2009 POINTERS FOR REVIEW

1

COMMERCIAL LAW

2010 POINTERS FOR REVIEW

INSURANCE

Q. How may a contract of insurance be perfected?

A. A contract of insurance, like other contracts, must be assented to by both parties either in person or by their agents. So long as an application for insurance has not been either accepted or rejected, it is merely an offer or proposal to make a contract. There can be no contract of insurance unless the minds of the parties have met in agreement. Hence, it is only when the insurer accepts the application and communicates the same to the applicant that the contract of insurance is perfected.[footnoteRef:2] If the offer and acceptance are made by correspondence, the acceptance shall not be binding until it has been made known to the one making the offer.[footnoteRef:3] Aside from meeting of the minds of the parties, premium on the policy must be paid before the contract can be valid and binding.[footnoteRef:4] [2: Perez vs. Court of Appeals, G. R. No. 112329, January 28, 2000.] [3: Enriquez vs. Sun Life Insurance of Canada, 41 Phil. 269.] [4: Section 77.]

Q. Perez applied for life insurance coverage with the BF Lineman Insurance Corporation and immediately paid part of the premium. The application was forwarded to the office of BF Lineman at Gumaca, Quezon for transmittal to its head office in Manila. Perez died before his application was brought to the Manila Office of BF Lineman. Without knowing of his death, BF Lineman approved the application and issued the corresponding policy. The beneficiary filed a claim with the insurer which refused to pay on the ground that the contract was not perfected. Was the insurance contract perfected? A. The contract was not perfected. It is only when the insurer accepts the application and communicates the same to the applicant and the latter pays the premium while he is in good health that the contract of insurance is perfected. The insurers acceptance is manifested when it issues a corresponding policy to the applicant. Perez died before his application was brought to the head office of BF Lineman in Manila. There was absolutely no way the acceptance of the application could have been communicated to the applicant inasmuch as the applicant was already dead at that time. There can be no contract of insurance unless the minds of the parties have met in agreement.[footnoteRef:5] [5: Perez vs. Court of Appeals, G. R. No. 112329, January 28, 2000.]

Q. How should insurance contracts be interpreted?A. In case there is no doubt as to the terms of an insurance contract, the provisions must be construed in their plain, ordinary and popular sense. However, when the terms of the policy are ambiguous, uncertain or doubtful, they should be interpreted strictly against the insurer and liberally in favor of the insured, because the insured has no voice in the selection of the words used, and the language of the contract is selected by legal advisers of the insurance company.[footnoteRef:6] In such case, ambiguous provisions are construed strictissimi juris or of strictest terms[footnoteRef:7] against the insurer. [6: Calanoc vs. Court of Appeals, 52 O. G. 191; Qua Chee Gan vs. Law Union Rock Ins. Co., Ltd., 52 O. G. 1982.] [7: Mc Cullough & Co. vs. Taylor, 25 Phil. 113; Asked, No. V (2), 2003 Bar Exams.]

An insurance contract, being a contract of adhesion, should be interpreted as to carry out the purpose for which the parties entered into the contract which is to insure against risks of loss or damage to the goods. 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.[footnoteRef:8] [8: DBP Pool of Accredited Insurance Companies vs. Radio Mindanao Network, Inc., 480 SCRA 314 315, January 27, 2006.]

Q. Are contracts of insurance entered into by the insurer and insured on equal footing?A. To characterize the insurer and the insured as contracting parties on equal footing is inaccurate at best. Insurance contracts are wholly prepared by the insurer with vast amounts of experience in the industry purposefully used to its advantage. More often than not, insurance contracts are contracts of adhesion containing technical terms and conditions of the industry confusing if at all understandable to lay persons, that are imposed on those who wish to avail of insurance. As such, insurance contracts are imbued with public interest that must be considered whenever the rights and obligations of the insurer and the insured are to be delineated. Hence, in order to protect the interest of insurance applicants, insurance companies must be obligated to act with haste upon insurance applications, to either deny or approve the same, or otherwise be bound to honor the application as a valid, binding and effective insurance contract.[footnoteRef:9] [9: Eternal Gardens Memorial Park Corporation vs. The Phil. American Life Insurance Co., G. R. No. 166245, April 9, 2008.]

Q. Why are insurance contracts called contracts by adhesion or adherence?A. Insurance contracts are prepared only by the insurer and imposed upon parties dealing with it which may not be changed, the latters participation in the agreement being reduced to the alternative to take it or leave it, in contrast to those entered into by parties bargaining on an equal footing and, therefore, any ambiguity thereon must be resolved against the insurer, the party preparing the contract.[footnoteRef:10] [10: (Qua Chee Gan vs. Law Union Rock Ins. Co., Ltd., 52 O. G. 1982).]

Q. Philamlife and Eternal Gardens entered into a Group Life Policy under which the clients of Eternal who purchased burial lots from it on installment would be insured by Philamlife. Eternal was required under the policy to submit a list of new lot purchasers , together with a copy of the application of each purchasers and the amounts of the respective unpaid balances of all insured lot purchasers. Eternal sent a letter dated December 29, 1982, containing a list of insurable balances of its lot buyers. On of those included in the list was John Chuang. Philamlife did not reply to the said letter. On August 2, 1984 Chuang died. Eternal demanded payment from Philamlife of the insurance claim for Chuangs death. Philamlife denied the claim on the ground that no application for Group Insurance was submitted to Philamlife prior to Chuangs death. The contact between Philamlife and Eternal stated that the insurance of any eligible Lot Purchaser shall be effective on the date he contracts a loan with the Assured (Eternal). It was further stated that there shall be no insurance if the application of the Lot Purchaser is not approved by the Company (Philamlife). Was there a valid contract of insurance covering Chuangs life considering the conflicting provisions of the policy?

A. The seemingly conflicting provisions must be harmonized to mean that upon a partys purchase of a memorial lot on installment basis 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. Insurance is a contract by adhesion which must be construed liberally in favor of the insured and strictly against the insurer.[footnoteRef:11] [11: Eternal Gardens Memorial Park Corp. vs. Philamlife, G. R. 166245, April 9, 2008.]

Q. How should ambiguities in a Health Care Agreement be interpreted?A. Health Care Agreement is in the nature of a non-life insurance which is primarily a contract of indemnity[footnoteRef:12] and hence, it is a contract of adhesion the terms of which must be interpreted and enforced stringently against the insurer which prepared the contract.[footnoteRef:13] [12: Philamcare Health Systems, Inc. vs. CA, 379 SCRA 356 (2002).] [13: Blue Cross Health Care, Inc. vs. Olivares, 544 SCRA 580, 586, February 12, 2008.]

Q. Who may be a beneficiary in life insurance?A. Any person may be designated as beneficiary in a life insurance contract even though he is a stranger and has no insurable interest in the life insured,[footnoteRef:14] except those [14: 4 Couch 2d, 504; Asked, 1946 (Aug.) and 1969 Bar Exams.; No. IV, 1987 Bar Exams.]

who are forbidden by law to receive donations from the insured[footnoteRef:15] such as: [15: Art. 2012, Civil Code; Asked, 1955 & 1962 Bar Exams.; No. 4, 1981 Bar Exams., No. 13, 1985 Bar Exams.; No. X, 1998 Bar Exams.]

(a) Those made between persons who are guilty of adultery or concubinage at the

time of the donation;

(b) Those made between persons found guilty of the same criminal offense, in

consideration thereof;

(c) Those made to a public officer or his wife, descendants and ascendants, by

reason of his office.[footnoteRef:16] [16: Article 739 Civil Code.]

In essence, a life insurance policy is no different from a civil donation insofar as designation of 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 of the said insurance. As a consequence, the proscription in Article 739 of the Civil Code should equally operate in life insurance contracts. 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.[footnoteRef:17] [17: Insular Life Assurance Co., Ltd., vs. Ebrado, 80 SCRA 181; Asked, No. 4, 1981 Bar Exams.; No. 13, 1985 Bar Exams.; No. X, 1998 Bar Exams.]

Q. Must the beneficiary have insurable interest in life insured?

A. A person procuring insurance on his own life may name anyone he chooses as beneficiary thereof, even though he is stranger and has no insurable interest in the life insured.[footnoteRef:18] However, a person who cannot receive donation from the insured under Article 739 of the Civil Code cannot be designated as beneficiary.[footnoteRef:19] [18: 4 Couch 2d. 504; In re Saymanakis Estate, 167 A. 420, 109 Pa. Super, 555; Asked 1949 Bar Exams.; No. IV, 1987 Bar Exams.] [19: See discussions under Section 11.]

Q. May the wife who abandoned her husband be a beneficiary of Social Security Benefits?A. In the case of Social Security System, et al., vs. Gloria de los Santos[footnoteRef:20] the Supreme Court ruled that a wife who left her husband and lived with another man is no longer entitled to receive Social Security benefits upon the death of the husband because she was no longer dependent upon him for her support. [20: G. R. No. 164790, August 29, 2008.]

