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2008 Bar Examinations Questions

By: Paulynn S. Lentejas

Corporation entered into a contract with PT Construction Corp. for the latter to construct and
build a sugar mill within six (6) months. They agreed that in case of delay, PT Construction
Corp. will pay X Corporation P100,000 for every day of delay. To ensure payment of the agreed
amount of damages, PT Construction Corporation secured from Atlantic Bank a confirmed and
irrevocable letter of credit which was accepted by X Corporation in due time. One week before
the expiration of the six (6) month period, PT Construction Corp. requested for an extension of
time to deliver claiming that the delay was due to the fault of X Corporation. A controversy as to
the cause of the delay which involved the workmanship of the building ensued. The controversy
remained unresolved. Despite the controversy, X Corporation presented a claim against Atlantic
Bank by executing a draft against the letter of credit.
a) Can Atlantic Bank refuse payment due to the unresolved controversy? Explain. (3%)
b) Can X Corporation claim directly from PT Construction Corporation? Explain. (3%)
1. No, Atlantic Bank cannot refuse payment.

Under the independence principle of letters of credit, the issuing bank is obliged to pay a draft
drawn by the beneficiary upon tender of the required documents without need of examining the
main contract, the letter of credit being an independent undertaking by the bank.

In the given case, the unresolved controversy as to the cause of the delay in the main contract
does not in any way affect Atlantic Bank's obligation under the letter of credit. This is especially
true since the letter of credit is designated as irrevocable, which, thus, makes definite the bank's
undertaking to pay.

Hence, considering that all the required documents have been tendered by X Corporation,
Atlantic Bank cannot validly refuse to pay.

2. Yes, X Corporation may directly claim from PT Construction Corp.

Under the Civil Code, which is suppletory to the Code of Commerce, a contract, once perfected
binds the parties not only to the fulfillment of what has been stipulated but also to all the
consequences which according to their nature may be in keeping with good faith, usage and law.

A careful perusal of the contract between X Corporationand PT Construction Corp. reveals the
intention of the parties to make the letter of credit answerable for damages occasioned by the
latter's delay. At the same time, there is no showing that this is the only remedy available to X

Hence, a claim against the letter of credit is merely an alternative recourse and does not in any
way prevent X Corporation from claiming directly against PT Construction Corp. (Transfield
Phils. Inc. vs. Luzon Hydro Corporation, G.R. No. 146717, Nov. 22, 2004)

AB Corporation drew a check for payment to XY Bank. The check was given to an officer of AB
Corporation who was instructed to deliver it to XY Bank. Instead, the officer, intending to
defraud the Corporation, filled up the check by making himself as the payee and delivered it to
XY bank for deposit to his personal account. XY Bank debited AB Corporations account. AB
Corporation came to know of the officers fraudulent act after he absconded. AB Corporation
asked XY Bank to credit its amount. XY Bank refused.
a) If you were the judge, what issues would you consider relevant to resolve the case? Explain.
b) How would you decide the case? (2%)

1. If I were the judge, I would consider the following issues as relevant to the case:
Whether or not AB Corporation is negligent
If so, whether or not such negligence is the proximate cause
Whether or not there is contributory negligence on the part of XY Bank
2. AB Corporation must bear the loss.

The Negotiable Instruments Law provides that where an instrument is wanting in any material
particular,the person in possession thereof has prima facie authority to complete it by filling up
the blanks therein. This rule is founded upon the principle that where one of two persons must
suffer by the bad faith of another, the loss must fall upon the one who first reposed confidence
and made it possible for the loss to occur.

Applying said principle to the case at bar, although AB Corporation cannot necessarily be
faulted for placing confidence on its own officer, the fact remains that such act is the proximate
cause of the loss. Moreover, there is no showing that XY Bank is likewise negligent. By the very
nature of negotiable instruments, one is not obligated to inquire beyond what appears on its

Hence, as between the drawer AB Corporation and drawee XY Bank, the former bears the loss.

Nelson owned and controlled Sonnel Construction Company. Acting for the company, Nelson
contracted the construction of a building. Without first installing a protective net atop the
sidewalks adjoining the construction site, the company proceeded with the construction work.
One day a heavy piece of lumber fell from the building. It smashed a taxicab which at that time
had gone offroad and onto the sidewalk in order to avoid the traffic. The taxicab passenger died
as a result.
a) Assume that the company had no more account and property in its name. As counsel for the
heirs of the victim, whom will you sue for damages, and what theory will you adopt? (3%)
b) If you were the counsel for Sonnel Construction, how would you defend your client? What
would be your theory? (2%)
c) Could the heirs hold the taxicab owners and driver liable? Explain. (2%)

1. As counsel for the heirs of the victim, I will sue Nelson as owner of Sonnel Construction
Company using the Doctrine of Piercing the Veil of Corporate Fiction.

