Mercial

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NEGOTIABLE INSTRUMENTS LAW
HOLDER IN DUE COURSE; PRESUMPTION OF ACQUISITION OF AN INSTRUMENT FOR A

CONSIDERATION; CROSSED CHECKS
CELY YANG vs. HON. COURT OF APPEALS ET AL.

[G.R. No. 138074. August 15, 2003]
QUISUMBING, J.:
FACTS: Conformably with her agreement with Prem Chandiramani, Cely Yang procured two
cashier’s checks in the amount of Php 2.087 Million each, payable to Fernando David. Yang also
secured from FEBTC a dollar draft, which Chandiramani would exchange for another dollar draft in
the same amount. She gave the checks to Danilo Ranigo to be delivered to Chandiramani.
Ranigo allegedly lost the checks and the draft. The loss was reported to the police.
However, the instruments were not actually “lost”. Chandiramani was able to get hold of them
without delivering the Php 4.2 million check as consideration. Subsequently, Chandiramani
delivered the checks to Fernando David and the latter gave USD 360,000 in return.
Yang lodged a Complaint for injunction and damages against Equitable, Chandiramani, and
David, with prayer for a temporary restraining order, with the Regional Trial Court. The Complaint
was subsequently amended to include a prayer for Equitable to return to Yang the amount of
P2.087 million, with interest thereon until fully paid. Later on, Yang filed a separate case for
injunction and damages, with prayer for a writ of preliminary injunction against FEBTC, PCIB,
Chandiramani and David, with the RTC.
The cases where thereafter consolidated. After trial, a decision was rendered stating
among others that David is entitled to the proceeds of the two cashier’s checks. The decision was
without prejudice to any action Yang may have against Chandiramani.
ISSUE: Is Fernando David entitled the proceeds of the checks?
HELD: YES. In the present case, it is not disputed that David was the payee of the checks in
question. The weight of authority sustains the view that a payee may be a holder in due course.
Hence, the presumption that he is a prima facie holder in due course applies in his favor. However,
said presumption may be rebutted. Hence, what is vital to the resolution of this issue is whether
David took possession of the checks under the conditions provided for in Section 52 of the
Negotiable Instruments Law. All the requisites provided for in Section 52 must concur in David’s
case, otherwise he cannot be deemed a holder in due course.
First, with respect to consideration, Section 24 of the Negotiable Instruments Law creates a
presumption that every party to an instrument acquired the same for a consideration or for value.
Thus, the law itself creates a presumption in David’s favor that he gave valuable consideration for
the checks in question. In alleging otherwise, the Yang has the onus to prove that David got hold of
the checks absent said consideration. In other words, the Yang must present convincing evidence
to overthrow the presumption. Our scrutiny of the records, however, shows that the petitioner
failed to discharge her burden of proof. The averment that David did not give valuable
consideration when he took possession of the checks is unsupported, devoid of any concrete proof
to sustain it. Note that both the trial court and the appellate court found that David did not receive
the checks gratis, but instead gave Chandiramani US $360,000.00 as consideration for the said
instruments. Factual findings of the Court of Appeals are conclusive on the parties and not
reviewable by this Court; they carry great weight when the factual findings of the trial court are
affirmed by the appellate court.
Second, Yang fails to point any circumstance which should have put David on inquiry as to
the why and wherefore of the possession of the checks by Chandiramani. David was not privy to the
transaction between Yang and Chandiramani. Instead, Chandiramani and David had a separate
dealing in which it was precisely Chandiramani’s duty to deliver the checks to David as payee. The
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evidence shows that Chandiramani performed said task to the letter. Yang admits that David took
the step of asking the manager of his bank to verify from FEBTC and Equitable as to the
genuineness of the checks and only accepted the same after being assured that there was nothing
wrong with said checks. At that time, David was not aware of any “stop payment” order. Under
these circumstances, David thus had no obligation to ascertain from Chandiramani what the nature
of the latter’s title to the checks was, if any, or the nature of his possession. Thus, the court
cannot hold him guilty of gross neglect amounting to legal absence of good faith, absent any
showing that there was something amiss about Chandiramani’s acquisition or possession of the
checks.
Yang now claims that David should have been put on alert as the instruments in question
were crossed checks. Pursuant to Bataan Cigar & Cigarette Factory, Inc. v. Court of Appeals, David
should at least have inquired as to whether he was acquiring said checks for the purpose for which
they were issued, according to petitioner’s submission. Petitioner’s reliance on the Bataan Cigar
case, however, is misplaced. The facts in the present case are not on all fours with Bataan Cigar.
In the latter case, the crossed checks were negotiated and sold at a discount by the payee, while in
the instant case, the payee did not negotiate further the checks in question but promptly deposited
them in his bank account.
PROMISSORY NOTES; RULE IN CASE OF AMBIGUITY
SPOUSES EDUARDO AND EPIFANIA EVANGELISTA vs. MERCATOR FINANCE CORP. LYDIA P.
SALAZAR, LAMECS REALTY&DEV’T CORP. and the REGISTER OF DEEDS OF BULACAN
[G.R. No. 148864. August 21, 2003]
PUNO, J.:
FACTS: The spouses Evangelista filed a complaint for annulment of titles against the respondents,
claiming to be the registered owners of five (5) parcels of land contained in the real estate
mortgage executed by them and Embassy Farms Inc. in favor of Mercator Financing Corporation
(“Mercator”). The mortgage was in consideration of certain loans and credit accommodations
amounting to P844, 625.78.
The spouses alleged the following: (1) that they executed the said real estate mortgage
merely as officers of Embassy Farms; (2) that they did not receive the proceeds of the loan
evidenced by the promissory note, as all went to Embassy Farms; (3) that the real estate mortgage
is void due to absence of a principal obligation on which it rests; (4) that since the real estate
mortgage is void, the foreclosure proceedings, the subsequent sale as well as the issuance of
transfer certificates of title are likewise void. Petitioners further alleged ambiguity in the wording
of the promissory note, which should be resolved against Mercator who provided the form thereof.
Mercator admitted that petitioners were the owners of the subject parcels of land. It,
however, contended that the spouses executed a Mortgage in favor of Mercator Finance Corporation
‘for and in consideration of certain loans, and/or other forms of credit accommodations obtained
from the Mortgagee (defendant Mercator Finance Corporation) amounting to EIGHT HUNDRED
FORTY-FOUR THOUSAND SIX HUNDRED TWENTY-FIVE & 78/100 (P844,625.78) and to secure the
payment of the same and those others that the MORTGAGEE may extend to the MORTGAGOR
(plaintiffs) x x x.’” It contended that since petitioners and Embassy Farms signed the promissory
note as co-makers (the note being worded as “For value received, I/We jointly and severally
promise to pay to the order of Mercator…”), aside from the Continuing Suretyship Agreement
subsequently executed to guarantee the indebtedness, the petitioners are jointly and severally
liable with Embassy Farms. Due to their failure to pay the obligation, the foreclosure and
subsequent sale of the mortgaged properties are thus valid. Respondents Salazar and Lamecs
asserted that they are innocent purchasers for value and in good faith.
ISSUE: May the spouses be held solidarily liable with Embassy Farms?
HELD: YES. Courts can interpret a contract only if there is doubt in its letter. But, an examination
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of the promissory note shows no such ambiguity. Besides, assuming arguendo that there is an
ambiguity, Section 17 of the Negotiable Instruments Law states, viz:
SECTION 17. Construction where instrument is ambiguous. – Where the language of the
instrument is ambiguous or there are omissions therein, the following rules of construction apply: (g)
Where an instrument containing the word “I promise to pay” is signed by two or more persons, they
are deemed to be jointly and severally liable thereon.
Petitioners also insist that the promissory note does not convey their true intent in
executing the document. The defense is unavailing. Even if petitioners intended to sign the note
merely as officers of Embassy Farms, still this does not erase the fact that they subsequently
executed a continuing suretyship agreement. A surety is one who is solidarily liable with the
principal. Petitioners cannot claim that they did not personally receive any consideration for the
contract for well-entrenched is the rule that the consideration necessary to support a surety
obligation need not pass directly to the surety, a consideration moving to the principal alone being
sufficient. A surety is bound by the same consideration that makes the contract effective between
the principal parties thereto. Having executed the suretyship agreement, there can be no dispute
on the personal liability of petitioners.
LIABILITY OF MAKERS OF PROMISSORY NOTES
ASTRO ELECTRONICS CORP. and PETER ROXAS vs. PHILIPPINE EXPORT AND FOREIGN LOAN
GUARANTEE CORPORATION
[G.R. No. 136729. September 23 ,2003]
AUSTRIA-MARTINEZ, J.:
FACTS: Astro was granted several loans by the Philippine Trust Company (Philtrust) secured by
three promissory notes. In each of these promissory notes, it appears that Roxas signed twice, as
President of Astro and in his personal capacity. Roxas also signed a Continuing Surety ship
Agreement in favor of Philtrust Bank, as President of Astro and as surety. Thereafter,
Philguarantee, with the consent of Astro, guaranteed in favor of Philtrust the payment of 70% of
Astro’s loan, subject to the condition that upon payment by Philguanrantee of said amount, it shall
be proportionally subrogated to the rights of Philtrust against Astro.
As a result of Astro’s failure to pay its loan obligations despite demands, Philguarantee paid
70% of the guaranteed loan to Philtrust. Subsequently, Philguarantee filed against Astro and Roxas
a complaint for sum of money with the RTC. In his Answer, Roxas disclaims any liability on the
instruments, alleging, inter alia, that he merely signed the same in blank and the phrases “in his
personal capacity” and “in his official capacity” were fraudulently inserted without his knowledge.
The trial court held Roxas and Astro jointly and severally liable. The trial court observed
that if Roxas really intended to sign the instruments merely in his capacity as President of Astro,
then he should have signed only once in the promissory note. On appeal, the Court of Appeals
affirmed the RTC decision agreeing with the trial court that Roxas failed to explain satisfactorily
why he had to sign twice in the contract and therefore the presumption that private transactions
have been fair and regular must be sustained.
ISSUE: Is Roxas liable jointly and severally with Astro?
HELD: YES. Astro’s loan with Philtrust Bank is secured by three promissory notes. These
promissory notes are valid and binding against Astro and Roxas. As it appears on the notes, Roxas
signed twice: first, as president of Astro and second, in his personal capacity. In signing his name
aside from being the President of Astro, Roxas became a co-maker of the promissory notes and
cannot escape any liability arising from it.
Under the Negotiable Instruments Law, persons who write their names on the face of
promissory notes are makers, promising that they will pay to the order of the payee or any holder
according to its tenor. Thus, even without the phrase “personal capacity,” Roxas will still be
primarily liable as a joint and several debtor under the notes considering that his intention to be
liable as such is manifested by the fact that he affixed his signature on each of the promissory
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notes twice which necessarily would imply that he is undertaking the obligation in two different
capacities, official and personal.
The three promissory notes uniformly provide: “FOR VALUE RECEIVED, I/We jointly,
severally and solidarily, promise to pay to PHILTRUST BANK or order...” An instrument which begins
with “I”, “We”, or “Either of us” promise to pay, when signed by two or more persons, makes them
solidarily liable. Also, the phrase “joint and several” binds the makers jointly and individually to
the payee so that all may be sued together for its enforcement, or the creditor may select one or
more as the object of the suit.
Having signed under such terms, Roxas assumed the solidary liability of a debtor and
Philtrust Bank may choose to enforce the notes against him alone or jointly with Astro.
CHECKS
CELESTINA T. NAGUIAT vs. COURT OF APPEALS and AURORA QUEAÑO

[G.R. No. 118375. October 3, 2003]
TINGA, J.:
FACTS: Queaño applied with Naguiat for a loan, which Naguiat granted. Pursuant thereof, Naguiat
indorsed a check and issued another one to Queaño the proceeds of which will constitute the loan.
To secure the loan, Queaño executed a Deed of Real Estate Mortgage in favor of Naguiat and
surrendered to the latter the owner’s duplicates of the titles covering the mortgaged properties.
The mortgage deed was notarized on the same day. Queaño also issued to Naguiat a promissory and
a post dated Security Bank and Trust Company check for the amount of the loan and payable to the
order of Naguiat.
When the check was presented on its maturity date, it was dishonored for insufficiency of
funds. Naguiat demanded settlement of the loan but Queaño countered that she did not receive the
proceeds of the loan as the checks where never given to them by Naguiat’s agent. Naguiat
petitioned the extra judicial foreclosure of the mortgage while Queaño filed a complaint for
annulment of the mortgage. The Trial Court declared the mortgage void and the Court of Appeals
affirmed the said decision.
Naguiat questions the findings of facts made by the Court of Appeals, especially on the
issue of whether Queaño had actually received the loan proceeds, which were supposed to be
covered by the two checks Naguiat had issued or indorsed. Naguiat claims that being a notarial
instrument or public document, the mortgage deed enjoys the presumption that the recitals therein
are true.
ISSUE: Was there in fact, a valid loan thus giving Naguiat the right to foreclose the mortgage?
HELD: NO. The Court of Appeals is correct in ruling that the presumption of truthfulness of the
recitals in a public document was defeated by the clear and convincing evidence in this case that
pointed to the absence of consideration. This Court has held that the presumption of truthfulness
engendered by notarized documents is rebuttable, yielding as it does to clear and convincing
evidence to the contrary, as in this case.
On the other hand, absolutely no evidence was submitted by Naguiat that the checks she
issued or endorsed were actually encashed or deposited. The mere issuance of the checks did not
result in the perfection of the contract of loan. For the Civil Code provides that the delivery of
bills of exchange and mercantile documents such as checks shall produce the effect of payment
only when they have been cashed. It is only after the checks have produced the effect of payment
that the contract of loan may be deemed perfected. Art. 1934 of the Civil Code provides:
“An accepted promise to deliver something by way of commodatum or simple loan is binding
upon the parties, but the commodatum or simple loan itself shall not be perfected until the delivery
of the object of the contract.”

Law);
Patrick
Salvador Escalante
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A loan contract is a real contract, not consensual, and, as such, is perfected only upon the
delivery of the object of the contract. In this case, the objects of the contract are the loan
proceeds, which Queaño would enjoy only upon the encashment of the checks signed or indorsed by
Naguiat. If indeed the checks were encashed or deposited, Naguiat would have certainly presented
the corresponding documentary evidence, such as the returned checks and the pertinent bank
records. Since Naguiat presented no such proof, it follows that the checks were not encashed or
credited to Queaño’s account.
All told, we find no compelling reason to disturb the finding of the courts a quo that the
lender did not remit and the borrower did not receive the proceeds of the loan. That being the
case, it follows that the mortgage, which is supposed to secure the loan, is null and void. The
consideration of the mortgage contract is the same as that of the principal contract from which it
receives life, and without which it cannot exist as an independent contract. A mortgage contract
being a mere accessory contract, its validity would depend on the validity of the loan secured by it.
CHECKS; NEGOTIABLE PROMISSORY NOTES; RULES ON ACCOMMODATION PARTIES
ROMEO C. GARCIA vs. DIONISIO V. LLAMAS

[G.R. No. 154127. December 8, 2003]
PANGANIBAN, J.:
FACTS: Romeo Garcia and Eduardo de Jesus executed a promissory note in favor of Atty. Dionisio V.
Llamas. The note read as follows:
“PROMISSORY NOTE
“P400, 000.00
“RECEIVED FROM ATTY. DIONISIO V. LLAMAS, the sum of FOUR HUNDRED THOUSAND PESOS, Philippine
Currency payable on or before January 23, 1997 at No. 144 K-10 St. Kamias, Quezon City, with interest at the
rate of 5% per month or fraction thereof.
“It is understood that our liability under this loan is jointly and severally.
“Done at Quezon City, Metro Manila this 23rd day of December, 1996.”
The note not being paid despite repeated demands, Llamas filed a complaint for a sum of
money against the two. In his answer, Garcia resisted the complaint alleging that he signed the
note merely as an accommodation party for De Jesus and the latter had already paid the loan by
means of the check and acceptance thereof novated or superseded the note. Llamas replied that
the loan remain unpaid for the reason that the check issued by De Jesus bounced upon
presentment. The trial court, as well as the Court of Appeals rejected Garcia’s defenses and held
him liable for the debt.
ISSUE: Can Garcia effectively avoid any liability by raising the defense that he merely signed the
note as an accommodation party?
HELD: NO. Garcia cannot effectively raise as defense that he merely signed as an accommodation
party in order to avoid any liability. This reasoning is misplaced, because the note herein is not a
negotiable instrument.
By its terms, the note was made payable to a specific person rather than to bearer or to
order -- a requisite for negotiability under the Negotiable Instruments Law (NIL). Hence, Garcia
cannot avail himself of the NIL’s provisions on the liabilities and defenses of an accommodation
party. Besides, a non-negotiable note is merely a simple contract in writing and is evidence of such
intangible rights as may have been created by the assent of the parties. The promissory note is thus
covered by the general provisions of the Civil Code, not by the NIL.
Even granting arguendo that the NIL was applicable, still, Garcia would be liable for the
promissory note. Under Article 29 of Act 2031, an accommodation party is liable for the instrument
to a holder for value even if, at the time of its taking, the latter knew the former to be only an
accommodation party. The relation between an accommodation party and the party
accommodated is, in effect, one of principal and surety -- the accommodation party being the
surety. It is a settled rule that a surety is bound equally and absolutely with the principal and is
deemed an original promissor and debtor from the beginning. The liability is immediate and direct.