Q. Less than a year after the marriage of Antonio de los Santos and Gloria de los Santos, the latter left Antonio and contracted another marriage with Domingo Talens in 1965. In 1969, Gloria went back to Antonio and lived with him until 1983 when she again left Antonio and went to the United States where she obtained a divorce from Antonio. In the meantime, Antonio married Cirila de los Santos and amended his SSS records by changing his beneficiary from Gloria to Cirila. Antonio died and Gloria claimed the SSS insurance benefits. The Court of Appeals ruled that the marriage between Antonio and Gloria still subsisted and the subsequent marriages contracted by them were void. Thus, the Court of Appeals ruled that Gloria was still the legal wife of Antonio and hence entitled to the SSS benefits. Should Gloria be entitled to the SSS benefits? A. The divorce obtained by Gloria against Antonio was not binding in this jurisdiction. Under Philippine law, only aliens may obtain divorces abroad provided they are valid according to their national law. The divorce was obtained by Gloria while she was still a Filipino citizen, hence it did not sever her marriage with Antonio. However, although Gloria was the legal spouse, she is still disqualified to be his primary beneficiary under the SSS law. A wife who left her family until her husband died and lived with other men was not dependent upon her husband for support, financial or otherwise, during the same period. Gloria left the conjugal abode and lived with two different men. These facts remove her from qualifying as a primary beneficiary of her deceased husband.[footnoteRef:21] [21: Social Security System, et al., vs. Gloria de los Santos, August 29, 2008, Third Division, Supreme Court.]

Q. What is the meaning of incontestable clause?A. An incontestable clause in a life insurance policy is an agreement by which the insurance company limits the period of time within which it will interpose objections to the validity of the policy or set up any defense.[footnoteRef:22] [22: 45 C. J. S. 758.]

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 its last reinstatement, the insurer cannot prove that the policy is void ab initio or is rescindable by reason of the fraudulent concealment or misrepresentations of the insured or his agent.[footnoteRef:23] [23: Section 48, par. 2.]

Q. What are the requisites of incontestability?

A. To become incontestable, a policy must have the following requisites:

1. It must be a life insurance policy;2. It must be payable on the death of the insured; and 3. It must have been in force during the lifetime of the insured for a period of two years.[footnoteRef:24] [24: Section 48, par. 2.]

Q. What are the effects of incontestability?

A. Whenever all the requisites of incontestability are present, the insurer can no longer escape liability under the policy nor be allowed to prove that the policy is void ab initio or rescindable by reason of concealment or misrepresentation of the insured or his agent. In other words, the insurer is precluded from contesting the policy on any ground.[footnoteRef:25] [25: 45 C. J. S. 780; Asked, Bar Exams. : 1947, 1953 & 1966; Asked, No. XII, 1998 Bar Exams.]

Q. When may a third person sue the insurer?

A. If the insurance contract was intended to benefit third persons, the latter may directly claim from the insurer. Thus,

If the insurance contract should contain some stipulation in favor of a third person, the latter although not a party to the contract may enforce the stipulation in his favor before it is revoked by the contracting parties, [footnoteRef:26]or where the insurance contract provides for indemnity against liability to third persons, then third persons to whom the insured is liable, can sue the insurer.[footnoteRef:27] [26: Coquia vs. Fieldmens Ins.Co., 26 SCRA 179, 181.] [27: Guingon vs. del Monte, et al., 20 SCRA 1043.]

Q. The insurer issued a common carrier accident insurance policy to Manila Yellow Taxicab wherein it was stipulated that the insurer will indemnify any authorized driver who was driving the motor vehicle insured. A taxicab of the insured, driven by Coquia met a vehicular accident which caused the death of Coquia. May the heirs of Coquia hold the insurer liable?

A. The policy under consideration is typical of contracts pour autrui and therefore, the enforcement thereof may be demanded by a third party for whose benefit it was made, although not a party to the contract.[footnoteRef:28] [28: Coquia vs. Fieldmens Ins. Co., Inc., 26 SCRA 179.]

Q. Aguilar insured his jeepneys against accidents and third-party liability. In the policy, the insurer agreed to indemnify the insured against all sums which the insured shall become legally liable to pay in respect of death of or bodily injury to any person. One of the jeepneys insured bumped Guingon who had just alighted from another jeepney. Guingon died. Can the insurer be made directly liable for the death of Guingon who was not a party to the insurance contract?A. The insurance taken was one for indemnity for liability to third persons and, therefore, such third person is entitled to sue the insurer.[footnoteRef:29] [29: Guingon vs. del Monte, 20 SCRA 1043.]

Q. What are the statutory exceptions to the rule that the insurer is entitled to the payment of premium as soon as the thing insured is exposed to the peril insured against?A. Notwithstanding any agreement to the contrary, no policy or contract of insurance is valid and binding unless and until the premium thereof has been paid.[footnoteRef:30] [30: Section 77, 2nd sentence.]

The statutory exceptions wherein the policy shall be binding notwithstanding the non-payment of premiums are:1. In case of life or industrial life insurance whenever the grace period applies;[footnoteRef:31] [31: Section 77, 2nd sentence.]

2. When the insurer makes a written acknowledgment of the receipt of premium, such acknowledgment is a conclusive evidence of payment of premium to make the policy binding;[footnoteRef:32] [32: Section 78.]

3. Where the obligee has accepted the bond or suretyship contract in which case such bond or suretyship becomes valid and enforceable irrespective of whether or not the premium has been paid by the obligor to the surety.[footnoteRef:33] [33: Section 177.]

Q. Aside from the statutory exceptions mentioned above wherein the policy is valid and binding notwithstanding the non-payment of premiums, what are the other exceptions that evolved from cases decided by the Supreme Court:A. Aside from the statutory exceptions, the following are the instances when the Supreme Court ruled that the policy is valid and binding notwithstanding the non-payment of premiums:1. In case of cover notes which are binding even if premiums are not paid thereon because no premium could be fixed on the cover note until all the particulars of the insurance are known. Cover notes should be integrated to the regular policies so that the premiums on the regular policies include the consideration for the cover notes.[footnoteRef:34] [34: Pacific Timber and Export Corporation vs. Court of Appeals, 112 SCRA 199.]

2. When the parties agreed to have the premiums paid by installments or payment by installments is an established practice by the parties, acceptance of the payment of premium by installments would suffice to make the policy binding.[footnoteRef:35] [35: Makati Tuscany Condominium Corp. vs. Court of Appeals, 215 SCRA 462; Asked, No. V, 2006 Bar Exams.]

3. When the insurer has granted the insured a credit term for the payment of premium, the insurer is barred by estoppel from claiming forfeiture of the policy due to non-payment of premium within the credit term.[footnoteRef:36] [36: UCPB vs. Masagana Telamart, Inc., 356 SCRA 307. There are however, strong dissenting opinions in this case.]

Q. Olivares obtained a health care coverage from Blue Cross Health Care, Inc.. In the health care agreement of the parties, ailments due to pre-existing conditions were excluded from the coverage. Barely 38 days from the effectivity of her health care coverage, Olivares suffered a stroke and was admitted at the Medical City hospital. She was treated by Dr. Saniel, her attending physician. She asked Blue Cross to pay her medical expenses but the latter suspended payment pending submission of a certification from her attending physician that the stroke she suffered was not caused by a pre-existing condition. After being discharged from the hospital, Olivares again claimed payment from Blue Cross but the latter insisted on Dr. Saniels report. Blue Cross asked for a report from Dr. Saniel which was refused on the ground that Olivares invoked the patient-physician confidentiality. During the trial, Blue Cross never presented any evidence to prove that Olivares stroke was due to a pre-existing condition. It merely speculated that Dr. Saniels report would be adverse to Olivares, based on her invocation of the doctor-patient privilege. Should Blue Cross be exempted from liability?A. The rule that evidence willfully suppressed would be adverse if produced does not apply if the suppression is an exercise of a privilege. The refusal of Olivares was justified. It was privileged communication between physician and patient. Furthermore, limitations of liability on the part of the insurer or health care provider must be construed in such a way as to preclude it from evading its obligations. Since Blue Cross had the burden of proving exception to liability, it should have made its own assessment of whether Olivares had a pre-existing condition when it failed to obtain the attending physicians report. It could not just passively wait for Dr. Saniels report to bail it out.[footnoteRef:37] [37: Blue Cross Health Care, Inc. vs. Olivares, 544 SCRA 580, February 12, 2008. ]

Q. In an insurance suit, what is the actionable document, the policy or a memorandum thereof or a Marine Risk Note?

A. In an insurance suit, the actionable document is the policy which must be attached to the complaint pursuant to Section 7, Rule 9 of the Rules of Court. However, there is no specific provision in the Rules of Court which prohibits the admission in evidence of an actionable document in the event a party fails to comply with the requirement of the rule on actionable document under Section 7, Rule 9. But what must be presented as evidence is the policy itself and not a mere Marine Risk Note.[footnoteRef:38] [38: Malayan Insurance Co., Inc. vs. Regis Brokerage Corporation, G. R. No. 172156, Nov. 23, 2007.]

Q. 120 pieces of motors were air shipped from the US to ABB Koppel, Inc. in Manila. At the NAIA, the cargo was discharged and forwarded to the warehouse of Paircargo for temporary storage pending release by the Bureau of Customs. Later, Regis Brokerage withdrew the cargo and delivered it to ABB Koppel. However, it was discovered that only 65 of the 120 pieces of motors were actually delivered and the remaining 55 motors could not be accounted for. Paircargo and Regis both refused to pay the value of the missing motors. Thus, Malayan Insurance with which ABB Koppel insured the cargo paid ABB Koppel the insurance claim. Claiming subrogation to the right of ABB Koppel, Malayan Insurance filed an action against Paircargo and Regis at the MeTC of Manila where it presented Marine Risk Note as proof that Malayan Insurance insured the cargo. The complaint was dismissed on the ground that the Marine Risk Note presented as proof that the cargo was insured was invalid. (a) Was the Marine Risk Note sufficient to prove the existence of the insurance contract? (b) Was Malayan Insurance subrogated to the rights of ABB Koppel against the party responsible for the loss of the shipment?

