RED NOTES 2001-2002

Q & A in CORPORATION LAWS

1.Question:
Mr. Kenneth Cruz is the owner of 1,000 shares of stock in Luzon Corporation.
On 31 May 2000, he executed a special power of attorney granting full power to his
friend Randy Velarde to sell or otherwise dispose of his shares in Luzon Corporation.
Pursuant to said special power of attorney, Mr. Velarde executed a deed of
assignment of the shares in favor of Kevin Garcia. Two weeks thereafter Mr. Kenneth
Cruz died.
When Mr. Velarde presented the deeds of assignment to Luzon Corporation to
have it registered in the stock and transfer book of the corporation, the corporation
refused on the ground that there are irregularities in the transfer of the shares and
that upon the death of Kenneth Cruz, the shares of stock became the property of the
estate and that it should first be liquidated and settled.
Can the corporation refuse to register the transfer of the shares? Decide.
Answer:
The corporation cannot refuse to register the transfer of the shares. Section 63 of the
Corporation Code contemplates no restriction as to whom the stocks may be transferred. It
does not suggest that any discrimination may be created by the corporation in favor of, or
against a purchaser of shares. The owner of shares is at liberty to dispose of them in favor
of whomsoever he please, the only limitation is when the corporation holds any unpaid claim
against the shares intended to be transferred.
The right of a transferee/assignee to have the stocks transferred in his name is an
inherent right flowing the ownership of stocks, thus whenever the corporation refuses to
transfer and register stock, mandamus will lie to compel the officers of the corporation to
transfer said stock in the books of the corporation.
The corporations obligation to register is ministerial, it cannot try to decide the
question of ownership. (RURAL BANK OF SALINAS, INC. vs. COURT OF APPEALS 210
SCRA 510)
2. Question:
In a special meeting, the Board of Trustee passed Resolution No. 1, s.
2001granting monthly compensation to Mr. W, X, Y and Z as corporate officers of LLB
Corporation. It also provides that the ten percentum of the net profits of the
corporation shall be distributed equally among the ten members of the Board of
Trustees.
A few years later, Mr. Q, R, S and T filed two (2) separate criminal informations,
one for falsification and the other for estafa against Mr. A, B, C and D, majority and
controlling members of the corporation rooted in the above-mentioned resolution.
After a full-blown trial, a verdict of acquittal was granted without imposing civil
liability against the accused therein.
Mr. Q, R, S and T filed a Motion for Reconsideration of the civil aspect of the
decision and considered the same a s a derivative suit on behalf of the corporation
for the annulment of Resolution No 1, s. 2001.

(a)
(b)

Is Resolution No. 1, s. 2001 valid?

What are the ways by which members of the board can be granted
compensation apart from reasonable per diems?
(c) What is a derivative suit? What are the requisites of a derivative suit? Is
the Motion for Reconsideration filed by Mr. Q, R, S and T considered a
derivative suit?
Answer:

(a)

YES. Under Section 30 of the Corporation Code, the directors shall not
receive any compensation, as such directors. The phrase as such directors is not
without significance for it delimits the scope of the prohibition to compensation
given to them for services performed purely in their capacity as directors or

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trustees. The unambiguous implication is that members of the board may receive
compensation, in addition to reasonable per diems, when they render services to
the corporation in a capacity other than as directors/trustees. In the case at bar,
the resolution granted monthly compensation to Mr. W, X, Y and Z not in their
capacity as members of the board, but rather as officers of the corporation, more
particularly as Chairman, Vice-Chairman, Treasurer and Secretary of the
Corporation.
Clearly, therefore, the prohibition with respect to granting compensation to
corporate directors/trustees as such under section 30 is not violated in this particular
case.

(b)

The following are the ways in which members of the board can be
granted compensation apart from the reasonable per diems.

1.

When there is a provision in the by-laws fixing their compensation apart

from reasonable per diems;
When the stockholders representing a majority of the outstanding capital
stock at a regular or special stockholders meeting agree to give it to the;
and
When the members of the board render services to the corporation other
than as directors/trustees.

2.
3.

(c ) Derivative suit is an action brought by minority stockholders in the name

of the corporation to redress wrongs committed against it, for which the
directors refuse to sue. It is a remedy deigned by equity and has been the
principal defense of the minority stockholders against the abuses by the
majority.
The following are requisites of a derivative suit:

1.
2.
3.

The plaintiff constitute the minority stockholders;

The plaintiffs must be suing for and on behalf of the corporation and all
other stockholders similarly situated who wish to join; and
The complaint must allege that the minority stockholders are suing on a
derivative cause of cause.

Keeping in mind the above-mentioned requisites, the Motion for

Reconsideration is not a derivative suit. The plaintiffs failed to indicate that they are suing on
a derivative cause of action. It merely states that the action is a petition for review on pure
questions of law to set aside a portion of the RTC decision in the two criminal cases since
the trial courts judgment of acquittal failed to impose any civil liability against Mr. A, B, C and
D. By no amount of equity considerations, if at all deserved, can a mere appeal on the civil
aspect of a criminal case be treated as a derivative suit. (WESTERN INSTITUTE
TECHNOLOGY,INC. vs. SALAS G.R. No. 113032, August 21, 1997
278 SCRA 216).
3.Question:
Mr. Santos owned proprietary certificates of Davao Country Club. He lent his
best friend, Mr. Manuel, the said proprietary certificates to assist the latter in
entertaining clients in connection with Mr. Manuels business, that is, so that the
latter can enjoy the singing privileges of the club members. Davao Country Club
issued proprietary certificates in the name of Mr. Manuel.
After a year, Mr. Santos asked Mr. Manuel for the return of the certificates to
him. Mr. Manuel did so by executing a Deed of Transfer in favor of Mr. Santos. The
Club was furnished a copy of the said deed of transfer but the transfer was not
recorded in the corporate books of the Club.
May Mr. Santos validly object to the subsequent attachment of the said
certificates by a judgment creditor of Mr. Manuel on the ground that said certificates
were already transferred to him?

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Answer:
No. Section 63 of the Corporation Code of the Philippines provides that No transfer,
however, shall be valid, except as between the parties, until the transfer is recorded in the
books of the corporation showing the names of the parties to the transaction, the date of the
transfer, the number of the certificate or certificates and the number of the shares
transferred.
In the case of Uson vs. Diosomito, the court on the issue of whether a subsequent
attachment prevails over an unrecorded transfer of shares held that all transfers of shares
not so entered in the books are invalid as to attaching or execution creditors of the
assignors, as well as to the corporation and to subsequent purchasers in good faith, and
indeed, as to all persons interested, except the parties to such transfers. All transfer not so
entered on the books of the corporation are absolutely void not because they are without
notice or fraudulent in law but because they are made so void by statute.
Applying the above doctrine in the case at bar, Mr. Santos cannot therefore object to
the attachment based on the unrecorded deed of transfer for the same is considered void
and not binding as to third parties, in this case the attachment creditor.(GARCIA vs.
JOMOUAD G.R. No. 133969; January 26,2000)
4.Problem:
William, a stockholder of Wack-Wack Golf and Country Club, Inc., pledged his
stock certificate, the same to serve as a security for the loan which he owed to
Robert. The pledge was noted in Wack-Wacks corporate books. When the due date
came for the payment of Williams obligation, the former defaulted and in view of
which, led to the foreclosure of the pledged stock and its sale a public auction for
which Robert was the highest bidder. Prior to the said auction sale, Robert notified
Wack-Wack of the proceedings and requested the transfer of the shares in his name
and the same to be recorded in its corporate books. The latter refused. Robert was
then issued a certificate of sale for the shares bought.
Now claiming ownership of the shares of stock, Robert requested Wack-Wack
to issue new certificate of stocks in his name to cover the shares and the same to be
recorded in the corporate books. Wack-Wack refused contending that William, the
pledgor, has unpaid overdue accounts with the corporation and that he was already
declared deliquent. Instead, pursuant to a by-law provision of Wack-Wack, which
provides that after a member shall have been posted deliquent, the Board may order
his shares sold to satisfy the claim of the Club, said shares were sold at a public
auction in which Wack-Wack was the highest bidder.
Q.1. Who is entitled to the ownership of the disputed shares?
Q.2. Is the by-law provision binding against Roberto as to defeat his right over
the disputed shares?
Q.3. Would your answer in No. 1 be the same if instead the corporation relied
on Section 63 of the Corporation Code which provides that no shares of stock
against which the corporation holds any unpaid claim shall be transferable in the
books of the corporation to justify its claim over the disputed shares of stock?
Answer:
A.1. The pledgee, Robert, is the owner of the disputed shares. The purchase of the
subject shares of stock at the public auction by Robert (and the subsequent issuance to him
of the corresponding Certificate of Sale) transfered to him the ownership of the same, thus
entitling to have the said shares registered in his name as the stockholder of Wack-Wack.
This is strenghtened by the express recognition by the corporation of the pledge agreement
as evidenced by the notation of the agreement in its the corporate books. In addition,
William, the original stockholder, has not contested the transfer.
A.2. No. In order to be bound, a third party, in this case Robert, must have acquired
knowledge of the pertinent by-laws at the time the transaction or agreement between said
third party (Robert) and the shareholder (William) was entered into, in this case, at the time
the pledge agreement was executed. Wack-Wack could have easily informed Robert of its

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by-laws by sending a notice informing him thereof when the pledge agreement was noted in
its corporate books. Instead, Robert was notified only at the time of the foreclosure.
A.3. Wack-Wack Golf & Country Club Corp. cannot utilize said provision of law. The
term unpaid claim refers to any unpaid claim arising from unpaid suscription, and not to
any indebtedness which a sbscriber or stockholder may owe to the corporation arising from
any other transaction. In this problem, the subscription for the shares in question has been
fully paid as evidenced by the issuance of the stock certificate. What William owed WackWack were merely the monthly dues. Hence, the aforequoted provision does not apply.
(China Banking Corporation vs. Court of Appeals 270 SCRA 503 (1997)
5. Problem:
Don Andres is one of the incorporators and stockholders of ANSCOR, a
corporation formed in 1930. When Don Andres died in 1964, the records revealed that
he has a total shareholdings of 185, 154 shares 50,495 of which are original issues
and the balance of 134,659 shares as stock dividends declaration. In 1966, ANSCOR
declared again stock dividends and the estate of Don Andres received 52,577
common shares.
To partially retire some shares as treasury in order to reduce the companys
foreign exchange remittances in case cash dividends are declared, ANSCOR
redeemed a total of 108,000 common shares from Don Andres estate in 1968.
In 1973, the BIR assessed ANSCOR of deficiency withholding tax-at-source
since ANSCOR failed to withhold the tax due on income received by Don Andres
when ANSCOR redeemed the shares of Don Andres pursuant to Sec. 83 of the Tax
Code which provides that redemption by the corporation of the stocks of its
stockholders can be considered a taxable income or cash dividends to the extent that
it represents a distribution of earnings or profits accumulated.
Question:

1)

Are Stock dividends, standing alone, issued by ANSCOR constitute income

and therefore taxable on the part of Don Andres?

Answer:
No. Stock dividends strictly speaking, represents capital and do not constitute
income to its recipient. Thus, the mere issuance thereof does not subject it to income
tax as they are nothing but an enrichment through increase in value of capital
investment. As, capital, the stock dividends postponed the realization of profits
because the fund represented by the new stock has been transferred from surplus to
capital and no longer available for actual distribution.
Question:
What is redemption?
Answer:
Redemption is repurchased, a re-acquisition of stock by a corporation which issued
the stock in exchange for property, whether or not the acquired stock is cancelled,
retired or held in the treasury. Essentially, the corporation gets back some of its
stock, distributes cash or property to the stockholders in payment of the stock, and
continues in business as before.
Question:
Are the proceeds of the redemption of the 108,000 shares owned by Don
Andres which were previously declared by ANSCOR as a stock dividend
equivalent to distribution of cash or property dividends which is taxable?
Answer:
Yes. The proceeds of the redemption of the 108,000 shares owned by Don Andres
which were previously declared by the corporation as stock dividend amount to a
distribution of taxable cash or property dividends.
ANSCOR redeemed some shares of stock of Don Andres. Certainly, the
shares redeemed did not come from the original capital subscription of Don Andres

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for to do so would violate the Trust Fund Doctrine which regarded the capital stock of
the corporation as equity in trust for the payment of corporate creditors. The
redeemed shares came from the stock dividend previously declared by the
corporation. It is not the stock dividends but the proceeds of its redemption that may
be deemed as taxable dividend. The proceeds of the redemption is additional wealth,
for it is not merely a return of capital but a gain thereon. This amounts to distribution
of taxable cash or property dividends.(Commissioner of Internal Revenue vs. Court
of Appeals 301 SCRA 152)
6. Question:
May a corporate treasurer, by herself and without any authorization from the
board of director, validly sell a parcel of land owned by the corporation? May the veil
of corporate fiction be pierced on the mere ground that almost all of the shares of
stocks of the corporation are owned by said treasurer and her husband?
Answer:
Unless duly authorized by the board of directors, its charter or by the by-laws, a
treasurer, whose powers are limited, cannot bind the corporation in a sale of its assets.
Selling is obviously foreign to a corporate treasurers function, which generally has been
described as to receive and keep the funds of the corporation, and to disburse them in
accordance with the authority given him by the board or the properly authorized officers.
The question of piercing the veil of corporate fiction is essentially a matter of proof. In
the present case, it was not established that the corporation was formed, or that it is
operated, for the purpose of shielding any alleged fraudulent or illegal activities of its officers
or stockholders, or that the said veil was used to conceal fraud, illegality or inequity at the
expense of third persons. ( San Juan Structural and Steel Fabricators, Inc. vs. Court of
Appeals (296 SCRA 632)
7. Question:
BMG Corporation was formed and organized by Mr. and Mrs. Agustin B.
Aguilar. The spouses claimed that it was a close corporation, by reason of the fact
that 99.866% of its subscribed capital stock was owned them. Would that fact alone
sustain the contention of the spouses? Decide with reasons.
Answer:
A corporation does not become a close corporation just because a man and his wife
owns 99.866% of its subscribed capital stock. In the present case, the absence of any fact
showing that its articles of incorporation contains any provision stating that (a) the number of
stockholders shall not exceed 20, or (b) a preemption of shares is restricted in favor of any
stockholder, or of the corporation, or listing its stocks in any stock exchange or making a
public offering of such stocks is prohibited, thus is sufficient to sustain a conclusion that it is
not a close corporation, as these requirements are specifically provided by the Corporation
Code. So, too, a narrow distribution of ownership does not by itself make a close
corporation.( San Juan Structural and Steel Fabricators, Inc., vs. Court of Appeals (296
SCRA 632)
8.Question:
X Corporation purchased shares in Manila Polo Club for the benefit of Mr. A,
the executive president of the corporation. The shares were listed under the name of
Mr. A. When Mr. A retired, he transferred his proprietary share in the Manila Polo Club
to Mr. B, the new executive president. Mr. B, however, failed to execute a document
recognizing the beneficial interest of the corporation.
When Mr. B resigned, X Corporation sought the transfer of the share to the
corporation. Mr. B refused contending that the articles of incorporation and the bylaws of the Manila Polo Club prohibit artificial persons, such as corporations to be
club members.
Is the contention tenable?
Answer:
No. The contention is not tenable.
Although the articles of incorporation and the by-laws of the Manila Polo Club
prohibit the transfer of shares to artificial persons, there would be no violation of said

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prohibition if the shares is transferred to a nominee of the corporation who is a natural
person.
In this case, Mr. B was merely a nominee of the corporation to hold the shares and
enjoy the privileges of the club. Upon the expiration of Mr. Bs employment, the incentives
that go with the position, including the use of the Manila Polo Club share, also ceased to
exist. It behooves upon Mr. B to surrender said share to the corporations next nominee,
another natural person. This arrangement of trust and confidence cannot be defeated by
citation of the Manila Polo Club rules without doing violence to the basic tenets of justice
and fair dealings. (Thomson vs. Court of Appeals 298 SCRA 280)
9. Question:
X was the owner of 100% or 3,100 paid-up shares of stock of ABC Corporation.
On September 27, 1989, X entered into an Agreement with Y to sell to that latter his
3,100 shares (or 100% ) of ABC Corporation for 100,000.00. However, such transfer of
shares was not recorded or registered in the Stock and Transfer Book of ABC
Corporation. Y is now insisting that he is entitled to the voting rights pertaining said
shares. Decide with reason.
Answer:
It is a fundamental rule in Corporation Law that a stockholder acquires voting rights
only when the shares of stock to be votes are registered n his name in the corporate books.
Until registration is accomplished, the transfer, though valid between the parties,
cannot be effective as against the corporation. Thus, the unrecorded transaction cannot
enjoy the status of a stockholder; he cannot vote nor be voted for, and he will not be entitled
to dividends.
The Corporation will be protected when it pays dividend to the registered owner
despite a previous transfer of which it had no knowledge.
The purpose of registration is two-fold: to enable the transferee to exercise all the
rights of a stockholder, and to inform the corporation of any change in share ownership so
that it can ascertain the persons entitled to the rights and subject to the liabilities of a
stockholder. (De Erquiaga vs. CA 178 SCRA 1)
10.Question:
Erap and Loi are President and Chairman of Board of Directors, respectively,
of Boracay Corporation. Crony Bank is one of the creditors of Boracay Corporation,
and its credit is secured by a first mortgage on the manufacturing plant of said
company. On January 13, 1995 because Boracay Corporation is encountering a very
serious difficulty in continuing with its operations, it entered into a voting trust
agreement with Crony Bank. The terms of the voting trust agreement provides that
the duration of the agreement is contingent upon the fulfillment of certain obligations
of Boracay Corporation with the Crony Bank. Erap and Loi, pursuant to the voting
trust agreement disposed of all their shares through assignment and delivery in favor
of Crony Bank, as trustee. On February 20, 2000, Elitesta Incorporated filed in court a
complaint for sum of money against Boracay Corporation, and summons was served
upon Erap and Loi.

a.
b.
c.

