2019 Mercantile Law Bar Q and A

2019 BAR – MERCANTILE LAW*

A.1.

Define the following terms:

• Trust fund doctrine (2%)

The capital stock property and other assets of the corporation are regarded as equity in trust for the payment of corporate creditors. The subscribed capital stock is a trust fund for the payment of debts of the corporation which the creditors have the right to look up to satisfy their credits. Corporations cannot dissipate this and the creditors may sue stockholders directly for the unpaid subscription. (Sundiang and Aquino, p. 230)

• Unfair competition (2%)

Unfair competition is 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. (Dimaampao and Dumlao-Escalante, p. 457)

• Insurable interest in property (2%)

Insurable interest in property is any interest therein, or any relation or liability in respect thereof, of such nature that a contemplated peril might directly damnify the insured. It may consist of an existing interest, an inchoate interest founded on an existing interest, or an expectancy, coupled with an existing interest in that out of which the expectancy arises. (Id., p. 97)

• Splitting of deposits (2%)

Splitting of deposits occurs whenever a deposit account with an outstanding balance of more than the statutory maximum amount of insured deposit maintained under the name of natural or juridical persons is broken down and transferred into two (2) or more accounts in the name/s of natural or juridical persons or entities who have no beneficial ownership on transferred deposits in their names within one hundred twenty (120) days immediately preceding or during a bank-declared bank holiday, or immediately preceding a closure order issued by the Monetary Board of the Bangko Sentral ng Pilipinas for the purpose of availing of the maximum deposit insurance coverage. (PDIC Law, as amended)

A.2.

In May 2018, ABC Corp. entered into a merchandising contract which terms and conditions were totally lopsided in favor of the counterparty, XYZ, Inc. As a result, ABC Corp. suffered tremendous financial losses.

* This material contains unofficial suggested answers to the 2019 Bar Examination in Mercantile Law. The risk of use of this material shall be borne solely by the user.

A year after, or in May 2019, Mr. X became a stockholder of ABC Corp. Learning about the circumstances surrounding the merchandising contract, Mr. X filed a derivative suit against ABC Corp. ‘s directors to claim damages on behalf of ABC Corp. due to their mismanagement.

• What is a derivative suit? (2%)

A derivative suit is a suit by a shareholder to enforce a corporate cause of action. (Chua v.

Court of Appeals, G.R. No. 150793, November 19, 2004)

Note: This is an exception to the Business Judgment Rule.

An individual stockholder is permitted to institute a derivative suit on behalf of the corporation wherein he held stock in order to protect or vindicate corporate rights, whenever the officers of the corporation refuse to sue, or are the ones to be sued or hold the corporation. (First Philippine International Bank v. Court of Appeals, G.R. No. 115849, January 24, 1996; Filipinas Port Services v. Go, G.R. No. 161886, March 16. 2007; Yu v. Yukayguan, G.R. No. 177549, June 18, 2009)

• Was Mr. X’s filing of a derivative suit proper? Explain. (3%)

No, Mr. X’s filing of a derivative suit was not proper because there was no showing from that facts that he exhausted all available intra-corporate remedies.

Caveat: Go by the elements provided for by Dean Divina (C-SENA) in arriving at your answer.

1. the suit must be filed by the stockholder in behalf of the Corporation;
2. Plaintiff must be a Stockholder when he filed the complaint and when the cause of action accrued;
3. Exhaustion of intra-corporate remedies;
4. Not a nuisance or harassment suit; and
5. Appraisal right not available.

A.3.

In June 2018, DEF Corp. sent notices to its stockholders informing them of the corporation’s issuance of new shares of stock. The notice included a reminder that, pursuant to DEF Corp.’ s Articles of Incorporation, any stockholder who fails to exercise his or her pre-emptive right within three (3) weeks from receipt of notice would be considered to have waived the same.

Ms. Z, a stockholder of DEF Corp., failed to exercise her pre-emptive right within the said period. However, she claimed that she did not validly waive her right to do so because a waiver must be expressed in writing.

