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ATENEO CENTRAL BAR OPERATIONS 2007

Commercial Law
SUMMER REVIEWER

TABLE OF CONTENTS

I. Code of Commerce ............................................................................................... 2


II. Bulk Sales Law ...................................................................................................... 3
III. Warehouse Receipts Law...................................................................................... 4
IV. Trust Receipts Law................................................................................................ 6
V. Negotiable Instruments Law .................................................................................. 8
VI. Insurance Code ................................................................................................... 24
VII. Concurrence and Preference of Credits .............................................................. 39
VIII. Chattel Mortgage Law ......................................................................................... 43
IX. Corporation Code ................................................................................................ 46
X. Anti-Dumping Act................................................................................................. 62
XI. Intellectual Property Law ..................................................................................... 66
XII. Bank Secrecy Law............................................................................................... 83
XIII. Insolvency Law .................................................................................................... 84
XIV. Corporate Suspension of Payments.................................................................... 89
XV. Corporate Rehabilitation...................................................................................... 92
XVI. Securities Regulation Code ................................................................................. 94
XVII. Truth in Lending Act .......................................................................................... 102
XVIII. Transportation Code.......................................................................................... 105
XIX. Maritime Commerce .......................................................................................... 109
XX. Carriage of Goods By Sea Act .......................................................................... 114
XXI. Warsaw Convention .......................................................................................... 115
XXII. Public Service Act.............................................................................................. 116
XXIII. National Electrification
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Decree .......................................................................... 118
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XXIV. Franchise for TV and Radio Stations................................................................. 118
XXV. EPIRA Law ........................................................................................................ 118
XXVI. Ship Mortgage Decree....................................................................................... 118
XXVII. Philippine Deposit Insurance Corporation Act ................................................... 119
XXVIII. General Bonded Warehouse Act....................................................................... 121
XXIX. Installments Sales Law...................................................................................... 123

—Adviser: Atty. Jacinto Jimenez; Heads: Gail Maderazo; Volunteers: Jojo Baetiong, Joanne Bibal, Vira Castro,
Moe Villamor, Agatha Cruz—
ATENEO CENTRAL BAR OPERATIONS 2007
Commercial Law
SUMMER REVIEWER

give money to a third person on the basis of the letter


and on the credit of the person issuing it.
COMMERCIAL LAW – that branch of private law,
which regulates the juridical relations arising from
SIGNIFICANCE OF LETTERS OF CREDIT
commercial acts.
Roughly at least 85% of importations are
financed by letters of credit. The underlying idea of a
CONTRACTS BY CORRESPONDENCE – a
letter of credit is to ensure certainty of payment.
contract entered into by correspondence like letters,
Seller is assured of payment because the bank
telegrams, by messengers but not including those
intervenes and makes the commitment to pay. The
made by phone or through agents.
idea behind it is like your credit card. You walk into a
department store and they sell to you on credit
RULE ON THE PERFECTION OF CONTRACTS BY although you’re a total stranger because you show
CORRESPONDENCE your credit card, which means that the bank which
issued the credit card tells the seller that it will pay
Theory of Theory of Cognition the goods being bought.
Manifestation
Mercantile contracts are Contracts governed by ESSENTIAL CONDITIONS OF A LETTER OF
perfected from the civil law such as CREDIT
moment the acceptance partnerships, agencies, 1. Issued in favor of a definite person and not to
is sent, even if it has not deposits, loans, sales order. In effect, it is not a negotiable
yet been received by and guaranties will be instrument governed by the Negotiable
the offeror. perfected only upon Instruments Law.
receipt by the offeror of 2. Limited to fixed or specified amount, or to
Offeror can no longer the unconditional one or more amounts, but with maximum
withdraw the offer or acceptance by the stated limit. If any circumstance is missing,
change the terms and offeree. the letter is a mere letter of recommendation
conditions. (Article 568, Code of Commerce)

PARTIES TO A LETTER OF CREDIT


JOINT ACCOUNT – is a business arrangement 1. Buyer - who procures the letter of credit and
whereby two or more persons interest themselves in obliges himself to reimburse the issuing bank
the business of another, making contributions upon receipt of the document’s title;
thereto, and participating in the results of the 2. Issuing bank - which undertakes to pay the
business in the proportion they may determine. seller upon receipt of the draft and proper
documents of titles and to surrender the
FEATURES OF A JOINT ACCOUNT documents to the buyer upon
1. It may be contracted orally or in writing. reimbursement; and
2. No common name can be adopted. 3. Seller - who in compliance with the contract
3. Only one member is ostensible and can sue of sale ships the goods to the buyer and
or be sued. The others are silent. delivers the documents of title and draft to
4. No common fund. QuickTime™ and a the issuing bank to recover payment.
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The number of the parties may be increased and


COMPARISON OF JOINT ACCOUNT WITH may include:
COMMERCIAL PARTNERSHIP (see Annex C)
1. Advising (notifying) bank - may be utilized
to convey to the seller the existence of the
LETTER OF CREDIT – a letter issued by one credit.
merchant to another for the purpose of attending to a 2. Confirming bank - which will lend credence
commercial transaction. In banking practice, it is a to the letter of credit issued by a lesser
request by one bank to another bank to advance or known issuing bank; the confirming bank is

—Adviser: Atty. Jacinto Jimenez; Heads: Gail Maderazo; Volunteers: Jojo Baetiong, Joanne Bibal, Vira Castro,
Moe Villamor, Agatha Cruz—
Commercial Law Summer Reviewer
ATENEO CENTRAL BAR OPERATIONS 2007

directly liable to pay the seller-beneficiary;


3. Paying bank - which undertakes to encash
the drafts drawn by the exporter/seller BULK SALES LAW
4. Instead of going to the place of the issuing
bank to claim payment, the buyer may
approach another bank, termed the PURPOSE OF THE LAW
negotiating bank to have the draft discounted 1. To prevent the defrauding of creditors by the
(Charles Lee v. CA, GR No. 117913 secret sale or disposal or mortgage in bulk of
February 1, 2002) all or substantially all of a merchant’s stock of
goods.
LIABILITIES OF PARTIES 2. To prevent secret or fraudulent sale or
1. Drawer liable to person on whom it was mortgage of goods in bulk until the creditor of
issued provided identity proven, for the the seller shall have been paid in full.
amount paid within fixed maximum.
2. Bearer has no right of action if not paid by IMPORTANT: The law covers all transactions,
person who issued it. whether done in good faith or not, or whether the
3. Drawer may annul the letter of credit, seller is in a state of insolvency or not, as long as
informing the bearer and to whom it is the transaction falls within the description of what is a
addressed. “bulk sale.”
4. Bearer shall pay the amount received to
drawer, otherwise action for execution may TRANSACTIONS CONSIDERED AS “BULK SALE”
be filed with interest and current exchange in – sale, transfer, mortgage or assignment of
place where payment made on place where 1. a stock of goods, wares, merchandise,
repaid. provisions, or materials otherwise than in the
5. If a bearer does not make use of letter of ordinary course of trade
credit within agreed period, or if none, within 2. all, or substantially all, of the business of the
6 months from date if in the Philippines, and vendor, mortgagor, transferor, or assignor
12 months if outside the Philippines, it shall 3. all, or substantially all, of the fixtures and
be void. (Articles 569-572, Code of equipment used in the business of the
Commerce) vendor, mortgagor, transferor, or assignor.

INDEPENDENCE PRINCIPLE – in a letter of credit EXEMPTED TRANSACTIONS


transaction means that a bank, in determining 1. When accompanied with a written waiver by
compliance with the terms of a letter of credit is all the seller/mortgagor’s creditors
required to examine only the shipping documents 2. The law does not apply to executors,
presented by the seller and is precluded from administrators, receivers, assignees in
determining whether or not the main contract is insolvency, or public officers, acting under
actually accomplished or not. legal process
3. Sale or mortgage is made in the ordinary
RULE OF STRICT COMPLIANCE – in a letter of course of business
credit transaction means that the documents 4. Sale by assignee in insolvency or those
tendered by the seller or beneficiary must strictly beyond the right of creditors
conform to the terms of the letters of credit, i.e., they 5. Sale of properties exempt from attachment or
must include all documents required by the letter of
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from what has been stipulated under the letter of VENDOR BUYER, ASSIGNEE,
credit, as when it accepts a faulty tender, acts on its MORTGAGEE,
own risk and may not thereafter be able to recover TRANSFEROR
from the buyer or the issuing bank, as the case may Has obligations and No direct liability nor any
be, the money thus paid to the beneficiary (Feati liabilities under the Bulk obligation under the Bulk
Bank vs. CA, G.R. No. 94209, April 30, 1991) Sales Law. Sales Law
COMMON TYPES OF LETTERS OF CREDIT (see
Annex D)

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OBLIGATIONS OF THE VENDOR UNDER THE 2. to regulate the relationship between a


LAW – The vendor, mortgagor, transferor or assignor warehouseman and:
must: a. the depositor of the goods or
1. deliver to the vendee, mortgagee, transferee, b. holder of a warehouse receipt for the
or assignee a written statement of: goods or
a. names and addresses of all creditors to c. the person lawfully entitled to the
whom said vendor or mortgagor may be possession of the goods or
indebted d. other persons.
b. amount of indebtedness due or owing to
each of said creditors TERMS OR INFORMATION THAT SHOULD BE
2. apply the purchase money to the pro-rata CONTAINED IN A RECEIPT ISSUED BY THE
payment of bona fide claims of the creditors WAREHOUSEMAN FOR THE COMMODITY HE
as shown in the verified statement. RECEIVES FOR STORAGE – Although the law does
3. at least 10 days before the sale, shall: not prescribe any particular form, the receipt must at
a. make a full detailed inventory of the least contain the following:
goods, merchandise, etc., cost price of 1. Location of the warehouse
each article to be included in the sale 2. Date of Issue
b. notify every creditor at least 10 days 3. Receipt number
before transferring possession of the 4. Language to indicate if the receipt were
goods, of the price, terms and conditions negotiable or non-negotiable
of the sale 5. Rate of storage charges
6. Description of goods or packages containing
EFFECTS OF VIOLATION them
1. As between the parties: VALID CONTRACT 7. Signature of the warehouseman or his agent
2. As between persons other than the creditors: 8. Language indicating if the warehouseman is
VALID CONTRACT an owner solely or jointly with others, of the
3. As to affected creditors of the goods deposited and
seller/mortgagor: VOID CONTRACT 9. Statement of advances made by the
4. Criminal liability, if expressly provided warehouseman for which he claims a lien

RULE AS TO TRANSFERS WITHOUT RULE ON ADDITIONAL TERMS IN THE RECEIPT


CONSIDERATION OR FOR NOMINAL A warehouseman could add or insert any other terms
CONSIDERATION to his receipt provided that –
1. What the law says - The law makes it 1. such additional terms are not contrary to the
unlawful for any person, firm, or corporation, provisions of the Act
as owner of any stock of goods, wares, 2. they do not impair the degree of care in the
merchandise, provisions, or materials, in safekeeping of the goods entrusted to him
bulk, to transfer title to the same without required under the Act.
consideration or for a nominal consideration
only. Note: A warehouseman cannot provide in the
2. Effect - This will make the seller criminally warehouse receipt that the risk of loss of the goods
liable, and the sale would be void for lack of by fire or theft shall be for the depositor’s account as
consideration. that would be contrary to his obligation to keep the
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goods safe.
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What is the degree of care required of a
warehouseman in the safekeeping of goods
WAREHOUSE RECEIPTS LAW entrusted to him?
The degree of care that a reasonably careful
man would exercise in regard to similar goods of his
PURPOSE OF THE LAW own.
1. to prescribe the rights and duties of a
warehouseman KINDS OF RECEIPTS ISSUED BY A
WAREHOUSEMAN

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entitled to such delivery, which


Non-Negotiable Negotiable Receipt authority is endorsed upon the
Receipt receipt or written on another paper
A receipt which states A receipt which states c. The person in possession of a negotiable
that the goods received that the goods received receipt by the terms of which the goods
by the warehouseman by the warehouseman are deliverable:
will be delivered to the will be delivered to the i. to him or order, or
depositor or to any other bearer or to the order of ii. to bearer, or
specified person. any person named in iii. which has been endorsed to him or
such receipt. in blank by the person to whom
To make a receipt non- delivery was promised by the terms
negotiable, the word It can never be of the receipt of immediate endorsee.
“non-negotiable” should converted into a non-
be placed plainly upon negotiable by inserting 2. MISDELIVERY or CONVERSION – A
its face. provisions. Such warehouseman would be liable for
provision, if inserted, misdelivery or conversion if he delivers the
shall be void. goods to:
a. the one who is not in fact lawfully entitled
Note: A negotiable to the possession of goods
warehouse receipt is not b. a person holding a non-negotiable
a negotiable instrument receipt or a negotiable receipt if prior to
under the NIL. such delivery he had been requested not
to make such delivery or had information
that the delivery about to be made was to
WAREHOUSEMAN’S OBLIGATION TO DELIVER one not lawfully entitled to the
THE GOODS possession of goods.
1. Deliver to whom – upon demand
a. Holder of the receipt for the goods STEPS THAT A WAREHOUSEMAN COULD TAKE
b. Depositor TO PROTECT HIMSELF FROM A MISDELIVERY
2. The demand should be accompanied by: 1. Warehouseman is entitled to reasonable time
a. An offer to satisfy the warehouseman’s within which to ascertain the validity of the
lien adverse claim or to bring legal proceedings
b. An offer to surrender the receipt if it is to compel the claimants to interplead
negotiable 2. Warehouseman may require the claimants to
c. A readiness and willingness to sign an interplead.
acknowledgement, when the goods are
delivered, that they have been delivered RULE AS TO THE ATTACHMENT,
if such is requested by the GARNISHMENT, OR LEVY OF GOODS IN
warehouseman. POSSESSION OF A WAREHOUSEMAN
General Rule: Goods in the possession of a
warehouseman for which a negotiable receipt has
KINDS OF DELIVERY BY THE WAREHOUSEMAN been issued may be attached by garnishment or be
levied upon under an execution provided, the receipt
1. JUSTIFIED DELIVERY QuickTime™ and a
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warehouseman or its negotiation enjoined.
the following: Exceptions:
a. The person lawfully entitled to the 1. Where the person who made the deposit is
possession of the goods not the owner of the goods or is not a person
b. The person who is himself entitled to whose act in conveying title to them to a
delivery of the goods: purchaser in good faith for value would bind
i. by the terms of a non-negotiable the owner.
receipt or 2. In an action filed by the owner of the goods
ii. who has been authorized to take for their recovery or delivery to him.
delivery of the goods by the person

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3. Where the attachment of the goods on as if the warehouseman contracted with him
deposit is made before the negotiable receipt directly.
is issued.

RULE AS TO COMMINGLING OF GOODS


General Rule: Warehouseman must keep the goods
of the depositor separate from the goods of other
depositors, or from the goods of the same depositor
from a separate receipt (Ratio: to permit the TRUST RECEIPTS LAW
inspection and redelivery of the goods deposited at
all times)
Exceptions:
1. If the goods are fungible, i.e., any unit of the PURPOSE OF THE LAW
goods is, from its nature or by mercantile 1. To encourage and promote the use of trust
custom, treated as the equivalent of any receipts as an additional and convenient aid
other unit to commerce and trade;
2. The commingling is authorized by agreement 2. To provide for the regulation of trust receipts
or by custom transactions in order to assure the protection
of the rights and enforcement of obligations
OTHER LIABILITIES OF A WAREHOUSEMAN (see of the parties involved therein; and,
Annex E) 3. To declare the misuse and/or
misappropriation of goods or proceeds
WAREHOUSEMAN’S LIEN realized from the sale of goods, documents
1. Object of the Lien – on the goods deposited or instruments released under trust receipts
with him or on the proceeds thereof in his as a criminal offense punishable as estafa.
hands
2. Purpose – for all lawful charges for storage
and preservation of goods, money advanced TRUST RECEIPT - a written/printed document
by him in relation to such goods such as signed and delivered by the entrustee in favor of the
expenses of transportation or labor. entruster, whereby the latter releases the goods,
3. Against what Property may the lien be documents or instruments over which he holds
enforced – all goods belonging to the person absolute title or a security interest to the possession
liable for the charges, as well as against all of the former, upon the entrustee’s promise to hold
goods belonging to others deposited by the said goods in trust for the entruster, and to sell or
person liable for the charges and could have otherwise dispose of the goods, etc. with the
validly pledged the same. obligation to turn over the proceeds thereof to the
4. Loss of lien by warehouseman - by extent of what is owing to the entruster; or to return
surrendering the possession of the goods or the goods if UNSOLD, or for other purposes.
refusing to deliver the goods when demand is
made with which he is bound to comply.
5. Effect of the sale of goods to satisfy the OBLIGATIONS IN THE TRUST RECEIPT
warehouseman’s lien or on account of the
goods’ perishable or hazardous nature – FOR GOODS OR FOR INSTRUMENTS
warehouseman,QuickTime™ after the and a
sale, shall not be DOCUMENTS
liable for TIFF
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the goods to the 1. To sell them 1. To sell them
person lawfully entitled to the goods, even if 2. To manufacture 2. To deliver them to a
such receipt were negotiable. the for the purposes of principal
sale 3. To effect the
RIGHTS ACQUIRED BY A PERSON TO WHOM A 3. To unload/ship consummation of a
NEGOTIABLE RECEIPT HAS BEEN NEGOTIATED or deal with them in a transaction involving
1. Title to the goods as the person negotiating manner preliminary to delivery to a depositary
or transferring the receipt could convey their sale or a register
2. Direct obligation of the warehouseman to 4. To effect their
hold possession of the goods for him as fully presentation,

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collection or renewal sale of goods, public sale;


documents or 2. To have
NATURE OF THE TRUST RECEIPT AGREEMENT instruments; possession of the
1. A trust receipt agreement is merely a 2. Entitled to the return goods as a
collateral agreement, the purpose of which is of goods, etc. in case condition for his
to serve as security for a loan. of non-sale; liability under the
2. In relation to a letter of credit, a letter of credit 3. To enforce all other TRL (Ramos v.
is a separate document from a trust receipt. rights conferred on CA).
While the trust receipt may have been him under the TRL;
executed as a security on the letter of credit, 4. Extent of security
still the two documents involve different interest:
undertakings and obligations. a. As against
innocent
CONTENTS OF A TRUST RECEIPT – A trust receipt purchaser
need not be in any form but it must substantially for value: not
contain the following: preferred (Sec.
1. A description of the goods, documents or 12)
instruments subject of the trust receipt b. As against
2. The total invoice value of the goods and the creditors of
amount of the draft to be paid by the entrustee:
entrustee preferred
3. An undertaking or a commitment of the 5. To cancel the trust,
entrustee: take possession of
a. to hold in trust for the entruster the goods and to sell the
goods, documents or instruments therein goods in public sale
described in case of default;
b. to dispose of them in the manner 6. May purchase at the
provided for in the trust receipt; and intended public sale
c. to turn over the proceeds of the sale of (Sec. 7)
the goods, documents or instruments to
the entruster to the extent of the amount OBLIGATIONS OF THE ENTRUSTER AND
owing to the entruster or as appears in ENTRUSTEE
the trust receipt or to return the goods,
documents or instruments in the event of ENTRUSTER ENTRUSTEE
their non-sale within the period specified 1. To give possession 1. To hold the goods o
therein. of the goods to the the entruster;
4. The trust receipt may contain other terms entrustee; 2. To comply with his
and conditions agreed upon by the parties in 2. To give at least 5 3. To ensure agaisnt l
addition to those hereinabove enumerated days notice to the 4. To keep the goods
provided that such terms and conditions shall entrustee of the identifiable;
not be contrary to the provisions of this intention to sell the 5. To observe the
Decree, any existing laws, public policy or goods at the conditions of the
morals, public order or good customs. intended public trust receipt not
5. Trust receipts are denominated in Philippine
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currency. TRL.

RIGHTS OF ENTRUSTER AND ENTRUSTEE NOTES


1. Liability of the entruster in any sale or
ENTRUSTER ENTRUSTEE contract made by the entrustee – not be
1. Entitled to the 1. To receive the responsible as principal or as vendor under
proceeds from the surplus from the any sale or contract to sell made by the

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entrustee by virtue of such interest or having Negotiable Instruments vs. Negotiable


given the entrustee liberty of sale or other Documents of Title (see Annex F)
disposition of the goods, documents or
instruments under the terms of the trust
receipt transaction.
2. Who bears risk of loss – Entrustee
3. Rights of a purchaser for value and in PROMISSORY NOTE
good faith of the goods covered by the An unconditional promise to pay in writing made by
Trust Receipt – He acquires said goods, one person to another, signed by the maker,
documents or instruments free from the engaging to pay on demand or a fixed determinable
entruster's security interest. future time a sum certain in money to order or bearer.
4. Novation of a trust agreement - Supreme When the note is drawn to maker’s own order, it is
Court ruled that a Memorandum of not complete until indorsed by him. (Sec. 184)
Agreement entered into betweenthe bank-
entruster and entrustee extinguished the BILL OF EXCHANGE
obligation under the existing trust receipt An unconditional order in writing addressed by one
because the agreement did not only person to another, signed by the person giving it,
reschedule the debts of the entrustee but it requiring the person to whom it is addressed to pay
provided principal conditions which are on demand or at a fixed or determinable future time a
incompatible with the trust agreement. sum certain in money to order or to bearer. (Sec.
Hence, the liability for breach of the 126)
Memorandum of Agreement would be purely
civil in nature and no criminal liability under
the Trust receipt Law can be imposed. CHECK
(Philippines Bank v. Alfredo T. Ong, GR No. A bill of exchange drawn on a bank and payable on
133176, August 8, 2002) demand. (Sec. 185)

NEGOTIABLE INSTRUMENTS
LAW Promissory Note vs. Bill of Exchange

Promissory Note Bill of Exchange


Unconditional promise unconditional order
NEGOTIABLE INSTRUMENT Involves 2 parties involves 3 parties (drawer,
Written contracts for the payment of money; by its (maker, payee) payee, drawee)
form, intended as a substitute for money and Maker primarily liable drawer only secondarily
intended to pass from hand to hand, to give the liable
holder in due course the right to hold the same and
Only 1 presentment - for generally 2 presentments -
collect the sum due.
payment for acceptance and for
payment
CHARACTERISTICS OF NEGOTIABLE
INSTRUMENTS: QuickTime™ and a Check vs. Bill of Exchange
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1. Negotiability - right of transferee to hold the CHECK BOE
instrument and collect the sum due
- always drawn upon a - may or may not be
2. Accumulation of secondary contracts -
bank or banker drawn against a bank
instrument is negotiated from person to
person - always payable on - may be payable on
demand demand or at a fixed or
Negotiable Instruments vs. Non-Negotiable determinable future time
Instruments (see Annex G)

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- not necessary that it be - necessary that it be short of the diligence expected from it. It may still,
presented for acceptance presented for however, pursue an action against the person
acceptance responsible or who may have unjustly benefited.
- drawn on a deposit - not drawn on a deposit
- the death of a drawer of a - the death of the drawer Pabugais vs. Sahijwani, 423 SCRA 596 (2004)
check, with knowledge by of the ordinary bill of Generally, a manager’s check is not legal tender and
the banks, revokes the exchange does not the creditor may accept or refuse it. But, payment by
authority of the banker to revoke the authority of check may be accepted as valid if no prompt
pay the banker to pay objection is made.
- must be presented for - may be presented for
payment within a payment within a 2. Crossed check
reasonable time after its reasonable time after its Though the NIL is silent as to crossed checks, courts
issue (6 months) last negotiation. can take judicial cognizance of the practice that a
check crossed with two parallel lines in the upper left
hand corner means that it can only be deposited and
not converted to cash. The effects of a crossed check
Promissory Note vs. Check
thus relate to the mode of payment – meaning that
PN CHECK the drawer intends it to be only for deposit by the
rightful person, the named payee.
there are two (2) parties, there are three (3) parties,
the maker and the payee the drawer, the drawee Bataan Cigar vs. CA
bank and the payee A holder of crossed-checks is not obliged to inquire,
may be drawn against always drawn against a when he acquires them, as to purpose for which the
any person, not bank checks were issued. A payee who further negotiates
necessarily a bank cross-checks that he accepted from someone cannot
be considered a holder in good faith (and thus not a
may be payable on always payable on HIDC) is not applicable to this case. Here, when the
demand or at a fixed or demand payee acquired the checks, he duly deposited them
determinable future time in his bank account, and therefore, the purpose
a promise to pay An order to pay behind the crossing was satisfied by the payee.

Ngo vs. People, 434 SCRA 522 (2004)


The law does not require the payee to be interested
TYPES OF CHECKS in the obligation in consideration for which the check
was issued. The cause or reason of issuance is
1. Manager’s check - One drawn by the bank’s inconsequential (in connection with BP 22) in
manager upon the bank itself; and it is similar to a determining criminal liability.
cashier’s check both as to effect and use.
[International Corporate Bank v Gueco 351 SCRA
516 (2001) Associated Bank v. Court of Appeals, 208 SCRA
465
The payee of crossed checks issued with the notation
BPI Family Savings Bank v Manikan, 395 SCRA
“for payee’s account only” can sue a collecting bank
373 (2003)] QuickTime™ and a
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By its peculiar character
are needed and
to see this picture. general use in
deposit the checks in his own account and to
commerce, a manager’s check is regarded
withdraw the proceeds of the checks, because the
substantially to be as good as the money it
proceeds of the checks belonged to the payee and
represents
the bank paid the checks although the third person
Consequently, when a bank allows the delivery
had no title to the checks.
of a manager’s check to a person who is not directly
charged with the collection of its tax liabilities, such
bank must be deemed to have assumed the risk of a
possible misuse thereof, as it appears to have fallen

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A promise or order should not depend on a


contingent event. If it is conditional, it is non-
negotiable.

REQUISITES OF A NEGOTIABLE INSTRUMENT WHEN PROMISE IS UNCONDITIONAL

Sec. 1. An instrument to be negotiable, must conform Sec 3. An unqualified order or promise to pay is
to the following requirements: unconditional within the meaning of this Act, though
(a) It must be in writing and signed by the maker coupled with —
or drawer;
(b) Must contain an unconditional promise or (a) An indication of a particular fund out of which
order to pay a certain sum in money; reimbursement is to be made, or a particular account
(c) Must be payable on demand, or at a fixed or to be debited with the amount; or
determinable future time; (b) A statement of the transaction which gives rise to
(d) Must be payable to order or to bearer; and the instrument.