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LAW ENACTED FOR THE PURPOSE OF FACILITATING, NOT HINDERING OR HAMPERING

TRANSACTIONS IN COMMERCIAL PAPER
MICHAEL A. OSMEÑA vs. CITIBANK, N.A., ASSOCIATED BANK, ET AL.

[G.R. No. 141278. March 23, 2004]
CALLEJO, SR., J.:

FACTS: Michael Osmeña purchased from Citibank a Manager’s Check payable to Frank Tan.
Subsequently Osmeña received information that the manager’s check was deposited with
Associated Bank, to the account of a certain Julius Dizon. Claiming that the clearing and/or
payment by the Banks of the check to an improper party in the absence of any indorsement by the
payee constitutes a clear violation of the bank’s obligations under the Law and standard banking
practice; and claiming that the intended payee for the check did not receive the value thereof,
Osmeña demanded from Citibank and Associated Bank the payment or reimbursement of the value
of the check.
The two banks refused to heed his repeated demand. Hence, Osmeña filed a complaint
praying for the restitution of the amount of the check and for moral damages and attorney’s fees
with the RTC. The complaint was subsequently amended with leave of court impleading Frank Tan
as additional respondent on the ground that the check was purchased by Osmeña as a demand loan
to Tan.
In its answer, Associated Bank averred among others, that the account of Julius Dizon is
also in reality that of Frank Tan and therefore it has not committed any violation of its duties and
responsibilities as the proceeds of the check went and was credited to respondent Frank Tan, a.k.a.
Julius Dizon. On the other hand, Citibank avers that if at all, Osmeña had a cause of action only
against Associated Bank, which, as depository or collecting bank, was obliged to make sure that the
payee properly endorsed the check in question.
The trial court rendered judgment in favor of Osmeña and against respondent Frank Tan.
The complaints against the respondent Banks were dismissed. The CA affirmed the decision in
toto.
Osmeña allege among others that the Court of Appeals erred in not holding the two banks
liable to him for the encashment of the check to Julius Dizon. Osmeña allege that the Banks were
negligent in paying the amount to a certain Julius Dizon, in relation to the pertinent provisions of
the Negotiable Instruments Law, without the proper indorsement of the payee, Frank Tan. He cites
the ruling in Associated Bank v. Court of Appeals, in which the respective responsibilities and
liabilities of a drawee bank, such as the respondent Citibank, and a collecting bank, such
Associated Bank, in the event that payment of a check to a person not designated as the payee, or
who is not a holder in due course, had been made is outlined.
ISSUE: Considering the fact that the banks cleared and paid the check in favor of a person not
named as payee on the check without the proper indorsements, may they be held liable for such
acts?
HELD: NO. The banks cannot be held liable for such acts. The ruling in the case of Associated Bank
v. Court of Appeals does not apply to the present case for, as has been amply demonstrated,
Osmeña failed to establish that the proceeds of the check was indeed wrongfully paid by the
respondents Banks to a person other than the intended payee.
Associated Bank presented preponderant evidence to support its assertion that respondent
Tan, the payee of the check, did receive the proceeds of the check. It adduced evidence that
“Julius Dizon” and “Frank Tan” are one and the same person. In addition, the Negotiable
Instruments Law was enacted for the purpose of facilitating, not hindering or hampering
transactions in commercial paper. Thus, the said statute should not be tampered with haphazardly
or lightly. Nor should it be brushed aside in order to meet the necessities in a single case.

Law);
Patrick
Salvador Escalante
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TRANSPORTATION LAW
CONTRACT OF CARRIAGE; BREACH OF AN AIRLINE; GROSS NEGLIGENCE AMOUNTS TO BAD FAITH
CHINA AIRLINES vs. DANIEL CHIOK

[G.R. No. 152122. July 30, 2003]
PANGANIBAN, J.:
FACTS: Daniel Chiok purchased from China Airlines, Ltd. an airline passenger ticket for air
transportation covering Manila-Taipei-Hongkong-Manila. Said ticket was exclusively endorsable to
Philippine Airlines, Ltd. Before he left for said trip, the trips covered by the ticket were pre-
scheduled and confirmed by Chiok. When Chiok reached Hongkong, he went to the PAL office and
sought to reconfirm his flight back to Manila. The PAL office confirmed his return trip on board
Flight No. PR 311 and attached its own sticker.
On the next day, Chiok proceeded to Hongkong International Airport for his return trip to
Manila. However, upon reaching the PAL counter, Chiok saw a poster stating that PAL Flight No. PR
311 was cancelled because of a typhoon in Manila. He was then informed that all the confirmed
ticket holders of PAL Flight No. PR 311 were automatically booked for its next flight, which was to
leave the next day. He then informed PAL personnel that, being the founding director of the
Philippine Polysterene Paper Corporation, he had to reach Manila the following day because of a
business option which he had to execute on said date.
The following day Chiok went to the airport. Cathay Pacific stewardess Lok Chan took and
received Choik’s plane ticket and luggage. However, Carmen Chan, PAL’s terminal supervisor,
informed Chiok that his name did not appear in PAL’s computer list of passengers and therefore
could not be permitted to board PAL Flight No. PR 307. Thereafter, Chiok proceeded to PAL’s
Hongkong office and confronted PAL’s reservation officer, Carie Chao (hereafter referred to as
Chao), who previously confirmed his flight back to Manila. Chao told Chiok that his name was on the
list and pointed to the latter his computer number listed on the PAL confirmation sticker attached
to his plane ticket, which number was ‘R/MN62’. Chiok was not able to return to Manila on time.
Consequently, Chiok as plaintiff, filed a Complaint on November 9, 1982 for damages,
against PAL and CAL, as defendants with the Regional Trial Court Manila. He alleged therein that
despite several confirmations of his flight, defendant PAL refused to accommodate him in Flight
No. 307, for which reason he lost the business option aforementioned. He also alleged that PAL’s
personnel, specifically Carmen, ridiculed and humiliated him in the presence of so many people.
Further, he alleged that defendants are solidarily liable for the damages he suffered, since one is
the agent of the other.
The Regional Trial Court (RTC) of Manila held CAL and PAL jointly and severally liable.
Ultimately, it was only the Appeal of CAL that reached the Supreme Court. It allege among others
that since it was only the ticket issuer, it should not be held liable unlike PAL.
ISSUE: Considering the fact that CAL was only the ticket issuer, may it be held jointly and
severally liable for the acts of PAL’s employees?
HELD: YES. It is significant to note that the contract of air transportation was between petitioner
and respondent, with the former endorsing to PAL the Hong Kong-to-Manila segment of the journey.
Such contract of carriage has always been treated in this jurisdiction as a single operation. This
jurisprudential rule is supported by the Warsaw Convention, to which the Philippines is a party, and
by the existing practices of the International Air Transport Association (IATA).
In American Airlines v. Court of Appeals, the court have noted that under a general pool
partnership agreement, the ticket-issuing airline is the principal in a contract of carriage, while the
endorsee-airline is the agent.
“x x x Members of the IATA are under a general pool partnership agreement

wherein they act as agent of each other in the issuance of tickets to contracted passengers
to boost ticket sales worldwide and at the same time provide passengers easy access to
airlines which are otherwise inaccessible in some parts of the world. Booking and
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reservation among airline members are allowed even by telephone and it has become an
accepted practice among them. A member airline which enters into a contract of carriage
consisting of a series of trips to be performed by different carriers is authorized to receive
the fare for the whole trip and through the required process of interline settlement of
accounts by way of the IATA clearing house an airline is duly compensated for the segment
of the trip serviced. Thus, when the petitioner accepted the unused portion of the
conjunction tickets, entered it in the IATA clearing house and undertook to transport the
private respondent over the route covered by the unused portion of the conjunction tickets,
i.e., Geneva to New York, the petitioner tacitly recognized its commitment under the IATA
pool arrangement to act as agent of the principal contracting airline, Singapore Airlines, as
to the segment of the trip the petitioner agreed to undertake. As such, the petitioner
thereby assumed the obligation to take the place of the carrier originally designated in the
original conjunction ticket. The petitioner’s argument that it is not a designated carrier in
the original conjunction tickets and that it issued its own ticket is not decisive of its
liability. The new ticket was simply a replacement for the unused portion of the
conjunction ticket, both tickets being for the same amount of US$ 2,760 and having the
same points of departure and destination. By constituting itself as an agent of the principal
carrier the petitioner’s undertaking should be taken as part of a single operation under the
contract of carriage executed by the private respondent and Singapore Airlines in Manila.”
Likewise, as the principal in the contract of carriage, the petitioner in British Airways v.
Court of Appeals was held liable, even when the breach of contract had occurred, not on its own
flight, but on that of another airline. The Decision followed our ruling in Lufthansa German
Airlines v. Court of Appeals, in which we had held that the obligation of the ticket-issuing airline
remained and did not cease, regardless of the fact that another airline had undertaken to carry the
passengers to one of their destinations.
In the instant case, following the jurisprudence cited above, PAL acted as the carrying
agent of CAL. In the same way that we ruled against British Airways and Lufthansa in the
aforementioned cases, we also rule that CAL cannot evade liability to respondent, even though it
may have been only a ticket issuer for the Hong Kong-Manila sector.
AIRLINE CONTRACT OF CARRIAGE
CHINA AIRLINES,LTD., vs COURT OF APPEAL, ANTONIO S. SALVADOR and

ROLANDO C. LAO
[G.R. No. 129988. July 14, 2003.]
CARPIO, J:
FACTS: In order to travel to Los Angeles, California to pursue a cable business deal, private
respondents initially hired Morelia Travel Agency (“Morelia”) to book their flight with CAL. On
discovering that Morelia charged higher rates than American Express Travel Service Philippines
("Amexco"), private respondents dropped the services of Morelia. Instead, private respondents
engaged the services of Amexco through Lao who was an Amexco cardholder.
Thereafter Lao called up Amexco claiming that private respondents had confirmed booking
with CAL and gave to Amexco the record locator number or booking reference number that CAL had
previously issued to Morelia when the latter booked the reservations of the private respondents.
Amexco then used the record locator number given by Lao in confirming the reservation of private
respondents. CAL confirmed the bookings. Consequently, Amexco issued to private respondents the
confirmed tickets for the scheduled flight. On the same day, CAL called up Morelia to reconfirm the
reservations of private respondents. Morelia cancelled the reservations of private respondents.
At the date when the private respondents were about to board the scheduled flight, they
were prevented by CAL personnel on the grounds that their names were not in the passenger’s
manifest. CAL cancelled the reservations when Morelia revoked the booking it had made for the
private respondents. Private respondents were only able to leave for Los Angles the following day
on a different airline.
A demand letter was thereafter sent to CAL demanding moral damages and attorney’s fee.
CAL denied such claim and as a consequence of which a civil case was filed before the Regional
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Trial Court of Malolos which ruled in favor of the private respondents. Not satisfied with the
decision, the petitioner appealed before the Court of Appeals which affirmed the trial court’s
decision.
ISSUE: Should petitioner be made liable for damages sustained by the private respondents despite
the fact that the acts complained of were done by the employees of a booking agent and not by it
or its employees?
HELD: YES. The petitioner should be made liable. The nature of an airline’s contract of carriage
partakes of two types, namely: (1) a contract to transport passengers to their destination, and (2) a
contract to transport passengers to their destination. In this case, when CAL confirmed the
reservations, it bound itself to transport private respondents on its flight.
The airline business is intended to serve the traveling public primarily and is thus imbued
with public interest. The law governing common carriers consequently imposes and exacting
standard. Thus, in an action based on a breach of contract of carriage, the aggrieved party does not
have to prove that the common carrier was at fault or was negligent. All that he to prove is the
existence of the contract and the fact of its non-performance by the carrier. CAL does not deny its
confirmation of the reservations made by Amexco. The confirmed tickets issued by Amexco to
private respondents upon CAL's confirmation of the reservations are undeniable proof of the
contract of carriage between CAL and private respondents
In Alitalia Airways v CA, et al, the Supreme Court ruled that when an airline issues a ticket
to a passenger confirmed for a particular flight on certain date, a contract of carriage arises. The
passenger then has every right to expect that he would fly on that flight and on that date. If he
does not, then the carrier opens itself to a suit for breach of contract of carriage.
CAL did not allow private respondents, who were then in possession of the confirmed
tickets, from boarding its airplane because their names were not in the passenger’s manifest.
Clearly CAL breached its contract of carriage with private respondents.
COMMON CARRIERS AND EXTRAORDINARY DILIGENCE
ASIA LIGHTERAGE AND SHIPPING INC., vs. COURT OF APPEALS and PRUDENTIAL GUARANTEE AND
ASSURANCE, INC.
[G.R. No. 147246. August 19, 2003.]
PUNO, J:
FACTS: Upon the arrival of the carrying vessel containing the cargo of 3,150 metric tons of Better
Western White Wheat which was insured by Prudential Guarantee and Assurance. Inc. in Manila, the
said cargo was thereafter transferred to the custody of herein petitioner Asia Lighterage and
Shipping, Inc. The petitioner was contracted by the consignee as carrier to deliver the cargo to
consignee’s warehouse.
Unfortunately, the cargo did not reach its destination because the barge completely sank
after its towing bits broke during the typhoon subsequent to the fact that the barge had previously
sustained damage when it hit a sunken object while docked at the Engineering Island.
Consequently, the consignee sent a claim letter to the petitioner and another letter to the
private respondent for the value of the lost cargo. The private respondent indemnified the
consignee. Thereafter, as subrogee, it sought recovery of said amount from the petitioner, but to
no avail.
A complaint was thereafter filed before the Regional Trial Court which ruled in favor of the
private respondent since the petitioner was a common carrier. On appeal, the ruling was affirmed
by appellate court.
ISSUES:
1) Can petitioner be considered a common carrier; and,
2) Assuming the petitioner is a common carrier, whether it exercised extraordinary
diligence in its care and custody of the consignee’s cargo.

