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ADVANCE PRE-WEEK REVIEW PREDICTIONS AND REMINDERS in Mercantile Law by: Prof. Arturo M. de Castro (Pre-Bar Reviewer, Global Best Practice, UP Law Center; Professor of Law, Ateneo, Lyceum, U.E.) 1. Define Letter of Credit. Ans: A Letter of Credit is an instrument issued by a bank on behalf of one of its customers, authorizing an individual or a firm to draw drafts on the bank or one of its correspondents for its account under certain conditions of the credit. 2. What is the Independence principle in letters of credit transactions? Ans: The correspondent bank is not duty bound to open and inspect the goods to check if the contents tally with the description in the letter of credit. By custom in international banking, the negotiating bank deals only with the documents and not with the goods described in the document (Bank of P. I. vs. De Reny Fabric Industries, Inc., 35 SCRA 256 [1970]). This is the so-called “independence principle” which assures the seller or the beneficiary of prompt payment independent of any breach of the main contract and precludes the issuing bank from determining whether the main contract is actually accomplished or not. Under this principle, banks assume no liability or responsibility for the form, sufficiency, accuracy, genuineness, falsification or legal effect of any documents, or Prof. Arturo M. de Castro 7/19/2022 2010 pre-week review predictions and reminders in mercantile law 1

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PRE-WEEK REVIEW PREDICTIONS AND REMINDERS

ADVANCE Pre-Week Review predictions and reminders

in

Mercantile Law

by:

Prof. Arturo M. de Castro

(Pre-Bar Reviewer, Global Best Practice, UP Law Center; Professor of Law, Ateneo, Lyceum, U.E.)

1. Define Letter of Credit.

Ans:A Letter of Credit is an instrument issued by a bank on behalf of one of its customers, authorizing an individual or a firm to draw drafts on the bank or one of its correspondents for its account under certain conditions of the credit.

2. What is the Independence principle in letters of credit transactions?

Ans:The correspondent bank is not duty bound to open and inspect the goods to check if the contents tally with the description in the letter of credit. By custom in international banking, the negotiating bank deals only with the documents and not with the goods described in the document (Bank of P. I. vs. De Reny Fabric Industries, Inc., 35 SCRA 256 [1970]). This is the so-called independence principle which assures the seller or the beneficiary of prompt payment independent of any breach of the main contract and precludes the issuing bank from determining whether the main contract is actually accomplished or not. Under this principle, banks assume no liability or responsibility for the form, sufficiency, accuracy, genuineness, falsification or legal effect of any documents, or for the general and/or particular conditions stipulated in the documents or superimposed thereon, nor do they assume any liability or responsibility for the description, quantity, weight, quality, condition, packing, delivery, value or existence of the goods represented by any documents, or for the good faith or acts and/or omissions, solvency, performance or standing of the consignor, the carries, or the insurers of the goods, or any other person whomsoever. (Transfield vs. Luzon Hydro, Nov. 22, 2004, Justice Callejo, Sr., Ponente)

3. What are the exceptions to the independence principle in letters of credit transactions?

Ans:Fraudulent abuse of the credit, in case of collusion between the correspondent/paying bank and the exporter/seller of the goods. (Transfield vs. Luzon Hydro, supra)

4. What is a trust receipt transaction? (Sec. 4)

Ans:A Trust Receipt Transaction is a transaction between an entruster and an entrustee whereby the entruster, who owns or holds absolute title or security interests over certain specified goods, documents or instruments, releases the same to the possession of the entrustee upon the latters execution and delivery to the entruster of a trust receipt wherein the entrustee binds himself to hold the specified goods, documents or instruments in trust for the entruster and to sell or otherwise dispose of the goods, documents or instruments with the obligation to turn over to the entruster the proceeds thereof to the extent of the amount owing to the entruster, or the goods, documents or instruments themselves if they are unsold or not otherwise disposed of. (Colinares vs. Court of Appeals, 339 SCRA 609 [2000])

5. How is Trust Receipt related to Letter of Credit?

Ans:A Trust Receipt secures the loan covered by the letter of credit. (RCBC vs. Alfa RTW Mfg. Corp., G.R. No. 133877, 14 Nov. 2001)