As a general rule, the liability of a corporation is separate and distinct from that of the persons
comprising it. However, as an exception to the rule, the veil of corporate fiction may be pierced
when the separate personality of the corporation is used as a shield to avoid a clear legal
obligation. In such an event, it is treated as a mere association of persons upon whom liability

In the given case, Sonnel Construction Company has a clear legal obligation to the heirs of the
victim for its negligence in not installing a protective net atop the sidewalk before beginning
construction. Nelson, as owner of the company, cannot use the separate entity rule in order to
avoid liability. This is especially true when the company had no more account and property
under its name.

2. If I were the counsel of Sonnel Construction, I would raise the defense of due diligence in the
selection and supervision of its employees.

Under the doctrine of vicarious liability of employers, the employer may be relieved of
responsibility for the negligent acts of their employees if they can show that they observed all the
diligence of a good father of a family to prevent damage.

In the given case, Sonnel Construction, as employer, may prove due diligence in the selection
and supervision of its employees by establishing that prior to hiring, it examined them as to their
qualifications, experience and service records and during the course of employment, it
formulated standard operating procedures, monitored their implementation and imposed
disciplinary measures for breaches thereof.

3. Yes, the heirs may hold the taxicab owner and the driver liable.

As regards the taxicab owner, the heirs have two concurrent causes of action based on the
vicarious liability of an employer and based on contractual breach. In the first, the negligence of
the driver gives rise to the presumption of negligence of the taxicab owner as its employer. In the
second, there is a contract of carriage between the taxicab owner and its passenger and the
breach thereof by the former gives rise to the presumption that it failed to exercise extraordinary

In addition, the heirs also have two concurrent causes of action against the driver. First, they
may hold the driver criminally liable for reckless imprudence resulting in homicide. In which
case, the taxicab owner is also subsidiarily liable in case the driver becomes insolvent. Second,
the heirs may likewise sue the driver for damages based on tort.
All four cases may be pursued separately and simultaneously for they are independent of each
other. The only caveat is that the plaintiff may not recover twice for the same negligent act.

a) Since February 8, 1935, the legislature has not passed even a single law creating a private
corporation. What provision of the Constitution precludes the passage of such a law? (3%)
b) May the composition of the Board of Directors of the National Power Corporation (NPC) be
validly reduced to three (3)? Explain your answer fully. (2%)

1. Section 16, Article XII of the 1987 Constitution provides that Congress shall not, except by
general law, provide for the formation, organization, or regulation of private corporations.
Government-owned or controlled corporations may be created or established by special charters
in the interest of the common good and subject to the test of economic viability.

2. Yes, the composition of the board of directors of the NPC may be validly reduced to three (3).

The NPC is a government-owned or controlled corporation (GOCC) governed by its own
charter. The limitation under the Corporation Code that the number of directors be not less than
five (5) but not more than fifteen (15) does not apply to a GOCCthat has its own charter.
Pedro owns 70% of the subscribed capital stock of a company which owns an office building.
Paolo and Juan own the remaining stock equally between them. Paolo owns a security agency, a
janitorial company and a catering business. In behalf of the office building company, Paoplo
engaged his companies to render their services to the office building. Are the service contracts
valid? Explain. (4%)
Yes, the service contracts are valid.

Under the Corporation Code, contracts entered into by interlocking directors are valid if the
interest of the interlocking director in one corporation is nominal -- that is, less than 20% of the
outstanding capital stock -- and provided that the following conditions are met:
the presence of such director in the board meeting approving the contract was not necessary to
constitute a quorum his vote was not necessary to approve the contract
the contract is fair and reasonable under the circumstances.
According to the facts of the case, Pedro owns 70% of the stocks, leaving 30% to be divided
equally between Juan and Paolo. This shows that Paolo owns only a nominal interest of 15%.
Hence, provided that all the other conditions are met, Paolo's service contracts with the
company are valid.