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HELD: 1) YES. The petitioner is a common carrier. Article 1732 of the Civil Code defines common
carriers as persons, corporations, firms or associations engaged in the business of carrying or
transporting passengers or goods or both, by land, water, or air, for compensation, offering their
services to the public.
Petitioner contends that it is not a common carrier but a private carrier. Allegedly, it has
no fixed and publicly known route, maintains no terminals, and issues no tickets. It points out that
it is not obliged to carry indiscriminately for any person. It is not bound to carry goods unless it
consents. In short, it does not hold out its services to the general public.
In De Guzman vs. Court of Appeals, we held that the definition of common carriers in
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. We also did not distinguish between a person or enterprise offering transportation service
on a regular or scheduled basis and one offering such service on an occasional, episodic or
unscheduled basis. Further, we ruled that Article 1732 does not distinguish 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.
We therefore hold that petitioner is a common carrier whether its carrying of goods is done
on an irregular rather than scheduled manner, and with an only limited clientele. A common carrier
need not have fixed and publicly known routes. Neither does it have to maintain terminals or issue
tickets.
2) YES. The petitioner failed to exercise extraordinary diligence in its care and custody of
the consignee’s goods.
Common carriers are bound to observe extraordinary diligence in the vigilance over the
goods transported by them. They are presumed to have been at fault or to have acted negligently if
the goods are lost, destroyed or deteriorated. To overcome the presumption of negligence in the
case of loss, destruction or deterioration of the goods, the common carrier must prove that it
exercised extraordinary diligence. There are, however, exceptions to this rule. Article 1734 of the
Civil Code enumerates the instances when the presumption of negligence does not attach:
Art. 1734. Common carriers are responsible for the loss, destruction, or deterioration of the
goods, unless the same is due to any of the following causes only:
(1) Flood, storm, earthquake, lightning, or other natural disaster or calamity;
(2) Act of the public enemy in war, whether international or civil;
(3) Act or omission of the shipper or owner of the goods;
(4) The character of the goods or defects in the packing or in the containers;
(5) Order or act of competent public authority.
In the case at bar, the barge completely sank after its towing bits broke, resulting in the
total loss of its cargo. Petitioner claims that this was caused by a typhoon, hence, it should not be
held liable for the loss of the cargo. However, petitioner failed to prove that the typhoon is the
proximate and only cause of the loss of the goods, and that it has exercised due diligence before,
during and after the occurrence of the typhoon to prevent or minimize the loss. The evidence show
that, even before the towing bits of the barge broke, it had already previously sustained damage
when it hit a sunken object while docked at the Engineering Island. It even suffered a hole. Clearly,
this could not be solely attributed to the typhoon. The partly submerged vessel was refloated but
its hole was patched with only clay and cement. The patchwork was merely a provisional remedy,
not enough for the barge to sail safely.
COMMON CARRIER
ESTELA L. CRISOSTOMO vs. THE COURT OF APPEALS and CARAVAN TRAVEL & TOURS
INTERNATIONAL, INC.,
[G.R. No. 138334 August 25, 2003.]
YNARES-SANTIAGO, J:

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FACTS: Petitioner Estela L. Crisostomo contracted the services of respondent Caravan Travel &
Tours International, Inc. to arrange and facilitate her booking, ticketing and accommodation in a
tour dubbed “Jewels of Europe”.
Pursuant to the contract, Menor who is petitioner’s niece and the respondent’s ticketing
manager delivered to the petitioner her travel documents and plane tickets. Petitioner in turn,
gave Menor the full payment for the package tour.
Without checking her travel documents, the petitioner went to the airport to board the
plane. To her dismay, she was not allowed to board because the flight she was supposed to take
had already departed the previous day. The petitioner thereafter settled for the British Pageant
Tour.
Upon returning from her trip, the petitioner asked the reimbursement of the amount she
had paid representing the difference between the “Jewels of Europe” and the “British Pageant”
tour. The respondent refused on the ground that the amount paid was non-refundable.
Consequently, the petitioner filed a case before the Regional Trial Court who found the respondent
guilty while declaring that the petitioner was guilty of contributory negligence. On appeal, the
appellate ruled that both parties at fault while also finding that the petitioner is more negligent
than the respondent.
ISSUE: Is respondent a common carrier which would require it to advice the petitioner the exact
date of her flight with extraordinary diligence?
HELD: NO. The respondent is not a common carrier. A common carrier is defined under Article
1732 of the Civil Code as persons, corporations, firms or associations engaged in the business of
carrying or transporting passengers or goods or both, by land, water or air, for compensation,
offering their services to the public.
It is obvious from the above definition that respondent is not an entity engaged in the
business of transporting either passengers or goods and is therefore, neither a private nor a
common carrier. Respondent did not undertake to transport petitioner from one place to another
since its covenant with its customers is simply to make travel arrangements in their behalf. .
Respondent's services as a travel agency include procuring tickets and facilitating travel permits or
visas as well as booking customers for tours.
COMMON CARRIERS; DILIGENCE REQUIREMENT; FIRE AS CAUSE OF DAMAGE
DSR-SENATOR LINES AND C.F. SHARP AND COMPANY, INC. vs. FEDERAL PHOENIX ASSURANCE
CO., INC.
[G.R. No. 135377. October 7, 2003]
SANDOVAL-GUTIERREZ, J.:
FACTS: The ship carrying the goods of Berde Plants, Inc. caught fire and sank. As the subrogee of
Berde Plants Inc., Federal Phoenix Assurance sent a letter to C.F. Sharp demanding payment of
P941, 429.61 on the basis of the Subrogation Receipt. C.F. Sharp denied any liability on the ground
that such liability was extinguished when the vessel carrying the cargo was gutted by fire.
ISSUE: Is fire one of the events that will exempt a carrier from liability in case of loss?
HELD: NO. Article 1734 of the Civil Code provides:

Common carriers are responsible for the loss, destruction, or deterioration of the
goods, unless the same is due to any of the following causes only:
(1)Flood, storm, earthquake, lightning, or other natural disaster or calamity;
(2) Act of the public enemy in war, whether international or civil;
(3) Act or omission of the shipper or owner of the goods;
(4) The character of the goods or defects in the packing or in the containers;
(5) Order or act of competent public authority.”
Fire is not one of those enumerated under the above provision which exempts a carrier

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from liability for loss or destruction of the cargo. In Eastern Shipping Lines, Inc. vs. Intermediate
Appellate Court, the Court ruled that since the peril of fire is not comprehended within the
exceptions in Article 1734, then the common carrier shall be presumed to have been at fault or to
have acted negligently, unless it proves that it has observed the extraordinary diligence required by
law.
Even if fire were to be considered a natural disaster within the purview of Article 1734, it is
required under Article 1739 of the same Code that the natural disaster must have been the
proximate and only cause of the loss, and that the carrier has exercised due diligence to prevent or
minimize the loss before, during or after the occurrence of the disaster. A common carrier’s duty to
observe the requisite diligence in the shipment of goods lasts from the time the articles are
surrendered to or unconditionally placed in the possession of, and received by, the carrier for
transportation until delivered to or until the lapse of a reasonable time for their acceptance by the
person entitled to receive them. When the goods shipped either are lost or arrive in damaged
condition, a presumption arises against the carrier of its failure to observe that diligence, and there
need not be an express finding of negligence to hold it liable.
Common carriers are obliged to observe extraordinary diligence in the vigilance over the
goods transported by them. Accordingly, they are presumed to have been at fault or to have acted
negligently if the goods are lost, destroyed or deteriorated. There are very few instances when the
presumption of negligence does not attach and these instances are enumerated in Article 1734. In
those cases where the presumption is applied, the common carrier must prove that it exercised
extraordinary diligence in order to overcome the presumption.
Federal Phoenix Assurance raised the presumption of negligence against petitioners.
However, they failed to overcome it by sufficient proof of extraordinary diligence.
PRO-FORMA BILLS OF LADING; DUTY OF CARRIER IN CASE OF DAMAGED GOODS
IRON BULK SHIPPING PHILIPPINES, CO., LTD. vs. REMINGTON INDUSTRIAL SALES CORPORATION
[G.R. No. 136960. December 8, 2003.]
AUSTRIA-MARTINEZ, J.:
FACTS: Remington Industrial Sales Corporation ordered from Wangs Company, Inc. 194 packages of
hot rolled steel sheets. The packages were loaded on board the vessel MV 'Indian Reliance' at the
Port of Gdynia, Poland, for transportation to the Philippines, under Bill of Lading No. 27. Iron Bulk
Shipping Phils., represented the vessel's owner/charterer. When the packages were discharged and
inspected, they were wet and rusty.
Remington filed formal claims for loss with Pioneer(the insurer), Iron Bulk, Manila Port
Services, Inc. (MPS) and ESE Brokerage Corporation (ESE) but no one honored such claims. Because
of this, Remington filed an action for collection, plus attorney's fees.
Since Iron Bulk's own evidence shows that there was water inside the cargo hold of the
vessel and that the goods stored therein were wet and full of rust, without sufficient explanation
on its part as to when and how water found its way into the vessel holds, the Trial Court found and
held that Iron Bulk failed to exercise the extraordinary diligence required by law in the handling
and transporting of the goods.
In contending that it must not be held liable, Iron Bulk presented evidence to prove that,
contrary to the recitals contained in the subject bill of lading, the cargo therein described as clean
on board is actually wet and covered with rust. Iron Bulk contend that the fact that the packages
were actually wet and rusted upon receipt was not indicated on the bill of lading because the same
was a “pro-forma” bill of lading. As such, Iron Bulk contend that the CA erred in relying on the Bill
of Lading to establish the condition of the packages upon loading.
ISSUE: Considering the fact that the bills of lading involved were pro-forma, may the shipper
properly state facts contrary to that written on the document?
HELD: There is no merit to petitioner's contention that the Bill of Lading covering the subject
cargo cannot be relied upon to indicate the condition of the cargo upon loading. It is settled that a
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bill of lading has a two-fold character. In Phoenix Assurance Co., Ltd. vs. United States Lines, we
held that:
“[A] bill of lading operates both as a receipt and as a contract. It is a receipt for the goods
shipped and a contract to transport and deliver the same as therein stipulated. As a receipt, it recites
the date and place of shipment, describes the goods as to quantity, weight, dimensions, identification
marks and condition, quality and value. As a contract, it names the contracting parties, which include
the consignee, fixes the route, destination, and freight rate or charges, and stipulates the rights and
obligations assumed by the parties.”
The fact that the issued bill of lading is pro forma is of no moment. If the bill of lading is
not truly reflective of the true condition of the cargo at the time of loading to the effect that the
said cargo was indeed in a damaged state, the carrier could have refused to accept it, or at the
least, made a marginal note in the bill of lading indicating the true condition of the merchandise.
But it did not. On the contrary, it accepted the subject cargo and even agreed to the issuance of a
clean bill of lading without taking any exceptions with respect to the recitals contained therein.
Since the carrier failed to annotate in the bill of lading the alleged damaged condition of the cargo
when it was loaded, said carrier and the petitioner, as its representative, are bound by the
description appearing therein and they are now estopped from denying the contents of the said bill.
Even granting, for the sake of argument, that the subject cargo was already in a damaged
condition at the time it was accepted for transportation, the carrier is not relieved from its
responsibility to exercise due care in handling the merchandise and in employing the necessary
precautions to prevent the cargo from further deteriorating. It is settled that the extraordinary
diligence in the vigilance over the goods tendered for shipment requires the common carrier to
know and to follow the required precaution for avoiding damage to, or destruction of the goods
entrusted to it for safe carriage and delivery.
Under Article 1742 of the Civil Code, even if the loss, destruction, or deterioration of the
goods should be caused, among others, by the character of the goods, the common carrier must
exercise due diligence to forestall or lessen the loss. This extraordinary responsibility 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 a right to receive them. In the instant case, if the carrier
indeed found the steel sheets to have been covered by rust at the time that it accepted the same
for transportation, such finding should have prompted it to apply additional safety measures to
make sure that the cargo is protected from corrosion. This, the carrier failed to do.
CONTRACT OF CARRIAGE; BAD FAITH
SINGAPORE AIRLINES LIMITED vs. ANDION FERNANDEZ

[G.R. No. 142305. December 10, 2003]
CALLEJO, SR., J.:

FACTS: Andion Fernandez, an acclaimed soprano, was invited to sing before the King and
Queen of Malaysia. For this singing engagement, an airline passage ticket was purchased from
Singapore Airlines, which would transport her to Manila from Frankfurt, Germany. From Manila, she
would proceed to Malaysia on the next day. It was necessary for the respondent to pass by Manila in
order to gather her wardrobe and to rehearse and coordinate with her pianist her repertoire for the
performance.
The flight from Frankfurt was delayed by two hours causing Fernandez to miss the
connecting flight to Manila. Upon disembarkation at Singapore, Fernandez approached the night
stop counter and told the employee thereat that it was important for her to reach Manila on that
day. Her pleas for the Airlines to make arrangements to transport her to Manila were unheeded.
Fernandez was able to contact a family friend who picked her up from the airport for her
overnight stay in Singapore. The next day, after being brought back to the airport, the Fernandez
immediately went to the airlines’ counter, which says: “Immediate Attention To Passengers with
Immediate Booking.” She approached an employee at the counter to make arrangements for
immediate booking only to be told: “Can’t you see I am doing something.” She explained her
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predicament but the male employee uncaringly retorted: “It’s your problem, not ours.”
Fernandez never made it to Manila and was forced to take a direct flight from Singapore to
Malaysia through the efforts of her mother and travel agency in Manila. Her mother also had to
travel to Malaysia to bring her wardrobe and personal things needed for the performance that
caused them to incur an expense of about P50, 000. As a result of this incident, Fernandez’
performance before the Royal Family of Malaysia was below par. Because of the rude and unkind
treatment she received from the Airline’s personnel in Singapore, Fernandez was engulfed with
fear, anxiety, humiliation and embarrassment causing her to suffer mental fatigue and skin rashes.
She was thereby compelled to seek immediate medical attention upon her return to Manila for
“acute urticaria.”
The RTC rendered judgment in favor of Fernandez and awarded damages. The Court of
Appeals found no reversible error and affirmed the decision in toto. In its petition for review, the
Airlines aver that the Court of Appeals erred in holding it liable for damages. It contended that it
exercised the extraordinary diligence required by law under the given circumstances; that the
delay was caused by the Gulf war, which is considered a fortuitous event; and as such, the suit was
baseless.
ISSUE: Does Fernandez have basis to sue Singapore Airlines?
HELD: YES. When an airline issues a ticket to a passenger, confirmed for a particular flight on a
certain date, a contract of carriage arises. The passenger then has every right to expect that he be
transported on that flight and on that date. If he does not, then the carrier opens itself to a suit for
a breach of contract of carriage. The contract of air carriage is a peculiar one. Imbued with public
interest, the law requires common carriers to carry the passengers safely as far as human care and
foresight can provide, using the utmost diligence of very cautious persons with due regard for all
the circumstances. In an action for breach of contract of carriage, the aggrieved party does not
have to prove that the common carrier was at fault or was negligent. All that is necessary to prove
is the existence of the contract and the fact of its non-performance by the carrier.
In the case at bar, it is undisputed that Fernandez carried a confirmed ticket for the two-
legged trip from Frankfurt to Manila. In her contract of carriage with the airline, Fernandez
certainly expected that she would fly to Manila on Flight No. SQ 72. Since the airline did not
transport her as covenanted by it on said terms, the airline clearly breached its contract of
carriage. Fernandez had every right to sue the airline for this breach.
The defense of a fortuitous event is unavailing. Tagged as a premiere airline as it claims to
be and with the complexities of air travel, it was certainly well equipped to be able to foresee and
deal with such situation.
DILIGENCE OF EMPLOYERS; LIABILITY IN THE ABSENCE OF AN EXISTING CONTRACT
CECILIA YAMBAO vs. MELCHORITA C. ZUÑIGA ET AL.