What is the most immediate effect of a voting trust agreement on the status
of Erap and Loi as stockholders of the corporation?
Do Erap and Loi retain their respective positions as directors of the
corporation?
Is Erap still the President of Boracay Corporation so as to validity receive
the service of summons?

Answer:

a.
b.

As stockholders who are a party to execution of voting trust agreement, from

legal title holder or owner of the shares subject of the voting trust agreement they
become the equitable or beneficial owner of the stocks.
Under the Corporation Code, in order to be eligible as a director, what is material
is the legal title to, not the beneficial ownership of, the stock as appearing on the
books of the Corporation. Since Erap and Loi, by virtue of voting trust agreement

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c.

disposed of all their shares through assignment and delivery in favor of Crony
Bank, as trustee, they ceased to own at least one share outstanding in their
names on the books of Boracay Corporation as required under Sec. 23 of the
Corporation Code. Consequently, they ceased to be directors. Hence there was
created vacancies in their respective positions as directors of Boracay
Corporation.
Considering that the voting trust agreement between Boracay Corporation and
Crony Bank transferred legal ownership of the stocks covered by the agreement
to the Crony Bank as the trustee, the latter became the stockholder of record with
respect to the said shares of stocks. In the absence of a showing that Crony
Bank had caused to be transferred in name of Erap at least one share of stock
for the purpose of qualifying him as director of Boracay Corporation, Erap can no
longer be deemed to have retained his status as President of Boracay
Corporation. Thus, summons served upon him is valid. (Lee vs. Court of Appeals
(205 SCRA 752)

11. Problem:
Gomez, a stockholder of Goma Corporation owns 44 shares of stock for which
12 certificates of stock were issued in his favor. The word non-transferable appears
on each and every one of these certificates. In view of such restriction, he proposed
to the corporation to purchase his shares at par value or that he be authorized to sell
to them to other persons. The corporation offered to buy the shares but at much
lower price, below its par value. Gomez did not agree thereto.
Q.1. Is the restriction (non-trasferable) appearing on the 12 certificates of
stock a valid restriction as to preclude Gomez from selling or disposing his shares to
anybody other than to the Corporation or its stockholders?
Q.2. May such restriction (non-transferable) alone permit or authorize Gomez
to compel Goma Corporation to purchase his shares at par value?
Q.3. What is the purpose of the restriction on transfer of shares found in
Section 35 Act. No. 1459 (now Section 63 of the Corporation Code)?
Answer:
A.1. The restriction consisting the word non-transferable appearing on the 12
certificates is illegal and null and void on the ground that it constitutes an undue limitation of
the right of ownership and is in restraint of trade. It should, therefore, be eliminated.
Shares of corporate stock being regarded as property, the owner of such shares
may, as a general rule, dispose them as he sees fit, unless the corporation has been
dissolved, or unless the right to do so is properly restricted, or the owners privilege of
disposing of his shares has been hampered by his own action.
A.2. The indication of non-transferable alone on the fact of the stock certificate
does not compel the corporation to buy back the shares at par value from the stockholder. In
the absence of a similar contractual obligation and of a legal provision applicable thereto, it
is logical to conclude that it would be unjust and unreasonable to compel the said
defendants to comply with a non-existent or imaginary obligation.
Hence, in view of the non-existence of law or authority in support of Gomez claim to
the effect that the corporation is obliged to purchase his shares at par value, no contract
whether expressed or implied can likewise occur between Gomez and Goma Corporation.
The proper action is to compel the issuance of new certificate of stocks in exchange
for the old ones bearing the invalid restriction.
A.3. Section 36 of Act No. 1459 (now Section 63 of the Corporation Code) provides
that no transfer shall be valid, except as between the parties, until the transfer is entered
and noted upon the books of the corporation so as to show the names of the parties to the
transaction, the date of the transfer, the number of the certificate, and the number of shares
transferred. This restriction on the transfer of shares is necessary in order that the officers of
the corporation may know who are the actual stockholders, which is essential in conducting

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elections of officers, in calling of the stockholders meetings and other purposes. ( Padgett
vs. Babcock & Templeton, Inc., and Babcock 59 Phil. 232 (1933)
12. Question:
Uy Chiam Liong obtained a loan from Yuen Sheng Company (YSC) of Manila
and as security he pledged 400 shares of stocks of (YSC) which was held by its
manager. Later Uy Chiam Liong sold the same share of stock to Serafin Piaoco
evidenced by a notarial document. The certificates of stock not being in the
immediate possession and control of the vendor at the time of sale, no indorsement
thereof was made in accordance with the by-laws of the company, nor was the
company notified of the sale. Is the ownership and title to the stocks by virtue of the
contract of purchase and sale evidenced by the notarial document transferred despite
the fact that the certificates of stock were not indorsed over to the purchaser and new
certificates issued to him in accordance with the provisions of the charter or by-laws
of the company.
Answer:
A bonafide contract of purchase and sale of stock in a company or corporation set
out in a notarial documents conveys to the vendee, as between the vendor and the vendee,
the entire title, legal and equitable, of the vendor, although as between the vendee and the
company or corporation the vendee acquires only an equitable title, which the company or
corporation is bound to recognized and permit to be ripened into a legal title when he
presents himself to do the acts required by the charter to make a transfer. To bind the
corporation, these transfers should be registered in the stock and transfer of a new
certificate to the transferee. Under section 63 of the Corporation Code, no transfer of shares
of stock shall be valid except as between the parties until the transfer is recorded in the
books of the corporation showing the names of the parties to the transfer, the date of the
transfer and number of the certificates and shares transferred. ( Serafin Uy Piaoco vs. Jose
McMicking G.R. No. L-4237, March 5, 1908)
13. Problem:
JW was elected by the members of the Manila Stocks Exchange as honorary
life member without following the procedure for admission of members prescribed by
the by-laws such as the requisites as to the filling of an applications, publication,
payment of entrance and subscription fees, and the action to be taken by the Board of
Directors. JW argues that there was no need for him to file an application because he
was not admitted but elected to membership, that the terms of his election expressly
exempted him for the payments of dues and that there was no need for the Board of
Directors to act on his election because he was elected unanimously elected by the
members as an honorary member and not a regular member. There is no provision in
the by-laws for the election of a member whether regular or honorary. Decide on the
contention of JW.
Answer:
There is no showing that the election of JW to honorary life membership in the
corporation is incidental to its corporate existence or that it is among the implied powers
granted it to do all acts that may be necessary to enable it to exercise the powers expressly
conferred and to accomplish the object for which it was created. The resolution of the
members designated JW as honorary member, it stands to reason that his admission or
election must fallow the requisites prescribed for the admission of regular members, for he is
to all intents and purposes a regular member. One cannot be a regular member for the
purpose of enjoying the benefits of a regular membership and at the same time evade its
corresponding obligations on the ground that he is an honorary member so-called. An
honorary membership is an incongruity and finds no sanction either in law or custom.
The failure to fulfill the requirements exacted by the by-laws is fatal to JWs
pretension to membership. As held in J.A. Wolfson vs. Manila Stocks Exchange the by-laws
prescribe the mode, and the only in which membership in the exchange can be obtained,
and no one can justly claim to be a member who has not been admitted in the mode thus
prescribed. The principle is that if the governing law prescribes the conditions or special
methods for becoming a member of a corporation, the law is imperative, and the courts have
adhered strictly to this general rule. (J.A. Wolfson v Manila Stocks Exchange)

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14. Problem
Alfonso is the President-incorporator of the Visayan Education Supply
Corporation and owner of 400 shares of the capital stock evidenced by Certificate of
Stock No 2. Two incorporators withdrew from said corporation. In order to complete
the membership of 5 directors of the board. Alfonso, in a special meeting of the
board, sold 50 shares out of his 400 shares of capital stock to his brother Angel. In
said meeting, Angel was elected director and the minutes of the meeting was filed
with the SEC.
Accordingly, Certificate No. 2 was cancelled and split the same into Stock
Certificate No. 6 ( for Angel ) and Certificate No. 8 ( for Alfonso). However, Alfonso did
not endorse, instead, he kept the cancelled Certificate of Stock No. 2 and returned
only to the corporation the Certificate of Stock No. 8.
Alfonso withdrew from the corporation. Certificate Nos. 2 and 8 were cancelled
in the stock and transfer book of the corporation.
Several years after effecting the cancellation of the certificates, Alfonso
questioned the cancellation of aforesaid Stock Certificate Nos. 2 and 8, claiming that
the cancellation and transfer of his shares and Certificate No. 2 as well as the
issuance and cancellation of Certificate No. 8 was patently and palpably unlawful, null
and void, invalid and fraudulent. And that, Section 63 of the Corporation Code is
mandatory in nature, meaning that without the actual delivery and endorsement of
the certificate in question, there can be no transfer, or that such transfer is null and
void.
Decide the case with reasons.
Answer:
The contention of Alfonso is untenable. Remedial law statues are to be construed
liberally. The term may as used in adjective rules, is only permissive and not mandatory.
For all intents and purposes, however, since this was already cancelled which
cancellation was also reported to the Commission, there was no necessity for the same
certificate to be endorsed by Alfonso. All the acts required for the transferee to exercise its
right over the acquired stocks were attendant and even the corporation was protected from
other parties, considering that said transfer was earlier recorded or registered in the
corporate stock and transfer book. (Tan vs. Securities and Exchange Commission, 206
SCRA 740, March 3, 1992)
15.Problem:
X, an educational institution, hired Y as contractual instructor. Y conducted
classes. Initially, Y was compensated but for an unknown reason, X stopped paying Y.
Y filed a complaint with the Labor Arbiter seeking payment of his salaries. X denied
Ys claim. X contended that the contract is invalid because the signatory thereon was
not the Chairman of the Board in violation of its by-laws which requires that any
contract entered into by the institution to which it is a party, the Chairman of the
Board shall be the one who will sign on the said contract. X also contended that Y
was not able to produce the copy of the employment contract. The Labor Arbiter
ordered the declaring the case submitted for decision on the basis of position papers
which the parties filed. X opposed the order insisting that there should be a formal
trial in view of the important factual issues. The opposition was denied reiterating the
case was already submitted for decision.
Qeustions:
1.
Is the contention of X that the contract is invalid on the ground that the
signatory was not the Chairman of the Board in violation of Xs by-laws?
Answers:
1.
No. The contract cannot be held invalid just because the signatory thereon was not
the Chairman of the Board which allegedly violated Xs by-laws. Since the by-laws operate
merely as internal rules among the stockholders, they cannot affect or prejudice third
persons who deal with the corporation, unless they have knowledge of the same. (PMI
Colleges vs. NLRC, G.R.# 121466, August 15, 1997.).

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16. Question:
May the failure of the corporation to file its by-laws within one month from the
date of its incorporation, as mandated by Section 46 of the Corporation Code, result
in its automatic dissolution?
Answer:
There can be no automatic corporate dissolution simply because the incorporators
failed to abide by the required filing of by-laws embodied in Section 46 of the Corporation
Code. There is no outright demise of corporate existence. Proper notice and hearing are
cardinal components of due process in any democratic institution, agency or society. In other
words, the incorporators must be given the chance to explain their neglect or omission and
remedy the same (Loyola Grand Villas Homeowners (South) Association, Inc. vs. Court of
Appeals, G.R.# 117188, August 7, 1997.).
17.Problem:
In a civil case, the regional trial court rendered a decision ordering the
defendants A and B to pay jointly and severally plaintiff C Corporation a specified
sum of money. However, plaintiff C Corporation elevated the case to the Court of
Appeals praying for the payment of a higher amount. The Court of Appeals granted
the prayer of plaintiff C Corporation. Thereafter, the case was remanded to the
regional trial court for execution.
When the judgment had become final and executory, the regional trial court
issued a writ of execution. Defendants A and B moved to quash the writ of execution
on the ground that plaintiff C Corporation was no longer in existence and, as such,
the execution of the decision would be inequitable or impossible.
It was revealed that during the pendency of the case before the regional trial
court, the amended articles of incorporation of plaintiff C Corporation, which intended
to shorten its term of existence, had been approved by the Securities and Exchange
Commission. Notably, the records indicate no appointment of trustee for the
dissolved corporation. Thus, when the regional trial court rendered the appealed
decision, plaintiff C Corporation had already lost its capacity to sue and be sued,
defendants A and B contended.
Question:
1.
Is it correct to say that upon the expiration of its term, a corporation ceases to
be a body corporate?
2.

What can a dissolved corporation perform during the liquidation period?

3.

Is the motion of defendants A and B meritorious?

Answers:
1.
No. Under Section 122 of the Corporation Code, every corporation whose charter
expires by its own limitation or is annulled by forfeiture or otherwise, or whose corporate
existence for tother purposes is terminated in any manner, shall nevertheless be continued
as a body corporate for three (3) years after the time when it would have been so dissolved,
for the purpose of prosecuting and defending suits by or against it and enabling it to settle
and close its affairs, to dispose of and convey its property and to distribute its assets, but not
for the purpose of continuing the business for which it was established.
2.
At any time during the three-year liquidation period, the dissolved corporation is
authorized or empowered to convey all of its property to trustees for the benefit of
stockholders, members, creditors, and other persons in interest. From and after any such
conveyance by the corporation of its property in trust for the benefit of its stockholders,
members, creditors, and others in interest, all interests which the corporation had in the
property terminates, the legal interest vests in the trustee, and the beneficial interest in the
stockholders, members, creditors or other persons in interest (Second paragraph, Section
122, Corporation Code).
3.
No. A corporation that has a pending action and which cannot be terminated within
the three-year liquidation period after its dissolutionis authorized under Section 122 of the

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Corporation Code to convey all its property to trustees to enable it to prosecute and defend
suits by or against the corporation beyond the said period.
Although plaintiff C Corporation did not appoint any trustee, yet the counsel who
prosecuted and defended its interest and who in fact appeared in its behalf may be
considered a trustee of the corporation at least with respect to the matter in litigation only.
There was substamntial compliance with the law and, for that reason, the counsel of the
corporation could still continue to prosecute the present case even beyond the period of
three (3) years from the time of dissolution.
Furthermore, Section 145 of the Corporation Code expressly provides that no right or
remedy in favor of any corporation shall be removed or impaired either by the subsequent
dissolution of said corporation or by any subsequent amendment or repeal of the same
codeor of any part thereof. This provision safeguards the rights of a corporation which is
dissolved pending litigation.
There is, therefore, no reason why the suit filed by plaintiff C Corporation should not
be allowed to proceed to execution. The law specifically allows a trustee to manage the
affairs of the corporation in liquidation. Consequently, any supervening fact, such as the
dissolution of the corporation, repeal of a law, or any other fact of similar nature would not
serve as an effective bar to the enforcement of such right (Reburiano vs. Court of Appeals,
G.R. # 102965, January 21, 1999.).
18. Problem:
In 1985, various properties of Mr. G, including shares of stocks in Beta
Corporation, were attached due to a judgment rendered against him and in favor of
Alpha Corporation. However, said garnishment was not recorded in the latters stock
and transfer book.
During the pendency of the appeal, a compromise agreement was entered into
between Mr. G and Alpha Corporation.
In 1988, however, it appeared that Mr. G sold his shares of stocks in Beta
Corporation to Mr. U which stocks were later assigned to Zeta Corporation. Both the
sale and the transfer were properly recorded in the books of Beta Corporation and the
corresponding certificates of stocks were issued therefore.
In 1989, due to non-compliance with the compromise agreement, Alpha
Corporation sought for the execution of the writ of attachment and subsequently
bought the stocks which were sold at a public auction.
Alpha Corporation filed a motion to order Beta Corporation to enter the
sheriffs certificate of sale in its stock and transfer books.
Question:
1.
Who is legally entitled to the shares of stocks of Mr. G in Beta Corporation,
Alpha Corporation or Zeta Corporation?
2.
Is attachment of shares of stocks included in the term transfer as provided
in Section 63 of the Corporation Code?
Answers:
1.
Alpha Corporation is the one entitled. The attachment lien acquired by Alpha
Corporation is valid and effective. Both the Revised Rules of Court and the Corporation
Code do no not require annotation in the corporations stock and transfer books for the
attachment of shares of stocks to be valid and binding on the corporation and third parties.
Under Section 74 of the Corporation Code, only the following facts must be stated :
a. Book of Minutes of stockholders meetings and of board meetings
b. Book of all business transactions
c. Stock and transfer book
2.
No. As succintly declared in the case of Monserrat vs. Ceron (58 Phil 469, 1933.)
chattel mortgage over shares of stock need not be registered in the corporations stock and
transfer book inasmuch as chattel mortgage over shares of stock does not involve a
transfer of shares, and that only absolute transfers of shares of stock are required to be