Where the instrument is addressed to a drawee, he But an order or promise to pay out of a particular fund
must be named or otherwise indicated therein with is not unconditional.
reasonable certainty.
WHAT CONSTITUTES DETERMINABLE FUTURE
HOW NEGOTIABILITY IS DETERMINED TIME
1. By the provisions of the Negotiable
Instrument Law, particularly Section 1 Sec 4. An instrument is payable at a determinable
thereof future time, within the meaning of this Act, which is
2. By considering the whole instrument expressed to be payable —
3. By what appears on the face of the
instrument and not elsewhere (a) At a fixed period after date or sight; or
(b) On or before a fixed or determinable future time
NOTE: In determining whether the instrument is specified therein; or
negotiable, only the instrument itself and no other, (c) On or at a fixed period after the occurrence of a
must be examined and compared with the specified event, which is certain to happen, though
requirements stated in Sec. 1. If it appears on the the time of happening be uncertain.
instrument that it lacks one of the requirements, it is
not negotiable and the provisions of the NIL do not An instrument payable upon a contingency is not
govern the instrument. The requirement lacking negotiable, and the happening of the event does not
cannot be supplied by using a separate instrument in cure the defect.
which that requirement appears.
WHEN SOME OTHER ACT IS REQUIRED OTHER
WHEN A SUM IS CERTAIN THAN PAYMENT OF MONEY IN AN INSTRUMENT
Sec 2. The sum payable is a sum certain within the
meaning of this Act, although it is to be paid:
Sec 5. An instrument which contains an order or
(a) With interest; or promise to do any act in addition to the payment of
(b) By statedTIFF
installments; or
QuickTime™ and a
(Uncompressed) decompressor money is not negotiable. But the negotiable character
are needed to see this picture.
(c) By stated installments, with a provision that, of an instrument otherwise negotiable is not affected
upon default in payment of any installment or
by a provision which —
of interest, the whole shall become due; or
(d) With costs of collection or an attorney’s fee, (a) Authorizes the sale of collateral securities in case
in case payment shall not be made at
the instrument be not paid at maturity; or
maturity. (b) Authorizes a confession of judgment if the
instrument be not paid at maturity; or
EFFECT OF A CONDITIONAL PROMISE OR (c) Waives the benefit of any law intended for the
ORDER advantage or protection of the obligor; or

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(d) Gives the holder an election to require something An instrument is payable to order when it is drawn
to be done in lieu of payment of money. payable to the order of a specified person or to a
specified person or his order.
But nothing in this section shall validate any provision
or stipulation otherwise illegal.
Notes on Section 5:
1. Limitation on the provision: it cannot require
something illegal. FOR WHOSE ORDER AN INSTRUMENT CAN BE
2. There are two kinds of judgments by DRAWN
confession:
a. cognovit actionem Sec. 8 The instrument is payable to order where it is
b. relicta verificatione drawn payable to the order of a specified person or to
3. Confessions of judgment in the Philippines him or his order. It may be drawn payable to the
are void as against public policy. order of —
4. If the choice lies with the debtor, the
instrument is rendered non-negotiable. (a) A payee who is not maker, drawer, or drawee; or
(b) The drawer or maker; or
INSTANCES THAT DO NOT AFFECT THE (c) The drawee; or
VALIDITY AND NEGOTIABILITY OF AN (d) Two or more payees jointly; or
INSTRUMENT (e) One or some of several payees; or
(f) The holder of an office for the time being.
Sec 6. The validity and negotiable character of an
Where the instrument is payable to order the payee
instrument are not affected by the fact that —
must be named or otherwise indicated therein with
(a) It is not dated; or reasonable certainty.
(b) Does not specify the value given, or that any
value has been given therefor; or INSTRUMENTS PAYABLE TO BEARER
(c) Does not specify the place where it is drawn or Sec. 9 The instrument is payable to bearer —
the place where it is payable; or
(d) Bears a seal; or (a) When it is expressed to be so payable; or
(e) Designates particular kind of current money in (b) When it is payable to a person named therein or
which payment is to be made. bearer; or
(c) When it is payable to the order of a fictitious or
But nothing in this section shall alter or repeal any non-existing person, and such fact was known to the
statute requiring in certain cases the nature of the person making it so payable; or
consideration to be stated in the instrument. (d) When the name of the payee does not purport to
be the name of any person; or
(e) When the only or last indorsement is an
WHEN AN INSTRUMENT IS PAYABLE UPON indorsement in blank.
DEMAND
Sec. 7 An instrument is payable on demand — INSTANCES WHEN A DATE MAY BE INSERTED
IN AN INSTRUMENT
(a) Where it is expressed to be payable on
demand, or at sight, or on presentation;
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or
TIFF (Uncompressed) decompressor
are needed to see this picture.
Sec. 13. Where an instrument expressed to be
(b) In which no time for payment is expressed. payable at a fixed period after date is issued undated,
or where the acceptance of an instrument payable at
Where an instrument is issued, accepted, or indorsed a fixed period after sight is undated, any holder may
when overdue, it is, as regards the person so issuing, insert therein the true date of issue or acceptance,
accepting, or indorsing it, payable on demand. and the instrument shall be payable accordingly. The
insertion of a wrong date does not avoid the
WHEN AN INSTRUMENT IS PAYABLE TO ORDER instrument in the hands of a subsequent holder in
due course; but as to him, the date so inserted is to
be regarded as the true date.

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2. Where only a signature on a blank paper


EFFECT WHEN A DATE IS INSERTED IN AN was delivered:
INSTRUMENT a. It was delivered by the person making it
A holder may insert the true date of issuance or in order that it may be converted into a
acceptance, the insertion of a wrong date does not negotiable instrument
avoid the instrument in the hands of a subsequent b. The holder has prima facie authority to fill
holder in due course. As regards to the holder in due it up as such for any amount. (Sec. 14)
course, the date inserted (even if it is a wrong date) is WHEN AN INSTRUMENT IS INCOMPLETE AND
regarded as the true date. UNDELIVERED

DEFICIENCIES THAT DO NOT AFFECT THE Sec. 15. Where an incomplete instrument has not
RIGHTS OF A SUBSEQUENT HOLDER IN DUE been delivered, it will not, if completed and
COURSE negotiated without authority, be a valid contract in the
1. Incomplete but delivered instrument (Sec. hands of any holder, as against any person whose
14) signature was placed thereon before delivery.
2. Complete but undelivered (Sec. 16)
3. Complete and delivered issued without Note: It is a real defense. It can be interposed
consideration or a consideration consisting of
against a holder in due course. Delivery is not
a promise which was not fulfilled (Sec 28) conclusively presumed where the instrument is
incomplete. Defense of the maker is to prove non-
DEFICIENCIES/ABNORMALITIES THAT AFFECT delivery of the incomplete instrument.
THE RIGHTS OF A HOLDER IN DUE COURSE
1. Incomplete and undelivered instrument (Sec.
WHEN AN INSTRUMENT IS COMPLETE BUT
15)
UNDELIVERED
2. Maker/drawer’s signature forged (Sec. 23)
Sec. 16. Every contract on a negotiable instrument is
Republic Bank v. Court of Appeals, 196 SCRA 100
incomplete and revocable until delivery of the
Where the amount of the check was altered by
instrument for the purpose of giving effect thereto. As
increasing it but the drawee bank failed to return it to
between immediate parties, and as regards a remote
the collecting bank within 24 hours, the collecting
party other than a holder in due course, the delivery,
bank is absolved from liability for the drawee bank
in order to be effectual, must be made either by or
should detect the alteration.
under the authority of the party making, drawing,
accepting, or indorsing, as the case may be; and in
PNB v. Court of Appeals, 256 SCRA 491 such case the delivery may be shown to have been
The alteration of a serial number of a check is not conditional, or for a special purpose only, and not for
material and does not entitle the drawee bank which the purpose of transferring the property in the
paid it to recover the payment. instrument. But where the instrument is in the hands
of a holder in due course, a valid delivery thereof by
all parties prior to him so as to make them liable to
WHEN INSTRUMENTS ARE INCOMPLETE BUT him is conclusively presumed. And where the
DELIVERED instrument is no longer in the possession of a party
1. Where an instrument is wanting in any whose signature appears thereon, a valid and
material particular: intentional delivery by him is presumed until the
a. Holder has QuickTime™
prima facie and a authority to fill up
TIFF (Uncompressed) decompressor contrary is proved.
the blanks therein. picture.
are needed to see this

b. It must be filled up strictly in accordance Rules On Delivery Of Negotiable Instruments


with the authority given and within a 1. Delivery is essential to the validity of any
reasonable time. negotiable instrument
c. If negotiated to a holder in due course, it 2. As between immediate parties or those in like
is valid and effectual for all purposes as cases, delivery must be with intention of
though it was filled up strictly in passing title
accordance with the authority given and 3. An instrument signed but not completed by
within reasonable time. (Sec. 14) the drawer or maker and retained by him is

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invalid as to him for want of delivery even in


the hands of a holder in due course Sec. 22. The indorsement or assignment of the
4. But there is prima facie presumption of instrument by a corporation or by an infant passes
delivery of an instrument signed but not the property therein, notwithstanding that from want
completed by the drawer or maker and of capacity the corporation or infant may incur no
retained by him if it is in the hands of a holder liability thereon.
in due course. This may be rebutted by proof
of non-delivery.
EFFECT OF A FORGED SIGNATURE OR ONE
5. An instrument entrusted to another who
MADE WITHOUT AUTHORITY
wrongfully completes it and negotiates it to a
holder in due course, delivery to the agent or
custodian is sufficient delivery to bind the Sec. 23. When a signature is forged or made without
maker or drawer. the authority of the person whose signature it
6. If an instrument is completed and is found in purports to be, it is wholly inoperative, and no right to
the possession of another, there is prima retain the instrument, or to give a discharge therefor,
facie evidence of delivery and if it be a holder or to enforce payment thereof against any party
in due course, there is conclusive thereto, can be acquired through or under such
presumption of delivery. signature, unless the party against whom it is sought
7. Delivery may be conditional or for a special to enforce such right is precluded from setting up the
purpose but such do not affect the rights of a forgery or want of authority.
holder in due course.
Notes:
PERSONS LIABLE IN AN INSTRUMENT 1. Section 23 applies only to forged
General rule: A person whose signature does signatures or signatures made without
not appear on the instrument is not liable. authority
Exception: 2. Alterations such as to amounts or the like
1. One who signs in a trade or assumed name fall under section 124
(Sec. 18) 3. Forms of forgery are a) fraud in factum;
2. A duly authorized agent (Sec. 19) b) duress amounting to fraud; c)
3. A forger (Sec. 23) fraudulent impersonation
4. Only the signature forged or made
WHEN AN AGENT IS LIABLE ON THE without authority is inoperative, the
INSTRUMENT instrument or other signatures which are
genuine are not affected
Sec. 20. Where the instrument contains or a person 5. The instrument can be enforced by
adds to his signature words indicating that he signs holders to whose title the forged
for or on behalf of a principal, or in a representative signature is not necessary
capacity, he is not liable on the instrument if he was 6. Persons who are precluded from setting
duly authorized; but the mere addition of words up the forgery are a) those who warrant
describing him as an agent, or as filling a or admit the genuineness of the
representative character, without disclosing his signature b) those who are estopped.
principal, does not exempt him from personal liability. 7. Persons who are precluded by
warranting are: a) indorsers; b) persons
SIGNATURE BY PROCURATION QuickTime™ and a - operates as negotiating by delivery; c) acceptors.
TIFF (Uncompressed) decompressor
notice that the agent arehas
neededato limited authority to sign.
see this picture. 8. drawee bank is conclusively presumed to
Effects: know the signature of its drawer
1. The principal is only bound if the agent acted 9. if endorser’s signature is forged, loss will
within the limits of the authority given be borne by the forger and parties
2. The person who takes the instrument is subsequent thereto
bound to inquire into the extent and nature of 10. drawee bank is not conclusively
the authority given. (Sec. 21) presumed to know the signature of the
indorser. The responsibility falls on the
LIABILITY OF INFANTS AND CORPORATIONS bank which last guaranteed the
FOR THEIR INDORSEMENT OR ASSIGNMENT indorsement and not the drawee bank.

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11. Where the payee’s signature is forged, Bank of P.I. vs. Casa Montessori Internationale,
payments made by the drawee bank to 430 SCRA 261 (2004]
the collecting bank are ineffective. No Forgery is the counterfeiting of any writing, consisting
debtor/creditor relationship is created. of the signing of another’s name with intent to
An agency to collect is created between defraud, is forgery.
the person depositing and the collecting The bank which allows the payment on a check
bank. The drawee bank may recover where the signature is forged is liable to the
from collecting bank who may, in turn, depositor-drawer. When one of two persons suffers
recover from the person depositing. the wrongful act of a third person, he whose
negligence was the proximate cause of the loss must
Rules On Liabilities Of Parties On A Forged bear the loss. Pursuant to its prime duty to ascertain
Instrument well the genuineness of the signatures of its client-
In a PN depositors, the drawee-bank is expected to use
1. A party whose indorsement is forged on a reasonable business prudence. In the performance of
note payable to order and all parties prior to that obligation, it is bound by its internal banking rules
him including the maker cannot be held liable and regulation that form part of the contract it enters
by any holder into with its depositors.
2. A party whose indorsement is forged on a A drawee bank must restore to the account of the
note originally payable to bearer and all drawer the amounts of checks on which the signature
parties prior to him including the maker may of its president was forged even of the forger was the
be held liable by a holder in due course independent auditor of the drawer, who was in
provided that it was mechanically complete charge of reconciling the bank statements with the
before the forgery records of the drawer.
3. A maker whose signature was forged
cannot be held liable by any holder Astro-Electronics Corp. vs. Philguarantee, 411
SCRA 462 (2003)
In a BOE The Pres is personally liable. In signing his name
1. The drawer’s account cannot be charged by apart from being the Pres., he became a co-maker.
the drawee where the drawee paid Persons who write their names on the fact of PNs are
2. The drawer has no right to recover from the makers.
collecting bank
3. The drawee bank can recover from the Metropolitan Waterworks & Sewerage System v.
collecting bank Court of Appeals, 143 SCRA 20
4. The payee can recover from the drawer Where a depositor who was allowed to print its
5. The payee can recover from the recipient of checks privately adopted no security measures in the
the payment, such as the collecting bank printing of the checks, 23 checks with forged
6. The payee cannot collect from the drawee signatures of the authorized signatories were
bank deposited over a period of three months, and the
7. The collecting bank bears the loss but can fraud was not discovered because of the failure of the
recover from the person to whom it paid depositor to reconcile the bank statements with its
8. If payable to bearer, the rules are the same records, the depositor must bear the loss because of
as in PN. its negligence.
9. If the drawee has accepted the bill, the
drawee bears the loss and
QuickTime™ and a his remedy is to
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go after the forger Philippine National Bank v. Court of Appeals, 25
are needed to see this picture.
10. If the drawee has not accepted the bill but SCRA 693
has paid it, the drawee cannot recover from A drawee bank which paid a check on which the
the drawer or the recipient of the proceeds, signature of the drawer had been forged cannot
absent any act of negligence on their part. recover the payment from the collecting bank,
because payment implies acceptance and an
LIABILITY OF BANK FOR ALLOWING PAYMENT acceptor admits the genuineness of the signature of
ON CHECKS WHERE THE DRAWER’S the drawer.
SIGNATURE IS FORGED

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Associated Bank v. Court of Appeals, 252 SCRA


620
While a drawee bank which paid several checks Samson v. Court of Appeals, 402 SCRA 348
payable to order with forged endorsements can Since consideration is presumed, the maker is liable
recover the payment from the collecting bank to pay under a negotiable promissory note.
because the forged endorsement is inoperative, the
drawer must share one-half of the loss where the Villaluz v. Court of Appeals, 278 SCRA 540
drawer substantially contributed to the loss by Since a check which was dishonored for lack of funds
continuing to release the check to the forger although is presumed to have been issued for valuable
it knew the forger was no longer the cashier of the consideration. The drawer should be ordered to pay
drawer. its value if he failed to rebut the presumption.

Banco de Oro Savings & Mortgage Bank v. ACCOMMODATION PARTY


Equitable banking Corporation, 157 SCRA 188 An accommodation party is one who signs the
Where the endorsements on a check presented by a instrument as maker, drawer, acceptor, or indorser
collecting bank for clearing are forged, the drawee without receiving value for it and for the purpose of
bank can recover the payment, for it is the duty of the lending his name to some other person.
collecting bank to see to it that the endorsements are
genuine.
LIABILITY OF AN ACCOMMODATION PARTY
CONSIDERATION
Sec. 29. An accommodation party is one who has
Sec. 24. Every negotiable instrument is deemed signed the instrument as maker, drawer, acceptor, or
prima facie to have been issued for a valuable indorser, without receiving value therefor, and for the
consideration; and every person whose signature purpose of lending his name to some other person.
appears thereon to have become a party thereto for Such a person is liable on the instrument to a holder
value. for value, notwithstanding such holder at the time of
Sec. 26. Where value has at any time been given for taking the instrument knew him to be only an
the instrument, the holder is deemed a holder for accommodation party.
value in respect to all parties who became such prior
to that time.
Sec. 28. Absence or failure of consideration is matter Notes:
of defense as against any person not a holder in due 1. The accommodated party cannot recover
course; and partial failure of consideration is a from the accommodation party
defense pro tanto, whether the failure is an 2. Want of consideration cannot be interposed
ascertained and liquidated amount or otherwise. by the accommodation party
3. An accommodation maker may seek
reimbursement from a co-maker even in the
Notes: absence of any provision in the NIL; the
1. Absence of consideration is where no deficiency is supplied by the New Civil Code.
consideration was intended to pass. 4. He may do this even without first proceeding
2. Failure of consideration implies that against the debtor provided:
consideration was intended but that it failed a. He paid by virtue of judicial demand
to pass b. Principal debtor is insolvent
3. The defense of wantandof
QuickTime™ a
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consideration is
ineffective against a holder in due course
are needed to see this picture.
Prudencio v. Court of Appeals, 143 SCRA 7
4. A drawee who accepts the bill cannot allege To be entitled to recover from an accommodation
want of consideration against the drawer party, the holder of a negotiable instrument must be a
holder in due course except for the notice of want of
Yang vs. CA, 409 SCRA 159 (2003) consideration.
He who posits that there was no consideration, is
obliged to present convincing evidence to overthrow Caneda v. Court of Appeals, 181 SCRA 762
the presumption that every Negotiable Instrument is A party who signed a promissory note as
acquired by every party for value. accommodation maker in favor of the payees, who

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then indorsed it to a financing company, cannot raise


the defense that he did not receive any value but is
entitled to reimbursement from the party EFFECTS OF A TRANSFER WITHOUT
accommodated. ENDORSEMENT:
Sec. 49. Where the holder of an instrument payable
People v. Maniego, 148 SCRA 30 to his order transfers it for value without indorsing it,
Where a party indorsed several checks as the transfer vests in the transferee such title as the
accommodation endorser and the checks were transferor had therein, and the transferee acquires, in
dishonored for lack of funds, she is liable to the addition, the right to have the indorsement of the
holder for the payment of the checks. transferor. But for the purpose of determining
whether the transferee is a holder in due course, the
WHEN AN INSTRUMENT IS NEGOTIATED negotiation takes effect as of the time when the
Sec. 30. An instrument is negotiated when it is indorsement is actually made.
transferred from one person to another in such
manner as to constitute the transferee the holder RIGHTS OF A HOLDER
thereof. If payable to bearer, it is negotiated by Sec. 51. The holder of a negotiable instrument may
delivery; if payable to order, it is negotiated by the sue thereon in his own name; and payment to him in
indorsement of the holder completed by delivery. due course discharges the instrument.

REQUISITES OF A VALID INDORSEMENT REQUISITES FOR A HOLDER IN DUE COURSE


Sec. 31. The indorsement must be written on the (HDC)
instrument itself or upon a paper attached thereto. Sec. 52. A holder in due course is a holder who has
The signature of the indorser, without additional taken the instrument under the following conditions:
words, is a sufficient indorsement.
(a) That it is complete and regular upon its face;
KINDS OF INDORSEMENTS (b) That he became the holder of it before it was
1. Special (Sec. 34) overdue, and without notice that it had been
2. Blank (Sec. 35) previously dishonored, if such was the fact;
3. Restrictive (Sec. 36) (c) That he took it in good faith and for value;
4. Qualified (Sec. 38) (d) That at the time it was negotiated to him he had
5. Conditional (Sec. 39) no notice of any infirmity in the instrument or defect in
the title of the person negotiating it.

EFFECTS OF INDORSING AN INSTRUMENT Notes:


ORIGINALLY PAYABLE TO BEARER 1. Every holder is presumed to be a HDC (Sec.
59)
Sec. 40. Where an instrument, payable to bearer, is 2. The person who questions such has the
indorsed specially, it may nevertheless be further burden of proof to prove otherwise if one of
negotiated by delivery; but the person indorsing the requisites are lacking, the holder is not
specially is liable as indorser to only such holders as HDC
make title through his indorsement. 3. An instrument is considered complete and
regular on its face if: a) the omission is
QuickTime™ and a
EFFECTS WHENTIFFA(Uncompressed)
HOLDER STRIKES OUT AN immaterial; b) the alteration on the instrument
decompressor
are needed to see this picture.
INDORSEMENT, WHICH IS NOT NECESSARY TO was not apparent on its face
HIS TITLE 4. An instrument is overdue after the date of
maturity.
5. On the date of maturity, the instrument is not
Sec. 48. The holder may at any time strike out any
overdue and the holder is a HDC
indorsement, which is not necessary to his title. The
6. Acquisition of the transferee or indorsee must
indorser whose indorsement is struck out, and all
be in good faith
indorsers subsequent to him, are thereby relieved
7. Good faith means the lack of knowledge or
from liability on the instrument.
notice of defect or infirmity

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8. A holder is not a HDC where an instrument of faith


payable on demand is negotiated at an 10. negotiation under Execution of instrument
unreasonable length of time after its issue circumstances between public enemies
(Sec. 53) amounting to fraud
11. Mistake Illegality of contract made
RIGHTS OF A HOLDER IN DUE COURSE by statue
Sec. 57. A holder in due course holds the instrument 12. intoxication Forgery
free from any defect of title of prior parties, and free 13. ultra vires acts of
from defenses available to prior parties among corporations
themselves, and may enforce payment of the 14. want of authority of
instrument for the full amount thereof against all the agent where he has
parties liable thereon. apparent authority
15. illegality of contract
Notes: where form or
1. Personal or equitable defenses are those consideration is illegal
which grow out of the agreement or conduct 16. insanity where there
of a particular person in regard to the is no notice of insanity
instrument which renders it inequitable for
him through legal title to enforce it. Can be WHEN SUBJECT TO ORIGINAL DEFENSES
set up against holders not HDC
2. Legal or real defenses are those which Sec. 58 In the hands of any holder other than a
attach to the instrument itself and can be set holder in due course, a negotiable instrument is
up against the whole world, including a HDC. subject to the same defenses as if it were non-
negotiable. But a holder who derives his title through
Personal Defenses Real Defenses a holder in due course, and who is not himself a party
1. absence or failure of Alteration to any fraud or illegality affecting the instrument, has
consideration all the rights of such former holder in respect of all
2. want of delivery of Want of delivery of parties prior to the latter.
complete instrument incomplete instrument
3. insertion of wrong Duress amounting to
date where payable at a forgery RIGHTS OF A HOLDER NOT A HDC
fixed period after date 1. may sue in his own name
and issued undated; or 2. may receive payment and if it is in due
at a fixed period after course, the instrument is discharged
sight and acceptance is 3. holds the instrument subject to the same
undated defenses as if it were non-negotiable
4. filling up the blanks Fraud in factum or in 4. if he derives his title through a HDC and is
contrary to authority esse contractus not a party to any fraud or illegality thereto,
given or not within has all the rights of such HDC
reasonable time
5. fraud in inducement Minority WHO IS A HOLDER IN DUE COURSE
6. acquisition of the Marriage in case of a wife Sec. 59. Every holder is deemed prima facie to be a
instrument by force, holder in due course; but when it is shown that the
QuickTime™ and a
duress or fear TIFF (Uncompressed) decompressor title of any person who has negotiated the instrument
are needed to see this picture.
7. acquisition of the Insanity where the insane was defective, the burden is on the holder to prove
instrument by unlawful person has a guardian that he or some person under whom he claims
means appointed by the court acquired the title as holder in due course. But the
8. acquisition of the Ultra vires acts of a last-mentioned rule does not apply in favor of a party
instrument for an illegal corporation where its who became bound on the instrument prior to the
consideration charter or by statue, it is acquisition of such defective title.
prohibited from issuing
commercial paper
9. negotiation in breach Want of authority of agent

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Notes:
Yang vs. CA, 409 SCRA 159 (2003) 1. A maker’s liability is primarily and
Every holder is presumed to be a HDC. Also, a unconditional
holder is not obliged to show that there was valuable 2. One who has signed as such is presumed to
consideration, since the same is presumed. He does have acted with care and to have signed with
not also have to show that he made the full knowledge of its contents, unless fraud is
aforementioned inquiry. Absence the showing of a proved
circumstance that should have put the holder into 3. The payee’s interest is only to see to it that
such an inquiry, the failure to inquire is no tantamount the note is paid according to its terms
to bad faith. 4. When two or more makers sign jointly, each
is individually liable for the full amount even if
Banco Atlantico v. Auditor General, 81 SCRA 335 one did not receive the value given
A collecting bank which allowed the depositor to 5. The maker is precluded from setting up the
withdraw the proceeds of a check although the check defense that a) the payee is fictional, b) that
had not been cleared and was told by the depositor the payee was insane, a minor or a
not to present the check for payment until a later date corporation acting ultra vires.
although the check was already due, is not a holder
in due course and cannot recover from the drawer in LIABILITY OF A DRAWER
case the check is dishonored. A drawer is secondarily liable. By drawing the
instrument, the drawer:
1. Admits the existence of the payee,
State Investment House v. Intermediate Appellate 2. The capacity of such payee to indorse
Court, 175 SCRA 310 3. Engages that on due presentment, the
Where the postdated checks issued by the drawer as instrument will be accepted or paid or both
a loan to the payee were crossed, were indorsed by according to its tenor.
the payee to an investment house and were
dishonored for lack of funds, the investment house Notes:
cannot hold the drawer liable, because it is not a 1. If the instrument is dishonored, and the
holder in due course. Since the checks were crossed necessary proceedings on dishonor duly
and could only be deposited, it should have taken
ascertained the title to the check and the nature of a. The drawer will pay the amount thereof
the possession by the payee. If it failed to do so, it is to the holder
not a holder in good faith. Hence, if the issuance of b. Will pay to any subsequent indorser who
the check was subject to the condition that the payee may be compelled to pay it. (Sec. 61)
would deposit funds for the check and failed to do so, 2. A drawer may insert an express stipulation to
the drawer can raise this defense. negative or limit his liability