Ace Cruz subscribe to 100,000 shares of stock of JP Development Corporation, which has a par
value of P1 per share. He paid P25,000 and promised to pay the balance before December 31,
2008. JP Development Corporation declared a cash dividend on October 15, 2008, payable on
December 1, 2008.
a) For how many shares is Ace Cruz entitled to be paid cash dividends? Explain. (2%)
b) On December 1, 2008, can Ace Cruz compel JP Development Corporation to issue to him the
stock certificate corresponding to the P25,000 paid by him? (2%)

1. Ace Cruz is entitled to be paid cash dividends for his entire subscribed shares of 100,000.
Under the Corporation Code, holders of subscribed shares not fully paid which are not
delinquent shall have all the rights of a stockholder. This includes the proprietary right of the
stockholder to receive dividends based on his total subscription.

2. No, Ace Cruz cannot compel JP Development Corporation to issue to him the stock certificate.
The Corporation Code provides that no certificate of stock shall be issued to a subscriber until
the full amount of his subscription together with interest and expenses (in case of delinquent
shares) if any is due, has been paid.

a) Can a distressed corporation file a petition for corporate rehabilitation after the dismissal of its
earlier petition for insolvency? Why? (2%)
b) Can the corporation file a petition for rehabilitation first, and after it is dismissed file a petition
for insolvency? Why? (2%)
c) Explain the phrase equality is equity in corporate rehabilitation proceedings. (2%)
1. Yes, a distressed corporation can file a petition for corporate rehabilitation after the dismissal
of its earlier petition for insolvency. This is because a petition for corporate rehabilitation is
granted upon different grounds as a petition for insolvency. It is possible that the petition for
insolvency was not granted because the ground relied upon is insufficient to warrant a
declaration of a state of insolvency, but that the same ground may be obtaining in a petition for
corporate rehabilitation.

2. Yes, the corporation can file a petition for corporate rehabilitation first and after it is
dismissed, file a petition for insolvency, for the same reason as above. The grounds relied upon
are different. For as long as the first petition is no longer pending but is already terminated, the
second petition based on a ground incompatible with the first may still be filed.

3. "Equality is equity" means that whenever a distressed corporation asks the Securities and
Exchange Commission for rehabilitation and suspension of payments, preferred creditors may
no longer assert preference, but shall stand in equal footing with other creditors. It is for this
reason that during corporate rehabilitation, all pending claims, whether secured or unsecured,
are suspended. However, the preferred status of secured creditors still remain so that when the
corporation is declared insolvent and its assets are distributed, the secured creditors continue to
be preferred over the unsecured ones.

Industry Bank, which has a net worth of P1 Billion, extended a loan to Celestial Properties Inc.
amounting to P270 Million. The loan was secured by a mortgage over a vast commercial lot in
the Fort Bonifacio Global City, appraised at P350 Million. After audit, the Bangko Sentral ng
Pilipinas gave notice that the loan to Celestial Properties exceeded the single borrowers limit at
25% of the banks net worth under a recent BSP Circular. In light of other previous similar
violations of the credit limit requirement, the BSP advised Industry Bank to reduce the amount of
the loan to Celestial Properties under pain of severe sanctions. When Industry Bank informed
Celestial Properties that it intended to reduce the loan by P50 Million, Celestial Properties
countered that the bank should first release a part of the collateral worth P50 Million. Industry
Bank rejected the counter-proposal, and referred the matter to you as counsel. How would you
advise Industry Bank to proceed, with its best interest in mind? (5%)

I would advise Industry Bank to release a part of the collateral worth P50 Million.

While it is true that under the Civil Code a mortgage is one and indivisible as to the contracting parties
so that every portion of the property mortgaged is answerable for the whole obligation as soon as it falls
due, the Supreme Court has held that this rule is not applicable to a situation where only a portion of the
loan was released. In such a case, the mortgage on the loan became unenforceable to the extent of the
unreleased portion.

In the case at bar, the loan agreement is for P270 Million. By reducing the amount to P220 Million (or
P270 Million less P50 Million), the real estate mortgage over the commercial lot became unenforceable
to the extent of P50 Million and subsists as a security only for P220 Million debt. In other words, in case
of default of Celestial Properties, the mortgage can be foreclosed only to the extent of the P220 Million.
(Central Bank of the Philippines vs. CA, 139 SCRA 46[1985])

Hence, it would be in the best interest of the bank to comply with its client's request since retaining the
entire collateral would not result in any benefit. On the contrary, it might damage its relationship with its
client by refusing to accommodate its request.