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recorded in the corporations stock and transfer book in order to have force and effect as
against third persons.
Although the Monserrat case refers to a chattel mortgage over shares of stock, the
same may be applied to the attachment of shares of stock since an attachment does not
constitute an absolute conveyance of property but is primarily used as a means to seize the
debtors property in order to secure the debt or claim of the creditor in the event that a
judgment is rendered.
The requirement that the transfer shall be recorded in the books of the corporation to
be valid as against third persons, has reference only to absolute transfers or absolute
conveyance of the ownership or title to a share (Chemphil Export and Import Corporation vs.
Court of Appeals, G.R. 112438-39, December 12, 1995).
19. Question:
Mr. Kenneth Cruz is the owner of 1,000 shares of stock in Luzon Corporation.
On 31 May 2000, he executed a special power of attorney granting full power to his
friend Randy Velarde to sell or otherwise dispose of his shares in Luzon Corporation.
Pursuant to said special power of attorney, Mr. Velarde executed a deed of
assignment of the shares in favor of Kevin Garcia. Two weeks thereafter Mr. Kenneth
Cruz died.
When Mr. Velarde presented the deeds of assignment to Luzon Corporation to
have it the stock and transfer book of the corporation, the corporation refused on the
ground that there are irregularities in the transfer of the shares and that upon the
death of Kenneth Cruz, the shares of stock became the property of the estate and that
it should first be liquidated and settled.
Can the corporation refuse to register the transfer of the shares? Decide.
Answer:
The corporation cannot refuse to register the transfer of the shares. Section 63 of the
Corporation Code contemplates no restriction as to whom the stocks may be transferred. It
does not suggest that any discrimination may be created by the corporation in favor of, or
against a purchaser of shares. The owner of shares is at liberty to dispose of them in favor
of whomsoever he please, the only limitation is when the corporation holds any unpaid claim
against the shares intended to be transferred.
The right of a transferee/assignee to have the stocks transferred in his name is an
inherent right flowing the ownership of stocks, thus whenever the corporation refuses to
transfer and register stock, mandamus will lie to compel the officers of the corporation to
transfer said stock in the books of the corporation.
The corporations obligation to register is ministerial, it cannot try to decide the
question of ownership. (RURAL BANK OF SALINAS, INC. vs. COURT OF APPEALS 210
SCRA 510)
20. Question:
In a special meeting, the Board of Trustee passed Resolution No. 1, s.
2001granting monthly compensation to Mr. W, X, Y and Z as corporate officers of LLB
Corporation. It also provides that the ten percentum of the net profits of the
corporation shall be distributed equally among the ten members of the Board of
Trustees.
A few years later, Mr. Q, R, S and T filed two (2) separate criminal informations,
one for falsification and the other for estafa against Mr. A, B, C and D, majority and
controlling members of the corporation rooted in the above-mentioned resolution.
After a full-blown trial, a verdict of acquittal was granted without imposing civil
liability against the accused therein.
Mr. Q, R, S and T filed a Motion for Reconsideration of the civil aspect of the
decision and considered the same a s a derivative suit on behalf of the corporation
for the annulment of Resolution No 1, s. 2001.

(a)
(b)

Is Resolution No. 1, s. 2001 valid?

What are the ways by which members of the board can be granted
compensation apart from reasonable per diems?

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(c)

What is a derivative suit? What are the requisites of a derivative suit? Is

the Motion for Reconsideration filed by Mr. Q, R, S and T considered a
derivative suit?

Answer:

(a)

YES. Under Section 30 of the Corporation Code, the directors shall not
receive any compensation, as such directors. The phrase as such directors is not
without significance for it delimits the scope of the prohibition to compensation
given to them for services performed purely in their capacity as directors or
trustees. The unambiguous implication is that members of the board may receive
compensation, in addition to reasonable per diems, when they render services to
the corporation in a capacity other than as directors/trustees. In the case at bar,
the resolution granted monthly compensation to Mr. W, X, Y and Z not in their
capacity as members of the board, but rather as officers of the corporation, more
particularly as Chairman, Vice-Chairman, Treasurer and Secretary of the
Corporation.

Clearly, therefore, the prohibition with respect to granting compensation to

corporate directors/trustees as such under section 30 is not violated in this particular
case.

(b)

The following are the ways in which members of the board can be
granted compensation apart from the reasonable per diems.

1.

When there is a provision in the by-laws fixing their compensation apart

from reasonable per diems;
When the stockholders representing a majority of the outstanding capital
stock at a regular or special stockholders meeting agree to give it to the;
and
When the members of the board render services to the corporation other
than as directors/trustees.

2.
3.

(c ) Derivative suit is an action brought by minority stockholders in the name

of the corporation to redress wrongs committed against it, for which the
directors refuse to sue. It is a remedy deigned by equity and has been the
principal defense of the minority stockholders against the abuses by the
majority.
The following are requisites of a derivative suit:

1.
2.
3.

The plaintiff constitute the minority stockholders;

The plaintiffs must be suing for and on behalf of the corporation and all
other stockholders similarly situated who wish to join; and
The complaint must allege that the minority stockholders are suing on a
derivative cause of cause.

Keeping in mind the above-mentioned requisites, the Motion for

Reconsideration is not a derivative suit (WESTERN INSTITUTE TECHNOLOGY,INC. vs.
SALAS G.R. No. 113032, August 21, 1997 278 SCRA 216).
21.Problem:
International Towage and Transport Corporation (ITTC), a domestic
corporation engaged in the shipping business, entered into a 1-year contract with
LEGASPI OIL, GRANEXPORT and UNITED COCONUT, INC., comprising COCONUT
INDUSTRY INVESTMENT FUND (CIIF) companies, for the transport of coconut oil in
bulk. Majority shareholdings of the CIIL companies, are owned by UCPB, its
administrator. Under the contract, either party could terminate the agreement
provided a 3-month advance notice is served to the other party. Prior to the expiration

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of the contract, the CIIF, through their president, terminated their contract without any
notice. Subsequently, M vice president of ITTC, filed with the OFFICE OF THE
OMBUDSMAN a grievance case against CIIF. The OFFICE OF THE OMBUDSMAN
dismissed the case on the ground that the controversy is a simple case of breach of
contract which should be filed in the regular court and the entities involved are
private corporations.
Question: Is the contention of the OFFICE OF THE OBUDSMAN correct?
Answer:
The contention is correct. A corporation to be considered a s a GOCC must comply
with the following requisites:
1) It is organized as a stock of non-stock corporation.
2) Vested with functions relating to public needs. Whether governmental or
proprietary in nature.
3) Owned by the Government directly or through its instrumentalities, either wholly
or when applicable to the extent of at least 51% of its capital stock.
There is no showing that the CIIF companies were vested with functions relating to
public needs and that the below 51% shared of stock were not complied with, hence, they
are not considered as GOCCs and not within the OMBUDSMAN scope of jurisdiction.
(LEYSON, JR. vs. OFFICE OF THE OMBUDSMAN - GR NO. 134990, April 27, 2000)
22. Problem:
X,Y,Z, entered into a commercial fishing with one another as partners, under
which they bought two fishing boats out of borrowed money. They agreed that the
refurbishing, re-equipping, repairing, dry docking and other expenses for the boats
would be shouldered by Y and Z. Subsequently, on behalf of MAD FISH Corporation, Y
and Z entered into a contract with the Phil ABC Corporation, claiming that they were
engaged in a business venture with X, who was however, not a signatory to the
contract. It was shown, however, that the aforesaid corporation was nonexistent as
certified by the SEC. The buyers, Y and Z defaulted and failed to pay the purchase
price of the fishing nets and floats; which prompted ABC Corporation to file a civil
suit against X, Y, and Z, on their liability as general partners as implied from a
compromise agreement among them.
Question:

1.
2.
3.

What is a Corporation by Estoppel?

What is the liability of X, with respect to the contract entered into by Y and
Z.
What are the legal effects of a Corporation by Estoppel with respect to third
persons and the ostensible corporation itself?

Answer/s:
1. A Corporation by Estoppel is one created by reason of equity, it has no real
existence in law, but is a mere fiction existing for the particular case, and
vanishing where the element of estoppel is absent it exists only between the
persons who misrepresented their status and the parties who relied on the
misrepresentation. Under Sec. 21 of the Corporation Code
All persons who assume to act as a corporation knowing to be without authority to
do so shall be liable as general partners for all the debts liabilities and damages
incurred or arising as a result thereof.

2.

X is liable together with Y and Z as general partners in an ostensible association.

Clearly, under the law on estoppel those acting for and in behalf of a corporation
and those benefited by it, knowing it to be without valid existence, are held liable

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as general partners. Even if the ostensible corporate entity is proven to be legally
nonexistent, a party may be estopped from denying its corporate existence.
In the above case, it cannot be denied that a partnership engaged in the
fishing business existed among them. They purchased the boats which constituted
their main assets. The fishing nets and the floats both essential to fishing were
obviously in furtherance of their business. It would have been inconceivable for X to
involved himself so much in buying the boat but not in the acquisition of the aforesaid
equipment without which the business could not have proceeded.
3. The Doctrine of corporation by estoppel may apply to the alleged corporation and
to a third party. In the first instance, an unincorporated association, which
represented itself to be a corporation, will be estopped from denying its corporate
capacity in a suit against it by a third person who relied in good faith on such
representation. It cannot allege lack of personality to be sued to evade its
responsibility for a contract it entered into and by virtue of which it received
advantages and benefits. On the other hand. A third party who, knowing an
association to be unincorporated, nonetheless, treated it as a corporation and
received benefits from its, may be barred from denying its corporate existence in a
suit brought against the alleged corporation. In such a case, all those who benefited
from the transaction made by the ostensible corporation, despite knowledge of its
legal defects, may be held liable for contracts they impliedly to or took advantage of (
LIM TONG LIM vs. PHILIPPINE FISHING GEAR INDUSTRIES, INC. 317 SCRA 728)
23.Question:
Sui Sung Ptak Pte., Ltd, a Singaporean firm engaged in manufacturing and
selling Lee Kum Khee Soy Sauce and Oyster Sauce filed a collection case in RTC
against Triple V Group of Companies, a domestic firm engaged in operating various
chain of Specialty restaurant, for the sum of $ 46,000 for purchasing plaintiffs
products. Plaintiff alleged that from a period of 4 months defendant ordered and
received various products of plaintiff on several occasions with a 90-day credit term.
That demands were made but the defendant refused thus the instant case. It was
further alleged that it has no license to engage in business and was performing an
isolated transaction.
The defendant on the other hand filed a motion to dismiss contending that
petitioner corp. had no legal capacity to sue because the plaintiff was engaging in
business without a license hence barred to seek to maintain a court action.

A)

If you were the RTC Judge how would you resolve the motion to
dismiss?

If I were the Judge I would grant the motion to dismiss because plaintiff is engaged in
business without a license hence barred to seek redress from the courts. The test whether
the transaction or series of transactions set apart from the common business of a foreign
enterprise that there is an intention to engage in a progressive pursuit of the purpose and
object of the business organization. In the case at bar, the transaction entered into by
plaintiff are a series of commercial dealings which would signify an intent to do business in
the Philippines and could not be an isolated one. It could not constitute as a single act or
isolated business transaction because there was an intention to continue the business
relationship and that the fact a 90-day credit term was agreed upon.
The grant and extension of the 90-day credit term by a foreign corporation to a
domestic corporation for every purchase made arguably shows an intention to continue
transacting with the later since in the usual course of transaction, credit is extended only to
customers in good standing or to those on whom there is an intention to maintain a long
term relationship.
And granting the series of transaction constitute a single act if the intention was of a
continuing business relationship. What is determinative is not really the number or the
quantity of the transaction but more importantly the intention of an entity to continue the
body of its business in the country. Whether a foreign corporation is doing business does not
necessarily depend upon the frequency of its transaction, but more upon the nature and
character of the transaction. (Ericks Pte., Ltd Vs. CA 267 scra 567)

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B) Granting that the motion was upheld and the plaintiff did not file an appeal,
the plaintiff sought your legal opinion on what remedy to take?
I would advice my client to obtain a license and then file a collection suit despite the
dismissal of the first action. Res judicata does not set in a case dismissed for lack of
capacity to sue, because there has been no determination on the merits and subsequent
acquisition of the license will cure the lack of capacity at the time of the execution.
( ERICKS Pte., Ltd vs. CA - 267 SCRA 567)
24. Question:
PLDT is under the supervision and regulation of NTC by virtue of the Public
Service Act, as amended NTC served PLDT assessment notices and demands for
payment as supervision and regulation fee under the Public Service Act. The said
fees were computed by NTC on the basis of the market value of PLDTs outstanding
capital stock inclusive of stock dividends and premium. PLDT challenged said
assessments and alleged that the fees should have been based on the par value of its
(PLDT) outstanding capital stock excluding stock dividends and premium.

a)
b)

Is PLDT correct in saying that the computation of the suspension and

regulation fees should be based on the par value of the subscribed capital
stock?
Distinguish par value from market value.

Answer:

a)

b)

Yes. The basis for computation of the fee to be charged by NTC on PLDT is the
capital stock subscribed or paid and not alternatively, the property and
equipment. The assessment made by the NTC of the fee imposed by the Public
Service Act, as amended, on the basis of the market value of the subscribed or
paid- in capital stock is a deviation from the explicit language of the law.
The par value indicated in the certificate of stock represents the amount of
money or property contributed by the shareholder to the capital stock
corporation. The assets of the corporation cannot always be equal to the par
value of the outstanding capital stock, the assets being constantly in a safe of
fluctuation as the business prospers or declines.

The market value is the price at which a willing seller would sell and a willing
buyer would buy, assuming that both have a reasonable knowledge of the facts, and neither
being under abnormal pressure. The market value of stocks may be influenced by the
present and prospective net income of the corporation, attractive dividend payments, and
other factors.
(NATIONAL TELECOMMUNICATIONS COMMISSION vs. COURT OF APPEALS 311
SCRA 508)
25.Problem:
Does a corporation have the same right as a natural person such as the right
to recover moral damages on account of a besmirched reputation?
Answer:
No. A corporation is a mere artificial being and it cannot be considered at par with a
natural person. It has only the powers, attributes and properties expressly provided by law or
incident to its existence. Thus, a corporation being an artificial person and having existence
only in legal contemplation, has no feelings, emotions or senses and cannot experience
physical suffering and hence, not entitled to moral damages, as sleepless nights, wounded
feelings, physical sufferings, mental anguish and anxiety may be suffered only by a natural
person. The statement in People vs. Manero (1993) and Mambulao Lumber Co. vs. PNB
(1968) that a corporation may recover moral damages if it has a good reputation that is
debased resulting in social humiliation is merely an obiter dictum. (ABS-CBN Broadcasting
Corporation vs. Court of Appeals, 301 SCRA 572, G.R. No. 128690, January 2, 1999)
26. PROBLEM:

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By virtue of a public document, T transferred to CFD Co., Inc. four parcels of
land almost five months before the incorporation by the company. Later, the
company sold the four parcels of land to S. For failure to pay, CFD Co., Inc. sued S.
Was the contract between T and CFD Co., Inc. valid? How about the sale
by CFD Co., Inc. to S?
Answer:
No. CFD Co., Inc. not being in legal existence then did not possess the juridical
capacity to enter into the contract. A corporation, until organized, has no life and, therefore
no faculties. It is, as it were, a child in ventre as mere. This is not saying that under no
circumstances may the acts of promoters of a corporation be satisfied by the corporation if
and when subsequently organized. However, under the peculiar facts of the case at bar, the
doctrine of ratification is not applicable.
If CFD Co., Inc. could not and did not acquire the four parcels of land here
involved, it follows that it did not possess any resultant right to dispose of them by sale to S.
(Cagayan Fishing Development Co., Inc. vs. Sandiko, 65 SCRA 223, No. 43350, December
23, 1937)
27.Problem:
It is the contention of the Union that the closure was illegal as business has
not ceased at Complex Electronics Corporation but was merely transferred to Ionics
Circuit, Inc., a runaway shop. It presented as proof that out of the 80,000 shares
compromising the increased capital stock of Ionics, it was Complex that owns the
majority of said shares with P1,200,000.00 as its capital subscription and 448,000.00
as its paid-up investment, compared to 800,000.00 subscription and 324,560.00 paidup owing to the other stockholders combined. Thus, according to the Union, there is
a clear ground to pierce the corporate fiction.
Answer:
The contention is untenable. A runaway shop is a relocation motivated by antiunion intention rather that for business reasons. Ionics, however, was not set-up merely for
the purpose of transferring the business of Complex. At the time the labor dispute arose at
Complex, Ionics already existed as an independent company. The Union failed to show that
the primary reason for the closure of the establishment was due to the union activities of the
employees.
Neither the mere fact that one or more of the corporations are owned or
controlled by the same or single stockholder a sufficient ground for disregarding the
separate corporate personalities, nor substantial identity of the incorporators of two
corporations necessarily imply that there was fraud committed to justify piercing the veil of
corporate fiction. That the two corporations engage in the same business is not enough
reason to pierce that veil. To disregard separate judicial personality of a corporation, the
wrongdoing must be clearly and convincingly established. (Complex Electronics Employees
Association vs. NLRC, 310 SCRA 403)
28.Problem:
The stockholders of FGS Corporation executed a certificate of liquidation of
the assets of the corporation reciting, among others, that a resolution was adopted by
the stockholders dissolving the corporation and that they have distributed among
themselves in proportion to their stockholdings as liquidating dividends, the assets
of the corporation, including real properties in Manila.
The certificate of liquidation when presented to the Register of Deeds of
Manila was denied registration because of the failure to pay required fees,
documentary stamps and the number of parcels was not certified in the
acknowledgement.
The stockholders contend that the certificate of liquidation is not a
conveyance or transfer but merely a distribution of the assets of the corporation
which has ceased to exist for having been dissolved hence they are not bound to
comply with the requirements are applicable only in cases of transfer or conveyance.
Decide with reasons.
Answer:

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A corporation is a juridical person distinct from the members composing it. The
properties registered in the name of the corporation are owned by it as an entity separate
and distinct from its members. While shares of stocks constitute personal property, they do
not represent property of the corporation. Te stockholder is not a co-owner or tenant in
common of the corporate property.
From the foregoing, it is clear that the act of liquidation is not and cannot be
considered a partition of community property but rather a transfer or conveyance of the title
of its assets to individual stockholders. It is, therefore, fair and logical to consider that the
certificate of liquidation as one in the nature of a transfer or conveyance. (Stockholders of F.
Guanzon vs. Register of Deeds, 6 SCRA 373)
29.Problem:
The petitioner, Francisco Motors Corporation was held liable by the trial court
by application of the doctrine of piercing the veil of corporate entity in the
counterclaim interposesed by Manuel Gonzales, the defendant, seeking to enforce
collection of fees for services rendered to its incorporators, directors and officers in
their personal capacities.
Whether or not there was proper application of the doctrine?
Answer:
The doctrine was improperly applied. The defendants move to recover unpaid legal
fees through a counterclaim against the corporation to offset the unpaid balance of the
purchase and repair of a jeep body could only result from an obvious misapprehension that
petitioners assets could be used to answer for the liabilities of its individual directors,
officers and incorporators. Such result, if permitted, could easily prejudice the corporation,
its own creditors and even other stockholders.
Whatever obligation the incorporators, directors and officers of the corporation
had incurred, it was incurred in their personal capacity. When directors and officers of a
corporation are unable to compensate a party for a personal obligation, it is far-fetched to
allege that a corporation is perpetuating fraud or promoting injustice, and be thereby held
liable therefore by piercing its corporate veil. (Francisco Motors Corporation vs. Court of
Appeals, 309 SCRA 72)
30.Problem:
On May 2000, Mr. X, President of ABC Corporation, in his capacity as such,
and on behalf of the said corporation obtained delivery of 100 metal rods from PNB
by virtue of a trust agreement which among others provides that ABC shall hold the
rods in trust and sell them and turn over the proceeds of the sale to PNB. However,
the rods were never returned and the proceeds of the sale never accounted for. PNB
filed a complaint against Mr. X for Estafa due to the violation of the trust agreement
using the principle that for crimes committed by a corporation, the responsible
officers would bear the criminal liability. Mr. X contends that he should not be made
liable because he was dealing with him only as an officer of ABC Corp. since the
applicant, and the one who complied with the trust agreement was ABC Corporation.
Decide with reasons.
Answer:
Mr. X cannot be liable. Though, an officer of a corporation can be held criminally
liable for acts or omissions done in behalf of the corporation, this only applies where the law
directly requires the corporation to do an act in a given manner. In the case at bar, an act is
imposed by agreement of the parties, and as such the offense may arise, if at all, from the
peculiar terms and conditions agreed upon by the parties to the transaction, not by direct
provision of law.
Furthermore, in the absence of a law making a corporate officer liable for a
criminal offence committed by the corporation, the existence of criminal liability of the former
cannot be said to be beyond doubt. The intention of the parties must be ascertained in such
a situation to determine if criminal liability was intended to result. Considering that there is
nothing mentioned in the facts to such effect, only a civil liability arises.
Lastly, the President of a corporation cannot be liable for Estafa under Art 315 of
the RPC on account of the corporations violation of the terms of the trust receipt that speaks
exclusively of the corporations liability. This is made clearly so upon the consideration of the
fact that absence of positive evidence to the contrary, as in the case at bar, it is only the

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corporation that benefited and not the President personally. (Jose Sia vs. The People of the
Philippines, 121 SCRA 655)

Q & A in INSURANCE LAWS

1.Question: On January 14, 1913, X, married to Y, took out a life insurance policy for
$10,000.00 from the Sun Life Assurance Company of Canada, Manila Branch and
named his estate as the sole beneficiary thereof. The premiums from the years 19131918 were paid at the Manila branch of said company. However, on or about the year
1918, the policy was transferred to the companys London branch, hence, the
premiums from then on until the death of the insured in 1928 were paid to that
branch. All the premiums were paid out of the conjugal funds with the exception of
the first premium which was paid out of the separate property of X when he was still
single.
Upon the death of X, the insurance company paid the proceeds of the policy to
the administrator of Xs estate for management and partition, who turnover said
proceeds to Y, Xs widow and sole heir. Upon the transmission of the proceeds, the
Collector of Internal Revenue imposed an inheritance tax thereon which the
inheritance tax was paid by the administrator of Xs estate ender the protest. Y now
claims recovery of the amount paid. Is an insurance policy payable to the estate of
the deceased, by reason of such ownership, subject to inheritance tax?
Answer
YES. It is well to remember that since the premiums for the policy were paid out of
the conjugal funds, the proceeds thereof are likewise conjugal one half belonging to X and
the other half belonging to Y.
Hence, with respect to the one-half belonging to the estate, inasmuch as the
proceeds of the policy were paid to the administrator of Xs estate for management and
partition and thereafter, turnover to Y, Xs sole heir, in Manila, the situs of said proceeds is
the Philippines and thus subject to inheritance tax.
According to Cooley, the following is the general rule governing the levying of taxes
upon tangible personal property:
The situs of tangible personal property for the purposes of taxation may be
where the owner is domiciled but is not necessarily so. xxx It may acquire a taxable situs
where it is more or less permanently located (not merely in transit or temporarily located),
regardless of the domicile of the owner. xxx .
To reiterate, the proceeds of a life insurance policy payable to the insureds estate
of the former as part of the assets of said estate under his administration, are subject to the
inheritance tax, if they belong to the assured exclusively and it is immaterial that the insured
is domiciled in the country or outside.(Bank of the Philippine Islands vs. Posadas 56 PHIL
215)
2.Question: Can a common-law wife named as beneficiary in the Life Insurance Policy
of legally married man claim the proceeds thereof in case of death of the latter?
Answer
NO. In essence, a Life Insurance Policy is no different from a civil donation is so far
as the beneficiary thereof 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 of the proceeds or profits of the said insurance.
Hence, the mandate of Article 2012 of the New Civil Code providing that Any person who is
forbidden from receiving any donation under Article 739 cannot be named beneficiary of a
Life Insurance Policy by a person who cannot make a donation to him cannot be laid aside.
As a consequence, the proscription in Article 739, which provides the donations made
between persons guilty of adultery or concubinage at the time of donation are void, should

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equally operate in Life Insurance Contracts. Conviction of the crime of adultery or
concubinage is not necessary as the law merely speaks of persons guilty of concubinage,
which guilt may be proven by mere preponderance of evidence in an action for the
declaration of nullity of said donation brought by the spouse of the donor or donee. The
effect of these provisions is to bar common-law spouses from receiving donations from each
other, directly or indirectly. To rule otherwise would place common- law spouse in a better
position than that of the legal spouse which is not the intendment of the law.( The Insular
Life Assurance Company Limited vs. Ebrado (80 SCRA 181)
3.Question: A collision between a car in which A was riding and a Superlines bus
occurred along the national highway. A sustained physical injuries as a result of the
collision. Subsequently, A filed with trial court a complaint for damages against
PERLA, the insurer of the bus. The vehicle in which A was riding was insured with
MALAYAN. The judge ordered PERLA to pay immediately the P5,000 under the nofault indemnity clause to A. PERLA denied liability and held the position that under
section 378 of Insurance Code, the insurer liable to pay the P5,000 is the insurer of
the vehicle in which A is riding. Who should be liable to A for the P5,000 under
the no-fault indemnity clause, PERLA or MALAYA?
Answer
MALAYAN is liable to A for the P5,000. Under Section 378 of the Insurance Code,
any claim for debt or injury to any passenger or third party shall lie against the insurer of the
vehicle in which the occupant is riding, mounting or dismounting. In the case at bar,
MALAYAN is the insurer of the vehicle in which A is riding. Therefore PERLA cannot be
made to pay the P5,000 indemnity to A.( Perla Compania de Seguros, Inc. vs Ancheta (164
SCRA 144)
4.Question: TKC imported 1,000 bags of fishmeal valued at $3,600.30 from Texas,
USA. The goods were insured with EASCO and shipped on board with M/V Peskov, a
vessel owned by Far Eastern Shipping Company. When the goods reached Manila,
they were found to be damaged by seawater. TKC filed a claim with EASCO but it
refused to pay. TKC sued them for the damages before the trial court. The trial court
rendered judgment ordering EASCO to pay P105, 986.68 less than the amount of
unpaid premiums with interest at the legal rate (6%). TKS contended that the legal
rate to be used is 12% pursuant to 243 and 244 of the Insurance Code, in paying
damages by EASCO. What is the interest rate to be used in paying the damages by
EASCO, 6% or 12%?
Answer
The interest rate to be paid by EASCO is 6%. Section 243 and 244 of the Insurance
Code apply only when the court finds an unreasonable delay or refusal in the payment of the
claims. This was not present in the case at bar. EASCO refusal to settle the claim to TKC
was based on some ground which, while not sufficient to free it from liability under its policy,
nevertheless is sufficient to negate any assertion that in refusing to pay, it acted unjustifiably.
( Tio Khe Chio vs. Court of Appeals (202 SCRA 219))
5.Question: A filed a letter complaint with B, the insurance commissioner alleging
certain problems encountered by agents, supervisors, managers and public
consumers of the XYZ Insurance Co. as a result of certain practices of said company.
A hearing was conducted by the Commissioner. Does the Commissioner have
jurisdiction to hear and decide cases?
Answer
The contract between XYZ Co. and its agents are not included with in the meaning
of an insurance business as defined in the Insurance Code. Therefore, the Commissioner
has no jurisdiction to hear and decide the case. A reading of section 416 of the Insurance
Code that the Commissioner can only hear and decide claims and complaints involving any
loss, damage or liability for which an insurer may be answerable under any kind of policy. It
ides not contemplate on cases affecting the Insurance Co. and its agents.(Philippine
American Life Assurance Co. vs Ansaldo (234 SCRA 509))

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6.Question: State the rules on how to claim under the no-fault indemnity provision
where proof of fault or negligence is not necessary for payment of any claim for death
or injury to a passenger or third party.
Answer
1) A claim may be made against one motor vehicle only.
2) If the victim is an occupant of the vehicle, the claim shall lie against the insurer of
the vehicle in which he is riding mounting or dismounting from.
3) In any other case ( i.e. if the victim is not an occupant of the vehicle), the claim
shall lie against the insurer of the directly offending vehicle.
4) In all cases, the right of the party paying the claim to recover against the owner
of the vehicle responsible for the accident shall be maintained. ( Sec 378, Insurance Code(
Perla Compania de Seguros, Inc. vs Ancheta (164 SCRA 144)
7.Question: Who is a passenger? A third party? An occupant?
Answer
A passenger is any fare paying person being transported and conveyed in and by a
motor vehicle for transportation of passengers for compensation, including persons
expressly authorized by law or by the vehicles operator or his agent to ride without fare.
(Section 373 Insurance Code)
A third party is any person other than the passenger. (Section 373 Insurance Code)
An occupant includes both a passenger and a third party, so long as they are riding
in or mounting or dismounting from a motor vehicle. (Section 378 Insurance Code) Perla
Compania de Seguros, Inc. vs Ancheta (164 SCRA 144)
8.Problem: Life insurance policies were issued in the basis of the statement
subscribed by the applicant to the effect that he was and had been in good health,
when as a matter of fact he was then suffering from advanced pulmonary
tuberculosis. The insurers agent knew all the time the true state of health of the
insured. The insurers medical examiner approved the application knowing fully well
that the applicant was sick.
A: Question: May the insured recover from the policy
Answer
No, Although the agent and the medical examiner knew the statement to be false, no
valid contract of insurance was entered into because there was no real meeting of the minds
of the parties. (The Insular Life Assurance Co., Ltd v Feliciano 74 Phil 468)
B. Question: Was there concealment on the part of the insured?
Answer
Yes. When the applicant signed the application, he was having difficulty in breathing.
He had gone three times to the hospital and had X-ray pictures taken of his lungs. He
therefore knew that he was not a proper subject for life insurance. When he accepted the
policy, he knew that he was not in good health.( The Insular Life Assurance Co., Ltd. Vs.
Feliciano (74 Phil 468))
10.Problem: The lessees of a business establishment standing on a lot took out an
insurance policy from insurer on stocks of cloth materials, belonging to third parties
while in the possession of the owner. While the insurance policy was in full force and
effect, the building together with all the machineries, equipments and other
accessories was burned by an accidental fire of unknown origin. The clothing
materials were also burned.
Do the lessees have insurable interest in the property/materials?
Answer:
Yes, Under the Insurance Code, the insurable interest of the lessee is not
necessarily limited to their liability to the owners of the insured materials. They were
interested in the safety and the preservation of said materials because they stood to benefit

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from their continued existence or to be prejudiced by their destruction. The destruction of the
textile meant pecuniary loss to the lessees because they were deprived of the compensation
they would be certainly be entitled to for dyeing the same, not to mention their pecuniary
liability for labor and other expenses. To that extent, they were directly damnified, even
without taking into account their liability to the owners for the value of the goods.(Filipino
Merchants Insurance Co.,Inc v CA 179 SCRA 638)
11.Question: How are insurance contracts construed?
Answer:
Insurance contract, life all other contracts are construed to give effect to the
intention of the parties, but where there is doubt as to that intention, it is always to be
resolved strictly against the insurer and in favor of the insured.( Ang Ka Yu, et. Al. Vs.
Phoenix Assurance Co., Ltd., et. Al. (1 CAR 704)
12.Question: Define barratry
Answer:
Barratry as defined in American Insurance Law is any willful misconduct on the part
of master of crew in pursuance of some unlawful or fraudulent purpose with out the consent
of the owners, and to the prejudice of the owner's interest. Barratry necessarily requires a
willful and intentional act in its commission. No honest error of judgment or mere negligence,
unless criminally gross, can be barratry.( Roque vs. Intermediate Appellate court 139 SCRA
597 (1985)
13.Question: X procured a life insurance contract for himself from Y and he was
issued a non-medical insurance policy. The medical examination was waived by Y.
Two weeks prior to his application, Y was examined and confined in a
hospital where he was diagnosed for renal failure. This fact however, was not
disclosed by him in his application for insurance. After one year, X died in a plane
crash. Pursuant to this, Ys mother, being designated as the beneficiary, filed a claim
with Y. Y, however, denied the claim upon the ground that there was concealment on
the part of X for failure to disclose material facts relevant to the issuance of policy.
a.) Was there material concealment so as to bar Xs mother from collecting?
b.) Was Ys waiver of the medical examination debunks the materiality of the
facts concealed?
c.) Can Y escape liability on the ground that the facts concealed had no
bearing to the cause of death of the insured?
d.) Can Ys mother use good faith as a defense in concealment and under the
belief that they need not disclose?
Answers:
a.) YES, the information, which the insurer failed to disclose, were material and
relevant to the approval and issuance of policy. The matters concealed would have definitely
affected petitioners action on his application, either by approving it with the corresponding
adjustment for a higher premium or rejecting the same. Moreover, a disclosure may have
warranted a medical examination of the insured by the petitioner in order for it to reasonably
assess the risk involved in accepting the application
b.) NO, the waiver of medical examination (in a non-medical insurance contract)
renders even more material the information required of the applicant concerning previous
condition of health and diseases suffered, for such information necessarily constitute an
important factor which the insurer taken into consideration whether to issued policy or not.
c.) NO, it is well settled that he insured need not die of the disease he had filed
to disclose to the insurer. It is sufficient that his non-disclosure misled the insurer in forming
his estimates of the risks of the proposed insurance policy or in making inquiries.
d.) NO, good faith is no defense in concealment. The insured failure to
disclose the fact that he was hospitalized for two weeks prior to filing his application for

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insurance raises grave about his bonafides. It appears that such concealment was
deliberate on his part. ( Sunlife Assurance company of Canada vs. Court of Appeals)
14.Question: X was the consignee of the shipment of fishmeal loaded on board the
vessel SS Bougainvillea which X insured with Y insurance company against all
risks. When the cargo was unloaded at the port of Manila, it was found that several
bags were in bad order condition. Thus, Y insurance company denied liability upon
filing of a claim by X contending that in an all risks marine policy, before a claim
can be compensable, there must be some fortuity, casualty, or accidental
cause to which the alleged loss is attributable.
Is the contention of the insurance company tenable?
Answer:
No. The very nature of the term all risks must be given a broad and comprehensive
meaning as covering any loss other than willful and fraudulent act of the insured. This is
pursuant to the very purpose of an all risks insurance to give protection to the insurance to
give protection to the insured in those cases where difficulties of logical explanation or some
mystery surround the loss or damage to property. An all risks policy has been evolved to
grant greater protection that that afforded by the perils clause, in order to assure that no
loss can happen through the incidence of a cause neither insured against nor creating
liability in the ship; it is written against all losses, that is attributable to external causes.(
Filipino Merchants Insurance Co., Inc vs. Court of Appeals 799 SCRA 638 (1989))
15.Question: Under an all risks policy, who has the burden of proof to show that the
loss is caused by an expected risk?
Answer:
Generally, the burden of proof is upon the insured to show that a loss arose from a
covered peril, but under an all risks policy, the burden is not on the insured to prove the
precise cause of the loss or damage for which it seeks compensation. The insured to prove
the precise cause of the loss or damage for which it seeks compensation. The insured under
an all risks insurance policy has the initial burden of proving that the cargo was damaged
when unloaded from the vessel; thereafter, the burden then shifts to the insurer to show the
exception to the coverage. The basic rule is that the insurance company has the burden of
proving that the loss is caused by the risks expected and want of such proof, the company is
liable.( Filipino Merchants Insurance Co., Inc vs. Court of Appeals 799 SCRA 638 (1989))
16.Problem: GNDV took out a life insurance policy and named his son, ADV, as the
sole beneficiary. After GNDVs death, ADV collected the face amount of the policy, a
portion of which he used to redeem certain real estate which his father sold to third
persons with a right to repurchase. ADVs attorney effected the redemption under the
name of his brothers and sisters and himself as heirs of the deceased vendor instead
of his name alone without his knowledge or consent.
Now, his co-heirs claim for the partition of all property left by their father and
that the balance of the proceeds of the life insurance policy received by ADV be
divided equally among them. ADV opposed. ADV argues that he is the sole owner of
the real estate redeemed by his attorney notwithstanding, as it was not his intention
to use the insurance proceeds for the benefit of any person but himself. ADV likewise
maintain that he is the owner of the balance of the insurance proceeds being the sole
beneficiary of the deceased.
a.)
Discuss the merit of the case with reasons.
b.)
What remedy is available to ADV, if there is any?
Answers:
a.)