State Investment House, Inc. v. Court of Appeals, ACCEPTOR - By accepting the instrument, an
217 SCRA 32 acceptor:
A drawer who issued two checks as security for 1. Engages that he will pay according to the
jewelry to be sold by the drawer is liable to an tenor of his acceptance
endorsee to whom the payee negotiated the checks 2. Admits the existence of the drawer, the
even if the drawer returned the pieces of jewelry to genuineness of his signature and his
QuickTime™ and a
the payee, sinceTIFF
the payee decompressor
(Uncompressed) is presumed to be a capacity and authority to draw the instrument
are needed to see this picture.
holder in due course and the drawer cannot invoke 3. The existence of the payee and his then
want of consideration between the drawer and the capacity indorse
payee as a defense.
IRREGULAR INDORSER - a person not otherwise
LIABILITIES OF A MAKER a party to an instrument places his signature in blank
Sec. 60. The maker of a negotiable instrument by before delivery is liable as an indorser in the following
making it engages that he will pay it according to its manner:
tenor, and admits the existence of the payee and his 1. If payable to order of a third person – liable to
then capacity to indorse. the payee and to all subsequent parties

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2. If payable to order of the maker or drawer – 7. A person Negotiating by Delivery warrants


liable to all parties subsequent to the maker the same as those of qualified indorser and
or drawer extends to immediate transferees only
3. If payable to bearer – liable to all parties
subsequent to the maker or drawer WARRANTIES OF A GENERAL INDORSER
4. If signs for an accommodation party – liable Sec. 66. Every indorser who indorses without
to all parties subsequent to the payee (Sec. qualification warrants, to all subsequent holders in
64) due course —

WARRANTIES AND ITS LIMITATIONS (a) The matters and things mentioned in subdivisions
Sec. 65. Every person negotiating an instrument by (a), (b), and (c) of the next preceding section; and
delivery or by a qualified indorsement warrants — (b) That the instrument is at the time of his
indorsement valid and subsisting.
(a) That the instrument is genuine and in all
respects what it purports to be; And, in addition, he engages that on due
(b) That he has a good title to it; presentment, it shall be accepted or paid, or both, as
(c) That all prior parties had capacity to contract; the case may be, according to its tenor, and that if it
(d) That he has no knowledge of any fact which be dishonored, and the necessary proceedings on
would impair the validity of the instrument or render it dishonor be duly taken, he will pay the amount
valueless. thereof to the holder, or to any subsequent indorser
who may be compelled to pay it.
But when the negotiation is by delivery only, the
warranty extends in favor of no holder other than the Notes:
immediate transferee. 1. The indorser under Section 66 warrants the
solvency of a prior party
The provisions of subdivision (c) of this section do not 2. The indorser warrants that the instrument is
apply to persons negotiating public or corporation valid and subsisting regardless of whether he
securities, other than bills and notes. is ignorant of that fact or not.
3. Warranties extend in favor of a) a HDC b)
Notes: persons who derive their title from HDC c)
1. A qualified indorser is one who indorses immediate transferees even if not HDC
without recourse 4. The indorser does not warrant the
2. Recourse - resort to a person secondarily genuineness of the drawer’s signature
liable after default of person primarily liable 5. General indorser is only secondarily liable
3. A qualified indorser cannot raise the defense
of a) forgery b) defect of his title or that it is
void c) the incapacity of the maker, drawer or PRESENTMENT FOR PAYMENT
previous indorsers. Sec. 70. Presentment for payment is not necessary
4. A qualified indorsement makes the indorser in order to charge the person primarily liable on the
mere assignor of title of instrument, relieves instrument; but if the instrument is, by its terms,
him of general obligation to pay if instrument payable at a special place, and he is able and willing
is dishonored, but he is still liable for the to pay it there at maturity, such ability and willingness
warranties arising from instrument only up to are equivalent to a tender of payment upon his part.
QuickTime™ and a
warranties of(Uncompressed)
TIFF general indorser
decompressor But, except as herein otherwise provided,
are needed to see this picture.
5. The warranty is to the capacity of prior presentment for payment is necessary in order to
parties at the time the instrument was charge the drawer and indorsers.
negotiated. Subsequent incapacity does not
breach the warranty.
Notes:
6. Lack of knowledge of the indorser as to any
fact that would impair the validity or the value PRESENMENT FOR PAYMENT – production of
of the instrument must be subsisting all a BOE to the drawee for his acceptance, or to a
throughout. drawee or acceptor for payment. Also
presentment of a PN to the party liable for
payment of the same.

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c. That the drawee or acceptor will pay


1. It consists of: a) a personal demand for (Sec 79)
payment at a proper place; and, b) the bill or 2. Presentment not required to charge the
note must be ready to be exhibited if required indorser where:
and surrendered upon payment. a. The instrument was made or accepted
2. Parties primarily liable – persons by the for his accommodation
terms of the instrument are absolutely b. He has no reason to expect that the
required to pay the same. E.g. maker and instrument will be paid if presented (Sec.
acceptors. They can be sued directly. 80)
3. If payable at the special place, and the 3. Summary of rules as to presentment for
person liable is willing to pay there at payment:
maturity, such willingness and ability is a. Presentment not necessary to charge
equivalent to tender of payment. persons primarily liable
4. Presentment is necessary to charge persons b. Necessary to charge persons secondarily
secondarily liable otherwise they are liable
discharged Except:
5. Acts needed to charge persons secondarily i. The drawer under Sec. 79
liable: a) presentment for ii. The indorser under Sec. 80
payment/acceptance; b) dishonor by non- 4. When excused under Sec. 82
payment/non-acceptance; c) notice of a. After due diligence, presentment cannot
dishonor to secondary parties be made
6. Acts needed to charge persons secondarily b. Presentment is waived
liable in other cases: a) protest for non- c. The drawee is a fictitious person
payment by the drawee; b) protest for non- d. When the instrument has been
payment by the acceptor for honor dishonored by non-acceptance under
Sec. 83
REQUISITES FOR PROPER PRESENTMENT 5. How dishonored by non-acceptance:
Sec. 72. Presentment for payment, to be sufficient, a. The instrument was duly presented but
must be made — payment is refused or cannot be
obtained
(a) By the holder, or by some person authorized to b. Presentment is excused and the
receive payment on his behalf; instrument is overdue and unpaid (Sec.
(b) At a reasonable hour on a business day; 83)
(c) At a proper place as herein defined; 6. Effects of dishonor by non-payment:
(d) To the person primarily liable on the instrument, a. An immediate right of recourse to all
or if he is absent or inaccessible, to any person found parties secondarily liable accrues to the
at the place where the presentment is made. holder. (Sec. 84)

REQUISITES OF A PAYMENT IN DUE COURSE


Sec. 88. Payment is made in due course when it is
If the instrument is payable on demand: made at or after the maturity of the instrument to the
1. Presentment must be made within holder thereof in good faith and without notice that his
reasonable time after issue (if a note) title is defective.
2. Presentment QuickTime™must andbe a made within
TIFF (Uncompressed) decompressor
reasonablearetime after
needed to last negotiation (if a
see this picture. TO WHOM A NOTICE OF DISHONOR MAY BE
bill) GIVEN
Sec. 90. The notice may be given by or on behalf of
Notes: the holder, or by or on behalf of any party to the
instrument who might be compelled to pay it to the
1. Presentment not required to charge the holder, and who, upon taking it up, would have a right
drawer: to reimbursement from the party to whom the notice
a. He has no right to expect is given.
b. He has no right to require

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FORM OF A NOTICE (b) When the drawee is a fictitious person or a


Sec. 95. A written notice need not be signed, and an person not having capacity to contract.
insufficient written notice may be supplemented and (c) When the drawer is the person to whom the
validated by verbal communication. A misdescription instrument is presented for payment.
of the instrument does not vitiate the notice unless (d) Where the drawer has no right to expect or
the party to whom the notice is given is in fact misled require that the drawee or acceptor will honor the
thereby. instrument.
(e) Where the drawer has countermanded payment.
Sec. 96. The notice may be in writing or merely oral
and may be given in any terms which sufficiently WHEN NOTICE TO AN INDORSER IS NOT
identify the instrument and indicate that it has been REQUIRED
dishonored by non-acceptance or non-payment. It
Sec. 115. Notice of dishonor is not required to be
may in all cases be given by delivering it personally given to an indorser in either of the following cases:
or through the mails
(a) Where the drawee is a fictitious person or a
WHEN NOTICE CAN BE WAIVED person not having capacity to contract, and the
Sec. 109. Notice of dishonor may be waived, either indorser was aware of the fact at the time he
before the time of giving notice has arrived or after indorsed the instrument;
the omission to give due notice, and the waiver may (b) Where the indorser is the person to whom the
be express or implied. instrument is presented for payment;
(c) Where the instrument was made or accepted for
Notes: his accommodation
1. Protest may be waived. It is also deemed a
waiver of presentment and notice of dishonor Note:
(Sec. 111) 1. Omission to give notice of dishonor by non-
2. Where notice is waived, presentment is not acceptance does not prejudice a HDC (Sec. 117)
waived 2. Protest only necessary for a foreign bill of
3. Where presentment is waived, notice is also exchange. Protest for other negotiable
waived instruments is optional. (Sec. 118)
4. Where protest is waived, notice and
presentment is waived State Investment House, Inc. v. Court of Appeals,
217 SCRA 32
Notice of Dishonor - given by the holder to the The holder of two checks which were dishonored
parties secondarily liable, drawer and each indorser, because the drawer withdrew her funds from the
that the instrument was dishonored by non- bank can hold the drawer liable even if no notice of
acceptance or non-payment by the drawee/maker dishonor was given to the drawer, since the drawer
had no right to expect that the drawee bank would
General rule: Any drawer or indorser to whom such honor the checks.
notice is not given is discharged.
Associate Bank v. Tan, 446 SCRA 282
Exceptions: A drawee bank is liable for damages to a drawer
1. Waiver (Sec. 109) whose checks were dishonored for lack of funds
2. Notice is dispensed (Sec.
QuickTime™ and a112) because, it did not give him notice that the check he
TIFF (Uncompressed) decompressor
3. Not necessary to Drawer
are needed (Sec. 114)
to see this picture. deposited in his account was dishonored
4. Not necessary to Indorser (Sec. 115)
CAUSES OF DISCHARGE OF THE INSTRUMENT
WHEN NOTICE OF DISHONOR IS NOT Sec. 119. A negotiable instrument is discharged —
NECESSARY TO A DRAWER (a) By payment in due course by or on behalf of the
Sec. 114. Notice of dishonor is not required to be principal debtor;
given to the drawer in either of the following cases: (b) By payment in due course by the party
accommodated, where the instrument is made or
(a) Where the drawer and drawee are the same accepted for accommodation;
person.

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(c) By the intentional cancellation thereof by the 2. Instrument cannot be renegotiated where it
holder; was made or accepted for accommodation
(d) By any other act which will discharge a simple and it has been paid by the party
contract for the payment of money; accommodated.
(e) When the principal debtor becomes the holder of
the instrument at or after maturity in his own right. WHEN RENUNCIATION BY A HOLDER
DISCHARGES AN INSTRUMENT
1. Made in favor of a person primarily liable
Notes:
2. Made at or after maturity of the instrument
1. Discharge of the instrument discharges all 3. In writing or the instrument is delivered up to
the parties thereto the person primarily liable .
2. Payment must be in due course, and by the Notes:
principal debtor or on his behalf 1. If renounced in favor of a party secondarily liable,
3. If payment is not made by the principal only he is exonerated from liability and all parties
debtor, payment only cancels the liability of subsequent to him.
the payor and those obligated after him but 2. Discharge by novation is allowed.
does not discharge the instrument.
4. Payment by an accommodation party does General rule: When materially altered, without
not discharge the instrument. the consent of all parties liable, the instrument is
avoided
HOW A SECONDARY PARTY IS DISCHARGED Except as against:
Sec. 120. A person secondarily liable on the 1. The party who has made the
instrument is discharged — alteration
(a) By any act which discharges the instrument; 2. The party who authorized or
(b) By the intentional cancellation of his signature by assented to the alteration.
the holder; Subsequent indorsers
(c) By the discharge of a prior party; Exception:
(d) By a valid tender of payment made by a prior If in the hands of a HDC, may be enforced
party; according to its original tenor
(e) By a release of the principal debtor, unless the
holder's right of recourse against the party Material Alteration - if it alters the effect of the
secondarily liable is expressly reserved; instrument.
(f) By any agreement binding upon the holder to
extend the time of payment, or to postpone the Sec. 125 Any alteration, which changes —
holder's right to enforce the instrument, unless made (a) The date;
with the assent of the party secondarily liable, or (b) The sum payable, either for principal or
unless the right of recourse against such party is interest;
expressly reserved. (c) The time or place of payment;
(d) The number or the relations of the parties;
RIGHTS OF A PARTY SECONDARILY LIABLE (e) The medium or currency in which payment is
WHO ALREADY PERFORMED HIS OBLIGATION to be made;
TO PAY
1. The instrument is not discharged Or which adds a place of payment where no place of
2. The party is remitted to and
QuickTime™ hisa former rights as to payment is specified, or any other change or addition
TIFF (Uncompressed) decompressor
all prior parties
are needed to see this picture. which alters the effect of the instrument in any
3. The party may strike out his own and all respect, is a material alteration.
subsequent indorsements
4. The party may negotiate the instrument again INSTANCES WHEN A BOE MAY BE TREATED AS
A PN
EXCEPTIONS: 1. The drawer and the drawee are one and the
1. An instrument cannot be renegotiated where same
it is payable to order of a 3rd person and has 2. The drawee is a fictitious person
been paid by the drawer 3. The drawee has no capacity to contract.

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Acceptance - the signification by the drawee of his b. after due diligence presentment cannot
assent to the order of the drawer. It is an act by be made,
which a person on whom the BOE is drawn assents c. presentment is refused on another
to the request of the drawer to pay it. ground although presentment is irregular
(Sec. 148)
ACCEPTANCE MAY BE:
1. actual General rule: Protest is required only for foreign bills
2. constructive Exception: Inland bills and notes may also be
3. general protested if desired
4. qualified
WHEN PROTEST REQUIRED
REQUISITES OF AN ACTUAL ACCEPTANCE Sec. 152. Where a foreign bill appearing on its face
to be such is dishonored by non-acceptance, it must
1. In writing be duly protested for non-acceptance, and where
2. Signed by the drawee such bill which has not previously been dishonored
3. Must not express that the drawee will by non-acceptance is dishonored by non-payment, it
perform his promise by any other means than must be duly protested for non-payment. If it is not so
payment of money protested, the drawer and indorsers are discharged.
4. Communicated or delivered to the holder Where a bill does not appear on its face to be a
foreign bill, protest thereof in case of dishonor is
Note: unnecessary.
A holder has a right to:
1. require that acceptance be written on the bill
Notes:
and if refused, treat it as if dishonored (Sec. 1. Protest - formal statement in writing made by
133) a notary under his seal of office at the
2. refuse to accept a qualified acceptance and
request of the holder, in which it is declared
may treat it as dishonored (Sec. 142) that the same was presented for payment or
acceptance (as the case may be) and such
CONSTRUCTIVE ACCEPTANCE was refused
Sec. 137. Where a drawee to whom a bill is delivered 2. It means all steps or acts accompanying the
for acceptance destroys the same, or refuses within dishonor of a bill or note necessary to charge
twenty-four hours after such delivery, or within such an indorser
other period as the holder may allow, to return the bill 3. Required when the instrument is a foreign bill
accepted or non-accepted to the holder, he will be of exchange.
deemed to have accepted the same. 4. It must be made on the same date of
dishonor, by a notary/respectable citizen of
PRESENTMENT FOR ACCEPTANCE the place in the presence of 2 credible
1. If necessary to fix the maturity of the bill witnesses so recourse to secondary parties
2. If it is expressly stipulated that it shall be
presented for acceptance Bill in Set - a bill of exchange drawn in several parts,
3. If the bill is drawn payable elsewhere than each part of the set being numbered and containing a
the residence or place of business of the reference to the other parts, the whole of the parts
drawee. just constituting one bill.
QuickTime™ and a
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SUMMARY ON PRESENTMENT
are needed to see this picture. FOR
ACCEPTANCE OF BILLS OF EXCHANGE: Lee v. CA, 375 SCRA 5579 (2002)
1. To make the drawee primarily liable and for Although drafts issued in connection with letters of
the accrual of secondary liability (Sec. 144) credit are negotiable instruments.
2. Necessary to fix maturity date, where bill
expressly stipulates presentment, bill payable
other than place of drawee (Sec. 143)
3. When presentment is excused:
a. drawee is dead, hides, is fictitious,
incapacitated person,

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contract, takes into account the character,


INSURANCE CODE credit and conduct of the other.
4. Conditional - The insurer’s liability is based
on the happening of the event insured
against.
CONTRACT OF INSURANCE An agreement 5. Contract of Indemnity – Indemnity is the
whereby one undertakes for a consideration to basis of all property insurance. It simply
indemnify another against loss, damage or means that the insured who has insurable
liability arising from an unknown or contingent interest over a property is only entitled to
event. recover the amount of actual loss sustained
and the burden is upon him to establish the
amount of such loss.
CONTRACT OF SURETYSHIP An agreement
whereby a party called the surety guarantees the
ELEMENTS OF AN INSURANCE CONTRACT:
performance by another called the principal or Aside from the essential requisites of an ordinary
obligor of an obligation or undertaking in favor of contract such as consent, subject-matter and
a third party called the oblige. It shall be deemed
consideration, an insurance contract must have the
to be an insurance contract if made by a surety following elements:
who or which, as such, is doing an insurance 1. The insured must possess an interest of
business. some kind susceptible of pecuniary
estimation, known as insurable interest;
DOING AN INSURANCE OR TRANSACTING AN 2. The insured is for a risk of loss through the
INSURANCE BUSINESS: A person is doing or destruction or impairment of that interest by
transacting an insurance business if he performs any the happening of designated perils;
of the following: 3. The insurer assumes the risk of loss;
1. Making or proposing to make an insurer, any 4. Such assumption is part of a general
insurance contract; scheme to distribute actual losses among
2. Making or proposing to make, as surety any a large group of persons bearing somewhat
contract of suretyship as a vocation, not as a similar risks;
mere incident to any other legitimate 5. As consideration for the insurer’s promise,
business as a surety; the insured makes a ratable contribution
3. Doing any insurance business like called premium, to a general insurance fund.
reinsurance and similar acts; and,
4. Doing or proposing to do any business UBERRIMAE FIDES CONTRACT The contract of
equivalent to the above. insurance is one of perfect good faith not for the
insured alone, but equally so for the insurer. It
CHARACTERISTICS OF AN INSURANCE requires the parties to the contract to disclose
CONTRACT: conditions affecting the risk of which he is aware,
1. Aleatory - it is an aleatory but not a wagering or material fact, which the applicant knows, and
contract. By an aleatory contract, one of the those, which he ought to know.
parties or both reciprocally bind themselves
to give or to do something in consideration of
what the other shall give or do upon the COVER NOTE A concise and temporary written
happening of an event which is uncertain, or contract issued by the insurer through its duly
which is to occur QuickTime™ and a
at andecompressor
indeterminate time. authorized agent embodying the principal terms
TIFF (Uncompressed)
are needed to see this picture.
2. Unilateral - A contract of insurance is wholly of an expected policy of insurance. It is a contract
executed on the party of the insured by the for temporary insurance for a reasonable time
payment of the premium, and remains until the policy or policies can be written or issued
executory on the part of the insurer, subject by the insurer.
to the condition of the happening of the event
insured against. RULES GOVERNING COVER NOTES:
3. Personal - it is personal in the sense that 1. The cover note shall be issued or renewed
each party to it, in entering into the insurance only upon proper approval of the Insurance
Commission;

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2. The cover note shall be valid and binding not Commissioner of Internal Revenue v. Lincoln
more than sixty (60) days from the date of its Philippine Life Insurance Company, G.R. No.
issuance; 119176 (March 19, 2001)
3. No separate premium is required for the When the requirements for a rider are complied
cover note; with (including clause, warranty or endorsement), it is
4. The policy should be issued within sixty (60) considered part of the policy. Thus, a rider containing
days after the issuance of the cover note; an “automatic increase clause” – one that increases
5. The sixty (60) day period may be extended the coverage subject to the attainment of a certain
upon written approval or the Insurance age of the insured – is not a separate contract. It is
Commission; and part of the original policy which is in the nature of a
6. The written approval of the Insurance conditional obligation.
Commission is dispensed with upon the
certification of the president, vice-president GROUNDS FOR CANCELLATION OF NON-LIFE
or general manager of the insurer that the POLICY: Cancellation by the insurer of an insurance
risk involved, the values of such risks and policy other than life requires (a) prior notice to the
premium therefore have not as yet been insured, and (b) any of the following grounds:
determined or established and the extension 1. Non-payment of premium;
or renewal is not contrary to or is not for the 2. Conviction of a crime out of acts increasing
purpose of violating the Insurance Code or the hazard insured against;
any rule. 3. Fraud or material misrepresentation;
4. Willful or reckless acts or omissions
INSURANCE POLICY A written document issued by increasing the risk insured against;
the insurer to the insured, embodying the terms 5. Physical changes in the property insured
and conditions of their contract of insurance. making it uninsurable; and
6. Determination by the Insurance
The policy is not necessary for the perfection of the Commissioner that the policy would violate
contract. It is required however that all policies issued the Insurance Code.
or delivered must be in the form previously approved
by the Insurance Commission. REQUISITES FOR CANCELLATION:
1. Prior notice of cancellation to insured;
BASIC CONTENTS OF A POLICY: 2. Notice must be based on the occurrence
1. Parties; after effective date of the policy of one or
2. Amount of insurance, except in open or more of the grounds mentioned;
running policies; 3. Notice must be in writing, mailed or delivered
3. Rate of premium; to the insured at the address shown in the
4. Property or life insured; policy; and
5. Interest of the insured in the property if he is 4. Notice must state the grounds relied upon
not the absolute owner; and upon request of insured, to furnish facts
6. Risk insured against; and on which cancellation is based.
7. The period during which the insurance is to
continue. KINDS OF POLICIES: Property insurance policies
are classified into:
RIDER – An attachment to an insurance policy that 1. Open policy – Value of thing insured is not
modifies the conditions QuickTime™
of the policy and a by expanding or agreed upon, but left to be ascertained at
TIFF (Uncompressed) decompressor
restricting its benefits or excluding
are needed to see this picture.certain conditions time of loss;
from the coverage. Riders, together with other 2. Valued policy – Definite valuation is agreed
attachments to the policy like clause, warranty or upon by both parties, and written on the face
endorsements, are not binding on the insured unless of the policy;
the descriptive title or name thereof is mentioned and 3. Running policy – Contemplates successive
written on the blank spaces provided in the policy insurances and which provides that the
subject of the policy may from time to time be
defined.
Life insurance policies are always valued
policies.

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TYPES OF INSURANCE CONTRACTS: whether or not the beneficiary has an


1. Life Insurance insurable interest in the life of the insured.
a. Individual Life – Insurance on Exceptions: Persons specified in Article 739
human lives and insurance of the Civil Code cannot be designated:
appertaining thereto or connected a. Those made between persons who
therewith; were guilty of adultery or
b. Group Life – A blanket policy concubinage (conviction not being a
covering a number of individuals. condition precedent);
c. Industrial Life – A form of life b. Those made between persons found
insurance under which the premiums guilty of the same criminal offense, in
are payable either monthly or consideration thereof;
oftener, if the face amount of c. Those made to a public officer or his
insurance provided in any policy is wife, descendants or ascendants by
not more than five hundred times reason of his office.
that of the current statutory minimum Note: The designation of persons
daily wage in the City of Manila and if mentioned in Article 739 is void but the
the words “industrial” policy are policy is binding. The estate will get the
printed upon the policy as part of the proceeds.
descriptive matter. 2. If a person will insure the life of another
2. Non-Life Insurance payable to himself, he must have insurable
a. Marine interest on the life of the person whose life he
b. Fire is insuring.
c. Casualty 3. In property insurance, the beneficiary must
3. Contract of Suretyship have insurable interest on the property.
4. The designation is revocable unless the right
PARTIES TO AN INSURANCE CONTRACT: to revoke is expressly waived in the policy.
1. Insurer – The person who undertakes to 5. If the insured or beneficiary is a minor, and
indemnify another the amount involved does not exceed
2. Insured – The person with capacity to P50,000.00, the father, in the absence or
contract and having an insurable interest in incapacity, the mother may exercise the
the life or property of the insured; and minor’s rights under the policy, without the
3. Beneficiary – Person designated to receive need of a court authority or a bond.
proceeds of policy when risk attaches.
BPI v. Posadas, 56 Phil. 215 If the premiums are
INSURANCE CORPORATION – Corporations paid out of the conjugal funds, the proceeds are
formed or organized to save any person or persons considered conjugal. If the beneficiary is other than
or other corporations harmless from loss, damage, or the insured’s estate, the source of premiums would
liability from any unknown or future or contingent not be relevant.
event, or to indemnify or to compensate any person
or persons or other corporations for any such loss, VOID STIPULATIONS IN AN INSURANCE
damage, or liability, or to guarantee the performance CONTRACT:
of or compliance with contractual obligations or the 1. Stipulations for the payment of loss whether
payment of debt of others. It must have (1) sufficient the person insured has or has not any
capital and assets required under the Insurance
QuickTime™ and a interest in the property insured; or
Code and pertinent regulations
TIFF (Uncompressed) decompressorissued
are needed to see this picture.
by the 2. The policy shall be received as proof of such
Commission, and (2) a certificate of authority to interest, or
operate issued by the Insurance Commission which 3. Policies executed by way of gaming or
should be renewed every year. wagering.