[G.R. No. 146173. December 11, 2003.]
QUISUMBING, J:
FACTS: Herminigildo Zuñiga was killed by a bus owned by Cecilia Yambao. Ceferino G. Venturina
was driving the bus at the time of the accident. As heirs of the victim, the private respondents filed
a Complaint against Yambao and her driver. The complaint essentially alleged that Venturina drove
the bus in a reckless, careless and imprudent manner, in violation of traffic rules and regulations,
without due regard to public safety, thus resulting in the victim's premature death.
In her answer, Yambao allege among others that she was not liable for any damages
because as an employer, she exercised the proper diligence of a good father of a family, both in
the selection and supervision of her bus driver. To support her claim, she points out that when
Venturina applied with her as a driver, she required him to produce not just his driver's license, but
also clearances from the National Bureau of Investigation (NBI), the Philippine National Police, and
the barangay where he resides. She also required him to present his Social Security System (SSS)
Number prior to accepting him for employment. She likewise stresses that she inquired from
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Venturina's previous employer about his employment record, and only hired him after it was shown
to her satisfaction that he had no blot upon his record.
Subsequently, the trial court held Yambao liable for Herminigildo’s death AND applied
Article 1756 of the Civil Code, observing that Yambao had failed to prove that she observed the
diligence required by Articles 1733 and 1755 of the said Code.
While sustaining the trial court's findings, the Court of Appeals, however, found the trial
court's reliance on Articles 1755 and 1756 of the Civil Code misplaced. It held that this was a case
of quasi-delict, there being no pre-existing contractual relationship between the parties. Hence,
the law on common carriers was inapplicable. The court a quo then found the Yambao directly and
primarily liable as Venturina's employer pursuant to Article 2180 of the Civil Code as she failed to
present evidence to prove that she has observed the diligence of a good father of a family in the
selection and supervision of her employees.
ISSUE: Are the acts of Yambao sufficient to exculpate her from liability as employer?
HELD: NO. Case law teaches that for an employer to have exercised the diligence of a good father
of a family, he should not be satisfied with the applicant's mere possession of a professional driver's
license; he must also carefully examine the applicant for employment as to his qualifications, his
experience and record of service. Yambao failed to present convincing proof that she went to this
extent of verifying Venturina's qualifications, safety record, and driving history. The presumption
juris tantum that there was negligence in the selection of her bus driver, thus, remains unrebutted.
Nor did Yambao show that she exercised due supervision over Venturina after his selection.
For as pointed out by the Court of Appeals, she did not present any proof that she drafted and
implemented training programs and guidelines on road safety for her employees. In fact, the record
is bare of any showing that she required Venturina to attend periodic seminars on road safety and
traffic efficiency. Hence, Yambao cannot claim exemption from any liability arising from the
recklessness or negligence of Venturina.
In sum, Yambao’s liability to private respondents for the negligent and imprudent acts of
her driver, Venturina, under Article 2180 of the Civil Code is both manifest and clear. Having failed
to rebut the legal presumption of negligence in the selection and supervision of her driver, she is
responsible for damages, the basis of the liability being the relationship of pater familias or on the
employer's own negligence.
CONTRACT OF CARRIAGE; BILL OF LADING, A READY FORM CONTRACT WHERE ONE PARTY
PREPARES STIPULATIONS AND THE OTHER PARTY AFFIXES HIS SIGNATURE ADHESION; 24-HOUR
REQUIREMENT TO PRESENT CLAIM FOR DAMAGES.
PROVIDENT INSURANCE CORP vs. COURT OF APPEALS

[G.R. No. 118030. January 15, 2004]
YNARES-SANTIAGO, J.:
FACTS: The vessel MV “Eduardo II” took and received on board a shipment of 32,000 plastic woven
bags of various fertilizer in good order and condition for transportation to Cagayan de Oro City. The
shipment was consigned to Atlas Fertilizer Corporation, and covered by a Bill of Lading and a
Marine Insurance Policy. In the process of unloading the shipment, three bags of fertilizer fell
overboard and 281 bags were considered to be unrecovered spillages.
As the claims were not paid, Provident Insurance Corporation indemnified the consignee for
its damages. Thereafter, Provident, as subrogee of the consignee, filed a complaint against Azucar
Shipping carrier seeking reimbursement for the value of the losses/damages to the cargo. The
carrier moved to dismiss the complaint on the ground that the claim or demand by Provident has
been waived, abandoned or otherwise extinguished for failure of the consignee to comply with the
required claim for damages set forth in the first sentence of Stipulation No. 7 of the bill of lading,
which provides in part:
“All claims for damages to the goods must be made to the carrier at the time of delivery to
the consignee or his agent if the package or containers show exterior sign of damage, otherwise to
be made in writing to the carrier within twenty-four hours from the time of delivery.”
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The trial court found the motion to dismiss well taken and accordingly, dismissed the
complaint. The Court of Appeals affirmed the decision. Provident contend that it is unreasonable
for the consignee Atlas Fertilizer Corporation to be required to abide by the provisions of
Stipulation No. 7 of the bill of lading. Since the place of delivery was remote and inaccessible, the
consignee cannot be expected to have been able to immediately inform its main office and make
the necessary claim for damages for the losses and unrecovered spillages in the subject cargo.
Petitioner further argues that the contents of the bill of lading are printed in small letters that no
one would bother to read them, as they are difficult to read.
ISSUE: Is the failure of Provident to make the prompt notice of claim as required fatal to its right
to claim indemnification for damages?
HELD: YES. The bill of lading defines the rights and liabilities of the parties in reference to the
contract of carriage. Stipulations therein are valid and binding in the absence of any showing that
the same are contrary to law, morals, customs, public order and public policy. Where the terms of
the contract are clear and leave no doubt upon the intention of the contracting parties, the literal
meaning of the stipulations shall control.
There can be no question about the validity and enforceability of Stipulation No. 7 in the
bill of lading. The twenty-four hour requirement under the said stipulation is, by agreement of the
contracting parties, a sine qua non for the accrual of the right of action to recover damages against
the carrier. The wisdom of this kind of proviso has been succinctly explained in Consunji v. Manila
Port Service, where it was held:
Carriers and depositaries sometimes require presentation of claims within a short time
after delivery as a condition precedent to their liability for losses. Such requirement is not
an empty formalism. It has a definite purpose, i.e., to afford the carrier or depositary a
reasonable opportunity and facilities to check the validity of the claims while the facts are
still fresh in the minds of the persons who took part in the transaction and the document
are still available.
Considering that a prompt demand was necessary to foreclose the possibility of fraud or
mistake in ascertaining the validity of claims, there was a need for the consignee or its agent to
observe the conditions provided for in Stipulation No. 7.
A bill of lading is in the nature of a contract of adhesion, defined as one where one of the
parties imposes a ready-made form of contract which the other party may accept or reject, but
which the latter cannot modify. One party prepares the stipulation in the contract, while the other
party merely affixes his signature or his “adhesion” thereto, giving no room for negotiation and
depriving the latter of the opportunity to bargain on equal footing. Nevertheless, these types of
contracts have been declared as binding as ordinary contracts, the reason being that the party who
adheres to the contract is free to reject it entirely. After it received the bill of lading without any
objection, consignee Atlas Fertilizer Corporation was presumed to have knowledge of its contents
and to have assented to the terms and conditions set forth therein.
PUBLIC UTILITIES; PROVISIONAL INCREASE OF ELECTRICITY RATES
FREEDOM FROM DEBT COALITION, ET AL. vs. ENERGY REGULATORY

COMMISSION and MANILA ELECTRIC COMPANY
[G.R. No. 161113 June 15, 2004]
TINGA, J.:
FACTS: MERALCO filed with the ERC an Application for an increase in rates. MERALCO also prayed
ex parte for the grant of a provisional authority to implement the increase according to the
schedule attached to its Application. Several groups from different sectors filed their respective
oppositions against the proposed increase. However the ERC, without first resolving the

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oppositions, issued an Order provisionally approving MERALCO’s ex parte application for rate
increases.
According to ERC, the order was done pursuant to Section 8 of Executive Order No. 172 and
Section 4 (e) of the Implementing Rules and Regulations of the Electric Power Industry Reform Act
of 2001 (EPIRA R.A. 9136). Freedom from Debt Coalition among others, contend that the ERC has no
more authority to order provisional increases unlike previous legislations that expressly provide for
such, the EPIRA (R.A. 9136) does not. They also contend that the proceedings were held with grave
abuse of discretion and manifest bias.
ISSUES: 1) Considering the fact that the new law, R.A. 9136 does not expressly provide for the
power to authorize provisional increases unlike previous laws, does the ERC still have the power to
grant such provisional increases?
2) Did the ERC committed grave abuse of discretion?
HELD: 1) YES. The ERC is endowed with the statutory authority to approve provisional rate
adjustments under the aegis of Sections 44 and 80 of the EPIRA. The sections read, thus:
SEC. 44. Transfer of Powers and Functions. — The powers and functions of the
Energy Regulatory Board not inconsistent with the provisions of this Act are hereby
transferred to the ERC. The foregoing transfer of powers and functions shall include all
applicable funds and appropriations, records, equipment, property and personnel as may be
necessary.
Sec. 80. Applicability and Repealing Clause. — The applicability provisions of

Commonwealth Act No. 146, as amended, otherwise known as the “Public Services Act;”
Republic Act 6395, as amended, revising the charter of NPC; Presidential Decree 269, as
amended, referred to as the National Electrification Decree; Republic Act 7638, otherwise
known as the “Department of Energy Act of 1992;” Executive Order 172, as amended,
creating the ERB; Republic 7832 otherwise known as the “Anti-Electricity and Electric
Transmission Lines/Materials Pilferage Act of 1994;” shall continue to have full force and
effect except insofar as they are inconsistent with this Act.
The provisions with respect to electric power of Section 11(c) of Republic Act
7916, as amended, and Section5(f) of Republic Act 7227 are hereby repealed or modified
accordingly.
The principal powers of the ERB relative to electric public utilities transferred to
the ERC are the following:
1. To regulate and fix the power rates to be charged by elective companies;
2. To issue certificates of public convenience for the operation of electric power utilities;
3. To grant or approve provisional electric rates.
It bears stressing that the conferment upon the ERC of the power to grant provisional rate
adjustments is not inconsistent with any provision of the EPIRA. The powers of the ERB transferred
to the ERC under Section 44 are in addition to the new powers conferred upon the ERC under
Section 43.
Similarly, Sections 8 and 14 of E.O. No. 172 or the ERB Charter continue to be in full force
by virtue of Sections 44 and 80 of the EPIRA. Said provisions of the ERB charter read:
SEC. 8. Authority to Grant Provisional Relief. ⎯ The Board may, upon the filing of
an application, petition or complaint or at any stage thereafter and without prior hearing, on
the basis of the supporting papers duly verified or authenticated, grant provisional relief on
motion of a party in the case or on its own initiative, without prejudice to a final decision
after hearing, should the Board find that the pleadings, together with such affidavits,
documents and other evidence which may be submitted in support of the motion,
substantially support of the provisional order; Provided, That the Board shall immediately
schedule and conduct a hearing thereon within thirty (30) days thereafter, upon publication
and notice to all affected parties.

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SEC. 14. Applicability Clause.— The applicability (applicable) provisions of
Commonwealth Act No. 146, as amended, otherwise known as the “Public Service Act;”
Republic Act No. 6173, as amended, otherwise known as the “Oil Industry Commission Act;”
Republic Act No. 6395, as amended, revising the charter of the National Power Corporation
under C.A. 120; Presidential Decree No. 269, as amended, also referred to as the “National
Electrification Administration Decree;” and Presidential Decree No. 1206, as amended,
creating the Department of Energy, shall continue to have full force and effect, except
insofar as inconsistent with this Order.
The above-quoted applicability clause is quite clear. It cannot be argued that the clause
could not have referred to the provisions of the prior laws empowering the Public Service
Commission (PSC) and the ERB to grant provisional rate adjustments on the premise that the
lawmakers deliberately deleted the provisions in the crafting of the EPIRA. Such an argument begs
the question. What is clear from Sections 80 and 44 is that the legislators saw the superfluity or
needlessness of carrying over in the EPIRA the same provision found in the previous laws. The
power to approve provisional rate increases is included among the powers transferred to the ERC by
virtue of Section 44 since the grant of that authority is not inconsistent with the EPIRA; rather, it is
in full harmony with the thrust of the law which is to strengthen the ERC as the new regulatory
body.
To repeat, the EPIRA grants unto the ERC both old and new powers. The old powers are
referred to in Section 44 while the new ones are listed in Section 43 of the law.
2) YES. The challenged provisional rate increase transgresses Section 4(e), Rule 3 of
the IRR in two major respects. The violations involve a couple of new requirements prescribed by
the IRR. These are, first, the need to publish the application in a newspaper of general circulation
in the locality where the applicant operates; and second, the need for ERC to consider the
comments or pleadings of the customers and LGU concerned in its action on the application or
motion for provisional rate adjustment.
Corollarily, the requirements seek to temper the lack of fairness implicit in the kind of ex
parte modality theretofore followed in regard to applications for provisional rate increases.
Clearly, therefore, although the new requirements are procedural in character, they represent
significant reforms in public utility regulation as they engender substantial benefits to the
consumers. It is in this light that the new requirements should be appreciated and their
observance enforced.
SEAWORTHINESS; A RELATIVE TERM
SANTIAGO LIGHTERAGE CORPORATION vs. COURT OF APPEALS, C-SQUARE CONSOLIDATED MINES

and MANUEL A. PELAEZ,
[G.R. No. 139629. June 21, 2004]
CARPIO, J.:
FACTS: C-Square signed a single voyage charter agreement with Pelaez, who represented himself as
the disponent owner of MV Christine Gay. Pelaez warranted that MV Christine Gay was seaworthy
and can undertake a voyage to South Korea. As the ship was unable to begin the voyage due to
massive engine failure, C-Square sued Pelaez for damages.
For his part, Pelaez filed a third party complaint against Santiago Lighterage for damages
with prayer for writ of preliminary attachment. Pelaez signed the bareboat charter agreement
with Santiago Lighterage because of its representations that MV Christine Gay was seaworthy and
fit to undertake a voyage to South Korea.
In its answer to the third party complaint, Santiago Lighterage argued that Pelaez has no
cause of action against it because MV Christine Gay was seaworthy at the time of delivery. Santiago
Lighterage asserts that delivery of the MV Christine Gay to Pelaez and Pelaez’s subsequent takeover
of the vessel is already a full performance of its obligations. The pertinent part of the bareboat
charter agreement reads:
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3.Delivery – The VESSEL shall be delivered and taken over by the CHARTERERS at
the port of the City of Manila, in such ready berth as the CHARTERERS may direct.
The OWNER shall before and at the time of delivery exercise due diligence to
make the VESSEL seaworthy and in every respect ready in hull, machinery and equipment
for service hereunder. The VESSEL shall be properly documented at time of delivery.
The delivery to the CHARTERERS of the VESSEL and the taking over of the VESSEL
by the CHARTERERS shall constitute a full performance by the OWNER of all the OWNER’S
obligations hereunder, and thereafter the CHARTERERS shall not be entitled to make or
assert any claim against the OWNER on account of the representations or warranties
expressed or implied with respect to the VESSEL but the OWNER shall be responsible for
repairs or renewals occasioned by latent defects in the VESSEL, her machinery or
appurtenances existing at the time of delivery under this Agreement, provided such
defects have manifested before turn-over.
ISSUE: 1) Does the act delivering of MV Christine Gay to Pelaez sufficient to relieve Santiago
Lighterage of any liability?
2) Is MV Christine Gay seaworthy?
HELD: 1) The mere physical transfer of MV Christine Gay from Santiago Lighterage to Pelaez does
not constitute full performance of its obligation under their bareboat charter agreement. Neither
is it considered a delivery. Under the agreement, physical transfer of a seaworthy vessel is
necessary to satisfy delivery. Paragraph 3 of the bareboat charter agreement expressly requires
petitioner “to make the VESSEL seaworthy” at the time of delivery. Since Santiago Lighterage did
not deliver a seaworthy vessel, it failed to perform his obligation to Pelaez under the agreement.
2) Seaworthiness is a relative term. Santiago Lighterage claims that MV Christine Gay later
undertook voyages within the Philippines. However, such subsequent voyages in the Philippines do
not prove the vessel’s seaworthiness to withstand a voyage to South Korea. We quote from
authorities in Maritime Law:
To be seaworthy, a vessel “must have that degree of fitness which an ordinary, careful and
prudent owner would require his vessel to have at the commencement of her voyage, having regard
to all the probable circumstances of it.” Thus the degree of seaworthiness varies in relation to the
contemplated voyage. Crossing the Atlantic calls for stronger equipment than sailing across the
Visayan Sea. It is essential to consider that once the necessary degree of seaworthiness has been
ascertained, this obligation is an absolute one, i.e. the undertaking is that the vessel actually is
seaworthy. It is no excuse that the ship owner took every possible precaution to make her so, if in
fact he failed.
In examining what is meant by seaworthiness we must bear in mind the dual nature of the
carrier’s obligations under a contract of affreightment. To satisfy these duties the vessel must (a)
be efficient as an instrument of transport and (b) as a storehouse for her cargo. The latter part of
the obligation is sometimes referred to as cargoworthiness.
A ship is efficient as an instrument of transport if its hull, tackle and machinery are in a state
of good repair, if she is sufficiently provided with fuel and ballast, and is manned by an efficient
crew.
And a vessel is cargoworthy if it is sufficiently strong and equipped to carry the particular
kind of cargo which she has contracted to carry, and her cargo must be so loaded that it is safe for
her to proceed on her voyage. A mere right given to the charterer to inspect the vessel before
loading and to satisfy himself that she was fit for the contracted cargo does not free the shipowner
from his obligation to provide a cargoworthy ship.
CORPORATION LAW
SEPARATE ENTITY OF CORPORATION FROM ITS OFFICERS; CORPORATIONS AS REAL PARTIES IN
INTEREST; PIERCING