• Explain the concept of pre-emptive right under the Corporation Code. (2 %)

A pre-emptive right is the shareholder’s right to subscribe to all issues or disposition of shares of any class in proportion to his present stockholdings, the purpose being to enable the stockholder to retain his proportionate control in the corporation and to retain his equity in surplus. (Sundiang and Aquino, p. 246)

Pre-emptive right is intended to protect both the proprietary and voting rights of a stockholder in a corporation. It allows him to retain and maintain his proportionate interest in the corporation, thus, preventing dilution of a stockholder’s shareholdings in the corporation.

The pre-emptive right of stockholders, being a common law right, is always available even if not expressly granted or recognized.

• Is Ms. Z’s contention correct? Explain. (3%)

According to jurisprudence, a stockholder’s pre-emptive may be denied or limited in the articles of incorporation, even in the absence of a written waiver. (Caveat: At the time of writing these suggested answers, the author could not find a case that falls on all fours as the problem above. Please answer at your own risk.)

A.4.

In 2016, X Corp. obtained a loan worth ₱50,000,000.00 from J Bank, which was secured by a third-party mortgage executed by Y, Inc. in favor of X Corp. Since X Corp. was not able to settle its loan obligation to J Bank when it fell due, and despite numerous demands, J Bank foreclosed the mortgaged properties. The properties were sold in a foreclosure sale for ₱35,000,000.00, thereby leaving a ₱15,000,000.00 deficiency. For failure of X Corp. to pay said deficiency, J Bank filed a complaint for sum of money against X Corp., its President, Mr. P, and Y, Inc.

With respect to Mr. P, J Bank argued that he should be held solidarily liable together with X Corp. because he signed the loan document on behalf of X Corp. in his capacity as President. On the other hand, J Bank contended that Y, Inc. should also be held solidarily liable because the shareholdings of both corporations are identically owned and their operations are controlled by the same people; hence, Y, Inc. is a mere alter ego of X Corp.

• Should Mr. P be held liable? Explain. (2.5%)

No, Mr. P should not be held liable because of the Doctrine of Separate Juridical Entity. The obligations of the corporation are not the obligations of its stockholders, unless there is reason to pierce the veil of corporate fiction. Since there is no cause to pierce the corporate veil in the above problem, Mr. P should not be held liable.

• Should Y, Inc. be held liable? Explain. (2.5%)

No, Y, Inc. should not be held liable. Jurisprudence provides that mere majority or complete stock control is not sufficient basis to pierce the veil of corporate fiction. The alleged alter ego must have no separate mind, will or existence of its own at the time the transaction.

Caveat: It would be best if your answer will be based on the elements below. The Supreme Court has applied what is known as the Control Test or the Instrumentality/Alter Ego Doctrine. The test in determining applicability of piercing the veil of corporate fiction is as follows:

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;

• 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 rights; and

• The aforesaid control and breach of duty must proximately cause the injury or unjust loss complained of.

The absence of any one of these elements prevents ‘piercing the corporate veil. In applying the ‘instrumentality’ or ‘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.

A.5.

Mr. Y filed a case captioned as “Injunction with Prayer for Status Quo Order, Temporary Restraining Order and Damages” against Z Company to prohibit the latter from selling shares which Mr. Y purportedly bought from Z Company. Mr. Y alleged that the subscription for the said shares was already partly paid by him, but the subject shares were nonetheless being offered for sale by Z Company to the corporation’s other stockholders.

• Is the case filed by Mr. Y against Z Company considered an intra-corporate dispute? Explain. (2.5%)
  • Assuming that it was Z Company which instead filed a case against Mr. Y in order to collect the unpaid balance of his stock subscriptions, is the case considered an intra-corporate dispute? Explain. (2.5%)

A.6.

In January 2016, Mr. H was issued a life insurance policy by XYZ Insurance Co., wherein his wife, Mrs. W, was designated as the sole beneficiary. Unbeknownst to XYZ Insurance Co., however, Mr. H had been previously diagnosed with colon cancer, the fact of which Mr. H had concealed during the entire time his insurance policy was being processed.