INSURABLE INTEREST means that the insured


RULES IN THE DESIGNATION OF BENEFICIARY: possess an interest of some kind susceptible of
1. When one insures his own life, he may pecuniary estimation.
designate any person as the beneficiary,

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INSURABLE INTEREST IN LIFE INSURANCE: 4. A transfer of interest by one of several


Every person has an insurable interest in the life and partners, joint owners in common who are
health of: jointly insured to the others (even though it
1. Himself, of his spouse and of his children; has been agreed that the insurance shall
2. Any person on whom he depends wholly or seize upon the alienation of the thing
in party for education or support, or in whom insured).
he has pecuniary interest;
3. Any person under a legal obligation to him for CHANGE OF INTEREST THAT SUSPENDS AN
the payment of money, or respecting INSURANCE CONTRACT: The change of interest
property or services, of which death or illness contemplated by law is an absolute transfer of the
might delay or prevent the performance; and insured’s entire interest in the property insured to one
4. Any person upon whose life any estate or not previously interested or insured. In the following
interest vested in him depends. cases, the policy is not suspended:
1. Execution of a mortgage
INSURABLE INTEREST IN PROPERTY 2. Lease of the insured property
INSURANCE: 3. Judgment debtor whose property has been
1. Insurable interest in property is any interest sold on execution (right to redeem)
therein, or liability in respect thereof and it 4. Mortgagor whose property has been
may consist in an existing interest, an foreclosed (right of redemption)
inchoate interest founded on an existing 5. Vendor who has a lien on the property sold
interest, or any expectancy coupled with an until the purchase price is paid or the
existing interest. conditions of the sale are performed
2. In general, a person has an insurable interest
in the property, if he derives pecuniary Table 1
benefit or advantage from its preservation or Category Life Property
would suffer pecuniary loss, damage or Basis May be Based on
prejudice by its destruction whether he has or based on pecuniary
has no title in, or lien upon, or possession of pecuniary interest
the property. Hence, pecuniary interest over interest,
the property is always necessary. affinity, or
3. Existence of insurable interest is a matter of consanguinity
public policy. Hence, the principle of estoppel When General Rule: Must exist at
cannot be invoked. interest must at the the time
exist Time the the policy
GENERAL RULE AS TO CHANGE IN INTEREST policy takes takes effect
OF THING – Generally, a change in interest in the effect except and at time of
thing insured without a change in insurance does not life insurance loss but
transfer the policy but suspends it until the interest in taken by not
the thing and the interest in the insurance are vested creditor on necessarily in
in the same person. the life of the the
debtor meantime
EXCEPTION TO THE GENERAL RULE IN THE wherein
CHANGE OF INTEREST IN THE THING INSURED interest must
WITHOUT A CHANGE QuickTime™ IN INSURANCE:and a
In case of also exist at
life, health and accident insurance:
TIFF (Uncompressed) decompressor
are needed to see this picture. the time of
1. When the change in interest results after the the loss
occurrence of an injury which results in a loss Amount of General Rule: Limited to
2. A change of interest in one or more several insurable no limit the actual
distinct things, separately insured by one interest Except: if value of
policy insurable damage/
3. A change in the interest by will or succession interest is injury/ loss
on the death of the insured (interest passes based on
to the heirs) creditor-
debtor

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relationship 1. The mortgagee may collect from the insurer


(only to the upon the occurrence of the loss to the extent
extent of the of his credit.
credit or 2. Unless otherwise stated in the policy, the
debt) mortgagor has no right to collect the balance
of the proceeds of the policy after payment of
REQUISITES IN ORDER THAT A PERSON MAY the interest of the mortgagee.
BE INSURED UNDER A CONTRACT OF 3. The insurer, upon payment to the mortgagee-
INSURANCE: insured, becomes subrogated to the rights of
1. He must be competent to enter into a the mortgagee against the mortgagor and
contract; may collect the debt of the mortgagor to the
2. He must possess an insurable interest in the extent of the amount paid to the mortgagee.
subject of the insurance; and 4. The mortgagee-insured can no longer collect
3. He must not be a public enemy (subject of a the mortgagor’s indebtedness after receiving
country with whom the Philippines is at war) full payment of his credit from the insurer
since the latter thereby acquires the right to
EXTENT OF INSURABLE INTEREST IN A collect from the mortgagor by virtue of
MORTGAGE SITUATION: subrogation.
1. Mortgagor may insure the property
mortgaged to the full value of such property. RISKS OR PERILS THAT MAY BE INSURED:
2. Mortgagee can insure the same only to the 1. Any contingent or unknown event, whether
extent of the amount of his credit. past or future, which may damnify a person
having an insurable interest; or
CONSEQUENCES WHERE THE MORTGAGOR 2. Any contingent or unknown event, whether
INSURES THE PROPERTY MORTGAGED IN HIS past or future, which may create a liability
OWN NAME BUT MAKES THE LOSS PAYABLE against the person insured.
TO THE MORTGAGEE OR ASSIGNS THE POLICY
TO THE LATTER: PREMIUM The consideration paid to an insurer for
1. The insurance is still deemed to be upon the undertaking to indemnify the insured against a
interest of the mortgagor who does not cease specified peril.
to be a party to the original contract.
2. Any act of the mortgagor, prior to the loss, Sec. 77. An insurer is entitled to payment of the
which would otherwise avoid the insurance, premium as soon as the thing insured is exposed to
will have the same effects, although the the peril insured against. Notwithstanding any
property is in the hands of the mortgagee. agreement to the contrary, no policy or contract of
3. Any act, which under the contract of insurance issued by an insurance company is valid
insurance is to be performed by the and binding unless and until the premium thereof has
mortgagor, may be performed by the been paid, except in the case of a life or an industrial
mortgagee with the same effect as if it has life policy whenever the grace period provision
been performed by the mortgagor. applies.
4. Upon the occurrence of the loss, the
mortgagee is entitled to recover to the extent
of his credit and the balance, if any, is EXCEPTIONS TO GENERAL RULE AS TO
payable to the mortgagor since such policy is PAYMENT OF PREMIUMS:
QuickTime™ and a
for the benefit of both
TIFF (Uncompressed) the
decompressor mortgagor and 1. In case of life and industrial life whenever the
are needed to see this picture.
mortgagee. grace period provision applies.
5. Upon recovery of the mortgagee to the extent 2. Where there is an acknowledgement in the
of his credit from the insurer, the mortgagor contract or policy of insurance that the
is released from his indebtedness. premium had already been paid.
3. The rule laid down in Makati Tuscany
EFFECTS OF INSURANCE PROCURED BY THE Condominium v. Court of Appeals to the
MORTGAGEE WITHOUT REFERENCE TO THE effect that Section 77 may not apply if the
RIGHT OF THE MORTGAGOR: parties have agreed upon to the payment of
the premium in installments and partial

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payment has been made at the time of the the insured. If there is transfer of property insurance
loss. without such consent, the insurance policy is
4. Where a credit term was agreed upon like suspended and will not be avoided until the interest in
the agreement in UCPB General Insruance, the thing and the interest in the insurance are vested
Inc. v. Masagana Telemart where the insurer in the same person.
granted a 60-90-day credit term for the
payment of the premiums despite full
awareness of Section 77. PRIMARY CONCERNS OF THE INSURER:
5. Where the parties are barred by estoppel. 1. Correct estimation of risk which enables
insurer to determine if he will approve the
American Home Assurance Co. v. Chua, G.R. No. policy application and if so at what premium
130421 (June 28, 1999) Where an insurer authorizes rate;
an insurance agent or broker to deliver a policy to the 2. Delimitation of the risk;
insured, it is deemed to have authorized said agent to 3. Control of risk to guard against increase in
receive the premium in its behalf. The insurer is also risk;
bound by its agent’s acknowledgement of receipt of 4. Determine if loss occurs and if so the amount
payment of premium.. thereof.

RETURN OF PREMIUMS: The insured is entitled to DEVICES OF INSURER IN ASCERTAINING AND


return of premiums paid: CONTROLLING RISK:
1. If the thing insured was never exposed to the 1. Concealment
risks insured against; 2. Representations
2. Contract is voidable due to the fraud or 3. Warranties – Statements or promises by the
misrepresentation of insurer; insured, whether expressed, implied,
3. Insurer never incurred liability; affirmative or promissory, set forth in the
4. When the insurance is for a definite period policy itself or incorporated in it by proper
and the insured surrenders his policy before reference, the untruth or non-fulfillment of
the termination thereof; which in any respect, and without reference
5. Contract is voidable because of the existence to whether the insurer was in fact prejudiced
of facts of which the insured was ignorant by such untruth or non-fulfillment renders the
without his fault; policy voidable by the insurer.
6. When there is over-insurance; and, 4. Conditions
7. When rescission is granted due to the 5. Exceptions – Excluding certain specified
insurer’s breach of contract. risks that otherwise would be included under
the general language describing the risks
Philippine Pryce Assurance Corporation v. Court assumed.
of Appeals, 230 SCRA 164 (1994) Generally,
premium is also necessary in order for the contract of CONCEALMENT A neglect to communicate that
suretyship or bond to be binding. However, where the which a party knows and ought to communicate.
oblige has accepted the bond, it is binding even if the
premium has not been paid subject to the right of the EFFECTS OF CONCEALMENT:
insurer to recover the premium from its principal. General Rule – The insured is not required to
communicate the nature (or kind) or the amount of
QuickTime™ and a his insurable interest in the life or property insured to
Sec. 181. A policy of insurance
TIFF (Uncompressed) upon life or health
decompressor
are needed to see this picture. the insurer.
may pass by transfer, will or succession to any
Exceptions –
person, whether he has an insurable interest or not,
1. When the insurer makes inquiry from the
and such person may recover upon it whatever the
insured of the nature or amount of the latter’s
insured might have recovered.
insurable interest, whether in life or property
insurance;
On the other hand, property insurance cannot be 2. Insurance policy must specify the interest of
transferred without the consent of the insurer the insured in the property insured, if he is
because the insurer approved the policy based on not the absolute owner thereof.
the personal qualification and the insurable interest of

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Note: Concealment, whether intentional or not, NOTE: Information as to the nature of interest need
entitles the injured party to rescind a contract of not be disclosed except in property insurance, if the
insurance, provided the: insured is not the owner. If somebody is insuring
1. Party concealing must have knowledge of the properties of which he is not the owner, he must
facts concealed; disclose why he has insurable interest that would
2. Facts concealed must be material to the risk; entitle him to insure it.
3. Party is duty bound to disclose such fact to
the other; WAIVER OF MATERIAL FACTS:
4. Party concealing makes no warranty as to 1. by the terms of the insurance; or
the facts concealed; 2. by the neglect to make inquiry as to such
5. Other party has no other means of facts, where they are distinctly implied in
ascertaining the facts concealed. other facts which information is
communicated.
INSTANCES WHEN CONCEALMENT MADE BY
AN AGENT PROCURING THE INSURANCE BINDS Vda. de Canilang v. CA, 223 SCRA 443 (1993) Test
THE PRINCIPAL: of Materiality – Materiality is determined not by the
1. Where it was the duty of the agent to acquire event, but solely by the probable and reasonable
and communicate information of the facts in influence of the facts upon the party to whom the
question; communication is due, in forming his estimate of the
2. Where it was possible for the agent, in the disadvantages of the proposed contract, or in making
exercise of reasonable diligence, to have his inquiries or in fixing the premium rate. Hence,
made the communication before the making good faith is no defense in concealment.
of the insurance contract.
Failure on the part of the insured to disclose such Sunlife Assurance Company of Canada v. Court
facts known to his agent, or wholly due to the of Appeals, 245 SCRA 268 (1995) The fact that the
fault of the agent, will avoid the policy, despite matter concealed had no bearing to the cause of
the good faith of the insured. death of the insured is not important because it is
well-settled that the insured need not die of the
INFORMATION NOT BOUND TO BE disease he had failed to disclose to the insurer. It is
COMMUNICATED: Neither party to the insurance sufficient that his non-disclosure misled the insurer in
contract is bound to communicate information on the forming his estimates of the risks of the proposed
following matters except in answer to the inquiries of insurance policy or in making inquiries.
the other:
1. Those of which the other knows;
2. That which, in the exercise of ordinary care, REPRESENTATION It is a factual statement made
the other ought to know and of which the by the insured at the time of, or prior to, the
former has no reason to suppose his issuance of the policy, to give information to the
ignorance, i.e. political situation, general insurer and otherwise induce him to enter into the
usages of trade; insurance contract. It may be made orally or in
3. Those of which the other waives writing. It may be made at the time of, or before,
communication; the issuance of the policy. It may be altered or
4. Those which prove or tend to prove the withdrawn before the insurance is effected, but
existence of the risk excluded by a warranty not afterwards.
and which are not otherwise material;
QuickTime™ and a
5. Those which relate
TIFF (Uncompressed) todecompressor
a risk excepted from NOTE: A representation cannot qualify an express
are needed to see this picture.
the policy and which are not otherwise provision in a contract of insurance but it may qualify
material. an implied warranty. A representation as to the future
is to be deemed a promise unless it appears that it
NOTE: Neither party is bound to communicate his was merely a statement of belief or an expectation
mere opinion, even upon inquiry, because such that is susceptible to present, actual knowledge. The
opinion would add nothing to the appraisal of the statement of an erroneous opinion, belief or
application. information, or of an unfulfilled intention, will not avoid
the contract of insurance, unless fraudulent.

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KINDS OF REPRESENTATION:
1. Affirmative which is an affirmation of a fact Table 3
existing when the contracts begins; or Warranty Misrepresentation
2. Promissory which is a statement by the Part of the contract Collateral
insured concerning what is to happen during Inducement
the term of the insurance. Written on the policy Need not be written
or in a valid rider or
NOTE: If there is misrepresentation, the injured party attachment
is entitled to rescind from the time when the Generally Should be
representation becomes false. The right to rescind conclusively established to be
must be exercised previous to the commencement of presumed to be material
an action on the contract (the action referred to is that material
to collect a claim on the contract) Fact warranted must Requires only to be
be strictly complied substantially true
Table 2 with
Concealment Misrepresentation
Neglect of one party Communication OTHER INSURANCE CLAUSE – This is a clause in
to communicate to required to comply the policy that provides that the policy shall be void if
the other material with the prohibition the insured procures additional insurance without the
facts against consent of the insurer. The purpose is to prevent
concealment; over-insurance and thus to avert the possibility of a
information insured perpetration of fraud. It is a warranty that entitles the
gives in compliance insurer to rescind in case of breach.
with the duty to
reveal information General Insurance and Surety Corp. v. Ng Hua,
Passive form of the Active form of the 106 Phil 1117 The “other insurance clause” may be
act act subject to waiver but the waiver must either be
express or if it is to be implied from conduct mainly,
WARRANTY It is a statement or promise set forth in said conduct must be clearly indicative of a clear
the policy or by reference incorporated therein, intent to waive such right. There must be clear
the untruth or non-fulfillment of which in any showing that the insurer knew about the violation of
respect, and without reference to whether insurer the clause.
was in fact prejudiced by such untruth or non-
fulfillment, renders the policy voidable. TIME TO EXERCISE THE RIGHT TO RESCIND:
1. Non-Life Policy – Prior to the commencement
KINDS OF WARRANTY: of an action on the contract
1. Express; and 2. Life Policy – A period of two years from the
2. Implied – Warranties that are deemed date of issue or last reinstatement of the
included in the contract, although not policy (i.e. incontestability clause).
expressly mentioned. They are found only in
marine insurance. Sec. 48. Whenever a right to rescind a contract of
3. Affirmative – Asserts the existence of a fact insurance is given to the insurer by an provision of
or condition at the time it is made; this chapter, such right must be exercised previous to
4. Promissory – TheQuickTime™insured
and a
TIFF (Uncompressed) decompressor
stipulates that the commencement of an action on the contract.
certain facts or conditions
are needed to see this picture.shall exist or thin
After a policy of life insurance made payable on the
shall be done or omitted. death of the insured shall have been in force during
the lifetime of the insured for a period of two years
EFFECT OF BREACH OF WARRANTY: It gives the from the date of its issue or of its last reinstatement,
insurer the right to rescind, except in the following the insurer cannot prove that the policy is void ab
instances – initio or is rescindible by reason of the fraudulent
1. Loss occurs before the time of performance concealment or misrepresentation of the insured or
of the warranty; his agent.
2. The performance becomes unlawful;
3. Performance becomes impossible.

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REQUISITES OF INCONCTESTIBILITY CLAUSE: 5. The risk or peril insured against is likewise


1. The insurance is a life insurance policy the same.
payable on the death of the insured.
2. It has been in force during the lifetime of the REINSURANCE is one by which an insurer procures
insured for at least 2 years from its date of a third person to insure him against loss or
issue or of its last reinstatement. The period liability by reason of such original insurance. In
of 2 years may be shortened but it cannot be every reinsurance contract, the original contract
extended by stipulation. of insurance and the contract of reinsurance are
separate and distinct and covered by separate
DEFENSES THAT ARE NOT BARRED BY policies.
INCONTESTIBILITY CLAUSE:
1. That the person taking the insurance lacked Table 4
insurable interest as required by law; Policy of Insurance Reinsurance
2. That the cause of the death of the insured is Written document Any contract by
excepted risk; embodying the terms which an insurer
3. That the premiums have not been paid; and stipulations of procures a 3rd
4. That the conditions of the policy relating to the contract of person to insure him
military or naval service have been violated; insurance between against loss or
5. That the fraud is of a particularly vicious type, the insured and liability by reason of
wherein: insurer an original insurance
a. The policy was taken in furtherance Formal written The original contract
of a scheme to murder the insured; instrument of insurance and the
b. The insured instituted another evidencing the contract of
person for the medical examination; contract of insurance reinsurance are
and, covered by separate
c. The beneficiary feloniously killed the policies
insured;
6. That the beneficiary failed to furnish proof of
death or to comply with any condition Table 5
imposed by the policy after the loss has Double Insurance Reinsurance
happened; or, Involves the same Insurance of
7. That the action was not brought within the interest different interests
time specified. Insurer remains in Insurer becomes an
such capacity insured in relation to
DOUBLE INSURANCE It exists where the same insurer
person is insured by several insurers separately Insured in the 1st Original insured has
in respect to same subject and interest. It is not contract is a party in no interest in
prohibited by law but it may be prohibited by an interest in the 2nd reinsurance contract
“other insurance clause”. When there is double contract
insurance and over insurance results, the insured Subject of insurance Subject of insurance
can claim in case of loss only up to the agreed is property is the original
valuation or up to the full insurable value from insurer’s risk
any, some or all insurers, without prejudice to the Insured has to give Consent of original
insurers ratably apportioning
QuickTime™ and a
the payments. his consent insured, not
Insured can also recover before
picture. or after the loss,
TIFF (Uncompressed) decompressor
are needed to see this necessary
from both insurers the excess premium he has
paid. INSURER IS LIABLE IF:
1. Loss the proximate cause of which is the
REQUISITES OF DOUBLE INSURANCE: peril insured against;
1. The person insured is the same; 2. Loss the immediate cause of which is the
2. There are two or more insurers insuring peril insured against except where proximate
separately; cause is an excepted peril;
3. The subject matter is the same;
4. The interest insured is also the same;

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3. Loss through the negligence of insured In the absence of an express stipulation in


except where there was gross negligence the policy it being based on a written contract, the
amount to willful act; and action prescribes in 10 years. However, the parties
4. Loss caused by efforts to rescue the thing may validly agree on a shorter period provided it is
from peril insured against – if during the not less than one year from the time the cause of
course of rescue, the thing is exposed to a action accrues. The cause of action accrues from the
peril not insured against, which permanently final rejection of the claim of the insured and not from
deprives the insured of its possession, in the time of the loss.
whole or in part. Where a policy of insurance provides for a
prescriptive period of one year from the time the
INSURER IS NOT LIABLE IF: cause of action accrues and the insured files a
1. Loss by insured’s willful act or gross motion for reconsideration upon the initial denial of
negligence; his claim, the period shall commence to run from the
2. Loss due to connivance of the insured; denial of the claim, not from the resolution of the
3. Loss where the excepted peril is the motion for reconsideration filed by the insured,
proximate cause. otherwise, it can be used by the insured as a scheme
or device to waste time until the evidence which may
CLAIMS SETTLEMENT: be used against him is destroyed.
1. Life Insurance
a. The proceeds shall be paid immediately Jacqueline Jimenez Vda. De Gabriel v. CA, G.R.
upon the maturity of the policy if there is No. 103883 (November 4, 1996) Under 384 of the
such a maturity date. Insurance Code, notice of claim must be filed within
b. If the policy matures by the death of the six months from the date of accident, otherwise the
insured, within sixty (60) days after claim shall be deemed waived. Action or suit must be
presentation of the claim and filing of the brought in proper cases, with Commission or the
proof of the death of the insured. courts within one year from the denial of the claim,
2. Property Insurance otherwise, the claimant’s right of action shall
a. Proceeds shall be paid within thirty (30) prescribe.
days after proof of loss is received by the
insurer and ascertainment of the loss or SUBROGATION The right of subrogation is the
damage is made either by agreement or mode which equity adopts to compel the ultimate
by arbitration. payment of a debt by one who in justice and
b. If no ascertainment is made within 60 good conscience ought to pay. It is not
days after receipt of proof of loss, the dependent upon, nor does it grow out of any
loss shall be paid within 90 days. privity of contract nor upon written assignment of
claim. It accrues simply upon payment by the
EFFECT OF DELAY OF INSURER: If the prescribed insurance company of the insurance claim.
period for both life and property insurance are not Consequently, the payment made by the insurer
complied with, the beneficiary is entitled to payment to the assured operates as an equitable
of: assignment to the former of all the remedies
1. Interest for the duration of the delay at the which the latter may have against the obligor.
rate of twice the legal interest;
2. Attorney’s fees and other litigation expenses;
CASES WHEN THERE IS NO RIGHT OF
3. Appropriate damages under the Civil Code
QuickTime™ and a SUBROGATION:
like moralTIFF and exemplary
(Uncompressed) decompressordamages when
are needed to see this picture. 1. The insured by his own act releases the
requisites are present.
wrongdoer/third person liable for the loss;
2. Where the insurer pays the insured for a loss
Sec. 63. A condition, stipulation, or agreement in any or risk not covered by the policy;
policy of insurance, limiting the time for commencing 3. In life insurance;
an action thereunder to a period of less than one year 4. For recovery of loss in excess of insurance
from the time when the cause of action accrues, is coverage.
void.

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IMPLIED WARRANTIES IN MARINE INSURANCE: Denote nature Damage or losses resulting


1. That the ship is seaworthy at the inception of accidents peculiar from:
the insurance; to the sea which do 1. natural and inevitable
2. That the ship will not deviate from agreed not happen by action of the sea
voyage unless deviation is proper; intervention of man 2. ordinary wear and tear of a
3. That the ship will not engage in an illegal nor are to be ship, or
venture; prevented by 3. negligent failure of the ship
4. Warranty of possession of documents of human prudence owner to provide the
neutrality; that the ship will carry the requisite vessel with proper
documents of nationality or neutrality of the equipment to convey the
ship or cargo where such nationality or cargo under ordinary
neutrality is expressly warranted; conditions
5. Presence of insurable interest.