A. (a) The Marine Risk Note was not the insurance contract itself, but merely a complementary or supplementary document to the contract of insurance that may have existed between Malayan and ABB Koppel. (b) Since Malayan failed to introduce in evidence the Marine Insurance Policy itself as the main insurance contract, or even advert to said document in the complaint, it failed to establish its cause of action for restitution as a subrogee of ABB Koppel. Malayans right to recovery is derived from contractual subrogation as an incident to an insurance relationship, and not from any proximate injury to it inflicted by the defendants. It is critical that Malayan establish the legal basis of such right to subrogation by presenting the contract constitutive of the insurance relationship between it and ABB Koppel. Without such legal basis, its cause of action cannot survive. The dismissal of the complaint is correct.[footnoteRef:39] [39: Malayan Insurance Co., Inc. vs. Regis Brokerage Corporation, supra.]

Q. When may abandonment be made?A. Abandonment may be made in any of the following cases:[footnoteRef:40] [40: Section 139; Asked, X (b), 2005 Bar Exams. ]

(a) If more than of the value of the thing insured is actually lost;(b) If more than of the value of the thing insured would have to be expended to recover it from the peril;[footnoteRef:41] [41: Asked, 1971 Bar Exams.]

(c) If it is injured to such an extent as to reduce its value by more than ; (d) If the thing insured is a ship and the contemplated voyage cannot be lawfully performed without an expense to the insured of more than of the value of the thing abandoned; (e) If the thing insured is a ship and the contemplated voyage cannot be lawfully performed without incurring risk which a prudent man would not take under the circumstances;(f) If the thing insured, being cargo or freightage, and the voyage cannot be performed nor another ship procured by the master within a reasonable time and with reasonable diligence, to forward the cargo without incurring an expense of more than of the value of the thing[footnoteRef:42] or without incurring a risk which a prudent man would not under take under the circumstances. [42: Asked, No. 5, 1982 Bar Exams.]

Q. What may be recovered by the insured when abandonment is properly made?A. When abandonment is properly made, the insured may recover a total loss, and the insurer acquires all the interests of the insured in the thing insured with all chances of recovery and indemnity. But if the insured omits to abandon, he may recover only his actual loss.[footnoteRef:43] [43: Sections. 146 and 155; Asked, No. 5, 1982 Bar Exams.]

Q. WG& A, as owner of Superferry 3 entered into a contract for dry docking and repairs of said vessel with Keppel. It was insured by WG&A with Pioneer Insurance for its total value of P360 million. In Clause 20 of the Ship Repair Agreement between WG& A and Keppel, it was agreed that in case of damage to the vessel, Keppel shall be liable only for P50 million . Due to the negligence of Keppels specially trained welder, fire broke out and burned Superferry 3. It was established that the damage to the ship would exceed P270 million, or of the total value of the policies. WG&A abandoned the ship and claimed P360 million, the total value of the policies. Pioneer paid the total loss and claimed reimbursement from Keppel by way of subrogation. Keppel refused to pay.(a) Was abandonment proper? As a consequence thereof, was it correct for Pioneer to pay WG&A a total loss?(b) Was subrogation proper?(c) Can the liability of Keppel exceed P50 million, the limitation of liability agreed upon with WG &A in Clause 20 of the Ship Repair Agreement?A. (a) The abandonment was proper since it could be made, when among others, more than three-fourths thereof in value is actually lost, or would have to be expended to recover it from the peril[footnoteRef:44]. The total value of the property insured was P360 million and the damage was more than P270 million or more than of the vessels insured value. As a consequence of the proper abandonment, the loss became a constructive total loss[footnoteRef:45] which entitles the insured to recover a total loss.[footnoteRef:46] [44: Section 139.] [45: Section 131.] [46: Keppel Cebu Shipyard, Inc. vs. Pioneer Insurance & Surety Corp., G. R. 180880-81, Sept. 25, 2009.]

(b) The subrogation was proper because under Art. 2207 of the Civil Code, if the insured has received indemnity from the insurance company for the injury or loss arising out ot the wrong or breach of contract complained of, the insurance company shall be subrogated to the rights of the insured against the wrongdoer or the person who violated the contract. It contemplates full substitution such that it places the party subrogated in the shoes of the creditor, and he may use all means that the creditor could employ to enforce payment.[footnoteRef:47] [47: Ibid.]

(c) 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.[footnoteRef:48] [48: Ibid. ]

Q. How can the insurer be held liable under the no fault indemnity clause in motor vehicle third party liability insurance? A. An insurer may be held liable under the no fault indemnity provision without the necessity of proving fault or negligence of any kind provided the following requisites are present:[footnoteRef:49] [49: Section 378; Asked, 1977 Bar Exams.; No. 6, 1983 Bar Exams.; No. III (1), 1989 Bar Exams.; No. 1 (1), 1994 Bar Exams.]

(a) The claim is for death or injury to any passenger or third party;(b) The total indemnity in respect of any one person does not exceed P5,000; and(c) The necessary proof of loss under oath to substantiate the claim must be submitted. Q. Which insurer is liable under the no fault indemnity provision?A. A claim under the no fault indemnity provision may be made against the insurer of one motor vehicle only. Such claim may be made directly by the injured party against the insurer as follows:(a) In case of an occupant of a vehicle, claim shall lie against the insurer of the vehicle in which the occupant is riding, mounting or dismounting from.(b) In any other case, claim shall lie against the insurer of the directly offending vehicle.[footnoteRef:50] [50: Section 378; Asked, No. III (1), 1989 Bar Exams; No. 1 (1), 1994 Bar Exams.]

NEGOTIABLE INSTRUMENTSQ. Who is an accommodation party? What is the liability of an accommodation party?[footnoteRef:51] [51: Asked: 1952, 1963, 1964, 1973, 1974, 1975, 1976, 1982, 1985 and 1986 Bar Exams.; No. III (a), 1993 Bar Exams.; No. IX (1), 2003 Bar Exams.]

A. An accommodation party is one who has signed the instrument as maker, drawer, acceptor, or indorser, without receiving value therefor, and for the purpose of lending his name to some other person. Such person is liable on the instrument to a holder for value, notwithstanding such holder at the time of taking the instrument knew him to be only an accommodation party.[footnoteRef:52] [52: Section 29; Ang vs. Associated Bank, 532 SCRA 244, September 5, 2007.]

Q. What is the relation between the accommodation party and the party accommodated?

A. The accommodated party is the principal while the accommodation party is the surety. It is a settled rule that as surety, the accommodation party is bound equally and absolutely with the principal and is deemed an original promissor and debtor from the beginning. The liability of the accommodation party is immediate and direct.[footnoteRef:53] [53: Garcia vs. Llamas, 417 SCRA 292. ]

The relation between an accommodation party and the accommodated party is one of principal and suretythe accommodated party is one of principal and surety the accommodated party being the surety. As such, he deemed to an original promissor and debtor from the beginning; he is considered in law as the same party as the debtor in relation to whatever is adjudged touching the obligation of the latter since their liabilities are interwoven as to be inseperable.[footnoteRef:54] [54: Ang vs. Associated Bank, 532 SCRA 244.]

Q. Are the liabilities and defenses of an accommodation party under the Negotiable Instruments Law available in case the instrument is non-negotiable?

A. In case the instrument is non-negotiable, it is covered by the provisions of the Civil Code and not by the Negotiable Instruments Law. A non-negotiable note is merely a simple contract in writing and is evidence of such intangible rights as may have been created by the assent of the parties. Hence, where the note was made payable to a specific person rather than to bearer or to order a requisite of the Negotiable Instruments Law, the parties cannot avail of the provisions of the Negotiable Instruments Law on the liabilities and defenses of an accommodation party.[footnoteRef:55] [55: Garcia vs. Llamas, supra.]

Q. What are the requisites in order that a party may be considered as an accommodation party?

A. The following are the requisites in order that a party may be considered as an accommodation party:

(a) He must have signed the instrument as maker, drawer, acceptor or indorser;

(b) He signed without receiving value therefor;

(c) He signed for the purpose of lending his name to some other person.[footnoteRef:56] [56: Section 29; Asked, No. IX (c), 2003 Bar Exams.]

Q. What is the effect of an extension of time to pay the obligation given by a holder for value to the accommodated party? Will it release the accommodation party of his liability?

A. Even if the accommodated party receives an extension of the period for payment without the consent of the accommodation party, the latter is still liable for the whole obligation and such extension does not release him because as far as the holder for value is concerned, he is a solidary co-debtor. The liability of an accommodation party is not only primary but also unconditional to a holder for value.[footnoteRef:57] [57: Ang vs. Associated Bank, 532 SCRA 244, September 5, 2007.]

Q. What constitutes a holder in due course?[footnoteRef:58] [58: Asked: 1962, 1963, 1966, 1980 and 1987 Bar Exams.; No. I (b), 1992 and No. I (c). 1996 Bar Exams.]

