STUDIES ON SPANISH-PHILIPPINE PRIVATE LAW
Papers of the Private Law of the Philippines and Spain International Scientific Congress

ROOTS OF MODERNITY GROUNDED ON TRADITION: Select Civil Law concepts ingrained in Commercial Law

Atty. Nilo T. Divina*

It is my distinct honor and a cherished privilege to speak before you in the occasion of the Spain- Philippines Civil Law Congress against the background of this beautiful city of Malaga and interact with legal luminaries imbued with strong passion for education and love for the law. As everyone knows, the Philippines has deep historical and cultural ties with Spain. Other than our Catholic faith, Spain’s most dominant influence in our culture is reflected and ingrained in our civil laws. I happen to teach and practice commercial law. The topic of my brief lecture is therefore apt and close to my heart- civil law concepts ingrained in commercial law. The topic can be extensive. After all, civil and commercial laws do intertwine. I have taken the liberty though of selecting certain legal principles consistent with my general topic which I consider interesting owing to questions they pose and in view of recent jurisprudence in our country. Kindly allow me to state these topics in question form.

I.  What is the prescriptive period for the insurer to file an action against the wrongdoer?
A recent interesting jurisprudence in our insurance laws relates to the prescriptive period within which the insurer should file an action for recovery against the wrongdoer after the insurer has been subrogated to the rights of the insured.
Subrogation is defined as the transfer of all the rights of the creditor to a third person, who substitutes him in all his rights.  It may either be legal or conventional. Legal subrogation is that which takes place without agreement but by operation of law because of certain acts. Conventional subrogation is that which takes place by agreement of parties.1  

An example of legal subrogation that does not require and is not dependent upon the agreement of the parties is that which takes place under the law on insurance but which has its basis under the Civil Code. Article 2207 of the Philippine Civil Code provides that if the plaintiff’s property has been insured, and he has received indemnity from the insurance company for the injury or loss arising out of the wrong or breach of contract complained of, the insurance company shall be subrogated to the rights of the insured against the wrong-doer or the person who has violated the contract. 
 
The case of Pan Malaysian Insurance Corp. v. Court of Appeals2 has construed this provision to mean that payment by the insurer to the assured operates as an equitable assignment to the former of all remedies which the latter may have against the third party whose negligence or wrongful act caused the loss. The right of subrogation is not dependent upon, nor does it grow out of, any privity of contract or upon written assignment of claim. It accrues simply upon payment of the insurance claim by the insurer.
In the exercise of this right by the insurer, a relevant issue is the prescriptive period within which the insurer may proceed against the wrongdoer. This is now settled by the case of Vector Shipping Corporation v. American Home Assurance Company 3. In this case, a collision occurred between the M/T Vector and the M/V Doña Paz in the evening of December 20, 1987. The collision led to the sinking of the vessels, which resulted in the loss of the petroleum cargo of Caltex on board the M/T Vector. Fortunately, the goods were insured and so after the filing of an application by Caltex, the insurer paid it for the loss of the petroleum cargo on July 12, 1988. On March 5 1992, the insurer filed a complaint against Vector, Soriano, and Sulpicio, Lines Inc. to recover the full amount it paid to Caltex. 
In opposition, Vector, Soriano, and Sulpicio, Lines Inc. insisted that the action was premised on a quasi-delict or upon an injury to the rights of the plaintiff, which, pursuant to Article 1146 of the Civil Code, must be instituted within four years from the time the cause of action accrued. Since the cause of action accrued on December 20, 1987, which was the date of the collision, the insurer had only four years, or until December 20, 1991 to bring its action. Since the complaint was filed only on March 5, 1992, then the action is already barred for being commenced beyond the four-year prescriptive period.
In its decision, the High Court held that the action was not based upon a quasi-delict or upon a written contract, but upon an obligation created by law. This is because the subrogation of the insurer to the rights of Caltex as the insured was by virtue of the express provision of law embodied in Article 2207 of the Philippine Civil Code. Hence, it came under Article 1144 (2) of the Civil Code, which states that in an obligation created by law, an action must be brought within ten years from the time the cause of action accrues. Since the right of subrogation accrues simply upon payment of the insurance claim by the insurer, then the cause of action accrued as of the time the insurer actually indemnified Caltex on July 12, 1988. Henceforth, the action was not yet barred by the time of the filing of the complaint on March 5, 1992, which was well within the 10-year period prescribed by Article 1144 of the Civil Code.
It is therefore settled that the right of the insurer to proceed against the wrongdoer accrues from the time of payment to the insured and not from the time when the goods were lost or damaged.
 
