12 a.

Q: Explain what is a “Letter of Credit” as a financial device and a “Trust Receipt” as a security to the Letter
of Credit. (2016 Bar) A: A letter of credit is any arrangement however named or described whereby a bank
acting upon the request of its client or on its behalf agrees to pay another against stipulated documents
provided that the terms of the credit are complied with (Section 2 of the Uniform Customs and Practices
for Documentary Credit). A trust receipt is an arrangement whereby the issuing bank (referred to as the
entruster under the trust receipt) releases the imported goods to the importer (referred to as the
entrustee) but that the latter in case of sale must deliver the proceeds thereof to the entruster up to the
extent of the amount owing to the entruster or to return the goods in case of non-sale.

a. No, the beneficiary of X is not entitled to the proceeds of the life insurance. The hypertension of X is a
material fact that should have been disclosed to the insurer. The concealment of such material fact
entitles the insurer to rescind the insurance policy.

b. It is still a material information. It is settled that the insured cannot recover even though the material
fact not disclosed is not the cause of the loss

16.

A: Henry cannot be removed by his fellow directors. The power to remove belongs to the stockholders.
He can only be removed by the stockholders representing at least 2/3 of the outstanding capital stock in
a meeting called for that purpose. The removal may be with or without cause except that in this case, the
removal has to be with cause because it is intended to deprive minority stockholders of the right of
representation. Amotion is the premature ousting of a director or officer from his post in the corporation.

15

A: Yes. ABC Corporation violated the provisions of the Securities Regulation Code that prohibits sale of
securities to the public, like promissory notes, without a registration statement filed with and approved
by the Securities and Exchange Commission

14

A: The contention of X is not correct. Deposits in the context of the Secrecy of Philippine currency deposits
include deposits of whatever nature and kind. They include funds deposited in the bank giving rise to
creditor-debtor relationship, as well as funds invested in the bank like trust accounts (Ejercito v.
Sandiganbayan, G.R. Nos. 157294-95, Nov. 30, 2006)

BAR EXAM QUESTION NO.1(MERCANTILE LAW)

What does “doing business in the Philippines” under the Foreign
Investments Act of 1991 mean? ( 5%)

SUGGESTED ANSWER:

Under the Foreign Investments Act of 1991 of Section 3(d) “doing business” shall include
soliciting orders, service contracts, opening offices, whether called “liaison” offices or branches;
appointing representatives or distributors domiciled in the Philippines or who in any calendar
year stay in the country for a period or periods totaling one hundred eighty [180] days or more;
participating in the management, supervision or control of any domestic business, firm, entity
or corporation in the Philippines; and any other act or acts that imply a continuity of
commercial dealings or arrangements and contemplate to that extent the performance of acts
or works, or the exercise of some of the functions normally incident to, and in progressive
prosecution of commercial gain or of the purpose and object of the business organization:
Provided, however, That the phrase “doing business” shall not be deemed to include mere
investment as a shareholder by a foreign entity in domestic corporations duly registered to do
business, and/or the exercise of rights as such investor; nor having a nominee director or
officer to represent its interests in such corporation; nor appointing a representative or
distributor domiciled in the Philippines which transacts business in its own name and for its
own account;

Essential elements of the general rule pertaining to the mailing and delivery of mail matter as
announced by the American courts, namely, when a letter or other mail matter is addressed and
mailed with postage prepaid there is a rebuttable presumption of fact that it was received by the
addressee as soon as it could have been transmitted to him in the ordinary course of the mails.
But if any one of these elemental facts fails to appear, it is fatal to the presumption. For instance,
a letter will not be presumed to have been received by the addressee unless it is shown that it
was deposited in the post-office, properly addressed and stamped. (See 22 C.J., 96, and 49 L. R.
A. [N. S.], pp. 458, et seq., notes.)’