In January 2019, Mr. H unfortunately committed suicide. Due to her husband’s death, Mrs. W, as beneficiary, filed a claim with XYZ Insurance Co. to recover the proceeds of the late Mr. H’s life insurance policy. However, XYZ Insurance Co. resisted the claim, contending that: 1. the policy is void ab initio because Mr. H fraudulently concealed or misrepresented his medical condition, i.e., his colon cancer; and 2. as an insurer in a life insurance policy, it cannot be held liable in case of suicide. Rule on each of XYZ Insurance Co.’s contentions. (5%)

Rule on each of XYZ Insurance Co.’s contentions. (5%)

Not covered by MERCREV 1.

A.7.

Ms. J offered to sell her car to Ms. K, an interested buyer. Consequently, Ms. J emailed Ms. K a copy of the proposed Deed of Sale covering the same. After agreeing to its terms, Ms. K printed and then signed the emailed copy of the Deed of Sale. She then faxed it to Ms. J who signed the faxed copy.

Is the copy of the Deed of Sale faxed by Ms. K to Ms. J considered an electronic document under the Electronic Commerce Act? Explain. (2%)

No, the copy of the Deed of Sale faxed by Ms. K to Ms. J is not considered an electronic document under the Electronic Commerce Act.

It has been held that an original print out of a fax transmission via fax machine is not considered an electronic data message. This is in harmony with the E-Commerce Act’s focus on “paperless” communications and the “functional equivalent approach.” Facsimile transactions are not, in this sense, papers, but verily paper-based. (MCC Industries Sales Corporation v. Ssangyong Corporation, cited in Dimaampao & Dumlao- Escalante, 2018, p. 382)

A.8.

KLM Printers, Inc. operated a small outlet located at the ground floor of a university building in Quezon City. It possessed soft copies of certain textbooks on file, and would print “book-alikes” of these textbooks (or in other words, reproduced the entire textbooks) upon order and for a fee. It would even display samples of such “book-alikes” in its stall for sale to the public.

Upon learning of KLM Printers, Inc.’s activities, the authors of the textbooks filed a suit against it for copyright infringement. In its defense, KLM Printers, Inc. invoked the doctrine of fair use, contending that the “book-alikes” are being used for educational purposes by those who avail of them.

• What is the doctrine of fair use? (2%)
• Is KLM Printers, Inc.’s invocation of the doctrine of fair use proper in this case? Explain. (3%)

Not covered by MERCREV 1.

A.9.

X Pharmaceuticals, Inc. has been manufacturing the antibiotic ointment Marvelopis, which is covered by a patent expiring in the year 2020. In January 2019, the company filed an application for a new patent for Disilopis, which, although constituting the same substance as Marvelopis, is no longer treated as an antibiotic but is targeted and marketed for a new use, i.e., skin whitening.

• What are the three (3) requisites of patentability under the Intellectual Property Code? (3%)
• Should X Pharmaceuticals, Inc.’s patent application for Disilopis be granted? Explain. (2%)

Not covered by MERCREV 1.

A.10.

In 2005, W Hotels, Inc., a multinational corporation engaged in the hospitality business, applied for and was able to register its trademark “W” with the Intellectual Property Office of the Philippines (IPO) in connection with its hotels found in different parts of the world.

In 2009, a Filipino corporation, RST Corp., filed before the IPO a petition for cancellation of W Hotels, Inc.’s “W” trademark on the ground of non-use, claiming that W Hotels, Inc. failed to use its mark in the Philippines because it is not operating any hotel in the country which bears the “W” trademark.

In its defense, W Hotels, Inc. maintained that it has used its “W” trademark in Philippine commerce, pointing out that while it did not have any hotel establishment in the Philippines, it should still be considered as conducting its business herein because its hotel reservation services, albeit for its hotels abroad, are made accessible to Philippine residents through its interactive websites prominently displaying the “W” trademark. W Hotels, Inc. also presented proof of actual booking transactions made by Philippine residents through such websites.