II. Is a cashier’s check or manager’s check legal tender ?
One principle that gave rise to confusion in the history of Philippine jurisprudence is the issue of legal tender. The law mandates that all monetary obligations shall be settled in the Philippine currency which is legal tender in the Philippines. However, the parties may agree that the obligation or transaction shall be settled in any other currency at the time of payment. 4 Legal tender has been defined by BSP Circular No. 829 5 as notes and coins issued and circulating in accordance with R.A. No. 265 as amended and/or R.A. No. 7653, which, when offered for the payment of public or private debt must be accepted. Pursuant to Section 52 of R.A. 7653 6 all notes and coins issued by the Bangko Sentral shall be fully guaranteed by the Government of the Republic of the Philippines and shall be legal tender in the Philippines for all debts, both public and private. However, the legal tender power of coins has been limited by BSP Circular No. 537 7 to be One Thousand Pesos (P1,000.00) for denominations of 1-Peso, 5-Peso, and 10 Peso coins and One Hundred Pesos (P100.00) for denominations of 1-sentimo, 5-sentimo, 10-sentimo and 25-sentimo coins.
Article 1249 of the Civil Code states that the delivery of promissory notes payable to order, or bills of exchange or other mercantile documents shall produce the effect of payment only when they have been cashed, or when through the fault of the creditor they have been impaired.
Our jurisprudence is replete with cases in answering the question of whether checks are legal tender. In the 1980 case of New Pacific Timber v. Seneris8 the Court ruled that a cashier’s check issued by a bank of good standing is deemed as cash. As a consequence, a judgment creditor cannot validly refuse acceptance of the payment of the judgment obligation tendered in the form of a cashier’s check. However, in 1993, the Court reversed itself and ruled in the case of Tibajia, Jr. v. Court of Appeals 9 that a judgment creditor may validly refuse the tender of payment partly in check and partly in cash because a cashier’s check tendered by the judgment debtor to satisfy the judgment debt is not a legal tender.
The Court was even more categorical in the case of Roman Catholic Bishop of Malolos v. Intermediate Appellate Court 10 when it held that a check, be it a manager’s check or ordinary check, is not legal tender, and an offer of a check in payment of a debt is not a valid tender of payment and may be refused by the creditor. 
In the subsequent case of Tan v. Court of Appeals 11 the Court seemed to returned to its earlier ruling when it held that a cashier’s check by its peculiar character and general use in the commercial world is regarded substantially to be as good as the money which it represents. Then in the case of Pabugais v. Sahijiwani 12, it was held that payment in check by the debtor may be acceptable as valid, if no prompt objection to said payment is made. Thus, where the seller of real property tendered the return of the reservation fee in the form of manager’s check because the sale agreement was not fully consummated owing to the failure of the buyer to pay the balance of the purchase price within the stipulated period, the tender of the manager’s check was considered a valid tender of payment.
In the 2008 case of Bank of Philippine Islands v. Royeca13 , the Court held that since a negotiable instrument is only a substitute for money and not money, the delivery of such an instrument does not, by itself, operate as payment. Mere delivery of checks does not discharge the obligation under a judgment. The obligation is not extinguished and remains suspended until the payment by commercial document is actually realized. Then in the 2011 case of Halley v. Printwell Inc. 14 , our Supreme Court held that since a check is not money and only substitutes for money, the delivery of a check does not operate as payment and does not discharge the obligation under a judgment. The delivery of a bill of exchange only produces the fact of payment when the bill has been encashed. 
It must however be emphasized that said pronouncements apply only in the payment of an obligation but not in the exercise of a right 15 It was ruled in the case of Fortunado v. Court of Appeals16 that a check may be used for the exercise of the right of redemption, the same being a right and not an obligation. 
From the foregoing pronouncements, it is now a settled rule that a check is not legal tender. Indeed, a check should not considered as a legal tender. With the way how a check is used and issued, coupled with uncertainties as to encashment, payees of the checks are not assured of payment by their mere issuance including cashier’s check or manager’s check.  That checks are not legal tender is clear under the New Central Bank Act of the Philippines 17 which provides that checks representing demand deposits do not have legal tender power and their acceptance in the payment of debts, both public and private, is at the option of the creditor: Provided, however, That a check which has been cleared and credited to the account of the creditor shall be equivalent to a delivery to the creditor of cash in an amount equal to the amount credited to his account. Since our law does not make a distinction between ordinary check and cashier’s check/ manager’s check, then, checks, regardless of kind, are not legal tender consistent with the basic rule in statutory construction that when the law does not distinguish, neither should we distinguish.