INSURABLE INTEREST IN MARINE INSURANCE:


1. Shipowner
a. Over the value of the vessel, (even if
chartered and the charterer agreed to BARRATRY Willful misconduct on the part of the
pay the shipowner the value of the vessel master or crew in pursuance of some unlawful or
in case of loss, however, the shipowner fraudulent purpose without the consent of
can recover only the amount not owners, and to the prejudice of owner’s interest.
recoverable form the charterer). This may be expressly covered by thepolicy.
However, if the ship is hypothecated by a When so covered, proof of willful and intentional
bottomry loan, the insurable interest is act is necessary. No honest error or judgment or
only up to the excess of the value of the mere negligence, unless criminally gross, can be
vessel over the loan. barratry.
b. Over expected freightage.
2. Cargo owner/shipper – Over the cargo and LOAN ON BOTTOMRY OR RESPONDENTIA A loan
expected profits. in which under any condition whatsoever, the
3. Charterer repayment of the sum loaned, and of the
a. Over the vessel up to the extent of the premium stipulated, depends upon the safe
amount he is liable to the shipowner, if arrival in port of the goods on which it is made or
the ship is lost or damaged during the of the price they may receive in case of accident.
voyage. It is a loan on bottomry when the security is a
b. Over his expected profits or freightage if vessel, and respondentia when the security is
he accepts cargoes from other persons cargo.
for a fee. CHARTER PARTY CONTRACT Contract by virtue of
c. Over his own cargo or his client’s cargo. which the owner or the agent of a vessel binds
himself to transport merchandise or persons for a
Table 6 fixed price. It has also been defined as a
Perils of the Sea Perils of the Ship contract by virtue of which the owner or the agent
Covered by marine Not covered by marine of the vessel lets the vessel or some principal
insurance insurance part thereof for the transportation of goods or
persons from one port to another.
QuickTime™ and a
TIFF (Uncompressed) decompressor
are needed to see this picture.
CONCEALMENT IN MARINE INSURANCE:
1. Belief and expectation of a third person in
reference to a material fact is material and
must be disclosed in marine insurance. The
rule is different from the general rule where
matters of belief, judgment or opinion of third
persons (except experts) are not material.
2. Ordinarily, the matters need not be the cause
of the loss. In marine insurance, there are

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instances when matters, although concealed, 3. If made in good faith to avoid a peril;
will not vitiate the contract except when they 4. If made to save human life or another
caused the loss: distressed vessel.
a. National character of the insured;
b. Liability of insured thing to capture or KINDS OF LOSSES IN MARINE INSURANCE:
detention; 1. Actual total loss
c. Liability to seizure from breach of foreign a. Total Destruction;
laws; b. Loss by sinking;
d. Want of necessary documents; and, c. Damage rendering the thing valueless; or
e. Use of false or simulated papers. d. Total deprivation of owner of possession
of thing insured.
SEAWORTHINESS A ship is seaworthy, when 2. Constructive total loss
reasonably fit to perform the service, and to a. Actual loss or more than three-fourths
encounter the ordinary perils of the voyage, (3/4) of the value of the object;
contemplated by the parties to the policy. There b. Damage reducing value by more than
should be due consideration to the nature of the three-fourths (3/4) of the value of the
ship, the voyage and the service to be performed. vessel and of cargo; and
c. Expenses of shipment exceed three-
WHEN A SHIP SHOULD BE SEAWORTHY: An fourths (3/4) of value of cargo.
implied warranty of seaworthiness is complied with if NOTE: In case of constructive total loss,
the ship be seaworthy at the time of the insured may abandon the goods or vessel to
commencement of the risk, except in the following the insurer and claim for whole insured value,
cases: or he may, without abandoning vessel, claim
1. Time policy – When the insurance is made for partial actual loss.
for a specified length of time, the implied
warranty is not complied with unless the ABANDONMENT The act of the insured by which,
vessel is seaworthy at the commencement of after a constructive total loss, he declares the
every voyage it undertakes during that time; relinquishment to the insurer of his interest in the
2. When the insurance is upon the cargo which, thing insured.
by the terms of the policy, description of the
voyage, or established custom of trade, is to REQUISITES FOR VALID ABANDONMENT:
be transshipped at an intermediate port, at 1. There must be an actual relinquishment by
the commencement of each particular the person insured of his interest in the thing
voyage; insured;
3. Where different portions of the voyage are 2. There must be constructive total loss;
contemplated, at the commencement of each 3. The abandonment be neither partial nor
portion; conditional;
4. When the ship was unseaworthy at the 4. It must be made within a reasonable time
commencement of the voyage but becomes after receipt of reliable information of the
unseaworthy during the voyage to which an loss;
insurance related, and unreasonable delay in 5. It must be factual;
repairing the defect exonerates the insurer 6. It must be made by giving notice thereof to
on ship or shipowner’s interest from liability the insurer which may be done orally or in
from any loss arising therefrom.
QuickTime™ and a writing; and
TIFF (Uncompressed) decompressor
are needed to see this picture. 7. The notice of abandonment must be explicit
DEVIATION Departure of vessel from course of and must specify the particular cause of the
voyage, or an unreasonable delay in pursuing abandonment.
voyage, or the commencement of an entirely
different voyage. KINDS OF AVERAGES:
1. Simple or Particular Average – Includes all
DEVIATION IS PROPER WHEN: expenses and damages caused to the vessel
1. If due to circumstances outside the control of or cargo which have not inured to the
the ship captain or ship owner; common benefit of all persons interested in
2. If done to comply with a warranty; the vessel or cargo.

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2. General or Gross Average - Includes all the means within the control of the insured, and
damage and expenses which are deliberately increasing the risks, entitles the insurer to rescind a
caused in order to save the vessel, its cargo contract of fire insurance.
or both, from real and known risks.
EFFECT OF AN ALTERATION IN THRE USE OR
RIGHT TO FREIGHTAGE: CONDITION OF A THING INSURED FORM THAT
LIMITED BY THE POLICY: The insurer may rescind
1. Freightage earned before loss -Belongs to a contract of fire insurance provided the following
the insurer of freightage requisites are present:
2. Freightage earned after loss - Belongs to 1. The use or condition of the thing insured is
insurer of ship specially limited or stipulated in the policy;
2. Such use or condition is altered;
CO-INSURANCE Co-insurance is a form of 3. The alteration is made without the consent of
insurance in which a person who insures his the insurer;
property for less than the entire value is 4. The alteration is made by means within the
understood to be his own insurer for the control of the insured;
difference which exists between the true value of 5. The alteration increases the risk; and.
the property and the amount of insurance. 6. There must be a violation of a material policy
provision.

WHEN CO-INSURANCE APPLIES:


CASUALTY INSURANCE It is an insurance covering
1. Insurance taken is less than the actual value loss or liability arising from accident or mishap,
of the thing insured excluding those falling under those types of
2. Loss is partial insurance such as fire or marine.

FIRE INSURANCE It is a contract of indemnity by


which the insurer for a consideration agrees to Biagtan v. The Insular Life Assurance Co. Ltd., 44
indemnify the insured against loss of, or damage SCRA 58 (1972) Where a provision of the policy
to, property by fire, but may include loss by excludes intentional injury that is controlling. If the
lightning, windstorm, tornado or earthquake and injuries suffered by the insured clearly resulted from
other allied risks, when such risks are covered by the intentional act of a third person, the insurer is
extension to fire insurance policies or under relieved from liability as stipulated.
separate policies.
Pan Malayan Insurance Corp. v. CA, 184 SCRA 54
FRIENDLY FIRE AND HOSTILE FIRE: The terms “accident” and “accidental” as used in
1. Friendly Fire – Fire that burns in a place insurance contracts, have not acquired any technical
where it is supposed to burn meaning. They are construed by the courts in the
2. Hostile Fire – Fire that escapes and burns in ordinary and common acceptation. Thus, the terms
a place where it is not supposed to be. It may have been taken to mean that which happens by
also refer to fire that started out as a friendly chance or fortuitously, without intention or design,
fire but escapes from its original place or it which is unexpected, unusual and unforeseen. The
becomes too strong as it becomes out of terms do not, without qualification, exclude events
control. TIFF (Uncompressed)
QuickTime™ and a
decompressor resulting in damage or loss due to fault, recklessness
NOTE: The insurer isto see
are needed liable for loss or damage
this picture.
or negligence of third parties. The concept is not
caused by hostile fire (fire that escapes from the necessarily synonymous with “no fault”. It may be
place where it was intended to burn and ought to utilized simply to distinguish intentional or malicious
be in) and not that caused by friendly fire (fire acts from negligent or careless acts of man.
which burns in a place where it is intended to
burn). LIFE INSURANCE Life insurance is an insurance on
human life. Insurance appertaining thereto or
ALTERATION – An alteration is the use of condition connected therewith may be payable: (1) On the
of a thing insured from that to which it is limited by death of the insured, (2) On his surviving a
the policy made without the consent of the insurer, by

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specified period, and (3) Otherwise, contingently COMPULSORY MOTOR VEHICLE LIABILITY
on the continuance or cessation of life (b and c INSURANCE (CPTL) The Insurance Code
refer to endowment or annuities) makes it unlawful for any land transportation
operator or owner of a motor vehicle to operate
KINDS OF LIFE INSURANCE: the same in public highways unless there is an
1. Whole Life or Ordinary Policies - the insurance or guaranty to indemnify the death or
insured agrees to pay annual, semi-annual bodily injury of a third party or passenger arising
or; from the use thereof.
2. Quarterly premiums while he lives. The
insurer agrees to pay the face value of the RULES OF CPTL:
policy upon the death of the insured. 1. Registration of any vehicle will not be made
3. Limited Payment Life Policy - premiums or renewed without complying with the
paid only for a specified period of years. requirement.
4. Term Policy - insurer’s liability arises only 2. The protection may be complied with using
upon the death of the insured within the any of the following:
agreed term as period. If the latter survives a. Insurance policy
the period, the contract terminates and the b. Surety bond
insurer is not liable c. Cash bond
5. Endowment Policy - insurer agrees to pay a
certain sum to the insured if the latter outlives First Integrated Bonding and Ins. Co., Inc. v.
a designated period; if he dies before that Hernando, 199 SCRA 746 The purpose of CPTL is
time, the proceeds are paid to the beneficiary to give immediate financial assistance to victims of
6. Life Annuity - debtor binds himself to pay an motor vehicle accidents and/or their dependents,
annual pension or income during the life of especially if they are poor regardless of the financial
one or more persons in consideration of a capability of motor vehicle owners or operators
capital consisting of money or other property, responsible for the accident.
whose ownership is transferred to him with
the burden of income. NO FAULT CLAUSE – The injured third party or
passenger is given the option to file a claim for death
VARIABLE CONTRACT – Any policy or contract on or injury without the necessity of proving fault or
either on either a group or individual basis issued by negligence of any kind.
an insurance company providing for benefits or other
contractual payments or values thereunder to vary so CONDITIONS FOR APPLICATION OF “NO FAULT
as to reflect investment results of any segregated CLAUSE”:
portfolio of investment. 1. The total indemnity in respect of any person
shall not exceed five thousand pesos;
EFFECT OF DEATH OF INSURED THROUGH 2. The following proofs of loss, when submitted
SUICIDE: The insurer in alife insurance contract shall under oath, shall be sufficient evidence to
be liable in case of suicide by the insured if: substantiate the claim:
1. Suicide was committed after the policy has a. Police report of accident; and,
been in force for a period of two years from b. Death certificate and evidence sufficient
the date of its issue or its last reinstatement, to establish the proper payee; or,
unless the policy provides a shorter period; c. Medical report and evidence or medical
2. Suicide committed in a state of insanity; it
QuickTime™ and a or hospital disbursement in respect of
shall made arethe
neededinsurer liable regardless of
TIFF (Uncompressed) decompressor
to see this picture. which refund is claimed.
the date of the commission of the suicide. 3. Claim may be made against one motor
vehicle only.
SURETYSHIP Agreement whereby surety
guarantees the performance by another of an RECOVERY OF INJURED PERSON:
undertaking or an obligation in favor of a 3rd 1. In the case of an occupant of a vehicle, claim
party. shall lie against the insurer of the vehicle,
claim shall lie against the insurer of the
vehicle in which the occupant is riding,
mounting or dismounting from.

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2. If not an occupant, claim shall lie against the insured vehicle to the insured himself or any person
insurer of the directly offending vehicle. who drived on his order or with his permission.
3. In all cases, the right of the party paying the
claim to recover against the owner of the CCC Insurance Corporation v. CA, 31 SCRA 264 If
vehicle responsible for the accident shall be the claimant was able to present a driver’s license the
maintained. same is presumed to be genuine. Thus, even if it was
established that the driver does not know how to read
TIME TO FILE AND PROCESS CLAIM UNDER and write, the license will still be sustained in the
CPTL: absence of proof that it was not validly issued.
1. Period to File Notice – The written notice of
claim must be presented within six (6) Gutierrez v. Capital Insurance Co., 130 SCRA 618
months from the date of the accident A driver (not the insured himself) who holds an
otherwise the claim is deemed waived. expired driver’s license is not an authorized driver.
2. Prescriptive Period – The action must be
filed in court of the Insurance Commission
THEFT CLAUSE – The risks insured against in the
within one (1) year from denial of the claim.
policy may include theft. If there is such a provision
3. If there is an agreement, the insurance
and the vehicle was unlawfully taken, the insurer is
company shall forthwith ascertain the truth
liable under the theft clause and the authorized driver
and extend of the claim and make payment
clause does not apply. The insured can recover even
within five (5) working days after reaching an
if the thief has no driver’s license.
agreement.
4. If no agreement is reached, the insurance
CIRCUMSTANCES WHEN THE COMMISSIONER
company shall pay only the no-fault
MAY REVOKE OR SUSPEND THE LICENSE OF
indemnity without prejudice to the claimant
AN INSURER:
from pursuing his claim further, in which
1. If insurance contract is in unsound condition
case, he shall not be required or compelled
2. If it has failed to comply with the provisions of
by the insurance company to execute any
law or regulations obligatory upon it
quit claim or document releasing it from
3. Its conditions or methods of business is such
liability under the policy of insurance or
as to render its proceedings hazardous to the
surety bond issued.
public or to its policy holders
4. That its paid up capital stock, or its available
Bonifacio Brothers v. Mora, 20 SCRA 261 If the cash assets, or its security deposits, as the
policy provides for indemnity against liability, the case may be, is impaired or deficient
insurer can be sued directly by a third person. 5. That the margin of solvency required of each
However, if the policy provides for “reimbursement company is deficient
after actual payment by the insured”, or for the
indemnity against loss, a third person has no cause NOTE: The Insurance Commissioner has concurrent
of action against the insurer. jurisdiction with the regular courts to hear and decide
claims for which an insurer may be answerable under
Pan Malayan Insurance Corporation v. CA, 184 any kind of policy or contract of insurance where the
SCRA 54 While insurer’s liability may be direct, it amount of the loss, damage or liability excluding
does not mean that the insurer can be held solidarily interest, costs and attorney’s fees, does not exceed
liable with the insured. The insurer’s liability is based in any single claim P100,000.
on contract; that of theQuickTime™
insured and ais based on torts.
TIFF (Uncompressed) decompressor
Furthermore, the insurer’s liability
are needed to see this picture. is limited to the
PDIC v. CA, 283 SCRA 462 (1997) In order for a
amount of the insurance coverage. claim for deposit insurance with PDIC to prosper, the
law requires that a corresponding deposit be placed
AUTHORIZED DRIVER CLAUSE – A stipulation in a in the insured bank; and a deposit as defined under
motor vehicle insurance which provides that the Section 3(f) of R.A. No. 3591 may be constituted only
driver, other than the insured owner, must be duly if money or the equivalent of money is received by a
licensed to drive the motor vehicle otherwise the bank. When the evidence shows that the certificates
insurer is excused from liability. The clause means of time deposit were issued in consideration of
that the insurer indemnifies the insured owner against checks received by the issuing bank, which checks
loss or damage to the car but limits the use of the

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bounced, then the issuing bank received no money


therefore, no deposit therefore came into existence, PREFERENCE VS. LIEN
and therefore PDIC cannot be held liable for value of A preference applies only to claims that do not attach
the certificates of time deposit. to specific properties, while a lien creates a charge
on a particular property.

GENERAL PROVISIONS
CONCURRENCE AND
PREFERENCE OF CREDITS Art. 2236. The debtor is liable with all his property
present and future, for the fulfillment of his
obligations, subject to the exemptions provided by
law. (1911a)
CHARACTERISTICS OF CONCURRENCE AND
PREFERENCE ™ The creditors have the right to pursue the
1. The liens and mortgages with respect to property in possession of the debtor to satisfy
specific movable and immovable property the debt
have been increased. ™ Creditors may impugn the acts which the
2. The New Civil Code and the Insolvency Law debtor may have done to defraud them
have been brought into harmony.
3. Preferred claims as to the free property of the EXEMPT PROPERTY
insolvent have also been augmented.
4. The order of preference among claims with 1. Present property: family home; those
respect to specific personal and real property enumerated in Rule 39, Sec. 13 of the Rules
has been abolished, except that taxes must of Court; and Sec. 118 of Public Land Act
first be satisfied. 2. Future property: a debtor who obtains a
discharge from his debts on account of
CONCURRENCE OF CREDIT insolvency is not liable for the unsatisfied
A concurrence of credit implies the possession by claims of his creditors with said property
two or more creditors of equal rights or privileges subject to certain exceptions provided by law
over the same property or all of the property of the 3. Custodia legis & public dominion: under
debtor. legal custody and those owned by municipal
corporations necessary for governmental
PREFERENCE OF CREDIT purposes
A preference of credit is the right held by a creditor to
be preferred in the payment of his claim above others Art. 2237. Insolvency shall be governed by special
(to be paid first) out of the debtor’s assets laws insofar as they are not inconsistent with this
Code. (n)
A concurrence or preference of credit does not create
a lien. It merely creates a right of one creditor to be ™ The Civil Code prevails in case of conflict
paid first as against other creditors. If the property is with special laws on insolvency unless
not sufficient, creditors who concur share pro-rata. otherwise provided
™ Art. 110, Labor Code: preference of workers
APPLICATION OF THE RULES ON PREFERENCE as regards unpaid wages and money claims
The rules on preference generally
QuickTime™ and a apply only when
TIFF (Uncompressed) decompressor ™ Insolvency proceedings have for their aim the
the debtor does not have sufficient property to pay
are needed to see this picture.
conservation of all the remaining assets of
his debts. These rules are inapplicable when there is the insolvent/liquidated person/corporation
enough to pay everyone. Specifically, these rules for distribution to the creditors, after payment
apply only when the following concur: of taxes.
1. There are two or more creditors.
2. The debtor’s assets are not enough.
Art. 2238. So long as the conjugal partnership or
3. The claims held by various creditors have
absolute community subsists, its property shall not be
been established (in a proper proceeding).
among the assets to be taken possession of by the
4. All the credits must be due.
assignee for the payment of the insolvent debtor’s

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obligations, except insofar as the latter have (4) Credits guaranteed with a pledge so long as the
redounded to the benefit of the family. If it is the things pledged are in the hands of the creditor, or
husband who is insolvent, the administration of the those guaranteed by a chattel mortgage, upon the
conjugal partnership or absolute community may, by things pledged or mortgaged, up to the value thereof;
order of the court, be transferred to the wife or to a (5) Credits for the making, repair, safekeeping or
third person other than the assignee. preservation of personal property, on the movable
thus made, repaired, kept or possessed;
™ Subsisting CGP/ACP is exempt from (6) Claims for laborers' wages, on the goods
assignment in insolvency, except if obligation manufactured or the work done;
has redounded to the benefit of the family (7) For expenses of salvage, upon the goods
salvaged;
Art. 2239. If there is property, other than that (8) Credits between the landlord and the tenant,
mentioned in the preceding article, owned by two or arising from the contract of tenancy on shares, on the
more persons, one of whom is the insolvent debtor, share of each in the fruits or harvest; sLoEat
his undivided share or interest therein shall be among (9) Credits for transportation, upon the goods
its assets to be taken possession of by the assignee carried, for the price of the contract and incidental
for the payment of the insolvent debtor’s obligations. expenses, until their delivery and for thirty days
thereafter;
™ If there is co-ownership, the undivided (10)Credits for lodging and supplies usually furnished
to travellers by hotel keepers, on the movables
share/interest of one co-owner can be
possessed by the assignee for payment of belonging to the guest as long as such movables are
debtor’s obligation in the hotel, but not for money loaned to the guests;
(11)Credits for seeds and expenses for cultivation
and harvest advanced to the debtor, upon the fruits
Art. 2240. Property held by the insolvent debtor as a harvested;
trustee of an express or implied trust, shall be (12)Credits for rent for one year, upon the personal
excluded from the insolvency proceedings. (n) property of the lessee existing on the immovable
leased and on the fruits of the same, but not on
™ Subject matter of a trust in possession of money or instruments of credit;
trustee is also excluded (13)Claims in favor of the depositor if the depositary
has wrongfully sold the thing deposited, upon the
CLASSIFICATION OF CREDITS price of the sale.
Art. 2241. With reference to specific movable In the foregoing cases, if the movables to which the
property of the debtor, the following claims or liens lien or preference attaches have been wrongfully
shall be preferred: taken, the creditor may demand them from any
possessor, within thirty days from the unlawful
(1) Duties, taxes and fees due thereon to the State seizure.
or any subdivision thereof;
(2) Claims arising from misappropriation, breach of ™ This is just an enumeration of the credits that
trust, or malfeasance by public officials committed in enjoy preference with respect to specific
the performance of their duties, on the movables, movables; no order of preference, except as
money or securities obtained by them; regards the State
(3) Claims for the unpaid price of movables sold, on ™ Last paragraph applies only when the right of
said movables, so long as they and
QuickTime™ area in the possession ownership in the specific property continues
of the debtor, up TIFF
toare(Uncompressed)
the value
needed
decompressor
ofpicture.
to see this the same; and if the in the debtor
movable has been resold by the debtor and the price
is still unpaid, the lien may be enforced on the price; Art. 2242. With reference to specific immovable
this right is not lost by the immobilization of the thing property and real rights of the debtor, the following
by destination, provided it has not lost its form, claims, mortgages and liens shall be preferred, and
substance and identity; neither is the right lost by the shall constitute an encumbrance on the immovable or
sale of the thing together with other property for a real right:
lump sum, when the price thereof can be determined (1) Taxes due upon the land or building;
proportionally; aaesme

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(2) For the unpaid price of real property sold, upon liens within the purview of legal provisions governing
the immovable sold; insolvency. Taxes mentioned in No. 1, article 2241,
(3) Claims of laborers, masons, mechanics and other and No. 1, article 2242, shall first be satisfied. (n)
workmen, as well as of architects, engineers and
contractors, engaged in the construction, ™ Nature of claims in 2241 and 2242 are
reconstruction or repair of buildings, canals or other considered as mortgages or pledges of real
works, upon said buildings, canals or other works; or personal property; thus, provisions on
(4) Claims of furnishers of materials used in the pledge and mortgage are applicable
construction, reconstruction, or repair of buildings, ™ In case of insolvency, such claims shall be
canals or other works, upon said buildings, canals or considered as liens within the purview of
other works; legal insolvency
(5) Mortgage credits recorded in the Registry of ™ The preference in 2241 and 2242 are to be
Property, upon the real estate mortgaged; enforced in accordance with the Insolvency
(6) Expenses for the preservation or improvement of Law; taxes will still be paid first
real property when the law authorizes
reimbursement, upon the immovable preserved or Art. 2244. With reference to other property, real and
improved; personal, of the debtor, the following claims or credits
(7) Credits annotated in the Registry of Property, in shall be preferred in the order named:
virtue of a judicial order, by attachments or (1) Proper funeral expenses for the debtor, or
executions, upon the property affected, and only as children under his or her parental authority who have
to later credits; no property of their own, when approved by the court;
(8) Claims of co-heirs for warranty in the partition of (2) Credits for services rendered the insolvent by
an immovable among them, upon the real property employees, laborers, or household helpers for one
thus divided; year preceding the commencement of the
(9) Claims of donors or real property for pecuniary proceedings in insolvency;
charges or other conditions imposed upon the donee, (3) Expenses during the last illness of the debtor or
upon the immovable donated; of his or her spouse and children under his or her
(10)Credits of insurers, upon the property insured, for parental authority, if they have no property of their
the insurance premium for two years. own;
(4) Compensation due the laborers or their
™ This is just an enumeration of the credits that dependents under laws providing for indemnity for
enjoy preference with respect to specific damages in cases of labor accident, or illness
immovable; no order of preference, except as resulting from the nature of the employment;
regards the State (5) Credits and advancements made to the debtor
™ A recorded mortgage credit is a special for support of himself or herself, and family, during
preferred credit the last year preceding the insolvency;
™ Unrecorded sale is superior to a recorded (6) Support during the insolvency proceedings, and
mortgage, since execution in a public for three months thereafter;
instrument is equivalent to delivery (7) Fines and civil indemnification arising from a
™ Registered mortgage of a latter date is criminal offense;
superior to a prior unregistered mortgage (8) Legal expenses, and expenses incurred in the
™ There is preference among the credits administration of the insolvent's estate for the
mentioned in 2242(7) according to the order common interest of the creditors, when properly
of the time they were
QuickTime™ and a levied upon the authorized and approved by the court;
TIFF (Uncompressed) decompressor
property are needed to see this picture. (9) Taxes and assessments due the national
™ Pro rata rule in 2249 does not apply, government, other than those mentioned in articles
otherwise a preference of credit could be 2241, No. 1, and 2242, No. 1;
defeated by a writ of attachment or execution (10)Taxes and assessments due any province, other
even if such was obtained much later than those referred to in articles 2241, No. 1, and
2242, No. 1;
Art. 2243. The claims or credits enumerated in the (11)Taxes and assessments due any city or
two preceding articles shall be considered as municipality, other than those indicated in articles
mortgages or pledges of real or personal property, or 2241, No. 1, and 2242, No. 1;

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(12)Damages for death or personal injuries caused itself to or be compelled to undergo


by a quasi-delict; insolvency or liquidation proceedings
(13)Gifts due to public and private institutions of Art. 2245. Credits of any other kind or class, or by
charity or beneficence; any other right or title not comprised in the four
(14)Credits which, without special privilege, appear in preceding articles, shall enjoy no preference.
(a) a public instrument; or (b) in a final judgment, if
they have been the subject of litigation. These credits ™ Credits other than those in Arts. 2241, 2242,
shall have preference among themselves in the order and 2244 do not enjoy preference; it shall be
of priority of the dates of the instruments and of the paid pro rata regardless of dates (pro rata: in
judgments, respectively. proportion or ratably, or a division according
to share, interest, or liability of each)
™ Enumerates the preferred credits and gives ™ In cases of insolvency proceedings involving
their order of preference in the order named banks, a depositor cannot bring a separate
™ Taxes and assessments are mentioned as action against the bank; his remedy is to
No. 9, 10, and 11 in preference; if property is intervene in the judicial proceedings for
specific, duties and taxes on said property liquidation instituted by the Monetary Board;
are placed as No. 1 in order of preference the liquidation court acquires exclusive
™ In contrast to Arts. 2241 and 2242, Art. 2244 jurisdiction over all the claims against the
does not create liens on determinate bank to the exclusion of all other courts; the
property; Art. 2244 only creates rights in reason is to avoid multiplicity of suits
favor of certain creditors to have the cash
and other assets of the insolvent applied in a ORDER OF PREFERENCE OF CREDITS
certain sequence or order of priority
™ Specially preferred credits, because they Art. 2246. Those credits, which enjoy preference with
constitute liens, take precedence over respect to specific movables, excludes all others to
ordinary preferred credits insofar as the the extent of the value of the personal property to
attached property is concerned which the preference refers.
™ Art. 110 of the Labor Code modified Art. Art. 2247. If there are two or more credits with
2244 of the Civil Code: it is an ordinary respect to the same specific movable property, they
preferred credit (when not falling within shall be satisfied pro rata, after the payment of
™ 2241(6) and 2242(3)) that became first in duties, taxes and fees due the State or any
priority, and the one-year limitation in 2244(2) subdivision thereof. (1926a)
is abolished Art. 2248. Those credits, which enjoy preference in
™ From the provisions of the Labor Code, a relation to specific real property or real rights, exclude
declaration of bankruptcy or a judicial all others to the extent of the value of the immovable
liquidation must be enforced; if not, then the or real right to which the preference refers.
worker is put above the State Art. 2249. If there are two or more credits with
™ The reason behind the necessity for a judicial respect to the same specific real property or real
proceeding before the concurrence and rights, they shall be satisfied pro rata, after the
preference of credits may be applied is to payment of the taxes and assessments upon the
bind interested parties; there must be an immovable property or real right.
authoritative, fair, and binding adjudication Art. 2250. The excess, if any, after the payment of
™ Credits evidenced by a public instrument and the credits, which enjoy preference with respect to
by final judgment are
QuickTime™ and a
TIFF (Uncompressed) placed in the same
decompressor specific property, real or personal, shall be added to
are needed to see this picture.
order of preference; preference among the free property, which the debtor may have, for the
themselves is determined by considering the payment of the other credits. (1928a)
priority of the dates of the instruments/final
judgments ™ Under the New Civil Code, only taxes and
™ Notarized over non-notarized; among assessments upon specific movable and
notarized credits, earlier date prevails immovable property enjoy absolute
™ The statutory preferences listed in Title XIX preference; all the remaining classes of
do not apply to the obligations of State since preferred creditors enjoy no priority among
the government cannot voluntarily subject