A. A holder in due course is a holder who has taken the instrument under the following conditions:(a) That it is complete and regular upon its face;

(b) That he became the holder of it before it was overdue, and without notice that it had been previously dishonored, if such was the fact; That he took it in good faith and for value;

(d) 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.[footnoteRef:59] [59: Section 52.]

Q. Who is deemed a holder in due course?A. Every holder is deemed prima facie to be a holder in due course; but when it is shown that the title of any person who has negotiated the instrument was defective, the burden is on the holder to prove that he or some person under whom he claims acquired the title as holder in due course. But the last mentioned rule does not apply in favor of a party who became bound on the instrument prior to the acquisition of such defective title.[footnoteRef:60] [60: Section 59. ]

Under the above provision, every holder is presumed prima facie to be a holder in due course. One who claims otherwise has the onus probandi to prove that one or more of the conditions required to constitute a holder in due course are lacking.[footnoteRef:61] [61: Bank of the Philippine Islands vs. Roxas, 536 SCRA 168, October 15, 2007. ]

Q. Roxas sold to Rodrigo and Marissa Cawili vegetable oil. As payment therefore, spouses Cawili issued a personal check in the amount of P348,805.50. However, when Roxas tried to encash the check, it was dishonored by the drawee bank. Spouses Cawili assured him that they would replace the bounced check with a cashiers check from BPI. Rodrigo Cawili and Roxas went to BPI branch in Mandaluyong and upon instructions of the Branch Manager, BPI Cashiers Check in the amount of P348,805.50 was issued, drawn against the account of Marissa Cawili, payable to Roxas. Rodrigo then handed the cashiers check to Roxas. The following day, Roxas returned to BPIs branch in Mandaluyong to encash the cashiers check but it was dishonored on the ground that Marissas account was closed on that date. Upon being sued, BPI claimed that Roxas was not a holder in due course because the latter was not a holder for value. (a) Was Roxas a holder for value and hence, a holder in due course? (b) May BPI be relieved of its liability under the cashiers check it issued?A. (a) Roxas was a holder for value and a holder in due course. Roxas received the cashiers check as payment for the vegetable oil he sold to Cawili. The fact that Rodrigo was the one who purchased the cashiers check from BPI will not affect Roxas status as a holder for value since the check was delivered to him as payment for the vegetable oil he sold to spouses Cawili. Roxas is presumed to be a holder in due course and the one who claims otherwise must prove that one or more of the conditions required to constitute a holder in due course are lacking. BPI failed to prove that Roxas was not a holder for value. [footnoteRef:62] [62: Ibid.]

(b) BPI cannot be relived of its liability under the cashiers check it issued. A cashiers check is really the banks own check and may be treated as a promissory note with the bank as maker. The check becomes the primary obligation of the bank which issues it and constitutes a written promise to pay upon demand. It is of judicial notice that a cashiers check is deemed as cash. This is because the mere issuance of a cashiers check is considered acceptance thereof. Hence, a bank becomes liable to the payee the moment it issued the cashiers check.[footnoteRef:63] [63: Ibid.]

Q. What are crossed checks? What are the kinds of crossed checks?

A. A crossed check is one with two parallel lines diagonally written on the left top portion of the check.[footnoteRef:64] The crossing is special where the name of a bank or a business institution in written between the two parallel lines, which means the drawee should pay only with the intervention of that company. The crossing is general where the words written between the two parallel lines are and Co. or for payees account only,[footnoteRef:65] or nothing is written between the parallel lines. This means that the drawee bank should not encash the check but merely accept it for deposit.[footnoteRef:66] [64: Asked, No. III (b), 2004 Bar Exams.; No. II 2 (a), 2005 Bar Exams.] [65: Associated Bank vs. Court of Appeals, 208 SCRA 495.] [66: Associated Bank vs. Court of Appeals, supra; Asked, No. VI, 1995 Bar Exams.]

Q. What are the effects of crossing a check?[footnoteRef:67] [67: Asked, No. III (1), 1994 and No. I (d), 1996 Bar Exams.; No. II 2 (a), 2005 Bar Exams.]

A. The effects of crossing a check are:(1) The check may not be encashed but deposited only in a bank;

(2) The check may be negotiated only once; and

(3) The act of crossing a check serves as a warning to the holder that the check has been issued for a definite purpose so that he must inquire if he has received the check pursuant to that purpose.[footnoteRef:68] [68: State Investment House vs. IAC, 175 SCRA 310; Associated Bank vs. Court of Appeals, 208 SCRA 465; Traders Royal Bank vs. Radio Phil. Network, Inc., 390 SCRA 608.]

However, issuing a crossed check imposes no legal obligation on the drawee not to honor such a check. It is more of a warning to the holder that the check cannot be presented to the drawee bank for payment in such case. Instead, the check can only be deposited with the payees bank which in turn must present it for payment with the drawee bank in the course of normal banking transactions between banks. The crossed checks cannot be presented for payment but it can only be deposited and the drawee bank may only pay to another bank in the payees or indorsers account.[footnoteRef:69] [69: Gempesaw vs. Court of Appeals, G.R. No. 92244, Feb. 9, 1993.]

Q. E. T. Henry sold bunker fuel to Hi-Cement. In payment of the purchases, it issued post-dated checks payable to E. T. Henry. The checks were crossed and bore the restriction deposit to payees account only. E. T. Henry discounted the checks with Insular Bank of Asia and America (Insular). The said checks were dishonored. Insular sued Hi-Cement which claimed that the former was not a holder in due course as it should not have discounted the post-dated checks being crossed checks. (a) Insular hold Hi-Cement liable? (b) If not, who may be held liable by Insular?A. (a) Insular cannot hold Hi-Cement liable as the former was not a holder in due course. The last two elements of Section 52 have not been met by Insular. Insular did not act in good faith since it was grossly negligent. Insular knew that the checks were crossed and bore restrictions that they were for deposit for payees account only; hence, they could not be further negotiated to it. Crossing of checks should put the holder on inquiry and upon him devolves the duty to ascertain the indorsers title to the check or the nature of his possession. (b) Insular may hold the party who endorsed/encashed the checks. It was E. T. Henry that re-discounted the checks and received their value from Insular hence, it should pay the latter.[footnoteRef:70] [70: Hi-Cement Corporation vs. Insular Bank of Asia and America, 534 SCRA 269, September 28, 2007.]

CORPORATION LAW

Q. What is the meaning of the doctrine of legal entity of corporations?

A. It means that a corporation is a juridical person with a personality separate and distinct from that of each shareholder. It also means that the stockholders of a corporation are different from the corporation itself.[footnoteRef:71] [71: Section 2; SEC Opinions, Jan. 18, 1993 and June 18, 1993.]

Q. What are the consequences of the doctrine of legal entity?

A. The consequences of the doctrine of legal entity regarding the separate identity of the corporation and its stockholders are as follows:

1. The stockholders are not personally liable for the debts of the corporation and vice-versa.[footnoteRef:72] The stockholders are not liable for corporate acts unless otherwise provided by law.[footnoteRef:73] [72: 13A Fletcher, Sec. 6213.] [73: Wise and Co. vs. Man Sun Lung, 40 O. G. 50.]

2. The stockholders are not the owners of corporate properties and assets.[footnoteRef:74] [74: Berman Environmental Dev. Corp. vs. CA 167 SCRA, 540.]

3. The stockholders cannot sell or maintain actions in their own name in connection with corporation affairs, business or property. Neither do stockholders have the right to recover possession of corporation property or to recover damages for injury to properties belonging to the corporation, and vice-versa.[footnoteRef:75] [75: Sulo ng Bayan, Inc. vs. Araneta, Inc. 72 SCRA 347.]

4. The property belonging to the corporation cannot be attached to satisfy the debt of a stockholder and vice versa, the latter having only an indirect interest in the assets and business of the former.[footnoteRef:76] [76: Delima vs. Gois, 554 SCRA 731, June 17, 2008; Mandaue Dinghow Dimsum House, Inc. vs. NLRC, 547 SCRA 402, March 3, 2008.]

Q. The Labor Arbiter rendered judgment in favor of Delima for illegal dismissal against his employer, Golden Union Aquamarine Corporation (Golden). The judgment became final. Pursuant to a writ of execution, the sheriff attached an Isuzu Jeep registered in the name of Gois who filed a third-party claim over the said vehicle. The Labor Arbiter denied the third-party claim on the ground that Gois was one of the respondents in the case and an incorporator/officer of Golden. May the property of Gois be attached to satisfy the judgment claim against Golden on the ground that she is an incorporator/officer of said corporation?

A. The subject vehicle belonging to Gois cannot be attached to answer for the liabilities of a corporation of which she was an incorporator/officer. A corporation has a personality distinct and separate from its individual stockholders or members and from that of its officers who manage and run its affairs. The rule is that obligations incurred by the corporation, acting through its directors, officers and employees, are its sole liabilities. Thus, property belonging to a corporation cannot be attached to satisfy the debt of a stockholder and vice versa, the latter having only an indirect interest in the assets and business of the former.[footnoteRef:77] [77: Delima vs. Gois, 554 SCRA 737, June 17, 2008.]

