August 2010 Philippine Supreme Court Decisions on Commercial Law

September 1, 2010Hector M. de Leon JrLeave a commentGo to comments

Here are selected August 2010 rulings of the Supreme Court of the Philippines on commercial law:
Corporation; liability of directors and officers. Elementary is the rule that a corporation is invested
by law with a personality separate and distinct from those of the persons composing it and from
that of any other legal entity to which it may be related. Mere ownership by a single stockholder
or by another corporation of all or nearly all of the capital stock of a corporation is not of itself
sufficient ground for disregarding the separate corporate personality.
In labor cases, corporate directors and officers may be held solidarily liable with the corporation for
the termination of employment only if done with malice or in bad faith. Bad faith does not connote
bad judgment or negligence; it imports a dishonest purpose or some moral obliquity and conscious
doing of wrong; it means breach of a known duty through some motive or interest or ill will; it
partakes of the nature of fraud. Wensha Spa Center, inc. and/or Xu Zhi Jie vs. Loreta T.
Yung, G.R. No. 185122, August 16, 2010.
Crossed check; effect. A check is a bill of exchange drawn on a bank payable on demand. There
are different kinds of checks. In this case, crossed checks are the subject of the controversy. A
crossed check is one where two parallel lines are drawn across its face or across the corner
thereof. It may be crossed generally or specially.
A check is crossed specially when the name of a particular banker or a company is written between
the parallel lines drawn. It is crossed generally when only the words and company are written or
nothing is written at all between the parallel lines, as in this case. It may be issued so that
presentment can be made only by a bank.
In order to preserve the credit worthiness of checks, jurisprudence has pronounced that crossing
of a check has the following effects: (a) the check may not be encashed but only deposited in
the bank; (b) the check may be negotiated only once to one who has an account with a bank;
and (c) the act of crossing the check serves as warning to the holder that the check has been
issued for a definite purpose so that he must inquire if he has received the check pursuant to that
purpose, otherwise, he is not a holder in due course.
The Court has taken judicial cognizance of the practice that a check with two parallel lines in the
upper left hand corner means that it could only be deposited and not converted into cash. The
effect of crossing a check, thus, relates to the mode of payment, meaning that the drawer had
intended the check for deposit only by the rightful person, i.e., the payee named therein. The
crossing of a check is a warning that the check should be deposited only in the account of the
payee. Thus, it is the duty of the collecting bank to ascertain that the check be deposited to the
payees account only. Vicente Go vs. Metropolitan Bank and Trust Co., G.R. No. 168842, August
11, 2010.
Crossed check; liability of bank for lack of indorsement. Respondent bank was negligent in
permitting the deposit and encashment of the crossed checks without the proper indorsement. An
indorsement is necessary for the proper negotiation of checks specially if the payee named therein
or holder thereof is not the one depositing or encashing it. Knowing fully well that the subject
checks were crossed, that the payee was not the holder and that the checks contained no
indorsement, respondent bank should have taken reasonable steps in order to determine the
validity of the representations made by Chua. Respondent bank was amiss in its duty as an agent
of the payee. Prudence dictates that respondent bank should not have merely relied on the
assurances given by Chua.
Negligence was committed by respondent bank in accepting for deposit the crossed checks without
indorsement and in not verifying the authenticity of the negotiation of the checks. The law imposes
a duty of extraordinary diligence on the collecting bank to scrutinize checks deposited with it, for
the purpose of determining their genuineness and regularity. As a business affected with public
interest and because of the nature of its functions, the banks are under obligation to treat the
accounts of its depositors with meticulous care, always having in mind the fiduciary nature of the

relationship. The fact that this arrangement had been practiced for three years without Mr.
Go/Hope Pharmacy raising any objection does not detract from the duty of the bank to exercise
extraordinary diligence. Thus, the Decision of the RTC, as affirmed by the CA, holding respondent
bank liable for moral damages is sufficient to remind it of its responsibility to exercise
extraordinary diligence in the course of its business which is imbued with public interest. Vicente
Go vs. Metropolitan Bank and Trust Co., G.R. No. 168842, August 11, 2010.