ADV is the sole owner of the insurance proceeds. Where a life insurance policy is
made payable to one of the heirs of the person whose life is insured, the proceeds of
the policy on the death of the insured belong exclusively to the beneficiary and not to
the estate of the person whose life was insured and such proceeds are his individual
property and not the property of the heirs of the person whose life was insured. In

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the same token, absent any intention on his part to make a gift of real estate, the real
property in question belongs to ADV exclusively as the proceeds used to redeem the
same belongs exclusively to him.
b.)

ADV has two remedies. On one hand is to compel his co-heirs to reconvey to him
and the other is to let the title stand under their names and to recover from them the
sum he paid on their behalf.
(Del Val vs. Del Val (29 PHIL 534))
17.Problem: CTS imported 600 bags of lactose crystals from Holland to Manila. He
took a marine insurance cargo policy to ensure the shipment against all risk of loss
or damage. However, the policy contains a provision to the effect that the insurance
shall not extend to cover loss, damage or expense proximately caused by delay or
inherent vice or nature of the cargo insured.
Upon arrival of the vessel at Manila, the cargo was discharged to the custody
of the broker under a clean tally sheet. However, the survey undertaken by both the
vessel and insurer during the turnover revealed that out of 600 bags delivered, 300
were in bad order due to spillage and loss. The broker then delivered the cargo to
consignee under a clean gate pass and deliver permit. CTS filed a claim against the
insurer, which denied liability on the ground that CTS and his agent failed to avert the
loss by failing to recover spillage from the containers.
How would you decide the case?
Answer: Recovery under the policy will prosper. The terms of the policy are so clear and
require no interpretation. The insurance policy covers all loss or damage to the cargo
except those caused by delay or inherent vice or nature of the cargo insured. It is the duty
of the insure to establish that the said loss or damage falls within the exceptions provided
under the policy, otherwise it is liable thereof.
An all risks provision of marine insurance policy creates a special type of insurance,
which extend coverage to risk not usually contemplated and avoids putting upon the insured
the burden of establishing that the loss was due to peril falling within the policys coverage.
The insurer can avoid coverage upon demonstrating that a specific provision expressly
exclude the loss from coverage.
In this case, the damage caused to the cargo has not been attributed to any of the
exception provided for. Thus, the liability of the insurer is clear. Choa Tiek Seng vs. Court of
Appeals (183 SCRA 223)
18.Question: Roys truck, collided with a passenger jeep, which resulted on the
death of the three of the passengers of the jeep. Roys truck was insured by
Guevarra Insurance Company. After finding that Roy was the one who was negligent,
the heirs of the victims proceeded against the insurance company. However, it
denied that the claim because it alleges that it is not solidarily liable with the insured.
Decide.
Answer: As provided in Sec. 374 of the Insurance Code, vehicles must secure a
Compulsory Motor Vehicle Liability Insurance to give immediate benefit to victims of
vehicular accidents. Therefore, it is now established that the injured or the heirs of the
deceased victims of vehicular accidents may sue directly the insurer of the vehicle.
(Government Service Insurance System vs. Court of Appeals, GR No. 101439, June 29,
1999)
19.Problem: X insured his building for P2.5 Million with the insurer Y. Co. Thereafter,
the building was gutted by fire. It was ascertained after the loss occurred that X
sustained a loss in the amount of P508,867.00. He filed his claim against Y Co. for
such amount of loss but was denied. Y Co. invoked a stipulation in the policy which
provides that the insured shall be considered its own insurer for the difference
between the amount of P5.8 Million and the face value of the policy, i.e., P2.5 Million.
Thus, the insurer contends that X should share pro rata.
If you were the judge, how would you decide the case. Explain.

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Answer:
I would hold the insurer Y Co. liable for the amount of actual loss, i.e., P508,867.00.
The policy of insurance, in the case at bar, is an open policy. As defined in Section 60 of the
Insurance Code, an open policy is one in which the value of the thing insured is not agreed
upon but is left to be ascertained in case of loss. This means that
tha actual loss as
determined , will represent the total indemnity due to the insured from the insurer except
only that the total indemnity shall not exceed the face value of the policy.
The actual loss has been ascertained in this case and such determination shall be
given respect in the absence of proof that it was arrived arbitrarily. (Development Insurance
Corporation vs. IAC, L-71360, July 16, 1986).
20.Problem: What is an Open Policy Insurance?
Answer:
As defined in Section 60 of the Insurance 60 Code, an open policy is one in which
the value of the thing insured is not agreed upon but is left to be ascertained in case of loss.
This means that the actual loss, as determined, will represent the total indemnity due to the
insured from the insurer except only that the total indemnity shall not exceed the face value
of the policy. (Development Insurance Corp. vs IAC, L-71360, July 16,1986)
21.Problem: Panama Sawmill Co., bought 1,208 pieces of apitong logs in Palawan. It
hired Transpacific Towage, Inc. to transport the logs by sea to Manila and insured it
against loss for One Million Pesos (P1,000,000) with Oriental Assurance Corp. The
marine insurance policy stipulated that the subject matter insured is 1,208 pieces of
apitong logs with a total volume of 2,000 cubic meters. It was also warranted that the
insurance is against TOTAL LOSS only.
The logs were loaded on two barges, on barge PCT-7000 610 pieces of
logs and on barge TPAC-1000 598 pieces of logs. During the voyage, rough seas
and strong winds caused damage to the barge TPAC-1000 resulting in the loss of 497
pieces of logs out of 598.
Panama demanded payment from Oriental Assurance Corporation but
the latter refused on the ground that its contracted liability was for TOTAL LOSS
only.
Panama then filed a complaint and obtained a favorable judgment from
both the trial and appellate court. Both courts shared the view that the logs loaded in
two barges should be treated separately such that the loss sustained by shipment in
one of them may be considered as constructive total loss. If you were the counsel
of Oriental Assurance Corp., how would you challenge the aforesaid dispositions
thereby absolving your client from liability.
Answer:
As counsel for the insurer, I would maintain in my petition for review that insurer
should be absolved from liability because the liability under the marine insurance policy is
for TOTAL LOSS only. In this case, there was neither actual total loss nor constructive total
loss because of the entirety of 1,208 pieces of logs, only 497 pieces thereof were lost or
41.45% of the entire shipment. Hence, the theory of constructive total loss cannot be
sustained pursuant to the provisions of Section 139(a) of the Insurance Code because only
497 pieces were lost and such does not exceed 75% of the value of all 1,208 pieces of logs.
The fact that the logs were loaded on two different barges did not make the
contract several and divisible as to the items insured. The logs on the two barges were not
separately valued or separately insured. Only one premium was paid for the entire
shipment, making only one consideration. The insurance contract is therefore considered
indivisible. The logs having been insured as one inseparable unit, the correct basis for
determining the existence of constructive total loss is the totality of the shipment of the logs.
(Oriental Assurance Corp. vs. CA, 200 SCRA 459, August 9, 1991)
22.Problem: Union Manufacturing Co., Inc. obtained certain loans, overdrafts, and
other credit accommodations from the Republic Bank for the total amount of
P415,000. It executed a real and chattel mortgages on certain properties to secure the

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payment thereof. Republic Bank procured from Philippine Guaranty Co., Inc. an
insurance coverage in favor of Union Manufacturing Co., Inc. on loss against fire for
P500,000.00 over the mortgaged properties. The policy contains a cover note with the
annotation that loss or damage, if any, is payable to Republic Bank as its interest may
appear subject however to the printed conditions of the fire policy.
A fire occurred in the premises of the insured. Union Manufacturing Co.,
Inc. filed its fire claim but Philippine Guaranty Co., denied the claim on the ground
that Policy Condition No. 3, which requires notice to the insurer of other insurance
policies obtained over the same properties, was violated.
The lower court released the insured from liability upon proof of a
violation of a warranty. Republic Bank appealed claiming that it is entitled to recover
on the policy as mortgagee by virtue of the cover note providing for the payment of
loss or damages to the bank as its interest may appear. Is this contention tenable?
Answer:
No. Republic Bank is bound by the conditions stated in the policy. Its interest as
stated in the cover note includes an annotation subjecting the bank to the printed conditions
of the policy. The annotation must be deemed to be a warranty that the property was not
insured by any other policy. Violation thereof entitles the insurer to rescind.
Union Manufacturing Co., Inc. has violated the condition of the policy to the
effect that it did not reveal the existence of other insurance policies over the same properties
as required by the warranty appearing on the face of the policy. Hence, Republic Bank and
Union Manufacturing Co., Inc. cannot recover from the policy because the same is null and
void.
The insurance contract may be onerous but that in itself does not justify the
abrogation of its expressed terms, terms which the insured accepted or adhered to and
which is the law between the contracting parties.
(Union Manufacturing Co., Inc. vs.
Philippine Guaranty Co., Inc., 47 SCRA 271, October 30,1972)
23.Question: Can a cargo be the subject of marine insurance and that once it is so
made, does the implied warranty of seaworthiness immediately attaches to whoever
is insuring the cargo whether he be the ship owner or not?
Answer:
Yes. Where cargo is the subject of marine insurance, the implied warranty of
seaworthiness attaches to whoever is insuring the cargo, whether he be the ship owner or
not. The fact that the unseaworthiness of the ship was unknown to insured is immaterial in
ordinary marine insurance and may not be used by him as a defense in order to recover on
the marine insurance policy.
Since the law provides for an implied warranty of seaworthiness in every contract of
ordinary marine insurance, it becomes the obligation of a cargo owner to look for a reliable
common carrier, which keeps its vessel in seaworthy condition. The shipper may have no
control over the vessel but he has full control in the choice of the common carrier that will
transport his goods. Or the cargo owner may enter into the contract of insurance, which
specifically provides for coverage of perils of the ship. (Roque vs. Intermediate Appellate
Court 139 SCRA 597 (1985)
24.Question: VHIS entered in to an agreement with SB whereby the latter undertook
to lead on board its vessel, M/V SA, the formers lauan round logs for shipment from
Isabela to Manila.
VHIS insured the logs against loss and/or damages with SSSIC and the latter
issued its Marine Cargo Insurance Policy. VHIS gave the check in payment of the
premium on the insurance policy to Mr. VC, agent of SSSIC. However, MR. VC did not
immediately tendered the check to SSSIC. In the meantime, M/V SA sank resulting to
the loss of the insured logs. Five days after the vessel sank, Mr. VC tendered the
check to SSSIC but the latter refused to accept it. Instead, SSSIC cancelled the policy
for non-payment of the premium. Subsequently, VHIS demanded from SSSIC the
payment of the proceeds of the policy but the latter denied liability under the policy.
Is the payment of the premium necessary for the validity of the insurance
policy?

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Answer:
The payment of the premium is a condition precedent to, and essential for, the
efficaciousness of the contract of insurance. The only two exceptions are (1) in case the
insurance coverage relates to a life or industrial life (health) insurance when a grace period
applies and (2) when the insurer makes a written acknowledgment of the receipt of the
premium, this acknowledgment being declared by law to be then conclusive evidence of the
premium payment. (South Sea Surety and Insurance Co., Inc. vs. Court of Appeals)
25.Question: AHAC issued in favor of MTCC an insurance policy on the latters
building and premises. The premium for which was paid in installments. All of which
were accepted by AHAC.
Subsequently, the policy was renewed. The premium was again paid
installment payments, both were accepted by AHAC. Thereafter, MTCC refused to pay
the balance of the premium.
AHAC filed an action to recover the unpaid balance of the insurance policy.
However, MTCC claimed that the policy was never valid and binding. It alleged that
payment by installment of the premiums invalidated the said policy because such
was in violation of Section 77 of the Insurance Code MTCC then sought refund of the
premium payments made under the policy.
Is payment by installment of the premiums for the insurance policy invalidates
the said policy?
Answer: Section 77 of the Insurance Code provides:
An insurer is entitled to the payment of the premium as soon as the thing is
exposed to the peril insured against. Notwithstanding any agreement to the contrary, no
policy or contract of insurance issued by an insurance company is valid and binding unless
and until the premium thereof has been paid, except in the case of a life or an industrial life
policy whenever the grace period provision applies.
The provision imports that prepayment of premiums is strictly required as a condition
to the validity of the contract of insurance. However, such provision merely precludes the
parties from stipulation that the policy is valid even if premiums are not paid. It does not
expressly prohibit an agreement granting credit extension and such an agreement is not
contrary to law, morals, good customs, public order or public policy. Thus, an agreement to
allow the insured to pay premiums in installments is not prohibited. At the very least, both
parties should be deemed in estoppel to question the agreement that they have voluntarily
accepted. (Makati Tuscany Condominium Corp. vs. Court of Appeals)
26.Question: What is the limit provided for by law to the quasi-judicial power of the
Insurance Commissioner?
Answer: It is limited to claims and complaints involving any loss, damage or liability for
which an insurer may be answerable under any kind of policy or contract of insurance.
( Philippine American Life Insurance Co. vs. Ansaldo (234 SCRA 509) 1994)
27.Problem:Tan secured from S Co. and insurance policy for P30, 000.00 to cover his
interest in the electrical supply store of his brother. Four days thereafter, the building
was gutted down by fire including the store. On August 20, 1983, he filed his claim
form S Co. but the latter denied the claim on February 27, 1984. On April 3, 1984, Tan
wrote S Co. to seek reconsideration of the denial. On October 11, 1985, S Co. sent a
letter to Tan stating that his request has been denied. Tan sued S Co. on November
20, 1985 but the latter moved to dismiss the complaint on the ground of prescription
of the action relying upon the stipulation in the policy which provides that any action
or suit against the insurer shall be filed within twelve months from receipt of notice of
rejection. Tan contends that his filing of reconsideration on April 3, 1984 interrupted
the twelve-month prescriptive period on contesting the denial of an insurance claim.
If you were the judge of the sala in which the complaint was filed, would you
grant of deny the motion to dismiss filed by S Co.?
Answer: I would grant the motion to dismiss. The insureds cause of action or his
right to file a claim either in the Insurance Commission or in a court of competent
jurisdiction commences from the time of denial of the claim by the insurer, either

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expressly or impliedly. Since Tans claim was originally denied on February 27, 1984,
his cause of action has already prescribed at the time he filed the complaint.
Consequently, the complaint must be dismissed.
The rejection referred to should be rejection in the first instance, otherwise if it
is a reiterated rejection such as a reconsideration, it should have been stipulated.
28.Question: Can a cargo be the subject of marine insurance and that once it is so
made, does the implied warranty of seaworthiness immediately attaches to whoever
is insuring the cargo whether he be the ship owner or not?
Answer: Yes. Where cargo is the subject of marine insurance, the implied warranty of
seaworthiness attaches to whoever is insuring the cargo, whether he be the ship owner or
not. The fact that the unseaworthiness of the ship was unknown to insured is immaterial in
ordinary marine insurance and may not be used by him as a defense in order to recover on
the marine insurance policy.
Since the law provides for an implied warranty of seaworthiness in every contract of
ordinary marine insurance, it becomes the obligation of a cargo owner to look for a reliable
common carrier, which keeps its vessel in seaworthy condition. The shipper may have no
control over the vessel but he has full control in the choice of the common carrier that will
transport his goods. Or the cargo owner may enter into the contract of insurance, which
specifically provides for coverage of perils of the ship. (Roque vs. Intermediate Appellate
Court 139 SCRA 597 (1985)

Q & A in TRANSPORTATION LAWS

1. Q: Ernesto, a junk dealer, is engaged in the business of buying used bottles and
scrap metals in Olongapo City. Upon gathering sufficient quantities of such scrap
material, he brings such materials to Manila for resale. He utilizes two (2) six wheeler
trucks which he owned for hauling such materials to Manila. On the return trip to
Olongapo City, respondent usually loads his vehicles with cargo which various
merchants wanted delivered in different establishments in Olongapo City. Ernesto
charges freight rates for that service.
Pedro, a merchant and authorized dealer of Mangboro Cigarette Company, Inc.
contracted with Ernesto for hauling 200 cartons of Mangboro cigarettes from a
warehouse of Mangboro Cigarette Company in Caloocan City to Pedros
establishment in Olongapo City. In compliance with their agreement, Ernesto loaded
in Caloocan City said merchandise on to his trucks. Only 100 boxes of Mangboro
cigarettes were delivered to Pedro since the other boxes were hijacked somewhere
along Olongapo-Gapan Road in San Fernando, Pampanga by armed men.
May Pedro hold Ernesto liable as a common carrier? Explain.
A: Yes. Pedro may hold Ernesto liable as common carrier. Article 1732 of the Civil Code
makes no distinction between one whose principal business activity is the carrying of
persons or goods or both, and one who does such carrying only as an ancillary activity. The
said provision also carefully avoids making any distinction between a person or enterprise
offering transportation service on a regular or scheduled basis and on offering such service
on occasional, episodic, or unscheduled basis. Neither does said article distinguishes
between a carrier offering its services to the general public and one who offers services or
solicits business only from a narrow segment of the general population. Article 1732
deliberately refrained from making any distinction (Pedro De Guzman vs. Court of Appeals,
168 SCRA 612).
2. Q: May a common carrier be exempt from liability upon proof of exercise of the
diligence of a good father of a family in the selection and supervision of its
employees?