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ALVIN TAN vs. COURT OF APPEALS and ARTHUR DY GUANI

[G.R. No. 127210. August 7, 2003]
CARPIO-MORALES, J.:
FACTS: Arthur Dy Guani agreed to purchase a car being sold by Tan. Since it will be more
advantageous to purchase the car through a lease-financing agreement, the Board of Directors of
Guani Marketing authorized Arthur Dy Guani to 1) purchase a Mercedes Benz through a lease-
financing agreement with CIFC, 2) negotiate with CIFC for the purchase of the vehicle through
lease-financing, and 3) sign all documents necessary to facilitate the purchase. CIFC as lessor and
Guani Marketing as lessee entered into an Equipment Lease Agreement.
Thereafter, the Bureau of Customs issued a warrant of seizure and detention over the
vehicle on account of which it was impounded by the Constabulary Highway Patrol of Cebu City, it
having allegedly been imported without payment of the requisite customs duties and taxes in
violation of the Tariff and Customs Code. The seizure of the vehicle was published in the Newstime
Daily which Arthur Dy Guani claims caused him great embarrassment.
Arthur Guani then filed a complaint, now the subject of the present petition, for “damages
and attorney’s fees,” before the RTC against Tan, alleging that, inter alia, as a result of Tan’s
fraudulent acts, he suffered damages.
Tan allege among others that Guani has no personality to file this action since he is not a
real party in interest, considering that it was Guani Marketing that purchased the car.
ISSUE: Considering his role in the transaction between Guani Marketing and CIFC, does Arthur
Guani have the personality to sue being a real party in interest?
HELD: NO. From the facts of the case, private respondent merely acted as agent of Guani
Marketing, lessee of the vehicle. He is thus not the real party in interest-plaintiff to prosecute the
case. It is the corporation, which is a juridical person with a personality separate and distinct from
its individual stockholders and from that of its officers who manage and run its affairs that is the
real party in interest.
While Arthur Guani concedes that the possession of the vehicle was for and in behalf of
Guani Marketing, he argues that the corporate veil should be pierced since the corporate
personality of Guani Marketing “is used to shield an unlawful and illegal purpose at the instance of .
. . petitioner. Private respondent’s argument does not lie.
The doctrine of piercing the veil of corporate fiction is resorted to as a measure of
protection against, and not to open the door to, deception. In the case at bar, it is petitioner (a
natural person), as the defendant, who is being charged of deception. It is he who is being made to
answer for damages arising from fraud. The doctrine thus finds no application to the plaintiff-
herein private respondent, President and General Manager of Guani Marketing, who is enforcing,
not avoiding or escaping, liability on the basis of fraud.
In fine, private respondent not being the real party in interest to file the complaint, he has
no cause of action. Resolution of the first assigned error bearing on fraud on petitioner’s part is
thus rendered unnecessary.
SEC; INTERIM MANAGEMENT COMMITTEE
RAMON P. JACINTO and JAIME J. COLAYCO vs. FIRST WOMEN’S CREDIT CORPORATION,
represented in this derivative suit by SHIG KATAYAMA
[G.R. No. 154049. August 28, 2003]
BELLOSILLO, J.:
FACTS: Shig Katayama, in his capacity as director and minority stockholder of FWCC, instituted a
derivative suit before the SEC against petitioners Ramon P. Jacinto and Jaime J. Colayco, President
and Vice President, respectively, of FWCC. Katayama claimed that petitioners Jacinto and Colayco
committed company plunder when they raided FWCC’s coffers and diverted the staggering amount
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of P720,333,266.00 to RJ Guitars, RJ Holdings, RJ Music, RJ Bistro, Rajah Broadcasting Network, RJ
FM, RJ Productions (collectively referred to herein as “RJ Group of Companies”) as well as to
companies affiliated with FWCC, namely, Quantum, Shigra, RJ Ventures Realty Corporation and
Save-a-Lot.
Katayama prayed that petitioners be ordered to account for and return the diverted
amount to FWCC and that in the interim a management committee be appointed to end the
dissipation, wastage and loss of corporate funds. Katayama presented the Special Audit Report
prepared by FWCC’s external auditor, Carlos J. Valdez & Associates, stating that from 1993 to 1997
petitioners withdrew P720,333,266.00 from FWCC and transferred the withdrawn amount to RJ
Group of Companies and companies affiliated with FWCC without Board authorization. In the wake
of the diversion, FWCC was left flat broke causing it to default on several of its obligations and to
close down several of its offices around the country. Katayama also averred that the intemperate
withdrawal of funds amounted to grave mismanagement as petitioners placed almost all of the
operating funds of FWCC in one basket, that of petitioner Jacinto’s companies, instead of lending
to as many of its customers to distribute the risk of non-payment.
Before resolving Katayama’s prayer for the appointment of an interim management
committee, Hearing Officer Palmares ordered the presentation of evidence. After petitioners
presented their evidence, Hearing Officer Palmares issued an order creating an Interim
Management Committee composed of three (3) members to oversee the administration of FWCC
pending resolution of the dispute. Hearing Officer Palmares explained that the massive diversion of
funds and the constant bickering among stockholders demanded the immediate creation of a
management committee pendente lite.
The petitioners questioned the appointment/creation of an Interim Management
Committee. It allege among others that the drastic relief of appointing an interim management
committee must be granted only after much serious thought; in other words, they posit that the
creation of a management committee for a solvent and going corporation should be a last-resort
remedy considering that it would deprive the Board of Directors of its power over the corporation.
ISSUE: Considering the fact that FWCC is solvent, is the creation of a management committee
proper?
HELD: YES. The creation of a management committee is proper notwithstanding the fact that
FWCC is solvent. Sec. 6. of P.D. 902-A provides:
In order to effectively exercise such jurisdiction, the Commission shall possess the
following powers: x x x x d) To create and appoint a management committee, board, or body
upon petition or motu propio when there is imminent danger of dissipation, loss, wastage or
destruction of assets or other properties or paralization of business operations of such
corporations or entities which may be prejudicial to the interest of minority stockholders,
parties-litigants or the general public.
A reading of the aforecited legal provision reveals that for a minority stockholder to obtain
the appointment of an interim management committee, he must do more than merely make a
prima facie showing of a denial of his right to share in the concerns of the corporation; he must
show that the corporate property is in danger of being wasted and destroyed; that the business of
the corporation is being diverted from the purpose for which it has been organized; and that there
is serious paralization of operations all to his detriment. It is only in a strong case where there is a
showing that the majority are clearly violating the chartered rights of the minority and putting
their interests in imminent danger that a management committee may be created.
After a review of the records, we are convinced that the appointment of the Interim
Management Committee is fully warranted by the circumstances. The findings of Hearing Officer
Palmares relative to the transfer of funds from FWCC to RJ Group of Companies without the
corresponding Board resolutions, the drastic reduction of the number of FWCC branch offices all
over the country, the suspension of lending operations, the limitation of FWCC’s operations to mere
collection of receivables as well as the inability of FWCC to pay its pressing obligations amply
support the conclusion that there is “imminent danger of dissipation, loss, wastage or destruction
of corporate assets.”
The word “imminent” has been defined as “impending or on the point of happening;” while
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“danger” means “peril or exposure to loss or injury.” The findings of FWCC’s external auditor,
which were embodied in an audit report the accuracy of which was not questioned by petitioners,
support the conclusion that petitioners’ unrestricted and continuous management of FWCC poses an
impending peril to corporate assets. For one, petitioners allowed the release of loans to companies
associated with petitioner Jacinto without the corresponding Board resolutions. Petitioners’
argument that Katayama knew of the practice does not justify the impropriety of their dealings
inasmuch as a corporate act inherently illegal does not cease to be illegal simply because the
questioning stockholder is aware of the illegal practice and hence cannot claim that he was
deceived.
Additionally, as admitted by the parties and borne out by the evidence on record, the
prevailing internal dispute and feud between petitioners and Katayama have resulted in the total
paralization of FWCC’s business operations and adversely affected its collection efforts. In view of
these facts, Hearing Officer Palmares was clearly justified in ordering the appointment of the IMC
to oversee the operation of FWCC and preserve its assets pending resolution of the parties’ dispute.
CAPITALIZATION REQUIREMENTS OF CERTAIN INDUSTRIES
JG SUMMIT HOLDINGS, INC. vs. COURT OF APPEALS, COMMITTEE ON PRIVATIZATION, its

Chairman and Members; ASSET PRIVATIZATION TRUST and PHILYARDS HOLDINGS, INC.
[G.R. No. 124293. September 24, 2003]
PUNO, J.:
FACTS: Kawasaki Heavy Industries, Ltd. of Kobe, Japan was a part of Joint Venture agreement
(KAWASAKI) for the construction, operation and management of the Subic National Shipyard, Inc.
(SNS) which subsequently became the Philippine Shipyard and Engineering Corporation (PHILSECO).
It originally has a 40% proportion on the capital. One of its salient features is the grant to the
parties of the right of first refusal should either of them decide to sell, assign or transfer its
interest in the joint venture.
Pursuant to the program of the government to privatize several government assets, it was
deemed best to sell the National Government’s share in PHILSECO to private entities. After a series
of negotiations between the APT and KAWASAKI, they agreed that the latter’s right of first refusal
under the JVA be “exchanged” for the right to top by five percent (5%) the highest bid for the said
shares. They further agreed that KAWASAKI would be entitled to name a company in which it was a
stockholder, which could exercise the right to top.
After the bidding was held, the highest bidder JG Summit informed APT that it was
protesting the offer of PHI to top its bid. Subsequently, JG Summit was notified that PHI had
already exercised its option and had fully paid its balance. JG then filed a petition for mandamus
but the same was dismissed.
In 2000, the Supreme Court ruled that a shipyard like PHILSECO is a public utility whose
capitalization must be sixty percent (60%) Filipino-owned. Consequently, the right to top granted to
KAWASAKI under the Asset Specific Bidding Rules (ASBR) drafted for the sale of the 87.67% equity of
the National Government in PHILSECO is illegal---not only because it violates the rules on
competitive bidding--- but more so, because it allows foreign corporations to own more than 40%
equity in the shipyard. It also held that “although the petitioner had the opportunity to examine
the ASBR before it participated in the bidding, it cannot be estopped from questioning the
unconstitutional, illegal and inequitable provisions thereof.” Thus, this Court voided the transfer of
the national government’s 87.67% share in PHILSECO to Philyard Holdings, Inc., and upheld the right
of JG Summit.
Philyard Holdings filed a motion for reconsideration.
ISSUE: Is PHILSECO a public utility and as such, it must comply with the 60-40 capitalization
requirement of the constitution?
HELD: NO. A “public utility” is “a business or service engaged in regularly supplying the public
with some commodity or service of public consequence such as electricity, gas, water,
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transportation, telephone or telegraph service.” To constitute a public utility, the facility must be
necessary for the maintenance of life and occupation of the residents. However, the fact that a
business offers services or goods that promote public good and serve the interest of the public does
not automatically make it a public utility. Public use is not synonymous with public interest. As its
name indicates, the term “public utility” implies public use and service to the public.
By nature, a shipyard is not a public utility. A “shipyard” is “a place or enclosure where
ships are built or repaired.” Its nature dictates that it serves but a limited clientele whom it may
choose to serve at its discretion. While it offers its facilities to whoever may wish to avail of its
services, a shipyard is not legally obliged to render its services indiscriminately to the public. It has
no legal obligation to render the services sought by each and every client. The fact that it publicly
offers its services does not give the public a legal right to demand that such services be rendered.
There can be no disagreement that the shipbuilding and ship repair industry is imbued with
public interest as it involves the maintenance of the seaworthiness of vessels dedicated to the
transportation of either persons or goods. Nevertheless, the fact that a business is affected with
public interest does not imply that it is under a duty to serve the public. While the business may be
regulated for public good, the regulation cannot justify the classification of a purely private
enterprise as a public utility.
A shipyard has been considered a public utility merely by legislative declaration. Absent
this declaration, there is no more reason why it should continuously be regarded as such. The fact
that the legislature did not clearly and unambiguously express its intention to include shipyards in
the list of public utilities indicates that that it did not intend to do so. Thus, a shipyard reverts
back to its status as non-public utility prior to the enactment of the Public Service Law.
BOARD OF DIRECTORS; POWER TO PURCHASE PROPERTY
SPOUSES CONSTANTE AND AZUCENA FIRME VS. BUKAL ENTERPRISES AND DEVELOPMENT
CORPORATION
[G.R. NO. 146608, October 23, 2003]
CARPIO, J:
FACTS: The Spouses Firme are the registered owners of a parcel of land located in Quezon City.
Renato De Castro, the vice-president of Bukal Enterprises, authorized his friend Teodoro Aviles, a
broker, to negotiate with the Spouses for the purchase of their property. Despite 3 drafts of deeds
of sale, the Spouses rejected the offer of Bukal Enterprises to purchase the property. However,
when the Spouses visited the property, they were surprised to find that it was already fenced and
occupied by workers of De Castro.
The Spouses demanded that the fence be removed and that the occupants vacate the
property. In turn, Bukal Enterprises wrote the Spouses demanding the latter to sell the property.
They refused. Bukal Enterprises sued for specific performance.
ISSUE: Was the Spouses justified in rejecting the offer of Bukal Enterprises to purchase the
property, which offer was made through Aviles, a mere broker?
HELD: YES. Aviles, who negotiated the purchase of the Property, is neither an officer of Bukal
Enterprises nor a member of the Board of Directors of Bukal Enterprises. There is no Board
Resolution authorizing Aviles to negotiate and purchase the Property for Bukal Enterprises. There is
also no evidence to prove that Bukal Enterprises approved whatever transaction Aviles made with
the Spouses Firme. The power to purchase real property is vested in the board of directors or
trustees. While a corporation may appoint agents to negotiate for the purchase of real property
needed by the corporation, the final say will have to be with the board, whose approval will
finalize the transaction. A corporation can only exercise its powers and transact its business
through its board of directors and through its officers and agents when authorized by a board
resolution or its by-laws.
GOVERNMENT OWNED AND CONTROLLED CORPORATIONS WITH ORIGINAL CHARTERS