6. Distinguish a Letter of Credit from a Trust Receipt.

Ans:A Letter of credit is a separate document from a trust receipt. While the trust receipt may have been executed as a security on the letter of credit, still the two documents involve different undertakings and obligations. A letter of credit is an engagement by a bank or other person made at the request of a customer that the issuer will honor drafts or other demands for payment upon compliance with the conditions specified in the credit. Through a letter of credit, the bank merely substitutes its own promise to pay for the promise to pay of one of its customers who in return promises to pay the bank the amount of funds mentioned in the letter of credit plus credit or commitment fees mutually agreed upon. By contrast, a trust receipt transaction is one where the entruster, who holds an absolute title or security interests over certain goods, documents or instruments, released the same to the entrustee, who executes a trust receipt binding himself to hold the goods, documents or instruments in trust for the entruster and to sell or otherwise dispose of the goods, documents and instruments with the obligation to turn over to the entruster the proceeds thereof to the extent of the amount owing to the entruster, or as appears in the trust receipt, or return the goods, documents or instruments themselves if they are unsold, or not otherwise disposed of, in accordance with the terms and conditions specified in the trust receipt. (Bank of Commerce vs. Serrano, Feb. 16, 2005)

A steals goods from B, deposits the goods with Warehouseman C who issues a negotiable Warehouse Receipt in favor of A, who then negotiates the Warehouse Receipt to D, who pays value to A in good faith and without any notice of defect in the title of A.

B, the owner of the goods, notifies C that the goods were stolen from him and demands delivery of the goods to him. As holder of the Negotiable Warehouse Receipt, D claims delivery of the goods to him.

1. Who between B, the owner of the goods, and D, the holder of the Negotiable Warehouse Receipt is entitled to the goods?

Ans:B, the owner, is entitled to the delivery of the goods. The authorities are unanimous that in case of theft of goods, negotiation of the warehouse receipt will not confer a better right to the holder. Article 1512 and 1513 of the Civil Code require that the negotiation must be made by the owner or the person authorized by the owner.

2. Will your answer be the same if what is stolen by A from B is the Negotiable Warehouse Receipt covering the goods, instead of the goods themselves, and A then negotiates the stolen Negotiable Warehouse Receipt to D?

Ans:No, my answer will be different. D, the holder will prevail. Under Art. 1518 of the Civil Code, the negotiation of the Warehouse Receipt is not impaired by the fact that the owner has been deprived thereof by theft, fraud, duress or conversion.

Note: The problem is the subject of an article published by the author in the Ateneo Law Journal entitled The Rights of a Holder In Due Course of a Negotiable Documents of Title to Goods to reconcile the conflict between Art. 1518 on the one hand sustaining the above answer and Articles 1512 and 1513 supporting the contrary answer. If the problem is presented in another form requiring the examinee to argue in favor of B, the owner of the stolen Warehouse Receipt, Articles 1512 and 1513 may be cited and in favor of D, Article 1518 may be cited. As Judge, the examinee may choose and then support the answer with reasons. As for me, I suggest the following answer.

As Judge, I would decide in favor of D, the holder, for the following reasons:

1) The Code Commission that drafted the Civil Code made a mistake in adopting both Articles 1512 and 1513 on the one hand and Article 1518 on the other hand from the comparative laws from the United States where the model of Articles 1512 and 1513 were already amended by the model for Article 1518. As now codified in the Uniform Commercial Code in the United States, the prevailing rule is as it now appears in Art. 1518 granting the holder of a Negotiable Document of Title to goods the same right of a holder in due course of a Negotiable Instrument, free from the personal defenses of prior parties.

2) The conflict may be reconciled by applying Articles 1512 and 1513 requiring negotiation by the owner or his authorized representative to the situation of stolen goods, while Article 1518 to stolen negotiable warehouse receipt, to harmonize the seemingly conflicting provisions.

3) The prevailing practice in the United States granting a holder in good faith and for value of the negotiable document the right of a holder in due course of a negotiable instrument to take the negotiable document of title free from personal defenses of prior parties enhances the function of a negotiable document of title to facilitate trade and commerce with relative ease and convenience arising from the better faith and trust in the negotiable documents of title as substitute to goods. The same way that the negotiable instrument is a substitute for money facilitates trade and commerce with ease and convenience.

1. May a holder of a negotiable instrument be a holder in due course when the instrument was overdue at the time it was negotiated to him?

Ans:No. The second requisite of a holder in due course is that he became holder of it before it was overdue, and without notice that it had been previously dishonored, it such was the fact.

Alternative Ans:

Yes. When an instrument is overdue, it is payable on demand, and it may still be negotiated conferring on the holder the status of a holder in due course if it is negotiated within a reasonable period of time after its issuance (Sec. 53). Moreover, the negotiability of an instrument is not affected by the fact that it is anti-dated, which always appears to be overdue.

2. A issues a check to B in the amount of Php100,000.00. B alters the amount to Php1,100,000.00 and negotiates it to C who takes it under all the conditions making him a holder in due course. C then indorses the instrument to D, who is also a holder in due course.

a. How much may D collect from A, the drawer?

Ans:Php100,000.00 only, the original tenor prior to the alteration. When an instrument is in the hands of a holder in due course, he may enforce payment thereof according to its original tenor.

b. How much may D collect from B?