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A: No. A common carrier must exercise extraordinary diligence for the safe transportation
of their passengers to their destination. This duty of care is not excused by proof that they
exercised the diligence of a good father of a family in the selection and supervision of its
employees.( Engracio Fabre Jr v Court of Appeals 259 SCRA 426)
3. Q: H and W were spouses who owned a minibus used principally in connection
with a bus service for children. The couple had a driver, D, whom they hired after
trying him out for two weeks. F, a Christian Fellowship Association, arranged with the
couple for the transportation of 33 of its members from Manila to La Union and back.
A consideration was paid for the same. D did not take the usual route to La Union
because a bridge was under repair in Pangasinan. He was thus forced to take a
detour. D was unfamiliar with the area. At 11:30 p.m., D came upon a sharp curve on
the highway. The road was slippery because of the rain. The bus, running at the
speed of 50 kph, skidded to the left road shoulder and rammed a fence, and then
turned over, it came to a full stop only after a series of impacts. Several passengers
were injured. An action for damages was filed against the couple.
Were H and W liable for a breach of contract of carriage considering that they
were not engaged in the business of public transportation?
A: Yes. As common carriers, H and W were bound to exercise extraordinary diligence for
the safe transportation of the passengers to their destination. This duty of care is not
excused by proof that they exercised the diligence of a good father of a family in the
selection and supervision of their employees. The case involves a contract of carriage. H
and W did not have to be engaged in the business of public transportation for the provisions
of the Civil Code to apply to them.(Fabre v CA)
4. Q: A was sailing southbound leaving the port of Manila for Cebu when it collided
with B, which was then approaching the port of Manila coming from Japan. The
collision inflicted a gaping hole on the left side of B, through which seawater rushed
in and flooded the hatch damaging all the cargo stowed.
Ten minutes prior the collision and at the distance of eight miles, each vessel
made a visual sighting of each other. Four minutes after B gave one blast whistle to
inform A that it was turning starboard (right), there was no blast or proper response
from A.
At the time of the collision, A failed to follow Rule 18 (a) of the International
Rules of the Road which requires 2 vessels meeting head on to change their course
by each vessel steering starboard (right) so that each would pass by the port side
(left) of the other. Also, at that time, A had no proper lookout.
Who would you hold liable for the collision?
A: A was negligent for two reasons: (1) It failed to follow Rule 18 (a) of the International
Rules of the Road by not altering her course to the starboard; and (2) it did not have a
lookout properly trained and who is given no other duty save to act as a lookout and who is
stationed where he can see and hear best and maintain good communication with the officer
in charge of the vessel, and who of course must be vigilant. (Smith Bell vs. CA, 197 SCRA
201)
5.Q: Are the common carrier and arrastre operator always solidarily liable for
damages to the goods shipped?
A: No. The Supreme Court held that since it is the duty of the arrastre to take good care of
the goods that are in its custody and to deliver them in good condition to the consignee,
such responsibility also devolves upon the carrier. Both the arrastre and the carrier are
therefore charged with the obligation to deliver the goods in good condition to the
consignee. The Court, do not, of course, imply by the above pronouncement that the
arrastre operator and the customs broker are themselves always and necessarily liable with
the carrier, or vice versa, nor the attendant facts in a given case may not vary the rule.
(Eastern Shipping Lines, Inc. vs. CA, 234 SCRA 78)

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6. Q: When the interisland vessel M/V Pioneer bound for Cebu left the port of Manila,
its officers were already aware of the typhoon Klaring building up somewhere in
Mindanao. Near Romblon, the vessel encountered heavy rains. Fearing that due to
zero visibility the vessel might hit an island, the captain ordered a reversal of the
course so that the vessel could weather out the typhoon by facing the winds and the
waves in the open. Unfortunately, the vessel struck a reef, sustained a leak and
eventually sank. A suit for damages was filed against the carrier.
a. Will the defense of fortuitous event prosper? Why?
b. Can there be recovery despite total loss of the vessel?
A: (a.) No, because the carrier was at fault. In Vasquez vs. CA (L-42926, September 13,
1985), it was said that to constitute caso fortuito that would exempt a person from liability, it
is necessary that: (1) the event must be independent of the human will; (2) the occurrence
must render it impossible for the debtor to fulfill the obligation in a normal manner; and that
(3) the obligor must be free of participation in, or aggravation of the injury to the creditor. The
event must have been impossible to foresee, or if could be foreseen, must be impossible to
avoid. There must be entire exclusion of human agency from the cause of the injury or loss.
In the instant case, the typhoon was inevitable occurrence, yet, having been kept posted
with the same, the captain and the members of the crew took a calculated risk in proceeding
with the voyage. In so doing, they failed to observe the extraordinary diligence required of
them by law for the safety of the passengers transported by them with due regard for all
circumstances and unnecessarily exposed the vessel and the passengers to the tragic
mishap. They failed to overcome the presumption of negligence under the provisions of
Article 1756 of the Civil Code.
(b) Yes. The liability of the shipowner is limited to the value of the vessel or its insurance.
Despite the total loss of the vessel, its insurance answers for the damages that a shipowner
or agent may be held liable for any reason of the death of its passengers. (Vasquez v CA L42926 September 13, 1985)
7. Q: Z Transportation Co., unregistered owner of an ill-fated vehicle which claimed
the lives of some people, and ZZ Transportation Co. , the registered owner of the
same vehicle, were sued for breach of contract of carriage . Both Z and ZZ admitted
that the driver of the said vehicle were in their employ. Can Z, ZZ and the driver be
jointly and severally liable ?
A:
Previous decisions of the Supreme Court is to the effect that transfer of a certificate
of public convenience to operate a transportation service is not effective and binding insofar
as the responsibility of the grantee under the franchise in its relation to the public is
concerned. Without the approval of the transfer by the Public Service Commission required
by the Public Service Act, the transferor of such certificate continues to be the operator of
the service and as such operator, he is the one responsible jointly and severally with his
driver for damages incurred by passengers or third persons in consequence of injuries or
deaths resulting from the operation of such service.
We do not find any need for applying these rulings to the present petitioners for the
simple reason that in their respective third-party complaints, as noted by the Court of
Appeals, they both admitted separately that they are the owners of the bus involved in the
incident in question and that Valeriano Marcos, the driver of said bus at the time of said
incident, was in their employ. (Zamboanga Transportation Company v CA G.R. No. L25292)
8. Q: Will the extraordinary responsibility of a common carrier commence from the
issuance of a bill of lading without the actual receipt of the shipment covered by the
same?
A: No. The Supreme Court held that explicit is the rule under Article 1736 of the Civil Code
that the extraordinary responsibility of the common carrier begins from the time the goods
are delivered to the carrier. This responsibility remains in full force and effect even when
they are temporarily unloaded or stored in transit, unless the shipper or owner exercises the
right of stoppage in transit, and terminates only after the lapse of reasonable time for the
acceptance of the goods by the consignee or such other person entitled to receive them.

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And, there is delivery to the carrier when the goods are ready for and have been placed in
the exclusive possession, custody and control of the carrier for the purpose of their
immediate transportation and the carrier has accepted them. Where such delivery has thus
been accepted by the carrier, the liability of the common carrier commences co instanti.
Hence, while we agree with petitioners that the extraordinary diligence statutorily required to
be observed by the carrier instantaneously commences upon delivery of the goods hereto,
for such duty to commence, there must in fact, have been delivery of the cargo subject of
the contract of carriage. (Saludo v CA 207 SCRA 498)
9. Q: A bus of X Bus Co. figured in an accident with a jeepney, resulting in the death
of several passengers including two Maranaos. Information was received that certain
Maranaos were panning to avenge their death by burning some of the buses of X Bus
Co. Days after the accident, three armed Maranaos, who pretended to be passengers,
seized a bus of X Bus Co., poured gasoline on it and ordered the passengers to get
off the bus. However, "A", one of the passengers, returned to the bus to retrieve
something. At that point, one of the armed men was pouring gasoline over the driver.
"A" pleaded to spare the driver's life. The driver took that opportunity to jump off the
window of the bus. The armed men shot "A" and set the bus on fire.
An action for breach of contract of carriage was filed against X Bus Co. but the
latter raised the defense of caso fortuito. Is the bus company liable?
A: YES. In the case of Fortune Express, Inc. vs. Court of Appeals, 305 SCRA 14, the
Supreme Court ruled that a fortuitous event is an occurrence which could not be foreseen or
which though foreseen, is inevitable. If the bus company and its employees had been
vigilant, they wou1d not have failed to see that the malefactors had a large quantity of
gasoline with them. Simple precautionary measures to protect the safety of passengers
could have been employed, such as frisking passengers and inspecting their baggages,
preferably with the non-intrusive gadgets such as metal detectors, before allowing them on
board, without violating the passenger's constitutional rights.
To be considered force majure, it is necessary that (1) the cause of the breach of the
obligation must be independent of human will; (2) the event must be either unforeseeable or
unavoidable; (3) the occurrence must be such as to render it impossible for the debtor to
fulfill the obligation in a normal manner; and (4) the obligor must be free from participation
in, or aggravation of, the injury to the creditor. The absence of any of the foregoing requisites
would prevent the obligor from raising the defense of force majure. (Fortune Express v CA
305 SCRA 14)
10. Q: A shipment insured under ABC Insurance arrived at the port of Manila. The
shipment was discharged from the vessel to the custody of XYZ Services, an Arrastre
Operator. A "good order" cargo receipt was then issued by the latter to the carrier.
Upon arrival at the port of destination, some of the goods were found to have been
lost. After the insurer indemnified the consignee for the loss, it sued the arrastre
operator for reimbursement.
Is the arrastre operator legally liable for the loss of a shipment in its custody?
A: Yes. The Supreme Court held that the relationship between the consignee and the
arrastre operator is akin to that existing between the consignee and the common carrier, or
that between a depositor and a warehouseman. In the performance of its obligations, an
arrastre operator should observe the same degree of diligence as that required of a
common carrier and a warehouseman as enunciated under Article 1733 of the New Civil
Code and Section 3(b) of the Warehouse Receipts Law, respectively. Being the custodian of
the goods discharged from a vessel, an arrastre operator's duty is to take good care of the
goods and to turn them to the party entitled to their possession. (Summa Insurance Corp.
vs. C.A., 253 SCRA 175)
11. Q: Mr. A contracted the services of X to haul 305 tons of scrap iron from
Mariveles, Bataan on board the latter's lighter. Pursuant to their agreement, Mr. A
delivered the scrap iron to the captain of the lighter for loading.
When about half of the scrap iron was already loaded, Mayor Y of Mariveles,
Bataan demanded P5,000 from Mr. A. When Mr. A refused to give the said amount,

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Mayor Y ordered his men to dump the scrap iron at a certain compound. A receipt was
thereafter issued stating that the Municipality of Mariveles had taken custody of the
scrap iron.
Is the common carrier liable to the owner of the scrap iron?
A: Yes. By the act of delivery made by Mr. A, the scraps were unconditionally placed in the
possession and control of the common carrier, and upon their receipt by the carrier for
transportation, the contract of carriage was deemed perfected. Consequently, the carrier's
extraordinary responsibility for the loss, destruction or deterioration of the goods
commenced.
Pursuant to Article 1738 of the Civil Code, such extraordinary responsibility would
cease only upon the delivery, actual or constructive, by the carrier to the consignee, or to the
person who has the right to receive them. The fact that part of the shipment had not been
loaded on board the lighter did not impair the said contract of transportation as the goods
remained in the custody and control of the carrier, albeit still unloaded. (Ganzon vs. Court of
Appeals, 161 SCRA 646)
12. Q: A, a fare-paying passenger boarded FLY Airlines and checked in three pieces
of baggage. One of the baggages did not arrive with the flight because it was missent.
When the baggage finally arrived, it was discovered that some of its contents was
missing. Upon complaint for damages, the carrier claimed that its liability is limited to
the stipulation printed at the back of the airline ticket. A, the passenger averred that
he was not able to read such stipulations as they were printed so small and that they
were hard to read. As such it does not bind him. Decide.
A: The pecuniary of the common carrier may by contract limited to a fixed amount provided
that the contract is reasonable and just under the circumstances and has been freely and
fairly agreed upon. Where however, the conditions limiting the carrier's liability printed at the
back of the ticket are in letters so small that they are hard to read, this would not warrant the
presumption that the passenger was aware of these conditions such that he had "fairly and
freely agreed" to them. A, therefore is not and cannot be bound by the conditions found at
the back of the ticket stub. (Shewaram vs. Philippine Airlines, Inc., 17 SCRA 606)
13. Q: A passenger jeepney owned by spouses Isidro Mangune and Guillerma
Carreon and driven by Tranquilino Manalo was on its way to Pangasinan when the
jeepney's right rear wheel was detached forcing it to invade the other lane. After it
encroached into the other lane, a bus bumped it from behind killing 3 passengers and
injuring others. A complaint for recovery of damages was filed. Who should be held
liable for the death and physical injuries suffered by the passengers of the jeepney?
A: The owners and the driver are liable. In culpa contractual, the moment a passenger dies
or is injured, the carrier is presumed to have been at fault or to have acted negligently, and
this disputable presumption may only be overcome by evidence that he had observed extraordinary diligence or that the death or injury of passenger was due to a fortuitous event.
In an action for damages against the carrier for his failure to safely carry his
passengers to their destination, an accident caused either by the defects in the automobile
or through the negligence of the driver, is not a caso fortuito which would avoid the carrier's
liability for damages. (Necessito v Paras 104 Phil 75)
14. Q: Corporation A sought recovery from carrier B the alleged value of the
merchandise it shipped which was not delivered to the consignee or returned to it.
The carrier contended, however, that assuming it is liable, it could not be held liable
in excess of P300.00 for each package unless the value and the contents thereof are
declared in the bill of lading at the time of shipment pursuant to a provision in the bill
of lading executed between the parties. Is the stipulation limiting the liability of the
carrier for the loss of the cargo valid and binding upon shipper?
A: NO. A common carrier cannot lawfully stipulate for exemption from liability unless such
exemption is just and reasonable, and the contract is freely and fairly made. The carrier
cannot limit its liability for injury to or loss of goods shipped where such injury or loss was
caused by its own negligence. The rule rests on considerations of public policy. The
undertaking is to carry the goods, and to relieve shipper from all liability for loss or damage

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arising from negligence in performing its contract is to ignore the contract itself. The natural
effect of a limitation of liability against negligence is to induce want of care on the part of the
carrier in the performance of its duty (Juan Ysmael and Co., Inc. vs. Gabino Barreto and
Co., Ltd, 51 PHIL 90).
15. Q: X a duly licensed copra dealer, loaded sacks of copra on board the vessel "M/V
Luzviminda" for shipment from Mindoro to Manila. Said cargo however, did not reach
Manila because along the way, the vessel capsized and sank with all its cargo.
Petitioner filed an action to recover the value of his cargo. In its defense, the
shipowner claimed that his liability is extinguished by the total loss of the vessel. Is
the defense of shipowner tenable?
A: Yes, the direct liability of the shipowner is moderated and limited by the shipagent's or
shipowner's right of abandonment of the vessel and earned freight. This expresses the
universal principle of limited liability under maritime law. The most fundamental effect of
abandonment is the cessation of the responsibility of the shipagent/owner. It has been held
that by implication, the shipagent's or shipowner's liability is confined to that which he is
entitled as of right to abandon -"the vessel with all her equipment and the freight it may have
earned during the voyage,"/and "to the insurance thereof, if any." In other words, the
shipowner's or agent's liability is merely co-extensive with his interest in the vessel such that
a total loss thereof results in its extinction. "No vessel, no liability" expresses in a nutshell
the limited liability rule. The total destruction of the vessel extinguishes maritime lien as
there is no longer any res to which it can attach.(Chua Yek Hong V IAC 166 SCRA 183)
16. Q: ABC Corp. imported from the U.S. several machineries and equipment which
were loaded on board the S/S Albert Maersk. The shipment arrived at the Port of
Manila and was turned over complete and in good order condition to the arrastre
operator XYZ Service, Inc. An employee of XYZ Service, Inc. was ordered to transfer
the shipment and while the employee was manoeuvring the tractor, the cargo fell from
the chassis and the machineries were broken, dented, cracked and no longer useful
for their purposes. It was discovered that there were no twist lock at the rear end of
the chassis where the cargo was loaded. DEF Insurance Co. paid the value of the
damage to the consignee and as a subrogee, filed and action for damages against the
arrastre operator, XYZ Service, Inc. Is the arrastre operator solidarily liable with the
carrier for damages to the goods while in its custody?
A: YES. The legal relationship consignee and the arrastre operator is akin to that of a
depositor and warehouseman. The relationship between the consignee and the carrier is
similar to that of the consignee and the arrastre operator. Since it is the duty of the arrastre
to take good care of the goods that are in its custody and to deliver them in good condition
to the consignee, such responsibility also devolves upon the carrier. Both the arrastre and
the carrier are therefore charged with and obligated to deliver the goods in good condition to
the consignee. (Firemans Fund Insurance Co. vs. CA)
17. Q: Jose is the holder of a certificate of public convenience for the operation of a
jeepney line. One of his jeepneys hit Mario and his wife, Maria, causing Mario's death.
The latter's heirs filed an action for damages against Jose, Juan (the driver) and
Pedro (the actual owner of the jeepney). Pedro denied ownership of the jeepney, while
Jose claimed that he was only the franchise owner and that he had nothing to do with
the actual operation and supervision of the jeepney which is under the control,
operation and supervision of Pedro who operates the same under the "kabit system".
In the case at bar, who should be held liable for the death of Mario?
A: Jose should be held liable. In the case of Vargas vs. Langkay, the court held that it is the
registered owner of passenger's vehicle who is jointly and severally liable with the driver for
damages incurred by passengers or third persons as a consequence of injuries or death
sustained in the operation of said vehicle.
This is, however, without prejudice to the right of the registered owner/operator to be
indemnified by the real or actual owner of the amount that he may be required to pay.
(Jereos vs. Court of Appeals, 117 SCRA 395)

