DMT, Advatech, LEP Profit,
LEP International Philippines, Inc, Marina, and Serbros. While LEP and NYK acknowledged
receipt of the demand, both denied liability for the loss.

ISSUE: Whether or not petitioner is entitled to the claim based from the insurance policy
including interests in the delay of the release of such claim.

HELD: YES. The marine open policy that Seaboard issued to New World was an all-risk
policy. Such a policy insured against all causes of conceivable loss or damage except
when otherwise excluded or when the loss or damage was due to fraud or intentional
misconduct committed by the insured. The policy covered all losses during the voyage
whether or not arising from a marine peril.

Here, the policy enumerated certain exceptions like unsuitable packaging, inherent vice,
delay in voyage, or vessels unseaworthiness, among others. But Seaboard had been
unable to show that petitioner New Worlds loss or damage fell within some or one of the
enumerated exceptions.

Seaboard cannot pretend that the above documents are inadequate since they were
precisely the documents listed in its insurance policy. Being a contract of adhesion, an
insurance policy is construed strongly against the insurer who prepared it. The Court
cannot read a requirement in the policy that was not there. Section 241 of the Insurance
Code provides that no insurance company doing business in the Philippines shall refuse
without just cause to pay or settle claims arising under coverages provided by its policies.
And, under Section 243, the insurer has 30 days after proof of loss is received and
ascertainment of the loss or damage within which to pay the claim. If such ascertainment is
not had within 60 days from receipt of evidence of loss, the insurer has 90 days to pay or
settle the claim. And, in case the insurer refuses or fails to pay within the prescribed time,
the insured shall be entitled to interest on the proceeds of the policy for the duration of
delay at the rate of twice the ceiling prescribed by the Monetary Board.

Notably, Seaboard already incurred delay when it failed to settle petitioner New Worlds
claim as Section 243 required. Under Section 244, a prima facie evidence of unreasonable
delay in payment of the claim is created by the failure of the insurer to pay the claim within
the time fixed in Section 243.

Consequently, Seaboard should pay interest on the proceeds of the policy for the duration
of the delay until the claim is fully satisfied at the rate of twice the ceiling prescribed by the
Monetary Board. The term ceiling prescribed by the Monetary Board means the legal rate
of interest of 12% per annum provided in Central Bank Circular 416, pursuant to
Presidential Decree 116. Section 244 of the Insurance Code also provides for an award of
attorney’s fees and other expenses incurred by the assured due to the unreasonable
withholding of payment of his claim. #TOMARONG

***
CALTEX (PHILIPPINES), INC, vs. SULPICIO LINES, INC.,

CASES IN COMMERCIAL LAW REVIEW (J. Dimaampao) 4E 2017-2018 | 103

 G.R. No. 131166. September 30, 1999.

DOCTRINE: A charter party is a contract by which an entire ship, or some principal part
thereof, is let by the owner to another person for a specified time or use; a contract of
affreightment is one by which the owner of a ship or other vessel lets the whole or part of
her to a merchant or other person for the conveyance of goods, on a particular voyage, in
consideration of the payment of freight.

FACTS: On December 19, 1987, motor tanker MT Vector left Limay, Bataan, at about 8:00
p.m., enroute to Masbate, loaded with 8,800 barrels of petroleum products shipped by
petitioner Caltex. MT Vector is a tramping motor tanker owned and operated by Vector
Shipping Corporation, engaged in the business of transporting fuel products such as
gasoline, kerosene, diesel and crude oil. During that particular voyage, the MT Vector
carried on board gasoline and other oil products owned by Caltex by virtue of a charter
contract between them.

On December 20, 1987, at about 6:30 a.m., the passenger ship MV Doña Paz left the port
of Tacloban headed for Manila with a complement of 59 crew members including the
master and his officers, and passengers totaling 1,493 as indicated in the Coast Guard
Clearance. The MV Doña Paz is a passenger and cargo vessel owned and operated by
Sulpicio Lines, Inc. plying the route of Manila/ Tacloban/ Catbalogan/ Manila/ Catbalogan/
Tacloban/ Manila, making trips twice a week.

At about 10:30 p.m. of December 20, 1987, the two vessels collided in the open sea within
the vicinity of Dumali Point between Marinduque and Oriental Mindoro. All the
crewmembers of MV Doña Paz died, while the two survivors from MT Vector claimed that
they were sleeping at the time of the incident.

The MV Doña Paz carried an estimated 4,000 passengers; many indeed, were not in the
passenger manifest. Only 24 survived the tragedy after having been rescued from the
burning waters by vessels that responded to distress calls. Among those who perished
were public school teacher Sebastian Cañezal (47 years old) and his daughter Corazon
Cañezal (11 years old), both unmanifested passengers but proved to be on board the
vessel.

The board of marine inquiry in BMI Case No. 653-87 after investigation found that the MT
Vector, its registered operator Francisco Soriano, and its owner and actual operator Vector
Shipping Corporation, were at fault and responsible for its collision with MV Doña Paz.

Teresita Cañezal and Sotera E. Cañezal, Sebastian Cañezal's wife and mother
respectively, filed with the RTC Manila, a complaint for "Damages Arising from Breach of
Contract of Carriage" against Sulpicio Lines, Inc. (hereafter Sulpicio). Sulpicio, in turn, filed
a third party complaint against Francisco Soriano, Vector Shipping Corporation and Caltex
(Philippines), Inc. Sulpicio alleged that Caltex chartered MT Vector with gross and evident
bad faith knowing fully well that MT Vector was improperly manned, ill-equipped,
unseaworthy and a hazard to safe navigation; as a result, it rammed against MV Doña Paz
in the open sea setting MT Vector's highly flammable cargo ablaze. In its decision, the RTC
dismissed the third party against petitioner.

On appeal to the CA interposed by Sulpicio Lines, Inc., the CA modified the trial court's
ruling and included petitioner Caltex as one of the those liable for damages. Hence, this
petition.

ISSUES:
1. Is the charterer of a sea vessel liable for damages resulting from a collision between
the chartered vessel and a passenger ship?
2. (2) Does a charter party agreement turn the common carrier into a private one?
3. (3) Is Caltex liable for damages under the Civil Code?

HELD:

CASES IN COMMERCIAL LAW REVIEW (J. Dimaampao) 4E 2017-2018 | 104

1. NO. The charterer has no liability for damages under Philippine Maritime laws. The
respective rights and duties of a shipper and the carrier depends not on whether the carrier
is public or private, but on whether the contract of carriage is a bill of lading or equivalent
shipping documents on the one hand, or a charter party or similar contract on the other.

Petitioner and Vector entered into a contract of affreightment, also known as a voyage
charter. A charter party is a contract by which an entire ship, or some principal part thereof,
is let by the owner to another person for a specified time or use; a contract of affreightment
is one by which the owner of a ship or other vessel lets the whole or part of her to a
merchant or other person for the conveyance of goods, on a particular voyage, in
consideration of the payment of freight.

A contract of affreightment may be either time charter, wherein the leased vessel is leased
to the charterer for a fixed period of time, or voyage charter, wherein the ship is leased for a
single voyage. In both cases, the charter-party provides for the hire of the vessel only,
either for a determinate period of time or for a single or consecutive voyage, the ship owner
to supply the ship's store, pay for the wages of the master of the crew, and defray the
expenses for the maintenance of the ship.

Under a demise or bareboat charter on the other hand, the charterer mans the vessel with
his own people and becomes, in effect, the owner for the voyage or service stipulated,
subject to liability for damages caused by negligence.

If the charter is a contract of affreightment, which leaves the general owner in possession
of the ship as owner for the voyage, the rights and the responsibilities of ownership rest on
the owner. The charterer is free from liability to third persons in respect of the ship.

2. MT Vector is a common carrier. In this case, the charter party agreement did not
convert the common carrier into a private carrier. The parties entered into a voyage charter,
which retains the character of the vessel as a common carrier.

"The Civil Code defines "common carriers" in the following terms:

"ARTICLE 1732. Common carriers are persons, corporations, firms or associations

engaged in the business of carrying or transporting passengers for passengers or goods or
both, by land, water, or air for compensation, offering their services to the public."

"The above article makes no distinction between one whose principal business activity is
the carrying of persons or goods or both, and one who does such carrying only as an
ancillary activity (in local idiom, as "a sideline"). Article 1732 also carefully avoids making
any distinction between a person or enterprise offering transportation service on a regular
or scheduled basis and one offering such services on a an occasional, episodic or
unscheduled basis. Neither does Article 1732 distinguish between a carrier offering its
services to the "general public," i.e., the general community or population, and one who
offers services or solicits business only from a narrow segment of the general population.
We think that Article 1733 deliberately refrained from making such distinctions.
Under the Carriage of Goods by Sea Act:
SECTION 3. (1) The carrier shall be bound before and at the beginning of the voyage to
exercise due diligence to —
(a) Make the ship seaworthy;
(b) Properly man, equip, and supply the ship;
xxx xxx xxx

Thus, the carriers are deemed to warrant impliedly the seaworthiness of the ship. For a
vessel to be seaworthy, it must be adequately equipped for the voyage and manned with a
sufficient number of competent officers and crew. The failure of a common carrier to
maintain in seaworthy condition the vessel involved in its contract of carriage is a clear
breach of its duty prescribed in Article 1755 of the Civil Code.

CASES IN COMMERCIAL LAW REVIEW (J. Dimaampao) 4E 2017-2018 | 105

3. NO. The charterer of a vessel has no obligation before transporting its cargo to ensure
that the vessel it chartered complied with all legal requirements. The duty rests upon the
common carrier simply for being engaged in "public service." The Civil Code demands
diligence which is required by the nature of the obligation and that which corresponds with
the circumstances of the persons, the time and the place. Hence, considering the nature of
the obligation between Caltex and MT Vector, the liability as found by the Court of Appeals
is without basis.

The relationship between the parties in this case is governed by special laws. Because of
the implied warranty of seaworthiness, shippers of goods, when transacting with common
carriers, are not expected to inquire into the vessel's seaworthiness, genuineness of its
licenses and compliance with all maritime laws. To demand more from shippers and hold
them liable in case of failure exhibits nothing but the futility of our maritime laws insofar as
the protection of the public in general is concerned. By the same token, we cannot expect
passengers to inquire every time they board a common carrier, whether the carrier
possesses the necessary papers or that all the carrier's employees are qualified. Such a
practice would be an absurdity in a business where time is always of the essence.
Considering the nature of transportation business, passengers and shippers alike
customarily presume that common carriers possess all the legal requisites in its operation.

Thus, the nature of the obligation of Caltex demands ordinary diligence like any other
shipper in shipping his cargoes.

Clearly, as a mere voyage charterer, Caltex had the right to presume that the ship was
seaworthy as even the Philippine Coast Guard itself was convinced of its seaworthiness. All
things considered, we find no legal basis to hold petitioner liable for damages. #TUQUERO

***
ISABELA ROQUE, doing business under the name and style of Isabela Roque Timber
Enterprises and ONG CHIONG, vs. HON. INTERMEDIATE APPELLATE COURT and
PIONEER INSURANCE AND SURETY CORPORATION,
G.R. No. L-66935; November 11, 1985

DOCTRINE: Since Section 113 of the Insurance Code provides for an implied warranty of
seaworthiness in every contract of ordinary marine insurance, it becomes the obligation of
a cargo owner to look for a reliable common carrier which keeps its vessels in seaworthy
condition. The shipper of cargo may have no control over the vessel but he has full control
in the choice of the common carrier that will transport his goods. Or the cargo owner may
enter into a contract of insurance which specifically provides that the insurer answers not
only for the perils of the sea but also provides for coverage of perils of the ship.

FACTS:This case is a petition for certiorari seeking to review the decision of the IAC’s (CA)
decision which absolved the respondent insurance company from liability on the grounds
that the vessel carrying the insured cargo was unseaworthy and the loss of said cargo was
caused not by the perils of the sea but by the perils of the ship.

Manila Bay Lighterage Corporation (Manila Bay) a common carrier, entered into a contract
with the petitioners whereby the former would load and carry on board its barge, logs from
Malampaya Sound, Palawan to North Harbor, Manila. The petitioners insured the logs
against loss for P100,000.00 with respondent Pioneer Insurance and Surety Corporation.
Sometime on February, the petitioners loaded on the barge, 811 pieces of logs at
Malampaya Sound, Palawan for carriage and delivery to North Harbor, Port of Manila, but
the shipment never reached its destination because Mable 10 sank with the 811 pieces of
logs. As alleged by the petitioners in their complaint and as found by both the trial and
appellate courts, the barge where the logs were loaded was not seaworthy such that it
developed a leak.

The appellate court modified the trial court's decision and absolved Pioneer from liability
after finding that there was a breach of implied warranty of seaworthiness on the part of the
petitioners and that the loss of the insured cargo was caused by the "perils of the ship" and

CASES IN COMMERCIAL LAW REVIEW (J. Dimaampao) 4E 2017-2018 | 106

not by the "perils of the sea". It ruled that the loss is not covered by the marine insurance
policy. Petitioners contended that the implied warranty of seaworthiness provided for in the
Insurance Code refers only to the responsibility of the shipowner who must see to it that his
ship is reasonably fit to make in safety the contemplated voyage. They alleged that a mere
shipper of cargo, having no control over the ship, has nothing to do with its seaworthiness.

ISSUE: Whether or not the marine insurance is liable for the petitioners’ loss.

HELD: NO. The Court ruled that the term "cargo" can be the subject of marine insurance
and that once it is so made, the implied warranty of seaworthiness immediately attaches to
whoever is insuring the cargo whether he be the shipowner or not. Moreover, the fact that
the unseaworthiness of the ship was unknown to the insured is immaterial in ordinary
marine insurance and may not be used by him as a defense in order to recover on the
marine insurance policy.

Since Section 113 of the Insurance Code provides for an implied warranty of seaworthiness
in every contract of ordinary marine insurance, it becomes the obligation of a cargo owner
to look for a reliable common carrier which keeps its vessels in seaworthy condition. The
shipper of cargo may have no control over the vessel but he has full control in the choice of
the common carrier that will transport his goods. Or the cargo owner may enter into a
contract of insurance which specifically provides that the insurer answers not only for the
perils of the sea but also provides for coverage of perils of the ship.#TURO

***

THE INSULAR LIFE ASSURANCE COMPANY, LTD. vs. CARPONIA T. EBRADO

G.R.No.L-44059; October28,1977

DOCTRINE: A life insurance policy is no different from a civil donation insofar as the
beneficiary is concerned. Both are founded upon the same consideration: liberality. A
beneficiary is like a donee, because from the premiums of the policy which the insured
pays out of liberality, the beneficiary will receive the proceeds or profits of said insurance.
As a consequence, the proscription in Article 739 of the new Civil Code should equally
operate in life insurance contracts. The mandate of Article 2012 cannot be laid aside: any
person who cannot receive a donation cannot be named as beneficiary in the life insurance
policy of the person who cannot make the donation.

FACTS: On September 1, 1968, Buenaventura Ebrado ("Buenaventura") was issued by

The Life Assurance Co., Ltd. ("Insular Life/Insurer"), Policy No. 009929 on a whole-life for
P5,882.00 with a rider for Accidental Death for the same amount. He designated Carponia
Ebrado ("Carponia") as the revocable beneficiary in his policy. He to her as his wife.

On October 21, 1969, Buenaventura died when he was hit by a falling branch of a tree. As
the policy was in force, The Insular Life is liable to pay the coverage in the total amount of
P11,745.73, Carponia filed with the insurer a claim for the proceeds of the Policy as the
designated beneficiary therein, although she admits that she and the insured Buenaventura
were merely living as husband and wife without the benefit of marriage.

Pascuala Vda. de Ebrado ("Pascuala") also filed her claim as the widow of the deceased
insured. She asserts that she is the one entitled to the insurance proceeds, not the
common-law wife, Carponia. In doubt as to whom the insurance proceeds shall be paid, the
insurer, The Insular Life commenced an action for Interpleader before the Court of First
Instance of Rizal on April 29, which rendered judgment declaring Carponia disqualified from
becoming beneficiary of the insured Buenaventura and directing the payment of the
insurance proceeds to the estate of the deceased insured. The trial court held that it is
patent from the last paragraph of Art. 739 of the Civil Code that a criminal conviction for
adultery or concubinage is not essential in order to establish the disqualification mentioned
therein. Neither is it also necessary that a finding of such guilt or commission of those acts
be made in a separate independent action brought for the purpose. The guilt of the donee

CASES IN COMMERCIAL LAW REVIEW (J. Dimaampao) 4E 2017-2018 | 107

(beneficiary) may be proved by preponderance of evidence in the same proceeding (the
action brought to declare the nullity of the donation).

From this judgment, Carponia appealed to the Court of Appeals, which the latter certified to
the Higher Court as involving only questions of law.

ISSUE: Whether or not Carponia, a common-law wife, entitled to be a beneficiary of his

common-law husband, the insured.

HELD: NO. Insurance Act (RA 2327, as amended) or even the new Insurance Code (PD
No. 612, as amended) does not contain any specific provision grossly resolutory of the
prime question at hand. Section 50 of the Insurance Act which provides that "(t)he
insurance shag be applied exclusively to the proper interest of the person in whose name it
is made" cannot be validly seized upon to hold that the mm includes the beneficiary. The
word "interest" highly suggests that the provision refers only to the "insured" and not to the
beneficiary, since a contract of insurance is personal in character. Otherwise, the
prohibitory laws against illicit relationships especially on property and descent will be
rendered nugatory, as the same could easily be circumvented by modes of insurance.
Rather, the general rules of civil law should be applied to resolve this void in the Insurance
Law. Article 2011 of the New Civil Code states: "The contract of insurance is governed by
special laws. Matters not expressly provided for in such special laws shall be regulated by
this Code." When not otherwise specifically provided for by the Insurance Law, the contract
of life insurance is governed by the general rules of the civil law regulating contracts. And
under Article 2012 of the same Code, "any person who is forbidden from receiving any
donation under Article 739 cannot be named beneficiary of a fife insurance policy by the
person who cannot make a donation to him. Common-law spouses are, definitely, barred
from receiving donations from each other. Article 739 of the new Civil Code provides:

The following donations shall be void:

1. Those made between persons who were guilty of adultery or concubinage at the
time of donation;
2. Those made between persons found guilty of the same criminal offense, in
consideration thereof;
3. Those made to a public officer or his wife, descendants or ascendants by reason of
his office.

In the case referred to in No. 1, the action for declaration of nullity may be brought by the
spouse of the donor or donee; and the guilt of the donee may be proved by preponderance
of evidence in the same action.

A life insurance policy is no different from a civil donation insofar as the beneficiary is
concerned. Both are founded upon the same consideration: liberality. A beneficiary is like a
donee, because from the premiums of the policy which the insured pays out of liberality, the
beneficiary will receive the proceeds or profits of said insurance. As a consequence, the
proscription in Article 739 of the new Civil Code should equally operate in life insurance
contracts. The mandate of Article 2012 cannot be laid aside: any person who cannot
receive a donation cannot be named as beneficiary in the life insurance policy of the person
who cannot make the donation.

There is every reason to hold that the bar in donations between legitimate spouses and
those between illegitimate ones should be enforced in life insurance policies since the
same are based on similar Reason and morality dictate that the impediments imposed
upon married couple should likewise be imposed upon extra-marital relationship. If
legitimate relationship is circumscribed by these legal disabilities, with more reason should
an illicit relationship be restricted by these disabilities. #VALDEAVILLA

***

CASES IN COMMERCIAL LAW REVIEW (J. Dimaampao) 4E 2017-2018 | 108

 ORIENTAL ASSURANCE CORPORATION vs. CA AND
PANAMA SAW MILL CO.,
G.R.No.94052:August9,1991

DOCTRINE: The terms of the contract constitute the measure of the insurer liability and
compliance therewith is a condition precedent to the insured's right to recovery from the
insurer. Whether a contract is entire or severable is a question of intention to be determined
by the language employed by the parties.

FACTS: January 1986, private respondent Panama Sawmill Co., Inc. (Panama) bought, in
Palawan, 1,208 pieces of apitong logs, with a total volume of 2,000 cubic meters. It hired
Transpacific Towage, Inc., to transport the logs by sea to Manila and insured it against loss
for P1-M with petitioner Oriental Assurance Corporation (Oriental Assurance). Oriental
Assurance issued Marine Insurance Policy No. OACM 86/002, which warranted that this
Insurance is against TOTAL LOSS ONLY.

The logs were loaded on two (2) barges: (1) on barge PCT-7000,610 pieces of logs with a
volume of 1,000 cubicmeters; and (2) on Barge TPAC-1000, 598 pieces of logs, also with a
volume of 1,000 cubic meters. On 28 January 1986, the two barges were towed by one tug-
boat, the MT 'Seminole' But, as fate would have it, during the voyage, rough seas and
strong winds caused damage to Barge TPAC-1000 resulting in the loss of 497 pieces of
logs out of the 598 pieces loaded thereon.

Panama demanded payment for the loss but Oriental Assurance refuse on the ground that
its contracted liability was for "TOTAL LOSS ONLY." Panama filed a Complaint for
Damages before the Regional Trial Court, Kalookan, which rendered its Decision, ordering
the defendant Oriental Assurance to pay plaintiff Panama the amount of P415,000.00 as
insurance indemnity with interest at the rate of 12% per annum computed from the date of
the filing of the complaint. On appeal by both parties, respondent Appellate Court affirmed
the lower Court judgment in all respects except for the rate of interest, which was reduce
from twelve (12%) to six (6%) per annum.

Both Courts shared the view that the insurance contract should be liberally construed in
order to avoid a denial of substantial justice; and that the logs loaded in the two barges
should be treated separately such that the loss sustained by the shipment in one of them
may be considered as "constructive total loss" and correspondingly compensable.

ISSUE: Whether or not Oriental Assurance can be held liable under its marine insurance
policy based on the theory of a divisible contract of insurance and, consequently, a
constructive total loss.

HELD: NO. The Court considered that no liability attaches. The terms of the contract
constitute the measure of the insurer liability and compliance therewith is a condition
precedent to the insured's right to recovery from the insurer Whether a contract is entire or
severable is a question of intention to be determined by the language employed by the
parties. The policy in question shows that the subject matter insured was the entire
shipment of 2,000 cubic meters of apitong logs. The fact that the logs were loaded on two
different barges did not make the contract several and divisible as to the items insured. The
logs on the two barges were not separately valued or separately insured. Only one
premium was paid for the entire shipment, making for only one cause or consideration. The
insurance contract must, therefore, be considered indivisible.

More importantly, the insurer's liability was for "total loss only." A total loss may be either
actual or constructive (Sec. 129, Insurance Code). An actual total loss is caused by:
a. A total destruction of the thing insured;
b. The irretrievable loss of the thing by sinking, or by being broken up;
c. Any damage to the thing which renders it valueless to the owner for the purpose for
which he held it; or
d. Any other event which effectively deprives the owner of the possession, at the port
of destination, of the thing insured. (Section 130, Insurance Code).

CASES IN COMMERCIAL LAW REVIEW (J. Dimaampao) 4E 2017-2018 | 109

A constructive total loss is one which gives to a person insured a right to abandon, under
Section 139 of the Insurance Code. This provision reads:
SECTION 139. A person insured by a contract of marine insurance may abandon the
thing insured, or any particular portion thereof separately valued by the policy, or otherwise
separately insured, and recover for a total loss thereof, when the cause of the loss is a peril
injured against,
a. If more than three-fourths thereof in value is actually lost, or would have to be
expended to recover it from the peril;
b. If it is injured to such an extent as to reduce its value more than three-fourths;
xxx xxx xxx

Respondent Appellate Court treated the loss as a constructive total loss, and for the
purpose of computing the more than three-fourths value of the logs actually lost,
considered the cargo in one barge as separate from the logs in the other. Thus, it
concluded that the loss of 497 pieces of logs from barge TPAC-1000, mathematically
speaking, is more than three-fourths (¾) of the 598 pieces of logs loaded in that barge and
may, therefore, be considered as constructive total loss.

The requirements for the application of Section 139 of the Insurance Code, quoted above,
have not been met. The logs involved, although placed in two barges, were not separately
valued by the policy, nor separately insured. Resultantly, the logs lost in barge TPAC-1000
in relation to the total number of logs loaded on the same barge can not be made the basis
for determining constructive total loss. The logs having been insured as one inseparable
unit, the correct basis for determining the existence of constructive total loss is the totality
of the shipment of logs. Of the entirety of 1,208, pieces of logs, only 497 pieces thereof
were lost or 41.45% of the entire shipment. Since the cost of those 497 pieces does not
exceed 75% of the value of all 1,208 pieces of logs, the shipment can not be said to have
sustained a constructive total loss under Section 139(a) of the Insurance Code.

In the absence of either actual or constructive total loss, there can be no recovery by the
insured Panama against the insurer, Oriental Assurance. The judgment under review is
hereby SET ASIDE and petitioner, Oriental Assurance Corporation, is hereby ABSOLVED
from liability under its marine insurance policy. #VALDEAVILLA

***

FIRE INSURANCE

MALAYAN INSURANCE COMPANY, INC. vs. PAP CO., LTD. (PHIL. BRANCH).
G.R. No. 200784 August 7, 2013

DOCTRINE: Under Sec. 168 of the Insurance Code, an alteration in the use or condition of
a thing insured from that to which it is limited by the policy made without the consent of the
insurer, by means within the control of the insured, and increasing the risks, entitles an
insurer to rescind a contract of fire insurance.

FACTS: On May 13, 1996, petitioner Malayan issued a Fire Insurance Policy to respondent
PAP Co., Ltd. for the latter’s machineries and equipment located at Sanyo Precision Phils.
Bldg., Phase III, Lot 4, Block 15, PEZA, Rosario, Cavite (Sanyo Building). The insurance,
which was for P15,000,000 and effective for a period of 1 year, was procured by PAP Co.
for Rizal Commercial Banking Corporation (RCBC), the mortgagee of the insured
machineries and equipment.

Prior to the expiration of the insurance coverage, PAP renewed the policy on an "as is"
basis. Pursuant thereto, a renewal policy was issued for the period May 13, 1997 to May
13, 1998. On October 12, 1997 and during the subsistence of the renewal policy, the
insured machineries and equipment were totally lost by fire. Hence, PAP filed a fire
insurance claim with Malayan in the amount insured.

CASES IN COMMERCIAL LAW REVIEW (J. Dimaampao) 4E 2017-2018 | 110

In a letter, dated December 15, 1997, Malayan denied the claim upon the ground that, at
the time of the loss, the insured machineries and equipment were transferred by PAP to a
location different from that indicated in the policy. Specifically, that the insured machineries
were transferred in September 1996 from the Sanyo Building to the Pace Pacific Bldg., Lot
14, Block 14, Phase III, PEZA, Rosario, Cavite (Pace Pacific).

Contesting the denial, PAP argued that Malayan cannot avoid liability as it was informed of
the transfer by RCBC, the party duty-bound to relay such information. When Malayan
reiterated its denial of the claim, PAP filed the complaint.

The RTC ordered Malayan to pay PAP an indemnity for the loss under the fire insurance
policy as well as for attorney’s fees. The CA modified the decision by deleting the attorney’s
fees.

Malayan basically argues that it cannot be held liable under the insurance contract because
PAP committed concealment, misrepresentation and breach of an affirmative warranty
under the renewal policy when it transferred the location of the insured properties without
informing it. Such transfer affected the correct estimation of the risk which should have
enabled Malayan to decide whether it was willing to assume such risk and, if so, at what
rate of premium. The transfer also affected Malayan’s ability to control the risk by guarding
against the increase of the risk brought about by the change in conditions, specifically the
change in the location of the risk.

ISSUE: WON Malayan is liable for the loss of the insured properties under the fire
insurance policy.

HELD: NO. The policy forbade the removal of the insured properties unless sanctioned by
Malayan under its “Condition No. 9(c) of the renewal policy.” Evidently, by the clear and
express condition in the renewal policy, any transfer effected by the insured, without the
insurer’s consent, would free the latter from any liability.

The Court agrees with Malayan that the transfer to the Pace Factory exposed the
properties to a hazardous environment and negatively affected the fire rating stated in the
renewal policy. The increase in tariff rate from 0.449% to 0.657% put the subject properties
at a greater risk of loss. Such increase in risk would necessarily entail an increase in the
premium payment on the fire policy.

Hence, Malayan is entitled to rescind the insurance contract. The terms and conditions in
the renewal policy provided, among others, that the location of the risk insured against is at
the Sanyo factory. The subject insured properties, however, were totally burned at the Pace
Factory which was not the location stipulated in the renewal policy. There being an
unconsented removal, the transfer was at PAP’s own risk. Consequently, it must suffer the
consequences of the fire.

The transfer of the location of the subject properties, without notice and without Malayan’s
consent, after the renewal of the policy, PAP clearly committed concealment,
misrepresentation and a breach of a material warranty under Section 26 and 27 of the
Insurance Code. Moreover, under Section 168 of the Insurance Code, the insurer is entitled
to rescind the fire insurance contract in case of an alteration in the use or condition of the
thing insured. #VALERIANO

***

CASES IN COMMERCIAL LAW REVIEW (J. Dimaampao) 4E 2017-2018 | 111

CASUALTY INSURANCE

FIRST INTEGRATED BONDING & INSURANCE COMPANY, INC., v HERNANDO

G.R. No. 51221. July 31, 1991.

DOCTRINE: where the insurance contract provides for indemnity against liability to a third
party, such third party can directly sue the insurer. The liability of the insurer to such third
person is based on contract while the liability of the insured to the third party is based on
tort

FACTS: Silverio Blanco was the owner of a passenger jeepney which he insured against
liabilities for death and injuries to third persons with First Integrated Bonding and Insurance
Company, Inc. (First Insurance) under Motor Vehicle Policy No. V-05-63751 with the face
value of P30,000.00.
The said jeepney driven by Blanco bumped a five-year old child, Deogracias Advincula,
causing the latter's death and a subsequent complaint for damages brought by the child's
parents against Blanco, impleading therewith First Insurance as the insurer. The court
rendered a decision in favor of the spouses Advincula, ordering First Insurance to pay for
the costs and damages. First insurance filed a petition for certiorari contending, among
others, that the victim’s parents have no cause of action against it because they are not
parties to the insurance contract and that they may only proceed against the driver based
on the provisions of the New Civil Code

ISSUE: WON an injured party for whom the contract of insurance is intended can sue
directly the insurer

HELD: An injured party for whom the contract of insurance is intended can sue directly the
insurer. It is settled that where the insurance contract provides for indemnity against liability
to a third party, such third party can directly sue the insurer (Caguia v. Fieldman's
Insurance Co., Inc., G.R. No. 23276, November 29, 1968, 26 SCRA 178). The liability of
the insurer to such third person is based on contract while the liability of the insured to the
third party is based on tort (Malayan Insurance Co., Inc. v. CA, L-36413, September 26,
1988, 165 SCRA 536).
The general purpose of statutes enabling an injured person to proceed directly against the
insurer is to protect injured persons against the insolvency of the insured who causes such
injury, and to give such injured person a certain beneficial interest in the proceeds of the
policy, and statutes are to be liberally construed so that their intended purpose may be
accomplished. It has even been held that such a provision creates a contractual relation
which inures to the benefit of any and every person who may be negligently injured by the
named insured as if such injured person were specifically named in the policy.
First Insurance cannot evade its liability as insurer by hiding under the cloak of the insured.
Its liability is primary and not dependent on the recovery of judgment from the insured.
"Compulsory Motor Vehicle Liability Insurance (third party liability, or TPL) is primarily
intended to provide compensation for the death or bodily injuries suffered by innocent third
parties or passengers as a result of a negligent operation and use of motor vehicles. The
victims and or their dependents are assured of immediate financial assistance, regardless
of the financial capacity of the motor vehicle owners. ". . . the insurer's liability accrues
immediately upon the occurrence of the injury or event upon which the liability depends,
and does not depend on the recovery of judgment by the injured party against the
insured.#YOROBE

***

CASES IN COMMERCIAL LAW REVIEW (J. Dimaampao) 4E 2017-2018 | 112

 JEWEL VILLACORTA vs. THE INSURANCE COMMISSION and EMPIRE INSURANCE
COMPANY
G.R. No. L-54171 : October 28, 1980

DOCTRINE: The use of a thing constitutes gain, giving rise to liability by the insurer under
a theft clause of an insurance contract.

