Hierarchy of Diligence

By Atty. Jun de Zuñiga

When one deals with banks, the expectation is that they will discharge their responsibilities to the public in a
matter befitting the fiduciary relationship between them. Rightly so, because it is basic that every person
obliged to give something is also obliged to take care of it with the proper diligence of a good father of a
family (Art. 1163, Civil Code).

How would one then define the degree of due diligence that banks should observe? The law provides a guide
in saying that such diligence is that which is required by the nature of the obligation and corresponds with the
circumstances of person, time and place (Art. 1173, ibid.).

In line with this guide, the Supreme Court in several cases has made these pronouncements: (1) the degree of
diligence required of banks should be more than that of a good father of a family and it is grounded on the
fiduciary nature of the relationship between the bank and its depositors; (2) no less than the highest degree of
diligence is required of banks by reason of the fact that the banking business is impressed with public
interest; (3) the degree of responsibility, care and trustworthiness expected of the banks’ employees is far
greater than those of ordinary clerks and employees; and (4) the fiduciary relationship between the bank and
the depositor means that the bank’s obligation to observe high standards of integrity and performance is
deemed written into every deposit agreement.

For trust corporations and for banks discharging trust functions, this expected degree of diligence would even
be higher under the prudent man’s rule (Sec. 80, General Banking Law). This is a rule for those who are
investing the money of others who are thus required to act as a prudent man would act with discretion and
intelligence to seek reasonable income, preserve capital and in general avoid speculative investments (Barron’s
Financial Guides). What is the reason then why a higher diligence is required from the trustee? The basic
difference is that a bank which lends out the amount deposited would still be liable to pay the depositor even if
the loan turns sour because of the debtor-creditor relationship between them, whereas in an investment made
by the trustee who in effect merely acts as agent, in case of loss it is borne by the trustor, and not by the trustee.

For completion of the discussion on due diligence, the next level of due diligence in the Philippine legal
system is that of extraordinary diligence required from common carriers or those 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 (Arts. 1732 and 1733, Civil Code). The standards for such extraordinary diligence
were defined to mean that “a common carrier is bound to carry the passengers safely as far as human care and
foresight can provide, using the utmost diligence of very cautious persons with a due regard for all the
circumstances (Art. 1755, ibid.). Also under Section 16 of the BSP Charter, members of the Monetary Board
and personnel of the Bangko Sentral are expected to exercise extraordinary diligence in the performance of
their duties.

*****

The above comments are the personal views of the writer. His email address is jzuniga@bsp.gov.ph

Source: By Atty. Jun de Zuñiga

When one deals with banks, the expectation is that they will discharge their responsibilities to the public in a
matter befitting the fiduciary relationship between them. Rightly so, because it is basic that every person
obliged to give something is also obliged to take care of it with the proper diligence of a good father of a
family (Art. 1163, Civil Code).

How would one then define the degree of due diligence that banks should observe? The law provides a guide
in saying that such diligence is that which is required by the nature of the obligation and corresponds with the
circumstances of person, time and place (Art. 1173, ibid.).

In line with this guide, the Supreme Court in several cases has made these pronouncements: (1) the degree of
diligence required of banks should be more than that of a good father of a family and it is grounded on the
fiduciary nature of the relationship between the bank and its depositors; (2) no less than the highest degree of
diligence is required of banks by reason of the fact that the banking business is impressed with public
interest; (3) the degree of responsibility, care and trustworthiness expected of the banks’ employees is far
greater than those of ordinary clerks and employees; and (4) the fiduciary relationship between the bank and
the depositor means that the bank’s obligation to observe high standards of integrity and performance is
deemed written into every deposit agreement.

For trust corporations and for banks discharging trust functions, this expected degree of diligence would even
be higher under the prudent man’s rule (Sec. 80, General Banking Law). This is a rule for those who are
investing the money of others who are thus required to act as a prudent man would act with discretion and
intelligence to seek reasonable income, preserve capital and in general avoid speculative investments (Barron’s
Financial Guides). What is the reason then why a higher diligence is required from the trustee? The basic
difference is that a bank which lends out the amount deposited would still be liable to pay the depositor even if
the loan turns sour because of the debtor-creditor relationship between them, whereas in an investment made
by the trustee who in effect merely acts as agent, in case of loss it is borne by the trustor, and not by the trustee.

For completion of the discussion on due diligence, the next level of due diligence in the Philippine legal
system is that of extraordinary diligence required from common carriers or those 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 (Arts. 1732 and 1733, Civil Code). The standards for such extraordinary diligence
were defined to mean that “a common carrier is bound to carry the passengers safely as far as human care and
foresight can provide, using the utmost diligence of very cautious persons with a due regard for all the
circumstances (Art. 1755, ibid.). Also under Section 16 of the BSP Charter, members of the Monetary Board
and personnel of the Bangko Sentral are expected to exercise extraordinary diligence in the performance of
their duties.

*****

The above comments are the personal views of the writer. His email address is jzuniga@bsp.gov.ph