Mercantile Law – Mid Terms Suggested Answers

1.

Q: PJ Corporation (PJ) obtained a loan from ABC Bank (ABC) in the amount of P10 million
for the purchase of 100 pieces of ecodoors. Thereafter, a Letter of Credit was obtained by PJ
against such loan. The beneficiary of the Letter of Credit is Scrap Metal Corp. (Scrap Metal)
in Beijing, China. Upon arrival of 100 pieces of ecodoors, PJ executed a Trust Receipt in
favor of ABC to cover for the value of the ecodoors for its release to PJ. The terms of the
Trust Receipt is that any proceeds from the sale of the ecodoors will be delivered to ABC as
payment. After the ecodoors were sold, PJ, instead of paying ABC, used the proceeds of the
sale to order from Scrap Metal another 100 pieces of ecodoors but using another bank to
issue a new Letter of Credit fully covered by such proceeds.

PJ refused to pay the proceeds of the sale of the first set of ecodoors to ABC, claiming that
the ecodoors that were delivered were defective. It then instructed ABC not to negotiate
the Letter of Credit that was issued in favor of Scrap Metal.
As counsel of ABC, you are asked for advice on whether or not to grant the instruction of PJ.
What will be your advice? (2016 Bar)

A: I will not grant the instruction of PJ. Under the independence principle, the obligation of
the bank to pay the Scrap Metal Corporation is not dependent upon the fulfillment or non-
fulfillment of the main contract underlying the letter of credit but conditioned only on its
submission of the stipulated documents to ABC Bank.

2.

Q: CCC Car, Inc. obtained a loan from BBB Bank, which fund was used to import ten (10)
units of Mercedes Benz S class vehicles. Upon arrival of the vehicles and before release of
said vehicles to CCC Car, Inc. X and Y, the President and Treasurer, respectively, of CCC Car,
Inc. signed the Trust Receipt to cover tha value of the ten
(10) units of Mercedes Benx S class vehicles after which, the vehicles were all delivered to
the Car display room of CCC Car, Inc. Sale of the vehicles were slow, and it took a month to
dispose of the ten (10) units. CCC Car, Inc. wanted to be in business and to save on various
documentations required by the bank, decided that instead of turning over the proceeds of
the sales, CCC Car Inc. used the proceeds to buy another ten (10) units of BMW 3 series.

a. Is the action of CCC Car, Inc. legally justified? Explain your answer.
b. Will the corporate officers of CCC Car, Inc. be held liable under the circumstances?

Explain your answer. (2012 Bar)

A:

a. NO. It is the obligation of the entrustee, CCC Car, Inc. to receive the proceeds of the sale of
the goods covered by the trust receipts in trust for the entruster and to turn over the same
to him the extent of the obligation (Sec. 4, P.D. 115).

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B. YES. Failure of the entrustee to turn over the proceeds of the sale of the goods shall
constitute the crime of estafa. If the violation is committed by a juridical entity, the penalty
shall be imposed upon the directors, officers, employees or other officials or persons
therein responsible for the offense, without prejudice to the civil liabilities arising from the
criminal offense. Hence, the corporate officers are criminally liable for the violation of the
law being he human agent responsible for the same (Sec. 13, P.D. 115).

3.

Q: While driving his car along EDSA, Cesar sideswiped Roberto, causing injuries to the
latter, Roberto sued Cesar and the third-party liability insurer for damages and/or
insurance proceeds. The insurance company moved to dismiss the complaint, contending
that the liability of Cesar has not yet been determined with finality. Is the contention of the
insurer correct? (1996 Bar)

A: NO, the contention of the insurer is not correct. There is no need to wait for the decision
of the court determining Cesar’s liability with finality before the third-party liability insurer
could be sued. The occurrence of the injury to Roberto immediately gave rise to the liability
of the insurer under its policy. Where an insurance policy insures directly against liability,
the insurer’s liability accrues immediately upon the occurrence of the injury or event upon
which the liability depends (Shafer vs. RTC Judge, supra).

4.