Ans:The full amount of Php1,1000,000.00 because B is the party to the fraud.

c. How much may D collect from C?

Ans:The full Php1,1000,000.00 under his warranty as a general indorser that the instrument is genuine and what it purports to be and that on due presentment, the instrument shall be accepted or paid or both, according to its tenor, and in case of dishonor and necessary notice of dishonor is given he will pay the amount thereof to the holder or to any subsequent indorser who may be compelled to pay it.

3. By its payment of a check with forged signature of the drawer, does the drawee bank become liable for the warranties of an acceptor?

Ans:No, the prevailing rule is that payment does not include acceptance, for the following reasons:

a. Payment by the drawee as the party principally liable discharges the instrument and reduces it into a mere voucher or receipt and it may no longer be negotiated further.

b. Acceptance does not discharge the instrument, and instead enhances its further negotiability by the firm commitment of the drawee to pay upon presentment and its warranties as acceptor admitting (1) the existence of the drawer, (2) the genuineness of the drawers signature, (3) the capacity of the drawer to draw the instrument and (4) the existence of the payee and his then capacity to indorse.

4. Can a drawee be a holder in due course?

Ans:No, because by paying the instrument, the drawee discharges the instrument whereas a holder in due course may negotiate the instrument further.

V

1. What are the elements of insurance?

Ans:Elements of Insurance

a. Insurable Interest (Sec. 51, par. 9)

b. Risk of Loss (Sec. 2)

c. Assumption of Risk

d. Scheme to distributor losses

e. Payment of Premiums (Sec. 77; Phil-am Care Health System, Inc. vs. CA, G.R. No. 125678, March 18, 2002)

2. A and B have children C, D & E. A and B obtained annulment of marriage on the ground of psychological incapacity under Art. 36 of the Family Code. Before partition of the conjugal property of A and B, do C, D and E have insurable interest on the conjugal property of their parents, A and B?

Ans:Yes, to the extent of their entitlement to presumptive legitime, which is an existing right. Children of parents whose marriage are annulled or who obtain legal separation are entitled to presumptive legitime.

3. Masagana Telemart Inc. insures its building against fire with UCPB General Insurance Co. In the past, the insurer as a matter of practice had been extending grace period within which to pay renewal premium after expiration of the policy. The policy expires and the Building is gutted by fire within the usual grace period granted as a matter of practice in the past. The insured pays the renewal premium the following day after the fire and then files a claim with the insurer which refuses to pay the claim on the ground that the renewal premium was paid after the building was already lost by fire.

What will be your arguments

a. As counsel for the Insurer

b. As counsel for the Insured

c. As a Judge, decide, with reasons.

Ans:

a. As counsel for the Insurer, I will cite Sec. 77 of the Insurance Code that the policy shall not take effect until the premium is paid, notwithstanding any agreement to the contrary. Credit extension for the payment of premium is contrary to the policy of the law.

b. As counsel for the Insured, I will cite the latest ruling of the Supreme Court in UCPB Insurance Company vs. Masagana Telemart in which the Supreme Court held, under identical facts as given in the problem, that the Insurer is liable for the claim because (1) the Insurer is under estoppel by reason of the grace period to pay the renewal period extended in the past, and (2) the credit extension renders the policy effective.

c. As a Judge, I will apply the Supreme Court decision in UCPB Insurance Company vs. Masagan Telemart and order the insurer to pay the claims.

1) Although the legislative history of the amendment to Sec. 77 shows that notwithstanding any agreement to the contrary was introduced to do away with credit extension as an exception, as initially held by the Supreme Court in the aforesaid case, on reconsideration the Supreme Court finally ruled in said case that credit extension is a recognized exception to the general rule that the policy shall not take effect until the premium is paid.

2) The law is what the Supreme Court says it is, and judicial decisions form part of the legal system.

3) The practice in the past of giving grace period to the insured in the payment of renewal premium places the insurer in estoppel to depart from the established practice under the general principle of equity.

4. What are the exceptions to the rule that the policy shall not take effect until the premium is paid?

Ans:a. In case of life and industrial life whenever the grace period provision applies (Sec. 77).

b. Where there is an acknowledgment in the contract or policy of insurance that the premium had already been paid. (Sec. 78, ICP).

c. The rule laid down in Makati Tuscany Condominium v. Court of Appeals to the effect that Section 77 may not apply if the parties have agreed to the payment of the premium in installments and partial payment has been made at the time of the loss.

d. Where a credit term was agreed upon like the agreement in UCPB General Insurance, Inc. v. Masagana Telemart where the insurer granted a 60-90-day credit term for the payment of the premiums despite full awareness of Section 77.

e. Where the parties are barred by estoppel.