-IV-
X’s “MINI-ME” burgers are bestsellers in the country. Its “MINI-ME” logo, which bears the color
blue, is a registered mark and has been so since the year 2010. Y, a competitor ofX, has her own
burger which she named “ME-TOO” and her logo thereon is printed in bluish-green. When X sued
Y for trademark infringement, the trial court ruled in favor of the plaintiff by applying the Holistic
Test. The court held that Y infringed on X’s mark since the dissimilarities between the two marks
are too trifling and frivolous such that Y’s “ME-TOO,” when compared to X’s “MINI-ME,” will likely
cause confusion among consumers.

Is the application of the Holistic Test correct? (5%)

SUGGESTED ANSWER:

Yes, Holistic Test is correct,

The Holistic Test entails a consideration of the entirety of the marks as applied to the products,
including labels and packaging, in determining confusing similarity. The scrutinizing eye of the
observer must focus not only on the predominant words but also on the other features
appearing in both labels so that a conclusion may be drawn as to whether one is confusingly
similar to the other.

Relative to the question on confusion of marks and trade names, jurisprudence has noted two
(2) types of confusion, viz: (1) confusion of goods (product confusion), where the ordinarily
prudent purchaser would be induced to purchase one product in the belief that he was
purchasing the other; and (2) confusion of business (source or origin confusion), where,
although the goods of the parties are different, the product, the mark of which registration is
applied for by one party, is such as might reasonably be assumed to originate with the
registrant of an earlier product, and the public would then be deceived either into that belief or
into the belief that there is some connection between the two parties, though in existent.

-VI-
Nautica Shipping Lines (Nautica) bought a second hand passenger ship from Japan. It modified
the design o f the bulkhead of the deck o f the ship to accommodate more passengers. The ship
sunk with its passengers in Tablas Strait due to heavy rains brought by the monsoon. The heirs
of the passengers sued Nautica for its liability as a common carrier based on the reconfiguration
of the bulkhead which may have compromised the stability of the ship. Nautica raised the defense
that the monsoon is a fortuitous event and, at most, its liability is prescribed by the Limited
Liability Rule. Decide with reasons. (5%)

November 22, 2016 at 6:25 pm

Nautica Shipping Lines liability is prescribed by the Limited Liability Rule:

If the ship owner or agent may in any way be held civilly liable at all for injury to or death of
passengers arising from the negligence of the captain in cases of collisions or shipwrecks, his
liability is merely co-extensive with his interest in the vessel such that a total loss thereof
results in its extinction. (Yangco vs. Laserna, et al., supra).

The rationale therefor has been explained as follows:

The real and hypothecary nature of the liability of the ship owner or agent embodied in the
provisions of the Maritime Law, Book III, Code of Commerce, had its origin in the prevailing
conditions of the maritime trade and sea voyages during the medieval ages, attended by
innumerable hazards and perils. To offset against these adverse conditions and to encourage
ship building and maritime commerce, it was deemed necessary to confine the liability of the
owner or agent arising from the operation of a ship to the vessel, equipment, and freight, or
insurance, if any, so that if the ship owner or agent abandoned the ship, equipment, and
freight, his liability was extinguished. (Abueg vs. San Diego, 77 Phil. 730 [1946])

Without the principle of limited liability, a ship owner and investor in maritime commerce would
run the risk of being ruined by the bad faith or negligence of his captain, and the apprehension
of this would be fatal to the interest of navigation.” Yangco vs. Lasema, supra).

As evidence of this real nature of the maritime law we have (1) the limitation of the liability of
the agents to the actual value of the vessel and the freight money, and (2) the right to retain the
cargo and the embargo and detention of the vessel even in cases where the ordinary civil law
would not allow more than a personal action against the debtor or person liable. It will be
observed that these rights are correlative, and naturally so, because if the agent can exempt
himself from liability by abandoning the vessel and freight money, thus avoiding the possibility
of risking his whole fortune in the business, it is also just that his maritime creditor may for any
reason attach the vessel itself to secure his claim without waiting for a settlement of his rights
by a final judgment, even to the prejudice of a third person. (Phil. Shipping Co. vs. Vergara, 6
Phil. 284 [1906]).

