Fiduciary duty of diligence of the highest level for corporations vested with public interest

(First of two parts)

Under the aegis of the old Corporation Code, the Supreme Court began to evolve a theory of “Corporate Social Responsibility” on corporations vested with public interests that imposed a fiduciary duty of diligence beyond their shareholders but primarily stakeholders who are most affected by the corporations’ business or economic enterprise.

In 1990, without formal statutory basis, the Supreme Court in Simex International (Manila), Inc. v. Court of Appeals, under the ponencia of Justice Isagani Cruz, began to lay down the corporate governance principle that “corporations vested with public interest” owe a fiduciary duty not just to the shareholders, but the public that they serve or interact with, particularly in the banking industry, thus:

The banking system is an indispensable institution in the modern world and plays a vital role in the economic life of every civilized nation. Whether as mere passive entities for the safe-keeping and saving of money or as active instruments of business and commerce, banks have become an ubiquitous presence among the people, who have come to regard them with respect and even gratitude, most of all, confidence … The point is that as a business affected with public interests and because of the nature of its functions, the bank is under obligation to treat the accounts of its depositors with meticulous care, always having in mind the fiduciary nature of their relationship.

Prior to Simex International, the doctrine pervading the relationship of a bank with its depositors, was that of simply being contractual in character — that of a loan or mutuum — under which the rights and obligations of the parties emanate from the principle of breach of contract between debtor and creditor. Simex International therefore evolved the relationship between the bank and its depositors into one that is fiduciary in character — a doctrine that has since then pervaded the decisions of the Supreme Court involving the dealings of the banks with their depositors.

Although there was resistance in some of the decisions to extend that “fiduciary nature of the relationship,” beyond those of the depositors, the formal recognition of banks being vested with public interests eventually covered all of their dealings with the public, thus:

• Over supervision of their officers and employees as the only way to ensure that banks will comply with their fiduciary duties;

• In extending loans and other credit accommodations;

• In accepting real estate mortgages, dealing with registered land and other properties given as security; and,

• In general, in handling all their transactions, or dealings with the public.

More importantly, the recognized fiduciary obligation of banking institutions to all such stakeholders, was characterized to be of the “highest degree,” and not just the diligence of a good father of a family. Thus, in PCI Bank v. Court of Appeals, the Supreme Court held:

“Time and again, we have stressed that banking business is so impressed with public interest where the trust and confidence of the public in general is of paramount importance such that the appropriate standard of diligence must be very high, if not the highest, degree of diligence. A bank’s liability as obligor is not merely vicarious but primary; the defense of exercise of due diligence in the selection and supervision of its employees is of no moment.

“Banks handle daily transactions involving millions of pesos. By the very nature of their work the degree of responsibility, care and trustworthiness expected of their employees and officials is far greater than those of ordinary clerks and employees. Banks are expected to exercise the highest degree of diligence in the selection and supervision of their employees.”

The theory that the nature of the banking industry is one that is vested with public interest and owes fiduciary duties to other stakeholders was formally incorporated into the General Banking Law of 2000, where Section 2 thereof expressly imposes a fiduciary duty on banks when it declared the “fiduciary nature of banking that requires high standards of integrity and performance,” which requires a bank to assume a degree of diligence higher than that of a good father of a family. In Philippine National Bank v. Pike, the Supreme Court held that even if the transaction with the bank occurred prior to the promulgation of the General Banking Law of 2000, nonetheless its Section 2 categorical declaration of the “fiduciary nature of banking that requires highest standards of integrity and performance” is only a statutory affirmation of the Supreme Court’s decisions in esse at the time of such transactions. In other words, the doctrine that the diligence of the highest degree, and high standards of integrity and performance are required of corporations impressed with public interest has common-law binding effect without the need of any statutory confirmation thereof.