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themselves, but must be paid concurrently


and pro rata The Chattel Mortgage Law primarily governs chattel
™ Arts. 2241 and 2241 read together with Arts. mortgage. The provisions on pledge of NCC in so far
2246 to 2249 establish a two-tier order of as not in conflict with CML also govern chattel
preference: the first-tier includes only taxes, mortgages.
duties, and fees due on the specific movable
or immovable property; all other special A chattel mortgage may be rescinded for being in
preferred credits (non-tax credits) are on the fraud of creditors.
second-tier, to be satisfied pro rata, out of
any residual value of the specific property to SUBJECT MATTER OF A CHATTEL MORTGAGE
which such other credits relate
™ However, the pro rata rule does not apply to Personal or movable property
credits annotated in the Registry of Property 1. Shares of stock;
in virtue of a judicial order, by attachments 2. Interest in business;
and executions 3. Machinery treated as personal property
subsequently installed on leased land (Davao
Art. 2251. Those credits which do not enjoy any Sawmill v. Castillo, 61 Phil. 709).
preference with respect to specific property, and 4. Vessels recorded in the office of the
those which enjoy preference, as to the amount not Philippine Coast Guard to be effective as to
paid, shall be satisfied according toe the following third persons; not necessary to be recorded
rules: in the Office of the Register of Deeds;
(1) In the order established in Art. 2244 5. Motor Vehicles mortgage registered in the
(2) Common credits referred to in Art. 2245 LTO (for vehicles used for public services)
shall be paid pro rata regardless of dates. 6. House of Mixed Materials;
(1929a). 7. House intended to be demolished;
8. House built on rented land.
™ This contemplates: GR: Immovable property.
ƒ Other credits that do not enjoy any E: treated as movable by estoppel of parties.
preference, since they are not among 9. House of strong materials is personal
those mentioned in Arts. 2241 and 2242; property for purposes of executing a chattel
and mortgage as between the parties to the
ƒ Those that are included in Arts. 2241 and contract if parties so agree and no innocent
2242 but are unpaid because the value third party will be prejudiced.
of the property to which the preference
refers is less than the preferred credit or General Rule: chattel mortgages cannot cover debts
credits, shall be satisfied in the order subsequently contracted.
established in Arts. 2244 Furthermore, the following must be remembered:
™ Also contemplates common credits which do 1. Chattel mortgages must be registered in
not fall under Arts. 2241, 2242, and 2244, in place where mortgagor resides and where
which case they shall be paid pro rata property (chattel) is located. If mortgagor
regardless of date resides abroad, it must be registered in place
where property is located.
2. With respect to growing fruits, they may be
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secured by a chattel mortgage but they may
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CHATTEL MORTGAGE LAW
are needed to see this picture.
3. With respect to machineries placed on plant
or building owned by another, they can be
the object of chattel mortgage.
4. With respect to shares of stock: place of
CHATTEL MORTGAGE domicile of corporation and shareholder. No
A chattel mortgage is an accessory contract by virtue need for notation in books of corporation.
of which personally property is recorded in the
Chattel Mortgage Register as security for the REQUISITES TO BIND THIRD PERSONS
performance of an obligation. (Art. 2140, NCC) 1. Affidavit of good faith

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2. Contract must be registered 1. Such property is a renewal of, or in


substitution for goods on hand when the
Under the chattel mortgage law, there can be a mortgage was executed, or
recovery of a deficiency judgment, except when the 2. Such property was purchased with proceeds
Recto Law applies (not of your own money) of said goods.

ESSENTIAL REQUISITES TO CONSTITUTE A Acts, which provide for criminal liability under the
VALID CHATTEL MORTGAGE OVER PERSONAL Chattel Mortgage Law: (Art. 319, RPC)
PROPERTY 1. Removal of chattel to another city or province
(NOTE: ALL MUST CONCUR) without written consent of mortgagee,
1. It must be constituted to secure the fulfillment 2. Selling property already pledged, or
of principal obligation. (Art. 2085, NCC) mortgaged without written consent of
2. The mortgagor must be the absolute owner mortgagee.
of the thing mortgaged. (Art. 2085, NCC)
3. The persons constituting the mortgage have EQUITY OF REDEMPTION
the free disposal of the property and in the There is no right of redemption in Chattel Mortgage.
absence thereof, they be legally authorized There is only an equity of redemption.
for the purpose. (Art. 2085, NCC)
4. Must be recorded in the Chattel Mortgage The following may redeem if the condition of the
Register in order to bind third persons. mortgage is broken:
1. mortgagor
The first three requirements pertain to the 2. a person holding subsequent mortgage
requirements of any valid mortgage under the Civil 3. a subsequent attaching creditor (sec. 13, Act
Code. 1508)
REQUIREMENTS UNDER THE CHATTEL RULE ON RECOVERY OF DEFICIENCY AFTER
MORTGAGE LAW FOR THE VALIDITY OF A FORECLOSURE
CHATTEL MORTGAGE
1. Substantial compliance with form in Sec. 5 of There is recovery of deficiency in all mortgages
the Chattel Mortgage Law. (chattel or real).
2. The deed of mortgage must be signed by at ™ Reason: Mortgages as accessory contracts
least 2 witnesses. serve only as securities and not for the
3. Deed must contain an affidavit of good satisfaction of the principal obligation.
faith. ™ Prescriptive Period: 10 years, under Article
4. Deed must be accompanied by a certificate 1142, NCC (DBP v. Tomelda, 101 SCRA
of oath [notarial acknowledgment]. 171).

CONTENTS REQUIRED IN THE AFFIDAVIT OF Exception: When the transaction secured is sale of
GOOD FAITH personal property on installment basis under Article
1. Where the parties severally swear that the 1484 of the New Civil Code otherwise known as
mortgage is made for the purpose of Recto Law.
securing the obligation specified and for
no other purpose and that the same is a just Bicol Savings and Loan Association v. Guinhawa
and valid obligation and not one entered into A chattel mortgage is just a security, foreclosure
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for fraud; TIFF
and,(Uncompressed) decompressor thereof will not prevent mortgagee from recovering
are needed to see this picture.
2. Property given in chattel mortgage must be any deficiency that may result after applying the
described to enable the parties or any other proceeds of the foreclosure sale to the obligation
person after reasonable inquiry and
investigation to identify it. RECTO LAW (ART. 1484 AND 1485, NCC)
Art. 1484. In a contract of sale of personal property
Future property may not be covered by a chattel the price of which is payable in installments, the
mortgage. vendor may exercise any of the following remedies:
Except: Future property may be the subject of a
chattel mortgage when:

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(1) Exact fulfillment of the obligation, should the Spouses De Vera vs. Agloro
vendee fail to pay; If the mortgagor fails to redeem the property, the
(2) Cancel the sale, should the vendee's failure buyer at public auction may file, with the RTC in the
to pay cover two or more installments; province or place where the property or portion
(3) Foreclose the chattel mortgage on the thing thereof is located, an ex parte motion for the
sold, if one has been constituted, should the issuance of a writ of possession within one (1) year
vendee's failure to pay cover two or more from the registration of the Sheriff’s Certificate of
installments. In this case, he shall have no further Sale, and the court shall grant the said motion upon
action against the purchaser to recover any unpaid the petitioner’s posting a bond in an amount
balance of the price. Any agreement to the contrary equivalent to the use of the property for a period of
shall be void. (1454-A-a) twelve (12) months.
Art. 1485. The preceding article shall be
applied to contracts purporting to be leases of
personal property with option to buy, when the lessor DIFFERENCES OF CHATTEL MORTGAGE WITH
has deprived the lessee of the possession or
enjoyment of the thing. (1454-A-a) a.) PLEDGE
Chattel Mortgage Pledge
Applicability: Delivery of the property Delivery of the property
1. Sale of personal property, the price of which to the mortgagee is not to the pledge is
is payable on installment; necessary necessary.
2. Contracts purporting to be leases of personal Registration in the Registration in the
property with option to buy (Art. 1458, NCC). Chattel Mortgage Registry of Property is
Register is necessary for not necessary
SELLER’S ALTERNATIVE AND EXCLUSIVE validity
REMEDIES IN CASE OF BUYER’S DEFAULT Procedure for the Sale is Procedure found in Art.
found in Sec. 14, Act. 2112 NCC
1. Exact Fulfillment of the obligation, should the No. 1508
vendee fail to pay (action for specific If the property is Debtor is not entitled to
performance) foreclosed, the excess the excess unless it is
2. Cancel the sale, should the vendee’s failure over the amount due otherwise agreed upon
to pay cover two or more installments goes to the debtor or except in the case of
(rescission) or a legal pledge
3. Foreclose the chattel mortgage on the thing Creditor may recover Creditor cannot recover
sold, should the vendee’s failure to pay cover after deficiency deficiency even if agreed
2 or more installments. He cannot recover upon
any unpaid balance of the price. Any Cannot secure future Can secure future
agreement to the contrary shall be void obligations obligations
(foreclosure).
b. ) PACTO DE RETRO SALE
RECOVERY OF DEFICIENCY AFTER Chattel Mortgage Pactro de Retro Sale
FORECLOSURE Accessory contract Principal Contract
1. In case there is no other security actual Title to the thing Title to the subject
foreclosure mortgaged is not matter is transferred to
2. bars an action for specific
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transferred the vendee a retro but
TIFF (Uncompressed) decompressor
3. In case there is an
are needed to seeadditional
this picture. security other subject to the
than chattel mortgage not covered by the redemption by the
Recto law: vendor
a. 1st foreclosure is on the main chattel Affidavit in good faith is Not required
mortgage covered by the Recto Law required
b. 2nd foreclosure on the additional security
is prohibited (Cruz v. Filipinas c. ) REAL ESTATE MORTGAGE
Investment).
Chattel Mortgage Real Estate Mortgage
Thing mortgaged must Thing mortgaged must

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be a personal or be real or immovable suffering and mental anguish, which call be


movable property property experienced only by one having a nervous system.
Affidavit of Good Faith Not Required The statement in People v. Manero and Mambulao
Required Lumber Co. v. PNB that a corporation may recover
Mortgagor cannot Mortgagor can alienate moral damages if it "has a good reputation that is
alienate the thing the thing mortgaged debased, resulting in social humiliation" is an obiter
mortgaged without the without the consent of dictum.
written consent of the the mortgagee and any
mortgagee such prohibition is void However the Supreme Court ruled in Filipinas
No right of redemption There can be right of Broadcasting Network v. Ago Medical and
redemption in Educational Center that a corporation can recover
extrajudicial foreclosure moral damages under Article 2219(7) of the Civil
and in judicial Code if it was the victim of defamation.
foreclosure by banks
Cannot secure future Can secure future Filipinas Broadcasting Network, Inc. v. Ago
obligations obligations Medical and Educational Center, 448 SCRA 413
(2005)
[Article 2219(7)] expressly authorizes the
recovery of moral damages in cases of libel, slander
or any other form of defamation. [It] does not qualify
CORPORATION CODE whether the plaintiff is a natural or juridical person.
Therefore, a juridical person such as a corporation
can validly complain for libel or any other form of
defamation and claim for moral damages.

Sec. 2. Corporation defined. - A corporation is an Although generally the corporation is in and by itself a
artificial being created by operation of law, having the separate being from its stockholders and directors,
right of succession and the powers, attributes and this legal fiction is in certain instances disregarded.
properties expressly authorized by law or incident to
its existence.
Piercing the Veil of Corporate Fiction “Piercing the
veil of corporate fiction” means that while the
A corporation is an artificial being that is, by such corporation cannot be generally held liable for
nature, subject to certain limitations. acts or liabilities of its stockholders or members,
and vice versa because a corporation has a
Generally, it cannot commit felonies punishable personality separate and distinct from its
under the Revised Penal Code for corporations are members or stockholders, however, the
incapable of the requisite intent to commit these corporate existence is disregarded under this
crimes. It cannot commit crimes that are punishable doctrine when the corporation is formed or used
under special laws because crimes are personal in for illegitimate purposes, particularly, as a shield
nature requiring personal performance of overt acts. to perpetuate fraud, defeat public convenience,
Also, the penalty of imprisonment cannot be justify wrong, evade a just and valid obligation or
imposed. defend a crime.
Further, a corporation cannot
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TIFF (Uncompressed) decompressor
damages. are needed to see this picture.
Circumstances that may indicate that the piercing
doctrine should be applied:
1. The parent corporation owns all or most of
ABS-CBN v. Court of Appeals, 301 SCRA 572 the capital of the subsidiary.
(1999) 2. The parent and subsidiary corporations have
The award of moral damages cannot be granted common directors or officers.
in favor of a corporation because, being an artificial 3. The parent company finances the subsidiary.
person and having existence only in legal
contemplation, it has no feelings, no emotions, no
senses, It cannot, therefore, experience physical

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4. The parent company subscribed to all the (PNB v. Andrada Electric & Engineering
capital stock of the subsidiary or otherwise Company, 381 SCRA 244 [2002])
causes its incorporation.
5. The subsidiary has grossly inadequate A corporation may also own its own property. Note
capital. that the property it owns does not by any means
6. The subsidiary has substantially no business belong to the stockholders. The stockholders thus
except with the parent corporation or no have no interest in such corporate properties.
assets except those conveyed to or by the Conversely, the corporation also has no interest in
parent corporation. the properties of the stockholders.
7. The papers of the parent corporation or in the
statements of its officers, the subsidiary is Wise v. Man Sung Lung, 69 Phil 309
described as a department or division of the [The Corporation] is entitled to own properties in
parent corporation, or its business or its own name and its properties are not the properties
financial responsibility is referred to as the of its stockholders, directors and officers.
parent corporation’s own.
8. The parent corporation uses the property of Saw v. Court of Appeals, 195 SCRA 740 (1991)
the subsidiary as its own. The interest of the stockholder over the
9. The directors or executives of the subsidiary properties of the corporation is merely inchoate.
do no act independently in the interest of the
subsidiary but take their orders from the
As a consequence of this delineation between
parent corporation.
properties of the corporation and its stockholders,
10. The formal legal requirements of the
liquidating dividends may be made subject to
subsidiary are not observed.
taxation.
(Phil. National Bank v. Ritratto Group, Inc., 362
SCRA 216 [2001]
F. Guanzon and Sons, Inc. v. Register of Deeds of
Manila, G.R. No. L-18216 (1962)
Francisco v. Mejia, G.R. No. 141617, August 14,
2001
FACTS:
Mere ownership by a single stockholder or by
A corporation was dissolved and its properties
another corporation of all or substantially all of the
conveyed to the stockholders as liquidating
capital stock of the corporation does not justify the
dividends. The government is claiming that they are
application of the doctrine. There must be other
liable for tax on the gain on the dividends. The
circumstances that must be present.
stockholders said refused on the ground that there
was no conveyance of property, rather it was merely
Elements that must be present to justify piercing a case of partitioning what they own.
on the ground that the corporation is a mere alter
ego: ISSUE:
1. Control – not mere stock control but Whether or not there is a taxable transaction?
complete domination – not only of finances,
but of policy and business practice in respect HELD:
to the transaction attacked and must have The properties do not belong to the stockholders,
been such that the corporate entity as to this they belong to the corporation. Hence, upon
transaction had at the time no separate mind, distribution via liquidating dividends, there was a
will or existenceQuickTime™
of its own. and a
conveyance and consequently, a taxable transaction.
TIFF (Uncompressed) decompressor
2. Such control must
are needed have
to see been used by the
this picture.
defendant to commit a fraud or wrong to
GRANDFATHER RULE The “grandfather rule” is
perpetuate the violation of a statutory or
applied in determining the nationality of a
other positive legal breach of duty, or a
corporation. It traces the nationality of the
dishonest and an unjust act in contravention
stockholders of investor corporations so as to
of the plaintiff’s legal right, and,
ascertain the nationality of the corporation where
3. The said control and breach of duty must
the investment is made.
have proximately caused the injury or unjust
Ex: MV Corporation and AC Corporation have equal
loss complained of.
interest in XYZ Company. MV Corporation is 60%

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owned by Filipinos, while AC Corporation is 50% NOTE: See Table 2.


owned by Filipinos. By the grandfather rule, MV 5. As to existence of stocks:
Corporation would have a 30% Filipino interest in a. Stock corporation – Corporation in
XYZ Company (60% of 50%), while AC which capital stock is divided into
Corporation would have a 25% Filipino interest in shares and is authorized to distribute
XYZ Company (50% of 50%). Hence, the total to holders thereof of such shares
Filipino interest is only 55%. dividends or allotments of the surplus
profits on the basis of the shares
The application of the test is limited however to held.
resolving issues on investments. By the Foreign b. Non-stock corporation –
Investments Act, the grandfather rule is merely an Corporation which does not issue
ancillary rule to the main method of determining stocks and does not distribute
nationality, wherein corporations that are 60% owned dividends to their members.
by Filipinos are automatically considered as 100%
Filipino-owned. Only when a corporation is less than Distinguish a Corporation from a Partnership
60% owned shall the grandfather rule be applied. Table 1
Ex: Using the same facts as the example supra, Corporation Partnership
since MV Corporation is 60% Filipino owned then it is As to Commences only By mere
considered as 100% Filipino. Hence, the total Filipino manner of from the issuance agreement
interest in XYZ Company would now by 75% (100% creation of a Certificate of
of 50% from the MV Corporation plus 50% of 50% Incorporation by
from the AC Corporation). the SEC, or, in
proper cases,
SEC. 3. Classes of Corporations. Corporations passage of a
formed or organized under this Code may be stock or special law
non-stock corporations. Corporations which have As to the At least 5 persons At least 2
capital stock divided into shares and are authorized number of
to distribute to the holders of such shares dividends organizers
or allotments of the surplus profits on the basis of the As to Restricted due to Subject to the
shares held are stock corporations. All other powers limited personality agreement of
corporations are non-stock corporations. partners
Authority of Stockholders are Mutual agency
Classes of Corporations: those who not agents of the between
1. As to organizers: compose corporation in the partners
a. Public – by State only; and absence of
b. Private – by private persons alone or express authority
with the State. Transfer of Freely Cannot be
2. As to functions: interest transferable transferred
a. Public – government of a portion of without the without the
the State; and consent of other consent of the
b. Private – usually for profit-making stockholders other partners
functions. (unless there is a
3. As to governing law: stipulation to the
a. Public QuickTime™
– Special and a Laws and Local contrary)
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Government
are needed to seeCode;
this picture.and Succession Existence Death a partner
b. Private – Law on Private continues even as ends the
Corporations. persons who partnership
4. As to legal status: compose it
a. De jure corporation – Corporation change
organized in accordance with
requirements of law; May a corporation be a partner in a partnership?
b. De facto corporation – Corporation In Aurbach v. Sanitary Wares Manufacturing
where there exists a flaw in its Corporation (180 SCRA 130 [1989]), the Court ruled
incorporation. against corporations as being partners in

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partnerships but clarified that they may enter into joint 1. Incorporators – those mentioned in the
ventures. In that same case, a distinction was made articles of incorporation as originally forming
between partnerships and joint ventures. and composing the corporation, having
signed the articles and acknowledged the
Aurbach v. Sanitary Wares Manufacturing, 180 same before the notary public.
SCRA 130 (1989) a. They must be natural persons;
The main distinction cited by most opinions in b. At least five (5) but not more than
common law jurisdiction is that the partnership fifteen (15);
contemplates a general business with some degree c. They must be of Legal Age;
of continuity, while the joint adventure is formed for d. Majority must be residents of the
the execution of a single transaction, and is thus of a Philippines; and
temporary nature. This observation is not entirely e. Each must own or subscribe to at
accurate in this jurisdiction, since under the Civil leat one share.
Code, a partnership may be particular or universal, 2. Corporators – All the stockholders and
and a particular partnership may have for its object a members of a corporation including the
specific undertaking. It would seem therefore that incorporators who are still stockholders.
under Philippine law, a joint adventure is a form of 3. Stockholders – Corporators in a stock
partnership and should thus be governed by the law corporation
of partnerships. The Supreme Court has however 4. Members – Corporators in a non-stock
recognized a distinction between these two business corporation
forms, and has held that although a corporation 5. Directors and Trustees – The Board of
cannot enter into a partnership contract, it may Directors is the governing body in a stock
however engage in a joint adventure with others. corporation while the Board of Trustees is the
governing body in a non-stock corporation.
The SEC has maintained this stand on the grounds 6. Corporate Officers – They are the officers
that the management of a partnership is vested in the who are identified as such in the Corporation
partners and that will run counter to the idea that any Code, the Articles of Incorporation or the By-
exposure of the corporation should be within the laws of the corporation.
control of the directors. However, the SEC has 7. Promoter – A self-constituted organizer who
determined at one time that an exception can be finds an enterprise or venture and helps to
made when it is satisfied that the main objections to attract investors, forms a corporation and
allowing a corporation to enter into a contract of launches it in business, all with a view to
partnership were adequately met by the proper promotion profits.
safeguards and conditions imposed by the
Commission (e.g. Articles of incorporation authorize TYPES OF SHARES:
the corporation). 1. Common Shares – A basic class of stock
ordinarily and usually issued without
Table 2 extraordinary rights or privileges and entitles
De Jure De Facto the shareholder to a pro rata division of
Created in strict or Actually exists for all profits.
substantial conformity practical purposes as a 2. Founders Shares – Given rights and
with the statutory corporation but which has no privileges not enjoyed by owners of other
requirements for legal right to corporate stocks; exclusive right to vote/be voted in the
incorporation existence
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State
are needed to see this picture.
(note: within this period, common shares are
Right to exist cannot be Right to exercise powers deprived of their voting rights)
successfully attacked cannot be inquired into 3. Preferred Shares – Issued only with par
even in a direct collaterally in any private value; given preference in distribution of
proceeding by the suit. But such inquiry may be assets in liquidation and in payment of
State made by the State in a dividends and other preferences stated in the
proper court proceeding. articles of incorporation; may be deprived of
voting rights.
4. Redeemable Shares – Expressly provided in
Components of a Corporation:
articles; have to be purchased/taken up upon

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expiration of period of said shares purchased stock certificate. The total par value of the stocks
whether or not there is unrestricted retained subscribed by him should first be paid.
earnings; may be deprived of voting rights.
5. Treasury Stocks – stocks previously issued METHODS OF COLLECTION OF UNPAID
and fully paid for and reacquired by the SUBSCRIPTIONS:
corporation through lawful means (purchase, 1. Call, delinquency and sale at public auction
donation, etc.); not entitled to vote and no of delinquent shares;
dividends could be declared thereon as 2. Ordinary civil action;
corporations cannot declare dividends to 3. Collection from cash dividends and other
itself. amounts due to stockholders if allowed by
by-laws/agreed to by him.
INSTANCES WHEN HOLDERS OF NON-VOTING
SHARES CAN VOTE: CASES WHEN CORPORATION CAN REACQUIRE
1. Amendments of articles of incorporation STOCK:
2. Adoption/amendment of by-laws 1. Eliminate fractional shares;
3. Increase/decrease of bonded indebtedness 2. Corporate indebtedness arising from unpaid
4. Increase/decrease of capital stock subscriptions;
5. Sale/disposition of all/substantially all 3. Purchase delinquent shares;
corporate property 4. Exercise of appraisal right.
6. Merger/consolidation of corporation
7. Investment of funds in another INCORPORATION AND ORGANIZATION OF
corporation/another business purpose PRIVATE CORPORATIONS
8. Corporate dissolution
25-25 RULE – Except for instances specifically
PREFERRED CUMULATIVE PARTICIPATING provided for by special law, there is no minimum
SHARE OF STOCK – Share entitling its holder to requirement for authorized capital stock to
preference in the payment of dividends ahead of incorporate. There is however a requirement of
common stockholders and to be paid the dividends subscription of at least twenty-five (25%) percent of
ahead of common stockholders and to be paid the the authorized capital stock as stated in the articles of
dividends due for prior years and to participate further incorporation AND at least twenty-five (25%) percent
with common stockholders in dividend declarations. the total subscription must be paid upon subscription.

PROMOTION STOCKS FOR SERVICES


RENDERED PRIOR TO INCORPORATION CONTENTS OF ARTICLES OF INCORPORATION:
ESCROW STOCK – 1. Name of corporation;
rd
Stock deposited with a 3 person to be delivered to 2. Purpose/s, indicating the primary and
stockholder/assignor after complying with certain secondary purposes;
conditions. 3. Place of principal office;
4. Term which shall not be more than 50 years;
OVER-ISSUED STOCK – Stock issued in excess of 5. Names, citizenship and residences of
authorized capital stock; null and void. incorporators;
6. Number, names, citizenships and residences
WATERED STOCK – Stock issued gratuitously, of directors;
money/property less than par value, services less
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7. If stock corporation, amount of authorized
than par value, dividends where
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decompressor
are needed to see this picture.
capital stock, number of shares;
exist. 8. In par value stock corporations, the par value
of each share;
CERTIFICATE OF STOCK - Written 9. Number of shares and amounts of
acknowledgment by the corporation of the subscription of subscribers which shall not be
stockholder’s interest in the corporation. It is the less than 25% of authorized capital stock;
personal property and may be mortgaged or pledged. 10. Amount paid by each subscriber on their
Transfer binds the corporation when it is recorded in subscription, which shall not be less than
the corporate books. A stockholder who does not 25% of subscribed capital and shall not be
pay his subscription is not entitled to the issue of a less than P5000.00;

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11. Name of treasurer elected by subscribers; 4. Non-compliance with required Filipino stock
and ownership.
12. If the corporation engages in a nationalized
industry, a statement that no transfer of stock WHEN A CORPORATE NAME CANNOT BE USED:
will be allowed if it will reduce the stock 1. Names which are identical, deceptively or
ownership of Filipinos to a percentage below confusingly similar to that of any existing
the required legal minimum. corporation including internationally known
foreign corporation through not used in the
DOCUMENTS THAT SHOULD BE FILED TO Philippines;
SECURE A CERTIFICATE OF REGISTRATION OF 2. Name already protected by law;
A STOCK CORPORATION: 3. Name which is contrary to law, morals or
1. Articles of Incorporation; public policy.
2. Treasurer’s Affidavit certifying that 25% of
the total authorized capital stocks has been Sec. 19. A private corporation formed or organized
subscribed and at least 25% of such have under this Code commences to have corporate
been fully paid in cash or property; existence and juridical personality and is deemed
3. Bank certificate covering the paid-up capital; incorporated from the date the Securities and
4. Letter authority authorizing the SEC to Exchange Commission issues a certificate of
examine the bank deposit and other incorporation under its official seal; and thereupon
corporate books and records to determine the incorporators, stockholders/members and their
the existence of paid-up capital; successors shall constitute a body politic and
5. Undertaking to change the corporate name in corporate under the name stated in the articles of
case there is another person or entity with incorporation for the period of time mentioned
same or similar name that was previously therein, unless said period is extended or the
registered; corporation is sooner dissolved in accordance with
6. Certificate of authority from proper law.
government agency whenever appropriate.