Albeit taking of a vehicle was temporary and for joy ride, the better view is when a person,
either with the object of going to a certain place, or learning how to drive, or enjoying a free
ride, takes possession of a vehicle belonging to another, without the consent of its owner,
he is guilty of theft because by taking possession of the personal property belonging to
another and using it, his intent to gain is evident since he derives therefrom utility,
satisfaction, enjoyment and pleasure.

FACTS: The case involves an insured Colt Lancer (1976 model) owned by appellant with
respondent under a comprehensive motor car insurance policy with theft and authorized
driver’s clauses for P 35,000.

While under general check-up and repairs with Sunday Machine Works, Inc., subject
vehicle was allegedly taken by six (6) persons, driven by a resident of the repair shop
(Mabasa) and figured an accident en route Montalban, Rizal, resulting in the death of said
driver and another passenger as well as physical injuries of the rest.

Claiming indemnity under the authorized driver and theft clauses of the policy, appellant
was refused by respondent, contending that neither the driver at the time of the accident
was authorized nor theft took place for it to be liable to pay the proceeds of the insurance
contract.

Public respondent (Insurance Commission) likewise upheld Empire’s contention by

declaring that since Mabasa was not under authority to have driven the car for temporary
“joy ride”, the authorized driver and theft clauses do not operate to make respondent liable
for payment.

ISSUE: WON respondent insurer is liable under the comprehensive motor car insurance
policy

HELD: YES. Although sustaining the inapplicability of the authorized driver’s clause, the
Supreme Court held that respondent is liable under the Theft Clause of the policy with right
of reimbursement as subrogee against Sunday Machine Works, Inc.

Revisiting the investigator’s report on the vehicular accident where one cal. 45 Colt. and
one apple type grenade were found in the body of the driver (Mabasa), the Court rejected
the findings of the Insurance Commission that the car was merely taken for a “joy ride”
since said evidence is hardly to be brought by one who intended to drive away just for such
purpose.

Further, had there actually been a “joy ride”, the better view is that use of a thing
constitutes gain (hurt de uso). Theft is committed when a person, either with the object of
going to a certain place, or learning how to drive, or enjoying a free ride, takes possession
of a vehicle belonging to another, without the consent of its owner. #ZARA

***

ANDREW PALERMO vs.PYRAMID INSURANCE CO., INC.,

G.R. No. L-36480 May 31, 1988

DOCTRINE: The requirement that the driver be "permitted in accordance with the licensing
or other laws or regulations to drive the Motor Vehicle and is not disqualified from driving
such motor vehicle by order of a Court of Law or by reason of any enactment or regulation
in that behalf," applies only when the driver" is driving on the insured's order or with his

CASES IN COMMERCIAL LAW REVIEW (J. Dimaampao) 4E 2017-2018 | 113

permission." It does not apply when the person driving is the insured himself. The main
purpose of the "authorized driver" clause, as may be seen from its text, is that a person
other than the insured owner, who drives the car on the insured's order, such as his regular
driver, or with his permission, such as a friend or member of the family or the employees of
a car service or repair shop, must be duly licensed drivers and have no disqualification to
drive a motor vehicle.

FACTS: Appellee Andrew Palermo purchased a brand new Nissan Cedric de Luxe Sedan
car and insured the same with defendant Pyramid Insurance Co., Inc. against any loss or
damage for P 20,000.00 and against third party liability for P 10,000.00. Plaintiff paid the
defendant P 361.34 premium for one year, March 12, 1968 to March 12, 1969, for which
defendant issued Private Car Comprehensive Policy No. MV-1251. On April 17, 1968, while
driving the automobile in question, the plaintiff met a violent accident. The La Carlota City
fire engine crashed head on, and as a consequence, the plaintiff sustained physical
injuries. On March 7, 1969, the insured, appellee Andrew Palermo, filed a complaint in the
Court of First Instance of Negros Occidental against Pyramid Insurance Co., Inc., for
payment of his claim under a Private Car Comprehensive Policy MV-1251 issued by the
defendant. In its answer, the appellant Pyramid Insurance Co., Inc., alleged that it
disallowed the claim because at the time of the accident, the insured was driving his car
with an expired driver's license.

ISSUE: WON appellant is correct in denying the claim of Andrew Palermo.

HELD: NO. There is no merit in the appellant's allegation that the plaintiff was not
authorized to drive the insured motor vehicle because his driver's license had expired. The
driver of the insured motor vehicle at the time of the accident was, the insured himself,
hence an "authorized driver" under the policy.
While the Motor Vehicle Law prohibits a person from operating a motor vehicle on the
highway without a license or with an expired license, an infraction of the Motor Vehicle Law
on the part of the insured, is not a bar to recovery under the insurance contract. It however
renders him subject to the penal sanctions of the Motor Vehicle Law.
The requirement that the driver be "permitted in accordance with the licensing or other laws
or regulations to drive the Motor Vehicle and is not disqualified from driving such motor
vehicle by order of a Court of Law or by reason of any enactment or regulation in that
behalf," applies only when the driver" is driving on the insured's order or with his
permission." It does not apply when the person driving is the insured himself.
The main purpose of the "authorized driver" clause, as may be seen from its text, is that a
person other than the insured owner, who drives the car on the insured's order, such as his
regular driver, or with his permission, such as a friend or member of the family or the
employees of a car service or repair shop, must be duly licensed drivers and have no
disqualification to drive a motor vehicle.#ACHAS

***

VILLACORTA vs. THE INSURANCE COMMISSION and EMPIRE INSURANCE

COMPANY
G.R. No. L-54171 October 28, 1980

DOCTRINE: The main purpose of the "authorized driver" clause, as may be seen from its
text, supra, is that a person other than the insured owner, who drives the car on the
insured's order, such as his regular driver, or with his permission, such as a friend or
member of the family or the employees of a car service or repair shop must be duly
licensed drivers and have no disqualification to drive a motor vehicle.
Where the insured's car is wrongfully taken without the insured's consent from the car
service and repair shop to whom it had been entrusted for check-up and repairs (assuming
that such taking was for a joy ride, in the course of which it was totally smashed in an
accident), respondent insurer is liable and must pay insured for the total loss of the insured
vehicle under the theft clause of the policy.

CASES IN COMMERCIAL LAW REVIEW (J. Dimaampao) 4E 2017-2018 | 114

FACTS: On May 9, 1978, the vehicle was brought to the Sunday Machine Works, Inc., for
general check-up and repairs. On May 11, 1978, while it was in the custody of the Sunday
Machine Works, the car was allegedly taken by six (6) persons and driven out to
Montalban, Rizal. While travelling along Mabini St., Sitio Palyasan, Barrio Burgos, going
North at Montalban, Rizal, the car figured in an accident, hitting and bumping a gravel and
sand truck parked at the right side of the road going south. As a consequence, the gravel
and sand truck veered to the right side of the pavement going south and the car veered to
the right side of the pavement going north. The driver, Benito Mabasa, and one of the
passengers died and the other four sustained physical injuries. The car, as well, suffered
extensive damage. Complainant, thereafter, filed a claim for total loss with the respondent
company but claim was denied. Hence, complainant, was compelled to institute the present
action.

Respondent insurance commission, however, dismissed petitioner's complaint for recovery

of the total loss of the vehicle against private respondent, sustaining respondent insurer's
contention that the accident did not fall within the provisions of the policy either for the Own
Damage or Theft coverage, invoking the policy provision on "Authorized Driver" clause.

Respondent commission upheld private respondent's contention on the "Authorized Driver"

clause in this wise: "It must be observed that under the above-quoted provisions, the policy
limits the use of the insured vehicle to two (2) persons only, namely: the insured himself or
any person on his (insured's) permission.
A car owner who entrusts his car to an established car service and repair shop necessarily
entrusts his car key to the shop owner and employees who are presumed to have the
insured's permission to drive the car for legitimate purposes of checking or road-testing the
car. The mere happenstance that the employee(s) of the shop owner diverts the use of the
car to his own illicit or unauthorized purpose in violation of the trust reposed in the shop by
the insured car owner does not mean that the "authorized driver" clause has been violated
such as to bar recovery, provided that such employee is duly qualified to drive under a valid
driver's license.

The situation is no different from the regular or family driver, who instead of carrying out the
owner's order to fetch the children from school takes out his girl friend instead for a joy ride
and instead wrecks the car. There is no question of his being an "authorized driver" which
allows recovery of the loss although his trip was for a personal or illicit purpose without the
owner's authorization.

Secondly, and independently of the foregoing (since when a car is unlawfully taken, it is the
theft clause, not the "authorized driver" clause, that applies), where a car is admittedly as in
this case unlawfully and wrongfully taken by some people, be they employees of the car
shop or not to whom it had been entrusted, and taken on a long trip to Montalban without
the owner's consent or knowledge, such taking constitutes or partakes of the nature of
theft.
ISSUE: Whether or not the insurer is liable under theft clause?

HELD: YES. The Court rejects respondent commission's premise that there must be an
intent on the part of the taker of the car "permanently to deprive the insured of his car" and
that since the taking here was for a "joy ride" and "merely temporary in nature," a
"temporary taking is held not a taking insured against."

The evidence does not warrant respondent commission's findings that it was a mere "joy
ride". From the very investigator's report cited in its comment, 3 the police found from the
waist of the car driver Benito Mabasa Bartolome who smashed the car and was found dead
right after the incident "one cal. 45 Colt. and one apple type grenade," hardly the materials
one would bring along on a "joy ride". Then, again, it is equally evident that the taking
proved to be quite permanent rather than temporary, for the car was totally smashed in the
fatal accident and was never returned in serviceable and useful condition to petitioner-
owner.

CASES IN COMMERCIAL LAW REVIEW (J. Dimaampao) 4E 2017-2018 | 115

The insurer must therefore indemnify the petitioner-owner for the total loss of the insured
car in the sum of P35,000.00 under the theft clause of the policy, subject to the filing of
such claim for reimbursement or payment as it may have as subrogee against the Sunday
Machine Works, Inc. #BAGAYAO

***

FCP CREDIT CORPORATION vs. THE COURT OF APPEALS

G.R.No.96493;May7,1992

DOCTRINE: The "authorized driver clause" in a typical insurance policy is in contemplation

or anticipation of accident in the legal sense in which it should be understood, and not in
contemplation or anticipation of an event such as theft. The distinction — often seized upon
by insurance companies in resisting claims from their assureds — between death occurring
as a result of accident and death occurring as a result of intent may, by analogy, apply to
the case at bar.

The insurance policy was therefore meant to be an additional security to the principal
contract, that is, to insure that the promissory note will still be paid in case the automobile is
lost through accident or theft.

FACTS: Spouses Herminio and Evelyn Lim (spouses) executed a promissory note in favor
Supercars, Inc. in the sum of P77,940.00, payable in monthly installments according to the
schedule of payment indicated in said note, and secured by a chattel mortgage over a
brand new red Ford Laser which is registered under the name of private respondent
Herminio Lim and insured with the petitioner Perla Compania de Seguros, Inc. (Perla) for
comprehensive coverage. Then, Supercars, Inc., with notice to spouses, assigned to
petitioner FCP Credit Corporation (FCP) its rights, title and interest on said promissory note
and chattel mortgage as shown by the Deed of Assignment.

The vehicle was carnapped while parked at the back of Broadway Centrum and Evelyn
Lim, who was driving said car before it was carnapped, immediately called up the Anti-
Carnapping Unit of the Philippine Constabulary to report said incident and thereafter, went
to the nearest police substation to make a police report. Then she reported the incident to
the Land Transportation Commission in compliance with the insurance requirement.

The spouses filed a claim for loss with the petitioner Perla but said claim was denied on the
ground that Evelyn Lim, who was using the vehicle before it was carnapped, was in
possession of an expired driver's license at the time of the loss of said vehicle which is in
violation of the authorized driver clause of the insurance policy, which states, to wit:

AUTHORIZED DRIVER:
Any of the following: (a) The Insured (b) Any person driving on the Insured's order, or with
his permission. Provided that the person driving is permitted, in accordance with the
licensing or other laws or regulations, to drive the Scheduled Vehicle, or has been
permitted and is not disqualified by order of a Court of Law or by reason of any enactment
or regulation in that behalf.

Then the spouses requested from petitioner FCP for a suspension of payment on the
monthly amortization agreed upon due to the loss of the vehicle and, since the carnapped
vehicle insured with petitioner Perla, said insurance company should be made to pay the
remaining balance of the promissory note and the chattel mortgage contract.

Perla, however, denied private respondents' claim. Consequently, petitioner FCP

demanded that the spouses pay the whole balance of the promissory note or to return the
vehicle but the latter refused.FCP filed a complaint against the spouses, who in turn filed an
amended third party complaint against petitioner Perla on December 8, 1983.

CASES IN COMMERCIAL LAW REVIEW (J. Dimaampao) 4E 2017-2018 | 116

After trial on the merits, the trial court rendered a decision that the spouses were solidarily
liable to Perla and the Third Party Complaint was dismissed. The appellate court reversed
the decision.

ISSUES:
1. Whether or not there was grave abuse of discretion on the part of the appellate court
in holding that private respondents did not violate the insurance contract because
the authorized driver clause is not applicable to the "Theft" clause of said Contract.
2. Whether or not the loss of the collateral exempted the debtor from his admitted
obligations under the promissory note particularly the payment of interest, litigation
expenses and attorney's fee

HELD: 1.NO. The comprehensive motor car insurance policy issued by petitioner Perla
undertook to indemnify the private respondents against loss or damage to the car (a) by
accidental collision or overturning, or collision or overturning consequent upon mechanical
breakdown or consequent upon wear and tear; (b) by fire, external explosion, self-ignition
or lightning or burglary, housebreaking or theft; and (c) by malicious act.

Where a car is admittedly, as in this case, unlawfully and wrongfully taken without the
owner's consent or knowledge, such taking constitutes theft, and, therefore, it is the
"THEFT"' clause, and not the "AUTHORIZED DRIVER" clause that should apply.

There is no causal connection between the possession of a valid driver's license and the
loss of a vehicle. To rule otherwise would render car insurance practically a sham since an
insurance company can easily escape liability by citing restrictions which are not applicable
or germane to the claim, thereby reducing indemnity to a shadow.

2.NO. The spouses are not relieved of their obligation to pay the former the installments
due on the promissory note on account of the loss of the automobile. The chattel mortgage
constituted over the automobile is merely an accessory contract to the promissory note.
Being the principal contract, the promissory note is unaffected by whatever befalls the
subject matter of the accessory contract. Therefore, the unpaid balance on the promissory
note should be paid, and not just the installments due and payable before the automobile
was carnapped, as erroneously held by the Court of Appeals.

However, this does not mean that private respondents are bound to pay the interest,
litigation expenses and attorney's fees stipulated in the promissory note. Because of the
peculiar relationship between the three contracts in this case, i.e., the promissory note, the
chattel mortgage contract and the insurance policy. #BELO

***

PARAMOUNT INSURANCE CORPORATION vs. SPOUSES YVES And MARIA TERESA

REMONDEULAZ
G.R. No. 173773 : November 28, 2012

DOCTRINE: The taking of a vehicle by another person without the permission or authority
from the owner thereof is sufficient to place it within the ambit of the word theft as
contemplated in the policy, and is therefore, compensable.

FACTS: Respondents insured with petitioner their 1994 Toyota Corolla sedan under a
comprehensive motor vehicle insurance policy for one year. During the effectivity of said
insurance, respondents car was unlawfully taken. Hence, they immediately reported the
theft to the Traffic Management Command of the PNP who made them accomplish a
complaint sheet. In said complaint sheet, respondents alleged that a certain Ricardo Sales
took possession of the subject vehicle, however, Sales failed to return the subject vehicle
within the agreed three-day period. As a result, respondents notified petitioner to claim for
the reimbursement of their lost vehicle. However, petitioner refused to pay.

CASES IN COMMERCIAL LAW REVIEW (J. Dimaampao) 4E 2017-2018 | 117

The trial court dismissed the case on the ground that the plaintiff had successfully
prosecuted and had been awarded the amount claimed which involved the loss of the same
vehicle under the same circumstances although under a different policy and insurance
company.

ISSUE: Whether or not petitioner is liable for the loss, since the car cannot be classified as
stolen because respondents entrusted the possession thereof to another person

HELD: YES. The taking of a vehicle by another person without the permission or authority
from the owner thereof is sufficient to place it within the ambit of the word theft as
contemplated in the policy, and is therefore, compensable. Records would show that
respondents entrusted possession of their vehicle only to the extent that Sales will
introduce repairs and improvements thereon, and not to permanently deprive them of
possession thereof. Since, Theft can also be committed through misappropriation, the fact
that Sales failed to return the subject vehicle to respondents constitutes Qualified Theft.
Hence, since respondents car is undeniably covered by a Comprehensive Motor Vehicle
Insurance Policy that allows for recovery in cases of theft, petitioner is liable under the
policy for the loss of respondents vehicle under the "theft clause." #CABATUANDO

***

BONUS: ASSIGNED CASES

PHILIPPINE PHOENIX SURETY & INSURANCE, INC. vs WOODWORKS, INC.

G.R. No. L-22684: August 31, 1967

DOCTRINE: As the contract had become perfected, the parties could demand from each
other the performance of whatever obligations they had assumed. In the case of the
insurer, it is obvious that it had the right to demand from the insured the completion of the
payment of the premium due or sue for the rescission of the contract.

FACTS: On April 1, 1960, plaintiff issued to defendant Fire Policy No. 9652 for the amount
of P300,000.00. The premiums of said policy amounted to P6,051.95, however, the
defendant was able to pay only P3,000.00 on September 22, 1960 under official receipt No.
30245 of plaintiff. Despite several demands, the defendant failed to pay the balance of the
premium.

The Municipal court ordered Woodworks to pay the unpaid balance of the premiums. The
lower court ruled that a partial payment of the premium made the policy effective during the
whole period of the policy. Appellant's theory that non-payment of Woodworks of the
premium due, produced the cancellation of the contract of insurance.

ISSUE: Whether or not the lower court erred in deciding that a partial payment of the
premium made the policy effective during the whole period of the policy.

HELD: Yes. There is, consequently, no doubt at all that, as between the insurer and the
insured, there was not only a perfected contract of insurance but a partially performed one
as far as the payment of the agreed premium was concerned. Thereafter the obligation of
the insurer to pay the insured the amount for which the policy was issued in case the
conditions therefor had been complied with, arose and became binding upon it, while the
obligation of the insured to pay the remainder of the total amount of the premium due
became demandable.

As the contract had become perfected, the parties could demand from each other the
performance of whatever obligations they had assumed. In the case of the insurer, it is
obvious that it had the right to demand from the insured the completion of the payment of
the premium due or sue for the rescission of the contract. As it chose to demand specific
performance of the insured's obligation to pay the balance of the premium, the latter's duty
to pay is indeed indubitable.#MUNGCAL
***

CASES IN COMMERCIAL LAW REVIEW (J. Dimaampao) 4E 2017-2018 | 118

 Tibay vs. CA
G.R. No. 119655: May 24, 1996

DOCTRINE: Payment of partial premium by the assured should not be considered the
payment required by the law and the stipulation of the parties. In other words, as expressly
agreed upon in the contract, full payment must be made before the risk occurs for the
policy to be considered effective and in force.

FACTS: On 22 January 1987 private respondent Fortune Life and General Insurance Co.,
Inc. (FORTUNE) issued Fire Insurance Policy No. 136171 in favor of Violeta R. Tibay
and/or Nicolas Roraldo on their two-storey residential building located in Makati City for
P600,000.00. On 23 January 1987, of the total premium of P2,983.50, petitioner Violeta
Tibay only paid P600.00 thus leaving a considerable balance unpaid.

On 8 March 1987 the insured building was completely destroyed by fire. Two days later or
on 10 March 1987 Violeta Tibay paid the balance of the premium. On the same day, she
filed with FORTUNE a claim on the fire insurance policy. FORTUNE denied the claim of
Violeta for non-payment of the full amount of premium, prompting the latter to file for an
action for damages against the former.

The trial court ruled for petitioners and adjudged FORTUNE liable for the total value of the
insured. However, CA reversed the court a quo by declaring FORTUNE not to be liable to
plaintiff-appellees therein but ordering defendant-appellant to return to the former the
premium of P2,983.50 plus 12% interest from 10 March 1987 until full payment.

Petitioners maintained that FORTUNE remains liable under the subject fire insurance policy
despite of its failure to pay the full amount of premium.

ISSUE: Whether or not a fire insurance policy is valid, binding, and enforceable upon mere
partial payment of premium?

HELD: NO. These two (2) cases, Phoenix and Tuscany, adequately demonstrate the
waiver, either express or implied, of prepayment in full by the insurer: impliedly, by suing
for the balance of the premium as in Phoenix, and expressly, by agreeing to make
premiums payable in installments as in Tuscany. But contrary to the stance taken by
petitioners, there is no waiver express or implied in the case at bench. Precisely, the
insurer and the insured expressly stipulated that (t)his policy including any renewal thereof
and/or any indorsement thereon is not in force until the premium has been fully paid to and
duly receipted by the Company x x x and that this policy shall be deemed effective, valid
and binding upon the Company only when the premiums therefor have actually been paid
in full and duly acknowledged.

Conformably with the aforesaid stipulations explicitly worded and taken in conjunction with
Sec. 77 of the Insurance Code the payment of partial premium by the assured in this
particular instance should not be considered the payment required by the law and the
stipulation of the parties. Rather, it must be taken in the concept of a deposit to be held in
trust by the insurer until such time that the full amount has been tendered and duly
receipted for.

In other words, as expressly agreed upon in the contract, full payment must be made
before the risk occurs for the policy to be considered effective and in force.Hence, in the
absence of clear waiver of prepayment in full by the insurer, the insured cannot collect on
the proceeds of the policy. #MUNGCAL

***

CASES IN COMMERCIAL LAW REVIEW (J. Dimaampao) 4E 2017-2018 | 119

 Makati Tuscany Condominium Corporation vs. Court Of Appeals
G.R. No. 95546 November 6, 1992

DOCTRINE: Section 78 of the Insurance Code allows waiver by the insurer of the condition
of prepayment by making an acknowledgment in the insurance policy of receipt of premium
as conclusive evidence of payment so far as to make the policy binding despite the fact that
premium is actually unpaid. Section 77 merely precludes the parties from stipulating that
the policy is valid even if premiums are not paid, but does not expressly prohibit an
agreement granting credit extension, and such an agreement is not contrary to morals,
good customs, public order or public policy.

FACTS: Private respondent American Home Assurance Co. (AHAC), represented by

American International Underwriters (Phils.), Inc., issued in favor of petitioner Makati
Tuscany Condominium Corporation (TUSCANY) an Insurance Policy on the latter's building
and premises, for a period of one year, with a total premium of P466,103.05. The premium
was paid on installments, all of which were accepted by private respondent. The same
arrangement was continued for the year 1983. On 20 January 1984, the policy was again
renewed and private respondent issued to petitioner Insurance Policy No. AH-CPP-
9210651. On this renewed policy, petitioner made two installment payments, both accepted
by private respondent, the first on 6 February 1984 for P52,000.00 and the second, on 6
June 1984 for P100,000.00. Thereafter, petitioner refused to pay the balance of the
premium. Consequently, private respondent filed an action to recover the unpaid balance of
P314,103.05 for Insurance Policy No. AH-CPP-9210651.

Petitioner now asserts that its payment by installment of the premiums for the insurance
policies for 1982, 1983 and 1984 invalidated said policies because of the provisions of Sec.
77 of the Insurance Code, as amended, and by the conditions stipulated by the insurer in
its receipts, disclaiming liability for loss occurring before payment of premiums.

It argues that where the premium is not actually paid in full, the policy would only be
effective if there is an acknowledgment in the policy of the receipt of premium pursuant to
Sec. 78 of the Insurance Code. The absence of an express acknowledgment in the policies
of such receipt of the corresponding premium payments, and petitioner's failure to pay said
premiums on or before the effective dates of said policies rendered them invalid. Petitioner
thus concludes that there cannot be a perfected contract of insurance upon mere partial
payment of the premiums because under Sec. 77 of the Insurance Code, no contract of
insurance is valid and binding unless the premium thereof has been paid, notwithstanding
any agreement to the contrary. As a consequence, petitioner seeks a refund of all premium
payments made on the alleged invalid insurance policies.

ISSUE: Whether or not payment by installment of the premiums due on an insurance

policy invalidates the contract of insurance.

HELD: NO, the subject policies are valid even if the premiums were paid on installments.
The records clearly show that petitioner and private respondent intended subject insurance
policies to be binding and effective notwithstanding the staggered payment of the
premiums. Such acceptance of payments speaks loudly of the insurer's intention to honor
the policies it issued to petitioner. Certainly, basic principles of equity and fairness would
not allow the insurer to continue collecting and accepting the premiums, although paid on
installments, and later deny liability on the lame excuse that the premiums were not
prepared in full. #CABATUANDO

***

CASES IN COMMERCIAL LAW REVIEW (J. Dimaampao) 4E 2017-2018 | 120

 LAW ON INTELLECTUAL PROPERTY
LIP VIP Cases:
UNILEVER PHILIPPINES, INC., v. TAN
G.R. No. 179367; January 29, 2014

FACTS: It was alleged that the respondent had in his possession counterfeit shampoo
products which were being sold, retailed, distributed, dealt with or intended to be disposed
of in violation of the Intellectual Property Code. A search warrant was issued which led to
the search of the premises of a warehouse and office located in Marikina City allegedly
owned by respondent Michael Tan. Sachets of Unilever shampoo were seized.

In his defense, respondent claimed that he is engaged in the business of selling leather
goods and raw materials, not in the sale of counterfeit Unilever shampoo products; the
sachets seized are genuine shampoo products which they use for personal consumption;
he does not own and does not operate the warehouse located in Marikina City.

DOJ dismissed on the ground of insufficiency of evidence. CA affirmed.

ISSUE: Whether or not respondent is guilty of unfair competition.

HELD: YES. A total of 1,238 assorted counterfeit Unilever products were found at, and
seized from, the respondent’s office The huge volume and the location where these
shampoos were found (inside a box under a pile of other boxes located inside the
respondent’s office) belie the respondent’s claim of personal consumption. Human
experience and common sense dictate that shampoo products (intended for personal
consumption) will ordinarily and logically be found inside the house, specifically, inside the
bathroom or in a private room, not in the consumer’s office.

Second, the failure to prove that the respondent is the owner of the warehouse located on
Camia St., Marikina City, does not automatically free him from liability. Proof of the
warehouse’s ownership is not crucial to the finding of probable cause. In fact, ownership of
the establishment where the counterfeit products were found is not even an element of
unfair competition. While the respondent may not be its owner, this does not foreclose the
possibility that he was the manufacturer or distributor of the counterfeit shampoo products.
Needless to say, what is material to a finding of probable cause is the commission of acts
constituting unfair competition, the presence of all its elements and the reasonable belief,
based on evidence, that the respondent had committed it.

The striking similarities between the genuine Unilever shampoo sachets and the counterfeit
sachets seized by the NBI support the belief that the respondent had been engaged in
dealing, manufacturing, selling and distributing counterfeit Unilever shampoo products.

***

DIAZ v. PEOPLE and LEVI STRAUSS (PHILS) INC.

G.R. No. 180677; February 18, 2013

FACTS: Levi Strauss and Company (Levi’s), a foreign corporation based in the United
States of America, had been engaged in the apparel business. It is the owner of
trademarks and designs of Levi’s jeans like LEVI’S 501, the arcuate design, the two-horse
brand, the two-horse patch, the two-horse patch with pattern arcuate, and the composite
tab arcuate.

According to the prosecution, after the licensee of Levi's in the Philippines received
information that Diaz was selling counterfeit LEVI’S 501 jeans in his tailoring shops in Las

CASES IN COMMERCIAL LAW REVIEW (J. Dimaampao) 4E 2017-2018 | 121

Piñas City, it hired a private investigation group to verify the information. It then sought the
assistance of NBI and search warrants were issued in due course. Armed with the search
warrants, NBI agents searched the tailoring shops of Diaz and seized several fake LEVI’S
501 jeans from them, each of them bearing the registered trademarks. In his defense,
respondent admitted being the owner of the tailoring shops but denied criminal liability.

He stated that he did not manufacture Levi’s jeans, his shop was offering made to order
jeans and accepting clothes for sewing and repair. He used the label "LS Jeans Tailoring" (
LS means latest style) in the jeans that he made and sold which was registered with the
Intellectual Property Office.

RTC found him guilty. CA dismissed his appeal for failure to file an appellant's brief.

ISSUE: Whether or not Diaz is guilty of trademark infringement.

HELD: NO. The elements of infringement under the Intellectual Property Code are:
1. The trademark being infringed is registered in the Intellectual Property Office;
2. The trademark is reproduced, counterfeited, copied, or colorably imitated by the
infringer;
3. The infringing mark is used in connection with the sale, offering for sale, or
advertising of any goods, business or services; or the infringing mark is applied to
labels, signs, prints, packages, wrappers, receptacles or advertisements intended to be
used upon or in connection with such goods, business or services;
4. The use or application of the infringing mark is likely to cause confusion or mistake or
to deceive purchasers or others as to the goods or services themselves or as to the
source or origin of such goods or services or the identity of such business; and
5. The use or application of the infringing mark is without the consent of the trademark
owner or the assignee thereof.

The likelihood of confusion is the gravamen of the offense of trademark infringement. There
are two tests to determine likelihood of confusion, namely: the dominancy test, and the
holistic test.
The dominancy test focuses on the similarity of the main, prevalent or essential features of
the competing trademarks that might cause confusion. Infringement takes place when the
competing trademark contains the essential features of another. Imitation or an effort to
imitate is unnecessary. The question is whether the use of the marks is likely to cause
confusion or deceive purchasers.

The holistic test considers the entirety of the marks, including labels and packaging, in
determining confusing similarity. The focus is not only on the predominant words but also
on the other features appearing on the labels.

The holistic test was used in this case. The jeans trademarks of Levi’s Philippines and Diaz
must be considered as a whole in determining the likelihood of confusion between them.
The Supreme Court held that DIaz is not guilty for the following reasons:

1. The products involved in the case at bar are various kinds of jeans. These are not your
ordinary household items like catsup, soy sauce or soap which are of minimal cost. Maong
pants or jeans are not inexpensive. Accordingly, the casual buyer is predisposed to be
more cautious and discriminating in and would prefer to mull over his purchase. Confusion
and deception, then, is less likely. Moreover, the average Filipino consumer generally buys
his jeans by brand. He is, therefore, more or less knowledgeable and familiar with his
preference and will not easily be distracted.