Q: On February 21, 2013, Barrack entered into a contract of insurance with Matino
Insurance Company (Matino) involving a motor vehicle. The policy obligates Matino to pay
Barrack the amount of P600,000 in case of loss or damage to said vehicle during the period
covered, which is from February 26,2013 to February 26,2014.
On April 16,2013, at about 9:00 am, Barrack instructed his driver, JJ, to bring the motor
vehicle to a nearby auto shop for tune-up. However, JJ no longer despite and diligent efforts
to locate the said vehicle, the efforts proved futile. Resultantly, Barrack promptly notified
Matino of the said loss and demanded payment of the insurance proceeds of P600,000. In a
letter dated July 5,2013, Matino denied the claim, reasoning as stated in the contract that
“the company shall not be liable for any malicious damage caused by the insured, any
member of his family or by a person in the insured’s service. Is Matino correct in denying
the claim? (2014 Bar)

A: Matino Insurance is not correct in denying the claim. The loss of the motor vehicle is not
excluded under the insurance policy as the loss was due to theft, not malicious damage. The
“malicious damage” clause under the policy is not applicable but rather the “theft” clause.
Thus, the provision under the policy that "the company shall not be liable for any malicious
damage caused by the insured, any member of his family or by a person in the insured’s
service” is not applicable (Alpha Insurance and Surety Co. v. Castor, G.R. No. 198174,
September 2,2003).

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 5.

Q: To secure a loan of P10 million, Mario mortgaged his building to Armando. In accordance
with the loan arrangements, Mario had the building insured with First Insurance Com for
P10 million, designating Armando as the beneficiary. Armando also took an insurance on
the building upon his own interest with Second Insurance Company for P5 million. The
building was totally destroyed by fire, a peril insured against under both insurance policies.
It was subsequently determined that the fire had been intentionally started by Mario and
that in violation of the loan agreement, he had been storing inflammable materials in the
building.

a. How much, if any, can Armando recover from either or both insurance companies?
b. What happens to the P10 million debt of Mario to Armando? Explain. (2010 Bar)

A:
a. Armando can receive P5 million from Second Insurance Company. As mortgagee, he had
an insurable interest in the building. Armando cannot collect anything from First Insurance
Co., since the latter is not liable for the loss of the building. First, it was due to a willful act
of Mario, who committed arson. Second, fire insurance policies contain a warranty that the
insured will not store hazardous materials within the insured premises. Mario breached
this warranty when he stored inflammable materials in the building. These two factors
exonerate First Insurance Co. from liability to Armando as mortgagee even though it was
Mario who committed them (IC, Sec. 8; Sec. 87).

b. Since Armando would have collected P5 million from Second Insurance Company, this
amount should be considered as partial payment of the loan. Armando can only collect the
balance of P5 million. Second Insurance Co. can recover from Mario the amount of P5
million it paid, because it became subrogated to the rights of Armando.

6.

Q: Jason is the proud owner of a newly-built house worth PS million. As a protection against
any possible loss or damage to his house, Jason applied for a fire insurance policy thereon
with Shure Insurance Corporation (Shure) on October 11, 2016 and paid the premium in
cash. It took the company a week to approve Jason's application. On October 18, 2016,
Shure mailed the approved policy to Jason which the latter received five (5) days later.
However, Jason's house had been razed by fire which transpired a day before his receipt of
the approved policy. Jason filed a written claim with Shure under the insurance policy.
Shure prays for the denial of the claim on the ground that the theory of cognition applies to
contracts of insurance. Decide Jason's claim with reasons. (2016 Bar)

A: Jason’s claim should be denied. What governs insurance contract is the cognition theory
whereby the insurance contract is perfected only from the time the applicant came to know
of the acceptance of the offer by the insurer. In this case, the loss occurred a day prior to
Jason’s knowledge of the acceptance by Shure of Janson’s application. There being no
perfected insurance contact, Jason is not entitled to recover from Shure.

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 7.