Q. Pursuant to a writ of execution in Felipe Javier, Jr. vs. Rufino Booc, the sheriff levied the land owned by Five Star Marketing Corporation. The said corporation, not being a party in the civil case demanded the cancellation of the notice of levy. The sheriff, on the other hand claimed that Rufino Booc was the owner of around 200 shares of stock in Five Star Marketing Corporation and the levy was made on the share, rights and/or interest and participation which Rufino Booc, as president and stockholder, may have in the parcel of land owned by Five Star Marketing Corporation. Was the levy on the corporate property proper?

A. The sheriff overstepped his authority when he disregarded the distinct and separate personality of the corporation from that of Rufino Booc as stockholder of the corporation by levying on the property of the corporation. It is settled that a corporation is clothed with a personality separate and distinct from that of its stockholders. The mere fact one is a president of the corporation does not render the property which the corporation owns or possesses the property of the president of the corporation since the latter, as an individual and the corporation are separate entities.[footnoteRef:78] [78: Booc vs. Bantuas, 354 SCRA 279.]

Q. May a corporation file an action on behalf of its members or stockholders for the recovery of properties belonging to the latter?A. No, the corporation cannot file an action to recover properties belonging to its stockholders. A corporation is a distinct legal entity considered as separate and apart from its individual stockholders or members who compose it, and is not affected by the personal rights, obligations and transactions of its stockholders or members.[footnoteRef:79] [79: Sulo ng Bayan, Inc. vs. Araneta, Inc., 72 SCRA 347.]

Q. Explain the doctrine of piercing the veil of corporate fiction.

A. Piercing the veil of corporate fiction means that while a corporation can not generally be made liable for acts or liabilities of its stockholders or members, and vice versa because a corporation has a personality separate and distinct from its stockholders or members, however, the corporate existence is disregarded under this doctrine where the corporation is formed or used for illegitimate purposes or justify wrong or evade a just and valid obligation. In such case, the corporation and the stockholders shall be considered as one and the same.[footnoteRef:80] [80: Solidbank Corporation vs. Mindanao Ferroalloy Corporation, 464 SCRA 409, July 28, 2005; Federation of Labor Union vs. Ople, 143 SCRA 124; Telephone Engineering & Service Co., Inc. vs. Workmens Compensation Commission, 104 SCRA 354; Asked, 1985 and 1991 Bar Exams.; No. III, 2004 Bar Exams.; No. I (1), 2006 Bar Exams.]

However, the application of the doctrine of piercing the corporate veil should be done caution. A court should be mindful of the milieu where it is to be applied. It must be certain that the corporate fiction was misused to such an extent that injustice, fraud, or crime was committed against another, in disregard of its rights. The wrongdoing must be clearly and convincingly established; it cannot be presumed. Otherwise, an injustice that was never intended may result from an erroneous application.[footnoteRef:81] [81: Philippine National Bank vs. Andrada Electric & Engineering Company, 381 SCRA 145, April 17, 2002.]

Q. Give additional examples when the veil of corporate fiction may be pierced?[footnoteRef:82] [82: Asked, 1962 and 1985 Bar Exams.; Asked, No. I (2), 2006 Bar Exams.]

A. When the corporate entity is used to defeat public convenience, justify wrong, protect fraud, or defend crime, the law will regard the corporation as the same as the stockholders and members composing it.[footnoteRef:83] [83: Fletcher, Vol. I, 166. ]

The veil of corporate fiction may likewise be pierced when the corporation is a mere alter ego, or business conduit of a person or an instrumentality, agency or adjunct of another corporation.[footnoteRef:84] To establish the alter ego doctrine it must be shown that the stockholders disregard of the corporate entity made it a mere instrumentality for the transaction of their own affairs, that there is such unity of interest and ownership that the separate personalities of the corporation and the owners no longer exist, and to adhere to the doctrine of corporate entity would promote injustice or protect fraud.[footnoteRef:85] [84: Solidbank Corporation vs. Mindanao Ferroalloy Corporation, 464 SCRA 409, July 28, 2005; San Juan Structural and Steel Fabrication, Inc. vs. Court of Appeals, 296 SCRA 631.] [85: 1 Fletcher Cyc. Corp., p. 171; Asked, 1991 and 1996 Bar Exams.]

Also, the separate personality of the corporation may be disregarded when the corporation is used as a cloak or cover for fraud or illegality, or to work injustice,[footnoteRef:86] or when necessary for the protection of the creditors,[footnoteRef:87] or when the notion of separate entity is used as a vehicle for the evasion of an existing obligation or to confuse legitimate issues,[footnoteRef:88] or to perpetrate a social injustice.[footnoteRef:89] [86: Gala vs. Ellice Agro-Industrial Corporation, 418 SCRA 431, December 11, 2003.] [87: Luxuria Homes, Inc. vs. Court of Appeals, 302 SCRA 315.] [88: Pabalan vs. NLRC 184 SCRA 495.] [89: Azcor Mfg., Inc. vs. NLRC, 303 SCRA 26.]

Q: What is meant by the alter ego doctrine or instrumentality rule?

A: Where one corporation is so organized and controlled and its affairs are conducted so that it is, in fact, a mere instrumentality or adjunct of the other, the fiction of the corporate entity of the 'instrumentality' may be disregarded. The control necessary to invoke the rule is not majority or even complete stock control but 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 principal.[footnoteRef:90] [90: Lipat vs. Pacific Banking Corporation 402 SCRA 339, April 30, 2003.]

Q. How may a corporation be established as a mere alter ego of another corporation or person?

A. The question of whether a corporation is a mere alter ego is one of fact. Piercing the veil of corporation fiction may be allowed only if the following elements concur:

(1) control not mere stock control, but complete domination- not only of finances, but of policy and business practice in respect to the transaction attacked, must have been such 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 a wrong doing to perpetuate the violation of a statutory or other positive legal duty, or a dishonest and an unjust act in contravention of the plaintiffs legal right;

(3) the said control and breach of duty must have proximately caused the injury or unjust loss complained of.[footnoteRef:91] [91: R & E Transport, Inc. vs. Latag, 422 SCRA 698, 707; Heirs of Ramon Durano, Sr. vs. Uy, 344 SCRA 238.]

Q. Is mere ownership by a single stockholder of nearly all or even all of the capital stock of a corporation sufficient ground to disregard the separate corporation personality?

A. While the veil of separate corporate personality may be pierced when the corporation is merely an adjunct, a business conduit, or alter ego of a person, the mere ownership by a single stockholder of nearly all or even all of the capital stock of a corporation is not be itself a sufficient ground to disregard the separate corporate personality.[footnoteRef:92] [92: Yamamoto vs. Nishino Leather Industries, Inc., 551 SCRA 447, April 16, 2008; Edsa Shangri-la Hotel and Resort, Inc. vs. BF Corp., 556 SCRA 25, June 27, 2008.]

Q. Is the mere fact that a single person owns or controls one or more corporation or substantial identity of incorporators of two corporations, sufficient to disregard the separate personalities of the corporations?A. Mere ownership by a single stockholder or by another corporation of all or nearly all of the capital stocks of a corporation is not by itself a sufficient ground to disregard the separate corporate personality.[footnoteRef:93] The substantial identity of the incorporators of two or more corporations does not imply that there was fraud so as to justify the piercing of the writ of corporate fiction. To disregard the said separate juridical personality, the wrong doing must be proven clearly and convincingly.[footnoteRef:94] [93: Secosa vs. Heirs of Erwin Suarez Francisco, 433 SCRA 273, June 29, 2004.] [94: Martinez vs. Court of Appeals, 438 SCRA 130, September 10, 2004.]

It is lawful to obtain a corporate charter, even with a single substantial stockholder, to engage in specific activity and such activity may co-exist with the other private activities of the stockholder. If the corporation is a substantial one, conducted lawfully and without fraud on another, its separate identity is respected.[footnoteRef:95] [95: Lidell & Co., Inc. vs. Collector of Internal Revenue, 2 SCRA 632; Wise & Co., Inc. vs. Man Sun Lung, 69 Phil. 308; Asked, 1970 Bar Exams. ]

However, the separate identity of the corporation may be disregarded where it serves but as a shield for tax evasion and treat the person who actually may take the benefits of the transactions as the person taxable.[footnoteRef:96] [96: Lidell & Co., Inc. vs. Collector of Internal Revenue, supra.]

Q. De Guzman was the President and controlling stockholder of EPG Construction Co., Inc. Said corporation entered into a contract with the University of the Philippines for the construction of its law library. Claiming defects in the air-conditioning installed by EPG, UP filed an action against EPG and its President, de Guzman. Should de Guzman be made liable?

A. De Guzman should not be made liable. 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. The president or general manager of a corporation therefore, should not be made personally answerable for the payment of the obligations of the corporation unless he had acted maliciously or in bad faith. That exception is not applicable to de Guzman because it was not proved that he acted maliciously or in bad faith when, as President of EPG, he sought to protect its interests and resisted UPs claims. Whatever damage was caused to UP as a result of his acts is the sole responsibility of EPG even though de Guzman was its principal officer and controlling stockholder.[footnoteRef:97] [97: EPG Construction Co., Inc. vs. Court of Appeal, 210 SCRA 230; Asked, 1996 Bar Exams.]