Directors; per diem. Under section 30 of the Corporation Code, the directors of a corporation
shall not receive any compensation for being members of the board of directors, except for
reasonable per diems. The two instances where the directors are to be entitled to compensation
shall be when it is fixed by the corporations by-laws or when the stockholders, representing at
least a majority of the outstanding capital stock, vote to grant the same at a regular or special
stockholders meeting, subject to the qualification that, in any of the two situations, the total
yearly compensation of directors, as such directors, shall in no case exceed ten (10%) percent of
the net income before income tax of the corporation during the preceding year. Gabriel C.
Singson, et al. vs. Commission on Audit, G.R. No. 159355, August 9, 2010.
Financial institutions; negligence. The petitioner, being a banking institution, had the direct
obligation to supervise very closely the employees handling its depositors accounts, and should
always be mindful of the fiduciary nature of its relationship with the depositors. Such relationship
required it and its employees to record accurately everysingle transaction, and as promptly as
possible, considering that the depositors accounts should always reflect the amounts of money the
depositors could dispose of as they saw fit, confident that, as a bank, it would deliver the amounts
to whomever they directed. If it fell short of that obligation, it should bear the responsibility for the
consequences to the depositors, who, like the respondent, suffered particular embarrassment and
disturbed peace of mind from the negligence in the handling of the accounts. Citytrust Banking
Corporation vs. Carlos Romulo N. Cruz, G.R. No. 157049, August 11, 2010.
Merger; effect on employment and seniority rights. Although not binding on this Court, American
jurisprudence on the consequences of voluntary mergers on the right to employment and seniority
rights is persuasive and illuminating. We quote the following pertinent discussion from the
American Law Reports:
Several cases have involved the situation where as a result of mergers, consolidations, or
shutdowns, one group of employees, who had accumulated seniority at one plant or for one
employer, finds that their jobs have been discontinued except to the extent that they are offered
employment at the place or by the employer where the work is to be carried on in the future. Such
cases have involved the question whether such transferring employees should be entitled to carry
with them their accumulated seniority or whether they are to be compelled to start over at the
bottom of the seniority list in the new job. It has been recognized in some cases that the
accumulated seniority does not survive and cannot be transferred to the new job.
In Carver v Brien (1942) 315 Ill App 643, 43 NE2d 597, the shop work of three formerly separate
railroad corporations, which had previously operated separate facilities, was consolidated in the
shops of one of the roads. Displaced employees of the other two roads were given preference for
the new jobs created in the shops of the railroad which took over the work. A controversy arose
between the employees as to whether the displaced employees were entitled to carry with them to
the new jobs the seniority rights they had accumulated with their prior employers, that is, whether
the rosters of the three corporations, for seniority purposes, should be dovetailed or whether the
transferring employees should go to the bottom of the roster of their new employer. Labor
representatives of the various systems involved attempted to work out an agreement which, in
effect, preserved the seniority status obtained in the prior employment on other roads, and the
action was for specific performance of this agreement against a demurring group of the original
employees of the railroad which was operating the consolidated shops. The relief sought was
denied, the court saying that, absent some specific contract provision otherwise, seniority rights
were ordinarily limited to the employment in which they were earned, and concluding that the
contract for which specific performance was sought was not such a completed and binding
agreement as would support such equitable relief, since the railroad, whose concurrence in the
arrangements made was essential to their effectuation, was not a party to the agreement.

Where the provisions of a labor contract provided that in the event that a trucker absorbed the
business of another private contractor or common carrier, or was a party to a mergerof lines, the
seniority of the employees absorbed or affected thereby should be determined by mutual
agreement between the trucker and the unions involved, it was held in Moore v International
Brotherhood of Teamsters, etc. (1962, Ky) 356 SW2d 241, that the trucker was not required to
absorb the affected employees as well as the business, the court saying that they could find no
such meaning in the above clause, stating that it dealt only with seniority, and not with initial
employment. Unless and until the absorbing company agreed to take the employees of the
company whose business was being absorbed, no seniority problem was created, said the court,
hence the provision of the contract could have no application. Furthermore, said the court, it did
not require that the absorbing company take these employees, but only that if it did take them the
question of seniority between the old and new employees would be worked out by agreement or
else be submitted to the grievance procedure. (Emphasis ours.)