• If a corporation fails to materialize, are the incorporators/subscribers of the corporation deemed partners inter se ?

Under the Philippine Civil Code, there are two kinds of persons with the capacity to enter into contracts, acquire property, incur obligations, sue and be sued in courts. These are the natural persons and juridical persons. Under Article 44 of the Civil Code, juridical persons are the State and its political subdivisions; other corporations, institutions and entities for public interest or purpose, created by law, and corporations, partnerships and associations for private interest or purpose to which the law grants a juridical personality, separate and distinct from that of each shareholder, partner or member. These juridical persons may acquire and possess property of all kinds, as well as incur obligations and bring civil or criminal actions, in conformity with the laws and regulations of their organization.18
There are likewise instances when a corporation is defectively formed. While it has been held that as between themselves the rights of the stockholders in a defectively incorporated association should be governed by the supposed charter and the laws of the state relating thereto and not by the rules governing partners, it is ordinarily held that persons who attempt, but fail, to form a corporation and who carry on business under the corporate name occupy the position of partners inter se. Thus, where persons associate themselves together under articles to purchase property to carry on a business, and their organization is so defective as to come short of creating a corporation within the statute, they become in legal effect partners inter se, and their rights as members of the company to the property acquired by the company will be recognized. So, where certain persons associated themselves as a corporation for the development of land for irrigation purposes, and each conveyed land to the corporation, and two of them contracted to pay a third the difference in the proportionate value of the land conveyed by him, and no stock was ever issued in the corporation, it was treated as a trustee for the associates in an action between them for an accounting, and its capital stock was treated as partnership assets, sold, and the proceeds distributed among them in proportion to the value of the property contributed by each. However, such a relation does not necessarily exist, for ordinarily persons cannot be made to assume the relation of partners, as between themselves, when their purpose is that no partnership shall exist, and it should be implied only when necessary to do justice between the parties; thus, one who takes no part except to subscribe for stock in a proposed corporation which is never legally formed does not become a partner with other subscribers who engage in business under the name of the pretended corporation, so as to be liable as such in an action for settlement of the alleged partnership and contribution. A partnership relation between certain stockholders and other stockholders, who were also directors, will not be implied in the absence of an agreement, so as to make the former liable to contribute for payment of debts illegally contracted by the latter. 19

• May a corporation by estoppel be sued independently of the persons assuming themselves to be corporation ?

An interesting principle in commercial law is a corporation by estoppel. This results when a corporation represented itself to the public as such despite its not being incorporated. As such, it is neither a natural nor a juridical person. Section 21 of the Corporation Code of the Philippines20 governs the liability of a corporation by estoppel which states that all persons who assume to act as a corporation knowing it to be without authority to do so shall be liable as general partners for all debts, liabilities and damages incurred or arising as a result thereof: Provided, however, That when any such ostensible corporation is sued on any transaction entered by it as a corporation or on any tort committed by it as such, it shall not be allowed to use as a defense its lack of corporate personality. Likewise, one who assumes an obligation to an ostensible corporation as such, cannot resist performance thereof on the ground that there was in fact no corporation. Thus, in the case of People v. Garcia21 , it was held that the persons who illegally recruited workers for overseas employment by representing themselves to be officers of a corporation which they knew had not been incorporated are liable as general partners for all debts, liabilities and damages incurred or arising as a result thereof. Even a person who did not directly act on behalf of the corporation but having reaped the benefits of the contract entered into by persons with whom he previously had an existing relationship, he is deemed to be part of said association and is covered by the scope of the doctrine of corporation by estoppel. 22