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18. Q: Mylene Saba boarded Northwest Airlines flight bound for South Korea to
attend a four- day convention. She checked-in one piece of luggage and after
boarding, however, they were asked to disembark and transfer to Korean Airlines
plane due to the Northwest Airlines plane's engine trouble. Mylene was assured that
his baggage would be with him in the same flight. When she arrived at South Korea,
she discovered that her luggage was nowhere to be found, instead, it was flown to
Seattle, USA. It was not until four days later, after repeated representations, she was
able to retrieve her luggage. Consequently, almost a month after, she filed an action
for damages against Northwest Airlines which raise the defense of prescription since
the claim was filed beyond the 21- day reglementary period under the Warsaw
Convention. Does the Warsaw Convention renders inoperative the pertinent
provisions of the Civil code on Common Carriers?
A: NO. The Supreme Court held that the Warsaw Convention was a treaty commitment
voluntarily assumed by the Philippine Government, consequently, it has the force and effect
of law in this country. However, the Warsaw Convention does not operate as an exclusive
enumeration of the instances for declaring an airline liable for breach of contract of carriage
or as an absolute limit of the extent of liability. The Convention merely declares the carrier
liable for damages in the enumerated cases, if the conditions therein specified are present.
For sure, it does not regulate the liability, much less exempt, the carrier for violating the
rights of others, which must simply be respected in accordance with their contracts of
carriage. The application of the Convention must not therefore be construed to preclude the
operation of the Civil Code and other pertinent laws. (Rufino Luna vs. CA, 216 SCRA 107)
19. Q: A ship was chartered, bareboat or demise. While in port, the vessel's master
contracted the services of a third engineer for twelve months. The engineer boarded
the vessel but was required to disembark before the expiration of his contract. The
cause of the discharge was described in his Seaman's Book as "by owner's
discharge." Is the shipowner liable for the wage of the said third engineer?
A: A shipowner is not liable in a bareboat or demise charter. A bareboat charter is likened to
a lease of an unfurnished house. The shipowner turns over his possession of the ship to the
charterer, who then undertakes to provide a crew and supplies during the charter. It is wellsettled that in a demise or bareboat charter, the charterer is treated as owner pro hac vice of
the vessel, the charterer assuming in a large measure the customary rights and liabilities of
the shipowner in relation to third persons who dealt with him or with the vessel. The master
of the vessel is deemed the agent of the charterer. The charterer, not the owner of the
vessel, is the one liable for the expenses of the voyage including the wages of the seamen.
(Litonjua Shipping Company Inc v National Seamen Board 176 SCRA 189)
20. Q: What law shall govern the liabilities of a common carrier in the event of loss,
destruction or deterioration of goods?
A: As enunciated in the case of National Development Corp. vs. Court of appeals, the law
of the country to which the goods are to be transported governs the liability of common
carriers in case of loss, destruction or deterioration of goods. In the case aforementioned the
law of the Philippines shall govern, being the country of destination of the said goods. The
liability of the carriers is governed primarily by the Civil Code and in all matters not regulated
by the said Code, the rights and obligations of common carriers should be governed by the
Code of Commerce and Special Laws. (National Development Corp v CA)
21.Q: May a passenger be bound by the provisions of a plane ticket, i.e., the carriers'
limited carriage liability, notwithstanding that he had not signed the same?
A: YES. As was held in the case of ONG YIU vs. CA, the provisions of the plane ticket bind
the passenger. It is what is known as the contract of adhesion where one party imposes a
ready-made form of contract on the other, as the plane ticket. Thus, the carrier's liability for
loss or delay of its passenger's baggage is valid and binding in the absence higher value
declared for luggage and actual value of goods lost.( Ong Yui v CA)
22. Q: Due to the eruption of Mt. Pinatubo, which caused heavy ashfall, the NAIA was
temporarily closed. During the period that the airport was non-functional,

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international airlines bound for Manila were forced to unload their passengers in
foreign countries. For a few days, the airline companies shouldered the expenses for
the hotel accommodations of their passengers. However, the companies later
informed the passengers that they were no longer willing to defray the cost of hotel
accommodations of their passengers, forcing the latter to bear the same. When the
passengers were eventually transported to Manila, they sued the airline companies
for damages. Are the airline companies liable?
A: NO. Common carriers are not absolutely responsible for all injuries or damages even if
the same were caused by a fortuitous event. To rule otherwise would render the defense of
"force majeure" as an exception from liability illusory and ineffective. Accordingly, there is no
question that when a party is prevented or unable to fulfill his obligation because of "force
majeure", the general rule is that he cannot be held liable for damages for non-performance.
Airline passengers must take such risks incident to the mode of travel. In this regard,
adverse weather conditions or extreme climactic changes are some of the perils involved in
air travel, the consequences of which the passenger must assume or expect. After all,
common carriers are not insurers of all risks. (Japan Airlines vs. Court of Appeals, 294
SCRA 19)
23. Q: A common carrier named SS Titanic sank on a voyage from Hong Kong to the
Philippines. The investigation found that such sinking was due to force majeure and
that subject vessel, at the time of the sinking was seaworthy.
Is the doctrine of limited liability applicable in this case?
A: The only time the Limited Liability Rule does not apply is when there is an actual finding
of negligence on the part of the vessel owner or agent. The pivotal question, thus, is whether
there is a finding of such negligence on the part of the owner in the instant case. In the case
at bar, the answer is in the negative.( Aboitiz Shipping Corporation v General Accident Fire
and Life Assurance Corporation, Ltd)
24.Q: M/T "Tacloban City," a barge-type oil tanker of Philippine registry and M/V "Don
Juan", an inter island vessel also of Philippine registry collided at the Talbas Strait
near Maestra de Ocampo island in the vicinity of Mindoro. When the collision
occurred, the sea was calm, the weather fair and visibility good. As a result of this
collision, the M/V "Don Juan" sank and hundreds of its passengers perished. The
Captain of the "Don Juan" in this instance was playing mahjong before and up to the
time of the collision. Petitioners filed a complaint against the Captain. The Captain
asserted in his defense that he was on "off duty". Discuss the merit of the Captain's
defense.
A: The behavior of the captain of "Don Juan" playing mahjong "before and up to the time of
collision" constitutes behavior that is simply unacceptable on the part of the vessel to whose
hands the lives and welfare of the passengers had been entrusted. Whether or nor the
Captain was "off-duty" or "on duty" at or around the time of actual collision is quite
immaterial; there is both realistically speaking and in contemplation of law, no such thing as
"off-duty" hours for the master of the vessel at sea that is a common carrier upon whom the
law imposes the duty of extraordinary diligence. (Mecenas v CA 180 SCRA 83)
25. Q: Rogelio Carochea, while being a passenger of a taxicab owned and operated
by Pascual Perez, was stabbed and killed by the driver. The said driver was found
guilty of homicide. While the criminal case was on appeal, Antonla Maranan,
Rogello's mother filed an action to recover damages for the death of her son. The trial
court awarded damages against Perez but dismissed the claim against the driver.
A: Article 1759 of the Civil Code provides that "common carriers are liable for the death of
or injuries to passengers through the negligence or willful acts of the former's employees,
although such employees may have acted beyond the scope of their authority or in violation
of the orders of the common carrier."
It is the carrier's strict obligation to select Its drivers and similar employees with due
regard not only to technical competence but also to their total personality, their behavior, and
their moral fiber.

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The dismissal of the claim against the driver is correct. The action by the plaintiff was
predicated on breach of contract of carriage and the driver was not a party thereto. His civil
liability is covered in the criminal case. (Maranan v Perez 20 SCRA 412)
26. Q: The petitioners Norberto Quisumbing, Sr. and Gunther Loeftler were among
the passengers of PALs plane in its flight which left Mactan City with Manila for its
destination. After the plane had taken off, Florencio 0. Villarin, a Senior NBI Agent
who was also a passenger of the said plane, noticed a certain 'Zaldy, a suspect in the
killing of Judge Valdez, seated at the front seat near the door leading to the cockpit of
the plane. 'Zaldy had three companions on board the plane. Villarin then scribbled a
note addressed to the pilot of the plane requesting the latter to contact NBI duty
agents in Manila for the said agents to ask the Director of the NBI to send about six
NBI agents to meet the plane because the suspect in the killing of Judge Valdez was
on board. Capt. Luis Bonnevie, Jr., explained that he could not send the message
because it would be heard by all ground aircraft stations. Villarin, however, told the
pilot of the danger of commission of violent acts on board the plane by the notorious
'Zaldy and his three companions. "Soon thereafter an exchange of gunshots ensued
between Villarin and 'Zaldy' and the latter's companions. 'Zaldy' announced to the
passengers and the pilots in the cockpit that it was hold-up and ordered the pilot not
to send any SOS. The hold-uppers divested the passengers of their belongings. Upon
landing at the Manila International Airport, Zaldy and his three companions
succeeded in escaping. Quisumbing and Loeffier brought suit against PAL to
recover the value of the property lost by them to the robbers as well as moral and
exemplary damages, attorney's fees and expenses of litigation.
Whether or not robbery constitute force majeure and exonerates a common
carrier who took necessary steps to prevent the same.
A: Yes. A careful analysis of the record in relation to the memoranda and other pleadings of
the parties, convinced the Supreme Court of the correctness of the essential conclusion of
both the trial and appellate courts that the evidence does indeed fail to prove any want of
diligence on the part of PAL, or that, more specifically, it had failed to comply with applicable
regulations or universally accepted and observed procedures to preclude hijacking; and that
the particular acts singled out by the petitioners as supposedly demonstrative of negligence
were, in the light of the circumstances of the case, not in truth negligent acts "sufficient to
overcome the force majeure nature of the armed robbery. The Court quite agrees too, with
the appellate tribunal's wry observation that PAL's "failure to take certain steps that a
passenger in hindsight believes should have been taken is not the negligence or misconduct
which mingles with force majeure as an active and cooperative cause. (Norberto
Quisumbing Sr v CA G.R. No 50076 September 14, 1990)
27. Q: A Co., a common carrier, shipped from England to Manila 180 cartons of
"Dunhill" cigarettes consigned to B Co. When the shipment arrived at the port of
manila, the container van carrying the goods was received by the arrastre operator.
However, due to lack of space, the containers were not turned over to the
responsibility of the arrastre. Subsequently, the goods were placed in two containers,
both duly padlocked and sealed by the representative of the carrier. The following
day, it was found out that 90 cases of the goods were missing. The consignee then
filed a claim against the carrier but the latter denied liability contending that the loss
occurred at the area under the absolute control of the arrastre. The carrier then filed a
claim against the arrastre. Will the action prosper?
A: NO. The shipment was lost while it was still in the custody of the common carrier and it
failed to prove that the loss was occasioned by an excepted cause. Hence, the inescapable
conclusion is that the carrier was negligent and should be held liable therefore. The common
carrier is bound to observe extraordinary diligence in the vigilance over the goods. If the
goods are lost, destroyed or deteriorated, the presumption of fault or negligence falls upon
the common carrier unless extraordinary diligence is shown to have been exercised. The
extraordinary diligence lasts from the time the goods are unconditionally placed in the
possession of, and received by the carrier for transportation until the same are delivered,
actually or constructively, by the carrier to the consignee or to the person who has the right
to receive them. (Citadel Lines, Inc. vs. CA, 184 SCRA 544)

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28. Q: A passenger of petitioner Bachelor Express, Inc. suddenly stabbed a PC
soldier which caused a commotion and panic among passengers. When the bus
stopped, passengers were lying on the road, one died as a result of head injuries
while others were severely injured. During the trial in the action for damages against
petitioner, it was established that shortly after the commotion, the bus conductor
opened the front door while the bus was still running, from which some of the
passengers, including the deceased alighted. Would a caso fortuito absolutely
exonerate the carrier from liability for damages when there was a finding of
negligence on its part to prevent injuries to passengers?
A: NO. The Supreme Court held that the sudden attack/act of the passenger who stabbed
another passenger in the bus is within the context of force majeure. However, in order that
a common carrier may be absolved from liability in case of force majeure, it is not enough
that the accident was caused by force majeure. The common carrier must still prove that it
was not negligent in causing the injuries resulting from such accident. Considering the
factual findings of the Court of Appeals- the bus did not immediately stop at the height of the
commotion; and the victims fell from the bus door when it was opened or gave way while the
bus was still running; the conductor panicked and blew his whistle after people had already
fallen off the bus; and the bus was not properly equipped with doors in accordance with lawit is clear that petitioner was at fault and negligent under the law governing common carriers.
(Bachelor Express, Inc. vs. Court of Appeals, 188 SCRA 216)
29. Q: Spouses Paeng and Arlene together with their minor children boarded a bus.
The front tire of the bus exploded. The driver lost control causing the bus to fall into a
ravine. Paeng died.
May the common carrier exculpate himself from liability solely on the ground
that the tire that blew was new and thus, constitutes fortuitous event?
A: No. The explosion of the new tire may not be considered a fortuitous event. There are
human factors involved in the situation. The fact that the tire was new did not imply that was
entirely free from manufacturing defects or that it was properly mounted on the vehicle.
Neither may the fact that the tire bought and used in the vehicle is of a brand name noted for
quality, resulting in the conclusion that it could not explode within day's use. Be that as it
may, it is settled hat an accident caused either by defects in the automobile or through the
negligence of its driver is not caso fortuito that would exempt the carrier from liability for
damages.
(Yobido v CA 281 SCRA 1)
30. Q: A is the registered owner of a freight truck. B hired the truck to haul fertilizer.
Under the lease contract, B shall be liable for all losses and damages attending the
carriage of the goods hauled by him. Thereafter, B entered into an agreement with C
for the use of the freight truck in question for the hauling of certain merchandise. The
merchandise was delivered to B but was not delivered to the consignee.
Is the registered owner liable for the loss of the goods?
A: Yes. The Supreme Court has invariably held in several decisions that the registered
owner of a public service vehicle is responsible for damages that may arise from
consequences incident to its operation or that may be caused to any passengers therein. It
is settled in our jurisprudence that if the property covered by a franchise is transferred or
leased without obtaining the requisite approval from the Public Service Commission, the
transfer is not binding upon the public and third persons. (Gelisan v Alday 154 SCRA 388)
31. Q: Gillaco was a passenger of appellant Manila Railroad Co. He was shot by
Deresa, a train guard of appellant Manila Railroad Co., who has a long-standing
grudge against him. An action for damages was filed against the appellant company.
Whether or not a carrier is liable for all injuries sustained by passengers due to
the willful act of its employees.
A: No. The responsibility of the carrier extends only to those acts that the carrier could
foresee or avoid through the exercise of the degree of care and diligence required of it. The
shooting was therefore caso fortuito, being unforeseeable and inevitable and pursuant to
established doctrine, the resulting breach of the company's contract of safe carriage was

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excused thereby. The crime stands on the same footing as if committed by a stranger or copassenger, since the killing was not done in line of duty.( Gillaco v Manila Railroad
Company)
32. Q: What relationship exists between the jeep owner and the driver under the
boundary system arrangement?
A: An employer-employee relationship exists between a jeep owner and a driver under a
boundary system. The features which characterize the boundary system -namely the fact
that the driver does not receive a fixed wage but gets only the excess of the amount of the
fares collected by him over the amount he pays to the jeep owner I and that the gasoline
consumed by the jeep is for the account of the driver - are not sufficient to withdraw the
relationship between them from that of employer-employee. (Magboo v Bernardo 7 SCRA
952)
33. Q: May the owner of a passenger jeep operated under the boundary system
arrangement be held liable for the indemnity due to the victim of the accident caused
by the driver in case of the latter's insolvency?
A: YES. Since an employer-employee relationship exists between the jeep owner and the
driver, the former is subsidiarily liable as employer in accordance with Art. 103, RPC. To
exempt him from liability on the ground that he is a mere lessor would not only abet flagrant
violations of the Public Service Law but also place the riding public at the mercy of reckless
and irresponsible drivers.
34. Q: A was killed in a motor vehicle accident. The jeep he was riding was owned by
B and driven by C under the boundary system arrangement. C was convicted of
homicide thru reckless imprudence but was not able to pay the indemnity due to
insolvency. The heirs of A filed an action against B for the enforcement of his
subsidiary liability as employer in accordance with Art. 103 of the Revised Penal
Code. Will the action prosper?
A: YES. B the owner of the jeep is considered as an employer of C. Thus, being so, he is
liable subsidiarily for damages caused by the latter in case of insolvency in accordance with
Art. 103 of the Revised Penal Code.
35. Q: Arelene took a Japan Airlines (JAL) flight from the United States to Manila.
The plane had an intermediate stop at Osaka, Japan. Upon reaching Manila, Arlene
discovered that her luggage was erroneously loaded on a different flight. She
demanded from JAL employees to return the luggage. The employees found the
luggage but lost it again due to carelessness. Arelene filed a suit for damages. The
JAL management admitted to the negligence of its employees but refused to pay the
total damages being prosecuted. It claimed that it is liable only for $20 per kilo of
luggage according to the Warsaw Convention.
A: The management is wrong; The Warsaw Convention denies the carrier to avail of its
provisions if the damage was caused by its willful misconduct or by such default on his part
as, in accordance with the law of the court seizing the case, is considered to be equivalent
to willful misconduct, or if damage is caused by any agent of the carrier acting within the
scope of his employment.
36. Q: Transcontinental Fertilizer Co. enters into a voyage charter with Hong Kong
Island Shipping Co. over the latter's vessel, "M/V H. K., for the transport of urea from
USSR to the Philippines. One of the stipulations in the Charter agreement provides
that the vessel owner shall not: be liable for loss or damage to the goods transported
unless the same be due to the negligence of the owner or want of diligence to make
the vessel seaworthy. The vessel arrived in Manila but the goods were shortlanded.
The consignee filed claim with the insurer which in turn, as subrogee, filed action for
reimbursement against the ship owner and the agent or the charterer.
May the ship owner and charterer under the said contract stipulate that the
owner be exempt from liability for damages to the goods unless the same be due to
his negligence?