REQUIREMENTS FOR AMENDING ARTICLES OF


INCORPORATION: DE FACTO CORPORATIONS A “de facto
1. A legitimate purpose for the amendment; corporation” is one that is defectively created so
2. Majority vote of directors or trustees and the as not to become a de jure corporation. It is the
vote or written assent of the stockholders result of an attempt to incorporate under an
representing at least two-thirds (2/3) of the existing law coupled with the exercise of
outstanding capital stock, without prejudice to corporate powers. The existence of a de facto
the appraisal right of dissenting stockholders, corporation can only be attacked directly by the
or two-thirds (2/3) of the members if it be a state through quo warranto proceedings. A de
non-stock corporation. facto corporation will incur the same obligations,
3. Indication in the articles, by underscoring, the have the same powers and rights as a de jure
change or changes made. corporation.
4. A copy of amended articles duly certified
under oath by the corporate secretary and a REQUISITES OF A DE FACTO CORPORATION:
majority of the directors or trustees stating 1. Valid law under which the corporation was
the fact that saidQuickTime™
amendment or amendments incorporated.
and a
have been duly approved
TIFF (Uncompressed) decompressor by the required 2. Attempt in good faith form a corporation
are needed to see this picture.
vote of stockholders or members, as the according to the requirements of the law.
case may be. Here the SC requires that you must have
filed with the SEC articles of incorporation
GROUNDS FOR REJECTING INCORPORATION and gotten the certificate with the blue ribbon
OR AMENDMENT TO ARTICLES OF and gold seal. For instance the majority of
INCORPORATION: the directors are not residents of the
1. Not in prescribed form; Philippines or the statement regarding the
2. Purpose illegal, inimical; paid up capital stock is not true, those are
3. Treasurer’s affidavit false; and

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defects that may make the corporation de 5. He must possess other qualifications as may
facto. be prescribed in the by-laws of the
3. User of corporate powers. The corporation corporation.
must have performed acts which are peculiar
to a corporation like entering into a METHODS OF VOTING IN THE ELECTION OF
subscription agreement, adopting by-laws, DIRECTORS:
electing directors. 1. Straight Voting – Every stockholder “may
4. It must act in good faith. So the moment, for vote such number of shares for as many
example, there is a decision declaring the persons as there are directors” to be elected;
corporation was not validly created, it can no 2. Cumulative Voting for One Candidate – a
longer claim good faith. stockholder is allowed to concentrate his
votes and “give one candidate as many votes
CORPORATION BY ESTOPPEL It is a corporation as the number of directors to be elected
which is so defectively formed so that it is not a multiplied by the number of his shares shall
de jure or a de facto corporation but is equal”;
considered as a corp with respect to those who 3. Cumulative Voting by Distribution – a
cannot deny its existence because of some stockholder may cumulate his shares by
agreement or admission or conduct on their part. multiplying also the number of his shares by
The existence of corporation by estoppel requires the number of directors to be elected and
that there must be dealings among the parties on distribute the same among as many
a corporate basis. candidates as he shall see fit

Table 3
De Facto By Estoppel BUSINESS JUDGMENT RULE Questions of policy
Existence in Yes None or management are left solely to the honest
Law decision of officers and directors of a corporation
Dealings Not required Required and the courts are without authority to substitute
among their judgment for the judgment of the board of
parties on a directors; the board is the business manager of
corporate the corporation and so long as it acts in good
basis faith its orders are not reviewable by the courts or
Effect of lack Could be a Not a the SEC. The directors are also not liable to the
of requisites corporation corporation stockholders in performing such acts. (Philippine
by estoppel in any shape Stock Exchange, Inc. v. Court of Appeals, 281
or form SCRA 232 [1997])

BOARD OF DIRECTORS/ TRUSTESS/ OFFICERS INSTANCES WHEN A DIRECTOR IS LIABLE:


1. Willfully and knowingly voting for and
QUALIFICATIONS OF DIRECTORS: assenting to patently unlawful acts of the
1. Must own at least one (1) share capital stock corporation;
of the corporation in his own name or must 2. Gross negligence or bad faith in directing the
be a member in the case of non-stock affairs of the corporation;
corporations QuickTime™ and a 3. Acquiring any personal or pecuniary interest
TIFF (Uncompressed) decompressor
are needed to see this picture.
2. A majority of the directors/trustees must be in conflict of duty.
residents of the Philippines
3. He must not have been convicted by final DOCTRINE OF APPARENT AUTHORITY If a
judgment of an offense punishable by corporation knowingly permits one of its officers,
imprisonment for a period exceeding six (6) or any other agent, to act within the scope of an
years or a violation of the Corporation Code, apparent authority, it holds him out to the public
committed within five (5) years before the possessing the power to so do those acts; and
date of his election thus, the corporation will, as against anyone who
4. He must be of legal age

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has in good faith dealt with it through such agent, expense of the corporation, he must account all
be estopped from denying the agent’s authority. the profits by refunding the same to the
corporation unless the act has been ratified by a
vote of the stockholders owning or representing
People’s Aircargo and Warehousing Co., Inc. v. at least two-thirds (2/3) of the outstanding capital
Court of Appeals, 297 SCRA 170 (1998) stock.
Apparent authority is derived not merely from
practice. Its existence may be ascertained through: REQUISITES OF REMOVAL FROM THE BOARD:
(a) the general manner in which the corporation holds 1. It must take place either at a regular meeting
out an officer or agent as having the power to act or, or special meeting of the stockholders or
in other words, the apparent authority to act in members called for the purpose;
general, with which it clothes him; or (b) the 2. There must be previous notice to the
acquiescence in his acts of a particular nature, with stockholders or members of the intention to
actual or constructive knowledge thereof, whether remove;
within or beyond the scope of his ordinary powers. It 3. The removal must be by a vote of the
requires presentation of evidence of similar acts stockholders representing 2/3 of the
executed either in its favor or in favor of other parties. outstanding capital stock or 2/3 of the
It is not the quantity of similar acts which establishes members, as the case may be;
apparent authority, but the vesting of a corporate 4. The director may be removed with or without
officer with the power to bind the corporation. cause unless he was elected by the minority,
in which case, it is required that there is
cause for removal.
Premiere Development Bank vs. CA, G.R. No.
159352, April 14, 2004 FILLING OF VACANCIES IN THE BOARD:
If a private corporation intentionally or negligently 1. By stockholders or members – if vacancy
clothes its officers or agents with apparent power to results because of:
perform acts for it, the corporation will be estopped to a. Removal
deny that the apparent authority is real as to innocent b. Expiration of term
third persons dealing in good faith with such officers c. The ground is other than removal or
or agents. When the officers or agents of a expiration of term where the remaining
corporation exceed their powers in entering into directors do not constitute a quorum
contracts or doing other acts, the corporation, when it d. Increase in the number of directors.
has knowledge thereof, must promptly disaffirm the 2. By board if remaining directors constitute
contract or act and allow the other party or third a quorum – cases not reserved to
persons to act in the belief that it was authorized or stockholders or members.
has been ratified. If it acquiesces, with knowledge of
the facts, or fails to disaffirm, ratification will be POWERS OF CORPORATIONS
implied or else it will be estopped to deny ratification.
GENERAL TYPES OF POWERS OF A
CORPORATION:
DOCTRINE OF CORPORATE OPPORTUNITY If 1. Express – those expressly authorized by the
there is presented to a corporate officer or Corporation Code and other laws, and its
director a business opportunity which (a) Articles of Incorporation or Charter
corporation is financially able to undertake; (b) 2. Implied Powers – those that can be inferred
QuickTime™ and a
from its nature, is in decompressor
TIFF (Uncompressed) line with corporations
are needed to see this picture. from or necessary for the exercise of the
business and is of practical advantage to it; and express powers.
(c) one in which the corporation has an interest or 3. Incidental Powers – those that are
a reasonable expectancy, by embracing the incidental to the existence of the corporation.
opportunity, the self-interest of the officer or
director will be brought into conflict with that of EXPRESS POWERS UNDER THE CORPORATION
his corporation. Hence, the law does not permit CODE:
him to seize the opportunity even if he will use his 1. General
own funds in the venture. If he seizes the a. Sue and be sued in its corporate name;
opportunity thereby obtaining profits to the b. Succession;

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c.
Adopt and use a corporate seal; 3. Part executed and part executory –
d.
Amend Articles of Incorporation Principle against unjust enrichment shall
e.
To adopt, amend or repeal by-laws; apply.
f.
For stock corporations – issue stocks to
subscribers and to sell treasury stocks; THOSE WHO MAY EXERCISE THE POWERS OF
for non-stock corporations – admit THE CORPORATION: Generally, the Board of
members; Directors ALONE exercises the powers of the
g. Purchase, receive, take, or grant, hold, corporation. These are the instances when other
convey, sell, lease, pledge, mortgage persons or groups within the corporation may do so
and otherwise deal with real and similarly:
personal property, pursuant to its lawful 1. If (1) there is a management contract and (2)
business; powers are delegated by majority of the
h. Enter into merger or consolidation; board to an Executive Committee;
i. To make reasonable donations for public 2. Corporate Officers (e.g. the President) via
welfare, hospital, charitable, cultural, authority from (1) law, (2) corporate by-laws;
scientific, civil or similar purposes and (3) authorization from the board, either
(Prohibited: for partisan political activity); expressly or impliedly by habit, custom or
j. To establish pension, retirement and acquiescence in the general course of
other plans for the benefit of directors, business;
trustees, officers and employees; and 3. A corporate officer or agent in transactions
k. Other powers essential or necessary to with third persons to the extent of the
carry out its purposes. authority to do so has been conferred upon
2. Specific him;
a. Power to extend or shorten corporate 4. Those with apparent authority.
term;
b. Increase/Decrease Corporate Stock; POWERS THAT CANNOT BE DELEGATED TO
c. Incur, Create Bonded Indebtedness; THE EXECUTIVE COMMITTEE:
d. To deny pre-emptive right; 1. Approval of action requiring concurrence of
e. Sell, dispose, lease, encumber all or stockholders;
substantially all of corporate assets; 2. Filling of vacancies in the board;
f. Purchase or acquire own shares; 3. Adoption, amendment or repeal of by-laws;
g. To invest in another corporation, 4. Amendment or repeal of board resolution
business other than the primary purpose; which by its terms cannot be amended or
h. To declare dividends; repealed;
i. To enter into management contract; 5. Distribution of cash dividends.
j. To amend the articles of incorporation.
INSTANCES WHEN THE CONCURRENCE OF
Ultra Vires Acts An act not within the express or STOCKHOLDERS IS NECESSARY FOR THE
implied powers of the corporation as fixed by its EXERCISE OF CORPORATE POWERS:
charter or the statutes. The term not only 1. Concurrence of 2/3 of the outstanding capital
includes contracts: (1) Entirely without the scope stock
and purpose of the charter and not pertaining to a. Power to extend or shorten corporate
the objects for which the corporation was term;
chartered, but also contracts;
QuickTime™ and and,a (2) Beyond the b. Increase/Decrease Corporate Stock;
TIFF (Uncompressed) decompressor
limitations conferred
are needed to by
see thisthe
picture. charter although
c. Incur, Create Bonded Indebtedness;
within the purposes contemplated by the articles d. To deny pre-emptive right;
of incorporation. e. Sell, dispose, lease, encumber all or
substantially all of corporate assets;
f. To invest in another corporation,
EFFECTS OF ULTRA VIRES ACT:
1. Executed contract – Courts will not set business other than the primary purpose;
aside or interfere with such contracts; g. To declare stock dividends
h. To enter into management contract if (1)
2. Executory contracts – No enforcement
even at the suit of either party (void and a stockholder or stockholders
unenforceable); representing the same interest of both

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the managing and the managed 2. As to Third Persons – Not binding unless
corporations own or control more than there is actual knowledge. Third persons are
1/3 of the total outstanding capital not even bound to investigate the content
entitled to vote of the managing because they are not bound to investigate
corporation; or (2) a majority of the the content because they are not bound to
members of the board of directors of the know the by-laws which are merely
managing corporation also constitute a provisions for the government of a
majority of the members of the board of corporation and notice to them will not be
the managed corporation; presumed. (China Banking Corp. v. Court of
i. To amend the articles of incorporation. Appeals, 270 SCRA 503 [1997])
2. Concurrence of majority of the outstanding
capital stock Note: Title on “Meetings” shall govern unless
a. To enter into management contract if any otherwise provided by by-laws.
of the two instances stated above are
absent;
b. To adopt, amend or repeal the by-laws. STOCKS AND STOCKHOLDERS
3. Without board resolution
a. 2/3 of outstanding capital stock – SEC. 60. Subscription contract – Any contract for the
Delegate to the board the power to acquisition of unissued stock in an existing
amend the by-laws; corporation or a corporation still to be formed shall be
b. Majority of outstanding capital stock – deemed a subscription within the meaning of this
Reovke the power of the board to amend Title, notwithstanding the fact that the parties refer to
the by-laws which was previously it as a purchase or some other contract.
delegated.
KINDS OS SUBSCRIPTION CONTRACTS:
BY-LAWS 1. Pre-incorporation subscription – entered into
before the incorporation and irrevocable for a
BY-LAWS Relatively permanent and continuing rules period of six (6) months from the date of
of action adopted by the corporation for its own subscription unless all other subscribers
government and that of the individuals consent or it the corporation failed to
composing it and those having direction, materialize. It cannot also be revoked after
management and control of its affairs, in whole or filing the Articles of Incorporation with the
in part, in the management and control of its SEC.
affairs and activities. 2. Post-incorporation subscription – entered into
after incorporation.
REQUISITES OF VALID BY-LAWS:
1. It must be consistent with the Corporation VALID CONSIDERATIONS FOR SUBSCRIPTION
Code, other pertinent laws and regulations. AGREEMENTS:
2. It must be consistent with the Articles of 1. Cash;
Incorporation. In case of conflict, the Articles 2. Property;
of Incorporation prevails. 3. Labor or services actually rendered to the
3. It must be reasonable and not arbitrary or corporation;
oppressive. 4. Prior corporate obligations;
4. It must not disturb QuickTime™vested
and a rights, impair 5. Amounts transferred from unrestricted
TIFF (Uncompressed) decompressor
contract or are
property
needed to seerights of stockholders or
this picture. retained earning to stated capital (in case of
members or create obligations unknown to declaration of stock dividends);
law. 6. Outstanding shares in exchange for stocks in
the event of reclassification or conversion.
BINDING EFFECT OF PROVISIONS OF BY-LAWS:
1. As to the Corporation and its components UNDERWRITING AGREEMENT – An agreement
– Binding not only upon the corporation but between a corporation and a third person, termed the
also on its stockholder, members and those “underwriter”, by which the latter agrees, for a certain
having direction, management and control of compensation, to take a stipulated amount of stocks
its affairs. or bonds, specified in the underwriting agreement, if

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such securities are not taken by those to whom they a. By means of deed of assignment,
are first offered. and
b. Such is duly recorded in the books of
SHARES OF STOCK This is the interest or right the corporation.
which an owner has in the management of the TRUST FUND DOCTRINE the subscribed capital
corporation, and its surplus profits, and, on stock of the corporation is a trust fund for the
dissolution, in all of its assets remaining after the payment of debts of the corporation which the
payment of its debt. The stockholder may own creditors have the right to look up to satisfy their
the share even if he is not holding a certificate of credits. Corporations may not dissipate this and
stock. the creditors may sue the stockholders directly
for their unpaid subscriptions.

RIGHTS OF STOCKHOLDERS:
1. Direct or indirect participation in
Table 4 management;
Shares of Stock Certificate of Stock 2. Voting rights;
Unit of interest in a Evidence of the holder’s 3. Right to remove directors;
corporation ownership of the stock 4. Proprietary rights;
and of his right as a a. Right to dividends;
shareholder and up to the b. Appraisal right;
extend specified therein c. Right to issuance of stock certificate
It is an incorporeal or It is concrete and tangible for fully paid shares;
intangible property d. Proportionate participation in the
It may be issued by the May be issued only if the distribution of assets in liquidation;
corporation even if the subscription is fully paid e. Right to transfer of stocks in
subscription is not fully corporate books;
paid f. Pre-emptive right.
5. Right to inspect books and records;
6. Right to be furnished with the most recent
SEC. 64. Issuance of stock certificates – No
financial statement/financial report;
certificate of stock shall be issued to a subscriber
7. Right to recover stocks unlawfully sold for
until the full amount of his subscription together with
delinquent payment of subscription;
interest and expense (in case of delinquent shares), if
8. Right to file individual suit, representative suit
any is due, has been paid.
and derivative suits.

Bitong v. Court of Appeals, 292 SCRA 503 (1998) OBLIGATIONS OF STOCKHOLDERS:


The certificate of stock must be signed by the 1. Liability to the corporation for unpaid
President or Vice-President and countersigned by the subscription;
Corporate Secretary or the Assistant Secretary 2. Liability to the corporation for interest on
otherwise it is not deemed issued. unpaid subscription if so required by the by-
laws;
TRANSFER OF SHARES: 3. Liability to the creditors o the corporation for
1. If represented by a certificate, the following unpaid subscription;
must be strictly complied
QuickTime™ andwith:
a 4. Liability for watered stock;
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a. Delivery
are neededof thethiscertificate;
to see picture. 5. Liability for dividends unlawfully paid;
b. Indorsement by the owner or his 6. Liability for failure to create corporation.
agent;
c. To be valid to third parties, the
transfer must be recorded in the SUITS BY STOCKHOLDERS/MEMBERS:
books of the corporation. 1. Derivative Suits – those brought by one or
2. If NOT represented by the certificate (such more stockholders/members in the name and
as when the certificate has not yet been on behalf of the corporation to redress
issued or where for some reason is not in the wrongs committed against it, or
possession of the stockholder): protect/vindicate corporate rights whenever

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the officials of the corporation refuse to sue, However, if the voting trust was a requirement for a
or the ones to be sued, or has control of the loan agreement, period may exceed 5 years but shall
corporation. automatically expire upon full payment of the loan.
2. Individual Actions – those brought by the
shareholder in his own name against the LIMITATIONS ON THE RIGHT TO VOTE;
corporation when a wrong is directly inflicted 1. Where the Articles of Incorporation provides
against him. for classification of shares pursuant to Sec.
3. Representative Actions – those brought by 6, non-voting shares are not entitled to vote
the stockholder in behalf of himself and all except as other provided in the said section.
other stockholders similarly situated when a 2. Preferred or redeemable shares may be
wrong is committed against a group of deprived of the right to vote unless otherwise
stockholders. provided.
3. Fractional shares of stock cannot be voted
unless they constitute at least one full share.
4. Treasury shares have no voting rights as
REQUISITES OF DERIVATIVE ACTIONS: long as they remain in treasury.
1. The party bringing the suit should be a 5. Holders of stock declared delinquent by the
shareholder as of the time of the act or board for unpaid subscription.
transaction complained of; 6. A transferee of stock if his stock transfer is
2. He has exhausted intra-corporate remedies; not registered in the stock and transfer book
and of the corporation.
3. The cause of action actually devolved on the 7. A stockholder who mortgages or pledges his
corporation, the wrongdoings or harm having shares and gives authority for creditor to
been caused to the corporation and not to vote.
the particular stockholder bringing the suit.
BOOKS
PRE-EMPTIVE RIGHT A pre-emptive right is the
shareholders’ right to subscribe to all issues or BOOKS REQUIRED TO BE MAINTAINED:
dispositions of shares of any class in proportion 1. Book of minutes of stockholders meetings;
to his present stockholdings, the purpose being 2. Book of minutes of board meetings;
to enable the shareholder to retain his 3. Record or Book of all business transactions;
proportionate control in the corporation and to 4. Stock and transfer book.
retain his equity in the surplus.
STOCK AND TRANSFER BOOK Record of (1) All
INSTANCES WHEN PRE-EMPTIVE RIGHT IS NOT stocks in the names of the stockholders
AVAILABLE: alphabetically arranged; (2) The installment paid
1. Shares to be issued to comply with laws and unpaid on all stock for which subscription
requiring stock offering or minimum stock has been made, and the date of payment of any
ownership by the public; installment; (3) A statement of every alienation,
2. Shares issued in good faith in exchange for sale or transfer of stock made; and, (4) such
property needed for corporate purposes; other entries as the by-laws may prescribe.
3. Shares issued in payment of previously
contracted debts; Gokongwei v. SEC, 278 SCRA 793 (1997)
4. In case the right is denied
QuickTime™ and a in the Articles of The corporate secretary is the officer who is duly
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Incorporation; are needed to see this picture. authorized to make entries on the stock and transfer
5. It does not apply to shares that are being book.
reoffered by the corporation after they were
initially offered together with all the shares. Garcia v. Jomouad, 323 SCRA 424 (2000)
The Supreme Court directly resolved the
VOTING TRUST – One or more stockholder of a issue “Whether a bona fide transfer of the shares of
stock corporation may create a voting trust for the a corporation, not registered or noted in the books of
purpose of conferring upon a trustee or trustees the the corporation, is valid as against a subsequent
right to vote and other rights pertaining to the shares lawful attachment of said shares, regardless of
for a period not exceeding 5 years at any one time.

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whether the attaching creditor had actual notice of examination, (2) If he is not acting in good faith, (3) It
said transfer or not.” The Court quoted from Uson v. is not being exercised for a legitimate purpose.
Diosomito, which held that all transfers of shares not
entered in the stock and transfer book of the DOCTRINAL RULINGS ON THE RIGHT TO
corporation are invalid as to attaching or execution INSPECT:
creditors of the assignors, as well as to the 1. The demand for inspection should cover only
corporation and to subsequent purchasers in good reasonable hours on business days;
faith and to all persons interested, except the parties 2. The stockholder, member, director or
to such transfers: “All transfers not so entered on the trustees demanding the exercise of the right
books of the corporation are absolutely void; not is one who has not improperly used any
because they are without notice or fraudulent in law information secured through any previous
or fact, but because they are made so void by examination of the records of the corporation
statute. The Supreme Court held that “the transfer of or any other corporation;
the subject certificate made by Dico to petitioner was 3. The demand must be accompanied with
not valid as to the spouses Atinon, the judgment statement of the purpose of the inspection,
creditors, as the same still stood in the name of Dico, which must show good faith or legitimate
the judgment debtor, at the time of the levy on purpose; and,
execution. In addition, as correctly ruled by the CA, 4. If the corporation or its officers contest such
the entry in the minutes of the meeting of the Club’s purpose or contend that there is evil motive
board of directors noting the resignation of Dico as behind the inspection, the burden of proof is
proprietary member does not constitute compliance with the corporation or such officer to show
with Section 63 of the Corporation Code. Said the same.
provision of law strictly requires the recording of the
transfer in the books of the corporation, and not MERGER AND CONSOLIDATION
elsewhere, to be valid as against third parties.”
MERGER A corporation absorbs the other and
Bitong v. Court of Appeals, 292 SCRA 503 (1998) remains in existence while the others are
The stock and transfer book is the best evidence of dissolved.
the transactions that must be entered or stated
therein. However, the entries are considered prima
CONSOLIDATION A new corporation is created, and
facie evidence only and may be subject to proof to
consolidating corporations are extinguished.
the contrary.