2. More credit should be given to the "ordinary purchaser." The ordinary purchaser is not
the "completely unwary consumer" but is the "ordinarily intelligent buyer. the "ordinary
purchaser" was defined as one "accustomed to buy, and therefore to some extent familiar
with, the goods in question. The test of fraudulent simulation is to be found in the likelihood
of the deception of some persons in some measure acquainted with an established design
and desirous of purchasing the commodity with which that design has been associated.

CASES IN COMMERCIAL LAW REVIEW (J. Dimaampao) 4E 2017-2018 | 122

The test is not found in the deception, or the possibility of deception, of the person who
knows nothing about the design which has been counterfeited, and who must be indifferent
between that and the other. The simulation, in order to be objectionable, must be such as
appears likely to mislead the ordinary intelligent buyer who has a need to supply and is
familiar with the article that he seeks to purchase

3. There are remarkable differences between the two trademarks:

a. Levi's use a two-horse design while Diaz used a buffalo design
b. the red tab used by Levis bear the word Levis while that of Diaz had the word LSJT.

***

SKECHERS, U.S.A. v. INTER PACIFIC INDUSTRIAL TRADING, CORP.

G.R. No. 164321 March 23, 2011

FACTS: In the course of its business, petitioner has registered the trademark
"SKECHERS" and the trademark "S" (within an oval design) with the Intellectual Property
Office (IPO). It filed for the issuance of search warrants against an outlet and warehouse
operated by respondents for infringement of trademark.

Thereafter a raid was conducted where more than 6,000 pairs of shoes bearing the "S"
logo were seized. Respondents moved to quash the search warrants, arguing that there
was no confusing similarity between petitioner’s "Skechers" rubber shoes and its "Strong"
rubber shoes. RTC quashed the search warrants and directed NBI to return the seized
goods, holding that the articles have glaring differences such that an ordinary prudent
purchaser would not likely be misled or confused in purchasing the wrong article. CA
affirmed

ISSUE: Whether or not the marks are confusingly similar.

HELD: YES. The essential element of infringement under R.A. No. 8293 is that the
infringing mark is likely to cause confusion. In determining similarity and likelihood of
confusion, jurisprudence has developed tests the Dominancy Test and the Holistic or
Totality Test. The Dominancy Test focuses on the similarity of the prevalent or dominant
features of the competing trademarks that might cause confusion, mistake, and deception
in the mind of the purchasing public. Duplication or imitation is not necessary; neither is it
required that the mark sought to be registered suggests an effort to imitate. Given more
consideration are the aural and visual impressions created by the marks on the buyers of
goods, giving little weight to factors like prices, quality, sales outlets, and market segments.
In contrast, the Holistic or Totality Test necessitates a consideration of the entirety of the
marks as applied to the products, including the labels and packaging, in determining
confusing similarity. The discerning eye of the observer must focus not only on the
predominant words, but also on the other features appearing on both labels so that the
observer may draw conclusion on whether one is confusingly similar to the other.

Relative to the question on confusion of marks and trade names, jurisprudence has noted
two (2) types of confusion, viz.: (1) confusion of goods (product confusion), where the
ordinarily prudent purchaser would be induced to purchase one product in the belief that he
was purchasing the other; and (2) confusion of business (source or origin confusion),
where, although the goods of the parties are different, the product, the mark of which
registration is applied for by one party, is such as might reasonably be assumed to
originate with the registrant of an earlier product, and the public would then be deceived
either into that belief or into the belief that there is some connection between the two
parties, though inexistent.

Applying the Dominancy Test to the case at bar, this Court finds that the use of the stylized
"S" by respondent in its Strong rubber shoes infringes on the mark already registered by
petitioner with the IPO. While it is undisputed that petitioner’s stylized "S" is within an oval
design, to this Court’s mind, the dominant feature of the trademark is the stylized "S," as it

CASES IN COMMERCIAL LAW REVIEW (J. Dimaampao) 4E 2017-2018 | 123

is precisely the stylized "S" which catches the eye of the purchaser. Thus, even if
respondent did not use an oval design, the mere fact that it used the same stylized "S", the
same being the dominant feature of petitioner’s trademark, already constitutes infringement
under the Dominancy Test.

This Court is at a loss as to how the RTC and the CA, in applying the holistic test, ruled that
there was no colorable imitation, when it cannot be any more clear and apparent to this
Court that there is colorable imitation. The dissimilarities between the shoes are too trifling
and frivolous that it is indubitable that respondent’s products will cause confusion and
mistake in the eyes of the public. Respondent’s shoes may not be an exact replica of
petitioner’s shoes, but the features and overall design are so similar and alike that
confusion is highly likely.

In a case for unfair competition, even if not all the details are identical, as long as the
general appearance of the two products are such that any ordinary purchaser would be
deceived, the imitator should be liable. Neither can the difference in price be a complete
defense in trademark infringement.

Withal, the protection of trademarks as intellectual property is intended not only to preserve
the goodwill and reputation of the business established on the goods bearing the mark
through actual use over a period of time, but also to safeguard the public as consumers
against confusion on these goods. While respondent’s shoes contain some dissimilarities
with petitioner’s shoes, this Court cannot close its eye to the fact that for all intents and
purpose, respondent had deliberately attempted to copy petitioner’s mark and overall
design and features of the shoes. Let it be remembered, that defendants in cases of
infringement do not normally copy but only make colorable changes. The most successful
form of copying is to employ enough points of similarity to confuse the public, with enough
points of difference to confuse the courts.

***

REPUBLIC GAS CORP., et al. v. PETRON CORP., et al.

G.R. No. 194062; June 17, 2013

FACTS: Complainants Petron and Shell received reports that certain entities were engaged
in the unauthorized refilling, sale and distribution of LPG cylinders bearing their registered
tradenames and trademarks. The assistance of the NBI was sought and acting on the letter
complaint, it conducted an investigation particularly within the areas of Caloocan, Malabon,
Novaliches and Valenzuela, which showed that several persons and/or establishments,
including REGASCO, were suspected of having violated provisions of Batas Pambansa
Blg. 33 or an act penalizing acts inimical to public interest involving petroleum products.
The surveillance and a test buy operation revealed that REGASCO LPG Refilling Plant in
Malabon was engaged in the refilling and sale of LPG cylinders bearing the registered
marks of the petitioners without authority from the latter. Thereafter a complaint was filed
before the DOJ against REGASCO for alleged violation of the IPC. DOJ dismissed while
CA reversed.

ISSUE: Whether or not REGASCO is guilty of trademark infringement and unfair

competition.

HELD: YES. Section 155 of R.A. No. 8293 identifies the acts constituting trademark
infringement as follows:

Any person who shall, without the consent of the owner of the registered mark:

155.1 Use in commerce any reproduction, counterfeit, copy or colorable imitation of a

registered mark of the same container or a dominant feature thereof in connection with
the sale, offering for sale, distribution, advertising of any goods or services including
other preparatory steps necessary to carry out the sale of any goods or services on or in

CASES IN COMMERCIAL LAW REVIEW (J. Dimaampao) 4E 2017-2018 | 124

 connection with which such use is likely to cause confusion, or to cause mistake, or to
deceive; or

155.2 Reproduce, counterfeit, copy or colorably imitate a registered mark or a dominant

feature thereof and apply such reproduction, counterfeit, copy or colorable imitation to
labels, signs, prints, packages, wrappers, receptacles or advertisements intended to be
used in commerce upon or in connection with the sale, offering for sale, distribution, or
advertising of goods or services on or in connection with which such use is likely to
cause confusion, or to cause mistake, or to deceive, shall be liable in a civil action for
infringement by the registrant for the remedies hereinafter set forth: Provided, That the
infringement takes place at the moment any of the acts stated in Subsection 155.1 or
this subsection are committed regardless of whether there is actual sale of goods or
services using the infringing material.

The mere unauthorized use of a container bearing a registered trademark in connection

with the sale, distribution or advertising of goods or services which is likely to cause
confusion, mistake or deception among the buyers or consumers can be considered as
trademark infringement. Here, petitioners have actually committed trademark infringement
when they refilled, without the respondents’ consent, the LPG containers bearing the
registered marks of the respondents. As noted by respondents, petitioners’ acts will
inevitably confuse the consuming public, since they have no way of knowing that the gas
contained in the LPG tanks bearing respondents’ marks is in reality not the latter’s LPG
product after the same had been illegally refilled. The public will then be led to believe that
petitioners are authorized refillers and distributors of respondents’ LPG products,
considering that they are accepting empty containers of respondents and refilling them for
resale.

As for the unfair competition charge, Section 168.3 describes the acts constituting unfair
competition as follows::
(a) Any person, who is selling his goods and gives them the general appearance of goods
of another manufacturer or dealer, either as to the goods themselves or in the wrapping of
the packages in which they are contained, or the devices or words thereon, or in any other
feature of their appearance, which would be likely to influence purchasers to believe that
the goods offered are those of a manufacturer or dealer, other than the actual manufacturer
or dealer, or who otherwise clothes the goods with such appearance as shall deceive the
public and defraud another of his legitimate trade, or any subsequent vendor of such goods
or any agent of any vendor engaged in selling such goods with a like purpose;

Unfair competition has been defined as the passing off (or palming off) or attempting to
pass off upon the public of the goods or business of one person as the goods or business
of another with the end and probable effect of deceiving the public. Passing off (or palming
off) takes place where the defendant, by imitative devices on the general appearance of the
goods, misleads prospective purchasers into buying his merchandise under the impression
that they are buying that of his competitors. Thus, the defendant gives his goods the
general appearance of the goods of his competitor with the intention of deceiving the public
that the goods are those of his competitor.11

In the present case, respondents pertinently observed that by refilling and selling LPG
cylinders bearing their registered marks, petitioners are selling goods by giving them the
general appearance of goods of another manufacturer. The consumers may be misled into
believing that the LPGs contained in the cylinders bearing the marks "GASUL" and
"SHELLANE" are those goods or products of the petitioners when, in fact, they are not.
Obviously, the mere use of those LPG cylinders bearing the trademarks "GASUL" and
"SHELLANE" will give the LPGs sold by REGASCO the general appearance of the
products of the petitioners.

***

CASES IN COMMERCIAL LAW REVIEW (J. Dimaampao) 4E 2017-2018 | 125

 UYCO v. LO
G.R. No. 202423; January 28, 2013

FACTS: The disputed marks in this case are the "HIPOLITO & SEA HORSE &
TRIANGULAR DEVICE," "FAMA," and other related marks, service marks and trade names
of Casa Hipolito S.A. Portugal appearing in kerosene burners. Respondent Vicente Lo and
Philippine Burners Manufacturing Corporation (PBMC) filed a complaint against the officers
of Wintrade.

Lo claimed in his complaint that Gasirel, the owner of the disputed marks, executed a deed
of assignment transferring these marks in his favor. In a test buy, Lo purchased from
National Hardware kerosene burners with the subject marks and the designations "Made in
Portugal" and "Original Portugal" in the wrappers. These products were manufactured by
Wintrade. Lo claimed that he had not authorized Wintrade to use these marks, nor had
Casa Hipolito S.A. Portugal. While a prior authority was given to Wintrade’s predecessor-in-
interest, Casa Hipolito S.A. Portugal had already revoked this authority through a letter of
cancellation. The kerosene burners manufactured by Wintrade have caused confusion,
mistake and deception on the part of the buying public.

In defense, the petitioners said that Lo failed to sufficiently prove that the burners bought
from National Hardware were those that they manufactured. But at the same time, they
also argued that the marks "Made in Portugal" and "Original Portugal" are merely
descriptive and refer to the source of the design and the history of manufacture.

The DOJ found probable cause to indict the petitioner for violation of Section 169.1 of the
IPC or for false designation of origin. CA affirmed

ISSUE: Whether or not petitioner is guilty of false designation of origin.

HELD: YES. Evidence shows that petitioner placed the words "Made in Portugal" and
"Original Portugal" with the disputed marks knowing fully well — because of their previous
dealings with the Portuguese company — that these were the marks used in the products
of Casa Hipolito S.A. Portugal. More importantly, the products that Wintrade sold were
admittedly produced in the Philippines, with no authority from Casa Hipolito S.A. Portugal.
The law on trademarks and trade names precisely precludes a person from profiting from
the business reputation built by another and from deceiving the public as to the origins of
products. These facts support the consistent findings of the State Prosecutor, the DOJ and
the CA that probable cause exists to charge the petitioners with false designation of origin.

***

COFFEE PARTNERS, INC. v. SAN FRANCISCO COFFEE & ROASTERY, INC.

G.R. No. 169504; March 3, 2010

FACTS: Coffee Partners, Inc. is a local corporation engaged in the business of establishing
and maintaining coffee shops in the country. It registered with the SEC in January 2001. It
has a franchise agreement with Coffee Partners Ltd. (CPL), a business entity organized
and existing under the laws of British Virgin Islands, for a non-exclusive right to operate
coffee shops in the Philippines using trademarks designed by CPL such as "SAN
FRANCISCO COFFEE."

Respondent is a local corporation engaged in the wholesale and retail sale of coffee. It
registered with the SEC in May 1995. It registered the business name "SAN FRANCISCO
COFFEE & ROASTERY, INC." with the Department of Trade and Industry (DTI) in June
1995. Respondent had since built a customer base that included Figaro Company,
Tagaytay Highlands, Fat Willy’s, and other coffee companies.

In 1998, respondent formed a joint venture company with Boyd Coffee USA under the
company name Boyd Coffee Company Philippines, Inc. (BCCPI). BCCPI engaged in the

CASES IN COMMERCIAL LAW REVIEW (J. Dimaampao) 4E 2017-2018 | 126

processing, roasting, and wholesale selling of coffee. Respondent later embarked on a
project study of setting up coffee carts in malls and other commercial establishments in
Metro Manila.

In June 2001, respondent discovered that petitioner was about to open a coffee shop under
the name "SAN FRANCISCO COFFEE" in Libis, Quezon City. According to respondent,
petitioner’s shop caused confusion in the minds of the public as it bore a similar name and
it also engaged in the business of selling coffee. Respondent sent a letter to petitioner
demanding that the latter stop using the name "SAN FRANCISCO COFFEE." Respondent
also filed a complaint with the Bureau of Legal Affairs-Intellectual Property Office (BLA-IPO)
for infringement and/or unfair competition with claims for damages.

Petitioner maintained that its mark could not be confused with respondent’s trade name
because of the notable distinctions in their appearances. Petitioner argued respondent
stopped operating under the trade name "SAN FRANCISCO COFFEE" when it formed a
joint venture with Boyd Coffee USA.

Bureau of Legal Affairs IPO held that petitioner’s trademark infringed on respondent’s trade
name. The Director General reversed and held that respondent had stopped using its trade
name when it entered into a joint venture with Boyd Coffee USA. CA reinstated the ruling of
the BLA

ISSUE: Whether or not the trademark SAN FRANCISCO COFFEE constitutes

infringement of respondent’s trade name "SAN FRANCISCO COFFEE & ROASTERY,
INC.," even if the trade name is not registered with the Intellectual Property Office
(IPO).

HELD: YES. The Court laid down what constitutes infringement of an unregistered trade
name:
(1) The trademark being infringed is registered in the Intellectual Property Office;
however, in infringement of trade name, the same need not be registered;
(2) The trademark or trade name is reproduced, counterfeited, copied, or colorably
imitated by the infringer;
(3) The infringing mark or trade name is used in connection with the sale, offering for
sale, or advertising of any goods, business or services; or the infringing mark or trade
name is applied to labels, signs, prints, packages, wrappers, receptacles, or
advertisements intended to be used upon or in connection with such goods, business,
or services;
(4) The use or application of the infringing mark or trade name is likely to cause
confusion or mistake or to deceive purchasers or others as to the goods or services
themselves or as to the source or origin of such goods or services or the identity of such
business; and
(5) It is without the consent of the trademark or trade name owner or the assignee
thereof
Clearly, a trade name need not be registered with the IPO before an infringement suit
may be filed by its owner against the owner of an infringing trademark. All that is
required is that the trade name is previously used in trade or commerce in the
Philippines.

RA 8293, which took effect on 1 January 1998, has dispensed with the registration
requirement. Section 165.2 of RA 8293 categorically states that trade names shall be
protected, even prior to or without registration with the IPO, against any unlawful act
including any subsequent use of the trade name by a third party, whether as a trade name
or a trademark likely to mislead the public.

Applying either the dominancy test or the holistic test, petitioner’s "SAN FRANCISCO
COFFEE" trademark is a clear infringement of respondent’s "SAN FRANCISCO COFFEE &
ROASTERY, INC." trade name. The descriptive words "SAN FRANCISCO COFFEE" are
precisely the dominant features of respondent’s trade name. Petitioner and respondent are
engaged in the same business of selling coffee, whether wholesale or retail. The likelihood

CASES IN COMMERCIAL LAW REVIEW (J. Dimaampao) 4E 2017-2018 | 127

of confusion is higher in cases where the business of one corporation is the same or
substantially the same as that of another corporation. In this case, the consuming public will
likely be confused as to the source of the coffee being sold at petitioner’s coffee shops.

Petitioner’s argument that "San Francisco" is just a proper name referring to the famous
city in California and that "coffee" is simply a generic term, is untenable. Respondent has
acquired an exclusive right to the use of the trade name "SAN FRANCISCO COFFEE &
ROASTERY, INC." since the registration of the business name with the DTI in 1995. Thus,
respondent’s use of its trade name from then on must be free from any infringement by
similarity. Of course, this does not mean that respondent has exclusive use of the
geographic word "San Francisco" or the generic word "coffee." Geographic or generic
words are not, per se, subject to exclusive appropriation. It is only the combination of the
words "SAN FRANCISCO COFFEE," which is respondent’s trade name in its coffee
business, that is protected against infringement on matters related to the coffee business to
avoid confusing or deceiving the public.

A corporation has an exclusive right to the use of its name. The right proceeds from the
theory that it is a fraud on the corporation which has acquired a right to that name and
perhaps carried on its business thereunder, that another should attempt to use the same
name, or the same name with a slight variation in such a way as to induce persons to deal
with it in the belief that they are dealing with the corporation which has given a reputation to
the name.

***

SOCIETE DES PRODUITS NESTLE, S.A. v. DY, JR.

G.R. No. 172276; August 9, 2010

FACTS: Nestle, a foreign corporation into manufacturing of food products and beverages,
owns the "NAN" trademark for its line of infant powdered milk products. Nestle distributes
and sells its NAN milk products all over the Philippines. It has been investing tremendous
amounts of resources to train its sales force and to promote the NAN milk products through
advertisements and press releases.

Dy, Jr. owns 5M Enterprises which imports Sunny Boy powdered milk from Australia and
repacks the powdered milk for adults into plastic packs bearing the name "NANNY." The
packs weigh 80, 180 and 450 grams and are sold for ₱ 8.90, ₱ 17.50 and ₱ 39.90,
respectively. NANNY is is also classified under Class 6 — "full cream milk for adults in [sic]
all ages." Dy, Jr. distributes and sells the powdered milk in Dumaguete, Negros Oriental,
Cagayan de Oro, and parts of Mindanao.

Nestle requested Dy, Jr. to refrain from using "NANNY" but Dy, Jr. did not act on Nestle’s
request. Nestle thereafter filed a complaint against Dy, Jr. for infringement. The trial court
dismissed the complaint. CA set aside the order and remanded the case to the trial court
for further proceedings.

ISSUE: Whether or not respondent is guilty of trademark infringement.

HELD: YES. The elements of infringement under R.A. No. 8293 are as follows:
1. The trademark being infringed is registered in the Intellectual Property Office;
however, in infringement of trade name, the same need not be registered;
2. The trademark or trade name is reproduced, counterfeited, copied, or colorably
imitated by the infringer;
3. The infringing mark or trade name is used in connection with the sale, offering for
sale, or advertising of any goods, business or services; or the infringing mark or trade
name is applied to labels, signs, prints, packages, wrappers, receptacles or

CASES IN COMMERCIAL LAW REVIEW (J. Dimaampao) 4E 2017-2018 | 128

 advertisements intended to be used upon or in connection with such goods, business or
services;
4. The use or application of the infringing mark or trade name is likely to cause
confusion or mistake or to deceive purchasers or others as to the goods or services
themselves or as to the source or origin of such goods or services or the idenity of such
business; and
5. It is without the consent of the trademark or trade name owner or the assignee
thereof.
Among the elements, the element of likelihood of confusion is the gravamen of
trademark infringement. There are two types of confusion in trademark infringement:
confusion of goods and confusion of business.

The first is the confusion of goods "in which event the ordinarily prudent purchaser would
be induced to purchase one product in the belief that he was purchasing the other." In
which case, "defendant’s goods are then bought as the plaintiff’s, and the poorer quality of
the former reflects adversely on the plaintiff’s reputation." The other is the confusion of
business: "Here though the goods of the parties are different, the defendant’s product is
such as might reasonably be assumed to originate with the plaintiff, and the public would
then be deceived either into that belief or into the belief that there is some connection
between the plaintiff and defendant which, in fact, does not exist.

The scope of protection afforded to registered trademark owners is not limited to protection
from infringers with identical goods. The scope of protection extends to protection from
infringers with related goods, and to market areas that are the normal expansion of
business of the registered trademark owners.

"Non-competing goods may be those which, though they are not in actual competition, are
so related to each other that it can reasonably be assumed that they originate from one
manufacturer, in which case, confusion of business can arise out of the use of similar
marks." In that case, the Court enumerated factors in determining whether goods are
related: (1) classification of the goods; (2) nature of the goods; (3) descriptive properties,
physical attributes or essential characteristics of the goods, with reference to their form,
composition, texture or quality; and (4) style of distribution and marketing of the goods,
including how the goods are displayed and sold.

The registered trademark owner may use his mark on the same or similar products, in
different segments of the market, and at different price levels depending on variations of
the products for specific segments of the market. The Court has recognized that the
registered trademark owner enjoys protection in product and market areas that are
the normal potential expansion of his business.

Modern law recognizes that the protection to which the owner of a trademark is entitled is
not limited to guarding his goods or business from actual market competition with identical
or similar products of the parties, but extends to all cases in which the use by a junior
appropriator of a trade-mark or trade-name is likely to lead to a confusion of source, as
where prospective purchasers would be misled into thinking that the complaining party has
extended his business into the field or is in any way connected with the activities of the
infringer; or when it forestalls the normal potential expansion of his business.

There are two tests to determine likelihood of confusion: the dominancy test and holistic
test. The dominancy test focuses on the similarity of the main, prevalent or essential
features of the competing trademarks that might cause confusion. Infringement takes place
when the competing trademark contains the essential features of another. Imitation or an
effort to imitate is unnecessary. The question is whether the use of the marks is likely to
cause confusion or deceive purchasers. The holistic test considers the entirety of the
marks, including labels and packaging, in determining confusing similarity. The focus is not
only on the predominant words but also on the other features appearing on the labels.

The Court holds that the dominancy test is applicable. The totality or holistic test is contrary
to the elementary postulate of the law on trademarks and unfair competition that confusing

CASES IN COMMERCIAL LAW REVIEW (J. Dimaampao) 4E 2017-2018 | 129

similarity is to be determined on the basis of visual, aural, connotative comparisons and
overall impressions engendered by the marks in controversy as they are encountered in the
realities of the marketplace. The totality or holistic test only relies on visual comparison
between two trademarks whereas the dominancy test relies not only on the visual but also
on the aural and connotative comparisons and overall impressions between the two
trademarks.

Applying the dominancy test, the Court finds that "NANNY" is confusingly similar to "NAN."
"NAN" is the prevalent feature of Nestle’s line of infant powdered milk products. Clearly,
"NANNY" contains the prevalent feature "NAN." The first three letters of "NANNY" are
exactly the same as the letters of "NAN." When "NAN" and "NANNY" are pronounced, the
aural effect is confusingly similar.

***

MCDONALD’S CORPORATION v. L.C. BIG MAK BURGER, INC.,

G.R. No. 143993; August 18, 2004

FACTS: McDonald's, a corporation organized under the laws of United States, operates a
global chain of fast-food restaurants. It owns a family of marks including the "Big Mac" mark
for its "double-decker hamburger sandwich." McDonald's registered this trademark with the
United States Trademark Registry on 16 October 1979. McDonald's then applied
for the registration of the same mark in with the Philippine Bureau of Patents, Trademarks
and Technology. Pending approval of its application, McDonald's introduced its "Big Mac"
hamburger sandwiches in the Philippine market in September 1981. The "Big Mac" mark
was registered in the Principal Register in 1985.

Respondent L.C. Big Mak Burger, Inc. is a domestic corporation which operates fast-food
outlets and snack vans in Metro Manila and nearby provinces. In 1988, respondent
corporation applied with the PBPTT for the registration of the "Big Mak" mark for its
hamburger sandwiches. McDonald's opposed respondent corporation's application on the
ground that "Big Mak" was a colorable imitation of its registered "Big Mac" mark for the
same food products.

Thereafter, petitioner sued respondents in for trademark infringement and unfair

competition. In their Answer, respondents admitted that they have been using the name
"Big Mak Burger" for their fast-food business. Respondents claimed, however, that
McDonald's does not have an exclusive right to the "Big Mac" mark or to any other similar
mark. Respondents point out that the Isaiyas Group of Corporations registered the same
mark for hamburger sandwiches with the PBPTT in 1979. One Rodolfo Topacio similarly
registered the same mark in 1983 , prior to McDonald's registration.. Alternatively,
respondents claimed that they are not liable for trademark infringement or for unfair
competition, as the "Big Mak" mark they sought to register does not constitute a colorable
imitation of the "Big Mac" mark. McDonald's disclosed that it had acquired Topacio's rights
to his registration in a Deed of Assignment executed in 1981.

RTC found respondent corporation liable for trademark infringement and unfair competition.
CA reversed.

ISSUE: Whether or not respondent is guilty of trademark infringement and unfair

competition

HELD: YES. To establish trademark infringement, the following elements must be shown:
(1) the validity of plaintiff's mark; (2) the plaintiff's ownership of the mark; and (3) the use
of the mark or its colorable imitation by the alleged infringer results in "likelihood of
confusion."34 Of these, it is the element of likelihood of confusion that is the gravamen of
trademark infringement.

A mark is valid if it is "distinctive". Once registered, not only the mark's validity but also the
registrant's ownership of the mark is prima facie presumed. As to respondent's contention

CASES IN COMMERCIAL LAW REVIEW (J. Dimaampao) 4E 2017-2018 | 130

that "Big Mac" is generic and descriptive thus incapable of exclusive appropriation, the
contention has no merit. Generic marks are commonly used as the name or description of
a kind of goods. Descriptive marks, on the other hand, convey the
characteristics, functions, qualities or ingredients of a product to one who has never seen it
or does not know it exists. On the contrary, "Big Mac" falls under the class of fanciful or
arbitrary marks as it bears no logical relation to the actual characteristics of the product it
represents.45 As such, it is highly distinctive and thus valid.

Section 22 covers two types of confusion arising from the use of similar or colorable
imitation marks, namely, confusion of goods (product confusion) and confusion of business
(source or origin confusion). The first is the confusion of goods "in which event the
ordinarily prudent purchaser would be induced to purchase one product in the belief that he
was purchasing the other." The other is the confusion of business where though the goods
of the parties are different, the defendant's product is such as might reasonably be
assumed to originate with the plaintiff, and the public would then be deceived either into
that belief or into the belief that there is some connection between the plaintiff and
defendant which, in fact, does not exist." Thus, while there is confusion of goods when the
products are competing, confusion of business exists when the products are non-
competing but related enough to produce confusion of affiliation.

The registered trademark owner may use his mark on the same or similar products, in
different segments of the market, and at different price levels depending on variations of
the products for specific segments of the market. The Court has recognized that the
registered trademark owner enjoys protection in product and market areas that are
the normal potential expansion of his business.

In determining likelihood of confusion, jurisprudence has developed two tests, the

dominancy test and the holistic test. The dominancy test focuses on the similarity of
the prevalent features of the competing trademarks that might cause confusion. In contrast,
the holistic test requires the court to consider the entirety of the marks as applied to the
products, including the labels and packaging, in determining confusing similarity.

This Court, however, has relied on the dominancy test rather than the holistic test. The
dominancy test considers the dominant features in the competing marks
in determining whether they are confusingly similar. Under the dominancy test, courts give
greater weight to the similarity of the appearance of the product arising from the adoption
of the dominant features of the registered mark, disregarding minor differences.59 Courts
will consider more the aural and visual impressions created by the marks in the public
mind, giving little weight to factors like prices, quality, sales outlets and market segments.
The totality or holistic test is contrary to the elementary postulate of the law on trademarks
and unfair competition that confusing similarity is to be determined on the basis of visual,
aural, connotative comparisons and overall impressions engendered by the marks in
controversy as they are encountered in the realities of the marketplace.

Applying the dominancy test, aurally the two marks are the same, with the first word
of both marks phonetically the same, and the second word of both marks also phonetically
the same. Visually, the two marks have both two words and six letters, with the first word
of both marks having the same letters and the second word having the same first two
letters. In spelling, considering the Filipino language, even the last letters of both marks are
the same.

Petitioners' failure to present proof of actual confusion does not negate their claim of
trademark infringement. Section 22 requires the less stringent standard of "likelihood of
confusion" only. While proof of actual confusion is the best evidence of infringement, its
absence is inconsequential.

As to the unfair competition charge, the essential elements of an action for unfair
competition are (1) confusing similarity in the general appearance of the goods, and (2)
intent to deceive the public and defraud a competitor. The confusing similarity may or may
not result from similarity in the marks, but may result from other external factors

CASES IN COMMERCIAL LAW REVIEW (J. Dimaampao) 4E 2017-2018 | 131

in the packaging or presentation of the goods. The intent to deceive and defraud may be
inferred from the similarity of the appearance of the goods as offered for sale to the
public.75 Actual fraudulent intent need not be shown.

Unfair competition is broader than trademark infringement and includes passing off goods
with or without trademark infringement. Trademark infringement is a form of unfair
competition.77 Trademark infringement constitutes unfair competition when there is not
merely likelihood of confusion, but also actual or probable deception on the public because
of the general appearance of the goods. There can be trademark infringement without
unfair competition as when the infringer discloses on the labels containing the mark that he
manufactures the goods, thus preventing the public from being deceived that the goods
originate from the trademark owner.

Passing off (or palming off) takes place where the defendant, by imitative devices on the
general appearance of the goods, misleads prospective purchasers into buying his
merchandise under the impression that they are buying that of his competitors.Thus, the
defendant gives his goods the general appearance of the goods of his competitor with the
intention of deceiving the public that the goods are those of his competitor.

The defendant gives "his goods the general appearance of goods of another
manufacturer." Respondents' goods are hamburgers which are also the goods of
petitioners. If respondents sold egg sandwiches only instead of hamburger sandwiches,
their use of the "Big Mak" mark would not give their goods the general appearance of
petitioners' "Big Mac" hamburgers. In such case, there is only trademark infringement but
no unfair competition. However, since respondents chose to apply the "Big Mak" mark on
hamburgers, just like petitioner's use of the "Big Mac" mark on hamburgers, respondents
have obviously clothed their goods with the general appearance of petitioners' goods.
There is actually no notice to the public that the "Big Mak" hamburgers are products of
"L.C. Big Mak Burger, Inc." and not those of petitioners who have the exclusive right to the
"Big Mac" mark. This clearly shows respondents' intent to deceive the public.