Is W Hotels, Inc.’s defense against the petition for cancellation of trademark tenable? Explain. (5%)

No. See W Land v. Starwood Hotels (PERLAS-BERNABE, J.)

– END OF PART I –

Note: This marks the end of Part I. The forthcoming problem sets will fall under Part II and the answers therefor should be written in Booklet II.

PART II

B.11.

W Medical, Inc. operated a full-service hospital named WMed. Using its stockholders’ advances and a mortgage loan from Bank X, W Medical, Inc. commenced the construction of a new 11-storey WMed Annex Building. Unfortunately, due to financial constraints, only seven (7) floors were constructed and the WMed Annex Building remained unfinished.

Despite the non-completion of the WMed Annex Building, W Medical, Inc. continued its operations and earned modest revenues. While W Medical, Inc.’s assets are more than its liabilities and it is able to turn a monthly profit, it could not pay its loan installments to Bank X as they fall due.

• What is the concept of “insolvency” under the Financial Rehabilitation and Insolvency Act (FRIA)? May W Medical, Inc. be considered “insolvent” under the FRIA? Explain. (3%)

As discussed by Dean Divina in his class, insolvency may either be:

Technical – the debtor has more assets than liabilities but foresees the impossibility of paying debts as they fall due.

Actual – the debtor has more liabilities than assets.

Under FRIA, whether actual or technical insolvent debtor, you can file a petition for rehabilitation.

Thus, insolvent shall refer to 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.

Considering the foregoing, W Medical, Inc. may be considered insolvent because it has more assets than liabilities but is unable to pay its debts or meet its obligations as they fall due.

• Assuming that W Medical, Inc. is considered “insolvent”, may it file a petition for suspension of payments under the FRIA? Explain. (2%)

No, W Medical, Inc. may not file a petition for suspension of payments under the FRIA because suspension of payments is a remedy available ONLY to INDIVIDUAL insolvent debtors, not to sole proprietorships, partnerships, and corporations. (Sundiang and Aquino, 2017, p.434)

• Assuming that W Medical, Inc. is considered “insolvent”, what are the legally recognized modes of rehabilitation it may opt to avail of? (3%)

W Medical, Inc. may opt to avail of the following legally recognized modes of rehabilitation:

1. Court-Supervised
   1. Voluntary proceedings (Sec. 12, FRIA)
   1. Involuntary proceedings (Sec. 13, FRIA)
2. Pre-Negotiated Rehabilitation (Sec. 76, FRIA)
3. Out-of-Court or Informal Restructuring Agreement or Rehabilitation Plan. (Sec. 83 and 84, FRIA)

Caveat: Please refer to the provisions cited. These are the legally recognized modes of rehabilitation according to Dimaampao & Dumlao-Escalante, 2018, p. 494-495.

• If W Medical, Inc. files a petition for rehabilitation before the court, is it possible for the rehabilitation proceedings to be converted into one for liquidation? Explain. (2%)

Yes, it is possible for the rehabilitation proceedings to be converted into one for liquidation if there is not substantial likelihood for the debtor to be successfully rehabilitated.

Note: Rehabilitation proceedings may be converted into liquidation proceedings in the following instances:

1. The debtor is insolvent;
2. No substantial likelihood for the debtor to be successfully rehabilitated;
3. If not rehabilitation plan is confirmed within one (1) year from the date of the filing of the petition for rehabilitation;
4. If the termination of the rehabilitation proceedings was due to failure of the rehabilitation or dismissal of the petition for reasons other than technical grounds;
5. If the court determines that the debtor or creditor supporting the Rehabilitation Plan acted in bad faith, or that the objection is not curable;
6. At any time pending the court-supervised or pre-negotiated rehabilitation proceedings, the debtor may file a motion in the same court where the rehabilitation proceedings are pending to convert the proceedings into one for liquidation; and
7. At any time pending the court-supervised or pre-negotiated rehabilitation proceedings, the court where the rehabilitation proceedings are pending may convert the proceedings into one for liquidation upon recommendation of the rehabilitation receiver. (Dimaampao & Dumlao-Escalante, 2018, p. 512)

B.12.

