August 2010 Philippine Supreme Court Decisions on Commercial Law

Here are selected August 2010 rulings of the Supreme Court of the Philippines on commercial law:

Corporation; liability of directors and officers.  Elementary is the rule that a corporation is invested by law with a personality separate and distinct from those of the persons composing it and from that of any other legal entity to which it may be related. “Mere ownership by a single stockholder or by another corporation of all or nearly all of the capital stock of a corporation is not of itself sufficient ground for disregarding the separate corporate personality.”

In labor cases, corporate directors and officers may be held solidarily liable with the corporation for the termination of employment only if done with malice or in bad faith. Bad faith does not connote bad judgment or negligence; it imports a dishonest purpose or some moral obliquity and conscious doing of wrong; it means breach of a known duty through some motive or interest or ill will; it partakes of the nature of fraud.  Wensha Spa Center, inc. and/or Xu Zhi Jie vs. Loreta T. Yung, G.R. No. 185122, August 16, 2010.

Crossed check;  effect. A check is a bill of exchange drawn on a bank payable on demand. There are different kinds of checks. In this case, crossed checks are the subject of the controversy.  A crossed check is one where two parallel lines are drawn across its face or across the corner thereof. It may be crossed generally or specially.

A check is crossed specially when the name of a particular banker or a company is written between the parallel lines drawn. It is crossed generally when only the words “and company” are written or nothing is written at all between the parallel lines, as in this case. It may be issued so that presentment can be made only by a bank.

In order to preserve the credit worthiness of checks, jurisprudence has pronounced that crossing of a check has the following effects: (a) the check may not be encashed but  only  deposited  in the bank; (b) the check may be negotiated only once — to one who has an account with a bank; and (c) the act of crossing the check serves as warning to the holder that the check has been issued for a definite purpose so that he must inquire if he has received the check pursuant to that purpose, otherwise, he is not a holder in due  course.

The Court has taken judicial cognizance of the practice that a check with two parallel lines in the upper left hand corner means that it could only be  deposited and  not  converted  into cash.  The effect of crossing a check, thus, relates to the mode of payment, meaning that the drawer had intended the check for deposit only by the rightful person, i.e., the payee named therein. The crossing of a check  is a warning that the check should be deposited only in the account of the payee. Thus, it is the duty of the collecting bank to ascertain that the check be deposited to the payee’s account only.   Vicente Go vs. Metropolitan Bank and Trust Co., G.R. No. 168842, August 11, 2010.

Crossed check; liability of bank for lack of indorsement.  Respondent bank was negligent in permitting the deposit and encashment of the crossed checks without the proper indorsement. An indorsement is necessary for the proper negotiation of checks specially if the payee named therein or holder thereof is not the one depositing or encashing it. Knowing fully well that the subject checks were crossed, that the payee was not the holder and that the checks contained no indorsement, respondent bank should have taken reasonable steps in order to determine the validity of the representations made by Chua. Respondent bank was amiss in its duty as an agent of the payee. Prudence dictates that respondent bank should not have merely relied on the assurances given by Chua.

Negligence was committed by respondent bank in accepting for deposit the crossed checks without indorsement and in not verifying the authenticity of the negotiation of the checks. The law imposes a duty of extraordinary diligence on the collecting bank to scrutinize checks deposited with it, for the purpose of determining their genuineness and regularity. As a business affected with public interest and because of the nature of its functions, the banks are under obligation to treat the accounts of its depositors with meticulous care, always having in mind the fiduciary nature of the relationship.  The fact that this arrangement had been practiced for three years without Mr. Go/Hope Pharmacy raising any objection does not detract from the duty of the bank to exercise extraordinary diligence. Thus, the Decision of the RTC, as affirmed by the CA, holding respondent bank liable for moral damages is sufficient to remind it of its responsibility to exercise extraordinary diligence in the course of its business which is imbued with public interest. Vicente Go vs. Metropolitan Bank and Trust Co., G.R. No. 168842, August 11, 2010.

Directors; per diem.   Under section 30 of the Corporation Code, the directors of a corporation shall not receive any compensation for being members of the board of directors, except for reasonable per diems.  The two instances where the directors are to be entitled to compensation shall be when it is fixed by the corporation’s by-laws or when the stockholders, representing at least a majority of the outstanding capital stock, vote to grant the same at a regular or special stockholder’s meeting, subject to the qualification that, in any of the two situations, the total yearly compensation of directors, as such directors, shall in no case exceed ten (10%) percent of the net income before income tax of the corporation during the preceding year.  Gabriel C. Singson, et al. vs. Commission on Audit, G.R. No. 159355, August 9, 2010.

Financial institutions;  negligence.   The petitioner, being a banking institution, had the direct obligation to supervise very closely the employees handling its depositors’ accounts, and should always be mindful of the fiduciary nature of its relationship with the depositors. Such relationship required it and its employees to record accurately everysingle transaction, and as promptly as possible, considering that the depositors’ accounts should always reflect the amounts of money the depositors could dispose of as they saw fit, confident that, as a bank, it would deliver the amounts to whomever they directed. If it fell short of that obligation, it should bear the responsibility for the consequences to the depositors, who, like the respondent, suffered particular embarrassment and disturbed peace of mind from the negligence in the handling of the accounts.  Citytrust Banking Corporation vs. Carlos Romulo N. Cruz, G.R. No. 157049, August 11, 2010.