***

UFC PHILIPPINES, INC. v. FIESTA BARRIO MFTG. CORP.

G.R. No. 198889; January 20, 2016

FACTS: Respondent Barrio Fiesta filed an application for the mark "PAPA BOY AND
DEVICE" for its lechon sauce product. The petitioner opposed the application alleging that
the mark "PAPA BOY & DEVICE" is confusingly similar with its "PAPA" marks inasmuch as
the former incorporates the term "PAP A," which is the dominant feature of petitioner's
"PAPA" marks. Petitioner averred that respondent's use of "PAPA BOY & DEVICE" mark
for its lechon sauce product, if allowed, would likely lead the consuming public to believe
that said lechon sauce product originates from or is authorized by petitioner, and that the
"PAPA BOY & DEVICE" mark is a variation or derivative of petitioner's "PAPA" marks.
Petitioner argued that this was especially true considering that petitioner's ketchup product
and respondent's lechon sauce product are related articles.

Responded in its Answer argued that the PAPA mark of petitioner has expired. Respondent
avers that the expiration of the 20-year term for the "PAPA" mark issued on August 11,
1983 was August 11, 2003. The application that petitioner filed on October 28, 2005 was
almost two years late. Thus, it was not a renewal application, but could only be considered
a new application with the filing date reckoned on October 28, 2005. As for petitioner's
other mark "PAPA BANANA CATSUP LABEL," respondent claims that its 20-year term
also expired on August 11, 2003 and that petitioner only filed its application for the new
"PAPA LABEL DESIGN" on November 15, 2006. Having been filed three years beyond the
renewal application deadline, petitioner was not able to renew its application on time, and
cannot claim a "continuous existence of its rights over the 'PAPA BANANA CATSUP
LABEL. Although its PAPA KETSARAP label for its banana sauce had been timely
renewed in 2005, jurisprudence provides that a certificate of registration confers upon the

CASES IN COMMERCIAL LAW REVIEW (J. Dimaampao) 4E 2017-2018 | 132

trademark owner the exclusive right to use its own symbol only to those goods specified in
the certificate.

IPO-BLA rejected respondent's application for PAPA BOY AND DEVICE. The Director
General affirmed. CA reversed.

ISSUE: Whether or not the application should be denied.

HELD: YES. In determining likelihood of confusion between marks used on non-identical

goods or services, several factors may be taken into account, such as, but not limited to:
a) the strength of plaintiffs mark;
b) the degree of similarity between the plaintiffs and the defendant's marks;
c) the proximity of the products or services;
d) the likelihood that the plaintiff will bridge the gap;
e) evidence of actual confusion;
f) the defendant's good faith in adopting the mark;
g) the quality of defendant's product or service; and/or
h) the sophistication of the buyers.

"Colorable imitation" denotes such a close or ingenious imitation as to be calculated to

deceive ordinary persons, or such a resemblance to the original as to deceive an ordinary
purchaser giving such attention as a purchaser usually gives, as to cause him to purchase
the one supposing it to be the other.

The scope of protection afforded to registered trademark owners is not limited to protection
from. infringers with identical goods. The scope of protection extends to protection from
infringers with related goods, and to market areas that are the normal expansion of
business of the registered trademark owners.

The essential element of infringement under R.A. No. 8293 is that the infringing mark is
likely to cause confusion. In determining similarity and likelihood of confusion,
jurisprudence has developed tests - the Dominancy Test and the Holistic or Totality Test.
The Dominancy Test focuses on the similarity of the prevalent or dominant features of the
competing trademarks that might cause confusion, mistake, and deception in the mind of
the purchasing public. Duplication or imitation is not necessary; neither is it required that
the mark sought to be registered suggests an effort to imitate. Given more consideration
are the aural and visual impressions created by the marks on the buyers of goods, giving
little weight to factors like prices, quality, sales outlets, and market segments.

Relative to the question on confusion of marks and trade names, jurisprudence has noted
two (2) types of confusion, viz.: (1) confusion of goods (product confusion), where the
ordinarily prudent purchaser would be induced to purchase one product in the belief that he
was purchasing the other; and (2) confusion of business (source or origin confusion),
where, although the goods of" the parties are different, the product, the mark of which
registration is applied for by one party, is such as might reasonably be assumed to
originate with the registrant of an earlier product, and the public would then be deceived
either into that belief or into the belief that there is some connection between the two
parties, though inexistent.

Section 123.l(d) of the IP Code provides: A mark cannot be registered if it:

(d) Is identical with a registered mark belonging to a different proprietor or a mark with an
earlier filing or priority date, in respect of:
i. The same goods or services, or
ii. Closely related goods or services, or
iii. If it nearly resembles such a mark as to be likely to deceive or cause confusion

The word PAPA is the dominant feature of the two marks. The visual and aural impressions
created by such dominant word "PAPA" at the least is that the respective goods of the
parties originated from the other, or that one party has permitted or has been given license
to the other to use the word "PAPA" for the other party's product, or that there is a

CASES IN COMMERCIAL LAW REVIEW (J. Dimaampao) 4E 2017-2018 | 133

relation/connection between the two parties when, in fact, there is none. This is especially
true considering that the products of both parties belong to the same class and are closely
related: Catsup and lechon sauce or liver sauce are both gravy-like condiments used to
spice up dishes. Thus, confusion of goods and of business may likely result.

Though Respondent-applicant was first to file the subject application on April 04, 2002 vis-
a-vis the mark "PAP A" the filing date of which is reckoned on October 28, 2005, and the
mark "PAPA LABEL DESIGN" the filing date of which is reckoned on November 15, 2006,
Opposer was able to secure a registration for the mark "PAPA KETSARAP" on August 23,
1985 considering that Opposer was the prior registrant and that its renewal application
timely filed on August 23, 2005.

Pursuant to [Section 123 .1 (d) of the IP Code], the application for registration of the subject
mark cannot be allowed considering that Opposer was earlier registrant of the marks PAPA
and PAPA KETSARAP which registrations were timely renewed upon its expiration.
Respondent-applicant's mark "PAPA BOY & DEVICE" is confusingly similar to Opposer's
mark "PAPA KETSARAP" and is applied to goods that are related to Opposer's goods.

***

TAIWAN KOLIN CORP., LTD. V. KOLIN ELECTRONICS CO., INC.,

G.R. No. 209843; March 25, 2015

FACTS: In 1996, Taiwan Kolin filed with the IPO a trademark application for the use of
"KOLIN" on a combination of goods, including television sets, camcorders, audio-visual
equipment, vaccum cleaners, cellphones, vending machines etc. Respondent Kolin
Electronics opposed the application. Kolin argued that the mark Taiwan Kolin seeks to
register is identical, if not confusingly similar, with its "KOLIN" mark registered in 2003,
covering automatic voltage regulator, converter, recharger, stereo booster, AC-DC
regulated power supply, step-down transformer, and PA amplified AC-DC. Petitioner
argued that it should be accorded the benefits of a foreign-registered mark, that it has
already registered the "KOLIN" mark in the People’s Republic of China, Malaysia and
Vietnam, all of which are parties to the Paris Convention for the Protection of Industrial
Property (Paris Convention) and the Agreement on Trade-Related Aspects of Intellectual
Property Rights (TRIPS); and that benefits accorded to a well-known mark should be
accorded to petitioner.

BLA-IPO rejected petitioner's application. Director General reversed. CA ruled in favor of

Kolin Electronics.

ISSUE: Whether or not Taiwan Kolin's KOLIN mark should be registered?

HELD: YES. Mere uniformity in categorization, by itself, does not automatically preclude
the registration of what appears to be an identical mark. Verily, whether or not the products
covered by the trademark sought to be registered by Taiwan Kolin, on the one hand, and
those covered by the prior issued certificate of registration in favor of Kolin Electronics, on
the other, fall under the same categories in the NCL is not the sole and decisive factor in
determining a possible violation of Kolin Electronics’ intellectual property right should
petitioner’s application be granted. It is hornbook doctrine, as held in the above-cited cases,
that emphasis should be on the similarity of the products involved and not on the arbitrary
classification or general description of their properties or characteristics. The mere fact that
one person has adopted and used a trademark on his goods would not, without more,
prevent the adoption and use of the same trademark by others on unrelated articles of a
different kind.

A certificate of trademark registration confers upon the trademark owner the exclusive right
to sue those who have adopted a similar mark not only in connection with the goods or
services specified in the certificate, but also with those that are related thereto.
In resolving one of the pivotal issues in this case––whether or not the products of the
parties involved are related––the doctrine in Mighty Corporation is authoritative. There, the

CASES IN COMMERCIAL LAW REVIEW (J. Dimaampao) 4E 2017-2018 | 134

Court held that the goods should be tested against several factors before arriving at a
sound conclusion on the question of relatedness. Among these are:
(a) the business (and its location) to which the goods belong;
(b) the class of product to which the goods belong;
(c) the product’s quality, quantity, or size, including the nature of the package, wrapper
or container;
(d) the nature and cost of the articles;
(e) the descriptive properties, physical attributes or essential characteristics with
reference to their form, composition, texture or quality;
(f) the purpose of the goods;
(g) whether the article is bought for immediate consumption, that is, day-to-day
household items;
(h) the fields of manufacture;
(i) the conditions under which the article is usually purchased; and
(j) the channels of trade through which the goods flow, how they are distributed,
marketed, displayed and sold.

It was erroneous for respondent to assume over the CA to conclude that all electronic
products are related and that the coverage of one electronic product necessarily precludes
the registration of a similar mark over another. In this digital age wherein electronic
products have not only diversified by leaps and bounds, and are geared towards
interoperability, it is difficult to assert readily, as respondent simplistically did, that all
devices that require plugging into sockets are necessarily related goods.
Kolin Electronics’ mark is italicized and colored black while that of Taiwan Kolin is white in
pantone red color background. The differing features between the two, though they may
appear minimal, are sufficient to distinguish one brand from the other.

More credit should be given to the "ordinary purchaser." Cast in this particular controversy,
the ordinary purchaser is not the "completely unwary consumer" but is the "ordinarily
intelligent buyer" considering the type of product involved.

The definition laid down in Dy Buncio v. Tan Tiao Bok is better suited to the present case.
There, the "ordinary purchaser" was defined as one "accustomed to buy, and therefore to
some extent familiar with, the goods in question. The test of fraudulent simulation is to be
found in the likelihood of the deception of some persons in some measure acquainted with
an established design and desirous of purchasing the commodity with which that design
has been associated. The test is not found in the deception, or the possibility of deception,
of the person who knows nothing about the design which has been counterfeited, and who
must be indifferent between that and the other. The simulation, in order to be objectionable,
must be such as appears likely to mislead the ordinary intelligent buyer who has a need to
supply and is familiar with the article that he seeks to purchase."

***

MIGHTY CORP. and LA CAMPANA FABRICA DE TABACO, INC. v.

E. & J. GALLO WINERY and THE ANDRESONS GROUP, INC.,
G.R. No. 154342. July 14, 2004

FACTS:
Respondent Gallo Winery is a foreign corporation not doing business in the Philippines but
organized and existing under the laws of the U.S., where all its wineries are located. Gallo
Winery produces different kinds of wines and brandy products and sells them in many
countries under different registered trademarks, including the GALLO and ERNEST &
JULIO GALLO wine trademarks. Respondent Andresons, has been Gallo Winery’s
exclusive wine importer and distributor in the Philippines since 1991, selling these products
in its own name and for its own account. Respondent's trademark GALLO was registered
with the IPO in 1971.

Petitioners on the other hand are engaged in the cultivation, manufacture, distribution and
sale of tobacco products for which they have been using the GALLO cigarette trademark

CASES IN COMMERCIAL LAW REVIEW (J. Dimaampao) 4E 2017-2018 | 135

since 1973. Upon learning about the use of the said trademark by petitioners, respondents
sent a demand letter to petitioners asking them to stop using the GALLO trademark, but to
no avail. Thereafter, on March 12, 1993, they sued for trademark infringement and unfair
competition with prayer for PI and damages.

RTC denied PI but thereafter RTC ruled for respondent after trial on the merits. CA
affirmed.
ISSUE: Whether or not petitioner is guilty of trademark infringement and unfair
competition

HELD: NO. The courts a quo erred in retroactively applying the IP Code in this case. It is a
fundamental principle that the validity and obligatory force of a law proceed from the fact
that it has first been promulgated. A law that is not yet effective cannot be considered as
conclusively known by the populace. To make a law binding even before it takes effect may
lead to the arbitrary exercise of the legislative power.40 Nova constitutio futuris formam
imponere debet non praeteritis. A new state of the law ought to affect the future, not the
past. The IP Code, repealing the Trademark Law, was approved on June 6, 1997. Section
241 thereof expressly decreed that it was to take effect only on January 1, 1998, without
any provision for retroactive application. Thus, the Makati RTC and the CA should have
limited the consideration of the present case within the parameters of the Trademark Law
and the Paris Convention, the laws in force at the time of the filing of the complaint.

DISTINCTIONS BETWEEN TRADEMARK INFRINGEMENT AND UNFAIR COMPETITION

Although the laws on trademark infringement and unfair competition have a common
conception at their root, that is, a person shall not be permitted to misrepresent his goods
or his business as the goods or business of another, the law on unfair competition is
broader and more inclusive than the law on trademark infringement. The latter is more
limited but it recognizes a more exclusive right derived from the trademark adoption and
registration by the person whose goods or business is first associated with it. The law on
trademarks is thus a specialized subject distinct from the law on unfair competition,
although the two subjects are entwined with each other and are dealt with together in the
Trademark Law (now, both are covered by the IP Code). Hence, even if one fails to
establish his exclusive property right to a trademark, he may still obtain relief on the ground
of his competitor’s unfairness or fraud. Conduct constitutes unfair competition if the effect is
to pass off on the public the goods of one man as the goods of another. It is not necessary
that any particular means should be used to this end.

We distinguished trademark infringement from unfair competition:

(1) Infringement of trademark is the unauthorized use of a trademark, whereas unfair
competition is the passing off of one's goods as those of another.
(2) In infringement of trademark fraudulent intent is unnecessary, whereas in unfair
competition fraudulent intent is essential.
(3) In infringement of trademark the prior registration of the trademark is a prerequisite to
the action, whereas in unfair competition registration is not necessary.

Under Article 6 of the Paris Convention, the following are the elements of trademark
infringement:
(a) registration or use by another person of a trademark which is a reproduction, imitation
or translation liable to create confusion,
(b) of a mark considered by the competent authority of the country of registration or use 48 to
be well-known in that country and is already the mark of a person entitled to the benefits of
the Paris Convention, and

(c) such trademark is used for identical or similar goods.

Under Trademark Law ,the following constitute the elements of trademark infringement:
(a) a trademark actually used in commerce in the Philippines and registered in the principal
register of the Philippine Patent Office

CASES IN COMMERCIAL LAW REVIEW (J. Dimaampao) 4E 2017-2018 | 136

(b) is used by another person in connection with the sale, offering for sale, or advertising of
any goods, business or services or in connection with which such use is likely to cause
confusion or mistake or to deceive purchasers or others as to the source or origin of such
goods or services, or identity of such business; or such trademark is reproduced,
counterfeited, copied or colorably imitated by another person and such reproduction,
counterfeit, copy or colorable imitation is applied to labels, signs, prints, packages,
wrappers, receptacles or advertisements intended to be used upon or in connection with
such goods, business or services as to likely cause confusion or mistake or to deceive
purchasers,

(c) the trademark is used for identical or similar goods, and

(d) such act is done without the consent of the trademark registrant or assignee.

In summary, the Paris Convention protects well-known trademarks only (to be determined
by domestic authorities), while the Trademark Law protects all trademarks, whether well-
known or not, provided that they have been registered and are in actual commercial use in
the Philippines. Following universal acquiescence and comity, in case of domestic legal
disputes on any conflicting provisions between the Paris Convention (which is an
international agreement) and the Trademark law (which is a municipal law) the latter will
prevail.

Under both the Paris Convention and the Trademark Law, the protection of a registered
trademark is limited only to goods identical or similar to those in respect of which such
trademark is registered and only when there is likelihood of confusion. Under both laws, the
time element in commencing infringement cases is material in ascertaining the registrant’s
express or implied consent to another’s use of its trademark or a colorable imitation thereof.
This is why acquiescence, estoppel or laches may defeat the registrant’s otherwise valid
cause of action.

THE ACTUAL COMMERCIAL USE IN THE PHILIPPINES OF GALLO CIGARETTE

TRADEMARK PRECEDED THAT OF GALLO WINE TRADEMARK.

In view of the foregoing jurisprudence and respondents’ judicial admission that the actual
commercial use of the GALLO wine trademark was subsequent to its registration in 1971
and to Tobacco Industries’ commercial use of the GALLO cigarette trademark in 1973, we
rule that, on this account, respondents never enjoyed the exclusive right to use the GALLO
wine trademark to the prejudice of Tobacco Industries and its successors-in-interest, herein
petitioners, either under the Trademark Law or the Paris Convention.

NO LIKELIHOOD OF CONFUSION, MISTAKE OR DECEIT AS TO THE IDENTITY OR

SOURCE OF PETITIONERS’ AND RESPONDENTS’ GOODS OR BUSINESS

A crucial issue in any trademark infringement case is the likelihood of confusion, mistake or
deceit as to the identity, source or origin of the goods or identity of the business as a
consequence of using a certain mark. There are two types of confusion in trademark
infringement. The first is "confusion of goods" when an otherwise prudent purchaser is
induced to purchase one product in the belief that he is purchasing another, in which case
defendant’s goods are then bought as the plaintiff’s and its poor quality reflects badly on
the plaintiff’s reputation. The other is "confusion of business" wherein the goods of the
parties are different but the defendant’s product can reasonably (though mistakenly) be
assumed to originate from the plaintiff, thus deceiving the public into believing that there is
some connection between the plaintiff and defendant which, in fact, does not exist.

In determining the likelihood of confusion, the Court must consider: [a] the resemblance
between the trademarks; [b] the similarity of the goods to which the trademarks are
attached; [c] the likely effect on the purchaser and [d] the registrant’s express or implied
consent and other fair and equitable considerations.

CASES IN COMMERCIAL LAW REVIEW (J. Dimaampao) 4E 2017-2018 | 137

Whether a trademark causes confusion and is likely to deceive the public hinges on
"colorable imitation"73 which has been defined as "such similarity in form, content, words,
sound, meaning, special arrangement or general appearance of the trademark or
tradename in their overall presentation or in their essential and substantive and distinctive
parts as would likely mislead or confuse persons in the ordinary course of purchasing the
genuine article."

The Dominancy Test focuses on the similarity of the prevalent features of the competing
trademarks which might cause confusion or deception, and thus infringement. If the
competing trademark contains the main, essential or dominant features of another, and
confusion or deception is likely to result, infringement takes place. Duplication or imitation is
not necessary; nor is it necessary that the infringing label should suggest an effort to
imitate. The question is whether the use of the marks involved is likely to cause confusion
or mistake in the mind of the public or deceive purchasers.

On the other hand, the Holistic Test requires that the entirety of the marks in question be
considered in resolving confusing similarity. Comparison of words is not the only
determining factor. The trademarks in their entirety as they appear in their respective labels
or hang tags must also be considered in relation to the goods to which they are attached.
The discerning eye of the observer must focus not only on the predominant words but also
on the other features appearing in both labels in order that he may draw his conclusion
whether one is confusingly similar to the other.

Applying the Dominancy and Holistic Tests, we find that the dominant feature of the GALLO
cigarette trademark is the device of a large rooster facing left, outlined in black against a
gold background. The rooster’s color is either green or red – green for GALLO menthols
and red for GALLO filters. Directly below the large rooster device is the word GALLO. The
rooster device is given prominence in the GALLO cigarette packs in terms of size and
location on the labels.

WINES AND CIGARETTES ARE NOT IDENTICAL, SIMILAR, COMPETING OR RELATED

GOODS

Confusion of goods is evident where the litigants are actually in competition; but confusion
of business may arise between non-competing interests as well.

Section 20 of the Trademark Law and Article 6bis of the Paris Convention which proscribe
trademark infringement not only of goods specified in the certificate of registration but also
of identical or similar goods, we have also uniformly recognized and applied the modern
concept of "related goods." Simply stated, when goods are so related that the public may
be, or is actually, deceived and misled that they come from the same maker or
manufacturer, trademark infringement occurs.
Non-competing goods may be those which, though they are not in actual competition, are
so related to each other that it can reasonably be assumed that they originate from one
manufacturer, in which case, confusion of business can arise out of the use of similar
marks. They may also be those which, being entirely unrelated, cannot be assumed to have
a common source; hence, there is no confusion of business, even though similar marks are
used.Thus, there is no trademark infringement if the public does not expect the plaintiff to
make or sell the same class of goods as those made or sold by the defendant.
In resolving whether goods are related,96 several factors come into play:
(a) the business (and its location) to which the goods belong
(b) the class of product to which the goods belong
(c) the product's quality, quantity, or size, including the nature of the package, wrapper or
container 97
(d) the nature and cost of the articles98
(e) the descriptive properties, physical attributes or essential characteristics with reference
to their form, composition, texture or quality
(f) the purpose of the goods99
(g) whether the article is bought for immediate consumption, 100 that is, day-to-day
household items101

CASES IN COMMERCIAL LAW REVIEW (J. Dimaampao) 4E 2017-2018 | 138

(h) the fields of manufacture
(i) the conditions under which the article is usually purchased 103 and
(j) the channels of trade through which the goods flow, 104 how they are distributed,
marketed, displayed and sold.
Petitioner’s use of the GALLO cigarette trademark is not likely to cause confusion or
mistake, or to deceive the "ordinarily intelligent buyer" of either wines or cigarettes or both
as to the identity of the goods, their source and origin, or identity of the business of
petitioners and respondents. Obviously, wines and cigarettes are not identical or competing
products. Neither do they belong to the same class of goods. We are mindful that product
classification alone cannot serve as the decisive factor in the resolution of whether or not
wines and cigarettes are related goods. Emphasis should be on the similarity of the
products involved and not on the arbitrary classification or general description of their
properties or characteristics. But the mere fact that one person has adopted and used a
particular trademark for his goods does not prevent the adoption and use of the same
trademark by others on articles of a different description.

THE GALLO WINE TRADEMARK IS NOT A WELL-KNOWN MARK IN THE CONTEXT

OF THE PARIS CONVENTION IN THIS CASE SINCE WINES AND CIGARETTES ARE
NOT IDENTICAL OR SIMILAR GOODS

Guidelines in the implementation of Article 6 of the Treaty of Paris.

a) the mark must be internationally known;
b) the subject of the right must be a trademark, not a patent or copyright or anything else;
c) the mark must be for use in the same or similar kinds of goods; and
d) the person claiming must be the owner of the mark

PETITIONERS ARE ALSO NOT LIABLE FOR UNFAIR COMPETITION

Under Section 29 of the Trademark Law, any person who employs deception or any other
means contrary to good faith by which he passes off the goods manufactured by him or in
which he deals, or his business, or services for those of the one having established such
goodwill, or who commits any acts calculated to produce said result, is guilty of unfair
competition. It includes the following acts:

(a) Any person, who in selling his goods shall give them the general appearance of goods
of another manufacturer or dealer, either as to the goods themselves or in the wrapping of
the packages in which they are contained, or the devices or words thereon, or in any other
feature of their appearance, which would be likely to influence purchasers to believe that
the goods offered are those of a manufacturer or dealer other than the actual manufacturer
or dealer, or who otherwise clothes the goods with such appearance as shall deceive the
public and defraud another of his legitimate trade, or any subsequent vendor of such goods
or any agent of any vendor engaged in selling such goods with a like purpose;

(b) Any person who by any artifice, or device, or who employs any other means calculated
to induce the false belief that such person is offering the services of another who has
identified such services in the mind of the public;
(c) Any person who shall make any false statement in the course of trade or who shall
commit any other act contrary to good faith of a nature calculated to discredit the goods,
business or services of another.

The universal test question is whether the public is likely to be deceived. Nothing less than
conduct tending to pass off one man’s goods or business as that of another constitutes
unfair competition. Actual or probable deception and confusion on the part of customers by
reason of defendant’s practices must always appear.125 On this score, we find that
petitioners never attempted to pass off their cigarettes as those of respondents. There is no
evidence of bad faith or fraud imputable to petitioners in using their GALLO cigarette mark.

***

CASES IN COMMERCIAL LAW REVIEW (J. Dimaampao) 4E 2017-2018 | 139

 E.Y. INDUSTRIAL SALES, INC. v. SHEN DAR ELECTRICITY AND MACHINERY CO.,
LTD.
G.R. No. 184850; October 20, 2010

FACTS: EYIS is a domestic Respondent Shen Dar is a Taiwan-based foreign corporation

engaged in the manufacture of air compressors. Respondent is a corporation engaged in
the production, distribution and sale of air compressors and other industrial tools and
equipment. Both companies claimed to have the right to register the trademark "VESPA"
for air compressors.

From 1997 to 2004, EYIS imported air compressors from Shen Dar through sales
contracts. In the corresponding Bill of Ladings, the items were described merely as air
compressors. There is no documentary evidence to show that such air compressors were
marked "VESPA."

On June 9, 1997, Shen Dar filed Trademark with the IPO for the mark "VESPA, Chinese
Characters and Device" for use on air compressors and welding machines. On July 28,
1999, EYIS filed Trademark Application, also for the mark "VESPA," for use on air
compressors. On January 18, 2004, the IPO issued Certificate of Registration in favor of
EYIS. Thereafter, on February 8, 2007, Shen Dar was also issued Certificate of
Registration.

Shen Dar filed a Petition for Cancellation of EYIS’ COR. It primarily argued that the
issuance of the COR in favor of EYIS violated the IP Code having first filed an application
for the mark. Shen Dar further alleged that EYIS was a mere distributor of air compressors
bearing the mark "VESPA" which it imported from Shen Dar. Shen Dar also argued that it
had prior and exclusive right to the use and registration of the mark "VESPA" in the
Philippines under the provisions of the Paris Convention.

EYIS denied the claim of Shen Dar to be the true owners of the mark "VESPA". It further
alleged that the air compressors that Shen Dar allegedly supplied them bore the mark "SD"
for Shen Dar and not "VESPA." Moreover, EYIS argued that Shen Dar, not being the owner
of the mark, could not seek protection from the provisions of the Paris Convention or the IP
Code.

The BLA ruled in favor EYIS. Director General affirmed. CA reversed and ruled in favor of
Shen Dar.

ISSUE: Whether EYIS is the true owner of the mark VESPA

HELD: YES. RA 8293 espouses the "first-to-file" rule as stated under Sec. 123.1(d) which
states:
Section 123. Registrability. - 123.1. A mark cannot be registered if it:
(d) Is identical with a registered mark belonging to a different proprietor or a mark with
an earlier filing or priority date, in respect of:
(i) The same goods or services, or
(ii) Closely related goods or services, or
(iii) If it nearly resembles such a mark as to be likely to deceive or cause confusion.
(Emphasis supplied.)

Under this provision, the registration of a mark is prevented with the filing of an earlier
application for registration. This must not, however, be interpreted to mean that ownership
should be based upon an earlier filing date. While RA 8293 removed the previous
requirement of proof of actual use prior to the filing of an application for registration of a
mark, proof of prior and continuous use is necessary to establish ownership of a mark.
Such ownership constitutes sufficient evidence to oppose the registration of a mark.

CASES IN COMMERCIAL LAW REVIEW (J. Dimaampao) 4E 2017-2018 | 140

Sec. 134 of the IP Code provides that "any person who believes that he would be damaged
by the registration of a mark x x x" may file an opposition to the application. The term "any
person" encompasses the true owner of the mark¾the prior and continuous user.

Notably, the Court has ruled that the prior and continuous use of a mark may even
overcome the presumptive ownership of the registrant and be held as the owner of the
mark.

Registration, without more, does not confer upon the registrant an absolute right to the
registered mark. The certificate of registration is merely a prima facie proof that the
registrant is the owner of the registered mark or trade name. Evidence of prior and
continuous use of the mark or trade name by another can overcome the presumptive
ownership of the registrant and may very well entitle the former to be declared owner in an
appropriate case.

Ownership of a mark or trade name may be acquired not necessarily by registration but by
adoption and use in trade or commerce. As between actual use of a mark without
registration, and registration of the mark without actual use thereof, the former prevails over
the latter. For a rule widely accepted and firmly entrenched, because it has come down
through the years, is that actual use in commerce or business is a pre-requisite to the
acquisition of the right of ownership.

By itself, registration is not a mode of acquiring ownership. When the applicant is not the
owner of the trademark being applied for, he has no right to apply for registration of the
same. Registration merely creates a prima facie presumption of the validity of the
registration, of the registrant’s ownership of the trademark and of the exclusive right to the
use thereof. Such presumption, just like the presumptive regularity in the performance of
official functions, is rebuttable and must give way to evidence to the contrary.

EYIS must be considered as the prior and continuous user of the mark "VESPA" and its
true owner. Hence, EYIS is entitled to the registration of the mark in its name. Its prior
adoption and continuous use of the mark "VESPA" on air compressors is bolstered by
numerous documentary evidence consisting of sales invoices issued. "VESPA" air
compressors were sold not only in Manila, but to locations such as Iloilo City, Cebu City,
Dumaguete City, Zamboanga City, Cagayan de Oro City, Davao City to name a few. There
is no doubt that it is through private respondents’ efforts that the mark "VESPA" used on air
compressors has gained business goodwill and reputation in the Philippines for which it has
validly acquired trademark rights.

Evidence likewise show that EYIS is not merely a distributor of Shen Dar. Not one of BOL
referred to a "VESPA" air compressor. Instead, it simply describes the goods plainly as air
compressors which is type "SD" and not "VESPA". Our only conclusion is that [Shen Dar]
was not able to prove to be the owner of the VESPA mark by appropriation. Neither was it
able to prove actual commercial use in the Philippines of the mark VESPA prior to its filing
of a trademark application in 9 June 1997.

***

ABS-CBN CORPORATION, v. GOZON et al.

G.R. No. 195956; March 11, 2015

DOCTRINE: News footage is copyrightable.

FACTS: Occasioned by the homecoming of the Angelo dela Cruz, an OFW kidnapped by
Iraqi militants, and the public interest it generated, both GMA Network, Inc and ABS CBN,
made their respective broadcasts and coverage of the live event. ABS-CBN conducted a
live audio-video coverage of, and broadcasted ,the arrival of dela Cruz at NAIA and the
press conference thereafter. Under a special embargo agreement, ABS-CBN allowed
Reuters Television Service to air its footages for the "use of Reuter's international
subscribers only, and shall be considered and treated by Reuters under 'embargo' against

CASES IN COMMERCIAL LAW REVIEW (J. Dimaampao) 4E 2017-2018 | 141

use by other subscribers in the Philippines, whereby no other Philippine subscriber of
Reuters would be allowed to use ABS-CBN footage without the latter's consent. While
doing a live newsfeed in its program "Flash Report," GMA-7, which is subscribed to
Reuter’s, aired the aforementioned footage for 5 seconds, only subsequently airing a
different feed upon realization that the footage belongs to ABS-CBN. GMA, allegedly,
claims that it did not receive any notice or was not aware that Reuters was airing footages
of ABS-CBN as neither "No Access Philippines" notice nor a notice that the video feed was
under embargo in favor of ABS-CBN was communicated to it. It claimed good faith in airing
the footage and its immediate removal upon realization.