5. Explain the synallagmatic characteristics of Insurance.

Ans:It is a highly reciprocal contract where the rights and obligations of the parties correlate and mutually correspond. The insurer assumes the risk of loss in consideration of premium payments under a risk distributing device. (UCPB vs. General Insurance Co., Inc., vs. Masagana Telemart, April 4, 2001)

V

1. Explain whether the following are common carriers bound to exercise extra-ordinary diligence in the carriage of goods or passengers or a private carrier.

a. Customs broker

Ans:Common carrier because although the transport services from the pier to the warehouse of the shipper are only incidental or ancillary to the brokerage business, the same is offered to the public in general and for compensation.

b. Arrastre

Ans:Arrastre refers to hauling and handling of cargoes on the wharf and between the establishment of the consignee or shipper and the ships tackle, usually performed by the longshoreman.

An arrastre operator is not a common carrier, but more of a warehouseman (Sua Kiam vs. Manila Railroad Co., 19 SCRA 5). Hence,

1) The one year prescriptive period under the COGSA is inapplicable

2) Arrastre services are not maritime hence maritime laws are inapplicable.

c. Vessel chartered under Contract of affreightment.

Ans:An owner who retains possession of the ship remains liable as a carrier (Coast wise lighterage Corp. vs. CA, 245 SCRA 796 [1995])

d. Vessel under bareboat or Demise Charter.

Ans:Under demise or bareboat charter, charterer will generally be regarded as owner for the voyage or services stipulated; charterer mans the vessel with his own people and becomes owners pro hac vice, subject to liability to others for damages caused by negligence. To create a demise, owner of vessel must completely and exclusively relinquish possession, command and navigation thereof to charter; anything short of such a complete transfer is a contract of affreightment (or time or voyage charter party). (Villanueva, Ibid, pp. 200-201)

2. Is the carrier liable for the death of newsboy or children permitted to ride gratuitously by an employee who has no authority to do so?

Ans:No, because there is no compensation, and the permission to ride is not authorized. (Meloon vs. Davis, C.C.A.N.H. 292 F. 82)

3. When may moral damages be recovered in case of breach of contract of carriage?

Ans:In case of death or physical injuries, or wanton malice and bad faith.4. What is the Warsaw Convention?

Ans:The Warsaw Convention to which the Philippines is a party and which has the force and effect of law in this country applies to all international transportation of persons, baggage or goods performed by an aircraft gratuitously or for hire. (American Airlines v. Court of Appeals, 237 SCRA 482[2000])

5. When does a contract involve international transportation?

Ans:There are two categories of international transportations, to wit: (1) that where the place of departure and the place of destination are situated within the territories of two High Contracting Parties regardless of whether or not there be a break in the transportation or a transshipment; and (2) that were the place of departure and the place of destination are within the territory of a single High Contracting Party if there is an agreed stopping place within a territory subject to the sovereignty, mandate, or authority of another power, even though the power is not a party to the Convention. (Mapa v. Court of Appeals, 275 SCRA 286 [1997])

6. Does the Warsaw Convention apply to loss of baggage? Shabby and humiliating treatment from an airline employee?

Ans:A cause of action arising from slashing and loss of personal effects by an airline passenger is well within coverage of the Warsaw Convention; while a cause of action arising from the shabby and humiliating treatment received from airline employees is not. (United Airlines v. Uy, 318 SCRA 576 [1999])

7. Does the Warsaw Convention on limitation of liability preclude the operation of the Civil Code?

Ans:No. It does regulate, much less exempt, carrier from liability for damages for violating the rights of its passengers under the contract of carriage, especially if willful misconduct on the part of the carriers employee is found or established here.

The Warsaw Convention denies to the carrier availment of the provisions which exclude or limit the carriers liability if the damage is caused by his willful misconduct or by such fault on his part considered to be equivalent to willful misconduct, or if the damage is similarly caused by any agent of carrier acting within the scope of his employment. (Sabena Belgian World Airlines vs. CA, 69 SCAD 494, 255 SCRA 38 [1996])

8. Where is the venue for an action for damages against an international airline comply?

Ans:Art. 28(1) of Warsaw Convention provides that an action for damages must be brought at the option of the plaintiff either before the court of the: (a) domicile of the carrier; (b) the carriers principal place of business; (c) the place where the carrier has a place of business through which the contract was made; (d) the place of destination

