Legal implications of ‘fiduciary duty of extraordinary diligence’

 Legal implications of ‘fiduciary duty of extraordinary diligence’

(Part 2)

In its 2018 Resolution, Virata v. Ng Wee, affirmed in toto the foregoing rulings in dismissing the motions for reconsideration filed by the petitioning directors and officers of Wincorp, and thereby solidifying the doctrine that when it comes to corporations vested with public interests, such as financial intermediaries, directors, trustees, and officers do owe a fiduciary duty of diligence not only to the shareholders, but to creditors and other stakeholders, who rely upon the Board and its officers to exercise their fiduciary duty of diligence in the management of the corporate business enterprise to protect their legitimate interests in the corporate assets.

The Revised Corporation Code, although retaining the same language on the liability of directors, trustees, or officers under its Section 30, nevertheless instituted under Section 22 the special category of “corporations vested with public interests,” and thus imports the existing jurisprudence defining the obligation of such corporation to act with extraordinary diligence. In other words, all corporations classified as being vested with public interests pursuant to Section 22 of the Revised Corporation Code must necessarily come under the rule that they are expected to exercise the highest degree of diligence with the public they deal with or for whose interests they operate their business enterprise.

Under the fiduciary duty to exercise extraordinary diligence rule, an injured stakeholder need only to prove the amount of damages sustained from the acts, contracts, or business transactions or operations of a corporation vested with public interests, and the burden to show that it has exercised extraordinary diligence would be on the part of the said corporation.

The doctrine is taken from statutory and jurisprudential rules embodying another industry vested with public interest, namely common carriers. Under Article 1733 of the Civil Code, “Common carriers, from the nature of their business and for reasons of public policy, are bound to observe extraordinary diligence in the vigilance over the goods and for the safety of the passengers transported by them, according to all the circumstances of each case.”

In turn, Article 1755 defines “extraordinary diligence” as the obligation of the common carried to carry its passengers safely as far as human care and foresight can provide, using the utmost diligence of a very cautious person, with due regard for all the circumstances. By reason therefore, Article 1756 provides that “In case of death of or injuries to passengers, common carriers are presumed to have been at fault or to have negligently, unless they prove that they observed extraordinary diligence.”

The underlying statutory rules imposing the duty to exercise extraordinary diligence on the part of common carriers have given rise to the rule of liability of common carriers well-expressed in Tiu v. Arriesgado, 437 SCRA 426 (2004), thus:

“Upon happening of the accident, presumption of negligence arises at once, and it becomes the duty of a common carrier to prove that he observed extraordinary diligence in the case of his passengers. To overcome such presumption of negligence, the carrier must show: (a) The utmost diligence of very cautious persons as far as human care and foresight can provide; or (b) That the accident was caused by fortuitous event.

“The negligence of employee gives rise to the presumption of negligence on the part of employer, the purpose of which is primarily intended to provide compensation for the death or bodily injuries suffered by innocent third parties or passengers as a result of negligent operation and use of motor vehicles.”

The Supreme Court has defined “extraordinary diligence” as that extreme measure of care and caution which persons of unusual prudence and circumspection observe for securing or preserving their own property or rights. This exacting standard imposed is intended to tilt the scales in favor of the shipper who is at the mercy of the common carrier once the goods have been lodged for shipment. When employee’s negligence causes damage or injury, there arises presumption juris tantum that employer failed to exercise diligentissimi patris families in selection or supervision of employees.

Presumption of Negligence When Passengers Die or Injured — In carriage of passengers, by reason that the common carrier is bound by duty to observe extraordinary diligence in pursuit of its business, it is presumed that common carrier was at fault/negligent if passenger dies or is injured. Unless presumption is rebutted, courts need not make an express finding of fault or negligence on the part of the common carrier.

It should then follow that for all corporation vested with public interests under or pursuant to Section 22 of the Revised Corporation Code, they are deemed to be bound to exercise extraordinary diligence in considering and protecting the interests of stakeholders who are affected directly by the nature of their business enterprise; and the moment they suffer any injury due to the act, contract, or pursuit of such business enterprise, then the corporation is ipso jure deemed negligent and liable unless it can prove that it has exercised extraordinary diligence in the selection and supervision of its employees and representatives. In the same manner, the Board of Directors, as the repository of all corporate powers is deemed to have failed to exercise extraordinary diligence in pursuing the affairs of the corporation and in the selection and supervision of its acting officers and employees, become solidarily liable with the corporation for the damages sustained by the injured stakeholders.

This article reflects the personal opinion of the author and does not reflect the official stand of the Management Association of the Philippines or the MAP.

Atty. Cesar L. Villanueva is chair of MAP Corporate Governance Committee, trustee of the Institute of Corporate Directors (ICD), the first chair of the Governance Commission for GOCCs (GCG — August 2011 to June 2016), dean of the Ateneo Law School (April 2004 to September 2011), and founding partner of Villanueva Gabionza & Dy Law Offices.