ABS-CBN filed a complaint for copyright infringement for GMA’s airing of the footage. ABS-
CBN claims that news footage is subject to copyright and prohibited use of copyrighted
material is punishable under the Intellectual Property Code. It argues that the new footage
is not a "newsworthy event" but "merely an account of the arrival of Angelo dela Cruz in the
Philippines — the latter being the newsworthy event

ISSUE: Whether or not news footage is copyrightable under the law.

HELD:YES. The news footage is copyrightable. Under the Intellectual Property Code,
"works are protected by the sole fact of their creation, irrespective of their mode or form of
expression, as well as of their content, quality and purpose." These include "[a]udiovisual
works and cinematographic works and works produced by a process analogous to
cinematography or any process for making audio-visual recordings. Although under Section
175 of the Intellectual Property Code, "news of the day and other miscellaneous facts
having the character of mere items of press information" are considered unprotected
subject matter, the Code does not state that expression of the news of the day, particularly
when it underwent a creative process, is not entitled to protection; News coverage in
television involves framing shots, using images, graphics, and sound effects. It involves
creative process and originality. Hence, television news footage is an expression of the
news, and is protected by law. #YOROBE
***

JOAQUIN, JR., and BJ PRODUCTIONS, INC. v. DRILON, et al

G.R. No. 108946; January 28, 1999

FACTS: Petitioner BJ Productions Inc. (BJPI) is the holder/grantee of Certificate No. M922,
dated January 28, 1971 over Rhoda and Me, a dating game show aired from 1970 to 1977.
It also submitted with the National Library an addendum to its certificate of copyright
specifying the shows and style of presentation. In 1991, BJPI’s president Francisco
Joaquin (“Joaquin”) saw on TV – RPN 9’s show It’s a Date, a show which is basically the
same as Rhoda and Me, produced by IXL Productions, Inc. (IXL). Joaquin called the
attention of the private respondent Gabriel M. Zosa (“ZOSA”), president and general
manager of IXL. Previous meetings were held, until Joaquin sued Zosa, for the violation of
P.D. No.49 in the RTC of Quezon City. The investigating prosecutor found probable cause
against Zosa. Zosa later sought a review of the prosecutor’s resolution before the Secretary
of Justice (Franklin Drilon). Drilon reversed the findings of the fiscal and directed him to
dismiss the case against Zosa. Petitioner filed a Motion for Reconsideration but was denied
by the Secretary of Justice.

ISSUE: Whether or not the order of Drilon finding no probable cause is valid.

HELD: YES. The essence of copyright infringement is the copying, in whole or in part, of
copyrightable materials as defined and enumerated in Section 2 of PD. No. 49 (Copyright
Law). P.D. No. 49, 2, in enumerating what are subject to copyright, refers to finished works
and not to concepts. The copyright does not extend to an idea, procedure, process,
system, method of operation, concept, principle, or discovery, regardless of the form in
which it is described, explained, illustrated, or embodied in such work. Apart from the
manner in which it is actually expressed, however, the idea of a dating game show is a

CASES IN COMMERCIAL LAW REVIEW (J. Dimaampao) 4E 2017-2018 | 142

non-copyrightable material. What is covered by BJPI’s copyright is the specific episodes of
the show Rhoda and Me.

Further, BJPI should have presented the master videotape of the show in order to show the
linkage between the copyright show (Rhoda and Me) and the infringing show (It’s a Date).
Though BJPI did provide a lot of written evidence and description to show the linkage
between the shows, the same were not enough. A television show includes more than
mere words can describe because it involves a whole spectrum of visuals and effects,
video and audio, such that no similarity or dissimilarity may be found by merely describing
the general copyright/format of both dating game shows. #VALDEAVILLA

***

DERMALINE, INC. v. MYRA PHARMACEUTICALS, INC.

G.R. No. 190065; August 16, 2010

FACTS: Dermaline filed before the IPO an application for registration of the trademark
"DERMALINE DERMALINE, INC." Myra Pharmaceuticals, Inc. filed an opposition alleging
that the trademark sought to be registered by Dermaline, registered with IPO since 1986,
so resembles its trademark "DERMALIN" and will likely cause confusion, mistake and
deception to the purchasing public. BLA IPO sustained Myra's opposition. Director General
and Ca affirmed.

ISSUE: Whether or not the marks are confusingly similar

HELD: YES. a registered trademark owner, it has the right under Section 147 of R.A. No.
8293 to prevent third parties from using a trademark, or similar signs or containers for
goods or services, without its consent, identical or similar to its registered trademark, where
such use would result in a likelihood of confusion.

In determining likelihood of confusion, case law has developed two (2) tests, the
Dominancy Test and the Holistic or Totality Test. The Dominancy Test focuses on the
similarity of the prevalent features of the competing trademarks that might cause confusion
or deception.17 It is applied when the trademark sought to be registered contains the main,
essential and dominant features of the earlier registered trademark, and confusion or
deception is likely to result. Duplication or imitation is not even required; neither is it
necessary that the label of the applied mark for registration should suggest an effort to
imitate. The important issue is whether the use of the marks involved would likely cause
confusion or mistake in the mind of or deceive the ordinary purchaser, or one who is
accustomed to buy, and therefore to some extent familiar with, the goods in
question.18 Given greater consideration are the aural and visual impressions created by the
marks in the public mind, giving little weight to factors like prices, quality, sales outlets, and
market segments.

On the other hand, the Holistic Test entails a consideration of the entirety of the marks as
applied to the products, including labels and packaging, in determining confusing similarity.
The scrutinizing eye of the observer must focus not only on the predominant words but also
on the other features appearing in both labels so that a conclusion may be drawn as to
whether one is confusingly similar to the other.

Relative to the question on confusion of marks and trade names, jurisprudence has noted
two (2) types of confusion, viz: (1) confusion of goods (product confusion), where the
ordinarily prudent purchaser would be induced to purchase one product in the belief that he
was purchasing the other; and (2) confusion of business (source or origin confusion),
where, although the goods of the parties are different, the product, the mark of which
registration is applied for by one party, is such as might reasonably be assumed to
originate with the registrant of an earlier product, and the public would then be deceived
either into that belief or into the belief that there is some connection between the two
parties, though inexistent.

CASES IN COMMERCIAL LAW REVIEW (J. Dimaampao) 4E 2017-2018 | 143

In rejecting the application of Dermaline for the registration of its mark "DERMALINE
DERMALINE, INC.," the IPO correctly applied the Dominancy Test. It declared that both
confusion of goods and service and confusion of business or of origin were apparent in
both trademarks. The public may mistakenly think that Dermaline is connected to or
associated with Myra, such that, considering the current proliferation of health and beauty
products in the market, the purchasers would likely be misled that Myra has already
expanded its business through Dermaline from merely carrying pharmaceutical topical
applications for the skin to health and beauty services.

While there are no set rules that can be deduced as what constitutes a dominant feature
with respect to trademarks applied for registration; usually, what are taken into account are
signs, color, design, peculiar shape or name, or some special, easily remembered
earmarks of the brand that readily attracts and catches the attention of the ordinary
consumer.

Verily, when one applies for the registration of a trademark or label which is almost the
same or that very closely resembles one already used and registered by another, the
application should be rejected and dismissed outright, even without any opposition on the
part of the owner and user of a previously registered label or trademark. This is intended
not only to avoid confusion on the part of the public, but also to protect an already used and
registered trademark and an established goodwill.

***

HABANA, et al v. ROBLES and GOODWILL TRADING CO., INC.

310 SCRA 511; July 19,1999

FACTS: Pacita Habana and two others were the authors of College English for Today
Series 1 and 2 (CET). While they were researching for books to assist them in updating
their own book, they chanced upon the book of Felicidad Robles entitled Developing
English Proficiency Books 1 and 2 (DEP). After an itemized examination and comparison of
the books, petitioners found that several pages of the respondents' book are similar, if not
altogether a copy from the petitioners' book, which is a case of plagiarism and copyright
infringement. When respondents ignored demands of petitioners for damages, the latter
filed a complaint for infringement and/or unfair competition with damages.

Robles, in her defense, alleged that her sources were from foreign books; that in their field
similarity in styles cannot be avoided since they come from the same background and
orientation. The trial court and the CA ruled in favor of Robles.

ISSUES:
1) Whether or not there was copyright infringement; and
2) Whether or not the extent of infringement was substantial.

HELD: 1) YES. Robles' act of lifting from the book of petitioners substantial portions of
discussions and examples, and her failure to acknowledge the same in her book is an
infringement of petitioners' copyrights.

A perusal of the records yields several pages of the book DEP that are similar if not
identical with the text of CET. In several other pages the treatment and manner of
presentation of the topics of DEP are similar, if not a rehash, of that contained in CET. The
similarities in examples and material contents are so obviously present in this case. How
can similar/identical examples not be considered as a mark of copying? Robles’ act of
lifting from the book of Habana et al substantial portions of discussions and examples, and
her failure to acknowledge the same in her book is an infringement of Habana et al’s
copyrights.

2) YES. In cases of infringement, copying alone is not what is prohibited. The copying must
produce an "injurious effect."

CASES IN COMMERCIAL LAW REVIEW (J. Dimaampao) 4E 2017-2018 | 144

It does not necessarily require that the entire copyrighted work, or even a large portion of it,
be copied. If so much is taken that the value of the original work is substantially diminished,
there is an infringement of copyright and to an injurious extent, the work is appropriated. In
determining the question of infringement, the amount of matter copied from the copyrighted
work is an important consideration. To constitute infringement, it is not necessary that the
whole or even a large portion of the work shall have been copied. If so much is taken that
the value of the original is sensibly diminished, or the labors of the original author are
substantially and to an injurious extent appropriated by another, that is sufficient in point of
law to constitute piracy.

Under Sec. 184 of Republic Act 8293 it is provided that: “xxx the following shall not
constitute infringement of copyright: . . . (c) The making of quotations from a published
work if they are compatible with fair use and only to the extent justified for the purpose, xxx
Provided, That the source and the name of the author, if appearing on the work, are
mentioned. xxx

In the case at bar, the least that respondent Robles could have done was to acknowledge
petitioners Habana et al. as the source of the portions of DEP. The final product of an
author's toil is her book. To allow another to copy the book without appropriate
acknowledgment is injury enough. #VALERIANO

***

GREAT WHITE SHARK ENTERPRISES, INC. v. CARALDE, JR.

G.R. No. 192294; November 21, 2012

FACTS: In July 2002 Caralde filed before the IPO a trademark application seeking to
register the mark "SHARK & LOGO" for his manufactured goods such as slippers, shoes
and sandals. Petitioner Great White Shark Enterprises, Inc., a foreign corporation domiciled
in USA, opposed the application claiming to be the owner of the mark consisting of a
representation of a shark in color, known as "GREG NORMAN LOGO". It alleged that,
being a world famous mark which is pending registration before the BLA since February
2002, the confusing similarity between the two (2) marks is likely to deceive or confuse the
purchasing public into believing that Caralde's goods are produced by or originated from it,
or are under its sponsorship, to its damage and prejudice.

Caralde explained that the subject marks are distinctively different from one another and
easily distinguishable. When compared, the only similarity in the marks is in the word
"shark" alone, differing in other factors such as appearance, style, shape, size, format,
color, ideas counted by marks, and even in the goods carried by the parties. Meanwhile,
Great White Shark’s trademark application was granted in October 2006 for clothing,
headgear and footwear, including socks, shoes and its components.

BLA IPO rejected Caralde's application. Director General affirmed. CA reversed.

ISSUE: Whether or not the subject marks are confusingly similar

HELD: NO. A trademark device is susceptible to registration if it is crafted fancifully or

arbitrarily and is capable of identifying and distinguishing the goods of one manufacturer or
seller from those of another. Apart from its commercial utility, the benchmark of trademark
registrability is distinctiveness.13 Thus, a generic figure, as that of a shark in this case, if
employed and designed in a distinctive manner, can be a registrable trademark device,
subject to the provisions of the IP Code.

Corollarily, Section 123.1(d) of the IP Code provides that a mark cannot be registered if it is
identical with a registered mark belonging to a different proprietor with an earlier filing or
priority date, with respect to the same or closely related goods or services, or has a near
resemblance to such mark as to likely deceive or cause confusion.

CASES IN COMMERCIAL LAW REVIEW (J. Dimaampao) 4E 2017-2018 | 145

In determining similarity and likelihood of confusion, case law has developed the
Dominancy Test and the Holistic or Totality Test. The Dominancy Test focuses on the
similarity of the dominant features of the competing trademarks that might cause confusion,
mistake, and deception in the mind of the ordinary purchaser, and gives more consideration
to the aural and visual impressions created by the marks on the buyers of goods, giving
little weight to factors like prices, quality, sales outlets, and market segments. In contrast,
the Holistic or Totality Test considers the entirety of the marks as applied to the products,
including the labels and packaging, and focuses not only on the predominant words but
also on the other features appearing on both labels to determine whether one is confusingly
similar to the other14 as to mislead the ordinary purchaser. The "ordinary purchaser" refers
to one "accustomed to buy, and therefore to some extent familiar with, the goods in
question."

Irrespective of both tests, the Court finds no confusing similarity between the subject
marks. While both marks use the shape of a shark, the Court noted distinct visual and aural
differences between them.

There being no confusing similarity between the subject marks, the matter of whether Great
White Shark’s mark has gained recognition and acquired becomes unnecessary. Besides,
both the BLA Director and the IPO Director General have ruled that Great White Shark
failed to meet the criteria to establish that its mark is well-known.

***

SUPERIOR COMMERCIAL ENTERPRISES, INC. v. KUNNAN ENTERPRISES LTD. AND

SPORTS CONCEPT & DISTRIBUTOR, INC.
G.R. No. 169974 April 20, 2010

DOCTRINES:
1. Under the Trademark Law, only the owner of the trademark, trade name or service mark
used to distinguish his goods, business or service from the goods, business or service of
others is entitled to register the same. An exclusive distributor does not acquire any
proprietary interest in the principals trademark and cannot register it in his own name
unless it is has been validly assigned to him.

2. The essential elements of unfair competition are (1) confusing similarity in the general
appearance of the goods; and (2) intent to deceive the public and defraud a competitor.
Jurisprudence also formulated the following true test of unfair competition: whether the acts
of the defendant have the intent of deceiving or are calculated to deceive the ordinary
buyer making his purchases under the ordinary conditions of the particular trade to which
the controversy relates.

FACTS: KUNNAN appointed SUPERIOR as its exclusive distributor in the Philippines

under a Distributorship Agreement whose pertinent provisions state:

“Whereas, KUNNAN intends to acquire ownership of KENNEX trademark registered by the

Superior in the Philippines. Whereas, the SUPERIOR is desirous of having been appointed
as the sole distributor by KUNNAN in the territory of the Philippines. Now, therefore, the
parties hereto agree as follows:
1. KUNNAN, in accordance with this Agreement, will appoint the sole distributorship right to
Superior in the Philippines, and this Agreement could be renewed with the consent of both
parties upon the time of expiration.
2. The SUPERIOR, in accordance with this Agreement, shall assign the ownership of
KENNEX trademark, under the registration of Patent Certificate No. 4730 dated 23 May
1980 to KUNNAN for the duration of its ten (10) years contract of distributorship, and it is
required that the ownership of the said trademark shall be genuine, complete as a whole
and without any defects."
KUNNAN alleged that SUPERIOR's President and General Manager misled KUNNAN's
officers into believing that KUNNAN was not qualified to hold the disputed trademarks due
to the many requirements set by the Philippine Patent Office that KUNNAN could not meet.

CASES IN COMMERCIAL LAW REVIEW (J. Dimaampao) 4E 2017-2018 | 146

KUNNAN further asserted it agreed to assign its applications to register the trademarks on
condition that SUPERIOR acknowledged that KUNNAN was still the real owner of the
marks and agreed to return them to KUNNAN on request.

On December 3, 1991, upon the termination of its distributorship agreement with

SUPERIOR, KUNNAN appointed SPORTS CONCEPT as its new distributor.
Subsequently, KUNNAN also caused the publication of a Notice and Warning in the Manila
Bulletin's January 29, 1993 issue, stating that (1) it is the owner of the disputed trademarks;
(2) it terminated its Distributorship Agreement with SUPERIOR; and (3) it appointed
SPORTS CONCEPT as its exclusive distributor.

This notice prompted SUPERIOR to file its Complaint for Infringement of Trademark and
Unfair Competition with Preliminary Injunction against KUNNAN. The trial court ruled in
favor of SUPERIOR. In the course of its appeal to the CA, KUNNAN filed a Manifestation
and Motion praying that the decision of the Bureau of Legal Affairs of the Intellectual
Property Office in the Consolidated Petitions for Cancellation be made of record and be
considered by the CA in resolving the case. The CA ordered the cancellation of the
disputed trademarks, holding that SUPERIOR was not the owner of, and could not validly
register these trademarks. On December 3, 2007, the CA decision on the cancellation of
the disputed trademarks was declared final and executory.

ISSUES:
1. Whether or not SUPERIOR is the rightful owner of the disputed trademarks
2. Whether or not KUNNAN is guilty of unfair competition

HELD: 1. NO. To establish trademark infringement, the following elements must be proven:
(1) the validity of plaintiffs mark; (2) the plaintiff's ownership of the mark; and (3) the use of
the mark or its colourable imitation by the alleged infringer results in likelihood of confusion.
Title to the trademark is indispensable to a valid cause of action and such title is shown by
its certificate of registration. With its certificates of registration over the disputed trademarks
effectively cancelled with finality, SUPERIOR's case for trademark infringement lost its legal
basis and no longer presented a valid cause of action. Even assuming that SUPERIOR’s
case for trademark infringement had not been rendered moot and academic, there can be
no infringement committed by KUNNAN. Even prior to the cancellation of the registration of
the disputed trademarks, SUPERIOR as a mere distributor and not the owner cannot assert
any protection from trademark infringement as it had no right in the first place to the
registration of the disputed trademarks. An exclusive distributor does not acquire any
proprietary interest in the principals trademark and cannot register it in his own name
unless it is has been validly assigned to him.

2. NO. Unfair competition has been defined as the passing off (or palming off) or attempting
to pass off upon the public of the goods or business of one person as the goods or
business of another with the end and probable effect of deceiving the public. The essential
elements of unfair competition are (1) confusing similarity in the general appearance of the
goods; and (2) intent to deceive the public and defraud a competitor. Jurisprudence also
formulated the following true test of unfair competition: whether the acts of the defendant
have the intent of deceiving or are calculated to deceive the ordinary buyer making his
purchases under the ordinary conditions of the particular trade to which the controversy
relates. One of the essential requisites in an action to restrain unfair competition is proof of
fraud; the intent to deceive, actual or probable must be shown before the right to recover
can exist.

In the present case, no evidence exists showing that KUNNAN ever attempted to pass off
the goods it sold as those of SUPERIOR. In addition, there is no evidence of bad faith or
fraud imputable to KUNNAN in using the disputed trademarks. Specifically, SUPERIOR
failed to adduce any evidence to show that KUNNAN by the above-cited acts intended to
deceive the public as to the identity of the goods sold or of the manufacturer of the goods
sold.

***

CASES IN COMMERCIAL LAW REVIEW (J. Dimaampao) 4E 2017-2018 | 147

 GSIS FAMILY BANK v. BPI FAMILY BANK
G.R. No. 175278; September 23, 2015

FACTS: The GSIS acquired petitioner from the Commercial Bank of Manila. Petitioner's
management and control was thus transferred to GSIS. 7 To improve its marketability to the
public, especially to the members of the GSIS, petitioner sought Securities and Exchange
Commission (SEC) approval to change its corporate name to "GSIS Family Bank, a Thrift
Bank." To improve its marketability to the public, especially to the members of the GSIS,
petitioner sought Securities and Exchange Commission (SEC) approval to change its
corporate name to "GSIS Family Bank, a Thrift Bank." 8 Petitioner likewise applied with the
Department of Trade and Industry (DTI) and Bangko Sentral ng Pilpinas (BSP) for authority
to use "GSIS Family Bank, a Thrift Bank" as its business name. The DTI and the BSP
approved the applications.9 Thus, petitioner operates under the corporate name "GSIS
Family Bank – a Thrift Bank

Respondent BPI Family Savings Bank was registered with the SEC as a wholly-owned
subsidiary of BPI. BPI Family Savings Bank then registered with the Bureau of Domestic
Trade the trade or business name "BPI Family Bank," and acquired a reputation and
goodwill under the name.

Eventually, it reached respondent’s attention that petitioner is using or attempting to use the
name "Family Bank." Thus respondent petitioned SEC to disallow or prevent the
registration of the name "GSIS Family Bank" or any other corporate name with the words
"Family Bank" in it. Respondent claimed exclusive ownership to the name "Family Bank,"
that it has been known as "BPI Family Bank" or simply "Family Bank" both locally and
internationally. As such, it has acquired a reputation and goodwill under the name, not only
with clients here and abroad, but also with correspondent and competitor banks, and the
public in general. SEC ruled in favor of BPI. CA affirmed.

ISSUE: Whether or not the trade names are confusingly similar.

HELD: YES. To fall within the prohibition of the law on the right to the exclusive use of a
corporate name, two requisites must be proven, namely:
(1) that the complainant corporation acquired a prior right over the use of such corporate
name; and
(2) the proposed name is either
(a) identical or
(b) deceptive or confusingly similar to that of any existing corporation or to any other
name already protected by law; or
(c) patently deceptive, confusing or contrary to existing law.

BPI was incorporated in 1969 as Family Savings Bank and in 1985 as BPI Family Bank.
Petitioner, on the other hand, was incorporated as GSIS Family – Thrift Bank only in
2002,38 or at least seventeen (17) years after respondent started using its name. Following
the precedent in the IRCP case, we rule that respondent has the prior right over the use of
the corporate name.

Section 3 of the Revised Guidelines in the Approval of Corporate and Partnership Names
states that if there be identical, misleading or confusingly similar name to one already
registered by another corporation or partnership with the SEC, the proposed name must
contain at least one distinctive word different from the name of the company already
registered. To show contrast with respondent's corporate name, petitioner used the words
"GSIS" and "thrift." But these are not sufficiently distinct words that differentiate petitioner's
corporate name from respondent's. While "GSIS" is merely an acronym of the proper name
by which petitioner is identified, the word "thrift" is simply a classification of the type of bank
that petitioner is. Even if the classification of the bank as "thrift" is appended to petitioner's
proposed corporate name, it will not make the said corporate name distinct from
respondent's because the latter is likewise engaged in the banking business.

CASES IN COMMERCIAL LAW REVIEW (J. Dimaampao) 4E 2017-2018 | 148

On the second point (b), there is a deceptive and confusing similarity between petitioner's
proposed name and respondent's corporate name, as found by the SEC. 42 In determining
the existence of confusing similarity in corporate names, the test is whether the similarity is
such as to mislead a person using ordinary care and discrimination.43 And even without
such proof of actual confusion between the two corporate names, it suffices that confusion
is probable or likely to occur.

Petitioner's corporate name is "GSIS Family Bank—A Thrift Bank" and respondent's
corporate name is "BPI Family Bank." The only words that distinguish the two are "BPI,"
"GSIS," and "Thrift." The first two words are merely the acronyms of the proper names by
which the two corporations identify themselves; and the third word simply describes the
classification of the bank. The overriding consideration in determining whether a person,
using ordinary care and discrimination, might be misled is the circumstance that both
petitioner and respondent are engaged in the same business of banking. "The likelihood of
confusion is accentuated in cases where the goods or business of one corporation are the
same or substantially the same to that of another corporation.

Petitioner cannot argue that the word "family" is a generic or descriptive name, which
cannot be appropriated exclusively by respondent. "Family," as used in respondent's
corporate name, is not generic. Generic marks are commonly used as the name or
description of a kind of goods, such as "Lite" for beer or "Chocolate Fudge" for chocolate
soda drink. Descriptive marks, on the other hand, convey the characteristics, function,
qualities or ingredients of a product to one who has never seen it or does not know it exists,
such as "Arthriticare" for arthritis medication.

Under the facts of this case, the word "family" cannot be separated from the word
"bank." This coined phrase, neither being generic nor descriptive, is merely suggestive and
may properly be regarded as arbitrary. Arbitrary marks are "words or phrases used as a
mark that appear to be random in the context of its use. They are generally considered to
be easily remembered because of their arbitrariness. They are original and unexpected in
relation to the products they endorse, thus, becoming themselves distinctive."51 Suggestive
marks, on the other hand, "are marks which merely suggest some quality or ingredient of
goods. xxx The strength of the suggestive marks lies on how the public perceives the word
in relation to the product or service."

***

LOUIS VUITTON S.A. v. JUDGE VILLANUEVA

A.M. No. MTJ-92-643; November 27, 1992

FACTS: Louis Vuitton, S.A. filed a criminal complaint against one Jose Rosario for unfair
competition, suing the accused for the protection of the trade mark Louis Vuitton and the
L.V. logo which are duly registered with the Philippine Patent Office.

The accused, on the other hand, claimed: that he is not the manufacturer or seller of the
seized articles; that the said articles were sold in the store by a concessionaire by the name
of Erlinda Tan who is doing business under the name of Hi-Tech Bags and wallets.

Accused aquitted - prosecution failed to prove that the articles were owned and being sold
by the accused. In holding that there was no unfair competition, the respondent judge said
that "the seized articles did not come close to the appearance of a genuine Louis Vuitton
product"

ISSUE: Whether or not there was unfair competition

HELD: NO. The test to determine unfair competition is whether certain goods have been
clothed with an appearance which is likely to deceive the ordinary purchaser exercising
ordinary care.

CASES IN COMMERCIAL LAW REVIEW (J. Dimaampao) 4E 2017-2018 | 149

In so finding that the seized products did not come close to the appearance of genuine
Louis Vuittons because they were poorly done, the court considered not only their
appearance but other factors as well, such as the price differences between the real and
the fake products. Complainant, on the other hand, alleged that they were good
workmanship. But, this Court is not in a position to review the evidence and thereafter
conclude that the imitation was poorly or excellently done. The findings of fact of the trial
court, if supported by substantial evidence, are binding on the Supreme Court. 13 Even on
the assumption that the judicial officer has erred in the appraisal of evidence, he cannot be
held administratively or civilly liable for his judicial action.

***

FREDCO MANUFACTURING CORPORATION vs. PRESIDENT AND FELLOWS OF

HARVARD COLLEGE
G.R. NO. 185917; June 01, 2011

FACTS: Fredco Manufacturing Corporation (Fredco), a corporation organized and existing

under the laws of the Philippines, filed a Petition for Cancellation of Registration against
respondents President and Fellows of Harvard College (Harvard University), a corporation
organized and existing under the laws of US.

Fredco alleged that the mark "Harvard" for t-shirts, polo shirts, sandos, briefs, jackets and
slacks was first used in the Philippines in 1982 by New York Garments, a domestic
corporation and Fredco’s predecessor-in-interest. Since its establishment in 1995, it had
since then handled the manufacture, promotion and marketing of "Harvard" clothing
articles.

Harvard University, on the other hand, alleged that it is the lawful owner of the name and
mark "Harvard" in numerous countries worldwide, including the Philippines. Harvard
University was established in 1639 and the name and mark "Harvard" was allegedly used
in commerce as early as 1872. Harvard University is over 350 years old and is a highly
regarded institution of higher learning in the United States and throughout the world.
Harvard University promotes, uses, and advertises its name "Harvard" through various
publications, services, and products in foreign countries, including the Philippines. Harvard
University further alleged that the name and the mark have been rated as one of the most
famous brands in the world.

BLA IPO cancelled Harvard's registration. The Director General reversed. CA affirmed.

ISSUE: Whether or not respondent University has acquired the right to the use of the
Harvard mark

HELD: YES. Under Section 239.2 of Republic Act No. 8293 (R.A. No. 8293), 18 "[m]arks
registered under Republic Act No. 166 shall remain in force but shall be deemed to have
been granted under this Act x x x," which does not require actual prior use of the mark in
the Philippines. Since the mark "Harvard Veritas Shield Symbol" is now deemed granted
under R.A. No. 8293, any alleged defect arising from the absence of actual prior use in the
Philippines has been cured by Section 239.2.19 In addition, Fredco’s registration was
already cancelled on 30 July 1998 when it failed to file the required affidavit of use/non-use
for the fifth anniversary of the mark’s registration. Hence, at the time of Fredco’s filing of the
Petition for Cancellation before the Bureau of Legal Affairs of the IPO, Fredco was no
longer the registrant or presumptive owner of the mark "Harvard."

There are two compelling reasons why Fredco’s petition must fail.

First, Fredco’s registration of the mark "Harvard" and its identification of origin as
"Cambridge, Massachusetts" falsely suggest that Fredco or its goods are connected with
Harvard University, which uses the same mark "Harvard" and is also located in Cambridge,
Massachusetts. This can easily be gleaned from the following oblong logo of Fredco that it
attaches to its clothing line:

CASES IN COMMERCIAL LAW REVIEW (J. Dimaampao) 4E 2017-2018 | 150

Fredco’s registration of the mark "Harvard" should not have been allowed because IPC
prohibits the registration of a mark "which may disparage or falsely suggest a connection
with persons, living or dead, institutions, beliefs x x x." Indisputably, Fredco does not have
any affiliation or connection with Harvard University. Fredco claims before this Court that it
used these words "to evoke a ‘lifestyle’ or suggest a ‘desirable aura’ of petitioner’s clothing
lines." Fredco’s belated justification merely confirms that it sought to connect or associate
its products with Harvard University, riding on the prestige and popularity of Harvard
University, and thus appropriating part of Harvard University’s goodwill without the latter’s
consent.

Second, the Philippines and the United States of America are both signatories to the Paris
Convention for the Protection of Industrial Property (Paris Convention). The Philippines
became a signatory to the Paris Convention on 27 September 1965.

ARTICLE 6
(i) The countries of the Union undertake either administratively if their legislation so
permits, or at the request of an interested party, to refuse or to cancel the
registration and to prohibit the use of a trademark which constitutes a reproduction,
imitation or translation, liable to create confusion or a mark considered by the
competent authority of the country as being already the mark of a person entitled to
the benefits of the present Convention and used for identical or similar goods. These
provisions shall also apply when the essential part of the mark constitutes a
reproduction of any such well-known mark or an imitation liable to create confusion
therewith.

ARTICLE 8
A trade name shall be protected in all the countries of the Union without the
obligation of filing or registration, whether or not it forms part of a trademark.
(Emphasis supplied)

Trade-names of persons described in the first paragraph of this section shall be

protected without the obligation of filing or registration whether or not they form parts of
marks.

Thus, under Philippine law, a trade name of a national of a State that is a party to the Paris
Convention, whether or not the trade name forms part of a trademark, is protected "without
the obligation of filing or registration."

"Harvard" is the trade name of the world famous Harvard University, and it is also a
trademark of Harvard University. Under Article 8 of the Paris Convention, as well as
Section 37 of R.A. No. 166, Harvard University is entitled to protection in the Philippines of
its trade name "Harvard" even without registration of such trade name in the Philippines.
This means that no educational entity in the Philippines can use the trade name "Harvard"
without the consent of Harvard University. Likewise, no entity in the Philippines can claim,
expressly or impliedly through the use of the name and mark "Harvard," that its products or
services are authorized, approved, or licensed by, or sourced from, Harvard University
without the latter’s consent.