Note, however, that under Art. 1 (3) of the Warsaw Convention, transportation to be performed by several successive carriers shall be deemed to be one undivided transportation. Manila Courts have jurisdiction over a trip from Geneva to Copenhagen to New York where the passenger purchased from Singapore Airlines in Manila conjunction tickets that would end in Geneva-Copenhagen- New York. The issuance by American Airlines of a new ticket in Geneva to cover a one-way trip to New York should be considered as part of the contract of transportation entered into by the passenger with Singapore Airlines in Manila, and cannot be considered separate and distinct from that entered into with Singapore Airlines. (American Airlines vs. CA, 327 SCRA 482 [2000])

9. What is the prescriptive period under the Warsaw Convention?

Ans:2 years from the arrival at the place of destination (Art. 29), unless the airline employed delaying tactics. (United Airlines vs. Uy, 318 SCRA 576 [1999])

V

1. May a private corporation be organized under a special law or charter?

Ans: No. Under the Constitution, a private corporation may be organized only under the Corporation Code as a general law and may not be organized under a special law or charter. (Agrix Marketing Inc.)

2. When may personal civil liability lawfully attach to a corporate director, trustee or officer without piercing the veil of corporate fiction?

Ans:When:

(1) He assents

1. to a patently unlawful act of the corporation, or

2. for bad faith or gross negligence in directing its affairs, or

3. 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; or

(4) He is made, by a specific provision of law, to personally answer for is corporate action. (Republic vs. Institute for Social Concern, January 28, 2005)

3. Which has jurisdiction over corporate officers dismissal?

Ans: The RTC. The question of remuneration involving a person who is not a mere employee but a stockholder and officer of the corporation is not a simple labor problem but a matter that comes within the area of corporate affairs and management, and is in fact a corporate controversy in contemplation of the Corporation Code. (Velarde vs, Lopez Inc., Jan, 14, 2004)

4. What are the elements of intra-corporate controversy?

Ans:To determine whether a case involves an intra-corporate controversy, and is to be heard and decided by the Branches of the RTC specifically designated by the Court to try and decide such cases, two elements must concur: (1) the status or relationship of the parties; and (2) the nature of the question that is the subject of their controversy. The first elements requires that the controversy must arise out of intra-corporate or partnership relations between any or all of the parties and the corporation, partnership or association of which they are stockholders, members or associates; between any or all of them and the corporation, partnership or association of which they are stockholders, members or associates; respectively; and between such corporation, partnership and the State insofar as it concerns their individual franchises. The second element requires that the dispute among the parties be intrinsically connected with the regulation of the corporation. If the nature of the controversy involves matters that are purely civil in character, necessarily, the case does not involve an intra-corporate controversy. For instance, the determination of whether a contract is simulated or not is an issue that could be resolved by applying pertinent provisions of the Civil Code. (Callejo, Sr. J)5. Is a corporation entitled to award of moral damages?

Ans:As a general rule, a corporation is not entitled to award of moral damages because it is incapable of physical suffering mental anguish and social humiliation. In a recent decision, the Supreme Court, thru Mr. Justice Antonio Carpio held that the previous decision holding that a corporation may recover moral damages for besmirched reputation and damage to goodwill is only an obiter dictum. A corporation may recover moral damages only in case of libel and defamation because the offended party or victim is any person, without limiting person to natural person, and the victim may even be one who is already dead if his memory is blackened.

6. May the by-laws legally provide for a right of first refusal in favor of the corporation only?

Ans: No. It is an undue restriction on the right of the stockholder to dispose of his shares freely. It is a different matter if the restriction is in the subscription agreement, which is individually and freely agreed upon. What is prohibited is the blanket restriction in the By-Laws.

7. What are the requisites for the validity of corporate transactions of:

a. A self-dealing director?

b. An interlocking director?

Ans:

a. Sec. 32. Dealings of directors, trustees or officers with the corporation A contract of the corporation with one or more of its directors or trustees or officers is voidable, at the option of such corporation, unless all the following conditions are present:

1. That the presence of such director or trustee in the board meeting in which the contract was approved was not necessary to constitute a quorum for such meeting;

2. That the vote of such director or trustee was not necessary for the approval of the contract;

3. That the contract is fair and reasonable under the circumstances; and

4. That in case of an officer, the contract has been previously authorized by the board of directors.

Where any of the first two conditions set forth in the preceding paragraph is absent, in the case of a contract with a director or trustee, such contract may be ratified by the vote of the stockholders representing at least two-thirds (2/3) of the outstanding capital stock or of at least two-thirds (2/3) of the members in a meeting called for the purpose: Provided, That full disclosure of the adverse interest of the directors or trustees involved is made at such meeting: Provided, however, That the contract is fair and reasonable under the circumstances.

b. Sec. 33. Contracts between corporations with interlocking directors Except in cases of fraud, and provided the contract is fair and reasonable under the circumstances, a contract between two or more corporations having interlocking directors shall not be invalidated on that ground alone: Provided, That if the interest of the interlocking director in one corporation is substantial and his interest in the other corporation or corporations is merely nominal, he shall be subject to the provisions of the preceding section insofar as the latter corporation or corporations are concerned.