Q. Emmanuel C. Onate owned the majority of the shares in ECO Management Corporation (ECO). Land Bank of the Philippines (LBP) extended a series of credit accommodations to ECO. The proceeds of the credit accommodations were received on behalf of ECO by Onate. ECO failed to pay the loans. LBP filed a complaint for collection of sum of money against ECO and Onate. LBP claimed that ECO and Onate should be treated as one person so Onate can be made liable for the loans obtained by ECO from LBP. Furthermore, LBP claimed, Onate owns the majority shares in ECO; ECO stands for the initials of Emmanuel C. Onate; Onate personally paid P1 Million from his own trust account; Onate controlled the corporation by holding two corporate positions such as Chairman and treasurer; and no meeting of the stockholders or directors had been held. Should the Onate and ECO be treated as one so as to hold Onate liable for ECOs debts?

A. Onate and ECO cannot be treated as one person so as to make Onate liable for ECOs debts. In the absence of any malice or bad faith, a stockholder or an officer of a corporation cannot be made personally liable for corporate liabilities. The mere fact that Onate owned the majority of the shares of ECO is not a ground to conclude that Onate and ECO is one and the same. Mere ownership by a single stockholder of all or nearly all of the capital stock of a corporation is not by itself sufficient reason for disregarding the fiction of separate corporate personalities. Neither is the fact that the name ECO represents the first three letters of Onates name sufficient reason to pierce the veil. Even if it did, it does not mean that the said corporation is merely a dummy of Onate. A corporation may assume any name provided it is lawful. There is nothing illegal in a corporation acquiring the name or as in this case, the initials of one of its stockholders. It has not been shown that ECO was used as a mere alter ego of Onate to obtain the loans. Bad faith or fraud on the part of ECO and Onate was not also shown. Payment of P1 Million out of the trust account of Onate and other investors merely showed that a shareholder wants to held his corporation. The evidence presented does not suffice to hold Onate personally liable for ECOs loans.[footnoteRef:98] [98: Onate vs. Land Bank of the Philippines, 364 SCRA 375, 383-384.]

Q. Aircon and Refrigeration Industries, Inc. supplied JRB Realty, Inc. with air-conditioning units. After the units were installed, they could not provide the desired cooling temperature. Aircon undertook to replace the units with new ones but this was never done. JRB Realty, Inc. filed an action not only against Aircon and Refrigeration Industries, Inc. but also against Jardine Davies, Inc. on the ground that Aircon was a subsidiary of Jardine. Can Jardine be made liable?

A. Jardine can not be made liable. While it is true that Aircon is a subsidiary of Jarine, it does not necessarily follow that Aircons corporate legal existence can just be disregarded. A subsidiary has an independent and separate juridical personality, distinct from that of its parent company, hence, any claim or suit against the latter does not bind the former, and vice versa. Before the separate personality of the subsidiary may be disregarded the following requisites must be established: (1) control, not merely majority or complete stock control; (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 acts in contravention of plaintiffs legal rights; and (3) the aforesaid control and breach of duty must proximately cause the injury or unjust loss complained of.[footnoteRef:99] [99: Jardine Davies, Inc. vs. JRB Realty, Inc. 463 SCRA 555, July 15, 2005, citing Velarde vs. Lopez, Inc. 419 SCRA 422, January 14, 2004.]

Aircon is a subsidiary of Jardine only because the latter acquired the majority of Aircons capital stock. It however, does not exercise complete control over Aircon; nowhere can it be gathered that the petitioner manages the business affairs of Aircon. Indeed, no management agreement exists between Jardine and Aircon and the latter is an entirely different entity from the Jardine.[footnoteRef:100] [100: Jardine Davies, Inc. vs. JRB Realty, Inc., supra.]

Q. Philippine National Bank (PNB) and Ritratto Group, Inc. are both domestic corporations. PNB International Finance, Ltd. (PNB-IFL), a wholly-owned subsidiary company of PNB, organized and doing business in Hong Kong, extended a letter of credit in favor of the Ritratto group secured by real estate mortgages constituted over four lots in Makati. When the Ritratto group failed to settle their obligations, PNB-IFL, through its attorney-in-fact PNB, notified the respondents of the foreclosure of the mortgaged properties. The Ritratto group filed a complaint for injunction against PNB. PNB filed a motion to dismiss on the ground of absence of privity between them. The RTC held that the suit against PNB is a suit against PNB-IFL. Should the veil of corporate fiction be pierced so that a suit against PNB may be considered as a suit against PNB-IFL?

A. No, the veil of corporate fiction should not be pierced. 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 subsidiarys separate existence may be respected, and the liability of the parent corporation as well as the subsidiary will be confined to those arising in their respective business.

The Ritratto group failed to show any cogent reason why the separate entities of the PNB and PNB-IFL should be disregarded. The doctrine of piercing the corporate veil is applicable only 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 another corporation.[footnoteRef:101] [101: Philippine National Bank vs. Ritratto Group, Inc., 362 SCRA 216, July 31, 2001.]

Q. What are elements to determine the application of the principle of piercing the veil of corporation fiction?

A. The elements determinative of the applicability of the doctrine of piercing the veil of corporation fiction are as follows:

1. Control, not mere majority or complete stock control, but complete domination, not only of the 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 corporation 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 the plaintiffs legal rights; and

3. 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.[footnoteRef:102] [102: Yamamoto vs. Nishino Leather Industries, Inc., supra.]

Q. Yamamoto, a Japanese national organized under Philippine Laws, Wako Enterprises Manila, Inc., later known as Nishino Leather Industries, Inc. (NLII). Yamamoto and another Japanese national. Nishino forged a Memorandum of Agreement under which they agreed to enter into a joint venture under which Nishino would acquire 70% of the authorized capital stock of Wako. Nishino and his brother acquired more than 70% of the authorized capital stock thereby reducing Yamamotos investment to about 10%. Wakos name was changed to NLII. Yamamoto and Nishino started to negotiate for the buy-out of the shares of Yamamoto. During the negotiations, Yamamoto claimed the machineries and equipment which he contributed to pay his shares to the corporation on the ground that Nishino agreed that he could take out the machineries provided the value of the said machineries would be deducted from his capital contribution. But later, Nishino frustrated Yamamotos claim by refusing the same. The Court of Appeals ruled that the machineries claimed by Yamamoto are corporate properties of NLII and cannot be retrieved by Yamamoto without the authority of NLII board of directors. On the other hand, Yamamoto claimed that Nishimo cannot hide behind the shield of corporate fiction because NLII is a mere instrumentality of Nishimo and his brother. Decide the case with reasons.

A. The separate personality of NLII cannot be disregarded since there is no showing that Nishimo used the separate personality of NLII to unjustly act or do wrong to Yamamoto in contravention of his legal rights. The machineries and equipment, which comprised Yamamotos investment in NLII thus remained part of the capital property of the corporation.[footnoteRef:103] [103: Ibid.]

Q. Respondent Equitable Savings Bank (ESB) was a subsidiary of Equitable PCI Bank (EPCIB) which later merged with Banco de Oro and thence known as Banco de Oro (BDO). Petitioners were client-depositors of EPCIB for more than 12 years. Petitioners obtained a loan amounting to P4,000,000 from EPCIB and to secure the loan, they mortgaged their land in Quezon City. Petitioners were able to draw from the loan the sum fo P3,600,000. They demanded from EPCIB copies of the loan agreement which refused to give them the copies on the ground that as a matter of practice, they give copies only after the entire loan has been withdrawn. Petitioners then did not continue payment of the amortization after paying a total of P500,000. Respondent, through counsel wrote a letter to the petitioner demanding payment of the entire loan released with interest thereon. Finally, petitioners got copy of the loan documents and they were surprised to find out that the lender was the respondent instead of EPCIB. When petitioners failed to pay the loan, respondent sought to extrajudicially foreclose the mortgage. Petitioners filed a case for injunction and claimed that respondent was not the real party in interest to foreclose the mortgage. May foreclose the mortgage obtained by the petitioners to secure a loan obtained by EPCIB?

A. An extrajudicial foreclosure instituted by a third party to the Loan Agreement and the real estate mortgage (REM) would be in violation of the petitioners rights over their property. Thus, respondent cannot exercise the right of foreclosure not being a party to the REM. Respondent, although a wholly-owned subsidiary of EPCIB, has an independent and separate juridical personality from its parent company. The fact that the 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 subsidiarys separate existence shall be respected. [footnoteRef:104] [104: Borromeo vs. Court of Appeals, 550 SCRA 269, March 28, 2008.]

Q. May the by-laws of a corporation provide for additional qualifications of directors?

A. The by-laws may provide for the qualifications of directors or trustees[footnoteRef:105] provided they are not inconsistent with the Constitution, law or charter of the corporation and they are reasonable. The minimum qualification required by the Corporation Code must however, be met.[footnoteRef:106] [105: Section 47, par. 5.] [106: SEC Opinion, Dec. 8, 1988.]

Q. The by-laws provide that only members in good standing for at least five (5) years shall be qualified to be elected as director. Is such additional qualification of directors valid?

A. Yes, it is valid because the bylaws may prescribe the qualifications of directors. Thus, one who was elected despite the fact that his membership in the corporation has not reached five (5) years is in violation of the by-laws and hence, his election is null and void.[footnoteRef:107] [107: Garcia vs. Diapo, SEC Case No. 2169, July 30, 1990.]