Merger; effect on employment and seniority rights.  Although not binding on this Court, American jurisprudence on the consequences of voluntary mergers on the right to employment and seniority rights is persuasive and illuminating. We quote the following pertinent discussion from the American Law Reports:

Several cases have involved the situation where as a result of mergers, consolidations, or shutdowns, one group of employees, who had accumulated seniority at one plant or for one employer, finds that their jobs have been discontinued except to the extent that they are offered employment at the place or by the employer where the work is to be carried on in the future. Such cases have involved the question whether such transferring employees should be entitled to carry with them their accumulated seniority or whether they are to be compelled to start over at the bottom of the seniority list in the “new” job. It has been recognized in some cases that the accumulated seniority does not survive and cannot be transferred to the “new” job.

In Carver v Brien (1942) 315 Ill App 643, 43 NE2d 597, the shop work of three formerly separate railroad corporations, which had previously operated separate facilities, was consolidated in the shops of one of the roads.  Displaced employees of the other two roads were given preference for the new jobs created in the shops of the railroad which took over the work.  A controversy arose between the employees as to whether the displaced employees were entitled to carry with them to the new jobs the seniority rights they had accumulated with their prior employers, that is, whether the rosters of the three corporations, for seniority purposes, should be “dovetailed” or whether the transferring employees should go to the bottom of the roster of their new employer.  Labor representatives of the various systems involved attempted to work out an agreement which, in effect, preserved the seniority status obtained in the prior employment on other roads, and the action was for specific performance of this agreement against a demurring group of the original employees of the railroad which was operating the consolidated shops.  The relief sought was denied, the court saying that, absent some specific contract provision otherwise, seniority rights were ordinarily limited to the employment in which they were earned, and concluding that the contract for which specific performance was sought was not such a completed and binding agreement as would support such equitable relief, since the railroad, whose concurrence in the arrangements made was essential to their effectuation, was not a party to the agreement.

Where the provisions of a labor contract provided that in the event that a trucker absorbed the business of another private contractor or common carrier, or was a party to a mergerof lines, the seniority of the employees absorbed or affected thereby should be determined by mutual agreement between the trucker and the unions involved, it was held in Moore v International Brotherhood of Teamsters, etc. (1962, Ky) 356 SW2d 241, that the trucker was not required to absorb the affected employees as well as the business, the court saying that they could find no such meaning in the above clause, stating that it dealt only with seniority, and not with initial employment.  Unless and until the absorbing company agreed to take the employees of the company whose business was being absorbed, no seniority problem was created, said the court, hence the provision of the contract could have no application.  Furthermore, said the court, it did not require that the absorbing company take these employees, but only that if it did take them the question of seniority between the old and new employees would be worked out by agreement or else be submitted to the grievance procedure. (Emphasis ours.)

Indeed, from the tenor of local and foreign authorities, in voluntary mergers, absorption of the dissolved corporation’s employees or the recognition of the absorbed employees’ service with their previous employer may be demanded from the surviving corporation if required by provision of law or contract.  The dissent of Justice Arturo D. Brion tries to make a distinction as to the terms and conditions of employment of the absorbed employees in the case of a corporate merger or consolidation which will, in effect, take away from corporate management the prerogative to make purely business decisions on the hiring of employees or will give it an excuse not to apply the CBA in force to the prejudice of its own employees and their recognized collective bargaining agent.  In this regard, we disagree with Justice Brion.

Justice Brion takes the position that because the surviving corporation continues the personality of the dissolved corporation and acquires all the latter’s rights and obligations, it is duty-bound to absorb the dissolved corporation’s employees, even in the absence of a stipulation in the plan of merger.  He proposes that this interpretation would provide the necessary protection to labor as it spares workers from being “left in legal limbo.”

However, there are instances where an employer can validly discontinue or terminate the employment of an employee without violating his right to security of tenure.  Among others, in case of redundancy, for example, superfluous employees may be terminated and such termination would be authorized under Article 283 of the Labor Code.

Moreover, assuming for the sake of argument that there is an obligation to hire or absorb all employees of the non-surviving corporation, there is still no basis to conclude that the terms and conditions of employment under a valid collective bargaining agreement in force in the surviving corporation should not be made to apply to the absorbed employees.  Bank of the Philippine Islands vs. BPI Employees Union-Davao Chapter-Federation of Unions in BPI Unibank, G.R. No. 164301, August 18, 2010.