Stockholdings exceeding twenty (20%) percent of the outstanding capital stock shall be considered substantial for purposes of interlocking directors.

V

1. What are pre-need plans?

Ans:These are contracts which provide for the performance of future services in the payment of future monetary consideration at the time of actual need, for which the plan holders pay in cash or installment at stated prices, which includes life, pension, education, interments and other plans which the SEC may approve.

2. What is a tender offer?

Ans:A tender of 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 (Sec. 19).

3. Why are tender offers regulated?

Ans:Tender offers are regulated to prevent the stockholders of the target company from being misled by the offeror or the targets management. Thus, a principal requirement of the SEC rules on tender offers is the disclosure by the offeror of certain information about the offer, with a copy of such information being given or sent to the stockholders. (See SRC Rule 19.1, para. 7)

4. Under what circumstances is a tender offer mandatory?

Ans:Except when relief from the mandatory tender offer requirement is granted under SRC Rule 19.1, paragraph 3, a person is required under the following circumstances to make a tender offer for equity shares of a pubic company in an amount equal to the number of shares that the person intends to acquire:

(a) Where the person intends to acquire 15% or more of the equity shares of a public company pursuant to an agreement made between or among the person and one or more sellers;

(b) Where the person intends to acquire 30% or more of the equity shares of a public company within a period of 12 months; and;

(c) Where the person intends to acquire shares that would result in the ownership of more than 50% of the equity shares of a public company.

5. What is the procedure to comply with the requirements of mandatory tender offers?

Ans:The following:

(a) Make a tender offer to stockholders by filing with SEC a declaration to that effect; and furnish the Issuer a statement containing such of the information required of issuers as SEC may prescribe, including subsequent or additional materials;

(b) Publish all requests or invitations for tender, or materials making a tender offer or requesting or inviting letters of such a security;

(c) Pay at time of filing of statement with SEC a filing fee.

6. Who is an independent director?

Ans:An Independent director is a person other than an officer or employee of the bank, its subsidiaries or affiliates or related interests.

Note that the term independent director is also used in the Securities Regulation Code (Sec. 38; see Paragraph 16.25) to refer to a person other than an officer or employee of the corporation, its parent or subsidiaries, or any other individual having a relationship with the corporation, which would interfere with the exercise of independent judgment in carrying out the responsibilities of a director.

7. When is a foreign corporation deemed doing business here in the Philippines?

Ans:Under Section 3(d) of the Foreign Investment Act doing business in the Philippines is deemed to include the following acts:

(a) Soliciting orders, service contracts, opening offices, whether liaison offices or branches;

(b) Appointing representatives or distributors operating under full control of the foreign corporation, domiciled in the Philippines or who in any calendar year stay in the country for a period or periods totaling one hundred eighty (180) days or more;

(c) Participating in the management, supervision or control of any domestic business, firm, entity or corporation in the Philippines; and

(d) Any other act or acts that imply a continuity of commercial dealings or arrangements, and contemplate to that extent the performance of acts or works, or the exercise of some of the functions normally incident to and in progressive prosecution of commercial gain or of the purpose or object of the business organization.

8. What are not deemed doing business?Ans: The following:

(a) Mere investment as a share-holder by a foreign entity in Domestic Corporation duly registered to do business and/or the exercise of rights as such investor;

(b) Having a nominee director or officer to represents its interests in such corporation; and

(c) Appointing a representative or distributor domiciled in the Philippines which transacts business in its own name and for its own account. (pp. 755-756 Villanueva)

V

1. What are the primary objectives of the BSP? (Sec. 3)

Ans:

(a) To maintain price stability for a balanced and sustainable growth of the economy.

(b) Promote and maintain monetary stability and the convertibility of the peso.

2. What are the grounds for closing a bank or a quasi-bank?

Ans:The following:

1) Equity test unable to pay its liabilities in the ordinary course of business (Sec. 30[a], RA 265)

2) Balance Sheet Test insufficient assets to meet liabilities (Sec. 30(b), RA 265)

3) Violation of Cease and Desist Order or Transactions constituting fraud or dissipation of assets.

4) Announced Bank Holiday (Sec. 53, RA 8791)

5) Suspension of Payment of deposits for more than 30 days (Sec. 53)

6) Unsound and unsafe banking practice (Sec. 56, RA 8791)

3. A borrows Php1 Million from XY Bank with 20% interest per annum on the security of a Real Estate Mortgage over his house and lot. On maturity, A defaults and XY Bank forecloses the mortgage to enforce repayment of the loan, which amounts to Php2 Million at the time of the Auction Sale, including interest of 20% per annum. The highest bid at the Auction Sale is Php1.5 Million submitted by XY Bank. The Certificate of Sale executed by the Sheriff is registered with the Register of Deeds and duly annotated at the title of A.

a) A wants to redeem the mortgage. What will be the redemption price?