EFG, Inc. is indebted to Bank Y in the amount of ₱50,000,000.00. The loan was secured by a suretyship agreement issued by Z Insurance Co.

Due to EFG, Inc’s default, Bank Y filed a case against Z Insurance Co. as surety. There is also a pending criminal case for violation of the Bouncing Checks Law against the President of EFG, Inc., Mr. P, who signed the check as signatory for the company.

Unable to meet its obligations as they fell due, EFG, Inc. filed a petition for rehabilitation. Finding the petition sufficient in form and substance, the court issued a Commencement Order, which was thereafter published.

• Should the case filed against Z Insurance Co. be suspended in light of the Commencement Order? Explain. (2.5%)

No, the case filed against Z Insurance should not be suspended in light of the Commencement Order because the effects of the Commencement Order do not apply to claims against sureties and other persons solidarily liable with the debtor.

• Should the criminal case filed against Mr. P be suspended in light of the Commencement Order? Explain. (2.5%)

No, the criminal case filed against Mr. P should not be suspended in light of the Commencement Order because the effects of the Commencement Order do not apply to criinal actions against individual debtors or owner, partner, director, or officer of the debtor.

Caveat: Remember Dean Divina’s SSQ-SIAC.

B.13.

Enumerate at least two (2) rights of a data subject under the Data Privacy Act. (2%)

Not covered by MERCREV 1.

B.14.

ABC Corp. is a company which shares are listed in the Philippine Stock Exchange. In 2015, 25% of ABC Corp.’s shareholdings were acquired by XYZ, Inc., while 40% of the same were acquired by RST, Inc., both of which are non-listed private corporations. Meanwhile, the remaining 35% of ABC Corp.’s shareholdings are held by the public.

In 2018, or three years (3) after it acquired its 25% stake in ABC Corp., XYZ, Inc. sought to obtain an additional 12% shareholding in ABC Corp. by purchasing some of the shares owned by RST, Inc. therein. The new acquisition will not, however, result in XYZ, Inc. gaining majority control of ABC Corp.’s Board.

Is XYZ, Inc. required to conduct a tender offer? Explain. (3%)

No, XYZ, Inc. is not required to conduct a tender offer.

According to the law, a tender offer is required when any person or group of persons acting in concert, who intends to acquire 35% or more of the outstanding voting share or such outstanding voting shares that are sufficient to gain control of the board in a public company in one or more transactions WITHIN A PERIOD OF 12 MONTHS equity shares in a public company. (See Sundiang and Aquino, 2017, p. 307)

While XYZ, Inc. was able to acquire 35% of the outstanding voting share of ABC Corp., a public company, it did not do so within a 12-month period as required by law, but rather in a 3- year period. Hence, the tender offer rule does not apply in this case.

B.15.

Mr. P, the President of JKL, Inc. which shares are listed in the Philippine Stock Exchange, was notified that the corporation has just been awarded a ₱5,000,000,000.00 construction contract by a reputable private company. Before this information could be disclosed to the public, Mr. P called his stockbroker to purchase 20,000 shares of JKL, Inc. He also mentioned the transaction to his brother, Mr. B. Mr. B, who was not involved at all in the business of JKL, Inc., also bought 50,000 shares of JKL, Inc. because of the tip disclosed to him by Mr. P.

• Is the information disclosed by Mr. P to Mr. B considered as material nonpublic information for purposes of insider trading? Explain. (2%)

Yes, the information disclosed by Mr. P to Mr. B is considered as material non-public information for purposes of insider trading.

Information is considered as material non-public information if such information would likely affect the market price of the security if it is disseminated to the public and reasonable time is allowed for the market to absorb the information.

The award in favor of JKL, Inc. would likely affect the market price of its securities should the information regarding the said award has been disseminated to the public and reasonable time is allowed for the market to absorb the information.

• Should Mr. P and Mr. B be held liable for insider trading? Explain. (3%)

the directors, officers, any stockholder controlling the issuer, any person, by reason of relationship, gains or gives him access to material non-public information like lawyers, accountants, advisers, managers; employee or official of the stock exchange who, by reason of their position, gives their material non-public information; another person who learns any of these information from an insider

B.16.