Whether the trademark under consideration is well-known in the Philippines or is a mark

already belonging to a person entitled to the benefits of the CONVENTION, this should be
established, pursuant to Philippine Patent Office procedures in inter partes and ex parte
cases, according to any of the following criteria or any combination thereof:
(a) a declaration by the Minister of Trade and Industry that the trademark being considered
is already well-known in the Philippines such that permission for its use by other than its
original owner will constitute a reproduction, imitation, translation or other infringement;

(b) that the trademark is used in commerce internationally, supported by proof that goods
bearing the trademark are sold on an international scale, advertisements, the establishment

CASES IN COMMERCIAL LAW REVIEW (J. Dimaampao) 4E 2017-2018 | 151

of factories, sales offices, distributorships, and the like, in different countries, including
volume or other measure of international trade and commerce;

(c) that the trademark is duly registered in the industrial property office(s) of another
country or countries, taking into consideration the dates of such registration;

(d) that the trademark has been long established and obtained goodwill and general
international consumer recognition as belonging to one owner or source;

(e) that the trademark actually belongs to a party claiming ownership and has the right to
registration under the provisions of the aforestated PARIS CONVENTION.

2. The word trademark, as used in this MEMORANDUM, shall include tradenames, service
marks, logos, signs, emblems, insignia or other similar devices used for identification and
recognition by consumers.

Rule 102. Criteria for determining whether a mark is well-known. In determining whether
a mark is well-known, the following criteria or any combination thereof may be taken into
account:
(a) the duration, extent and geographical area of any use of the mark, in particular, the
duration, extent and geographical area of any promotion of the mark, including
advertising or publicity and the presentation, at fairs or exhibitions, of the goods and/or
services to which the mark applies;
(b) the market share, in the Philippines and in other countries, of the goods and/or
services to which the mark applies;
(c) the degree of the inherent or acquired distinction of the mark;
(d) the quality-image or reputation acquired by the mark;
(e) the extent to which the mark has been registered in the world;
(f) the exclusivity of registration attained by the mark in the world;
(g) the extent to which the mark has been used in the world;
(h) the exclusivity of use attained by the mark in the world;
(i) the commercial value attributed to the mark in the world;
(j) the record of successful protection of the rights in the mark;
(k) the outcome of litigations dealing with the issue of whether the mark is a well-known
mark; and
(l) the presence or absence of identical or similar marks validly registered for or used on
identical or similar goods or services and owned by persons other than the person
claiming that his mark is a well-known mark. (Emphasis supplied)

Since "any combination" of the foregoing criteria is sufficient to determine that a mark is
well-known, it is clearly not necessary that the mark be used in commerce in the
Philippines. Thus, while under the territoriality principle a mark must be used in commerce
in the Philippines to be entitled to protection, internationally well-known marks are the
exceptions to this rule.

***

INDUSTRIAL REFRACTORIES CORP. OF THE PH. v. CA

G.R. No. 122174; October 3, 2002

FACTS: Respondent Refractories Corporation of the Philippines (RCP) is a corporation

duly organized on October 13, 1976 for the purpose of engaging in the business of
manufacturing, producing, selling, exporting and otherwise dealing in any and all refractory
bricks, its by-products and derivatives. On June 22, 1977, it registered its corporate and
business name with the Bureau of Domestic Trade.

Petitioner IRCP on the other hand, was incorporated on August 23, 1979 originally under
the name "Synclaire Manufacturing Corporation". It amended its Articles of Incorporation on
August 23, 1985 to change its corporate name to "Industrial Refractories Corp. of the
Philippines". It is engaged in the business of manufacturing all kinds of ceramics and other

CASES IN COMMERCIAL LAW REVIEW (J. Dimaampao) 4E 2017-2018 | 152

products, except paints and zincs. Both companies are the only local suppliers of
monolithic gunning mix.

Discovering that petitioner was using such corporate name, respondent RCP filed on April
14, 1988 with the Securities and Exchange Commission (SEC) a petition to compel
petitioner to change its corporate name on the ground that its corporate name is
confusingly similar with that of petitioner’s such that the public may be confused or
deceived into believing that they are one and the same corporation.
SEC ruled in favor of RCP. CA affirmed

ISSUE:
1. Whether the corporate names of IRCP and RCP are confusingly similar.
2. Whether the generic word rule would apply to support IRCP’s cause.

HELD:
Section 18 of the Corporation Code expressly prohibits the use of a corporate name which
is "identical or deceptively or confusingly similar to that of any existing corporation or to any
other name already protected by law or is patently deceptive, confusing or contrary to
existing laws". The policy behind the foregoing prohibition is to avoid fraud upon the public
that will have occasion to deal with the entity concerned, the evasion of legal obligations
and duties, and the reduction of difficulties of administration and supervision over
corporation.24

Pursuant thereto, the Revised Guidelines in the Approval of Corporate and Partnership
Names25 specifically requires that: (1) a corporate name shall not be identical, misleading
or confusingly similar to one already registered by another corporation with the
Commission;26 and (2) if the proposed name is similar to the name of a registered firm, the
proposed name must contain at least one distinctive word different from the name of the
company already registered.

To fall within the prohibition of the law, two requisites must be proven, to wit:
(1) that the complainant corporation acquired a prior right over the use of such corporate
name or priority of adoption
and (2) the proposed name is either: (a) identical, or (b) deceptively or confusingly similar
to that of any existing corporation or to any other name already protected by law; or (c)
patently deceptive, confusing or contrary to existing law.

Petitioner’s corporate name is "Industrial Refractories Corp. of the Phils.", while

respondent’s is "Refractories Corp. of the Phils." Obviously, both names contain the
identical words "Refractories", "Corporation" and "Philippines". The only word that
distinguishes petitioner from respondent RCP is the word "Industrial" which merely
identifies a corporation’s general field of activities or operations. We need not linger on
these two corporate names to conclude that they are patently similar that even with
reasonable care and observation, confusion might arise. 31 It must be noted that both cater
to the same clientele, i.e.¸ the steel industry. In fact, the SEC found that there were
instances when different steel companies were actually confused between the two,
especially since they also have similar product packaging.32 Such findings are accorded not
only great respect but even finality, and are binding upon this Court, unless it is shown that
it had arbitrarily disregarded or misapprehended evidence before it to such an extent as to
compel a contrary conclusion had such evidence been properly appreciated. 33 And even
without such proof of actual confusion between the two corporate names, it suffices that
confusion is probable or likely to occur.

While the word "refractories" is a generic term, its usage is not widespread and is limited
merely to the industry/trade in which it is used, and its continuous use by respondent RCP
for a considerable period has made the term so closely identified with it.

***

CASES IN COMMERCIAL LAW REVIEW (J. Dimaampao) 4E 2017-2018 | 153

Other LIP Cases:

I. LAW ON PATENTS

PEARL & DEAN (PHIL), INC. vs. SHOEMART, INC.

409 SCRA 231; August 15, 2003

DOCTRINE: What the law does not include, it excludes, and for the good reason: the light
box was not a literary or artistic piece which could be copyrighted under the copyright law.
And no less clearly, neither could the lack of statutory authority to make the light box
copyrightable be remedied by the simplistic act of entitling the copyright certificate issued
by the National Library as "Advertising Display Units."

FACTS: Petitioner Pearl and Dean (Phil.), Inc. is a corporation engaged in the manufacture
of advertising display units simply referred to as light boxes. Pearl and Dean was able to
secure a Certificate of Copyright Registration over the illuminated display units.

Sometime in 1985, Pearl and Dean negotiated with respondent Shoemart, Inc. (SMI) for the
lease and installation of the light boxes in SM City North Edsa. Since SM City North Edsa
was under construction at that time, SMI offered as an alternative, SM Makati and SM
Cubao, to which Pearl and Dean agreed. Only the contract for SM Makati, however, was
returned signed. However, in 1986, SMI rescinded the contract for SM Makati due to non-
performance of the terms thereof.

In 1988, Pearl and Dean trademark application for “Poster Ads” was approved; they used
the same trademark to advertise their light boxes.
Sometime in 1989, Pearl and Dean received reports that exact copies of its light boxes
were installed at SM City and in the fastfood section of SM Cubao. It further discovered that
respondent North Edsa Marketing Inc. (NEMI) is a sister company of SMI and was set up
primarily to sell advertising space in lighted display units located in SMI's different
branches. In the light of its discoveries, Pearl and Dean, sent a letter to both SMI and NEMI
enjoining them to cease using the subject light boxes and to remove the same from SMI's
establishments and the payment to Pearl and Dean of compensatory damages in the
amount of Twenty Million Pesos (P20,000,000.00).

Claiming that both SMI and NEMI failed to meet all its demands, Pearl and Dean filed a
case for infringement of trademark and copyright, unfair competition and damages. The
RTC ruled in favor of Pearl and Dean.

SM argued that it did not infringe on Pearl & Dean’s trademark because Pearl & Dean’s
trademark is only applicable to envelopes and stationeries and not to the type of ad spaces
owned by SM.SM also averred that “Poster Ads” is a generic term hence it is not subject to
trademark registration. SM also averred that the actual light boxes are not copyrightable.
The RTC ruled in favor of Pearl & Dean.

The CA reversed the trial court. It upheld SMI when it posited that what was copyrighted
were the technical drawings only, and not the light boxes themselves, and since the light
boxes cannot, by any stretch of the imagination, be considered as either prints, pictorial
illustrations, advertising copies, labels, tags or box wraps, to be properly classified as
copyrightable under the law. Hence, the present petition.

ISSUES:
1.WON the copyright extended to the light boxes themselves.
2.WON the owner of a registered trademark legally prevent others from using such
trademark if it is a mere abbreviation of a term descriptive of his goods, services or
business.

HELD:
1.NO. The Supreme Court affirmed the decision of the Court of Appeals and denied the
petition. According to the Court, petitioner Pearl & Dean secured its copyright under the

CASES IN COMMERCIAL LAW REVIEW (J. Dimaampao) 4E 2017-2018 | 154

classification class "O" work or under Section 2 (O) of P.D. 49. As such, petitioner's
copyright protection extended only to the technical drawings and not to the light box itself
because the latter was not at all in the category of "prints, pictorial illustrations, advertising
copies, labels, tags and box wraps."

While P & D indeed owned a valid copyright, the same could have referred only to the
technical drawings within the category of "pictorial illustrations." It could not have possibly
stretched out to include the underlying light box The strict application of the law's
enumeration in Section 2 of PD 49 prevented the Court from giving petitioner even a little
leeway, that is, even if its copyright certificate was entitled "Advertising Display Units."

What the law does not include, it excludes, and for the good reason: the light box was not a
literary or artistic piece which could be copyrighted under the copyright law.
The Court also ruled that petitioner could not legally prevent anyone from manufacturing or
commercially using its invention for the main reason that it never secured a patent for it.
The Court emphasized that to be able to effectively and legally preclude others from
copying and profiting from an invention, a patent is a primordial requirement.

No patent, no protection. The ultimate goal of a patent system is to bring new designs and
technologies into the public domain through disclosure. Ideas, once disclosed to the public
without the protection of a valid patent, are subject to appropriation without significant
restraint.

2. NO. This issue concerns the use by respondents of the mark "Poster Ads" which
petitioner's president said was a contraction of "poster advertising." P & D was able to
secure a trademark certificate for it, but one where the goods specified were "stationeries
such as letterheads, envelopes, calling cards and newsletters."

The words “Poster Ads” are a simple contraction of the generic term poster advertising. In
the absence of any convincing proof that “Poster Ads” has acquired a secondary meaning
in this jurisdiction, Pearl & Dean’s exclusive right to the use of “Poster Ads” is limited to
what is written in its certificate of registration, namely, stationeries.#CASTANEDA

***

PASCUAL GODINES vs. THE HONORABLE COURT OF APPEALS, SPECIAL FOURTH

DIVISION and SV-AGRO ENTERPRISES, INC.,
G.R. No. 97343 September 13, 1993

DOCTRINE: To determine whether the particular item falls within the literal meaning of the
patent claims, the court must juxtapose the claims of the patent and the accused product
within the overall context of the claims and specifications, to determine whether there is
exact identity of all material elements. (literal infringement)

An infringement also occurs when a device appropriates a prior invention by incorporating

its innovative concept and, albeit with some modification and change, performs
substantially the same function in substantially the same way to achieve substantially the
same result. (doctrine of equivalents)

FACTS: Letters Patent No. UM-2236 was issued by the Philippine Patent Office to one
Magdalena S. Villaruz on July 15, 1976. It covers a utility model for a hand tractor or power
tiller.

The above mentioned patent was acquired by SV-Agro Industries Enterprises, Inc., herein
private respondent, from Magdalena Villaruz, its chairman and president, by virtue of a
Deed of Assignment executed by the latter in its favor. SV-Agro Industries caused the
publication of the patent in Bulletin Today, a newspaper of general circulation.

Upon investigation, it discovered that power tillers similar to those patented by private
respondent were being manufactured and sold by petitioner herein. Consequently, private

CASES IN COMMERCIAL LAW REVIEW (J. Dimaampao) 4E 2017-2018 | 155

respondent notified Pascual Godines about the existing patent and demanded that the
latter stop selling and manufacturing similar power tillers. Upon petitioner's failure to comply
with the demand, SV-Agro Industries filed before the Regional Trial Court a complaint for
infringement of patent and unfair competition.

ISSUE: Whether or not Pascual Godines is liable for infringement of patent and unfair
competition

HELD: YES. Tests have been established to determine infringement. These are (a) literal
infringement; and (b) the doctrine of equivalents. In using literal infringement as a test, ". . .
resort must be had, in the first instance, to the words of the claim. If accused matter clearly
falls within the claim, infringement is made out and that is the end of it." To determine
whether the particular item falls within the literal meaning of the patent claims, the court
must juxtapose the claims of the patent and the accused product within the overall context
of the claims and specifications, to determine whether there is exact identity of all material
elements.

Moreover, it is also observed that petitioner also called his power tiller as a floating power
tiller. The patent issued by the Patent Office referred to a "farm implement but more
particularly to a turtle hand tractor having a vacuumatic housing float on which the engine
drive is held in place, the operating handle, the harrow housing with its operating handle
and the paddy wheel protective covering." It appears from the foregoing observation of the
trial court that these claims of the patent and the features of the patented utility model were
copied by petitioner. We are compelled to arrive at no other conclusion but that there was
infringement.
According to the doctrine of equivalents, "(a)n infringement also occurs when a device
appropriates a prior invention by incorporating its innovative concept and, albeit with some
modification and change, performs substantially the same function in substantially the
same way to achieve substantially the same result." The reason for the doctrine of
equivalents is that to permit the imitation of a patented invention which does not copy any
literal detail would be to convert the protection of the patent grant into a hollow and useless
thing. Such imitation would leave room for — indeed encourage — the unscrupulous
copyist to make unimportant and insubstantial changes and substitutions in the patent
which, though adding nothing, would be enough to take the copied matter outside the
claim, and hence outside the reach of the law. #CORREA

***

SMITH KLINE BECKMAN CORPORATION v. COURT OF APPEALS, and TRYCO

PHARMA CORPORATION
G.R. No. 12667; August 14, 2003

DOCTRINE: The Doctrine of Equivalents requires satisfaction of the function-means-and-

result test, the patentee having the burden to show that all three components of such
equivalency test are met. When the language of its claims is clear and distinct, the patentee
is bound thereby and may not claim anything beyond them.

FACTS: Smith Kline Beckman Corporation (petitioner), a corporation existing by virtue of

the laws of the state of Pennsylvania, United States of America (U.S.) and licensed to do
business in the Philippines, was granted Pantent No. 14561 over an invented compound
entitled "Methods and Compositions for Producing Biphasic Parasiticide Activity Using
Methyl 5 Propylthio-2-Benzimidazole Carbamate” for a term of 17 years. Such invention
was an active ingredient in fighting infections caused by gastrointestinal parasites and
lungworms in animals such as swine, sheep, cattle, goats, horses, and even pet animals.
Tryco Pharma Corporation (private respondent) is a domestic corporation that
manufactures, distributes and sells veterinary products including Impregon, a drug that has
Albendazole for its active ingredient and is claimed to be effective against gastro-intestinal
roundworms, lungworms, tapeworms and fluke infestation in carabaos, cattle and goats.
Smith Kline sued Tryco for infringement of patent and unfair competition claiming that its

CASES IN COMMERCIAL LAW REVIEW (J. Dimaampao) 4E 2017-2018 | 156

patent covers or includes the substance Albendazole such that private respondent, by
manufacturing, selling, using, and causing to be sold and used the drug Impregon without
its authorization, infringed Claims 2, 3, 4, 7, 8 and 9 of Letters Patent No. 14561. Tryco
averred that Letters Patent No. 14561 does not cover the substance Albendazole for
nowhere in it does that word appear; that even if the patent were to include Albendazole,
such substance is unpatentable; that the Bureau of Food and Drugs allowed it to
manufacture and market Impregon with Albendazole as its known ingredient; that there is
no proof that it passed off in any way its veterinary products as those of petitioner; that
Letters Patent No. 14561 is null and void, the application for the issuance thereof having
been filed beyond the one year period from the filing of an application abroad for the same
invention covered thereby, in violation of Section 15 of Republic Act No. 165 (The Patent
Law); and that petitioner is not the registered patent holder. The Trial Court rendered its
decision in favor of respondent Tryco which was affirmed by the Court of Appeals.

ISSUE: Whether or not Tryco committed patent infringement to the prejudice of petitioner
Smith Kline.

HELD: NO. The burden of proof to substantiate a charge for patent infringement rests on
the plaintiff. In the case at bar, petitioner’s evidence consists primarily of its Letters Patent
No. 14561, and the testimony of Dr. Orinion, its general manager in the Philippines for its
Animal Health Products Division, by which it sought to show that its patent for the
compound methyl 5 propylthio-2-benzimidazole carbamate also covers the substance
Albendazole. From a reading of the 9 claims of Letters Patent No. 14561 in relation to the
other portions thereof, no mention is made of the compound Albendazole. When the
language of its claims is clear and distinct, the patentee is bound thereby and may not
claim anything beyond them. And so are the courts bound which may not add to or detract
from the claims matters not expressed or necessarily implied, nor may they enlarge the
patent beyond the scope of that which the inventor claimed and the patent office allowed,
even if the patentee may have been entitled to something more than the words it had
chosen would include. the mere absence of the word Albendazole in Letters Patent No.
14561 is not determinative of Albendazole’s non-inclusion in the claims of the patent. While
Albendazole is admittedly a chemical compound that exists by a name different from that
covered in petitioner’s letters patent, the language of Letter Patent No. 14561 fails to yield
anything at all regarding Albendazole. And no extrinsic evidence had been adduced to
prove that Albendazole inheres in petitioner’s patent in spite of its omission therefrom or
that the meaning of the claims of the patent embraces the same. While petitioner concedes
that the mere literal wordings of its patent cannot establish private respondent’s
infringement, it urges this Court to apply the doctrine of equivalents.

The doctrine of equivalents provides that an infringement also takes place when a device
appropriates a prior invention by incorporating its innovative concept and, although with
some modification and change, performs substantially the same function in substantially
the same way to achieve substantially the same result.Yet again, a scrutiny of petitioner’s
evidence fails to convince this Court of the substantial sameness of petitioner’s patented
compound and Albendazole. While both compounds have the effect of neutralizing
parasites in animals, identity of result does not amount to infringement of patent unless
Albendazole operates in substantially the same way or by substantially the same means as
the patented compound, even though it performs the same function and achieves the same
result. In other words, the principle or mode of operation must be the same or
substantially the same.

The doctrine of equivalents thus requires satisfaction of the function-means-and-result test,

the patentee having the burden to show that all three components of such equivalency test
are met. Petitioner’s evidence fails to explain how Albendazole is in every essential detail
identical to methyl 5 propylthio-2-benzimidazole carbamate. Apart from the fact that
Albendazole is an anthelmintic agent like methyl 5 propylthio-2-benzimidazole carbamate,
nothing more is asserted and accordingly substantiated regarding the method or means by
which Albendazole weeds out parasites in animals, thus giving no information on whether
that method is substantially the same as the manner by which petitioner’s compound
works. The testimony of Dr. Orinion lends no support to petitioner’s cause, he not having

CASES IN COMMERCIAL LAW REVIEW (J. Dimaampao) 4E 2017-2018 | 157

been presented or qualified as an expert witness who has the knowledge or expertise on
the matter of chemical compounds. #FRANCISCO

***

PHIL PHARMAWEALTH, INC. vs PFIZER, INC. and PFIZER (PHIL.) INC.

GR No. 167715; Nov 17, 2010

DOCTRINE: RA 165 Sec 37 provides that a patentee shall have the exclusive right to
make, use and sell the patented machine, article or product, and to use the patented
process for the purpose of industry or commerce, throughout the territory of the Philippines
for the term of the patent; and such maing, using, or selling by any person without the
authorization of the patentee constitutes infringement of the patent. It is clear that the
exclusive right of a patentee to make, use and sell a patented product, article or process
exists only during the term of the patent.

FACTS: Pfizer is the registered owner of Patent No. 21116 which is valid until July 16,
2004, such patent covers Sulbactam Ampicillin. Pfizer is marketing Sulbactam Ampicillin
under the brand name “Unasyn” which come in oral and IV formulas. The sole and
exclusive distributor of Unasyn products in the Philippines is Zuellig Pharma Corporation,
pursuant to Distribution Services Agreement with Pfizer. In Junary 2003, complainants
came to know that Phil Pharmaweatlh submitted bids for the supply of Sulbactam Ampicillin
to several hospitals without the consent of Pfizer and in violation of the Pfrizer’s intellectual
property rights. Complainant demanded that hospitals and Phil Pharmawealth cease and
desist from accepting bids, however, in gross and bad faith, Phil Pharmawealth and
hospitals named ignored the said demands. Pfizer filed a complaint with RTC for
infringement and unfair competition with damages against herein petitioner. Pfizer prayed
for the issuance of temporary restraining order and preliminary injunction to prevent herein
petitioner from importing, distributing, selling or offering for sale Sulbactum Ampicillin.
Petitioner filed a Motion to Dismiss the case for being moot and academic, contending that
Pfizer’s patent had already lapsed, that the patent right sought to be protected has been
extinguished due to lapse of the patent license. Phil Pharmawealth claims that since
Pfizer’s patent expired in July 16, 2004, the latter no longer possess any right or monopoly
and as such, there is no more basis for the issuance of restraining order or injunction
against petitioner insofar as the disputed patent is concerned.

ISSUE: Whether or not Pfizer’s exclusive right to monopolize the subject matter of the
patent exists only within the term of the patent.

HELD: YES. RA 165 Sec 37 provides that a patentee shall have the exclusive right to
make, use and sell the patented machine, article or product, and to use the patented
process for the purpose of industry or commerce, throughout the territory of the Philippines
for the term of the patent; and such making, using, or selling by any person without the
authorization of the patentee constitutes infringement of the patent. It is clear that the
exclusive right of a patentee to make, use and sell a patented product, article or process
exists only during the term of the patent.

The Court agrees with Phil Pharmawealth that after July 16, 2004, respondents no longer
possess the exclusive right to make, use and sell the articles or products covered by Patent
No. 21116.#GASPI

***

CASES IN COMMERCIAL LAW REVIEW (J. Dimaampao) 4E 2017-2018 | 158

II. LAW ON TRADEMARKS, SERVICE MARKS AND TRADENAMES

CANON KABUSHIKI KAISHA vs. COURT OF APPEALS and NSR RUBBER

CORPORATION
G.R. No. 120900; July 20, 2000

DOCTRINE: The term "trademark" is defined by RA 166, the Trademark Law, as including
"any word, name, symbol, emblem, sign or device or any combination thereof adopted and
used by a manufacturer or merchant to identify his goods and distinguish them for those
manufactured, sold or dealt in by others." Tradename is defined by the same law as
including "individual names and surnames, firm names, tradenames, devices or words used
by manufacturers, industrialists, merchants, agriculturists, and others to identify their
business, vocations, or occupations; the names or titles lawfully adopted and used by
natural or juridical persons, unions, and any manufacturing, industrial, commercial,
agricultural or other organizations engaged in trade or commerce." Simply put, a trade
name refers to the business and its goodwill; a trademark refers to the goods.

FACTS: Private respondent NSR Rubber Corporation filed an application for registration of
the mark CANON for sandals in the Bureau of Patents, Trademarks, and Technology
Transfer (BPTTT). A Verified Notice of Opposition was filed by petitioner, a foreign
corporation duly organized and existing under the laws of Japan, alleging that it will be
damaged by the registration of the trademark CANON in the name of private respondent.

The evidence presented by petitioner consisted of its certificates of registration for the mark
CANON in various countries covering goods belonging to class 2 (paints, chemical
products, toner, and dye stuff). Petitioner also submitted in evidence its Philippine
Trademark Registration No. 39398, showing its ownership over the trademark CANON also
under class 2.
BPTTT issued its decision dismissing the opposition of petitioner and giving due course to
private respondents application for the registration of the trademark CANON. Petitioner
appealed the decision of the BPTTT with public respondent Court of Appeals that
eventually affirmed the decision of BPTTT. Hence, this petition for review.

ISSUES:
1) Whether or not petitioner is entitled to exclusive use of the mark canon because it is its
trademark.
2) Whether or not petitioner is entitled to the exclusive use of CANON because it forms part
of its corporate name, protected by the Paris Convention.

RULING:
1) NO. Ordinarily, the ownership of a trademark or tradename is a property right that the
owner is entitled to protect as mandated by the Trademark Law. However, when a
trademark is used by a party for a product in which the other party does not deal, the use of
the same trademark on the latter’s product cannot be validly objected to.
The certificates of registration for the trademark CANON in other countries and in the
Philippines as presented by petitioner, clearly showed that said certificates of registration
cover goods belonging to class 2 (paints, chemical products, toner, dyestuff). On this basis,
the BPTTT correctly ruled that since the certificate of registration of petitioner for the
trademark CANON covers class 2 (paints, chemical products, toner, dyestuff), private
respondent can use the trademark CANON for its goods classified as class 25 (sandals).
Clearly, there is a world of difference between the paints, chemical products, toner, and
dyestuff of petitioner and the sandals of private respondent. The certificate of registration
confers upon the trademark owner the exclusive right to use its own symbol only to those
goods specified in the certificate, subject to the conditions and limitations stated therein.
Thus, the exclusive right of petitioner in this case to use the trademark CANON is limited to
the products covered by its certificate of registration.

2) NO. The term "trademark" is defined by RA 166, the Trademark Law, as including "any
word, name, symbol, emblem, sign or device or any combination thereof adopted and used
by a manufacturer or merchant to identify his goods and distinguish them for those

CASES IN COMMERCIAL LAW REVIEW (J. Dimaampao) 4E 2017-2018 | 159

manufactured, sold or dealt in by others." Tradename is defined by the same law as
including "individual names and surnames, firm names, tradenames, devices or words used
by manufacturers, industrialists, merchants, agriculturists, and others to identify their
business, vocations, or occupations; the names or titles lawfully adopted and used by
natural or juridical persons, unions, and any manufacturing, industrial, commercial,
agricultural or other organizations engaged in trade or commerce." Simply put, a trade
name refers to the business and its goodwill; a trademark refers to the goods.

The Convention of Paris for the Protection of Industrial Property, otherwise known as the
Paris Convention, of which both the Philippines and Japan, the country of petitioner, are
signatories, is a multilateral treaty that seeks to protect industrial property consisting of
patents, utility models, industrial designs, trademarks, service marks, trade names and
indications of source or appellations of origin, and at the same time aims to repress unfair
competition. The controlling doctrine with respect to the applicability of Article 8 of the Paris
Convention is that established in Kabushi Kaisha Isetan vs. Intermediate Appellate Court.
As pointed out by the BPTTT:
"Regarding the applicability of Article 8 of the Paris Convention, this Office believes
that there is no automatic protection afforded an entity whose tradename is alleged
to have been infringed through the use of that name as a trademark by a local entity.

In Kabushiki Kaisha Isetan vs. The Intermediate Appellate Court, et. al., G.R. No. 75420,
15 November 1991, the Honorable Supreme Court held that:
The Paris Convention for the Protection of Industrial Property does not automatically
exclude all countries of the world which have signed it from using a tradename which
happens to be used in one country. To illustrate if a taxicab or bus company in a
town in the United Kingdom or India happens to use the tradename "Rapid
Transportation", it does not necessarily follow that "Rapid" can no longer be
registered in Uganda, Fiji, or the Philippines.
This office is not unmindful that in the Treaty of Paris for the Protection of Intellectual
Property regarding well-known marks and possible application thereof in this case.
Petitioner, as this office sees it, is trying to seek refuge under its protective mantle,
claiming that the subject mark is well known in this country at the time the then
application of NSR Rubber was filed.
However, the then Minister of Trade and Industry, the Hon. Roberto V. Ongpin,
issued a memorandum dated 25 October 1983 to the Director of Patents, a set of
guidelines in the implementation of Article 6bis (sic) of the Treaty of Paris. These
conditions are:

a) the mark must be internationally known;

b) the subject of the right must be a trademark, not a patent or copyright or anything
else;
c ) the mark must be for use in the same or similar kinds of goods; and
d) the person claiming must be the owner of the mark (The Parties Convention
Commentary on the Paris Convention. Article by Dr. Bogsch, Director General of the
World Intellectual Property Organization, Geneva, Switzerland, 1985)

From the set of facts found in the records, it is ruled that the Petitioner failed to comply with
the third requirement of the said memorandum that is the mark must be for use in the same
or similar kinds of goods. The Petitioner is using the mark "CANON" for products belonging
to class 2 (paints, chemical products) while the Respondent is using the same mark for
sandals (class 25). Hence, Petitioners contention that its mark is well-known at the time the
Respondent filed its application for the same mark should fail. " #GERONIMO

***

CASES IN COMMERCIAL LAW REVIEW (J. Dimaampao) 4E 2017-2018 | 160

 PRIBHDAS J. MIRPURI vs. COURT OF APPEALS, DIRECTOR OF PATENTS and the
BARBIZON CORPORATION
G.R. No. 114508 / November 19, 1999

DOCTRINE: The purpose of trademarks is three-fold:

(a) to indicate origin or ownership of the articles to which they are attached;
(b) to guarantee that those articles come up to a certain standard of quality; and
(c) to advertise the articles they symbolized.

FACTS: On June 15, 1970, one Lolita Escobar, the predecessor-in-interest of petitioner
Pribhdas J. Mirpuri, filed an application with the Bureau of Patents for the registration of the
trademark "Barbizon" for use in brassieres and ladies undergarments. Escobar alleged that
she had been manufacturing and selling these products under the firm name "L & BM
Commercial" since March 3, 1970.

Private respondent Barbizon Corporation, a corporation organized and doing business

under the laws of New York, U.S.A., opposed the application claiming that the mark
BARBIZON of respondent- applicant is confusingly similar to the trademark BARBIZON
which opposer owns and has not abandoned; that opposer will be damaged by the
registration of the mark BARBIZON and its business reputation and goodwill will suffer
great and irreparable injury; that the respondent-applicant's use of the said mark
BARBIZON which resembles the trademark used and owned by opposer, constitutes an
unlawful appropriation of a mark previously used in the Philippines and not abandoned and
therefore a statutory violation of Section 4 (d) of Republic Act No. 166, as amended.