Ans:Php2 Million with 20% interest stipulated in the mortgage and all the costs and expenses. Section 47 of the General Banking Act of 2000 provides in pertinent part that: In the event of a foreclosure, whether judicially or extra-judicially, of any mortgage on real estate which is security for any loan or other credit accommodation granted, the mortgagor or debtor whose real property has been sold for the full or partial payment of his obligation shall have the right within one year after the sale of the real estate, to redeem the property by paying the amount due under the mortgage deed, with interest thereon at the rate specified in the mortgage, and all the costs and expenses incurred by the bank or institution from the sale and custody of said property less the income derived therefrom. (NOTE: There are Supreme Court Decisions up to 2004 upholding this provision of law)

b) If A were a corporation or a partnership, what is the period within which the corporation or partnership may redeem the mortgage?

Ans:Notwithstanding Act 3135, juridical persons whose property is being sold pursuant to an extrajudicial foreclosure, shall have the right to redeem the property in accordance with this provision until, but not after, the registration of the certificate of foreclosure sale with the applicable Register of Deeds which in no case shall be more than three (3) months after foreclosure, whichever is earlier. (Sec. 47, General Banking Act of 2000)

4. (a) When is the purchaser in the Auction Sale entitled to possession of the mortgaged property?

Ans:However, the purchaser at the auction sale concerned whether in a judicial or extrajudicial foreclosure shall have the right to enter upon and take possession of such property immediately after the date of the confirmation of the auction sale and administer the same in accordance with law. (Sec. 47, General Banking Act of 2000)

(b) What is the requirement for the mortgagor to restrain or enjoin foreclosure?

Ans:Any petition in court to enjoin or restrain the conduct of foreclosure proceedings instituted pursuant to this provision shall be given due course only upon the filing by the petitioner of a bond in an amount fixed by the court conditioned that he will pay all the damages which the bank may suffer by the enjoining or the restraint of the foreclosure proceeding. (Sec. 47, General Banking Act of 2000)

X

1. (a) What is the so called TRIPs Agreement?

Ans: It is an agreement on the Trade Related Aspects of Intellectual Property attached to the Treaty establishing the World Trade Organization (WTO).

(b) What is the basic policy adopted in the trips agreement?

Ans: Equality and reciprocal treatment of nationals of member countries

1) Non-discrimination (Art 3) no less favorable than that accorded to its nationals.

2) Most favored treatment (Art 4) advantage, favor or privilege granted to nationals of a member country automatically accorded to nationals of other member countries.

3) Reverse reciprocity (Sec. 231, IPC) Restrictions on Filipino national in a foreign law are reciprocally enforceable against its national, in the Philippines.

2. Is the accession of the Philippines to the Agreement establishing the World Trade Organization (WTO) and the TRIPS (Trade Related Aspect of Intellectual Property) Agreement which require the contracting parties to accord other contracting parties treatment no less favorable than that accorded their own nationals under the principles of equality and reciprocity among nationals of the member countries unconstitutional for being violative of (1) Sec. 19, Art. of the Constitution which requires the Philippines to develop a self-reliant and independent national economy controlled by Filipinos, (2) Sec. 10, Art. X which requires preference in favor of qualified Filipino in the grant of rights, privileges and concession covering the national economy and patrimony, and (3) Sec. 12, Art. X which provides for preferential use of Filipino Labor domestic materials and locally produced goods?

Ans:No. The principles in Article are not self-executing principles ready for enforcement through the courts. They do not embody judicially enforceable constitutional rights but guidelines for legislation. (Taada vs. Angara, 272 SCRA 18).

Sections 10 and 12, Article X of the Constitution should be read and understood in relation to the other sections in Article X of the Constitution, especially Sections 1 and 13. Section 1, Article X of the Constitution lays down the basic goals of national economic development as a more equitable distribution of wealth, a sustained increase in the amount of goods and services for the benefit of the people, and an expanding productivity to raise the quality of life for all. Likewise, the Constitution takes into account the realities of the outside world, as it requires a trade policy that serves the general welfare and utilizes all forms of exchange on the basis of equality and reciprocity and speaks of industries which are competitive in both domestic and foreign markets, as well as the protection of Filipino enterprises against unfair foreign competition and trade practices. There are enough balancing provisions in the Constitution to allow the Senate to ratify the concurrence of the Philippines in the Agreement Establishing the World Trade Organizations. The Constitution does not intend to pursue an isolationist policy. The Agreement Establishing the World Trade Organization establishes rules of equality and reciprocity that apply to all members. The Constitution encourages industries that are competitive in both domestic and foreign markets, thereby demonstrating a clear policy against a sheltered domestic environment. Whether the Agreement Establishing the World Trade Organization will favor the general welfare of the public at large are to be answered by the policy makers. Such answers are not subject to judicial review based on grave abuse of discretion. (Taada vs. Angara, 272 SCRA 18)

X

1. Distinguish Trademark Infringement from Unfair Competition.

Ans:

(a) Infringement of trademark is the unauthorized use of a trademark, whereas unfair competition is the passing off of ones goods as those of another.