Merger; mandatory absorption of employees of corporation.  The lack of a provision in the plan of merger regarding the transfer of employment contracts to the surviving corporation could have very well been deliberate on the part of the parties to the merger, in order to grant the surviving corporation the freedom to choose who among the dissolved corporation’s employees to retain, in accordance with the surviving corporation’s business needs.  If terminations, for instance due to redundancy or labor-saving devices or to prevent losses, are done in good faith, they would be valid.  The surviving corporation too is duty-bound to protect the rights of its own employees who may be affected by the merger in terms of seniority and other conditions of their employment due to the merger.  Thus, we are not convinced that in the absence of a stipulation in the merger plan the surviving corporation was compelled, or may be judicially compelled, to absorb all employees under the same terms and conditions obtaining in the dissolved corporation as the surviving corporation should also take into consideration the state of its business and its obligations to its own employees, and to their certified collective bargaining agent or labor union.

Even assuming we accept Justice Brion’s theory that in a merger situation the surviving corporation should be compelled to absorb the dissolved corporation’s employees as a legal consequence of the merger and as a social justice consideration, it bears to emphasize his dissent also recognizes that the employee may choose to end his employment at any time by voluntarily resigning.  For the employee to be “absorbed” by BPI, it requires the employees’ implied or express consent.  It is because of this human element in employment contracts and the personal, consensual nature thereof that we cannot agree that, in a merger situation, employment contracts are automatically transferable from one entity to another in the same manner that a contract pertaining to purely proprietary rights – such as a promissory note or a deed of sale of property – is perfectly and automatically transferable to the surviving corporation.  Bank of the Philippine Islands vs. BPI Employees Union-Davao Chapter-Federation of Unions in BPI Unibank, G.R. No. 164301, August 18, 2010.

Trademark; rights.  A trademark is any distinctive word, name, symbol, emblem, sign, or device, or any combination thereof, adopted and used by a manufacturer or merchant on his goods to identify and distinguish them from those manufactured, sold, or dealt by others.  Inarguably, it is an intellectual property deserving protection by law. In trademark controversies, each case must be scrutinized according to its peculiar circumstances, such that jurisprudential precedents should only be made to apply if they are specifically in point.

As Myra correctly posits, as a registered trademark owner, it has the right under Section 147 of R.A. No. 8293 to prevent third parties from using a trademark, or similar signs or containers for goods or services, without its consent, identical or similar to its registered trademark, where such use would result in a likelihood of confusion.  Dermaline, Inc. vs. Myra Phamaceuticals, Inc., G.R. No. 190065, August 16, 2010.

Trademark; infringement.   Among the elements of trademark infringement, the element of likelihood of confusion is the gravamen of trademark infringement.  There are two types of confusion in trademark infringement: confusion of goods and confusion of business.  In Sterling Products International, Inc. v. Farbenfabriken Bayer Aktiengesellschaft, the Court distinguished the two types of confusion:

“Callman notes two types of confusion.  The first is the confusion of goods “in which event the ordinarily prudent purchaser would be induced to purchase one product in the belief that he was purchasing the other.”  In which case, “defendant’s goods are then bought as the plaintiff’s, and the poorer quality of the former reflects adversely on the plaintiff’s reputation.”  The other is theconfusion of business: “Here though the goods of the parties are different, the defendant’s product is such as might reasonably be assumed to originate with the plaintiff, and the public would then be deceived either into that belief or into the belief that there is some connection between the plaintiff and defendant which, in fact, does not exist.”

There are two tests to determine likelihood of confusion: the dominancy test and holistic test.  The dominancy test focuses on the similarity of the main, prevalent or essential features of the competing trademarks that might cause confusion.  Infringement takes place when the competing trademark contains the essential features of another.  Imitation or an effort to imitate is unnecessary.  The question is whether the use of the marks is likely to cause confusion or deceive purchasers.

The holistic test considers the entirety of the marks, including labels and packaging, in determining confusing similarity.  The focus is not only on the predominant words but also on the other features appearing on the labels.

In cases involving trademark infringement, no set of rules can be deduced.  Each case must be decided on its own merits.  Jurisprudential precedents must be studied in the light of the facts of each particular case.

In the light of the facts of the present case, the Court holds that the dominancy test is applicable.   Soceite Des Produits Nestle, S.A. vs. Martin T. Dy, Jr., G.R. No. 172276, August 8, 2010.

Trademark; infringement.   In determining likelihood of confusion, case law has developed two (2) tests, the Dominancy Test and the Holistic or Totality Test.

The Dominancy Test focuses on the similarity of the prevalent features of the competing trademarks that might cause confusion or deception.  It is applied when the trademark sought to be registered contains the main, essential and dominant features of the earlier registered trademark, and confusion or deception is likely to result.  Duplication or imitation is not even required; neither is it necessary that the label of the applied mark for registration should suggest an effort to imitate.  The important issue is whether the use of the marks involved would likely cause confusion or mistake in the mind of or deceive the ordinary purchaser, or one who is accustomed to buy, and therefore to some extent familiar with, the goods in question.  Given greater consideration are the aural and visual impressions created by the marks in the public mind, giving little weight to factors like prices, quality, sales outlets, and market segments.  The test of dominancy is now explicitly incorporated into law in Section 155.1 of R.A. No. 8293.

On the other hand, 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 inexistent. Dermaline, Inc. vs. Myra Phamaceuticals, Inc., G.R. No. 190065, August 16, 2010.