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ENGR. RANULFO C. FELICIANO, in his capacity as General Manager of the Leyte Metropolitan
Water District (LMWD), Tacloban City vs. COMMISSION ON AUDIT, Chairman CELSO D. GANGAN,
ET AL.
[G.R. No. 147402. January 14, 2004]
CARPIO, J.:
FACTS: A Special Audit Team from the Commission on Audit audited the accounts of Leyte
Metropolitan Water District (LMWD). Subsequently, the LMWD received a letter from COA
requesting payment of auditing fees.
As General Manager, Engr. Feliciano sent a reply informing COA’s Regional Director that the
water district could not pay the auditing fees. He cited as basis among others Presidential Decree
198 (“PD 198”). He claims that the COA cannot collect auditing fees because it has no audit
jurisdiction over a Local Water District because the same is not a government-owned or controlled
corporation. (GOCC)
According to Engr. Feliciano, what PD 198 created was the Local Waters Utilities
Administration (“LWUA”) and not the LWDs. He claims that LWDs are created “pursuant to” and
not created directly by PD 198. Thus, he concludes that PD 198 is not an “original charter” that
would place LWDs within the audit jurisdiction of COA as defined in the Constitution. He
elaborates that PD 198 does not create LWDs since it does not expressly direct the creation of such
entities, but only provides for their formation on an optional or voluntary basis.
Engr Feliciano further contend that a law must create directly and explicitly a GOCC in
order that it may have an original charter. In short, petitioner argues that one special law cannot
serve as enabling law for several GOCCs but only for one GOCC.
ISSUE: Are the contentions of Engr. Feliciano Correct?
HELD: NO. Obviously, LWDs are not private corporations because they are not created under the
Corporation Code. LWDs exist by virtue of PD 198, which constitutes their special charter. Since
under the Constitution only government-owned or controlled corporations may have special
charters, LWDs can validly exist only if they are government-owned or controlled. To claim that
LWDs are private corporations with a special charter is to admit that their existence is
constitutionally infirm.
Clearly, LWDs exist as corporations only by virtue of PD 198, which expressly confers on
LWDs corporate powers. Section 6 of PD 198 provides that LWDs “shall exercise the powers, rights
and privileges given to private corporations under existing laws.” Without PD 198, LWDs would
have no corporate powers. Thus, PD 198 constitutes the special enabling charter of LWDs. The
ineluctable conclusion is that LWDs are government-owned and controlled corporations with a
special charter.
Section 16, Article XII of the Constitution mandates that “Congress shall not, except by
general law,” provide for the creation of private corporations. Thus, the Constitution prohibits one
special law to create one private corporation, requiring instead a “general law” to create private
corporations. In contrast, the same Section 16 states that “Government-owned or controlled
corporations may be created or established by special charters.” Thus, the Constitution permits
Congress to create a GOCC with a special charter. There is, however, no prohibition on Congress to
create several GOCCs of the same class under one special enabling charter.
A Local Water District is under the audit jurisdiction of the COA.
FRANCHISE
SENATOR ROBERT S. JAWORSKI vs. PAGCOR and SPORTS AND GAMES ENTERTAINMENT
CORPORATION
[G.R. No. 144463. January 14, 2004]
YNARES-SANTIAGO, J.:
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FACTS: In 1998, PAGCOR’s board of directors approved an instrument denominated as “Grant of
Authority and Agreement for the Operation of Sports Betting and Internet Gaming”, which granted
SAGE the authority to operate and maintain Sports Betting station in PAGCOR’s casino locations,
and Internet Gaming facilities to service local and international bettors, provided that to the
satisfaction of PAGCOR, appropriate safeguards and procedures are established to ensure the
integrity and fairness of the games.
Pursuant to the authority granted by PAGCOR, SAGE commenced its operations by
conducting gambling on the Internet on a trial-run basis, making pre-paid cards and redemption of
winnings available at various Bingo Bonanza outlets.
ISSUE: Does PAGCOR, under its franchise, competent to grant SAGE the authority to operate
internet gambling?
HELD: NO. A legislative franchise is a special privilege granted by the state to corporations. It is a
privilege of public concern which cannot be exercised at will and pleasure, but should be reserved
for public control and administration, either by the government directly, or by public agents, under
such conditions and regulations as the government may impose on them in the interest of the
public. It is Congress that prescribes the conditions on which the grant of the franchise may be
made. Thus the manner of granting the franchise, to whom it may be granted, the mode of
conducting the business, the charter and the quality of the service to be rendered and the duty of
the grantee to the public in exercising the franchise are almost always defined in clear and
unequivocal language.
In the case at bar, PAGCOR executed an agreement with SAGE whereby the former grants
the latter the authority to operate and maintain sports betting stations and Internet gaming
operations. In essence, the grant of authority gives SAGE the privilege to actively participate,
partake and share PAGCOR’s franchise to operate a gambling activity. The grant of franchise is a
special privilege that constitutes a right and a duty to be performed by the grantee. The grantee
must not perform its activities arbitrarily and whimsically but must abide by the limits set by its
franchise and strictly adhere to its terms and conditions. A corporation as a creature of the State is
presumed to exist for the common good. Hence, the special privileges and franchises it receives are
subject to the laws of the State and the limitations of its charter. There is therefore a reserved
right of the State to inquire how these privileges had been employed, and whether they have been
abused.
While PAGCOR is allowed under its charter to enter into operator’s and/or management
contracts, it is not allowed under the same charter to relinquish or share its franchise, much less
grant a veritable franchise to another entity such as SAGE. PAGCOR cannot delegate its power in
view of the legal principle of delegata potestas delegare non potest, inasmuch as there is nothing in
the charter to show that it has been expressly authorized to do so.
After a circumspect consideration of the foregoing discussion and the contending positions
of the parties, we hold that PAGCOR has acted beyond the limits of its authority when it passed on
or shared its franchise to SAGE.
PIERCING THE VEIL OF CORPORATE FICTION
MEL V. VELARDE vs. LOPEZ, INC.

[G.R. No. 153886. January 14, 2004]
CARPIO-MORALES, J.:
FACTS: Mel Velarde failed to pay the installments of a loan agreement earlier entered into by him
and Lopez Inc. Apparently in answer to a proposal of Velarde respecting the settlement of the loan,
Lopez Inc. advised him by a letter that he may use his retirement benefits in Sky Vision in partial
settlement of his loan after he settles his accountabilities to the latter and gives his written
instructions to it (Sky Vision). Sky Vision is a subsidiary of Lopez Inc.
As Velarde failed to comply with the conditions of the loan, Lopez Inc. filed a complaint for
collection of sum of money with damages at the Regional Trial Court (RTC) against the former. By
way of compulsory counterclaim, Velarde claimed that he was entitled to retirement benefits from

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Sky Vision, unpaid salaries, unpaid incentives, unpaid share from the “net income of Plaintiff
corporation,” equity in his service vehicle in the amount of P1, 500,000, reasonable return on the
stock ownership plan for services rendered as General Manager, and moral damages and attorney’s
fees.
Lopez Inc. filed a manifestation and a motion to dismiss the counterclaim for want of
jurisdiction. Velarde to asserted in his comment and opposition thereto that the veil of corporate
fiction must be pierced to hold Lopez Inc. liable for his counterclaims. The RTC denied the motion
to dismiss the counterclaim stating among others, that there is identity of interest between
respondent and Sky Vision to merit the piercing of the veil of corporate fiction.
The Court of Appeals held that Lopez Inc. is not the real party-in-interest on the
counterclaim and that there was failure to show the presence of any of the circumstances to justify
the application of the principle of “piercing the veil of corporate fiction. The Orders of the trial
court were thus set aside and the CA dismissed the counterclaims.
ISSUE: May a defendant in a complaint for collection of sum of money raise a counterclaim for
retirement benefits, unpaid salaries and incentives, and other benefits arising from services
rendered by him in a subsidiary of the plaintiff corporation?
HELD: NO. It cannot be gainsaid that a subsidiary has an independent and separate juridical
personality, distinct from that of its parent company, hence, any claim or suit against the latter
does not bind the former and vice versa.
Petitioner argues nevertheless that jurisdiction over the subsidiary is justified by piercing
the veil of corporate fiction. Piercing the veil of corporate fiction is warranted, however, only in
cases when the separate legal entity is used to defeat public convenience, justify wrong, protect
fraud, or defend crime, such that in the case of two corporations, the law will regard the
corporations as merged into one. The rationale behind piercing a corporation’s identity is to
remove the barrier between the corporation from the persons comprising it to thwart the
fraudulent and illegal schemes of those who use the corporate personality as a shield for
undertaking certain proscribed activities.
In applying the doctrine of piercing the veil of corporate fiction, the following requisites
must be established: (1) control, not merely majority or complete stock control; (2) such control
must have been used by the defendant to commit fraud or wrong, to perpetuate the violation of a
statutory or other positive legal duty, or dishonest acts in contravention of plaintiff’s legal rights;
and (3) the aforesaid control and breach of duty must proximately cause the injury or unjust loss
complained of.
Nowhere, however, in the pleadings and other records of the case can it be gathered that
Lopez Inc. has complete control over Sky Vision, not only of finances but of policy and business
practice in respect to the transaction attacked, so that Sky Vision had at the time of the
transaction no separate mind, will or existence of its own. The existence of interlocking directors,
corporate officers and shareholders is not enough justification to pierce the veil of corporate
fiction in the absence of fraud or other public policy considerations.
DOCTRINE OF APPARENT AUTHORITY
LAPULAPU FOUNDATION, INC. and ELIAS Q. TAN vs. COURT OF APPEALS and ALLIED BANKING
CORP.
[G.R. No. 126006. January 29, 2004]
CALLEJO, SR., J.:

FACTS: Elias Q. Tan, then President Lapulapu Foundation, Inc., obtained four loans from Allied
Banking Corporation covered by four promissory notes in the amounts of P100, 000 each. When the
entire obligation became due, it was not paid despite demands by the bank. The Bank filed with
the RTC a complaint seeking payment by Lapulapu Foundation and Elias Tan, jointly and solidarily,
of the sum representing their loan obligation, exclusive of interests, penalty charges, attorney’s
fees and costs.
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The Foundation denied incurring indebtedness from the Bank alleging that Tan obtained the
loans in his personal capacity, for his own use and benefit and on the strength of the personal
information he furnished the Bank. The Foundation maintained that it never authorized petitioner
Tan to co-sign in his capacity as its President any promissory note and that the Bank fully knew that
the loans contracted were made in Tan’s personal capacity and for his own use and that the
Foundation never benefited, directly or indirectly, there from.
For his part, Tan admitted that he contracted the loans from the Bank in his personal
capacity. The parties, however, agreed that the loans were to be paid from the proceeds of Tan’s
shares of common stocks in the Lapulapu Industries Corporation, a real estate firm. The loans were
covered by promissory notes which were automatically renewable (“rolled-over”) every year at an
amount including unpaid interests, until such time as petitioner Tan was able to pay the same from
the proceeds of his aforesaid shares.
ISSUE: May the Foundation correctly raise as a defense that it did not authorize Tan to obtain the
loans involved and therefore it may not be held solidarily liable for them?
HELD: NO. The Court agrees with the CA that the petitioners cannot hide behind the corporate
veil under the following circumstances:
The evidence shows that Tan has been representing himself as the President of Lapulapu
Foundation, Inc. He opened a savings account and a current account in the names of the
corporation, and signed the application form as well as the necessary specimen signature cards
twice, for himself and for the foundation. He submitted a notarized Secretary’s Certificate from
the corporation, attesting that he has been authorized, inter alia, to sign for and in behalf of the
Lapulapu Foundation any and all checks, drafts or other orders with respect to the bank; to
transact business with the Bank, negotiate loans, agreements, obligations, promissory notes and
other commercial documents; and to initially obtain a loan for P100, 000.00 from any bank. Under
these circumstances, the Foundation is liable for the transactions entered into by Tan on its behalf.
Per its Secretary’s Certificate, the Foundation had given Tan ostensible and apparent
authority to inter alia deal with the Bank. Accordingly, the petitioner Foundation is estopped from
questioning Tan’s authority to obtain the subject loans from the Bank. It is a familiar doctrine that
if a corporation knowingly permits one of its officers, or any other agent, to act within the scope of
an apparent authority, it holds him out to the public as possessing the power to do those acts; and
thus, the corporation will, as against anyone who has in good faith dealt with it through such agent,
be estopped from denying the agent’s authority.
CAPACITY to SUE; FOREIGN CORPORATIONS
LORENZO SHIPPING CORP. vs. CHUBB and SONS, INC., ET AL.

[G.R. No. 147724. June 8, 2004.]
PUNO, J:
FACTS: 581 bundles of ERW black steel pipes were loaded on board the vessel M/V Lorcon IV,
owned by Lorenzo Shipping, for shipment to Davao City. Lorenzo Shipping issued a clean bill of
lading designated as Bill of Lading for the account of the consignee, Sumitomo Corporation of San
Francisco, California, USA, which in turn, insured the goods with Chubb and Sons, Inc.
When the goods arrived in Davao, the steel pipes were found in the hatch rusted and
submerged in seawater. The consignee Sumitomo rejected the damaged steel pipes and declared
them unfit for the purpose they were intended. It then filed a marine insurance claim with
respondent Chubb and Sons, Inc., which the latter settled.
As the subrogee insurer, Chubb and Sons, Inc. filed a complaint for collection of a sum of
money against respondents Lorenzo Shipping Gearbulk, and Transmarine. Chubb and Sons, Inc.
alleged that it is not doing business in the Philippines, and that it is suing under an isolated
transaction. The trial court, as well as the CA ruled in favor of Chubb.
Lorenzo Shipping contends among others that because Chubb and Sons is an insurance
company, it was merely subrogated to the rights of its insured, the consignee Sumitomo, after
paying the latter's policy claim. Sumitomo, however, is a foreign corporation doing business in the

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Philippines without a license and does not have capacity to sue before Philippine courts. Since
Sumitomo does not have capacity to sue, Lorenzo Shipping then concludes that, neither the
subrogee Chubb and Sons could sue before Philippine courts.
ISSUE: Is the contention of Lorenzo Shipping Correct?
HELD: NO. Assuming arguendo that Sumitomo cannot sue in the Philippines, it does not follow that
Chubb, as subrogee, has also no capacity to sue in our jurisdiction. When the insurer succeeds to
the rights of the insured, he does so only in relation to the debt. The person substituted (the
insurer) will succeed to all the rights of the creditor (the insured), having reference to the debt due
the latter.
In the instant case, the rights inherited by the insurer, Chubb and Sons, pertain only to the
payment it made to the insured Sumitomo as stipulated in the insurance contract between them,
and which amount it now seeks to recover from Lorenzo Shipping which caused the loss sustained
by the insured Sumitomo. The capacity to sue of Chubb and Sons could not perchance belong to the
group of rights, remedies or securities pertaining to the payment the insurer made for the loss
which was sustained by the insured Sumitomo and covered by the contract of insurance. Capacity
to sue is a right personal to its holder. It is conferred by law and not by the parties.
The law does not prohibit foreign corporations from performing single acts of business. A
foreign corporation needs no license to sue before Philippine courts on an isolated transaction.
Likewise, this Court ruled in Universal Shipping Lines, Inc. vs. Intermediate Appellate Court that:
The private respondent may sue in the Philippine courts upon the marine insurance policies
issued by it abroad to cover international-bound cargoes shipped by a Philippine carrier, even if it
has no license to do business in this country, for it is not the lack of the prescribed license (to do
business in the Philippines) but doing business without such license, which bars a foreign corporation
from access to our courts.
ENTITLEMENT TO MORAL DAMAGES OF A CORPORATION
FILIPINAS BROADCASTING NETWORK, INC., vs. AGO MEDICAL AND EDUCATIONAL CENTER-BICOL
CHRISTIAN COLLEGE OF MEDICINE
[G.R. No. 141994 . January 17, 2005]
CARPIO, J.:
FACTS: Because of the attacks made by Carmelo ‘Mel’ Rima and Hermogenes ‘Jun’ Alegre against
Ago Medical and Educational Center-Bicol Christian College of Medicine (“AMEC”) and its
administrators in their radio program, AMEC charged the two broadcasters as well as the company
for defamation.
As the broadcasters failed to overcome the presumption of malice, the trial court convicted
them. The court also awarded moral damages.
ISSUE: Considering the fact that AMEC is a juridical person, is it entitled to moral damages?
HELD: YES. A juridical person is generally not entitled to moral damages because, unlike a natural
person, it cannot experience physical suffering or such sentiments as wounded feelings, serious
anxiety, mental anguish or moral shock. The Court of Appeals cites Mambulao Lumber Co. v. PNB,
et al. to justify the award of moral damages. However, the Court’s statement in Mambulao that
“a corporation may have a good reputation which, if besmirched, may also be a ground for the
award of moral damages” is an obiter dictum.
Nevertheless, AMEC’s claim for moral damages falls under item 7 of Article 2219 of the
Civil Code. This provision expressly authorizes the recovery of moral damages in cases of libel,
slander or any other form of defamation. Article 2219(7) does not qualify whether the plaintiff is a
natural or juridical person. Therefore, a juridical person such as a corporation can validly complain
for libel or any other form of defamation and claim for moral damages.