(b) In infringement of trademark, fraudulent intent is unnecessary, whereas in unfair competition fraudulent intent is essential.

(c) In infringement of trademark the prior registration of the trademark is a prerequisite to the action, whereas in unfair competition registration is not necessary. (Mighty Corp. vs. E.J. Gallo Winery, July 14, 2004)

2. Are tradenames protected even without registration?

Ans: Yes, because tradenames are not required to be registered. (Sec. 165)

3. What is the related goods principle?

Ans:There is likely confusion from the use of identical marks on non-competing but related goods.

1) belonging to the same class

2) have the same descriptive properties or physical attributes

3) serve the same purpose or

4) flow through the same channel of trade

4. What are the tests to determine similarity and likelihood of confusion in trademark resemblance?

Ans:Two tests to determine similarity and likelihood of confusion in trademark resemblance:

(a) The Dominancy Test applied in Asia Brewery, Inc. vs. CA (1993) focuses on the similarity of the prevalent features; whether the use of the marks involved is likely to cause confusion or mistake in the mind of the public or deceive purchasers.

(b) The Holistic or Totality Test used in Del Monte Corporation vs. CA (1990) the trademarks in their entirety as they appear in their respective labels or hang tags must also be considered. (Mighty Corp. vs. E.J. Gallo Winery, July 14, 2004)

5. What are the essential elements for Unfair Competition?

Ans:The essential elements of an action for unfair competition are (1) confusing similarity in the general appearance of the goods, and (2) intent to deceive the public and defraud a competitor. The confusing similarity may or may not result from similarity in the marks, but may result from other external factors in the packaging or presentation of the goods. The intent to deceive and defraud may be inferred from the similarity of the appearance of the goods as offered for sale to the public. Actual fraudulent intent need not be shown. Unfair competition is broader than trademark infringement and includes passing off goods with or without trademark infringement. (McDonalds Corp. vs. LC BigMak Burger, Inc., August 18, 2004)

6. Can there be trademark infringement without unfair competition?

Ans:There can be trademark infringement without unfair competition as when the infringer discloses on the labels containing the mark that he manufactures the goods, thus preventing the public from being deceived that the goods originate from the trademark owner. (McDonalds Corp. vs. LC BigMak Burger, Inc., August 18, 2004)

X

1. May a bank collect handling charges if the PN does not contain stipulation on payment of handling charges?

Ans:No, for violation of the Truth and Lending Act (Solid Bank vs. CA, 246 SCRA 193 [1995]).

2. Is the assignment of credit covered by the Truth and Lending Act?

Ans:Yes.

3. For what amount may foreclosure of real estate mortgage be made?

Ans:A mortgage may be foreclosed only for the amount appearing in the mortgage document. (Landrito, Jr. vs. Court of Appeals, 466 SCRA 107 [2005])

4. What is the effect of iniquitous and unconscionable interest rate?

Ans:Stipulations authorizing iniquitous or unconscionable interest are contrary to morals (contra bonos mores), if not against the law. Under Article 1409 of the Civil Code, these contracts are inexistent and void from the beginning. They cannot be ratified nor the right to set up their illegality as a defense be waived.

Since the stipulation on the interest rate is void, it is as if there were no express contract thereon (Tongoy vs. CA, 123 SCRA 99 (1983). Hence, courts may reduce the interest rate as reason and equity demand.

In Medel vs. CA, 359 SCRA 820 (1998) it was held that the stipulated interest rate of 5.5 percent per month, or 66 percent per annum, was unconscionable. In the present case, the rate is even more iniquitous and unconscionable, as it amounts to 192 percent per annum. When the agreed rate is iniquitous or unconscionable, it is considered contrary to morals, if not against the law. Such stipulation is void (Ibarra vs. Aveyro, 37 Phil. 274 (1917); Sps. Almeda vs. CA, 326 Phil. 309 [1996]). (Imperial vs. Jaucian, April 14, 2004)

1Prof. Arturo M. de Castro9/17/20102010 pre-week review predictions and reminders in mercantile law