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A: Yes. A voyage charter being a private carriage, the parties may freely contract
respecting the liability for damages to the goods and other matters. The basic rule is that
the responsibility for cargo loss rests on the one who agreed to perform the duty involved "in
accordance with the terms of most voyage charters. The charterer was responsible for the
loading, stowage and discharging of the cargo at the ports visited, while the owner was
responsible for the care of the cargo during the voyage. If the goods were shortlanded, this
means that the loss took place on board the vessel before unloading of the shipment, for
which the owner will be answerable. However, goods damaged or lost during the unloading
is the liability of the charterer. (Maritime Agencies v. CA, 187 SCRA 346)
37. Q: A driver of a passenger bus ran over a pedestrian who died instantly. The
insurance company indemnified the heir in the amount of P5,000 under a vehicular
insurance policy obtained by the bus owner. The surviving heir of the deceased
sought to recover damages, among others, for loss of pension in the sum of P10,000
which the deceased failed to receive against the driver.
(a) Is the errant driver liable?
(b) What is the nature and extent of the liability of the bus owner in case the
driver fails to pay?
A: (a) Yes. Article 2206 of the Civil Code provides that "the amount of damages for death
caused by a crime or quasi-delict shall be at least P3,000 (now P50,000), even though there
may have been mitigating circumstances. In addition: (1I) the defendant shall be liable for
the loss of earning capacity of the deceased, and the indemnity shall be paid to the heirs of
the latter; xxx". The pension of the decedent being a sure income that was cut short by her
death for which the driver was responsible, the surviving heir is entitled to the award of
P10,000 which is just equivalent to the pension the decedent would have received for one
year if she did not dic.(De Caliston vs. CA, 122 SCRA 958)
(b) The liability of the bus owner is subsidiary m nature. The P5,000 paid to the
surviving heir by the insurer of the bus may be deemed to have come from the bus owner
who procured the insurance. Since the civil liability (ex delicto) of the bus owner for the
death caused by his driver is subsidiary and, at bottom, arises from the same culpa, the
insurance proceeds should be credited in favor of the errant driver. (supra)
38. Q: L, an inspector of the Bureau of Forestry, contracted malaria fever while
classifying the logs of V.L. asked V if he could take him in his pick-up truck as there
was no other means of transportation back to the city. V agreed and invited L to sit
with him on the front seat, but L declined. L accidentally fell-off the truck and
suffered serious injuries which caused his death.
Whether or not V should be made liable for the death of L.
A: V should not be made liable.
The deceased, as well as his companions who rode in the pick-up of defendant,
were merely accommodation passengers who paid nothing for the service and so they can
be considered as invited guests within the meaning of the law. As accommodation
passengers or invited guests, defendant as owner and driver of the pick-up owes to them
merely the duty to exercise reasonable cm-e so that they may be transported safely to their
destination. Thus, the rule is established by the weight of authority that the OW11er or
operator of an automobile owes the duty to an invited guest to exercise reasonable care in
its operation, and not unreasonably to expose him to danger and injury by increasing the
hazard of travel. The rule is that an owner of an automobile owes a guest the duty to
exercise ordinary or reasonable care to avoid injuring him. Since one riding in an automobile
is no less a guest because he asked for the privilege of doing so, the same obligation of
care is imposed upon the driver as in the case of one expressly invited to ride. Defendant,
therefore, is only required to observe ordinary care, and is not in duty bound to exercise
extraordinary diligence 80'3 required of a common carrier by our law (Articles 1755 and
1756 of the New Civil Code). (LARA vs. VALENCIA, 104 PHIL. 65)
39. Q: Mr. X shipped thirteen pieces of luggage through Lufthansa German Airlines.
Mr X did not declare an inventory of the contents or the value of the luggage. When
the luggage reached the place of destination, only twelve out of the thirteen pieces of
luggage were claimed by the consignee. A complaint for recovery of damages was

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filed against Lufthansa, which the latter claimed that its liability is only limited to $20
per kilo under the Warsaw Convention.
A: The Convention does not operate as an exclusive enumeration of the instances of an
airline's liability, or as an absolute limit of the extent of that liability .It should be deemed a
limit of liability only in those cases where the cause of the death or injury to person, or
destruction, loss or damage to property, or delay in its transport is not attributable to or
attended by any willful misconduct, bad faith, recklessness, or otherwise improper conduct
on the part of any official or employee for which the carrier is responsible, and there is
otherwise no special or extraordinary form of resulting injury. ( Lufthansa V IAC)
40. Q: Maria and her 5 year old son boarded a bus. The bus was running at an
inordinately fast speed despite the passenger's warnings. As such was the case, the
bus driver failed to notice a stalled truck and kerosene lamp the road, causing it to
collide with said truck.
Is the common carrier liable?
A: Yes. In a contract of carriage, it is presume that the common carrier was at faun or
negligent when a passenger dies or is injured. Unless the presumption is rebutted, the court
need not even make an express finding of faun or negligence on the part of the common
carrier. (Baliwag Transit v CA 256 SCRA 746
41. Q: X boarded a bus and seated himself at the left side of the vehicle. In the course
of the trip, he rested his left arm on the window. This was his position when the bus
he was riding collided with another vehicle. X's left arm was completely severed as a
result of the accident. May X file a suit against the common carrier for breach of
contract of carriage.
A: It is negligence per se for a passenger to voluntarily/inadvertently protrude his arm I
hand I elbow, or any part of his body through the window of a moving vehicle beyond the
outer edge of its window. Thus, no recovery can be had for an injury which but for such
negligence would not have been sustained.(Isaac v A.L. Ammen Transportation August 23,
1957)
42. Q: Mejia shipped thru PAL a microwave oven from San Francisco, USA, under
PAL airway bill 001, to Manila, Philippines. PAL's office at San Francisco inspected it
and found it in a good condition with its front glass intact. Mejia did not declare its
value upon advice of PAL's personnel there. Upon arrival, however, in Manila, Mejia
discovered that its front glass door was broken and the damage rendered it
unserviceable.
Discuss the statutory liability of PAL under the said airway bill.
A: There is no absolute obligation on the part of the carrier to accept a cargo. Hence, where
a common carrier accepts a cargo for shipment for valuable consideration, it takes the risk
of delivering it in good condition as when it was loaded. By Virtue of Article 1735 of the Civil
Code, PAL has to overcome the statutory presumption of negligence it was a laboring under
in case of loss, destruction, or deterioration of the goods, through proper showing of the
exercise of extraordinary diligence. It may also prove that the damage to the microwave was
because of any of the causes excepted under Article 1734 of the same code.
Inasmuch as the subject item was received in apparent good condition, no contrary notation
or exception having been made on the airway bill upon its acceptance for shipment, the fact
that its glass was broken upon delivery raises the presumption that PAL's personnel were
negligent in the carriage and handling of the cargo. (Philippine Airlines, Inc v CA 255 SCRA
48)
43.Q Passenger X boarded ABC Airlines at the airport of Laoag City for Manila. The
plane which would then take an hour from Laoag City to Manila did not reach its
destination. It was ascertained that the plane crashed at Benguet. All the
passengers, including X must have been lulled instantly.
In an action to recover damages, ABC Airlines disclaimed liability on the
ground that there was no express finding of its fault or negligence to hold it

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responsible. During the trial, it was established that the pilot of said plane did not
follow the designated route. Decide.
A.
Negligence of the common carrier need not be adequately or clearly proved to entitle
them to recover damages. In the absence on any satisfactory explanation, the presumption
is, the common carrier is at fault. In an action based on a contract of carriage, the court
need not make an express finding of fault or negligence in order to hold it responsible to pay
damages. The common carrier assumes the express obligation to transport the passengers
to their destination safely and to observe extraordinary diligence with due regard for all the
circumstances; and any injury that may be suffered by the passenger is right away
attributable to the fault or negligence of the common carrier. This is an exception to the
general rule that negligence must be proved. (Conrado Vda. De Abeto vs PAL 115 SCRA
489
July 30, 1982)
44.Q Vessel XXX received on its board goods for shipment which were insured with
Star Insurance against various risk. Vessel XXX in turn was insured by Diamond
Insurance. On its voyage, the vessel along with its cargo sank. Star Insurance paid
the insured in full settlement of the claim and the latter executed a subrogation
receipt.
Star Insurance filed a complaint against Vessel XXX and Diamond Insurance
alleging that the sinking of the vessel was due to the fault and negligence of vessel
XXX which disclaimed liability on the ground that it was a private carrier because it
was not issued a certificate of public convenience. Decide.
A. Vessel XXX is a common carrier. It is not necessary that the carrier be issued a
certificate of public convenience and this public character is not altered by the fact that
the carriege of the goods in question was periodic, occasional, episodic or unscheduled.
A Certificate of Public Convenience is not a requisite for incurring liability under the New
Civil Code provisions governing common carriers. That liability arises from the moment
a person or firm acts as a common carrier, without regard to whether or not such carrier
has also complied with the requirements of the applicable regulatory statutes and
implementing regulations. To exempt Vessel XXX from liabilities of a common carrier
because he has not secured the necessary certificate of public convenience would be
against sound public policy. (Loadstar Shipping Co., Inc.vs Court of Appeals GR No.
13162 September 28, 1999)
45. Q Mr.Z boarded Train ABC as a paying passenger from Manila. Mr. Z opted to sit
on the platform instead of the designated seats for passengers. Upon passing a
bridge which was under repair, Mr. Z fell off from the platform causing his death.
Despite the alarm raised by other passengers due to the accident, Train ABC did not
stop. Heirs of Mr. Z filed a case for breach of contract of carriage and seek for
damages. Decide whether train ABC could be held liable under the circumstances.
A: Train ABC is guilty of being negligent when it did not even slow down while approaching
the bridge which was under repair. Neither did it stop despite the alarm raised by the other
passengers that a person had fallen off the train. Train ABC is rendered liable but mitigated
by the presence of contributing negligence on the part of the victim since he opted to sit on
the platform. He should have exercised due diligence to avoid injury unto himself.
(Philippine National Railways vs. Court of Appeals 139 SCRA 87 October 4, 1985)
46. Q A cargo was consigned to Company A and insured with Diamond Insurance
Company were shipped on board Vessel XXX. Upon arrival, Company A was advised
of its arrival but did not immediately commence the unloading operations. Upon
examination of the cargo after unloading, it was determined that the cargo
deteriorated. Company A rejected entire cargo and demanded payment for damages
from Vessel XXX. The demands were unheeded and Diamond Insurance Company
was per forced obliged to pay. As subrogee, Diamond Insurance Company filed an
action against Vessel XXX which disclaimed liability on the ground that the contract
entered was a charter party agreement and as such, only ordinary diligence in the
care of the cargo was required. Decide.

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A. A charter party is defined as a contract by which an entire ship, or some principal part
thereof, is let by the owner to another person for a specified time or use; a contract of
affreightment by which the owner of a ship or other vessel lets the whole or part of her to a
merchant or other person for the conveyance of goods, on a particular voyage, in
consideration of the payment of freight. Contract of affreightment may either be time
charter, wherein ship is leased to the charterer for a fixed period of time, or a voyage
charter, wherein ship is leased for a single voyage. In both cases, the charter-party provides
for the hire of the vessel only, the shipowner to supply the ships store, pay for the wages,
and defray expenses for the maintenance of the ship. The charter party agreement between
Vessel XXX and Company A did not in any way convert the common carrier into a private
carrier. (TABACALERA Insurance Co. vs. North Front Shipping 272 SCRA 52 May 16, 1997)
47. Q Mr. A bought from Mr. B a jeepney of which a down payment with a promise
that the balance would be paid within one year. In default thereof, Mr. B filed an
action for damages. A chattel mortgage was constituted as a security for the
payment of the balance. Trial Court records show that the jeepney sold to Mr. A was
first mortgaged to ABC Marketing by Ms. X though the two are one and the same to
make it appear that way only as Mr. A had no franchise of his own. The agreement
was from Mr. B to undertake the yearly registration of the jeepney which he failed due
to failure to comply with some requirements by Mr. A. As a result, Mr. A suffered
damages when he failed to claim any insurance indemnity when the jeepney figured
in an accident.
ABD Marketing and/or Ms. X filed an action for sum of money with damages.
Trial Court rendered a judgment in favor of ABC Marketing. Was the Trial Court
correct with its judgment?
A: Party having entered into an illegal contract, neither of the parties can seek relief from
the courts and each must bear the consequences of his acts. The Kabit System had been
identified as one of the root causes of graft and corruption, and although not outrightly
penalized as criminal offense is contrary to public policy is void and inexistent under Article
1409 of the New Civil Code. It is a fundamental principle that the court will not aid either
party to enforce an illegal contract but will leave both where it finds them. The court has
erred in applying the doctrine of pan delicto.(Teja Marketing vs. Intermediate Appellate
Court 148 SCRA 347 March 9, 1987)
48. Q Mr. X purchased from ABC Airlines a roundtrip ticket in San Diego, USA for his
flight from San Diego, USA to Manila via Hong Kong. Despite a previous confirmation
for his scheduled flight, he was later informed that he had no reservation for his flight
from Hong Kong to Manila and was to be waitlisted. Mr. X sued said airlines for
damages in the RTC of Manila. ABC moved to dismiss the complaint on the ground
of lack of jurisdiction citing Article 28 (1) of the Warsaw Convention which provides
that action be instituted only in the territory of one of the contracting parties. Before:
1) the court of the domicile of the carrier; 2) principal place of business; 3) where it
has a place of business through which the contract had been made, and 4) the court
of the place of destination. Decide.
A. The Warsaw Convention provision on the matter of where the action for damage should
be filed is one of jurisdiction which is not subject to waiver by the parties. A number of
reasons tend to support the characterization of Article 28 (1) as a jurisdiction and not a
venue provision. First, the wording of Article 32 which indicates the place where the action
for damages must be brought, underscores the mandatory nature of Article 28 (1).
Second, its characterization is consistent with one of the objectives of the convention. Third,
convention does not contain any provision prescribing rules of jurisdiction other than Article
28 (1). In fact, the last sentence of Article 32 specifically deals with the exclusive
enumeration in Article 28 (1) as jurisdiction, which cannot be left to the will of the parties
regardless of time when the damage occurred.
(Augusto Benedicto Santos III vs Northwest Orient Airlines 210 SCRA 256June 23, 1992
49. Q Diamond Bus Lines collided with a delivery truck of ABC Marketing resulting in
the death and serious physical injuries of the passengers of the bus. An action for
damages was filed and trial court awarded, among others, P3,000.00 to the heirs of
the deceased. A motion for reconsideration was filed on the decision seeking an

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award of legal interest on the amount adjudged but the same was not acted by the
court a quo. No appeal was made by the heirs of the deceased but Diamond Bus
Lines filed an appeal for the granting of legal interest and for the increase of the
P3,000.00 award for the death of the passenger to P12,000.00. Can the court award
damages not specifically prayed for when the claimant did not appeal the questioned
decision? Decide.
A: YES. As long as the damages which can be awarded is deemed by the court as just and
equitable. Civil indemnity for the death of a passenger was properly awarded by vitue of
Article 1764 in relation to Article 2206 of the New Civil Code which allows a minimal
indemnity of P3,000.00 for the death of a passenger caused by the breach of contract of
carriage by the common carrier. In accordance with prevailing jurisprudence, the indemnity
of P3,000.00 should be increased to P50,000.00 and not P12,000.00 as prayed for in the
case. (Eladia de Lima vs Laguna Tayabas Co. 160 SCRA 70 April 15, 1988)

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