Indeed, from the tenor of local and foreign authorities, in voluntary mergers, absorption of the
dissolved corporations employees or the recognition of the absorbed employees service with their
previous employer may be demanded from the surviving corporation if required by provision of law
or contract. The dissent of Justice Arturo D. Brion tries to make a distinction as to the terms and
conditions of employment of the absorbed employees in the case of a corporate merger or
consolidation which will, in effect, take away from corporate management the prerogative to make
purely business decisions on the hiring of employees or will give it an excuse not to apply the CBA
in force to the prejudice of its own employees and their recognized collective bargaining agent. In
this regard, we disagree with Justice Brion.
Justice Brion takes the position that because the surviving corporation continues the personality of
the dissolved corporation and acquires all the latters rights and obligations, it is duty-bound to
absorb the dissolved corporations employees, even in the absence of a stipulation in the plan of
merger. He proposes that this interpretation would provide the necessary protection to labor as it
spares workers from being left in legal limbo.
However, there are instances where an employer can validly discontinue or terminate the
employment of an employee without violating his right to security of tenure. Among others, in
case of redundancy, for example, superfluous employees may be terminated and such termination
would be authorized under Article 283 of the Labor Code.
Moreover, assuming for the sake of argument that there is an obligation to hire or absorb all
employees of the non-surviving corporation, there is still no basis to conclude that the terms and
conditions of employment under a valid collective bargaining agreement in force in the surviving
corporation should not be made to apply to the absorbed employees. Bank of the Philippine
Islands vs. BPI Employees Union-Davao Chapter-Federation of Unions in BPI Unibank,G.R. No.
164301, August 18, 2010.
Merger; mandatory absorption of employees of corporation. The lack of a provision in the plan of
merger regarding the transfer of employment contracts to the surviving corporation could have
very well been deliberate on the part of the parties to the merger, in order to grant the surviving
corporation the freedom to choose who among the dissolved corporations employees to retain, in
accordance with the surviving corporations business needs. If terminations, for instance due to
redundancy or labor-saving devices or to prevent losses, are done in good faith, they would be
valid. The surviving corporation too is duty-bound to protect the rights of its own employees who
may be affected by the merger in terms of seniority and other conditions of their employment due
to the merger. Thus, we are not convinced that in the absence of a stipulation in the merger plan
the surviving corporation was compelled, or may be judicially compelled, to absorb all employees
under the same terms and conditions obtaining in the dissolved corporation as the surviving
corporation should also take into consideration the state of its business and its obligations to its
own employees, and to their certified collective bargaining agent or labor union.
Even assuming we accept Justice Brions theory that in a merger situation the surviving
corporation should be compelled to absorb the dissolved corporations employees as a legal

consequence of the merger and as a social justice consideration, it bears to emphasize his dissent
also recognizes that the employee may choose to end his employment at any time by voluntarily
resigning. For the employee to be absorbed by BPI, it requires the employees implied or
express consent. It is because of this human element in employment contracts and the personal,
consensual nature thereof that we cannot agree that, in a merger situation, employment contracts
are automatically transferable from one entity to another in the same manner that a contract
pertaining to purely proprietary rights such as a promissory note or a deed of sale of property
is perfectly and automatically transferable to the surviving corporation. Bank of the Philippine
Islands vs. BPI Employees Union-Davao Chapter-Federation of Unions in BPI Unibank, G.R. No.
164301, August 18, 2010.
Trademark; rights. A trademark is any distinctive word, name, symbol, emblem, sign, or device,
or any combination thereof, adopted and used by a manufacturer or merchant on his goods to
identify and distinguish them from those manufactured, sold, or dealt by others. Inarguably, it is
an intellectual property deserving protection by law. In trademark controversies, each case must
be scrutinized according to its peculiar circumstances, such that jurisprudential precedents should
only be made to apply if they are specifically in point.