Mayor J has two (2) bank accounts: 1. a Peso savings account with Bank P; and 2. a U.S. Dollar savings account with Bank D.

In 2018, Mayor J’s former business partner, Mr. K, filed a civil case for collection of sum of money against him.

In the same year, a criminal case for Direct Bribery under the Revised Penal Code was filed against Mayor J. It was alleged in the Information that in exchange for the expeditious approval of various permits and licenses, Mayor J received kickbacks which amounts were deposited to his bank accounts.

• In the event Mayor J is held ultimately liable in the civil case filed by Mr. K, may Mayor J’s bank accounts in Bank P and Bank D be subject to garnishment? Explain. (2.5%)

Bank P – Yes, since garnishment is one of the exceptions to the Law on Secrecy of Bank Deposits.

Bank D – No, since the lone exception to the Law on Secrecy of Foreign Currency Bank Deposits is the written permission of the depositor. (See Executive Notes on MERCREV I)

• Assuming that the prosecution in the criminal case sought from the court an inquiry of Mayor J’s bank accounts in Bank P and Bank D, may a bank inquiry order be issued? Explain. (2.5%)

Bank P – Yes, since a bank inquiry order issued by a competent court for cases of bribery or dereliction of duty or cases of unexplained wealth is one of the exceptions to the Law on Secrecy of Bank Deposits.

Bank D – No, since the lone exception to the Law on Secrecy of Foreign Currency Bank Deposits is the written permission of the depositor. (See Executive Notes on MERCREV I)

B.17.

Several public officials were charged before the Sandiganbayan for violation of the Anti- Graft and Corrupt Practices Act involving the anomalous award of a multi-billion contract to Corporation Z. The Information alleged that each of the accused received kickbacks from Corporation Z in exchange for the dispensation of certain bidding requirements, and that the said kickbacks were deposited to the accused’s respective bank accounts in the Philippines. Upon request of the Office of the Ombudsman, the Compliance and Investigation Staff of the Anti-Money Laundering Council (AMLC) conducted an intelligence database search. The search revealed that there were remittances to the bank accounts of the accused with six (6) different banks.

• May the AMLC examine the bank accounts of the accused-public officials even without seeking a prior court order? Explain.(2.5%)

No, the AMLC may not examine the bank accounts of the accused-public officials even without seeking a prior court order.

The AMLC may examine bank accounts without prior court order on the basis of the following predicate crimes (HK-TMAD): Hijacking, Kidnapping for Ransom, Terrorism, Murder, Destructive Arson, and Violation of the Comprehensive Dangerous Drugs Act.

Since the crime charged from the facts does not fall under any of the foregoing predicate crimes, the AMLC may not examine the bank accounts of the accused-public official without seeking prior court order. (See Sundiang and Aquino, 2017, p. 367)

• May a court order be issued ex parte for the freezing of the bank accounts of the accused-public officials upon application of the AMLC? If so, in what instance may this be done and which court can issue such order? Explain. (2.5%)

Yes, according to jurisprudence, a court order may be issued ex parte for the freezing of the bank accounts of the accused-public officials upon application of the AMLC.

It may be issued by the Court of Appeals if there is probable cause that any monetary instrument or property is in any way related to an unlawful activity. (See Sundiang and Aquino, 2017, p. 366)

B.18.

Mrs. T maintained a checking account with Bank U. While Mrs. T was abroad, she left her checkbook inside her office drawer, which she kept under lock and key. However, Mrs. T’s long-time secretary, Ms. S, knew where the checkbook was hidden. Ms. S then broke the

lock on the office drawer, took one of Mrs. T’s blank checks, and succeeded to encash

₱200,000.00 from Bank U by imitating Mrs. T’s signature. As soon as Mrs. T returned from abroad and discovered the incident, she immediately reported the matter to Bank U, seeking that the transaction be reversed. However, the bank refused, contending that Mrs. T should bear the loss arising from the forgery.