Q: Benny applied for life insurance for Php 1.5 Million. The insurance company approved
his application and issued an insurance policy effective Nov. 6, 2008. Benny named his
children as his beneficiaries. On April 6, 2010, Benny died of hepatoma, a liver ailment.
The insurance company denied the children's claim for the proceeds of the insurance policy
on the ground that Benny failed to disclose in his application two previous consultations
with his doctors for diabetes and hypertension, and that he had been diagnosed to be
suffering from hepatoma. The insurance company also rescinded the policy and refunded
the premiums paid.

Was the insurance company correct? (2013 Bar)

A: YES. The insurance company correctly rescinded the policy because of concealment.
Benny did not disclose that he was suffering from diabetes, hypertension, and hepatoma.
The concealment is material, because these are serious ailments. Also, Benny died less than
two years from the date of the issuance of the policy, hence rescission is still possible (IC,
Sec. 26; Sec. 48).

8.

Q: On July 3, 1993, Delia Sotero (Sotero) took out a life insurance policy from Ilocos
Bankers Life Insurance Corporation (Ilocos Life) designating Creencia Aban (Aban) her
niece, as her beneficiary. Ilocos Life issued Policy No. 747, with a face value of P100, 000, in
Sotero’s favor on August 30, 1993, after the requisite medical examination and payment of
the premium.

On April 10, 1996, Sotero died. Aban filed a claim for the insurance proceeds on July 9,
1996, Ilocos Life conducted an investigation into the claim and came out with the following
findings:

1. Sotero did not personally apply for insurance coverage, as she was illiterate.
2. Sotero was sickly since 1990.
3. Sotero did not have the financial capability to pay the premium on the policy.
4. Sotero did not sign the application for insurance
5. Alban was the one who filed the insurance application and designated herself as the
beneficiary.

For the above reasons and claiming fraud, Ilocos Life denied Aban’s claim on April 16, 1997
but refunded the premium paid on the policy. May the incontestability period set in even in
cases of fraud as alleged in this case? (2014, Bar)

A: YES. The incontestability period applies even in cases of fraud. Section 48 regulates both
the actions of the insurers and prospective takers of the life insurance. It gives insurers
enough time to inquire whether the policy was obtained by fraud, concealment, or
misrepresentation; on the other hand, it forewarns scheming individuals that their
attempts at insurance fraud would be timely uncovered. Legitimate policy holders are
absolutely protected from unwarranted denial of their claims or delay in the collection of

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insurance proceeds occasioned by allegations of fraud, concealment, or misrepresentation
by insurers, claims which may no longer be set up after the two-year period expires.
Section 48 prevents a situation where the insurer knowingly continues to accept annual
premium payments, only to later on deny a claim on the policy on specious claims of
fraudulent concealment or misrepresentation (Manila Bankers Life Insurance Corp. v. Aban,
G.R. No. 175666, July 29, 2013).

9.

Q: Are common carriers liable for injuries to passengers even if they have observed
ordinary diligence and care? Explain. (2015 Bar)

A: YES, common carriers are liable to injuries to passengers even if the carriers observed
ordinary diligence and care because the obligation imposed upon them by law is to exercise
extraordinary diligence. Common carriers are bound to carry the passengers safely as far
as human care and foresight can provide, using the utmost diligence of very cautious
persons with a due regard for all the circumstances.

10.

Q: Fil-Asia Air Flight 9I6 was on a scheduled passenger flight from Manila when it crashed
as it landed at the Cagayan de Oro airport. The pilot miscalculated the plane's approach and
undershot the runway. Ten passengers died at the crash scene.
One of them managed to leave the plane but was run over by an ambulance coming to the
rescue. Another was an airline employee who hitched a free ride to Cagayan de Oro and
who was not in the passenger manifest.

The Civil Aeronautics Authority investigation showed that the co-pilot who had control of
the plane's landing had less than the required flying and landing time experience, and
should not have been in control of the plane at the time. He was allowed to fly as a co-pilot
because of the scarcity of pilots - Philippine pilots have been recruited by foreign airlines
under vastly improved flying terms and wages so that newer and less trained pilots are
being locally deployed. The main pilot, on the other hand, had a very high level of blood
alcohol at the time of the crash.

You are part of the team that the victims hired to handle the case for them as a group.
Explain the causes of action legally possible under the given facts against the airline and the
pilots; whom will you specifically implead in these causes of action?