As Myra correctly posits, as a registered trademark owner, it has the right under Section 147 of
R.A. No. 8293 to prevent third parties from using a trademark, or similar signs or containers for
goods or services, without its consent, identical or similar to its registered trademark, where such
use would result in a likelihood of confusion. Dermaline, Inc. vs. Myra Phamaceuticals, Inc., G.R.
No. 190065, August 16, 2010.
Trademark; infringement. Among the elements of trademark infringement, the element of
likelihood of confusion is the gravamen of trademark infringement. There are two types of
confusion in trademark infringement: confusion of goods and confusion of business. In Sterling
Products International, Inc. v. Farbenfabriken Bayer Aktiengesellschaft, the Court distinguished the
two types of confusion:
Callman notes two types of confusion. The first is the confusion of goods in which event the
ordinarily prudent purchaser would be induced to purchase one product in the belief that he was
purchasing the other. In which case, defendants goods are then bought as the plaintiffs, and
the poorer quality of the former reflects adversely on the plaintiffs reputation. The other is
theconfusion of business: Here though the goods of the parties are different, the defendants
product is such as might reasonably be assumed to originate with the plaintiff, and the public
would then be deceived either into that belief or into the belief that there is some connection
between the plaintiff and defendant which, in fact, does not exist.
There are two tests to determine likelihood of confusion: the dominancy test and holistic test. The
dominancy test focuses on the similarity of the main, prevalent or essential features of the
competing trademarks that might cause confusion. Infringement takes place when the competing
trademark contains the essential features of another. Imitation or an effort to imitate is
unnecessary. The question is whether the use of the marks is likely to cause confusion or deceive
purchasers.
The holistic test considers the entirety of the marks, including labels and packaging, in determining
confusing similarity. The focus is not only on the predominant words but also on the other
features appearing on the labels.
In cases involving trademark infringement, no set of rules can be deduced. Each case must be
decided on its own merits. Jurisprudential precedents must be studied in the light of the facts of
each particular case.
In the light of the facts of the present case, the Court holds that the dominancy test is applicable.
Soceite Des Produits Nestle, S.A. vs. Martin T. Dy, Jr., G.R. No. 172276, August 8, 2010.
Trademark; infringement. In determining likelihood of confusion, case law has developed two (2)
tests, the Dominancy Test and the Holistic or Totality Test.
The Dominancy Test focuses on the similarity of the prevalent features of the competing
trademarks that might cause confusion or deception. It is applied when the trademark sought to

be registered contains the main, essential and dominant features of the earlier registered
trademark, and confusion or deception is likely to result. Duplication or imitation is not even
required; neither is it necessary that the label of the applied mark for registration should suggest
an effort to imitate. The important issue is whether the use of the marks involved would likely
cause confusion or mistake in the mind of or deceive the ordinary purchaser, or one who is
accustomed to buy, and therefore to some extent familiar with, the goods in question. Given
greater consideration are the aural and visual impressions created by the marks in the public
mind, giving little weight to factors like prices, quality, sales outlets, and market segments. The
test of dominancy is now explicitly incorporated into law in Section 155.1 of R.A. No. 8293.
On the other hand, the Holistic Test entails a consideration of the entirety of the marks as applied
to the products, including labels and packaging, in determining confusing similarity. The
scrutinizing eye of the observer must focus not only on the predominant words but also on the
other features appearing in both labels so that a conclusion may be drawn as to whether one is
confusingly similar to the other.
Relative to the question on confusion of marks and trade names, jurisprudence has noted two (2)
types of confusion, viz: (1) confusion of goods (product confusion), where the ordinarily prudent
purchaser would be induced to purchase one product in the belief that he was purchasing the
other; and (2) confusion of business (source or origin confusion), where, although the goods of the
parties are different, the product, the mark of which registration is applied for by one party, is such
as might reasonably be assumed to originate with the registrant of an earlier product, and the
public would then be deceived either into that belief or into the belief that there is some
connection between the two parties, though inexistent.Dermaline, Inc. vs. Myra Phamaceuticals,
Inc., G.R. No. 190065, August 16, 2010.
(Note: As of the date of this post, not all August 2010 cases have been published. This post will
be updated after the remaining August 2010 cases are published.)