• Is the imitation of Mrs. T’s signature considered as a material alteration under the Negotiable Instruments Law? Explain. (2.5%)

A material alteration is any alteration which changes the effect of the instrument as to date, sum payable, time or place of payment, number or relation of parties, medium or currency of payment, or adds place of payment where none is specified.

• Is Bank U’s contention tenable? Explain. (2.5%)

No, Bank U’s contention is not tenable.

The bank is bound to know the signature of its customers and if it pays a forged check, it must be considered as making the payment out of its own funds and cannot ordinarily charge the amount so paid to the account of the depositor whose name is forged. This is so because the

• bank is in a superior position to detect the forgery, being in possession of the customer’s specimen signature, and (b) the drawee bank, by accepting the instrument, becomes an acceptor who admits the genuineness and due execution of the drawer’s signature.

Caveat: You can also mention that banks are expected to exercise extraordinary diligence in its dealings with its clients since it is imbued with public interest.

B.19.

LMN, Inc. operates a beach resort in a secluded island off the coast of Puerto Princesa City, Palawan. It operates three (3) motorized boats to ferry its guests from the city proper to the island resort and vice-versa. During one rainy morning, the guests were informed that the ferry services for that day were cancelled due to a storm forecast. In order to appease the apparent dismay of most of the guests who will miss their flight back to Manila, the boat captain of one of LMN, Inc.’s motorized boats decided to push through with its trip back to the city. Shortly after the boat sailed, the storm hit and the winds and waves became stronger, causing engine trouble to the boat. Unfortunately, the boat capsized and sank, resulting in the death of one of the passengers, Mr. X.

This prompted Mr. X’s heirs to file a complaint for damages against LMN, Inc., which they alleged to be a common carrier. In its defense, LMN, Inc. maintained that it is not a common carrier because its boats are not available to the general public but only ferry resort guests and employees.

• May LMN, Inc. be considered a common carrier? Explain. (3%)
  • Assuming LMN, Inc. is a common carrier, may it be absolved from liability on the ground of fortuitous event? Explain. (2%)

Not covered by MERCREV 1.

B.20.

F Corp., a corporation engaged in the export of fertilizers, entered into a sale of its products with Mr. P. In this relation, Bank C, F Corp.’s bank, received an irrevocable letter of credit, payable on sight, issued by Bank I for the account of its client, Mr. P, in the amount of

₱1,000,000.00 to cover the purchase price of the sale. In the letter of credit, Bank C was designated as the confirming bank.

After being presented the required documents under the letter of credit, Bank C issued in favor of F Corp. a cashier’s check in the amount of ₱1,000,000.00.

Bank C then informed Bank I of the payment made pursuant to the letter of credit. Thereafter, Bank C transmitted the documents presented by F Corp. to Bank I and sought to be reimbursed for the amount it paid to F Corp.

Bank I, however, refused to reimburse Bank C for the reason that it received an e-mail coming from Mr. P that the latter will not make any payment to Bank I in relation to the letter of credit because the products shipped to him by F Corp. were of substandard quality.

• Is Bank I’s refusal to reimburse Bank C warranted? Explain. (3%)

No, Bank I’s refusal to reimburse Bank C is not warranted under the Doctrine of Independence.

Under the Doctrine of Independence, a letter of credit transaction is comprised of three

(3) separate and distinct, yet inter-related relationships, namely, (a) between the buyer and the seller; (b) the issuing bank and the buyer; and (c) the issuing bank and the seller. Performance in each relationship is not premised or conditioned upon performance in the other relationships.

• Assuming that the documents submitted by F Corp. were proven to be actually forged but were nonetheless accepted by Bank C as sufficient, may Bank I refuse Bank C’s claim for reimbursement? Explain. (2%)

Yes, Bank I may refuse Bank C’s claim for reimbursement under the Fraud Exception Principle.

The Fraud Exception Principle applies when there is fraud or forgery in the underlying transaction or the tender documents. (See Sundiang and Aquino, 2017, p. 397)

– END OF PART II –