Q. Who are disqualified from being elected as directors?A. The following are disqualified from being elected as directors: (a) those convicted by final judgment of an offense punishable by imprisonment for a period exceeding six (6) years; (b) those convicted by final judgment of a violation of the Corporation Code committed within five (5) years prior to the date of his election;[footnoteRef:108] (Sec. 27); and (c) those disqualified by the by-laws.[footnoteRef:109] [108: Section 27.] [109: Gokongwei vs. SEC, 89 SCRA 336.]

Q. The by-laws of San Miguel Corporation (SMC) disqualified from being elected as director those who were directors of another corporation whose business was in competition with or was antagonistic with SMC. Gokongwei was a director of other corporations whose lines of business were in direct competition with some of the business activities of SMC. May Gokongwei be elected as director of SMC?A. Gokongwei was disqualified from being elected as director of SMC. The provision of the by-laws of SMC disqualifying a competitors director from being elected as director of SMC was valid. Sound principles of corporate management counsel against sharing sensitive information with a director whose fiduciary duty of loyalty may well require that he disclose this information to a competitive rival.[footnoteRef:110] [110: Gokongwei vs. SEC, 89 SCRA336; Asked, 1998 Bar Exams.; No. VIII (a), 2000 Bar Exams.; No. XI, 2001 Bar Exams. ]

Page 89Q. As a general rule, are directors/trustees and officers of a corporation liable personally for their acts as such?A. As a general rule, directors/trustees and officers of a corporation who purport to act for and in behalf of the corporation, keep within the lawful scope of their authority in so acting, and act in good faith, do not become liable, whether civilly or otherwise, for the consequences of their acts. Those acts, when they are of such a nature and are done under such circumstances, are properly attributed to the corporation alone and no personal liability is incurred by such officers and board members/directors.[footnoteRef:111] [111: Benguet Electric Cooperative, Inc. vs. NLRC, 209 SCRA 55. ]

Officers of a corporation who act as such within the scope of their authority have no personal liability for such acts unless it is shown that they have acted negligently or in bad faith. They are mere agents of the corporation who cannot be made liable if they acted within the scope of their authority.[footnoteRef:112] [112: Mindanao Motor Line, Inc. vs. Court of Industrial Relations, 6 SCRA 710; Asked, 1968 and 1999 Bar Exams.]

For as long as the corporate officers acted within the scope of their authority and in good faith, they cannot be held personally liable for the consequences of their acts. The separate corporate personality is a shield against the personal liability of corporate officers, whose acts are property attributed to the corporation.[footnoteRef:113] [113: Solidbank Corporation vs. Mindanao Ferroalloy Corporation, et al., 464 SCRA 409, July 28, 2005.]

Likewise, officers of a corporation are not personally liable for their acts as such officers unless it is shown that they have exceeded their authority. The corporation has a personality separate and distinct from its officers.[footnoteRef:114] [114: Prudential Bank vs. Alviar, 464 SCRA 353. ]

However, when the legal fiction that a corporation has a personality separate and distinct from the stockholders and members is disregarded, as when it is used as a means to perpetrate fraud or an illegal act or as a vehicle for the evasion of an existing obligation, or to confuse legitimate issues, the officers of such corporation shall be liable for their acts.[footnoteRef:115] [115: Pabalan vs. NLRC, 184 SCRA 495; Asked, 1996 Bar Exams.).]

Q. Saludaga was a sophomore law student of Far Eastern University (FEU) when he was shot by Rosete, one of the security guards on duty at the school premises. Rosete claimed that the shooting was accidental. Saludaga filed an action for damages against FEU and de Jesus, President of FEU on the ground that FEU failed to provide students with a safe and secure environment and an atmosphere conducive to learning. The Trial Court rendered judgment finding FEU and its President jointly and severally liable for damages. Is the judgment of the court against FEUs President correct?A. A corporation is invested by law with a personality separate and distinct from those of the persons composing it, such that, save for certain exceptions, corporate officers who entered into contracts in behalf of the corporation cannot be held personally liable for the liabilities of the latter. Personal liability of a corporate director, trustee or officer along (although not necessarily) with the corporation may so validly attach, as a rule, only when (1) he assents to a patently unlawful act of the corporation, or when he is guilty of bad faith or gross negligence in directing its affairs, or when there is a conflict of interest resulting in damages to the corporation, its stockholders or other persons; (2) he consents to the issuance of watered down stocks or who, having knowledge thereof, does not forthwith file with the corporate secretary his written objection thereto; (3) he agrees to hold himself personally liable with the corporation; or (4) he is made by a specific provision of law personally answerable for his corporate action.[footnoteRef:116] [116: Powton Conglomerate Inc. vs. Agcolicol, 400 SCRA 523, April 3, 2003, cited in Saludaga vs. Far Eastern University, 553 SCRA 741, 755, April 30, 2008.]

None of the foregoing exceptions was established in this case, hence, FEU President de Jesus should not be held solidarily liable with FEU.[footnoteRef:117] [117: Saludaga vs. Far Eastern University, 553 SCRA 741, 755, April 30, 2008.]

Q. SSS filed an action against Impact Corporation and its directors for non-remittance of SSS premium contributions withheld by said corporation from its employees. Impact became insolvent and all directors died except director Garcia. Garcia claimed that only directors who participate in unlawful acts or are guilty of gross negligence and bad faith shall be personally liable, and that being a mere stockholder of the corporation, she could not be made liable. Is Garcia liable?

A. Among the exceptions when a director is liable for the obligations of the corporation is when a director, trustee or officer is made, by specific provision of law, personally liable for his corporate action. The situation of Garcia falls exactly under the aforesaid situation because Section 28 (f) of the Social Security Law imposes a civil liability upon its managing head, directors or partners for any act or omission pertaining to the violation of the Social Security Law when committed by a corporation, partnership or association.[footnoteRef:118] [118: Garcia vs. Social Security System Commission Legal and Collection, 540 SCRA 459, 475, Dec. 17, 2007]

Q. When are directors/trustees liable for damages suffered by the corporation, its stockholders/members and other persons?A. Directors or trustees who (a) willfully and knowingly vote for or assent to patently unlawful acts of the corporation or (b) who are guilty of gross negligence or bad faith in directing the affairs of the corporation or (c) acquire any personal or pecuniary interest in conflict with their duty as such directors or trustees shall be jointly and severally liable for all damages resulting therefrom suffered by the corporation, its stockholders or members and other persons.[footnoteRef:119] [119: Section 31, paragraph 1.]

In letter (c) mentioned above, the director, trustee or officer who attempts to acquire or acquires, in violation of his duty, any interest adverse to the corporation in respect of any matter which has been reposed in him in confidence, shall likewise be liable as a trustee for the corporation and must account for the profits which otherwise would have accrued to the corporation.[footnoteRef:120] [120: Section 31, par. 2; Asked, 1996 and 1997 Bar Exams.]

Consistent with the foregoing provision, it has been held that personal liability of a corporate director, trustee or offer along (although not necessarily) with the corporation may so validly attach, as a rule, only when (1) he assents to a patently unlawful act of the corporation, or when he is guilty of bad faith or gross negligence in directing its affairs, or when there is a conflict of interest resulting in damages to the corporation, its stockholders or other persons; (2) he consents to the issuance of watered down stocks or who, having knowledge thereof, does not forthwith file with the corporate secretary his written objection thereto; (3) he agrees to hold himself personally liable with the corporation; or (4) he is made by a specific provision of law personally answerable for his corporate action.[footnoteRef:121] [121: Powton Conglomerate Inc. vs. Agcolicol, 400 SCRA 523, April 3, 2003.]

Q. Petitioner D. M. Wenceslao and Associates, Inc. (WENCESLAO) had a contract with the Public Estates Authority for the improvement of the main expressway along the Coastal Road. To fulfill its obligations to the PEA, the petitioner entered into a contract with the respondent where Readycon Trading and Construction Corporation (READYCON) agreed to sell to petitioner asphalt materials valued at P 1.7 M. The contract bore the signature of co-petitioner Dayrit, the vice-president of the WENCESLAO. It was agreed that WENCESLAO would pay 20% upon delivery and the remaining balance was to be paid 15 days thereafter. It was further stipulated that READYCON was to furnish, deliver, lay, roll the asphalt, and if necessary, make the needed corrections on a prepared base at the jobsite. READYCON delivered, laid and rolled the asphalt. WENCESLAO failed to pay the balance contending that it was payable only upon acceptance of the work by the government. READYCON filed a complaint against WENCESLAO and Dayrit. Can Dayrit be made personally liable for the corporations failure to comply with its obligation?

A. Since Dayrit merely acted as representative of Wenceslao, in signing the contract, he could not be made personally liable for the corporations failure to comply with its obligation.[footnoteRef:122] [122: D. M. Wenceslao and Associates, Inc. vs. Readycon Trading and Construction Corp., 433 SCRA 251, June 29, 2004.]

Q. The officers and directors of Crispa, Inc. passed a resolution terminating several workers on the ground of serious business losses. The dismissed employees filed an action for illegal dismissal. Crispa was unable to prove its financial losses and merely presented a Statement of Profit and Losses which did not bear the signature of a certified public accountant nor audited by an independent auditor. The NLRC found the officers and directors of Crispa solidarily liable with said corporation for the payment of back wages and separation pay. Was such decision correct?A. Corporate officers and directors are solidarily liable with the corporation for the termination of employment of corporate employees done with malice or in bad faith. They were the ones, who as high-ranking officers and directors of Crispa signed the board resolution retrenching the employees on the feigned ground of serious business losses that had no basis apart from an unsigned and unaudited Profit and Loss Statement which has no evidentiary value whatsoever. This is indicative of bad faith on the part of the officers and directors for which they can be held jointly and severally liable with Crispa for all the money claims of the illegally terminated employees.[footnoteRef:123] [123: Uichico vs. NLRC, 273 SCRA 35.]