The limited liability rule, however, is not without exceptions, namely: (1) where the injury or
death to a passenger is due either to the fault of the ship owner, or to the concurring
negligence of the ship owner and the captain (Manila Steamship Co., Inc. vs. Abdulhaman
supra); (2) where the vessel is insured; and (3) in workmen’s compensation claims Abueg vs.
San Diego, supra). In this case, there is nothing in the records to show that the loss of the cargo
was due to the fault of the private respondent as shipowners, or to their concurrent negligence
with the captain of the vessel.

What about the provisions of the Civil Code on common carriers? Considering the “real and
hypothecary nature” of liability under maritime law, these provisions would not have any effect
on the principle of limited liability for ship owners or ship agents. As was expounded by this
Court:

In arriving at this conclusion, the fact is not ignored that the illfated, Nautica, as a vessel
engaged in interisland trade, is a common carrier, and that the relationship between the
petitioner and the passengers who died in the mishap rests on a contract of carriage. But
assuming that petitioner is liable for a breach of contract of carriage, the exclusively ‘real and
hypothecary nature of maritime law operates to limit such liability to the value of the vessel, or
to the insurance thereon, if any. In the instant case it does not appear that the vessel was
insured. (Yangco vs. Laserila, et al., supra).

Moreover, Article 1766 of the Civil Code provides:

Art. 1766. In all matters not regulated by this Code, the rights and obligations of common
carriers shall be governed by the Code of Commerce and by special laws.

In other words, the primary law is the Civil Code (Arts. 1732-1766) and in default thereof, the
Code of Commerce and other special laws are applied. Since the Civil Code contains no
provisions regulating liability of ship owners or agents in the event of total loss or destruction
of the vessel, it is the provisions of the Code of Commerce, more particularly Article 587, that
govern in this case.

Article 587 of the Code of Commerce provides:

Art. 587. “The ship agent shall also be civilly liable for the indemnities in favor of third persons
which may arise from the conduct of the captain in the care of the goods which he loaded on
the vessel; but he may exempt himself therefrom by abandoning the vessel with all the
equipment and the freight it may have earned during the voyage.”

In sum, it will have to be held that since the ship agent’s or ship owner’s liability is merely co-
extensive with his interest in the vessel such that a total loss thereof results in its extinction
(Yangco vs. Laserna, supra), and none of the exceptions to the rule on limited liability being
present, the liability of private respondents for the loss of the cargo of copra must be deemed
to have been extinguished. There is no showing that the vessel was insured in this case.

-XIX-
In 2015, R Corp., a domestic company that is wholly owned by Filipinos, filed its opposition to
the applications for Mineral Production Sharing Agreements (MPSA) of O Corp., P Corp., and Q
Corp. which were pending before the Panel of Arbitrators (POA) of the Department of Environment
and Natural Resources (DENR). The three corporations wanted to undertake exploration and
mining activities in the province of Isabela. The oppositor alleged that at least 60% of the capital
shareholdings of the applicants are owned by B Corp., a 100% Chinese corporation, in violation
of Sec. 2, Art. XII of the Constitution. The applicants countered that they are qualified corporations
as defined under the Philippine Mining Act of 1995 and the Foreign Investments Act of 1991 since
B Corp. holds only 40% of the capital stocks in each of them and not 60% as alleged by R Corp.

The Summary of Significant Accounting Policies statement of B Corp. reveals that the joint venture
agreements of B Corp. with Sigma Corp. and Delta Corp. involve the O Corp., P Corp., and Q Corp.
The ownership of the layered corporations and joint venture agreements show that B Corp.
practically exercises control over the O, P and Q corporations. O, P and Q corporations contend
that the control test should be applied and its MPSA applications granted. On the other hand, R
Corp. argues that the “grandfather rule” should be applied. Decide with reasons. (5%)

SUGGESTED ANSWER:

Basically, there are two acknowledged tests in determining the nationality of a corporation: the
control test and the grandfather rule. Paragraph 7 of DOJ Opinion No. 020, Series of 2005,
adopting the 1967 SEC Rules which implemented the requirement of the Constitution and other
laws pertaining to the controlling interests in enterprises engaged in the exploitation of natural
resources owned by Filipino citizens, provides:

Shares belonging to corporations or partnerships at least 60% of the capital of which is owned
by Filipino citizens shall be considered as of Philippine nationality, but if the percentage of
Filipino ownership in the corporation or partnership is less than 60%, only the number of shares
corresponding to such percentage shall be counted as of Philippine nationality. Thus, if
100,000 shares are registered in the name of a corporation or partnership at least 60% of the
capital stock or capital, respectively, of which belong to Filipino citizens, all of the shares shall
be recorded as owned by Filipinos. But if less than 60%, or say, 50% of the capital stock or
capital of the corporation or partnership, respectively, belongs to Filipino citizens, only 50,000
shares shall be counted as owned by Filipinos and the other 50,000 shall be recorded as
belonging to aliens.

The first part of paragraph 7, DOJ Opinion No. 020, stating “shares belonging to corporations
or partnerships at least 60% of the capital of which is owned by Filipino citizens shall be
considered as of Philippine nationality,” pertains to the control test or the liberal rule. On the
other hand, the second part of the DOJ Opinion which provides, “if the percentage of the
Filipino ownership in the corporation or partnership is less than 60%, only the number of shares
corresponding to such percentage shall be counted as Philippine nationality,” pertains to the
stricter, more stringent grandfather rule.

In ending, the “control test” is still the prevailing mode of determining whether or not a
corporation is a Filipino corporation, within the ambit of Sec. 2, Art. II of the 1987 Constitution,
entitled to undertake the exploration, development and utilization of the natural resources of
the Philippines. When in the mind of the Court there is doubt, based on the attendant facts and
circumstances of the case, in the 60-40 Filipino-equity ownership in the corporation, then it
may apply the “grandfather rule.”

-XX-
Company X issued a Bank A Check No. 12345 in the amount of P500,000.00 payable to the Bureau
of Internal Revenue (BIR) for the company’s taxes for the third quarter of 1997. The check was
deposited with Bank B, the collecting bank with which the BIR has an account. The check was
subsequently cleared and the amount of P500,000.00 was deducted from the company’s balance.
Thereafter, Company X was notified by the BIR of its non-payment of its unpaid taxes despite the
P500,000.00 debit from its account. This prompted the company to seek assistance from the
proper authorities to investigate on the matter.

The results of the investigation disclosed that unknown then to Company X, its chief accountant
Bonifacio Santos is part of a syndicate that devised a scheme to syphon its funds. It was
discovered that though deposited, the check was never paid to the BIR but was passed on by
Santos to Winston Reyes, Bank B’s branch manager and Santos’ co-conspirator. Instead of
bringing the check to the clearing house, Reyes replaced Check No. 12345 with a worthless check
bearing the same amount, and tampered documents to cover his tracks. No amount was then
credited to the BIR. Meanwhile, Check No. 12345 was subsequently cleared and the amount
therein credited into the accounts of fictitious persons, to be later withdrawn by Santos and Reyes.

Company X then sued Bank B for the amount of P500,000.00 representing the amount deducted
from its account. Bank B interposed the defense that Company X was guilty of contributory
negligence since its confidential employee Santos was an integral part of the scheme to divert
the proceeds of Check No. 12345. Is Company X entitled to reimbursement from Bank B, the
collecting bank? Explain. (5%)

Yes, Company X is entitled Reimbursement From Bank B

The Supreme Court has held that colecting banks are mandated to exercise extra ordinary
diligence in the conduct oF its operations. The nature of the industry to which they belong is
imbued with public interest since it involves public’s money.

Here, Bank X as the collecting bank Failed to exercise such extra ordinary diligence when it
cleared the Check No. 12345 without discovering such inFirmity. Making them liable For the
amount deducted From Company X.

Bank X’s contention on contributory negligence is also misplaced. Notwithstanding the crime
committed by their client’s employee, it does not by itselF deminish their aforementioned
liability since the imposition oF that degree oF diligence is mandated by law.