Once that threshold had been breached in the banking industry, the Supreme Court began to apply the doctrine of fiduciary obligation of corporations, and their Boards of Directors and Management, to affected stakeholders (not just shareholders), when the underlying business enterprise is that which affects a large segment of the public.

In 2006, in its decision in Nogales v. Capitol Medical Center, the Court began to move away from the otherwise well-established doctrine that a malpractice on the part of an independent or visiting physician does not make the hospital vicariously liable therefor. The Court held:

“In general, a hospital is not liable for the negligence of an independent contractor-physician. There is, however, an exception to this principle. The hospital may be liable if the physician is the ‘ostensible’ agent of the hospital. This exception is also known as the ‘doctrine of apparent authority’.”

The doctrine of apparent authority is a species of the doctrine of estoppel. Article 1431 of the Civil Code provides that “through estoppel, an admission or representation is rendered conclusive upon the person making it, and cannot be denied or disproved as against the person relying thereon.” Estoppel rests on this rule: “Whenever a party has, by his own declaration, act, or omission, intentionally and deliberately led another to believe a particular thing true, and to act upon such belief, he cannot, in any litigation arising out of such declaration, act or omission, be permitted to falsify it.”

The gravamen of the Nogales decision is to the effect that when a hospital holds out a physician as a member of its medical staff, when in fact he is an independent contractor merely using the facilities of the hospital, then insofar as the patient is concerned, the hospital has clothed such a physician with authority to bind the hospital under the doctrine of apparent authority, which the hospital cannot later on repudiate to insulate itself from the malpractice assertions hurled against the physician. Among the circumstances that were found by the Court to have played into the application of the doctrine of apparent authority was that the hospital granted staff privileges to the attending physician; it made the patient’s husband sign a consent form printed on the hospital’s letterhead; and that the complications experienced during the operation were referred to the hospital’s head which gave the impression to the patient and her husband that the attending physician was a member of the hospital’s medical staff and was collaborating with other hospital-employed specialists in treating the patient.

Quoting from American jurisprudence, Nogales began to characterize the “public interest” nature of a corporation operating a hospital, thus: “The conception that the hospital does not undertake to treat the patient, does not undertake to act through its doctors and nurses, but undertakes instead simply to procure them to act upon their own responsibility, no longer reflects the fact. Present day hospital, as their manner of operation plainly demonstrates, do far more than furnish facilities for treatment. They regularly employ on a salary basis a large staff of physicians, nurses and [interns], as well as administratively and manual workers, and they charge patients for medical care and treatment, collecting for such services, if necessary, by legal action. Certainly, the person who avails himself of ‘hospital facilities’ expects that the hospital will attempt to cure him, not that its nurses or other employees will act on their own responsibility.”

Subsequently, the Court had the occasion to revisit and expand the Nogales doctrine in its original decision in Professional Services, Inc. v. Agana, where the decision went into a historical development of hospitals and the resulting theories concerning their liability for the negligence of physicians, thus: “Until the mid-19th century, hospitals were generally charitable institutions, providing medical services to the lowest classes of society, without regard for a patient’s ability to pay. Those who could afford medical treatment were usually treated at home by their doctors.

“However, the days of house calls and philanthropic health care are over. The modern health care industry continues to distance itself from its charitable past and has experienced a significant conversion from a not-for-profit health care to for-profit hospital businesses. Consequently, significant changes in health law have accompanied the business-related changes in the hospital industry. One important legal change is an increase in hospital liability for medical malpractice. Many courts now allow claims for hospital vicarious liability under the theories of respondeat superior, apparent authority, ostensible authority, or agency by estoppel.”

(To be continued)

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.

Attorney Cesar L. Villanueva is Chair of the MAP Corporate Governance Committee, is a Trustee of the Institute of Corporate Directors (ICD), was the first Chair of Governance Commission for GOCCs (2011 to 2016), was Dean of the Ateneo Law School (2004 to 2011), and is a Founding Partner of the Villanueva Gabionza & Dy Law Offices.