January 2012 Philippine Supreme Court Decisions on Commercial Law

Here are selected January 2012 rulings of the Supreme Court of the Philippines on commercial law:

Contract; insurance surety.  Section 175 of the Insurance Code defines a suretyship as a contract or agreement whereby a party, called the surety, guarantees the performance by another party, called the principal or obligor, of an obligation or undertaking in favor of a third party, called the obligee. It includes official recognizances, stipulations, bonds or undertakings issued under Act 536, as amended.  Suretyship arises upon the solidary binding of a person – deemed the surety – with the principal debtor, for the purpose of fulfilling an obligation.  Such undertaking makes a surety agreement an ancillary contract as it presupposes the existence of a principal contract. Although the contract of a surety is in essence secondary only to a valid principal obligation, the surety becomes liable for the debt or duty of another although it possesses no direct or personal interest over the obligations nor does it receive any benefit therefrom.  And notwithstanding the fact that the surety contract is secondary to the principal obligation, the surety assumes liability as a regular party to the undertaking.  First Lepanto-Taisho Insurance Corporation (now known as FLT Prime Insurance Corporation) vs. Chevron Philippines, inc. (formerly known as Caltex Philippines, Inc.), G.R. No. 177839,  January 18, 2012.

Corporation; piercing the corporate veil.  A corporation is an artificial being created by operation of law. It possesses the right of succession and such powers, attributes, and properties expressly authorized by law or incident to its existence. It has a personality separate and distinct from the persons composing it, as well as from any other legal entity to which it may be related. This is basic.

Equally well-settled is the principle that the corporate mask may be removed or the corporate veil pierced when the corporation is just an alter ego of a person or of another corporation. For reasons of public policy and in the interest of justice, the corporate veil will justifiably be impaled only when it becomes a shield for fraud, illegality or inequity committed against third persons.

December 2011 Philippine Supreme Court Decisions on Commercial Law

Here are selected December 2011 rulings of the Supreme Court of the Philippines on commercial law:

Corporation; contracts before incorporation. With respect to petitioners’ contention that the Management Contract executed between respondent and petitioner Lucila has no binding effect on petitioner corporation for having been executed way before its incorporation, this Court finds the same meritorious.

Logically, there is no corporation to speak of prior to an entity’s incorporation.  And no contract entered into before incorporation can bind the corporation.  March II Marketing, Inc. and Lucila V. Joson vs. Alfredo M. Joson, G.R. No. 171993, December 12, 2011.

Corporation; corporate officers. In the context of Presidential Decree No. 902-A, corporate officers are those officers of a corporation who are given that character either by the Corporation Code or by the corporation’s by-laws.  Section 25 of the Corporation Code specifically enumerated who are these corporate officers, to wit: (1) president; (2) secretary; (3) treasurer; and (4) such other officers as may be provided for in the by-laws.

With the given circumstances and in conformity with Matling Industrial and Commercial Corporation v. Coros, this Court rules that respondent was not a corporate officer of petitioner corporation because his position as General Manager was not specifically mentioned in the roster of corporate officers in its corporate by-laws.  The enabling clause in petitioner corporation’s by-laws empowering its Board of Directors to create additional officers, i.e., General Manager, and the alleged subsequent passage of a board resolution to that effect cannot make such position a corporate office.  Matling clearly enunciated that the board of directors has no power to create other corporate offices without first amending the corporate by-laws so as to include therein the newly created corporate office.  Though the board of directors may create appointive positions other than the positions of corporate officers, the persons occupying such positions cannot be viewed as corporate officers under Section 25 of the Corporation Code.  In view thereof, this Court holds that unless and until petitioner corporation’s by-laws is amended for the inclusion of General Manager in the list of its corporate officers, such position cannot be considered as a corporate office within the realm of Section 25 of the Corporation Code.  March II Marketing, Inc. and Lucila V. Joson vs. Alfredo M. Joson, G.R. No. 171993, December 12, 2011.

(Hector thanks Mary Caroline A. Tan for her assistance to Lexoterica.)

November 2011 Philippine Supreme Court Decisions on Political Law

Here are selected November 2011 rulings of the Supreme Court of the Philippines on political law.