Q. Cuesta sold to Tramat Mercantile, Inc. a tractor. In payment thereof, David Ong, Tramats president and manager, issued a check. Tramat in turn, sold the tractor together with a lawn mower fabricated by it to NAWASA. Ong stopped payment of the check issued to Cuesta on the ground that NAWASA refused to pay the tractor and lawn mower because of some defects in the mower and that the engine of the tractor was a reconditioned unit. Cuesta sued Tramat and Ong. Was Ong liable?A. Ong was not liable because he acted not in his personal capacity, but as an officer of Tramat which has a distinct personality. Only the corporation and not the person acting for and on its behalf could be made liable thereon. Personal liability of a corporate director, trustee or officer along with the corporation (although not necessarily) may so validly attach, as a rule, only when 1. He assents (a) to a patently unlawful act of the corporation, or (b) for bad faith or gross negligence in directing its affairs, or (c) for conflict of interest, resulting in damages to the corporation, its stockholders or other persons;2. He consents to the issuance of watered stocks or who, having knowledge thereof, does not forthwith file with the corporate secretary his written objection thereto;3. He agrees to hold himself personally and solidarily liable with the corporation; or4. He is made, by a specific provision of law, to personally answer for his corporate action.[footnoteRef:124] [124: Tramat Mercantile, Inc. vs. Court of Appeals, 238 SCRA 14; Asked, 1995 and 1996 Bar Exams.]

Q. Define dividend.A. Dividend is that portion of the profits and surplus funds of the corporation which has been actually set apart, by a valid act of the corporation, for distribution among the stockholders according to their respective interests.[footnoteRef:125] It is the fund set aside and declared by the directors of the corporation and in case of stock dividends, with the approval (sic) of the stockholders, to be divided or distributed among the stockholders according to their respective interests.[footnoteRef:126] The term is also used to designate the shares of the individual stockholders or members in the fund so set apart, and also to designate the assets distributed by a corporation among its stockholders out of capital on reduction of the capital stock or dissolution.[footnoteRef:127] [125: 14 C. J. Sec. 1207.] [126: Nielson & Co., Inc. vs. Lepanto Consolidated Mining Co., 26 SCRA 542.] [127: 11 Fletcher Cyc. Corp., Sec. 53 18, p. 603; Asked, 1990 Bar Exams.]

Corporate profits when set apart, declared and ordered by the directors for distribution among the shareholders are known as dividends.[footnoteRef:128] [128: SEC Opinion, January 3, 1983.]

Q. Distinguish dividends from profits.A. Dividends are declared only from profit after they are earned.[footnoteRef:129] Profits in the coffers of a corporation do not become a dividend until they have been set apart or at least declared as a dividend.[footnoteRef:130] [129: Indiana Veneer and Lumber Co. vs. Hageman, 57 Ind. App. 668, 105 NE 253.] [130: Lord v. Territory of Hawaii, 79 F 2d, 761; 11 Fletcher Cyc. Corp., Sec. 5319, p. 609; Asked, No. V, b, 2005 Bar Exams.]

Q. What may be the source of payment of dividends?A. A corporation cannot lawfully declare dividends out of its capital stock, and thereby reduce the same, or out of assets which are needed to pay the corporate debts. They can be declared only out of surplus profits.[footnoteRef:131] The reason for the rule is that it would be a fraud upon the creditors of a corporation who extend credit to it on the faith of its capital stock, to permit it to be diverted by a distribution among the stockholders as dividends. Moreover, each stockholder is entitled to have the capital stock preserved unimpaired for the purpose of carrying out the object for which the corporation is formed.[footnoteRef:132] [131: 11 Fletcher Cyc. Corp. Sec. 5319, 611; Steinberg vs. Velasco, 52 Phil. 953; Asked, No. V, a, 2005 Bar Exams.] [132: 14 C. J. Sec. 1210; Asked, 1953 and 1957 Bar Exams.; No. V c, 2005 Bar Exams.]

Q. What is the effect of declaration of stock dividends?A. The declaration of stock dividends is akin t5o a forced purchase of stocks. By declaring stock dividends, a corporation ploughs back a portion or its entire unrestricted retained earnings either to its working capital or for capital asset acquisition or investments. When the dividend is distributed, it ceases to be a property of the corporation as the entire portion or its unrestricted retained is distributed pro rata to corporate stockholders. When stock dividends are distributed, the amount declared ceases to belong to the corporation but is distributed among the stockholders. Consequently, the unrestricted retained earnings of the corporation are diminished by the amount of the declared dividend while the stockholders equity is increased.[footnoteRef:133] [133: PLDT vs. NTC, 539 SCRA 365, December 4, 2007.]

THE SECURITIES REGULATION CODE

Q. What are the provisions under the Securities Regulation Code intended to protect the interest of shareholders?

A. The following are the provisions under the Securities Regulation Code intended to protect the interest of shareholders:

(1) Tender offers to stockholders whenever any person or group of persons intends to acquire 15% of the equity of a listed corporation or one with a capital of at least P50 million, or 30% of the equity of such corporation over a period of 12 months, as the case may be.[footnoteRef:134] [134: Section 19.1, Asked, No. VI, 2002 Bar Exams.]

(2) Restrictions on proxy solicitations;[footnoteRef:135] and [135: Section 20.]

(3) Requirements for internal record-keeping and accounting controls.[footnoteRef:136] [136: Section 22.]

Q. What is a tender offer? What is its purpose?

A. A tender offer is a publicly announced intention by a person acting alone or in concert with other persons to acquire equity securities of a public company i. e., one listed on an stock exchange. It is also defined as an offer by the acquiring person to stockholders of a public company for them to tender their shares therein on the terms specified in the offer.[footnoteRef:137] [137: Osmena III vs/ Social Security System of the Philippines, 533 SCRA, Sept. 13, 2007.]

Tender offer is in place to protect the interests of minority stockholders of a target company against any scheme that dilutes the share value of their investments. It affords such minority shareholders the opportunity to withdraw or exit from the company under reasonable terms, a change to sell their shares at the same price as those of the majority stockholders.[footnoteRef:138] [138: Ibid. ]

Q. When must tender offer be made to shareholders?

A. Any person or group of persons acting in concert who intends to acquire at least fifteen percent (15%) of any class of any equity security of a listed corporation or of any class of any equity security of a corporation with assets of at least Fifty million pesos (P50,000,000.00) and having two hundred (22) or more stockholders with at least one hundred (100) shares each or who intends to acquire at least thirty percent (30%) of such equity over a period of twelve (12) months shall make a tender offer to stockholders by filing with the Commission a declaration to that effect; and furnish the issuer, a statement containing such of the information required in Section 17 of this Code as the Commission may prescribe. Such person or group of persons shall publish all requests or invitations for tender, or materials making a tender offer or requesting or inviting letters of such a security. Copies of any additional material soliciting or requesting such tender offers subsequent to the initial solicitation or request shall contain such information as the Commission may prescribe, and shall be filed with the Commission and sent to the issuer not later than the time copies of such materials are first published or sent or given to security holders.[footnoteRef:139] [139: Section 19.1; Asked, No. VI, 2002 Bar Exams.]

Q. SSS, a government financial institution took steps to sell its shareholdings in Equitable PCI Bank (EPCIB). SSS and Banco de Oro and its subsidiary entered into Share Purchase Agreement (SPA) covering SSSs shares in EPCIB at P43.50 per share which was at a premium of 30% of the then market value in the stock market where the shares were traded at P34.50 per share. SSS advertised an invitation to bid its block of shares in EPCIB subject to the right of BDO to match the highest bid. Petitioners filed the present action for prohibition. In the meantime, BDO and EPCIB announced its intention to merge. SM Investment Corporation, an affiliate of BDO commenced a mandatory tender offer of the entire outstanding capital stock of EPCIB at P92.0 per share. SSS manifested in court that the case is already moot in view of the tender offer for P92.00 per share. Petitioners claimed that the tender offer cannot render the case moot and academic unless SSS withdraws the sale of the shares under its Share Purchase Agreement. Decide with reasons.

A. The case is already moot and academic. The condition under which the parties have agreed into a SPA case to exist because of the tender offer at a higher price. The pricing component at P43.50 per share has ceased to exist.[footnoteRef:140] [140: Osmena III vs. Social Security System of the Philippines, infra.]

Q. What is the meaning of Swiss Challenge?

A. Under the Swiss Challenge format, one of the bidders is given the option or preferential right to match the winning bid.[footnoteRef:141] [141: Osmena III vs. Social Security System of the Philippines, 533 SCRA 313, 321, September 13, 2007.]

PRESIDENTIAL DECREE NO. 902-A(As amended by Securities Regulation Code)

Q. Which court has jurisdiction over cases previously cognizable by the SEC?A. The court designated by the Supreme Court as Special Commercial Court is vested with jurisdiction over cases previously cognizable by the Securities and Exchange Commission. When a case is erroneously filed in the regular Regional Trial Court, such cou