A:

A complaint for breach of contract of carriage can be filed against Fil-Asia Air for failure to
exercise extraordinary diligence in transporting the passengers safely from their point of
embarkation to their destination (Art. 1755, NCC).

A complaint based on a quasi-delict can be filed against the pilots because of their fault and
negligence (Art. 2176, NCC). Fil-Asia Air can be included for negligence in the selection and
supervision of the pilots (Art. 2180, NCC).

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A third cause of action may be a criminal prosecution for the reckless imprudence resulting
in homicide against two pilots. The airline will be subsidiary liable for the civil

11.

Q: In a court case involving claims for damages arising from death and injury of bus
passengers, counsel for the bus operator filed a demurrer to evidence arguing that the
complaint should be dismissed because the plaintiffs did not submit any evidence that the
operator or its employees were negligent. If you were the judge, would you dismiss the
complaint? (1997 Bar)

A: NO. In the carriage of passengers, the failure of the common carrier to bring the
passengers safely to their destination immediately raises the presumption that such failure
is attributable to the carrier‘s fault or negligence, the plaintiff need not adduce proof of
specific acts of negligence committed by the carrier. It is for the carrier to rebut such
presumption.

12.

Q: What is a “Jason clause” in a charter party? (2015 Bar)

A: The Jason clause derives its name from The Jason 225 US 32 (1912) decided by the US
Supreme Court under the Harter Act. By the Jason clause, a shipowner (provided he had
exercised due diligence to make the ship seaworthy and properly manned, equipped and
supplied) could claim a general average contribution from cargo, even where the damage
was caused by faulty navigation of the vessel, provided that the bill of lading excluded
liability for such faults.

13.

Q: The Law in Secrecy of Bank Deposits provides that all deposits of whatever nature with
banks or banking institutions are absolutely confidential in nature and may not be
examined, inquired or looked into by any person, government official, bureau or office.
However, the law provides exceptions in certain instances. Which of the following may not
be among the exceptions:

1. In cases of impeachment
2. In cases involving bribery
3. In cases involving BIR inquiry
4. In cases of anti-graft and corrupt practices
5. In cases where the money involved is the subject of litigation.

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Explain your answer or choice briefly (2004 Bar)

A: Under Section 6 (F) of the NIRC, the CIR can inquire into the deposits of a decedent for
the purpose of determining the gross estate of such decedent. Apart from this case, a BIR
inquiry into bank deposits cannot be made. Thus, exception 3 may not be always
applicable. Turning to exception 4, an inquiry into bank deposits is possible only in
prosecutions for unexplained wealth under the Anti-Graft and Corrupt Practices Act,
according to the Supreme Court in the cases of Philippine National Bank v. Gancayco, G.R.
No. L-18343, September 30, 1965 and Banco Filipino Savings and Mortgage Bank v. Purisima,
G.R. No. L-56429, May 28, 1988. However, all other cases of anti-graft and corrupt practices
will not warrant an inquiry into bank deposits. Thus, exception 4 may not always be
applicable. Like any other exception, it must be interpreted strictly. Exceptions 1, 2 and 5,
on the other hand, are provided expressly in the Law on Secrecy of Bank Depositors. They
are available to depositors at all times.

14.

Discuss the nature of banking business and responsibility of banks.

A. The banking system is an indispensable institution in the modern world and plays a
vital role in the economic life of every civilized nation. Whether as mere passive entities for
the safekeeping and saving of money or as active instruments of business and commerce,
banks have become an ubiquitous presence among the people, who have come to regard
them with respect and even gratitude and, most of all, confidence. Thus, even the humble
wage-earner has not hesitated to entrust his life’s savings to the bank of his choice,
knowing that they will be safe in its custody and will even earn some interest for him. The
ordinary person, with equal faith, usually maintains a modest checking account for security
and convenience in the settling of his monthly bills and the payment of ordinary expenses.
As for business entities, the bank is a trusted and active associate that can help in the
running of their affairs, not only in the form of loans when needed but more often in the
conduct of their day-to-day transactions like the issuance or encashment of checks.