Constitutional Law

Agrarian reform; control over agricultural lands.  Upon review of the facts and circumstances, the Court concluded that the farm worker beneficiaries (FWBs) will never have control over the agricultural lands as long as they remain as stockholders of HLI.  Since control over agricultural lands must always be in the hands of the farmers, the Court reconsidered its earlier ruling that the qualified FWBs should be given an option to remain as stockholders of HLI, inasmuch as these qualified FWBs will never gain control given the present proportion of shareholdings in HLI.  A revisit of HLI’s Proposal for Stock Distribution under CARP and the Stock Distribution Option Agreement upon which the proposal was based reveals that the total assets of HLI is PhP590,554,220, while the value of the 4,915.7466 hectares is PhP196,630,000.  Consequently, the share of the farmer-beneficiaries in the HLI capital stock is 33.296% (196,630,000 divided by 590,554.220); 118,391,976.85 HLI shares represent 33.296%. Thus, even if all the holders of the 118,391,976.85 HLI shares unanimously vote to remain as HLI stockholders, which is unlikely, control will never be placed in the hands of the farmer-beneficiaries.  Control, of course, means the majority of 50% plus at least one share of the common shares and other voting shares. Applying the formula to the HLI stockholdings, the number of shares that will constitute the majority is 295,112,101 shares (590,554,220 divided by 2 plus one HLI share).  The 118,391,976.85 shares subject to the SDP approved by PARC substantially fall short of the 295,112,101 shares needed by the FWBs to acquire control of HLI.  Hence, control can never be attained by the FWBs.  There is even no assurance that 100% of the 118,391,976.85 shares issued to the FWBs will all be voted in favor of staying in HLI, taking into account the previous referendum among the farmers where said shares were not voted unanimously in favor of retaining the SDP.  In light of the foregoing consideration, the option to remain in HLI granted to the individual FWBs will have to be recalled and revoked.  Moreover, bearing in mind that with the revocation of the approval of the SDP, HLI will no longer be operating under SDP and will only be treated as an ordinary private corporation; the FWBs who remain as stockholders of HLI will be treated as ordinary stockholders and will no longer be under the protective mantle of RA 6657.  Hacienda Luisita Incorporated vs. Presidential Agrarian Reform Council, et al., G.R. No. 171101. November 22, 2011.

November 2011 Philippine Supreme Court Decisions on Commercial Law

Here are selected November 2011 rulings of the Supreme Court of the Philippines on commercial law:

Corporations; piercing the corporate veil.  Piercing the veil of corporate fiction is warranted 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.  As succinctly discussed by the Court in Velarde v. Lopez, Inc.:

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. (Citations omitted.)

Nowhere, however, in the pleadings and other records of the case can it be gathered that respondent 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.

Hacienda Luisita Incorporated vs. Presidential Agrarian Reform Council, G.R. No. 171101, November 22, 2011.

October 2011 Philippine Supreme Court Decisions on Commercial Law

Here are selected October 2011 rulings of the Supreme Court of the Philippines on commercial law:

Check;  issuance for consideration.   Upon issuance of a check, in the absence of evidence to the contrary, it is presumed that the same was issued for valuable consideration which may consist either in some right, interest, profit or benefit accruing to the party who makes the contract, or some forbearance, detriment, loss or some responsibility, to act, or labor, or service given, suffered or undertaken by the other side. Under the Negotiable Instruments Law, it is presumed that every party to an instrument acquires the same for a consideration or for value.   As petitioner alleged that there was no consideration for the issuance of the subject checks, it devolved upon him to present convincing evidence to overthrow the presumption and prove that the checks were in fact issued without valuable consideration. Sadly, however, petitioner has not presented any credible evidence to rebut the presumption, as well as North Star’s assertion, that the checks were issued as payment for the US$85,000 petitioner owed.  Engr. Jose E. Cayanan vs. North Star International Travel, Inc.  G.R. No. 172954. October 5, 2011

September 2011 Philippine Supreme Court Decisions on Commercial Law

Here are selected September 2011 rulings of the Supreme Court of the Philippines on commercial law:

Banks; degree of diligence required.  The General Banking Law of 2000 requires of banks the highest standards of integrity and performance. The banking business is impressed with public interest. Of paramount importance is the trust and confidence of the public in general in the banking industry. Consequently, the diligence required of banks is more than that of a Roman pater familias or a good father of a family. The highest degree of diligence is expected. Philippine Commercial Bank vs. Antonio B. Balmaceda and Rolando N. Ramos, G.R. No. 158143, September 21, 2011.

Banks; unilateral freezing of bank account.  We also find that PCIB acted illegally in freezing and debiting Ramos’ bank account. In BPI Family Bank v. Franco, we cautioned against the unilateral freezing of bank accounts by banks, noting that:

More importantly, [BPI Family Bank] does not have a unilateral right to freeze the accounts of Franco based on its mere suspicion that the funds therein were proceeds of the multi-million peso scam Franco was allegedly involved in. To grant [BPI Family Bank], or any bank for that matter, the right to take whatever action it pleases on deposits which it supposes are derived from shady transactions, would open the floodgates of public distrust in the banking industry.

We see no legal merit in PCIB’s claim that legal compensation took place between it and Ramos, thereby warranting the automatic deduction from Ramos’ bank account. For legal compensation to take place, two persons, in their own right, must first be creditors and debtors of each other. While PCIB, as the depositary bank, is Ramos’ debtor in the amount of his deposits, Ramos is not PCIB’s debtor under the evidence the PCIB adduced. PCIB thus had no basis, in fact or in law, to automatically debit from Ramos’ bank account.   Philippine Commercial Bank vs. Antonio B. Balmaceda and Rolando N. Ramos, G.R. No. 158143, September 21, 2011.