However, this doctrine applies only to a third party when he tries to escape liability on a contract from which he has benefited on the irrelevant ground of defective incorporation. Thus, when he is not trying to escape liability from the contract but rather the one claiming from the contract, the doctrine of corporation by estoppel is not applicable.23 Likewise held in the case of Lozano v. De Los Santos24 that where there is no third person involved and the conflict arises only among those assuming the form of a corporation, who therefore know that it has not been registered, there is no corporation by estoppel.

The question that arises then is whether a corporation by estoppel can be sued independently of the persons assuming themselves to be a corporation. This is answered by the case of Macasaet v. Francisco25 with the Philippine Supreme Court ruling that a corporation by estoppel may be impleaded as a party defendant considering that it possesses attributes of a juridical person, otherwise, it can not be held liable for damages and injuries it may inflict to other persons. There is no ruling yet on the liability of such corporation. The only issue raised  before the Supreme Court is the propriety of the order of the lower court granting the motion to drop a “ corporation “ as party defendant considering that it is not registered with the Securities and Exchange Commission and as such, has no juridical personality. It will be interesting to see how the Supreme Court will eventually rule on how to enforce a judgment against a corporation by estoppel (independently of those who represented themselves as a corporation who, under the law are liable as general partners) considering that a corporation by estoppel can not possibly acquire properties unlike regularly- organized corporations.  

• Should there be a minimum bid price requirement if the mortgagee is a bank ?

Another concrete example of how commercial law and civil law are very well- intertwined is mortgage. It is a security commonly used in commercial transactions that is clothed with characteristics that are civil in nature. Mortgage has been classified by the Civil Code as having the following requisites:

• That they be constituted to secure the fulfillment of a principal obligation;
• That the pledgor or mortgagor be the absolute owner of the thing pledged or mortgaged;
• That the persons constituting the pledge or mortgage have the free disposal of their property, and in the absence thereof, that they be legally authorized for the purpose. 26