In every case, the depositor expects the bank to treat his account with the utmost fidelity,
whether such account consists only of a few hundred pesos or of millions. The bank must
record every single transaction accurately, down to the last centavo and as promptly as
possible. This has to be done if the account is to reflect at any given time the amount of
money the depositor can dispose of as he sees fit, confident that the bank will deliver it as
and to whomever he directs.

The point is that as a business affected with public interest and because of the nature of its
functions, the bank is under obligations to treat the accounts of its depositors with
meticulous care, always having in mind the fiduciary nature of their relationship (Simex
International Inc. v. CA, G.R. No. 88013 March 19, 1990 as cited in the case of Land Bank of
the Philippines vs. Oñate, G.R. No. 192371, January 15, 2014).

15.

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Q: Prosperous Bank is a domestic bank with head office in Makati. It handles the banking
requirements of thousands of clients. The AMLC initiated a discreet investigation of the
financial transactions of Lorenzo, a suspected drug trafficker based in Naga City. The
intelligence group of the AMLC, in coordination with the counterpart group from the PDEA
and the NBI, gathered ample evidence establishing Lorenzo's unlawful drug activities. The
AMLC had probable cause that his deposits and investments in various banks, including
Prosperous Bank, were related to money laundering. Accordingly, the AMLC now transmits
to Prosperous Bank a formal demand to allow its agents to examine the banking
transactions of Lorenzo, but Prosperous Bank refuses the demand. Is Prosperous Bank's
refusal justified? Explain your answer. (2017 Bar)

A: NO. While, as a general rule, the AMLC may inquire into bank deposits only upon order of
any competent court, there is no need for such court order in cases of kidnapping,
hijacking, violation of the Dangerous Drugs Act, arson, and murder. Given that there is
probable cause that Lorenzo is engaged in unlawful activites as a drug trafficker, the AMLC
is authorized to inquire into his bank deposits with Prosperous Bank.

16.

What are sensitive personal information under the Data Privacy Act?
Sec. 3(i) of DPA provides:
“Sensitive personal information refers to personal information:
(1) About an individual’s race, ethnic origin, marital status, age, color, and religious,
philosophical or political affiliations;
(2) About an individual’s health, education, genetic or sexual life of a person, or to any
proceeding for any offense committed or alleged to have been committed by such person,
the disposal of such proceedings, or the sentence of any court in such proceedings;
(3) Issued by government agencies peculiar to an individual which includes, but not limited
to, social security numbers, previous or current health records, licenses or its denials,
suspension or revocation, and tax returns; and
(4) Specifically established by an executive order or an act of Congress to be kept
classified.”

17.

What are prohibited Per Se agreements under the Philippine Competition Law?
Sec. 14(a) of the PCA provides:
(a) The following agreements, between or among competitors, are per se prohibited:

(1) Restricting competition as to price, or components thereof, or other terms of trade;

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(2) Fixing price at an auction or in any form of bidding including cover bidding, bid
suppression, bid rotation and market allocation and other analogous practices of bid
manipulation;

These acts or agreements are illegal per se, which means that they are inherently illegal
and no further inquiry into their actual effect on the market or the intentions of the parties
who engaged in the illegal act or agreement is necessary.

18.

How can cram-down be practically applied?

The cram-down refers to the power of the rehabilitation court to approve and implement a
rehabilitation plan notwithstanding the objection of the majority of creditors. (Bank of the
Philippine Islands vs. Sarabia Manor Hotel Corporation, G.R. No. 175844, 29 July 2013)

A restructuring/workout agreement or Rehabilitation Plan that is approved pursuant to an

informal workout framework (out of court or informal restructuring agreements) shall
have the same legal effect as confirmation of a Plan under Section 69 of FRIA. The notice of
the Rehabilitation Plan or restructuring agreement or Plan shall be published once a week
for at least three (3) consecutive weeks in a newspaper of general circulation in the
Philippines. The Rehabilitation Plan or restructuring agreement shall take effect upon the
lapse of fifteen (15) days from the date of the last publication of the notice thereof (FRIA,
Sec. 86).