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Moreover, where the broadcast is libelous per se, the law implies damages. In such a case,
evidence of an honest mistake or the want of character or reputation of the party libeled goes only
in mitigation of damages. Neither in such a case is the plaintiff required to introduce evidence of
actual damages as a condition precedent to the recovery of some damages. In this case, the
broadcasts are libelous per se. Thus, AMEC is entitled to moral damages.
NOTE: This case is outside the cases covered by the bar exams but we include this case for the
purpose of clarifying the conflicting doctrines regarding the entitlement of a corporation to moral
damages.
BANKING LAWS
FIDUCIARY DUTIES OF BANKS
THE CONSOLIDATED BANK and TRUST CORPORATION vs. COURT OF APPEALS and L.C. DIAZ and
COMPANY, CPAs
[G.R. No. 138569. September 11, 2003]
CARPIO, J.:
FACTS: Instead of giving the passbook to the authorized messenger of L.C. Diaz, the bank gave it to
someone else, resulting to an unauthorized withdrawal of 300,000.00 the following day. The
withdrawal slip bore signatures of the authorized signatories but they deny having signed such slip.
LC Diaz demanded the return of the money but the bank refused. A complaint for recovery of a sum
of money was filed by LC Diaz but the trial court dismissed the complaint and absolved the bank.
In absolving Solidbank, the trial court applied the rules on savings account written on the
passbook. The rules state that “possession of this book shall raise the presumption of ownership and
any payment or payments made by the bank upon the production of the said book and entry therein
of the withdrawal shall have the same effect as if made to the depositor personally.”
Another provision of the rules on savings account states that the depositor must keep the
passbook “under lock and key.” When another person presents the passbook for withdrawal prior to
Solidbank’s receipt of the notice of loss of the passbook, that person is considered as the owner of
the passbook. The trial court ruled that the passbook presented during the questioned transaction
was “now out of the lock and key and presumptively ready for a business transaction.”
The trial court believed that Solidbank’s act of allowing the withdrawal of P300, 000.00 was
not the direct and proximate cause of the loss. The trial court held that L.C. Diaz’s negligence
caused the unauthorized withdrawal. Three facts establish L.C. Diaz’s negligence: (1) the
possession of the passbook by a person other than the depositor L.C. Diaz; (2) the presentation of a
signed withdrawal receipt by an unauthorized person; and (3) the possession by an unauthorized
person of a PBC check “long closed” by L.C. Diaz, which check was deposited on the day of the
fraudulent withdrawal.
The Court of Appeals ruled otherwise and held the bank liable.
ISSUE: Considering all the provisions stated in the passbook and the “negligence” of LC Diaz in
taking care of its passbook, may the bank still be held liable for the unauthorized withdrawal?
HELD: YES. The law imposes on banks high standards in view of the fiduciary nature of banking.
Section 2 of Republic Act No. 8791 (“RA 8791”), which took effect on 13 June 2000, declares that
the State recognizes the “fiduciary nature of banking that requires high standards of integrity and
performance.
This fiduciary relationship means that the bank’s obligation to observe “high standards of
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integrity and performance” is deemed written into every deposit agreement between a bank and its
depositor. The fiduciary nature of banking requires banks to assume a degree of diligence higher
than that of a good father of a family. Article 1172 of the Civil Code states that the degree of
diligence required of an obligor is that prescribed by law or contract, and absent such stipulation
then the diligence of a good father of a family. Section 2 of RA 8791 prescribes the statutory
diligence required from banks – that banks must observe “high standards of integrity and
performance” in servicing their depositors.
Article 1172 of the Civil Code provides that “responsibility arising from negligence in the
performance of every kind of obligation is demandable.” For breach of the savings deposit
agreement due to negligence, or culpa contractual, the bank is liable to its depositor. Calapre left
the passbook with Solidbank because the “transaction took time” and he had to go to Allied Bank
for another transaction. The passbook was still in the hands of the employees of Solidbank for the
processing of the deposit when Calapre left Solidbank. Solidbank’s rules on savings account require
that the “deposit book should be carefully guarded by the depositor and kept under lock and key, if
possible.” When the passbook is in the possession of Solidbank’s tellers during withdrawals, the law
imposes on Solidbank and its tellers an even higher degree of diligence in safeguarding the
passbook.
Likewise, Solidbank’s tellers must exercise a high degree of diligence in insuring that they
return the passbook only to the depositor or his authorized representative. The tellers know, or
should know, that the rules on savings account provide that any person in possession of the
passbook is presumptively its owner. If the tellers give the passbook to the wrong person, they
would be clothing that person presumptive ownership of the passbook, facilitating unauthorized
withdrawals by that person. For failing to return the passbook to Calapre, the authorized
representative of L.C. Diaz, Solidbank and Teller No. 6 presumptively failed to observe such high
degree of diligence in safeguarding the passbook, and in insuring its return to the party authorized
to receive the same.
DUE DILIGENCE REQUIRED OF BANKS EXTEND EVEN TO PERSONS, OR INSTITUTIONS LIKE THE
GSIS, REGULARLY ENGAGED IN THE BUSINESS OF LENDING MONEY SECURED BY REAL ESTATE
MORTGAGES.
GOVERNMENT SERVICE INSURANCE SYSTEM vs. EDUARDO M. SANTIAGO

[G.R. No. 155206. October 28, 2003]
CALLEJO, SR., J.:

FACTS: Deceased spouses Jose Zulueta and Soledad Ramos obtained various loans from the
Government Service Insurance System (GSIS) secured by real estate mortgages over parcels of land.
The Zuluetas failed to pay their loans to the GSIS and the latter foreclosed the real estate
mortgages. The mortgaged properties were sold at public auction. However, not all lots covered by
the titles were sold. 91 lots were expressly excluded from the auction since the lots were
sufficient to pay for all the mortgaged debts.
The sheriff issued a certificate of sale and the same was annotated and inscribed in the
TCTs. Subsequently, an Affidavit of Consolidation of Ownership was executed by GSIS over Zulueta’s
lots, including the lots, which as earlier stated, were already excluded from the foreclosure. GSIS
sold the foreclosed properties to Yorkstown Development Corporation which sale was disapproved
by the Office of the President of the Philippines. The sold properties were returned to GSIS. After
defendant GSIS had re-acquired the properties sold to Yorkstown Development Corporation, it
began disposing the foreclosed lots including the excluded ones.
Meanwhile, Eduardo Santiago and Antonio Vic Zulueta executed an agreement whereby
Zulueta transferred all his rights and interests over the excluded lots. Santiago’s lawyer wrote a
demand letter to GSIS asking for the return of the excluded lots. Santiago filed with the Regional
Trial Court a complaint for reconveyance of real estate against the GSIS. After due trial, the RTC
rendered judgment against GSIS ordering it to reconvey to the respondent, Rosario Enriquez Vda.
de Santiago, in substitution of her deceased husband Eduardo, the lots excluded from the
foreclosure sale.
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ISSUE: In consolidating ownership and causing the issuance of titles in its name over the subject
lots expressly excluded from foreclosure, did GSIS act in bad faith?
HELD: YES. GSIS is not an ordinary mortgagee. It is a government financial institution and, like
banks, is expected to exercise greater care and prudence in its dealings, including those involving
registered lands. Due diligence required of banks extend even to persons, or institutions like the
GSIS, regularly engaged in the business of lending money secured by real estate mortgages.
In this case, GSIS executed an affidavit in consolidating its ownership and causing the
issuance of titles in its name over the subject lots despite the fact that these were expressly
excluded from the foreclosure sale. By so doing, it acted in gross and evident bad faith. It cannot
feign ignorance of the fact that the subject lots were excluded from the sale at public auction. At
the least, its act constituted gross negligence amounting to bad faith. Further, as found by the CA,
the GSIS’ acts of concealing the existence of these lots, its failure to return them to the Zuluetas
and even its attempt to sell them to a third party is proof of the petitioner’s intent to defraud the
Zuluetas and appropriate for itself the subject lots.
LIABILITY FOR DAMAGES; BANKS
UNITED COCONUT PLANTERS BANK vs. TEOFILO C. RAMOS

[G.R. No. 147800. November 11, 2003]
CALLEJO, SR., J.:

FACTS: In a complaint for the collection of a sum of money, UCPB obtained a favorable judgment
holding the spouses Teofilo Ramos Sr. and Amelita Ramos liable as sureties. Upon motion, the court
issued a writ of execution for the enforcement of its decision ordering the Deputy Sheriff to levy
and attach all the real and personal properties belonging to the aforesaid defendants to satisfy the
judgment. In the writ of execution, the name of one of the defendants was correctly stated as
Teofilo Ramos, Sr.
In the implementation of the writ, the bank found a parcel of lot belonging to a certain
Teofilo C. Ramos married to Rebecca F. Ramos. When appraised by UCPB of the said report, the
Sheriff prepared a notice of levy in Civil Case No. 16453 stating, inter alia, that the defendants
were Teofilo Ramos, Sr. and his wife Amelita Ramos and caused the annotation thereof by the
Register of Deeds on the said title. Because of the annotation made on the title, Teofilo C. Ramos’
company, Ramdustrial Corporation, was not able to obtain a loan it needed to participate in a
bidding project.
The levy was subsequently lifted. However, despite the cancellation of the notice of levy,
Teofilo C. Ramos filed a complaint for damages against UCPB and the sheriff.
In its answer, the bank, while admitting that it made a mistake in causing the annotation of
notice of levy on the TCT, denied that it was motivated by malice and bad faith. The bank
contended that after ascertaining that it indeed made a mistake, it proposed that Ramos file a
motion to cancel levy with a promise that it would not oppose the said motion. According to the
bank, it was Ramos who dilly-dallied and failed to file the said motion; forthwith, if any damages
were sustained by him, it was because it took him quite a long time to file the motion. The bank
should not thus be made to suffer for the consequences Ramos’ delay.
ISSUE: May UCPB be held liable for damages?
HELD: YES. In approving the loan of an applicant, the bank concerns itself with proper information
regarding its debtors. UCPB, as a bank and a financial institution engaged in the grant of loans, is
expected to ascertain and verify the identities of the persons it transacts business with. In this
case, it knew that the sureties to the loan granted to ZDC and the defendants in Civil Case No. 94-
1822 were the Spouses Teofilo Ramos, Sr. and Amelita Ramos. The names of the Spouses Teofilo
Ramos, Sr. and Amelita Ramos were specified in the writ of execution issued by the trial court.
The bank in coordination with the sheriff, caused the annotation of notice of levy in the
respondent’s title despite its knowledge that the property was owned by the Teofilo Ramos and his

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wife Rebecca Ramos, who were not privies to the loan availment of ZDC nor parties-defendants in
Civil Case No. 16453. Even when informed that the property levied by the sheriff was owned
another, the bank failed to have the annotation cancelled by the Register of Deeds.
UCPB has access to more facilities in confirming the identity of their judgment debtors. It
should have acted more cautiously, especially since some uncertainty had been reported by the
appraiser whom the bank had tasked to make verifications.
In this case, the name of the judgment debtor in Civil Case No. 16453 was Teofilo Ramos,
Sr., as appearing in the judgment of the court and in the writ of execution issued by the trial court.
The name of the owner of the property covered by TCT No. 275167 was Teofilo C. Ramos. It
behooved the bank to ascertain whether the defendant Teofilo Ramos, Sr. in Civil Case No. 16453
was the same person who appeared as the owner of the property covered by the said title. If it had
done so, it would have surely discovered that the respondent was not the surety and the judgment
debtor in Civil Case No. 16453. The bank failed to do so, and merely assumed that the respondent
and the judgment debtor Teofilo Ramos, Sr. were one and the same person.
In sum, we find that the bank acted negligently in causing the annotation of notice of levy
in the title of the herein respondent, and that its negligence was the proximate cause of the
damages sustained by the respondent.
LIABILITY OF BANKS NOTWITHSTANDING NEGLIGENCE OF DEPOSITOR
CASA MONTESSORI INTERNATIONALE vs. BANK OF THE PHILIPPINE ISLANDS

[G.R. No. 149507. May 28, 2004.]
PANGANIBAN, J :
FACTS: CASA Montessori International maintains a Current Account with BPI wherein its President,
Carina C. Lebron was one of its authorized signatories. After conducting an investigation, CASA
discovered that nine (9) of its checks had been encashed by a certain Sonny D. Santos.
It turned out that 'Sonny D. Santos' with account at BPI's Greenbelt Branch was a fictitious
name used by Leonardo T. Yabut who worked as external auditor of CASA. Yabut voluntarily
admitted that he forged the signature of Ms. Lebron and encashed the checks. CASA filed a
Complaint for Collection with Damages against defendant bank praying that the amount be
restored.
The RTC rendered a decision in favor of CASA. However, the Court of Appeals modified the
decision and apportioned the loss between BPI and CASA. The appellate court took into account
CASA's contributory negligence that resulted in the undetected forgery.
ISSUE: Considering the fact that CASA is not entirely free from fault with respect to the
undetected forgery, should the loss be apportioned between CASA and the bank?
HELD: NO. The negligence is attributable to BPI Alone. Having established the forgery of the
drawer's signature, BPI — the drawee — erred in making payments by virtue thereof. The forged
signatures are wholly inoperative, and CASA — the drawer whose authorized signatures do not
appear on the negotiable instruments — cannot be held liable thereon. Neither is the latter
precluded from setting up forgery as a real defense.
We have repeatedly emphasized that, since the banking business is impressed with public
interest, of paramount importance thereto is the trust and confidence of the public in general.
Consequently, the highest degree of diligence is expected, and high standards of integrity and
performance are even required, of it. By the nature of its functions, a bank is "under obligation to
treat the accounts of its depositors with meticulous care, always having in mind the fiduciary
nature of their relationship.
BPI contends that it has a signature verification procedure, in which checks are honored
only when the signatures therein are verified to be the same with or similar to the specimen
signatures on the signature cards. Nonetheless, it still failed to detect the eight instances of
forgery. Its negligence consisted in the omission of that degree of diligence required of a bank. It
cannot now feign ignorance, for very early on we have already ruled that a bank is "bound to know
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the signatures of its customers; and if it pays a forged check, it must be considered as making the
payment out of its own funds, and cannot ordinarily charge the amount so paid to the account of
the depositor whose name was forged."
BANK’S FIDUCIARY DUTY TO DEPOSITORS; ITS ACCOUNTABILITY FOR WRONGFUL ACTS OF

OFFICERS
PHILIPPINE BANKING CORPORATION vs. COURT OF APPEALS and LEONILO MARCOS

[G.R. No. 127469. January 15, 2004]
CARPIO, J.:
FACTS: When Leonilo Marcos tried to offset the trust receipts he executed with his time deposits
with the bank, he realized that his deposits were insufficient because a part of it was applied as
payment for a promissory note he allegedly made.
Marcos denied that he obtained another loan from the BANK for P500, 000 with interest at
25% per annum supposedly covered by the Promissory note. Marcos bewailed the BANK’s belated
claim that his time deposits were applied to this void promissory note on 12 March 1985.
Marcos filed a complaint for sum of money and damages against the bank. Among others,
the BANK claimed that the promissory note is supported by documentary evidence such as Marcos’
application for this loan and the microfilm of the cashier’s check issued for the loan. The BANK
insisted that Marcos could not deny the agreement for the payment of interest and penalties under
the trust receipt agreements.
ISSUE: May the bank be held liable for negligence with respect to the fictitious promissory note?
HELD: YES. The BANK is liable to Marcos for offsetting his time deposits with a fictitious
promissory note. The BANK’s failure to explain the absence of the original documents and to
maintain a record of the offsetting of this loan with the time deposits bring to fore the BANK’s
dismal failure to fulfill its fiduciary duty to Marcos.
As the BANK’s depositor, Marcos had the right to expect that the BANK was accurately
recording his transactions with it. Upon the maturity of his time deposits, Marcos also had the right
to withdraw the amount due him after the BANK had correctly debited his outstanding obligations
from his time deposits.
By the very nature of its business, the BANK should have had in its possession the original
copies of the disputed promissory note and the records and ledgers evidencing the offsetting of the
loan with the time deposits of Marcos. The BANK inexplicably failed to produce the original copies
of these documents. Clearly, the BANK failed to treat the account of Marcos with meticulous care.
The BANK claims that it is a reputable banking institution and that it has no reason to forge
Promissory Note No. 20-979-83. The trial court and appellate court did not rule that it was the
bank that forged the promissory note. It was Pagsaligan, the BANK’s branch manager and a close
friend of Marcos, whom the trial court categorically blamed for the fictitious loan agreements. The
trial court held that Pagsaligan made up the loan agreement to cover up his inability to account for
the time deposits of Marcos.
Whether it was the BANK’s negligence and inefficiency or Pagsaligan’s misdeed that
deprived Marcos of the amount due him will not excuse the BANK from its obligation to return to
Marcos the correct amount of his time deposits with interest. The duty to observe “high standards
of integrity and performance” imposes on the BANK that obligation. The BANK cannot also unjustly
enrich itself by keeping Marcos’ money.
A bank holding out its officers and agents as worthy of confidence will not be permitted to
profit by the frauds they may thus be enabled to perpetrate in the apparent scope of their
employment; nor will it be permitted to shirk its responsibility for such frauds, even though no
benefit may accrue to the bank there from (10 Am Jur 2d, p. 114). Accordingly, a banking
corporation is liable to innocent third persons where the representation is made in the course of its
business by an agent acting within the general scope of his authority even though, in the particular
case, the agent is secretly abusing his authority and attempting to perpetrate a fraud upon his
principal or some other person, for his own ultimate benefit.