For a person to validly constitute a valid mortgage on real estate, he must be the absolute owner thereof as required by Article 2085 of the New Civil Code. The mortgagor must be the owner, otherwise the mortgage is void. In a contract of mortgage, the mortgagor remains to be the owner of the property although the property is subjected to a lien. A mortgage is regarded as nothing more than a mere lien, encumbrance, or security for a debt, and passes no title or estate to the mortgagee and gives him no right or claim to the possession of the property. In this kind of contract, the property mortgaged is merely delivered to the mortgagee to secure the fulfillment of the principal obligation.27 It therefore highlights the importance of mortgage as an assurance to ensure prompt payment and not as a mode of transferring ownership like that of a sale.
In the event the debtor fails to pay the loan, the creditor has the option to foreclose whatever security has been constituted over the loan by selling the same at a public auction. This could be done either judicially, by filing a petition with the court pursuant to Rule 68 of the Rules of Court or extra-judicially if there is an agreement between the parties.
After the foreclosure, the debtor is given a chance to reacquire the property sold at public auction by giving him the right of redemption. Redemption has been defined as “the right of a debtor, and sometimes of a debtor’s other creditors, to repurchase from a buyer at a forced sale, property of the debtor that was seized and sold in satisfaction of a judgment or other claim against the debtor, which right is usually limited to forced sale of real property. The concept of redemption is to allow the owner to repurchase or to buy back, within a certain period and for a certain amount, a property that has been sold due to debt, tax, or encumbrance. 28
If the foreclosure is done judicially, an equity of redemption is given to the debtor, but not a right of redemption. In Huerta Alba Resort, Inc. v. Court of Appeals 29, the Philippine Supreme Court held that the right of redemption is not recognized in a judicial foreclosure, thus:
The right of redemption in relation to a mortgage–understood in the sense of a prerogative to re-acquire mortgaged property after registration of the foreclosure sale–exists only in the case of the extrajudicial foreclosure of the mortgage.  No such right is recognized in a judicial foreclosure except only where the mortgagee is the Philippine National bank or a bank or a banking institution.
Where the foreclosure is judicially effected, no equivalent right of redemption exists.  The law declares that a judicial foreclosure sale, ‘when confirmed by an order of the court, x x x shall operate to divest the rights of all the parties to the action and to vest their rights in the purchaser, subject to such rights of redemption as may be allowed by law.’ Such rights exceptionally ‘allowed by law’ (i.e., even after the confirmation by an order of the court) are those granted by the charter of the Philippine National Bank (Act Nos. 2747 and 2938), and the General Banking Act (R.A.337).  These laws confer on the mortgagor, his successors in interest or any judgment creditor of the mortgagor, the right to redeem the property sold on foreclosure–after confirmation by the court of the foreclosure sale–which right may be exercised within a period of one (1) year, counted from the date of registration of the certificate of sale in the Registry of Property.
But, to repeat, no such right of redemption exists in case of judicial foreclosure of a mortgage if the mortgagee is not the PNB or a bank or banking institution.  In such a case, the foreclosure sale, ‘when confirmed by an order of the court, x x x shall operate to divest the rights of all the parties to the action and to vest their rights in the purchaser.’ There then exists only what is known as the equity of redemption.  This is simply the right of the defendant mortgagor to extinguish the mortgage and retain ownership of the property by paying the secured debt within the 90-day period after the judgment becomes final, in accordance with Rule 68, or even after the foreclosure sale but prior to its confirmation.
x x x
“This is the mortgagor’s equity (not right) of redemption which, as above stated, may be exercised by him even beyond the 90-day period ‘from the date of service of the order,’ and even after the foreclosure sale itself, provided it be before the order of confirmation of the sale.  After such order of confirmation, no redemption can be effected any longer.”
Thus, as a general rule, there is no right of redemption in a judicial foreclosure of mortgage. The only exception is when the mortgagee is the Philippine National Bank or a bank or a banking institution. They merely have an equity of redemption, which, to reiterate, is simply their right, as mortgagor, to extinguish the mortgage and retain ownership of the property by paying the secured debt prior to the confirmation of the foreclosure sale. 30 
In the case of redemption in extrajudicial foreclosure of mortgage, Sec. 6 of Act No. 3135, as amended by Act No. 4118 provides: 
SEC. 6. In all cases in which an extrajudicial sale is made under the special power hereinbefore referred to, the debtor, his successors-in-interest or any judicial creditor or judgment creditor of said debtor, or any person having a lien on the property subsequent to the mortgage or deed of trust under which the property is sold, may redeem the same at any time within the term of one year from and after the date of the sale; and such redemption shall be governed by the provisions of sections four hundred and sixty-four to four hundred and sixty-six, inclusive, of the Code of Civil Procedure, in so far as these are not inconsistent with the provisions of this Act. 
Thus, when a mortgaged property is foreclosed extrajudicially, the debtor is given one year to redeem the property, which is counted from the date of the registration of the certificate of sale. This gives the debtor an opportunity to buy back his property.
However, Section 47 of R.A. No. 8791 otherwise known as “The General Banking Law of 2000”, amended Act No. 3135. Said provision reads: 
SECTION 47. Foreclosure of Real Estate Mortgage. — In the event of foreclosure, whether judicially or extrajudicially, of any mortgage on real estate which is security for any loan or other credit accommodation granted, the mortgagor or debtor whose real property has been sold for the full or partial payment of his obligation shall have the right within one year after the sale of the real estate, to redeem the property by paying the amount due under the mortgage deed, with interest thereon at the rate specified in the mortgage, and all the costs and expenses incurred by the bank or institution from the sale and custody of said property less the income derived therefrom. However, the purchaser at the auction sale concerned whether in a judicial or extrajudicial foreclosure shall have the right to enter upon and take possession of such property immediately after the date of the confirmation of the auction sale and administer the same in accordance with law. Any petition in court to enjoin or restrain the conduct of foreclosure proceedings instituted pursuant to this provision shall be given due course only upon the filing by the petitioner of a bond in an amount fixed by the court conditioned that he will pay all the damages which the bank may suffer by the enjoining or the restraint of the foreclosure proceeding. Notwithstanding Act 3135, juridical persons whose property is being sold pursuant to an extrajudicial foreclosure, shall have the right to redeem the property in accordance with this provision until, but not after, the registration of the certificate of foreclosure sale with the applicable Register of Deeds which in no case shall be more than three (3) months after foreclosure, whichever is earlier. Owners of property that has been sold in a foreclosure sale prior to the effectivity of this Act shall retain their redemption rights until their expiration. 
The case of Asia Trust Development Bank v. Tuble31 , expounded on the terms of this right, based on Section 47 of the General Banking Law, as follows:

• The redemptioner shall have the right within one year after the sale of the real estate, to redeem the property.
• The redemptioner shall pay the amount due under the mortgage deed, with interest thereon at rate specified in the mortgage, and all the costs and expenses incurred by the bank or institution from the sale and custody of said property less the income derived therefrom.
• In case of redemptioners who are considered by law as juridical persons, they shall have the right to redeem not after the registration of the certificate of foreclosure sale with the applicable Register of Deeds which in no case shall be more than three (3) months after foreclosure, whichever is earlier.

Under the new law, an exception is thus made in the case of juridical persons which are allowed to exercise the right of redemption only “until, but not after, the registration of the certificate of foreclosure sale” and in no case more than three (3) months after foreclosure, whichever comes first. A shorter term is deemed necessary to reduce the period of uncertainty in the ownership of property and enable mortgagee-banks to dispose sooner of these acquired assets. It must be underscored that the General Banking Law of 2000, crafted in the aftermath of the 1997 Southeast Asian financial crisis, sought to reform the General Banking Act of 1949 by fashioning a legal framework for maintaining a safe and sound banking system. In this context, the amendment introduced by Section 47 embodied one of such safe and sound practices aimed at ensuring the solvency and liquidity of our banks. 32
If the mortgagee is a bank, quasi-bank or trust entity ( “ banking institution” ), a minimum bid price during foreclosure sale equivalent to at least the appraised value or zonal value of the property should be imposed. The rationale that the lesser the price the easier it is for the owner to redeem the mortgaged property is not accurate  because for banks, the redemption price is fixed at an amount equivalent to the outstanding loan obligation plus the interest stipulated in the real estate mortgage agreement.
The Supreme Court has ruled in many cases that mere inadequacy of the bid price at a forced sale is immaterial and does not nullify the sale on the theory that when the law gives the owner the right to redeem as when a sale is made at a public auction, upon the theory that the lesser the price the easier it is for the owner to effect the redemption.33
For banking institution, however, the redemption price is the outstanding amount of the loan plus interest stipulated in the agreement, regardless of the amount of the bid price. 34 Therefore, nothing precludes the bank from making a low bid during the foreclosure sale (provided it is not unconscionable) because the redemption price anyway is pegged by law at a fixed amount. Worst, the mortgagor is still liable to pay deficiency. Thus, to be fair and equitable, if the mortgagee is a banking institution, a minimum bid price during foreclosure sale should be set equivalent to at least the appraised value or assessed value of the mortgaged property.
 Indeed, commercial transactions of all sorts abound. The foregoing sampling illustrations show how civil law concepts are very much ingrained in the field of commercial law. Indeed, these laws primarily govern our business transactions and are understandably intertwined. For sure, there can be  more illustrations and applications on their seamless harmony- present and future. Admittedly, I am biased for commercial law since I teach and practice it. But, my love and passion for commercial law do not in any way diminish my appreciation and liking for civil law. I hope that was evident in my brief lecture.