The Director of Patents rendered judgment dismissing the opposition and giving due course
to Escobar's application. Subsequently, Escobar assigned all her rights and interest over
the trademark to petitioner Pribhdas J. Mirpuri who, under his firm name then, the "Bonito
Enterprises," was the sole and exclusive distributor of Escobar's "Barbizon" products.
In 1979, Escobar failed to file with the Bureau of Patents the Affidavit of Use of the
trademark required under Section 12 of Republic Act (R.A.) No. 166, the Philippine
Trademark Law. Due to this failure, the Bureau of Patents cancelled Escobar's certificate of
registration.

Subsequently, Escobar reapplied for registration of the cancelled trademark. Mirpuri filed
his own application for registration of Escobar's trademark. Escobar later assigned her
application to herein petitioner and this application was opposed by Barbizon Corporation.

Private respondent opposed again. This time it alleged (1) that the said trademark was
registered with the US Patent Office; (2) that it is entitled to protection as well-known mark
under Article 6 bis of the Paris Convention, EO 913 and the two Memoranda of the Minister
of Trade and Industry and (3) that its use on the same class of goods amounts to a
violation of the Trademark Law and Art. 189 of the RPC. Petitioner raised the defense of
Res Judicata.

ISSUE: Whether or not private respondent is barred from opposing petitioner’s application.

HELD: NO. The issue of ownership of the trademark was not raised in IPC 686. IPC 2049
raised the issue of ownership, the first registration and use of the trademark in the US and
other countries, and the international recognition of the trademark established by extensive
use and advertisement of respondents products for over 40 years here and abroad. These
are different from the issues of confessing similarity and damage in IPC 686. The issue of
prior use may have been raised in IPC 686 but this claim was limited to prior use in the
Philippines only. Prior use in IPC 2049 stems from the respondents claims originator of the
word and symbol “Barbizon”, as the first and registered user of the mark attached to its
products which have been sold and advertised would arise for a considerable number of
years prior to petitioner’s first application. Indeed, these are substantial allegations that
raised new issues and necessarily gave respondents a new cause of action.

CASES IN COMMERCIAL LAW REVIEW (J. Dimaampao) 4E 2017-2018 | 161

Here, SC recognized the need for a brief background on the function and historical
development of trademarks and trademark law. Also, what was mentioned in the book of
JDim were only those found in the doctrine above which are part of the historical
background discussion in this case.

A "trademark" is defined under R.A. 166, the Trademark Law, as including "any word,
name, symbol, emblem, sign or device or any combination thereof adopted and used by a
manufacturer or merchant to identify his goods and distinguish them from those
manufactured, sold or dealt in by others.” This definition has been simplified in R.A. No.
8293, the Intellectual Property Code of the Philippines, which defines a "trademark" as "any
visible sign capable of distinguishing goods." In Philippine jurisprudence, the function of a
trademark is to point out distinctly the origin or ownership of the goods to which it is affixed;
to secure to him, who has been instrumental in bringing into the market a superior article of
merchandise, the fruit of his industry and skill; to assure the public that they are procuring
the genuine article; to prevent fraud and imposition; and to protect the manufacturer against
substitution and sale of an inferior and different article as his product.

Modern authorities on trademark law view trademarks as performing three distinct

functions: (1) they indicate origin or ownership of the articles to which they are attached; (2)
they guarantee that those articles come up to a certain standard of quality; and (3) they
advertise the articles they symbolize.
Today, the trademark is not merely a symbol of origin and goodwill; it is often the most
effective agent for the actual creation and protection of goodwill. It imprints upon the public
mind an anonymous and impersonal guaranty of satisfaction, creating a desire for further
satisfaction. In other words, the mark actually sells the goods. The mark has become the
"silent salesman," the conduit through which direct contact between the trademark owner
and the consumer is assured. It has invaded popular culture in ways never anticipated that
it has become a more convincing selling point than even the quality of the article to which it
refers. #JAMES

***

ECOLE DE CUISINE MANILLE (CORDON BLEU OF THE PHILIPPINES), INC., vs.

RENAUD COINTREAU & CIE and LE CORDON BLEU INT'L., B.V.
G.R. No. 185830 June 5, 2013

DOCTRINE: Under the Paris Convention, the Philippines is obligated to assure nationals of
the signatory-countries that they are afforded an effective protection against violation of
their intellectual property rights in the Philippines in the same way that their own countries
are obligated to accord similar protection to Philippine nationals. "Thus, under Philippine
law, a trade name of a national of a State that is a party to the Paris Convention, whether or
not the trade name forms part of a trademark, is protected "without the obligation of filing or
registration.’"

FACTS: On June 21, 1990, Cointreau, a partnership registered under the laws of France,
filed before the (now defunct) Bureau of Patents, Trademarks, and Technology Transfer
(BPTTT) of the Department of Trade and Industry a trademark application for the mark "LE
CORDON BLEU & DEVICE" for the Purposes of Registrations of Marks ("Nice
Classification") (subject mark). On July 23, 1993, petitioner Ecole De Cuisine Manille, Inc.
(Ecole) filed an opposition to the subject application, averring that: (a) it is the owner of the
mark "LE CORDON BLEU, ECOLE DE CUISINE MANILLE," which it has been using since
1948 in cooking and other culinary activities, including in its restaurant business.

During the pendency of the proceedings, Cointreau was issued Certificates of Registration
Nos. 60631 and 54352 for the marks "CORDON BLEU & DEVICE" and "LE CORDON
BLEU PARIS 1895 & DEVICE" for goods and services under classes 21 and 41 of the Nice
Classification, respectively.

CASES IN COMMERCIAL LAW REVIEW (J. Dimaampao) 4E 2017-2018 | 162

The Bureau of Legal Affairs (BLA) of the IPO sustained Ecole’s opposition to the subject
mark, and found that the subject mark, which was the predecessor of the mark "LE
CORDON BLEU MANILLE" has been known and used in the Philippines since 1948 and
registered under the name "ECOLE DE CUISINE MANILLE (THE CORDON BLEU OF THE
PHILIPPINES), INC." on May 9, 1980.

Aggrieved, Cointreau filed an appeal with the IPO Director General. The IPO Director
General reversed and set aside the BLA’s decision. Ecole filed a Petition for Review dated
June 7, 2008 with the CA. In its Decision dated December 23, 2008, the CA affirmed the
IPO Director General’s Decision in toto. It declared Cointreau as the true and actual owner
of the subject mark with a right to register the same in the Philippines under Section 37 of
R.A. No. 166, having registered such mark in its country of origin on November 25, 1986.

ISSUE: Whether or not Cointreau is the true and lawful owner of the subject mark and thus,
entitled to have the same registered under its name.

HELD: At this point, it should be noted that the instant case shall be resolved under the
provisions of the old Trademark Law, R.A. No. 166, which was the law in force at the time
of Cointreau’s application for registration of the subject mark.

Under Section 2 of R.A. No. 166, in order to register a trademark, one must be the owner
thereof and must have actually used the mark in commerce in the Philippines for two (2)
months prior to the application for registration. Section 2-A of the same law sets out to
define how one goes about acquiring ownership thereof. Under Section 2-A, it is clear that
actual use in commerce is also the test of ownership but the provision went further by
saying that the mark must not have been so appropriated by another.

Additionally, it is significant to note that Section 2-A does not require that the actual use of
a trademark must be within the Philippines. Thus, as correctly mentioned by the CA, under
R.A. No. 166, one may be an owner of a mark due to its actual use but may not yet have
the right to register such ownership here due to the owner’s failure to use the same in the
Philippines for two (2) months prior to registration.

Nevertheless, foreign marks which are not registered are still accorded protection against
infringement and/or unfair competition. At this point, it is worthy to emphasize that the
Philippines and France, Cointreau’s country of origin, are both signatories to the Paris
Convention for the Protection of Industrial Property (Paris Convention).

In view of the foregoing obligations under the Paris Convention, the Philippines is obligated
to assure nationals of the signatory-countries that they are afforded an effective protection
against violation of their intellectual property rights in the Philippines in the same way that
their own countries are obligated to accord similar protection to Philippine nationals. "Thus,
under Philippine law, a trade name of a national of a State that is a party to the Paris
Convention, whether or not the trade name forms part of a trademark, is protected "without
the obligation of filing or registration.’"

In the instant case, it is undisputed that Cointreau has been using the subject mark in
France since 1895, prior to Ecole’s averred first use of the same in the Philippines in 1948,
of which the latter was fully aware thereof. In fact, Ecole’s present directress, Ms. Lourdes
L. Dayrit (and even its foundress, Pat Limjuco Dayrit), had trained in Cointreau’s Le Cordon
Bleu culinary school in Paris, France. Cointreau was likewise the first registrant of the said
mark under various classes, both abroad and in the Philippines, having secured Home
Registration No. 1,390,912 dated November 25, 1986 from its country of origin, as well as
several trademark registrations in the Philippines.

It is thus clear that at the time Ecole started using the subject mark, the same was already
being used by Cointreau, albeit abroad, of which Ecole’s directress was fully aware, being
an alumna of the latter’s culinary school in Paris, France. Hence, Ecole cannot claim any
tinge of ownership whatsoever over the subject mark as Cointreau is the true and lawful
owner thereof. As such, the IPO Director General and the CA were correct in declaring

CASES IN COMMERCIAL LAW REVIEW (J. Dimaampao) 4E 2017-2018 | 163

Cointreau as the true and lawful owner of the subject mark and as such, is entitled to have
the same registered under its name. #LOPEZ

***

ASIA BREWERY, INC. vs. THE HON. COURT OF APPEALS and SAN MIGUEL
CORPORATION
G.R. No. 103543 July 5, 1993

DOCTRINE: Infringement is determined by the "test of dominancy" rather than by

differences or variations in the details of one trademark and of another. Hence, there is no
infringement if absolutely no similarity in the dominant features of both trademarks are
present.

FACTS: San Miguel Corporation (SMC) filed a complaint against Asia Brewery Inc. (ABI)
for infringement of trademark and unfair competition on account of the latter's BEER PALE
PILSEN or BEER NA BEER product which has been competing with SMC's SAN MIGUEL
PALE PILSEN for a share of the local beer market. RTC dismissed the complaint because
ABI "has not committed trademark infringement or unfair competition against" SMC. SMC
appealed to the CA which reversed the RTC’s decision finding Asia Brewery Incorporated
GUILTY of infringement of trademark and unfair competition. ABI appealed to this Court by
a petition for certiorari under Rule 45 of the Rules of Court.

ISSUE: Does ABI infringes SMC's trademark: San Miguel Pale Pilsen with Rectangular
Hops and Malt Design, and thereby commits unfair competition against the latter.

HELD: NO. Infringement is determined by the "test of dominancy" rather than by

differences or variations in the details of one trademark and of another. Infringement of
trademark is a form of unfair competition. Sec. 22 of RA 166/ Trademark Law, defines what
constitutes infringement which implies that only registered trade marks, trade names and
service marks are protected against infringement or unauthorized use by another or others.
The use of someone else's registered trademark, trade name or service mark is
unauthorized, hence, actionable, if it is done "without the consent of the registrant.
In the present case, there is hardly any dispute that the dominant feature of SMC's
trademark is the name of the product: SAN MIGUEL PALE PILSEN, written in white Gothic
letters with elaborate serifs at the beginning and end of the letters "S" and "M" on an amber
background across the upper portion of the rectangular design. On the other hand, the
dominant feature of ABI's trademark is the name: BEER PALE PILSEN, with the word
"Beer" written in large amber letters, larger than any of the letters found in the SMC label.
The trial court perceptively observed that the word "BEER" does not appear in SMC's
trademark, just as the words "SAN MIGUEL" do not appear in ABI's trademark. Hence,
there is absolutely no similarity in the dominant features of both trademarks.

Neither in sound, spelling or appearance can BEER PALE PILSEN be said to be

confusingly similar to SAN MIGUEL PALE PILSEN. No one who purchases BEER PALE
PILSEN can possibly be deceived that it is SAN MIGUEL PALE PILSEN. No evidence
whatsoever was presented by SMC proving otherwise.

Petitioner ABI has neither infringed SMC's trademark nor committed unfair competition with
the latter's SAN MIGUEL PALE PILSEN product. While its BEER PALE PILSEN admittedly
competes with the latter in the open market, that competition is neither unfair nor
fraudulent. Hence, we must deny SMC's prayer to suppress it. #ONG

***

CASES IN COMMERCIAL LAW REVIEW (J. Dimaampao) 4E 2017-2018 | 164

 EMERALD MANUFACTURING CORPORATION VS. CA, BUREAU OF PATENTS,
TRADEMARKS AND TECHNOLOGY TRANSFER AND H.D. LEE COMPANY, INC.
G.R.No.100098; December 29,1995

DOCTRINE: The essential element of infringement is colorable imitation, which has been
defined as "such a close or ingenious imitation as to be calculated to deceive ordinary
purchasers, or such resemblance of the infringing mark to the original as to deceive an
ordinary purchaser giving such attention as a purchaser usually gives, and to cause him to
purchase the one supposing it to be the other."

In the case of DyBuncio v. Tan Tiao Bok, the term “ordinary purchaser” was defined as one
"accustomed to buy, and therefore to some extent familiar with, the goods in question.
Therefore, the test of fraudulent simulation is to be found in the likelihood of the deception
of some persons in some measure acquainted with an established design and desirous of
purchasing the commodity with which that design has been associated. The test is not
found in the deception, or the possibility of deception, of the person who knows nothing
about the design which has been counterfeited, and who must be indifferent between that
and the other. The simulation, in order to be objectionable, must be such as appears likely
to mislead the ordinary intelligent buyer who has a need to supply and is familiar with the
article that he seeks to purchase.

FACTS: Private respondent H.D. Lee Co., Inc., a foreign corporation organized under the
laws of Delaware, U.S.A., filed a petition for cancellation of registration for the trademark
“STYLISTIC MR. LEE” used on skirts, jeans, blouses, socks, dresses, among other goods
under Class 25 issued in the name of petitioner Emerald Garment Manufacturing
Corporation, a domestic corporation organized and existing under Philippine laws. It
contends that petitioner’s trademark ‘so closely resembled its own trademark ‘LEE’
previously registered and used in the Philippines and not abandoned, as to be likely to
cause confusion, mistake and deception on the part of the purchasing public as to the
origin of the goods. In its answer, petitioner contended that its trademark was entirely and
unmistakably different from that of private respondent and that its certificate of registration
was legally and validly granted.

The Director of Patents granted private respondent’s petition for cancellation and
opposition to registration. It found private respondent to be the prior registrant of the
trademark “LEE” in the Philippines and that it had been using said mark in the Philippines.
Using the test of dominancy, the Director of Patents declared that petitioner’s trademark
was confusingly similar to private respondent’s mark because “it is the word ‘Lee’ which
draws the attention of the buyer and leads him to conclude that the goods originated from
the same manufacturer, and it is the dominant feature of the mark”.

On appeal to the CA, the latter affirmed the Director of Patents’ decision, and applied the
dominancy test in determining whether or not a trademark causes confusion and is likely to
deceive the public. It ruled that the word “LEE” is the most prominent and distinctive feature
of the appellant’s trademark and all of the appellee’s “LEE” trademarks. Further, that said
word draws the attention of the buyer and leads him to conclude that the goods originated
from the same manufacturer. .

ISSUE: Whether or not petitioner’s trademark “STYLISTIC MR. LEE” is confusingly similar
with the private respondent’s trademarks “LEE or LEE-RIDERs, LEE-LEENS and LEE-
SURES”

HELD: NO.In determining whether the trademarks are confusingly similar, a comparison of
the words is not the only determinant factor. The trademarks in their entirety as they appear
in their respective labels or hang tags must also be considered in relation to the goods to
which they are attached. The discerning eye of the observer must focus not only on the
predominant words but also on the other features appearing in both labels in order that he
may draw his conclusion whether one is confusingly similar to the other.

CASES IN COMMERCIAL LAW REVIEW (J. Dimaampao) 4E 2017-2018 | 165

Applying the holistic test, the Court considered the trademarks involved as a whole and rule
that petitioner's "STYLISTIC MR. LEE" is not confusingly similar to private respondent's
"LEE" trademark.

Petitioner's trademark is the whole "STYLISTIC MR. LEE." Although on its label the word
"LEE" is prominent, the trademark should be considered as a whole and not piecemeal.
The dissimilarities between the two marks become conspicuous, noticeable and substantial
enough to matter especially in the light of the following variables that must be factored in.

First, the products involved in the case at bar are, in the main, various kinds of jeans.
These are not your ordinary household items like catsup, soy sauce or soap which are of
minimal cost. Maong pants or jeans are not inexpensive. Accordingly, the casual buyer is
predisposed to be more cautious and discriminating in and would prefer to mull over his
purchase. Confusion and deception, then, is less likely.

Second, like his beer, the average Filipino consumer generally buys his jeans by brand. He
does not ask the sales clerk for generic jeans but for, say, a Levis, Guess, Wrangler or
even an Armani. He is, therefore, more or less knowledgeable and familiar with his
preference and will not easily be distracted.

Finally, in line with the foregoing discussions, more credit should be given to the "ordinary
purchaser." Cast in this particular controversy, the ordinary purchaser is not the "completely
unwary consumer" but is the "ordinarily intelligent buyer" considering the type of product
involved.

In the case of in the case of DyBuncio vs. Tan Tiao Bok, the term "ordinary purchaser"was
defined as one "accustomed to buy, and therefore to some extent familiar with, the goods in
question. The test of fraudulent simulation is to be found in the likelihood of the deception
of some persons in some measure acquainted with an established design and desirous of
purchasing the commodity with which that design has been associated. The test is not
found in the deception, or the possibility of deception, of the person who knows nothing
about the design which has been counterfeited, and who must be indifferent between that
and the other. The simulation, in order to be objectionable, must be such as appears likely
to mislead the ordinary intelligent buyer who has a need to supply and is familiar with the
article that he seeks topurchase."

As the Court has previously intimated the issue of confusing similarity between trademarks
is resolved by considering the distinct characteristics of each case. In this case, taking into
account these unique factors, the Court concluded that the similarities in the trademarks in
question are not sufficient as to likely cause deception and confusion tantamount to
infringement. #RECINTO

***

DEL MONTE CORPORATION and PHILIPPINE PACKING CORPORATION

vs. COURT OF APPEALS and SUNSHINE SAUCE MANUFACTURING INDUSTRIES
G.R. No. L-78325; January 25, 1990

DOCTRINES:
1) The question is not whether the two articles are distinguishable by their label when set
side by side but whether the general confusion made by the article upon the eye of the
casual purchaser who is unsuspicious and off his guard, is such as to likely result in his
confounding it with the original. As observed in several cases, the general impression of
the ordinary purchaser, buying under the normally prevalent conditions in trade and giving
the attention such purchasers usually give in buying that class of goods is the touchstone.

2) Registration under the Supplemental Register is not a basis for a case of infringement
because unlike registration under the Principal Register, it does not grant exclusive use of
the patent.

CASES IN COMMERCIAL LAW REVIEW (J. Dimaampao) 4E 2017-2018 | 166

3) The male shopper is worse as he usually does not bother about such distinctions.

FACTS: Petitioner Del Monte Corporation is a foreign company organized under the laws
of the United States and not engaged in business in the Philippines. Del Monte granted
Philpack the right to manufacture, distribute and sell in the Philippines various agricultural
products, including catsup, under the Del Monte trademark and logo. The catsup bottle
configuration was granted Certificate of Trademark Registration under the Supplemental
Register.

Respondent Sunshine Sauce Manufacturing Industries was issued a Certificate of

Registration to engage in the manufacture, packing, distribution and sale of various kinds of
sauce, identified by the logo Sunshine Fruit Catsup. The product itself was contained in Del
Monte bottles, which the private respondent bought from the junk shops for recycling.

Having received reports that the private respondent was using its exclusively designed
bottles and a logo confusingly similar to Del Monte's, Philpack warned it to desist from
doing so on pain of legal action. Thereafter, claiming that the demand had been ignored,
Philpack and Del Monte filed a complaint against the private respondent for infringement of
trademark and unfair competition.

The Regional Trial Court of Makati dismissed the complaint. It held that there were
substantial differences in seven categories from shape of label to the words and colors
between the logos or trademarks of the parties and the complainants had failed to establish
the defendant's malice or bad faith, which was an essential element of infringement of
trademark or unfair competition. CA affirmed the decision in toto.

ISSUES:
1) Whether or not the RTC and CA properly used the side by side comparison of the
trademarks and logos as a final test of similarity.
2) Whether or not there is unfair competition based on the use of the bottles.

HELD:
1) NO. The Supreme Court ruled that the question is not whether the two articles are
distinguishable by their label when set side by side but whether the general confusion
made by the article upon the eye of the casual purchaser who is unsuspicious and off his
guard, is such as to likely result in his confounding it with the original. As observed in
several cases, the general impression of the ordinary purchaser, buying under the normally
prevalent conditions in trade and giving the attention such purchasers usually give in
buying that class of goods is the touchstone.

The Court recognized that there really are distinctions between the designs of the logos or
trademarks of Del Monte and Sunshine Sauce. However, it has been that side by side
comparison is not the final test of similarity. Sunshine Sauce’s logo is a colorable
imitation of Del Monte’s trademark. The word “catsup” in both bottles is printed in white and
the style of the print/letter is the same. Although the logo of Sunshine is not a tomato, the
figure nevertheless approximates that of a tomato. The person who infringes a trade mark
does not normally copy out but only makes colorable changes, employing enough points of
similarity to confuse the public with enough points of differences to confuse the courts.
What is undeniable is the fact that when a manufacturer prepares to package his product,
he has before him a boundless choice of words, phrases, colors and symbols sufficient to
distinguish his product from the others. When as in this case, Sunshine chose, without a
reasonable explanation, to use the same colors and letters as those used by Del Monte
though the field of its selection was so broad, the inevitable conclusion is that it was done
deliberately to deceive.

2) YES. The Supreme Court initially ruled that Del Monte does not have the exclusive right
to use Del Monte bottles in the Philippines because Philpack’s patent was only registered
under the Supplemental Register and not with the Principal Register. Under the law,
registration under the Supplemental Register is not a basis for a case of infringement

CASES IN COMMERCIAL LAW REVIEW (J. Dimaampao) 4E 2017-2018 | 167

because unlike registration under the Principal Register, it does not grant exclusive use of
the patent.

However, the SC determined that there was unfair competition because the bottles of Del
Monte do say in embossed letters: “Del Monte Corporation, Not to be Refilled”. And
yet Sunshine Sauce refilled these bottles with its catsup products. This clearly shows the
Sunshine Sauce’s bad faith and its intention to capitalize on the Del Monte’s reputation and
goodwill and pass off its own product as that of Del Monte. #SABULAO

***

III. THE LAW ON COPYRIGHT

ELIDAD C. KHO, DOING BUSINESS UNDER THE NAME AND STYLE OF KEC
COSMETICS LABORATORY, vs . HON. COURT OF APPEALS, SUMMERVILLE
GENERAL MERCHANDISING AND COMPANY, AND ANG TIAM CHAY
G.R. No. 115758. March 19, 2002

DOCTRINE: Trademark, copyright and patents are different intellectual property rights that
cannot be interchanged with one another. A trademark is any visible sign capable of
distinguishing the goods (trademark) or services (service mark) of an enterprise and shall
include a stamped or marked container of goods. In relation thereto, a trade name means
the name or designation identifying or distinguishing an enterprise. Meanwhile, the scope of
a copyright is confined to literary and artistic works which are original intellectual creations
in the literary and artistic domain protected from the moment of their creation. Patentable
inventions, on the other hand, refer to any technical solution of a problem in any field of
human activity which is new, involves an inventive step and is industrially applicable.

FACTS: This a petition for review on certiorari of the CA’s decision setting aside and
declaring as null and void the issuance of a writ of preliminary injunction in favor of
petitioner.

Petitioner filed a complaint for injunction against private respondents Summerville General
Merchandising and Company (Summerville, for brevity) and Ang Tiam Chay. Petitioner
alleged that he, doing business under the name and style of KEC Cosmetics Laboratory, is
the registered owner of the copyrights Chin Chun Su and Oval Facial Cream
Container/Case, as shown by Certificates of Copyright Registration No. 0-1358 and No. 0-
3678; that she also has patent rights on Chin Chun Su & Device and Chin Chun Su for
medicated cream. He further alleged that private respondent Summerville advertised and
sold petitioner's cream products under the brand name Chin Chun Su, in similar containers
that petitioner uses, thereby misleading the public, and resulting in the decline in the
petitioner's business sales and income; and, that the respondents should be enjoined from
allegedly infringing on the copyrights and patents of the petitioner.

As their defense, private respondents, alleged that Summerville is the exclusive and
authorized importer, re-packer and distributor of Chin Chun Su products manufactured by
Shun Yi Factory of Taiwan; that the said Taiwanese manufacturing company authorized
Summerville to register its trade name Chin Chun Su Medicated Cream with the Philippine
Patent Office and other appropriate governmental agencies; that KEC Cosmetics
Laboratory of the petitioner obtained the copyrights through misrepresentation and
falsification.

The trial court granted petitioner’s application for preliminary injunction. Private
respondents moved for reconsideration but it was denied. This made private respondents
file a petition for certiorari with the Court of Appeals but it affirmed the trial court’s decision.

ISSUE: Whether or not the copyright and patent over the name and container of a beauty
cream product would entitle the registrant to the use and ownership over the same to the
exclusion of others.

CASES IN COMMERCIAL LAW REVIEW (J. Dimaampao) 4E 2017-2018 | 168

HELD: NO. The Court ruled that trademark, copyright and patents are different intellectual
property rights that cannot be interchanged with one another. A trademark is any visible
sign capable of distinguishing the goods (trademark) or services (service mark) of an
enterprise and shall include a stamped or marked container of goods. In relation thereto, a
trade name means the name or designation identifying or distinguishing an enterprise.
Meanwhile, the scope of a copyright is confined to literary and artistic works which are
original intellectual creations in the literary and artistic domain protected from the moment
of their creation. Patentable inventions, on the other hand, refer to any technical solution of
a problem in any field of human activity which is new, involves an inventive step and is
industrially applicable.

In this case, petitioner has no right to support her claim for the exclusive use of the subject
trade name and its container. The name and container of a beauty cream product are
proper subjects of a trademark inasmuch as the same falls squarely within its definition. In
order to be entitled to exclusively use the same in the sale of the beauty cream product, the
user must sufficiently prove that she registered or used it before anybody else did. The
petitioner's copyright and patent registration of the name and container would not
guarantee her the right to the exclusive use of the same for the reason that they are not
appropriate subjects of the said intellectual rights. Consequently, a preliminary injunction
order cannot be issued for the reason that the petitioner has not proven that she has a
clear right over the said name and container to the exclusion of others, not having proven
that she has registered a trademark thereto or used the same before anyone did. #TURO

***

IN-N-OUT BURGER, INC. vs. SEHWANI, INC. AND/OR BENITA'S FRITES, INC.
G.R. No. 179127. December 24, 2008

DOCTRINE: The essential elements of an action for unfair competition are:

(1) confusing similarity in the general appearance of the goods and
(2) intent to deceive the public and defraud a competitor.

The confusing similarity may or may not result from similarity in the marks, but may result
from other external factors in the packaging or presentation of the goods.

The intent to deceive and defraud may be inferred from the similarity of the appearance of
the goods as offered for sale to the public. Actual fraudulent intent need not be shown.

FACTS: The case involves the alleged deception use of respondents Sehwani and Benita
Fries of the "IN-N-OUT”, "IN-N-OUT Burger & Arrow Design" and “DOUBLE-DOUBLE”
trademark of petitioner in the latter’s restaurant business, specifically through its menus,
hamburger products, burger wrappers, fries receptacles, and receipts.

Sehwani avers that had already obtained Trademark Registration for the mark "IN N OUT
(the inside of the letter "O" formed like a star since the commencement of business in 15
October 1982 and through a license agreement with Benita Fries. Though, not all elements
of said trademark was used due to difficulty in printing the “star”.

Meantime, IN-N-OUT BURGER contends that subject trademarks are registered under its
name in the US and in various parts of the world, are internationally well-known, and have
become distinctive of its business and goods through its long and exclusive commercial
use. Respondents allegedly started using them in 2000 when they opened their restaurant
business.

The IPO decided against respondents and ordered the cancellation of their trademark in
favor of petitioner for engaging in unfair competition.

CASES IN COMMERCIAL LAW REVIEW (J. Dimaampao) 4E 2017-2018 | 169

The Court of Appeals, however, reversed the said decision mainly on the ground that the
IPO is bereft of jurisdiction, which the court a quo interpreted to mean that it is conferred
only to regular courts.

ISSUE: Whether or not respondents are guilty of unfair competition and the IPO,
jurisdiction over cases to cancel registration of trademark.

HELD: YES. The Supreme Court found no evidence that the respondents were authorized
by the petitioner to use the latter's marks in the business and did not find respondents’
reason of difficulty in printing justifiable to unlawfully use the same.

The essential elements of an action for unfair competition are:

(1) confusing similarity in the general appearance of the goods and
(2) intent to deceive the public and defraud a competitor.

The confusing similarity may or may not result from similarity in the marks, but may result
from other external factors in the packaging or presentation of the goods.

The intent to deceive and defraud may be inferred from the similarity of the appearance of
the goods as offered for sale to the public. Actual fraudulent intent need not be shown.

By using subject trademarks, respondents are giving their products the general appearance
that would likely influence purchasers to believe that these products are those of the
petitioner, an already internationally recognized trademark registrant.

The Court of Appeals also erroneously reasoned on the lack of jurisdiction of the IPO for
being clearly contrary to the express provisions of Sections 7 and 10 of the Intellectual
Property Code. #ZARA

***

CASES IN COMMERCIAL LAW REVIEW (J. Dimaampao) 4E 2017-2018 | 170

 FINANCIAL REHABILITATION AND
INSOLVENCY ACT
VIVA SHIPPING LINES, INC., vs.
KEPPEL PHILIPPINES MINING, INC
February 17, 2016 G.R. No. 177382

DOCTRINE: Creditors are indispensable parties to a rehabilitation case, even if a

rehabilitation case is non-adversarial.
FACTS: Viva Shipping Lines, Inc. (Viva Shipping Lines) filed a Petition for Corporate
Rehabilitation before the Regional Trial Court of Lucena City. It claimed to own and operate
19 maritime vessels and Ocean Palace Mall, a shopping mall in downtown Lucena
City. Viva Shipping Lines also declared its total properties’ assessed value at about
₱ 45,172,790.00. However, these allegations were contrary to the attached documents in
the Amended Petition. One of the attachments, the Property Inventory List, showed that
Viva Shipping Lines owned only two (2) maritime vessels: M/V Viva Peñafrancia V and M/V
Marian Queen. The list also stated that the fair market value of all of Viva Shipping Lines’
assets amounted to ₱ 447,860,000.00, ₱ 400 million more than what was alleged in its
Amended Petition. Some of the properties listed in the Property Inventory List were already
marked as "encumbered" by its creditors; hence, only ₱ 147,630,000.00 of real property
and its vessels were marked as "free assets."

According to Viva Shipping Lines, the devaluation of the Philippine peso, increased
competition, and mismanagement of its businesses made it difficult to pay its debts as they
became due. It also stated that "almost all its vessels were rendered unserviceable either
because of age and deterioration that it can no longer compete with modern made vessels
owned by other operators."