43
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COMMERCIAL
INVESTMENTS OF BANKS IN REAL PROPERTY, LIMITATIONS
TALA REALTY SERVICES CORPORATION vs. BANCO FILIPINO SAVINGS AND MORTGAGE BANK
[G.R. No. 143263. January 29, 2004]
FACTS: Since Banco Filipino Savings and Mortgage Bank had to unload some of its branch sites
because it has reached its allowable limit provided by the General Banking Act, the majority
stockholders of the bank formed TALA Realty who would purchase the existing bank sites of Banco
Filipino and lease them back to the latter. The bank executed in favor of TALA deeds of sale
transferring to the latter its branch sites. In turn, TALA leased these branch sites to the bank
through separate contracts of lease for a period of twenty (20) years, renewable for another twenty
(20) years. On the same day, another lease contract was executed by the parties covering each
branch site providing for a period of eleven (11) years, renewable for another nine (9) years at the
option of the bank.
In 1985, the Central Bank ordered the closure of the bank. After a long legal battle, the
Supreme Court declared the closure illegal and ordered the reopening of the bank. In 1992, TALA
wrote to the bank informing it of the expiration of the 11-year lease contract. Thereupon, they
started to negotiate for its renewal, but they failed to reach an agreement.
In 1994, TALA notified the bank that the lease shall no longer be renewed and demanded
that it vacate the premises and pay the rents in arrears. The bank did not heed such demand,
prompting TALA to file a case for unlawful detainer. The MeTC rendered judgment holding that the
complaint for illegal detainer is premature since the 20-year lease contract has not yet expired.
Thus, it dismissed the complaint without prejudice to its filing at the right time.
The RTC rendered a Decision reversing the MeTC judgment and ordering the remand of the
entire records to said court for further proceedings. The RTC held that there exists a proper case
for illegal detainer based primarily on non-payment of rent. On appeal via a petition for review,
the Court of Appeals promulgated the challenged Decision dismissed the petition and upheld the
20-year lease contract between the parties.
TALA maintains that the Court of Appeals erred in holding that the lease contract between
the parties is for a period of twenty (20) years. Even granting that the lease is for twenty (20)
years, still respondent should have been ejected from the premises for non-payment of rent.
ISSUE: Considering the fact that the Bank only transferred its sites to TALA due to the limits set by
law, may Tala successfully seek any remedy against the Bank for the latter’s non-payment of
rentals?
HELD: Equity dictates that Tala should not be allowed to collect rent from the Bank. The factual
milieu of the instant case clearly shows that both the Bank and Tala participated in the deceptive
creation of a trust to circumvent the real estate investment limit under the General Banking Act.
Upholding Tala’s right to collect rent from the period during which the Bank was arbitrarily closed
would allow Tala to benefit from the illegal ‘warehousing agreement.’
Just as the Bank should not be allowed to benefit from its deceptive ‘warehousing
agreement,’ Tala should not also benefit from the arrangements as it was the Bank’s major
stockholders that proposed the arrangement and incorporated Tala. Tala committed deception by
participating in the ‘warehousing agreement,’ and committed another deception when it turned
the tables on the Bank and denied the arrangement. Allowing Tala to further benefit from the
‘warehousing agreement’ is unconscionable, to say the least.
Neither the Bank nor Tala came to court with clean hands; neither will obtain relief from
the court as one who seeks equity and justice must come to court with clean hands (Roque vs.
Lapuz, et al., 96 SCRA 741 [1980]). By not allowing Tala to collect from the Bank rent for the
period during which the latter was arbitrarily closed, both Tala and the Bank will be left where
they are, each paying the price for its deception.
If at all, petitioner TALA should seek remedy for its loss from the Central Bank which
caused the respondent bank’s arbitrary closure and not from the bank which was itself a victim of
Law);
Patrick
Salvador Escalante
44
COMMERCIAL
the arbitrary act of the government. Indeed, there is no ground for ejectment – either expiration of
the lease or non-payment of rent.
AUTHORITY OF A BANK OFFICER
BPI FAMILY SAVINGS BANK vs. FIRST METRO INVESTMENT CORP.

[G.R. No. 132390 May 21, 2004]
FACTS: FMIC, through its Executive Vice President Antonio Ong, opened current account and
deposited a METROBANK check of P100 million with BPI Family Bank. Ong made the deposit upon
request of his friend, Ador de Asis, a close acquaintance of Jaime Sebastian, then Branch Manager
of BPI FB San Francisco del Monte Branch. Sebastian’s aim was to increase the deposit level in his
Branch.
BPI FB, through Sebastian, guaranteed the payment of P14,667,687.01 representing 17% per
annum interest of P100 million deposited by FMIC. The latter, in turn, assured BPI FB that it will
maintain its deposit of P100 million for a period of one year on condition that the interest of 17%
per annum is paid in advance.
BPI paid the interest however, on August 29, 1989, on the basis of an Authority to Debit
signed by Ong and Ma. Theresa David, Senior Manager of FMIC, BPI FB transferred P80 million from
FMIC’s current account to the savings account of Tevesteco Arrastre — Stevedoring, Inc.
FMIC denied having authorized the transfer of its funds to Tevesteco, claiming that the
signatures of Ong and David were falsified. Thereupon, to recover immediately its deposit, FMIC, on
September 12, 1989, issued BPI FB check no. 129077 for P86,057,646.72 payable to itself and drawn
on its deposit with BPI FB SFDM branch. But upon presentation for payment on September 13, 1989,
BPI FB dishonored the check as it was “drawn against insufficient funds” (DAIF).
Consequently, FMIC filed with the Regional Trial Court a civil case against BPI FB. Both the
RTC and the CA decided in favor of petitioner FMIC holding BPI liable to pay the amount of 80
million pesos with interest at the rate of 17%.
In its attempt to evade any liability therefor, petitioner now impugns the validity of the
subject agreement on the ground that its Branch Manager, Jaime Sebastian, overstepped the limits
of his authority in accepting respondent’s deposit with 17% interest per annum.
ISSUE: Can BPI question the authority of its Branch Manager in order to evade its liability?
HELD: NO. We have held that if a corporation knowingly permits its officer, or any other agent, to
perform acts within the scope of an apparent authority, holding him out to the public as possessing
power to do those acts, the corporation will, as against any person who has dealt in good faith with
the corporation through such agent, be estopped from denying such authority.
“A bank holding out its officers and agent as worthy of confidence will not be permitted to
profit by the frauds they may thus be enabled to perpetrate in the apparent scope of their
employment; nor will it be permitted to shirk its responsibility for such frauds, even though no
benefit may accrue to the bank therefrom. Accordingly, a banking corporation is liable to innocent
third persons where the representation is made in the course of its business by an agent acting
within the general scope of his authority even though the agent is secretly abusing his authority and
attempting to perpetrate a fraud upon his principal or some other person for his own ultimate
benefit.”
INTELLECTUAL PROPERTY LAW

WORKS SUBJECT OF COPYRIGHT; PATENTS; TRADEMARKS; UNFAIR COMPETITION
PEARL & DEAN (PHIL.), INCORPORATED vs. SHOEMART, INCORPORATED, and NORTH EDSA
MARKETING, INCORPORATED
[G.R. No. 148222. August 15, 2003]
45
DigestsLAW
COMMERCIAL
CORONA, J.:
FACTS: Pearl and Dean (Phil.), Inc. is engaged in the manufacture of advertising display units
simply referred to as light boxes, which utilize specially printed posters sandwiched between
plastic sheets and illuminated with back lights. Pearl and Dean was able to secure a Certificate of
Copyright Registration over these illuminated display units. The advertising light boxes were
marketed under the trademark “Poster Ads”. The application for registration of the trademark was
filed with the Bureau of Patents, Trademarks and Technology Transfer.
Pearl and Dean used to have a contact with Shoemart, Inc. (SMI) for the lease and
installation of light boxes. The contract, however, was later rescinded. Pearl and Dean
subsequently discovered that SMI entered into contracts of lease with other companies involving
similar light boxes.
Upon demand of P & D, SMI suspended the leasing of 224 light boxes and NEMI took down its
advertisements for “poster ads” from the lighted units in SMI’s stores. Claiming that both SMI and
NEMI failed to meet all its demands, Pearl & Dean filed a case for infringement of trademark and
copyright, unfair competition and damages.
In denying the charges hurled against it, SMI maintained that it independently developed its
poster panels using commonly known techniques and available technology, without notice of or
reference to Pearl and Dean’s copyright. SMI noted that the registration of the mark “Poster Ads”
was only for stationeries such as letterheads, envelopes, and the like. Besides, according to SMI,
the word “Poster Ads” is a generic term, which cannot be appropriated as a trademark, and, as
such, registration of such mark is invalid. It also stressed that Pearl and Dean is not entitled to the
reliefs prayed for in its complaint since its advertising display units contained no copyright notice.
ISSUES: 1) If the engineering or technical drawings of an advertising display unit (light box) are
granted copyright protection, is the light box depicted in such engineering drawings ipso facto also
protected by such copyright?
2) If, despite its manufacture and commercial use of the light boxes without license from
petitioner, private respondents cannot be held legally liable for infringement of P & D’s copyright
over its technical drawings of the said light boxes, should they be liable instead for infringement of
patent?
3) Can the owner of a registered trademark legally prevent others from using such
trademark if it is a mere abbreviation of a term descriptive of his goods, services or business?
HELD:
1) NO. Copyright, in the strict sense of the term, is purely a statutory right. Being a mere
statutory grant, the rights are limited to what the statute confers. It may be obtained and enjoyed
only with respect to the subjects and by the persons, and on terms and conditions specified in the
statute. Accordingly, it can cover only the works falling within the statutory enumeration or
description.
P & D secured its copyright under the classification class “O” work. This being so,
petitioner’s copyright protection extended only to the technical drawings and not to the light box
itself because the latter was not at all in the category of “prints, pictorial illustrations, advertising
copies, labels, tags and box wraps.” Stated otherwise, even as we find that P & D indeed owned a
valid copyright, the same could have referred only to the technical drawings within the category of
“pictorial illustrations.” It could not have possibly stretched out to include the underlying light
box.
2) NO. For some reason or another, P & D never secured a patent for the light boxes. It
therefore acquired no patent rights which could have protected its invention, if in fact it really
was. And because it had no patent, P & D could not legally prevent anyone from manufacturing or
commercially using the contraption.
To be able to effectively and legally preclude others from copying and profiting from the
invention, a patent is a primordial requirement. No patent, no protection. The ultimate goal of a
patent system is to bring new designs and technologies into the public domain through disclosure.

Law);
Patrick
Salvador Escalante
46
COMMERCIAL
Ideas, once disclosed to the public without the protection of a valid patent, are subject to
appropriation without significant restraint.
Not having gone through the arduous examination for patents, the P & D cannot exclude
others from the manufacture, sale or commercial use of the light boxes on the sole basis of its
copyright certificate over the technical drawings.
3) NO. This issue concerns the use by respondents of the mark “Poster Ads”. P & D was
able to secure a trademark certificate for it, but one where the goods specified were “stationeries
such as letterheads, envelopes, calling cards and newsletters.” Petitioner admitted it did not
commercially engage in or market these goods.
PATENTS; DOCTRINE OF EQUIVALENTS
SMITH KLINE BECKMAN CORPORATION vs. COURT OF APPEALS ET AL.

[G. R. No. 126627. August 14, 2003]
CARPIO-MORALES, J.:
FACTS: Alleging that they have the same products, Smith Kline Beckman Corporation sued Tryco
Pharma Corporation for infringement of patent and unfair competition claiming that its patent
covers or includes the substance Albendazole such that Tryco, by manufacturing, selling, using, and
causing to be sold and used the drug Impregon without its authorization, infringed its Letters of
Patent as well as committed unfair competition for advertising and selling as its own the drug
Impregon although the same contained petitioner’s patented Albendazole.
In its answer, Tryco Pharma averred that Smith Kline’s letters of patent does not cover the
substance Albendazole for nowhere in it does that word appear; that even if the patent were to
include Albendazole, such substance is unpatentable; that the Bureau of Food and Drugs allowed it
to manufacture and market Impregon with Albendazole as its known ingredient.
Smith Kline argues that under the doctrine of equivalents for determining patent
infringement, Albendazole, the active ingredient it alleges was appropriated by Tryco Pharma for
its drug Impregon, is substantially the same as methyl 5 propylthio-2-benzimidazole carbamate
covered by its patent since both of them are meant to combat worm or parasite infestation in
animals. It cites the “unrebutted” testimony of its witness Dr. Godofredo C. Orinion (Dr. Orinion)
that the chemical formula in Letters Patent No. 14561 refers to the compound Albendazole.
Petitioner adds that the two substances substantially do the same function in substantially the
same way to achieve the same results, thereby making them truly identical.
ISSUE: Considering the fact that the products of the contending parties both involve neutralizing
parasites in animals, that there is identity of results, could there be infringement of patent?
HELD: NO. From an examination of the evidence on record, this Court finds nothing infirm in the
appellate court’s conclusions with respect to the principal issue of whether there was patent
infringement to the prejudice of Smith Kline.
From a reading of the 9 claims of Letters Patent No. 14561 in relation to the other portions
thereof, no mention is made of the compound Albendazole. All that the claims disclose are: the
covered invention, that is, the compound methyl 5 propylthio-2-benzimidazole carbamate; the
compound’s being anthelmintic but nontoxic for animals or its ability to destroy parasites without
harming the host animals; and the patented methods, compositions or preparations involving the
compound to maximize its efficacy against certain kinds of parasites infecting specified animals.
When the language of its claims is clear and distinct, the patentee is bound thereby and
may not claim anything beyond them. And so are the courts bound which may not add to or detract
from the claims matters not expressed or necessarily implied, nor may they enlarge the patent
beyond the scope of that which the inventor claimed and the patent office allowed, even if the
patentee may have been entitled to something more than the words it had chosen would include.
While petitioner concedes that the mere literal wordings of its patent cannot establish
private respondent’s infringement, it urges this Court to apply the doctrine of equivalents.
The doctrine of equivalents provides that an infringement also takes place when a device

47
DigestsLAW
COMMERCIAL
appropriates a prior invention by incorporating its innovative concept and, although with some
modification and change, performs substantially the same function in substantially the same way to
achieve substantially the same result. Yet again, a scrutiny of petitioner’s evidence fails to
convince this Court of the substantial sameness of petitioner’s patented compound and
Albendazole. While both compounds have the effect of neutralizing parasites in animals, identity
of result does not amount to infringement of patent unless Albendazole operates in substantially
the same way or by substantially the same means as the patented compound, even though it
performs the same function and achieves the same result. In other words, the principle or mode of
operation must be the same or substantially the same.
The doctrine of equivalents thus requires satisfaction of the function-means-and-result
test, the patentee having the burden to show that all three components of such equivalency test
are met.
As stated early on, Smith Kline’s evidence fails to explain how Albendazole is in every
essential detail identical to methyl 5 propylthio-2-benzimidazole carbamate. Apart from the fact
that Albendazole is an anthelmintic agent like methyl 5 propylthio-2-benzimidazole carbamate,
nothing more is asserted and accordingly substantiated regarding the method or means by which
Albendazole weeds out parasites in animals, thus giving no information on whether that method is
substantially the same as the manner by which petitioner’s compound works. The testimony of Dr.
Orinion lends no support to petitioner’s cause, he not having been presented or qualified as an
expert witness who has the knowledge or expertise on the matter of chemical compounds.

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Patrick
Salvador Escalante

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10

San Beda College of Law Case

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HOLDER IN DUE COURSE; PRESUMPTION OF ACQUISITION OF AN INSTRUMENT FOR A

CELY YANG vs. HON. COURT OF APPEALS ET AL.

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