The Regional Trial Court found that Viva Shipping Lines’ assets all appeared to be non-
performing. Further, it noted that Viva Shipping Lines failed to show any evidence of
consent to sell real properties belonging to its sister company.

ISSUE: Whether or not Viva Shipping Lines’ application for rehabilitation should be granted

RULING: NO. Liquidation is diametrically opposed to rehabilitation. Both cannot be

undertaken at the same time. In rehabilitation, corporations have to maintain their assets to
continue business operations. In liquidation, on the other hand, corporations preserve their
assets in order to sell them. Without these assets, business operations are effectively
discontinued. The proceeds of the sale are distributed equitably among creditors, and
surplus is divided or losses are re-allocated.

The first rule breached by petitioner is the failure to implead all the indispensable parties.
Petitioner did not even interpose reasons why it should be excused from compliance with
the rule to "state the full names of the parties to the case, without impleading the court . . .
as . . . respondents." Petitioner did exactly the opposite. It failed to state the full names of
its creditors as respondents. Instead, it impleaded the Presiding Judge of the originating
court.

The Rules of Court requires petitioner to implead respondents as a matter of due process.
Under the Constitution, "[n]o person shall be deprived of life, liberty or property without due
process of the law." An appeal to a corporate rehabilitation case may deprive creditor-
stakeholders of property. Due process dictates that these creditors be impleaded to give
them an opportunity to protect the property owed to them.

Creditors are indispensable parties to a rehabilitation case, even if a rehabilitation case is

non-adversarial. A corporate rehabilitation case cannot be decided without the creditors’
participation. The court’s role is to balance the interests of the corporation, the creditors,

CASES IN COMMERCIAL LAW REVIEW (J. Dimaampao) 4E 2017-2018 | 171

and the general public. Impleading creditors as respondents on appeal will give them the
opportunity to present their legal arguments before the appellate court. The courts will not
be able to balance these interests if the creditors are not parties to a case. Ruling on
petitioner’s appeal in the absence of its creditors will not result in judgment that is effective,
complete, and equitable.

The failure of petitioner to implead its creditors as respondents cannot be cured by serving
copies of the Petition on its creditors. Since the creditors were not impleaded as
respondents, the copy of the Petition only serves to inform them that a petition has been
filed before the appellate court. Their participation was still significantly truncated.
Petitioner’s failure to implead them deprived them of a fair hearing. The appellate court only
serves court orders and processes on parties formally named and identified by the
petitioner. Since the creditors were not named as respondents, they could not receive court
orders prompting them to file remedies to protect their property rights.

Petitioner’s rehabilitation plan should have shown that petitioner has enough serviceable
assets to be able to continue its business. Yet, the plan showed that the source of funding
would be to sell petitioner’s old vessels. Disposing of the assets constituting petitioner’s
main business cannot result in rehabilitation. A business primarily engaged as
a shipping line cannot operate without its ships. On the other hand, the plan to purchase
new vessels sacrifices the corporation’s cash flow. This is contrary to the goal of corporate
rehabilitation, which is to allow present value recovery for creditors. The plan to buy new
vessels after selling the two vessels it currently owns is neither sound nor workable as a
business plan.

Professor Stephanie V. Gomez of the University of the Philippines College of Law suggests
specific characteristics of an economically feasible rehabilitation plan:
a. The debtor has assets that can generate more cash if used in its daily operations
than if sold.
b. Liquidity issues can be addressed by a practicable business plan that will
generate enough cash to sustain daily operations.
c. The debtor has a definite source of financing for the proper and full
implementation of a Rehabilitation Plan that is anchored on realistic assumptions
and goals.147 (Emhasis supplied)

These requirements put emphasis on liquidity: the cash flow that the distressed corporation
will obtain from rehabilitating its assets and operations. A corporation’s assets may be more
than its current liabilities, but some assets may be in the form of land or capital equipment,
such as machinery or vessels. Rehabilitation sees to it that these assets generate more
value if used efficiently rather than if liquidated.

On the other hand, this court enumerated the characteristics of a rehabilitation plan that is
infeasible:
(a) the absence of a sound and workable business plan;
(b) baseless and unexplained assumptions, targets and goals;
(c) speculative capital infusion or complete lack thereof for the execution of the
business plan;
(d) cash flow cannot sustain daily operations; and
(e) negative net worth and the assets are near full depreciation or fully
depreciated.148

The Regional Trial Court correctly dismissed petitioner’s rehabilitation plan. It found that
petitioner’s assets are non-performing. Hence, its application for rehabilitation must be
denied.

***

CASES IN COMMERCIAL LAW REVIEW (J. Dimaampao) 4E 2017-2018 | 172

 PHILIPPINE BANK OF COMMUNICATIONS, vs. BASIC POLYPRINTERS AND
PACKAGING CORPORATION,
G.R. No. 187581 October 20, 2014

DOCTRINE:Liquidity was not an issue in a petition for rehabilitation. The basic issue in
rehabilitation proceeding is the viability and desirability of continuing business operations.
FACTS: Respondent Basic Polyprinters and Packaging Corporation (Basic Polyprinters)
was a domestic corporation engaged in the business of printing greeting cards, gift
wrappers, gift bags, calendars, posters, labels and other novelty items.
Respondent applied for corporate rehabilitation with the Regional Trial Court. Finding the
petition sufficient in formand substance, the RTC issued the stay order. It appointed Manuel
N. Cacho III as the rehabilitation receiver, and required all creditors and interested parties,
including the Securities and Exchange Commission (SEC), to file their comments.
Petitioner’s primary business is in the printing business. Based on its updated financial
report, the financial condition has greatly improved.
However, because of the indebtedness and the slowdown in sales brought about by a
depressed economy, the present income from the operations will be insufficient to pay off
its maturing obligations. Thus, the success of the rehabilitation planlargely depends on its
ability to reduce its debt obligation to a manageable level by the suspension of payments of
obligations and the proposed "dacion en pago."
After sufficient consideration, the RTC and CA granted the application.
ISSUES: Whether or not the application for rehabilitation should be granted
RULING: YES. Under the Interim Rules, rehabilitation is the process of restoring "the
debtor to a position of successful operation and solvency, if it is shown that its continuance
of operation is economically feasible and its creditors can recover by way of the present
value of payments projected in the plan more if the corporation continues as a going
concern that if it is immediately liquidated." It contemplates a continuance ofcorporate life
and activities in an effort to restore and reinstate the corporation to its former position of
successful operation and solvency.
In Asiatrust Development Bank v. First Aikka Development, Inc., we said that rehabilitation
proceedings have a two-pronged purpose, namely: (a) to efficiently and equitably distribute
the assets of the insolvent debtor to its creditors; and (b) to provide the debtor with a fresh
start, viz: Rehabilitation proceedings in our jurisdiction have equitable and rehabilitative
purposes. On the one hand, they attempt to provide for the efficient and equitable
distribution ofan insolvent debtor's remaining assets to its creditors; and on the other, to
provide debtors with a "fresh start" by relieving them of the weight of their outstanding
debts and permitting them to reorganize their affairs. The purpose of rehabilitation
proceedings is to enable the company to gain a new lease on life and thereby allow
creditors to be paidtheir claims from its earnings.
Consequently, the basic issues inrehabilitation proceedings concern the viability and
desirability of continuing the business operations of the petitioning corporation. The
determination of such issues was to be carried out by the court-appointed rehabilitation
receiver,25 who was Cacho in this case.
Moreover, Republic Act No. 10142 (Financial Rehabilitation and Insolvency Act (FRIA) of
2010), a law that is applicable hereto, has defined a corporate debtor as a corporation duly
organized and existing under Philippine laws that has become insolvent. 27 The term
insolventis defined in Republic Act No. 10142 as "the financial condition of a debtor that is
generally unable to pay its or his liabilities as they fall due in the ordinary course of
business or has liabilities that are greater than its or his assets."
As such, the contention that rehabilitation becomes inappropriate because of the perceived
insolvency of BasicPolyprinters was incorrect.

CASES IN COMMERCIAL LAW REVIEW (J. Dimaampao) 4E 2017-2018 | 173

 STEEL CORPORATION OF THE PHILIPPINES, vs. MAPFRE INSULAR INSURANCE
CORPORATION
G.R. No. 201199 October 16, 2013

DOCTRINE: The RTC, acting as rehabilitation court, has no jurisdiction over the insurance
claims. Rehabilitation proceedings are “summary and non-adversarial” in nature. They do
not include adjudication of claims that require full trial on the merits.

FACTS: SCP is a domestic corporation engaged in the manufacture and distribution of

cold-rolled and galvanized steel sheets and coils. It obtained loans from several creditors
and, as security, mortgaged its assets in their favor. The creditors appointed Bank of the
Philippine Islands (BPI) as their trustee. On 17 December 1997, SCP and BPI entered into
a Mortgage Trust Indenture (MTI) requiring SCP to insure all of its assets until the loans are
fully paid. Under the MTI, the insurance policies were to be made payable to BPI.

During the course of its business, SCP suffered financial difficulties. On 11 September
2006, one of the creditors, Equitable PCI Bank, Inc., now known as Banco de Oro-EPCI,
Inc., filed with the RTC a petition to have SCP placed under corporate rehabilitation. On 12
September 2006, the RTC issued a stay order to defer all claims against SCP and
appointed Atty. Santiago T. Gabionza, Jr. as rehabilitation receiver. On 3 December 2007,
the RTC rendered a Decision approving the modified rehabilitation plan.
Under Collective Master Policy No. UCPB Gem HOF075089, SCP insured against material
damage and business interruption its assets located in Barangay Munting Tubig, Balayan,
Batangas, for the period 19 August2007 to 19 August 2008. On 8 June 2008, a fire broke
out at SCP’s plant damaging its machineries. Invoking its right under the MTI, BPI
demanded and received from the insurers $450,000 insurance proceeds. Hence, this
appeal.
ISSUES: Does the RTC acting as rehabilitation court have jurisdiction to grant the
insurance claim
RULING: NO. The RTC, acting as rehabilitation court, has no jurisdiction over the subject
matter of the insurance claim of SCP against respondent insurers. SCP must file a
separate action for collection where respondent insurers can properly thresh out their
defenses. SCP cannot simply file with the RTC a motion to direct respondent insurers to
pay insurance proceeds. Section 3 of Republic Act No. 10142states that rehabilitation
proceedings are "summary and non-adversarial" in nature. They do not include adjudication
of claims that require full trial on the merits, like SCP’s insurance claim against respondent
insurers.
Rehabilitation proceedings are summary and non-adversarial in nature, and do not
contemplate adjudication of claims that must be threshed out in ordinary court proceedings.
Adversarial proceedings similar to that in ordinary courts are inconsistent with the
commercial nature of a rehabilitation case. The latter must be resolved quickly and
expeditiously for the sake of the corporate debtor, its creditors and other interested parties.
Thus, the Interim Rules "incorporate the concept of prohibited pleadings, affidavit evidence
in lieu of oral testimony, clarificatory hearings instead of the traditional approach of
receiving evidence, and the grant of authority to the court to decide the case, or any
incident, on the basis of affidavits and documentary evidence."
The Court agrees with the ruling of the Court of Appeals that the jurisdiction of the
rehabilitation courts is over claims against the debtor that is under rehabilitation, not over
claims by the debtoragainst its own debtors or against third parties. The insurance claims
cannot be considered as "claims" within the jurisdiction of the trial court functioning as a
rehabilitation court. Rehabilitation courts only have limited jurisdiction over the claims by
creditors against the distressed company, not on the claims of said distressed company
against its debtors. The interim rules define claim as referring to all claims or demands, of
whatever nature or character against a debtor or its property, whether for money or
otherwise.
***

CASES IN COMMERCIAL LAW REVIEW (J. Dimaampao) 4E 2017-2018 | 174

 SITUS DEVELOPMENT CORPORATION vs. ASIATRUST BANK
G.R. No. 180036 July 25, 2012

DOCTRINES: The petition shall be dismissed if no rehabilitation plan is approved by the

Court upon the lapse of the 180 days from the date of initial hearing.
The Stay Order does not suspend the foreclosure of a mortgage constituted over the
property of a third-party mortgagor.
FACTS: In 1972, the Chua Family, headed by its patriarch, Cua Yong Hu, a.k.a. Tony
Chua, started a printing business and put up Color Lithographic Press, Inc. (COLOR). On
June 6, 1995, the Chua Family ventured into real estate development/leasing by organizing
Situs Development Corporation (SITUS) in order to build a shopping mall complex, known
as Metrolane Complex (COMPLEX) at 20th Avenue corner P. Tuazon, Cubao, Quezon
City. To finance the construction of the COMPLEX, SITUS, COLOR and Tony Chua and his
wife, Siok Lu Chua, obtained several loans from (1) ALLIED secured by real estate
mortgages over two lots covered by TCT Nos. RT-13620 and RT-13621; (2) ASIATRUST
secured by a real estate mortgage over a lot covered by TCT No. 79915; and (3) Global
Banking Corporation, now METROBANK, secured by a real estate mortgage over a lot
covered by TCT No. 79916. The COMPLEX was built on said four (4) lots, all of which are
registered in the names of Tony Chua and his wife, Siok Lu Chua. On March 21, 1996, the
Chua Family expanded into retail merchandising and organized Daily Supermarket, Inc.
(DAILY). All three (3) corporations have interlocking directors and are all housed in the
COMPLEX. The Chua Family also resides in the COMPLEX, while the other units are being
leased to tenants. SITUS, COLOR and DAILY obtained additional loans from ALLIED,
ASIATRUST and METROBANK and their real estate mortgages were updated and/or
amended. Spouses Chua likewise executed five (5) Continuing Guarantee/Comprehensive
Surety in favor of ALLIED to guarantee the payment of the loans of SITUS and DAILY.
SITUS, COLOR, DAILY and the spouses Chua failed to pay their obligations as they fell
due, despite demands.
Hence, ALLIED filed with the Office of the Clerk of Court and Ex-Officio Sheriff of Quezon
City an application for extrajudicial foreclosure of the mortgage on the properties of
spouses Chua. However, SITUS, COLOR and spouses Chua filed a complaint for
nullification of foreclosure proceedings, with prayer for temporary restraining
order/injunction, with the Regional Trial Court. The spouses averred that the corporation
has a distinct and separate personality. As such, their properties may not be levied due to
the debt of the corporation.
ISSUES: Whether the Stay Order affects foreclosure proceedings involving properties
mortgaged by stockholders to secure corporate debts
RULING: NO. The Stay Order does not suspend the foreclosure of a mortgage constituted
over the property of a third-party mortgagor.

Petitioners insist that the Stay Order covers the mortgaged properties, citing the Interim
Rules on Corporate Rehabilitation (the Rules). Under the Rules, one of the effects of a Stay
Order is the stay of the "enforcement of all claims, whether for money or otherwise and
whether such enforcement is by court action or otherwise, against the debtor, its guarantors
and sureties not solidarily liable with the debtor."Based on a reading of the Rules, we rule
that the Stay Order cannot suspend foreclosure proceedings already commenced over
properties belonging to spouses Chua. The Stay Order can only cover those claims
directed against petitioner corporations or their properties, againstpetitioners’ guarantors, or
against petitioners’ sureties who are not solidarily liable with them.
Spouses Chua may not be considered as "debtors." The Interim Rules on Corporate
Rehabilitation (the Rules) define the term "debtor" as follows:"Debtor" shall mean any
corporation, partnership, or association, whether supervised or regulated by the Securities
and Exchange Commission or other government agencies, on whose behalf a petition for
rehabilitation has been filed under these Rules.Likewise, the enforcement of the mortgage

CASES IN COMMERCIAL LAW REVIEW (J. Dimaampao) 4E 2017-2018 | 175

lien cannot be considered as a claim against a guarantor or a surety not solidarily liable
with the debtor corporations. While spouses Chua executed Continuing Guaranty and
Comprehensive Surety undertakings in favor of Allied Bank, the bank did not proceed
against them as individual guarantors or sureties. Rather, by initiating extrajudicial
foreclosure proceedings, the bank was directly proceeding against the property mortgaged
to them by the spouses as security. The Civil Code provides that the property upon which a
mortgage is imposed directly and immediately subjected to the fulfillment of the obligation
for whose security the mortgage was constituted.As such, a real estate mortgage is a lien
on the property itself, inseparable from the property upon which it was constituted.
In this case, we find that the undertaking of spouses Chua with respect to the loans of
petitioner corporations is the sale at public auction of certain real properties belonging to
them to satisfy the indebtedness of petitioner corporations in case of a default by the latter.
This undertaking is properly that of a third-party mortgagor or an accommodation
mortgagor, whereby one mortgages one’s property to stand as security for the
indebtedness of another.
***
JOSE MARCEL PANLILIO vs. REGIONAL TRIAL COURT, BRANCH 51, CITY OF
MANILA, represented by HON. PRESIDING JUDGE ANTONIO M. ROSALES
G.R. No. 173846 February 2, 2011

DOCTRINE: Stay order does not include criminal cases.

FACTS: On October 15, 2004, Jose Marcel Panlilio, Erlinda Panlilio, Nicole Morris and
Marlo Cristobal (petitioners), as corporate officers of Silahis International Hotel, Inc. (SIHI),
filed with the Regional Trial Court (RTC) of Manila, Branch 24, a petition for Suspension of
Payments and Rehabilitation.
The RTC of Manila, Branch 24, issued an Orderstaying all claims against SIHI upon finding
the petition sufficient in form and substance.
On December 13, 2004, Branch 51 issued an Order denying petitioners motion to suspend
the proceedings. It ruled that the stay order issued by Branch 24 did not cover criminal
proceedings, to wit: x x x x
Clearly then, the issue is, whether the stay order issued by the RTC commercial court,
Branch 24 includes the above-captioned criminal cases.
The Court shares the view of the private complainants and the SSS that the said stay order
does not include the prosecution of criminal offenses. Precisely, the law criminalizes the
non-remittance of SSS contributions by an employer to protect the employees from
unscrupulous employers. Clearly, in these cases, public interest requires that the said
criminal acts be immediately investigated and prosecuted for the protection of society.
From the foregoing, the inescapable conclusion is that the stay order issued by RTC
Branch 24 does not include the above-captioned cases which are criminal in nature.
ISSUE: Whether or not a stay order issued by a financial rehabilitation court includes
criminal cases
RULING: NO. The Court shares the view of the private complainants and the SSS that the
said stay order does not include the prosecution of criminal offenses. Precisely, the law
"criminalizes" the non-remittance of SSS contributions by an employer to protect the
employees from unscrupulous employers. Clearly, in these cases, public interest requires
that the said criminal acts be immediately investigated and prosecuted for the protection of
society.

From the foregoing, the inescapable conclusion is that the stay order issued by RTC
Branch 24 does not include the above-captioned cases which are criminal in
naturecorporate rehabilitation connotes the restoration of the debtor to a position of

CASES IN COMMERCIAL LAW REVIEW (J. Dimaampao) 4E 2017-2018 | 176

successful operation and solvency, if it is shown that its continued operation is
economically feasible and its creditors can recover more, by way of the present value of
payments projected in the rehabilitation plan, if the corporation continues as a going
concern than if it is immediately liquidated.It contemplates a continuance of corporate life
and activities in an effort to restore and reinstate the corporation to its former position of
successful operation and solvency, the purpose being to enable the company to gain a new
lease on life and allow its creditors to be paid their claims out of its earnings.
A criminal action has a dual purpose, namely, the punishment of the offender and
indemnity to the offended party. The dominant and primordial objective of the criminal
action is the punishment of the offender. The civil action is merely incidental to and
consequent to the conviction of the accused. The reason for this is that criminal actions are
primarily intended to vindicate an outrage against the sovereignty of the state and to
impose the appropriate penalty for the vindication of the disturbance to the social order
caused by the offender. On the other hand, the action between the private complainant and
the accused is intended solely to indemnify the former.
The rehabilitation of SIHI and the settlement of claims against the corporation is not a legal
ground for the extinction of petitioners’ criminal liabilities. There is no reason why criminal
proceedings should be suspended during corporate rehabilitation, more so, since the prime
purpose of the criminal action is to punish the offender in order to deter him and others
from committing the same or similar offense, to isolate him from society, reform and
rehabilitate him or, in general, to maintain social order.As correctly observed in Rosario, it
would be absurd for one who has engaged in criminal conduct could escape punishment by
the mere filing of a petition for rehabilitation by the corporation of which he is an officer.
The prosecution of the officers of the corporation has no bearing on the pending
rehabilitation of the corporation, especially since they are charged in their individual
capacities. Such being the case, the purpose of the law for the issuance of the stay order is
not compromised, since the appointed rehabilitation receiver can still fully discharge his
functions as mandated by law. It bears to stress that the rehabilitation receiver is not
charged to defend the officers of the corporation. If there is anything that the rehabilitation
receiver might be remotely interested in is whether the court also rules that petitioners are
civilly liable. Such a scenario, however, is not a reason to suspend the criminal
proceedings, because as aptly discussed in Rosario, should the court prosecuting the
officers of the corporation find that an award or indemnification is warranted, such award
would fall under the category of claims, the execution of which would be subject to the stay
order issued by the rehabilitation court.The penal sanctions as a consequence of violation
of the SSS law, in relation to the revised penal code can therefore be implemented if
petitioners are found guilty after trial. However, any civil indemnity awarded as a result of
their conviction would be subject to the stay order issued by the rehabilitation court. Only to
this extent can the order of suspension be considered obligatory upon any court, tribunal,
branch or body where there are pending actions for claims against the distressed
corporation.
On a final note, this Court would like to point out that Congress has recently enacted
Republic Act No. 10142, or the Financial Rehabilitation and Insolvency Act of 2010. Section
18 thereof explicitly provides that criminal actions against the individual officer of a
corporation are not subject to the Stay or Suspension Order in rehabilitation proceedings,
to wit:
The Stay or Suspension Order shall not apply:
x xxx
(g) any criminal action against individual debtor or owner, partner, director or officer of a
debtor shall not be affected by any proceeding commenced under this Act.
Based on the foregoing discussion, this Court rules that there is no legal impediment for
Branch 51 to proceed with the cases filed against petitioners.
* **

CASES IN COMMERCIAL LAW REVIEW (J. Dimaampao) 4E 2017-2018 | 177

 TESTIMONIALS BY STUDENTS
Passionate ❤

Thank you so much sir for always motivating us to give our best and to work harder. It’s
indeed a privilege to have had the chance to learn from and with you. Your exceptional
dedication in teaching is a breath of fresh air – refreshing, inspiring, amazing in so many
ways. Iba kayo, sir! You are an inspiration. #Quijano-Manalo
________________________________________________________________________

To do right, give your all, be continuously ignited by passion for law and remain humble are
but four meaningful infinitives to sum up our review class on Commercial Law.

For one without any inkling for business, the study of law governing this field was quite a
hurdle inevitable to overcome. Were it only for the reason of going through it, I would still
find myself, amid all the checks, voting rights, risks insured against and insolvency
proceedings, exactly where I had been - in oblivion.

Justice Dimaampao is instrumental in enabling me to take a second look on what

Commercial Law really is, an equally intricate and interesting field of study and practice.
Constantly reminding that there are effective means to understand the same and strategies
to pass the bar, he allowed us to rise above our inhibitions and become wise law students
(and hopefully, bar exam reviewees) without forgetting that success attracts the
hardworking and humble as it is elusive to the proud, free and easy.

All learning are for keeps, Sir. We are so blessed to be your students. #Zara

Your excellent teaching skills and courteous personality has helped our class tremendously
to understand Commercial Law. Without your helpfulness and directness, Commercial Law
Review would have been more challenging. We appreciate you being stern and letting us
know what we did wrong. Verily, the class have learned so much from you.

Sir, thank you for being a remarkable professor. Thank you for caring for the class as if we
were your kids whom you only see once a week. It means a lot to us knowing that you
always take time to help us be a better student and be a step closer to our goal, to be
Bedan lawyer. #Tomarong

It is with deep gratitude to be guided by educators like you Sir, who is heartily dedicated to
share your knowledge to your students especially to aspiring lawyers like me. The
Commercial Law Review subject was made fun and exciting even if it was a very technical
and difficult bar subject. I am wholeheartedly thankful to have you as my professor in this
particular review subject as I was pushed to exert my best effort to master the subject in
preparation for one of the most difficult examination I will take for the profession I choose to
live out. Also thank you Sir for generously sharing your in-depth knowledge of the law and
your dedication and patience to teach us. #Plana
________________________________________________________________________

Thank you for creating such a great environment for learning. The way you expertly and
patiently taught us the intricacies of Commercial Law was both inspirational and
aspirational. There is certainly no professor like you, sir. Thanks for enriching our lives with
your brilliance. #LATORRE

CASES IN COMMERCIAL LAW REVIEW (J. Dimaampao) 4E 2017-2018 | 178

JUSTICE DIMAAMPAO,
NAGUUMAPAW PO ANG PASASALAMAT NAMIN AT NAGING PROF NAMIN KAYO.

IT’S SUCH AN HONOR TO BE YOUR STUDENT. WE HAVE LEARNED SO MUCH--

FROM THE STYLE OF ANSWERING, TO USING LOGIC, TO ANSWERING WITH LEGAL
BASIS, TO CORRELATING EVERYTHING, FOR USING MEMORY TOOLS ETC. WE
WILL SURELY USE ALL OF YOUR TIPS FOR THE BAR. I AM STILL AT AWE ON HOW
SHARP YOUR MEMORY IS BECAUSE YOU ARE THE ONLY PROF I HAD WHO
MEMORIZED EVEN THE SCRA NUMBERS AND ALL THE PROVISION NUMBERS. =D
GALING NYO PO! SIR OUR DREAM IS TO BECOME, IF NOT EQUAL, BUT AT LEAST A
PART OF WHAT YOU HAVE BECOME AND WHAT YOU HAVE ACHIEVED WHEN WE
FINALLY BECOME LAWYERS. #LIFEGOALS AGAIN SIR, MARAMING MARAMING
SALAMAT PO!

GOD BLESS YOU ALWAYS, SIR! #AIRAPEREZ

Justice Dimaampao, it has been such an honor to be under your class. It was a learning
and motivating experience for all of us. Thank you for sharing with us your knowledge. I
hope that one day we’ll do you proud.
#YOROBE
________________________________________________________________________

My heart is filled with awe and gratitude to have you Justice as my professor in Commercial
Law Review. I know that it best prepared for me the bar exams this November. I really love
your passion Sir in teaching your students. I see a great mentor in you who only wants the
good for his mentees. I owe you a lot Sir as I pass the bar exam. The questions in your
recitation, quizzes, and examinations pushed me to work harder, strive more and really
give my all. Thank you for that discipline I learned from your class, Justice. You are one of
the best professors I have in San Beda Law Mendiola. God bless you, Justice! #Luzon
________________________________________________________________________

Justice Dimaampao, thank you. Thank you for always motivating us and for pushing us to
strive harder. Personally Sir, if not for you, I would not have understood and appreciate Law
on Intellectual Property. With your brilliance and expertise, you made Commercial Law
more comprehensible for us. The class is indeed very fortunate to have you as our
professor. Your passion and dedication in teaching, and your genuine concern for us is
really one of a kind. One thing I also admired the most, Sir, is your humility despite
everything you have accomplished. Sobrang honored po ako dahil naging professor ko
kayo, and I will always be grateful for the opportunity that I have been mentored by you. All
the best, Sir! #SARAHFRANCISCO

To the lodi-petmalu Justice Dimaampao, you never seize to amaze me whenever I was in
your class. Despite being nervous of the class recitation, I was always astonished of the
knowledge you have for Commercial Law as it would not be everyone’s cup of tea.
Moreover, I am just grateful for the opportunity that you became my professor here in San
Beda. I have heard lots of stories about you and I had been hoping that the universe
conspired with my wish and thankfully it did.

I have to honestly say that you are one of the best professors out there as you not only
teach but also make sure to impart your knowledge to your students. I believe that
everyone can be a teacher but only handful can be a great educator--and you are both of
them. You truly are an inspiration to me and as well as my classmates. Thank you for
sharing what you know and I hope to be as great as you someday.

I pray for your good health and God Bless! Love, #ClarisaBelo

CASES IN COMMERCIAL LAW REVIEW (J. Dimaampao) 4E 2017-2018 | 179

To the great educator Justice Dimaampao, Thank you for a challenging semester sir!
Thank you for inspiring the class to pour out our best! It was an honour to be under
tutelage. You have imparted to us a deeper understanding of Commercial Laws, with those
critical correlations of the law as well as your experience in teaching the subject matter. As
your student, I will do my best to carry that kind of discipline as I hurdle for the Bar.
Hopefully someday, I may have the chance to share with other what I have learned from
you, sir. :)

Thank you sir! Praying for your good health and life! #FranzTuro

Justice, daghan kaayong salamat sa tsansa na makauban ka namo isip maestro sa

Commercial Law Review. Daghan kaayo ko og natun-an. Dako sab natabang sa imong
Pre-week book apil na ang Codals.

Justice, thank you for that important provisions that we often overlook, questions that are
probable Bar questions. The doctrinal jurisprudence and important cases that help us to
understand the application of laws. The correlations, mnemonics and techniques that
made our study easily.

Ang imong mga malamdagon nga tudlo maoy naghatag sa ako og inspirasyon na
maningkamot, mamahinong mapaubsabon ug maampoon sa ginoo.

Your words of wisdom inspired me to do our best, observe humility at all times and always
pray. Thank you so much Justice! #Christian Oliver Valdeavilla

Dearest Justice Dimaampao, Thank you for your dedication in sharing your knowledge with
us. Your vast wisdom of the law has taught us to look into its different aspects. You made
us think deeper – that it is never enough to memorize all the codal provisions. We should
also know how each provision works with the others. We are truly lucky to have you as our
mentor. You have and will always be a great influence on us. Thank you for the great work
you do and the huge impact you make in our lives as our professor. I hope that you will
continue to inspire more Bedan law students to become great lawyers. If all law professors
are like you, every law student will not only be well-educated, but will also have proper
values. May you be blessed always. Respectully, #Danika Marie S. Santos

Words are not enough to describe how grateful we are for all the lessons you’ve taught us.
Every Wednesday as the class awaits for your arrival, I can feel the pressure surrounding
the room. This is not because we have not studied but because we are afraid of not
meeting your expectations. For all the chances you gave us to increase our respective
class standing, I honestly feel ashamed of myself when I cannot answer your question. As
your students, we know that you gave it your all in teaching us and it is only proper that we
give the same to you. You are one of the professors who genuinely care for their students
which makes us want to strive harder. You inspire us to be the best student we can
possibly be. Hopefully, we can also make you proud when we pass the bar. Again, thank
you Justice Dimaampao for everything. #Issa Cabatuando

Dearest Justice Dimaampao,

You are an inspiration to all of us. Your passion and dedication is what truly inspires us to
work hard forn our dreams. Thank you for sharing with us your knowledge in commercial
law and your patience in guiding us and making us better understand Connercial law.you
are a great professor not only because we have learned so much from you but most
especially because you have given us the drive to do well. You are the pinaka petmalu na
lodi ever! I hope to make you proud in the coming 2018 bar examinations sir!
#STEPHANIELOPEZ

CASES IN COMMERCIAL LAW REVIEW (J. Dimaampao) 4E 2017-2018 | 180