Lanuza v. Court of Appeals, 454 SCRA 54 The PNB v. Andrada Electric & Engr. Co., Inc., 381
stock and transfer book of the corporation cannot be SCRA 244 (2002) Merger or consolidation does not
used as the sole basis for determining the quorum as become effective by mere agreement of the
it does not reflect the totality of shares which have constituent corporations. The approval of the SEC is
been subscribed, and more so when the articles of required.
incorporation show a significantly larger amount of
shares issued and outstanding as compared to that EFFECTS OF MERGER OR CONSOLIDATION:
listed in the stock and transfer book. To thus base the 1. The constituent corporations shall become a
computation of quorum solely on the obviously single corporation.
deficient, if not inaccurate stock and transfer book, 2. The separate existence of the constituents
and to completely disregard
QuickTime™ and a the issued and shall cease except that of the surviving
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outstanding shares as indicated
are needed to see this picture.in the articles of corporation (in merger) or the consolidated
incorporation would work injustice to the owners corporation (in consolidation).
and/or successors in interest of the said shares. 3. The surviving or the consolidated corporation
shall possess all the rights, privileges,
immunities and powers and shall be subject
Gokongwei v. SEC, 97 SCRA 78 (1979) Grounds for
to all duties and liabilities of a corporation.
not allowing inspection by a stockholder: (1) if the
4. The surviving or the consolidated corporation
person demanding to examine the records has
shall possess all rights, privileges, immunities
improperly used any information secured for prior
and franchises of each constituent
corporation and the properties shall be

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deemed transferred to the surviving or the 1. Extension or reduction of corporate term;


consolidated corporation. 2. Change in the rights of stockholders,
5. All liabilities of the constituents shall pertain authorize preferences superior to those
to the surviving or the consolidated stockholders, or restrict the right of any
corporation. stockholder;
3. Corporation authorized the board to invest
PROCEDURE: corporate funds in another business or
1. The Board of each corporation shall draw up purpose;
a plan of merger or consolidation setting 4. Corporation decides to sell or dispose of all
forth: or substantially all assets of corporation;
a. Names of the corporation involved; 5. Merger or consolidation.
b. Terms and mode of carrying it;
c. Statement of changes, if any, in the
present articles of the surviving
corporation or the articles of the new EXERCISE OF APPRAISAL RIGHT:
corporation to be formed in the case of 1. The stockholder must be a dissenting
consolidation. stockholder;
2. Plan for merger or consolidation shall be 2. The stockholder must made a written
approved by majority vote of each of the demand on the corporation within 30 days
board of the concerned corporations at after the vote was taken;
separate meetings, and approved 2/3 of the 3. The proposed action is any one of the
outstanding capital stock or members for instances supra;
non-stock corporations. 4. The price to be paid is the fair value of the
3. Any amendment to the plan must be shares on the date the vote was taken;
approved by the majority vote of the board 5. The fair value shall be agreed upon but in
members or trustees of the constituent case there is no agreement within 60 days
corporations and affirmative vote of 2/3 of the from the date the vote was taken, the fair
outstanding capital stock or members. value shall be determined by a majority of the
4. Articles of Merger or Articles of Consolidation 3 distinguished persons one of whom shall
shall be executed by each of the constituent be named by the stockholder another by the
corporations, signed by the President or corporation and the third by the two who
Vice-President and certified by secretary or were chosen;
assistant secretary setting forth: 6. The right of appraisal is extinguished when:
a. Plan of merger or consolidation; a. He withdraws the demand with the
b. For stock corporation, the number of corporations consent;
shares outstanding; for non-stock, b. The proposed action is abandoned;
the number of members; c. The SEC disapproves the action.
c. As to each corporation, number of
shares or members voting for and NON-STOCK CORPORATIONS
against such plan respectively.
5. Four copies of the Articles of Merger or SEC. 87. Definition – For the purposes of this Code,
Consolidation shall be submitted to the SEC a non-stock corporation is one where no part of its
for approval. income is distributable as dividends to its members,
QuickTime™ and a trustees, or officers, subject to the provisions of this
APPRAISAL RIGHT
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are needed to see this picture. Code on dissolution: Provided, That any profit which
a non-stock corporation may obtain as an incident to
APPRAISAL RIGHT The right to withdraw from the its operations shall, whenever necessary or proper,
corporation and demand payment of the fair be used for the furtherance of the purpose or
value of his shares after dissenting from certain purposes for which the corporation was organized,
corporate acts involving fundamental changes in subject to the provisions of this Title.
corporate structure. The provisions governing stock corporation, when
pertinent, shall be applicable to non-stock
INSTANCES WHEREIN APPRAISAL RIGHT MAY corporations, except as may be covered by specific
BE EXERCISED: provisions of this Title.

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b. There is no need to call a meeting to


A non-stock corporation cannot be converted into a elect directors;
stock corporation through mere amendment of its c. The stockholders are liable for tort.
Articles of Incorporation as this would be in violation 2. Despite the presence of the requisites, the
of Section 87 which prohibits distribution of income corporation shall not be deemed a close
as dividends to members. (SEC Opinion, 20 March corporation if at least 2/3 of the voting stocks
1995) However, a non-stock corporation can be or voting rights belong to a corporation which
converted into a stock corporation only if the is not a close corporation.
members dissolve it first and then organize a stock
corporation. The result is a new corporation. (SEC REQUIREMENTS FOR CLOSE CORPORATIONS:
Opinion, 13 May 1992) 1. The Articles of Incorporation must state that
On the other hand, a stock corporation may be the number of stockholders shall not exceed
converted into a non-stock corporation by mere 20;
amendment provided all the requirements are 2. The Articles of Incorporation must contain
complied with. Its rights and liabilities will remain. restriction on the transfer of issued stocks;
3. The stocks cannot be listed in the stock
CLOSE CORPORATIONS exchange nor be publicly offered.

SEC. 96. Definition and applicability of Title. - A close COMPANIES THAT CANNOT BE CLOSE
corporation, within the meaning of this Code, is one CORPORATIONS:
whose articles of incorporation provide that: (1) All 1. Mining companies;
the corporation's issued stock of all classes, 2. Oil companies;
exclusive of treasury shares, shall be held of record 3. Stock exchanges;
by not more than a specified number of persons, not 4. Banks;
exceeding twenty (20); (2) all the issued stock of all 5. Insurance companies;
classes shall be subject to one or more specified 6. Public utilities;
restrictions on transfer permitted by this Title; and (3) 7. Educational institutions;
The corporation shall not list in any stock exchange 8. Other corporations declared to be vested
or make any public offering of any of its stock of any with public interest.
class. Notwithstanding the foregoing, a corporation
shall not be deemed a close corporation when at SPECIAL CORPORATIONS
least two-thirds (2/3) of its voting stock or voting
rights is owned or controlled by another corporation KINDS:
which is not a close corporation within the meaning of 1. Educational Corporations
this Code. 2. Religious Corporations
Any corporation may be incorporated as a close a. Corporation Sole
corporation, except mining or oil companies, stock b. Religious Societies
exchanges, banks, insurance companies, public
utilities, educational institutions and corporations CORPORATION SOLE Special form of corporation,
declared to be vested with public interest in usually associated with the clergy and consists of
accordance with the provisions of this Code. one person only and his successors, who are
The provisions of this Title shall primarily govern incorporated by law to give some legal capacities
close corporations: Provided, That the provisions of and advantages.
other Titles of this Code shall
QuickTime™ and a apply suppletorily
except insofar as TIFF
this(Uncompressed) decompressor
Titletootherwise
are needed see this picture. provides. Roman Catholic Apostolic Church v. Land
Registration Commission, 102 Phil 596 (1957) A
CHARACTERISTICS: corporation sole does not have any nationality but for
1. The stockholders themselves can directly purposes of applying our nationalization laws,
manage the corporation and perform the nationality is determined by the nationality of the
functions of directors without need of members.
election:
a. When they manage, stockholders are
liable as directors;

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A registered corporation sole can acquire land if its or Director. Claims and demands must
members constitute at least 60% Filipinos. (SEC be stated in the petition;
Opinion, 8 August 1994) c. If Petition is sufficient in form and
substance, the SEC shall issue an Order
RELIGIOUS SOCIETIES Non-stock corporation fixing a hearing date for objections;
formed by a religious society, group, diocese, d. A copy of the Order shall be published at
synod or district of any religious denomination, least once a week for 3 consecutive
sect or church after getting the approval 2/3 of its weeks in a newspaper of general
members. circulation or if there is no newspaper in
the municipality or city of the principal
office, posting for 3 consecutive weeks in
3 public places is sufficient;
DISSOLUTION e. Objections must be filed no less than 30
days nor more than 60 days after the
DISSOLUTION – Extinguishment of the franchise of entry of the Order;
a corporation and the termination of its corporate f. After the expiration of the time to file
existence. objections, a hearing shall be conducted
upon prior 5 day notice to hear the
MODES OF DISSOLUTION: objections;
1. Voluntary dissolution where no creditors g. Judgment shall be rendered dissolving
are affected the corporation and directing the
a. A meeting must be held on the call of disposition of assets; the judgment may
directors or trustees; include appointment of a receiver.
b. Notice of the meeting should be given to 3. Dissolution by shortening corporate term
the stockholders by personal delivery or – This is done by amending the Articles of
registered mail at least 30 days prior to Incorporation.
the meeting; 4. Involuntary dissolution – By filing a verified
c. The notice of meeting should also be complaint with the SEC based on any ground
published for 3 consecutive weeks in a provided by law or rules, including:
newspaper published in the place; a. Failure to organize and commence
d. The resolution to dissolve must be business within 2 years from
approved by the majority of the incorporation;
directors/trustees and approved by the b. Continuously inoperative for 5 years;
stockholders representing at least 2/3 of c. Failure to file by-laws within 30 days from
the outstanding capital stock or 2/3 of issue of certificate of incorporation;
members; d. Continuance of business not feasible as
e. A copy of the resolution shall be certified found by Management Committee or
by the majority of the directors or Rehabilitation Receiver;
trustees and countersigned by the e. Fraud in procuring Certificate of
secretary; Registration;
f. The signed and countersigned copy will f. Serious Misrepresentation; and
be filed with the SEC and the latter will g. Failure to file required reports.
issue the certificate of dissolution.
2. Voluntary dissolution
QuickTime™ andwhere
a creditors are EFFECTS OF DISSOLUTION:
TIFF (Uncompressed) decompressor 1. Transfer of Legal Title to Corporate Property
affected are needed to see this picture.
2. On Continuation of Corporate Business
a. Approval of the stockholders
3. Creation of a New Corporation
representing at least 2/3 of the
4. Reincorporation of Dissolved Corporation
outstanding capital stock or 2/3 of
5. Continuation of a Body Corporation
members in a meeting called for that
6. Cessation of Corporate Existence for all
purpose;
Purposes
b. Filing a Petition with the SEC signed by
majority of directors or trustees or other
LIQUIDATION – Process by which all the assets of
officers having the management of its
the corporation are converted into liquid assets in
affairs verified by President or Secretary

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order to facilitate the payment of obligations to a. Mere investment as shareholder and


creditors, and the remaining balance if any is to be exercise of rights as investor;
distributed to the stockholders. b. Having a nominee director or officer to
represent its interest in the corporation;
Reburiano v. Court of Appeals, 301 SCRA 342 c. Appointing a representative or distributor
(1999) If full liquidation can only be effected after the which transact business in its own name
3-year period and there is no trustee, the directors and for its own account.
may be permitted to complete the liquidation by
continuing as trustees by legal implication Lorenzo Shipping Corp. v. Chubb & Sons, Inc., et
al., 431 SCRA 266 (2004) “[n]o foreign corporation
transacting business in the Philippines without a
FOREIGN CORPORATION license, or its successors or assigns, shall be
permitted to maintain or intervene in any action, suit
FOREIGN CORPORATION A corporation formed, or proceeding in any court or administrative agency
organized or existing under any law other than of the Philippines; but such corporation may be sued
those of the Philippines, and whose laws allow or proceeded against before Philippine courts or
Filipino citizens and corporations to do business administrative tribunals on any valid cause of action
in its own country or state. recognized under Philippine laws.”

INSTANCES WHEN UNLICENSED FOREIGN


“DOING BUSINESS” with regard to FOREIGN CORPORATIONS SUE:
CORPORATIONS Continuity of commercial 1. Isolated transactions;
dealings incident to prosecution of purpose and 2. Action to protect good name, goodwill, and
object of the organization. Isolated, occasional or reputation of a foreign corporation;
casual transactions do not amount to engaging in 3. The subject contracts provide that Phil.
business. But where the isolated act is not Courts will be venue to controversies;
incidental/casual but indicates the foreign 4. A license subsequently granted enables the
corporation’s intention to do other business, said foreign corporation to sue on contracts
single act constitutes engaging in business in the executed before the grant of the license;
Philippines. 5. Recovery of misdelivered property;
6. Where the unlicensed foreign corporation
“DOING BUSINESS” UNDER THE FOREIGN has a domestic corporation.
INVESTMENT ACT:
1. Doing Business
a. Soliciting orders, service contracts,
opening offices
b. Appointing representatives, distributors
domiciled in the Philippines or who stay ANTI-DUMPING ACT OF 1999
for a period or periods totaling 180 days
or more;
c. Participating in the management,
ANTI-DUMPING DUTY A special duty imposed on
supervision or control of any domestic
the importation of a product, commodity or article of
business, firm, entity, or corporation in
commerce into the Philippines at less than its normal
the Philippines; QuickTime™ and a value when destined for domestic consumption in the
d. Any act areor acts that imply a continuity of
TIFF (Uncompressed) decompressor
needed to see this picture. exporting country, which is the difference between
commercial dealings or arrangements,
the export price and the normal value of such
and contemplate to some extent the
product, commodity or article.
performance of acts or works or the
exercise of some functions normally
NORMAL VALUE refers to a comparable price at the
incident to and in progressive
date of sale of the like product, commodity or article
prosecution of, the purpose and object of
in the ordinary course of trade when destined for
its organization.
consumption in the country for export.
2. Not Doing Business

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DOMESTIC INDUSTRY refers to the domestic 2. is causing or is threatening to cause


producers as a whole of the like product or to those material injury to a domestic industry, or
of them whose collective output of the product materially retarding the establishment of a
constitutes a major proportion of the total domestic domestic industry, or materially retarding the
production of that product, except when producers establishment of a domestic industry
are related to the exporters or importers or are producing the like product,
themselves importers of the allegedly dumped 3. the Secretary of Trade and Industry, in the
product, the term “domestic industry” may be case of non-agricultural product, commodity
interpreted as referring to the rest of the producers. or article, or
4. the Secretary of Agriculture, in the case of
DUMPED IMPORT /PRODUCT refers to any product, agricultural product, commodity or article
commodity or article of commerce introduced into the (both of whom are hereinafter referred to as
Philippines at an export price less than its normal the Secretary, as the case may be),
value in the ordinary course of trade, for the like 5. after formal investigation and affirmative
product, commodity or article destined for finding of the Tariff Commission
consumption in the exporting country, which is (hereinafter referred to as the Commission),
causing or is threatening to cause material injury to a 6. shall cause the imposition of an anti-
domestic industry, or materially retarding the dumping duty equal to the margin of
establishment of a domestic industry producing the dumping on such product, commodity or
like product. article and on like product, commodity or
article thereafter imported to the Philippines
LIKE PRODUCT a product which is identical or alike under similar circumstances, in addition to
in all respects to the product under consideration, or ordinary duties, taxes and charges imposed
in the absence of such a product, another product by law on the imported product, commodity
which, although not alike in all respects, has or article.
characteristics closely resembling those of the 7. However, the anti-dumping duty may be less
product under consideration. than the margin if such lesser duty will be
adequate to remove the injury to the
NON-SELECTED EXPORTER OR PRODUCER an domestic industry.
exporter who has not been initially chosen as among 8. Even when all the requirements for the
the selected exporters or producers of the product imposition have been fulfilled, the decision
under investigation. weather or not to impose a definitive anti-
dumping duty remains the prerogative of
an exporter who has not been initially chosen as the Commission. It may consider, among
among the selected exporters or producers of the others, the effect of imposing an anti-
product under investigation. dumping duty on the welfare of consumers
and/or the general public, and other related
EXPORT PRICE refers to: local industries.
1. The ex-factory price at the point of sale for
export; or NOTE: In the case where products are not imported
2. The F.O.B price at the point of shipment. In directly from the country of origin but are exported to
cases where 91) or (2) cannot be used, then the Philippines from an intermediate country, the
the export price may be constructed based price at which the products are sold from the country
on such reasonable basis
QuickTime™ and aas the Secretary or
of export to the Philippines shall normally be
TIFF (Uncompressed) decompressor
the Commission may
are needed determine.
to see this picture.
compared with the comparable price in the
country of export. However, comparison may be
ANTI-DUMPING DUTY IS IMPOSED: made with the price in the country of origin, if for
1. Whenever any product, commodity or article example, the products are merely transshipped
of commerce imported into the Philippines at through the country of export, or such products are
an export price less than its normal value not produced in the country of export, or there is no
in the ordinary course of trade for the like comparable price for them in the country of export.
product, commodity or article destined for
consumption in the exporting country

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INITIATION OF ACTION:
1. An anti-dumping investigation may be NOTE: The application shall be filed with the
initiated upon receipt of a written Secretary of Trade and Industry in the case of non-
application from any person whether agricultural product, commodity or article, or with the
natural or juridical, representing a Secretary of Agriculture in the case of agricultural
domestic industry, which shall include product, commodity or article. The Secretary shall
evidence of require the petitioner to post a surety bond in such
a. dumping, reasonable amount as to answer for any and all
b. injury, and damages which the importer may sustain by reason
c. causal link between the dumped imports of the filing of a frivolous petition. He shall
and the alIeged injury. immediately release the surety bond upon making an
Simple assertions, unsubstantiated by affirmative preliminary determination
relevant evidence, cannot be considered
sufficient to meet the requirements of this In exceptional circumstances, the Philippines may be
paragraph. divided into two or more competitive markets and the
2. The application shall contain such producers within each market may be regarded as a
information as is reasonably, available to the separate industry if (a) the producers within such
applicant on the following market have the dominant market share; and (b) the
a. the identity of the applicant and a demand in that market is not substantially supplied by
description of the volume and the value other producers elsewhere in the Philippines.
of the domestic production of the like
product of the applicant; If in special circumstances, the Secretary decides to
b. a complete description of the alleged initiate an investigation without having received a
dumped product, the name of the country written application by or on behalf of a domestic
of origin or export under consideration, industry for the initiation of such investigation, he
the identity of each known exporter or shall proceed only if he has sufficient evidence of
foreign producer, and a list of known dumping, injury and a causal link, to justify the
persons importing the product under initiation of an investigation.
consideration;
c. information on the normal value of the The application shall be considered to have been
product under consideration in the made "'by or on behalf of the domestic industry" if it is
country of origin or export, and supported by those domestic producers whose
d. information on the evolution of the collective output constitutes more than fifty percent
volume of the alleged dumped imports, (50%) of the total production of the like product
the effect of these imports on the price of produced by that portion of the domestic industry
the like product in domestic market, and expressing either support for or opposition to the
the consequent impact of the imports on application. In cases involving an exceptionally large
the domestic industry. number of producers the degree of support and
3. Within five (5) working days from receipt of a opposition may be determined by using a statistically
properly documented application, the valid sampling technique or by consulting their
Secretary shall examine the accuracy and representative organizations. However, no
adequacy of the petition to determine investigation shall be initiated when domestic
whether there is sufficient evidence to justify producers expressly supporting the application
the initiation of investigation.
QuickTime™ and a
account for less than twenty -five percent (25%) total
4. If there is TIFF no sufficient
(Uncompressed) evidence to justify
decompressor
are needed to see this picture.
production of the like product produced by the
initiation, the Secretary shall dismiss the domestic industry.
petition and properly notify the Secretary of
Finance, the Commissioner of Customs, and NOTICES TO BE GIVEN OUT:
other parties concerned regarding such 1. Notice to the Secretary of Finance
dismissal. The Secretary shall extend legal, 2. Notice to Exporting Member-Country
technical, and other assistance to the 3. Notice to Concerned Parties and
concerned domestic producers and their Submission of Evidence
organizations at all stages of the anti-
dumping action.

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DETERMINATION OF MATERIAL INJURY OR c. Trade restrictive practices and


THREAT THEREOF: The presence and extent of competition between foreign and
material injury to the domestic industry, as a result of domestic producers;
the dumped imports shall be determined on the basis d. Developments in technology; and
of positive evidence and shall require an objective e. Export performance and productivity of
examination of, but shall not be limited to the the domestic industry.
following: 5. A determination of threat of material injury
1. The rate of increase and amount of imports, shall be based on facts and not merely on
either in absolute terms or relative to allegation, conjecture or remote possibility.
production or consumption in the domestic The change in circumstances which will
market; create a situation in which the dumping will
2. The effect of the dumped imports on the cause injury must be clearly foreseen and
price in the domestic market for like product, imminent. In making a determination
commodity or article, that is, whether there regarding the existence of a threat of material
has been a significant price undercutting by injury, the following shall be considered, inter
the dumped imports as compared with the alia, collectively:
price of like product, commodity or article in a. A significant rate of increase of the
the domestic market, or whether the effect of dumped imports in the domestic market
such imports is otherwise to depress prices indicating the likelihood of substantially
to a significant degree or prevent price increased importation;
increases, which otherwise would have b. Sufficient freely disposable, or an
occurred, to a significant degree; and imminent, substantial increase in
3. The effect of the imports on the domestic capacity of the exporter indicating the
producers or the resulting retardation of the likelihood of substantially increased
establishment of a domestic industry dumped exports to the domestic market,
manufacturing like product, commodity or taking into account the availability of
article, including an evaluation of all relevant other export markets to absorb any
economic factors and indices having a additional exports;
bearing on the state of the domestic industry c. Whether imports are entering at prices
concerned, such as, but not limited to, actual that will have significant depressing or
or potential decline in output, sales, market suppressing effect on domestic prices
share, profits, productivity, return on and will likely increase demand for
investments, or utilization of capacity; factors further imports; and
affecting domestic prices; the magnitude of d. Inventories of the product being
dumping; actual and potential negative investigated.
effects on cash flow, inventories,
employment, wages, growth, and ability to CUMULATION OF IMPORTS. - When imports of
raise capital or investments. products, commodities or articles from more than one
4. The extent of injury of the dumped imports to country are simultaneously the subject of an anti-
the domestic industry shall be determined by dumping investigation, the Secretary or the
the Secretary and the Commission upon Commission may cumulatively assess the effects of
examination of all relevant evidence. Any such imports
known factors other than the dumped imports
which at the same time are injuring the
QuickTime™ and a IMPOSITION OF THE ANTI-DUMPING DUTY - The
domestic TIFF
industry shall
(Uncompressed) also be examined
decompressor
are needed to see this picture. Secretary shall, within ten (10) days from receipt of
and the injuries caused by these factors must the affirmative final determination by the
not be attributed to the dumped imports. The Commission, issue a Department Order imposing an
relevant evidence may include, but shall not anti-dumping duty on the imported product,
be limited to, the following: commodity, or article, unless he has earlier accepted
a. The volume and value of imports not sold a price undertaking from the exporter or foreign
at dumping prices; producer. He shall furnish the Secretary of Finance
b. Contraction in demand or changes in with the copy of the order and request the latter to
consumption pattern; direct the Commissioner of Customs to collect within

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three (3) days from receipt thereof the definitive anti-


dumping duty.
INTELLECTUAL PROPERTY LAW
JUDICIAL REVIEW - Any interested party in an anti-
dumping investigation who is adversely affected by a
final ruling in connection with the imposition of an
anti-dumping duty may file with the Court of Tax
Law on Patents
Appeals, a petition for the review of such ruling within
thirty (30) days from his receipt of notice of the final
ruling: Provided, however, That the filing of such Sec 21 Patentable Inventions – Any technical
petition for review shall not in any way stop, suspend, solution of a problem in any field of human activity
or otherwise hold the imposition or collection, as the which is new, involves an inventive step and is
case may be, of the anti-dumping duty on the industrially applicable shall be patentable. It may be,
imported product, commodity or article. The rules of or may relate to, a product, or process, or an
procedure of the court on the petition for review filed improvement of any of the foregoing.
with the Court of Tax Appeals shall be applied.
ELEMENTS OF PATENTABILITY
Public Notices - The Secretary or the Commission 1. New – if it does not form part of the prior art
shall inform in writing all interested parties on record 2. Inventive Step – if having regard to prior art,
and, in addition, give public notices by publishing in it is not obvious to a person skilled in the art
two (2) newspapers of general circulation when: at the time of the filing date or priority date of
1. Initiating an investigation; the application claiming the invention
2. Concluding or suspending investigation; 3. Industrially applicable – if the invention can
3. Making any preliminary or final determination be produced and used in any industry
whether affirmative or negative;
4. Making a decision to. accept or to terminate PATENT
an undertaking
5. Terminating a definitive anti-dumping duty. 1. Statury grant by the government – conferred
to the inventor or his legal successor
REPORT TO BE SUBMITTED BY THE BUREAU 2. In return for the disclosure of the invention to
OF CUSTOMS The Secretary shall regularly submit the public
to the Commissioner of Customs a list of imported 3. Giving the right for a limited period of time
products susceptible to unfair trade practices. The 4. To exclude others from making, using,
Commissioner of Customs is hereby mandated to selling, importing the invention
submit to the Secretary monthly reports covering 5. Within the territory of the country granting the
importations of said products, including but not patent.
limited to the following:
1. Commercial invoice; IMPORTANCE OF A PATENT TO A
2. Bill of lading; BUSINESSMAN
3. Import Entries; and
4. Pre-shipment reports. 1. A patent is granted to protect an article that is
essentially better in some way than what was
NOTE: Failure to comply with the submission of such made before, or for a better way of making it.
report as provided herein shall hold the concerned
QuickTime™ and a
2. The monopoly a patent gives can also extend
officials liable and
TIFFshall be
(Uncompressed)punished
decompressor with a fine not
are needed to see this picture. to any other improved article or process
exceeding the equivalent of six (6) months salary or which is better for the same reasons as that
suspension not exceeding one (1) year. on which the patent is based. In an extreme
case, a patent can be wide enough and
represent a big enough advance over earlier
ideas to give its owner a complete monopoly
of an industry.

For instance, there have been patents giving,


for a time, a monopoly of telephones, a monopoly

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of pneumatic tires or a monopoly of transistors. Diamond vs. Diehr 437 U.S. 584 (1978)
Very few patents are as important as that, but the While a mathematical formula, like a law of nature,
existence of almost any patent will make it cannot be the subject of a patent, instead seek
necessary for a competitor to do costly design protection for a process of curing synthetic rubber.
work or even major research of his own rather Although their process employs a well-known
than copy the actual product he wishes to imitate. mathematical equation, they do not seek to pre-empt
the use of that equation, except in conjunction with all
Sec 22. Non-Patentable Inventions – The following of the other steps in their claimed process.
shall be excluded from patent protection:
1. Discoveries, scientific theories, and mathematical
methods; PATENTABILITY OF COMPUTER PROGRAMS
2. Schemes, rules and methods of performing General Rule – Computer programs, are in general,
mental acts, playing games or doing business copyrightable.
and programs for computers; Exception – They can be patentable if they are part
3. Methods for treatments of the human or animal of a process like a business process.
body by surgery or therapy and diagnostic
methods practiced on the human or animal body. Sec. 24 Prior Art – Prior art shall consist of:
This provision shall not apply to products and 1. Everything which has been made available to the
composition for use in any of these methods; public anywhere in the world, before the filing
4. Plant varieties or animal breeds or essentially date or priority date of the application claiming
biological process for the production of plants or the invention; and
animals. This provision shall not apply to micro- 2. The whole contents of an application for a patent,
organisms and non-biological and micro- utility model or industrial design registration,
biological processes; published according to this Act, filed or effective
5. Aesthetic creations; and in the Philippines, with a filing or priority date that
6. Anything which is contrary to public order or is earlier than the filing or priority date of the
morality. application. Provided, That the application which
has validly claimed the filing date of an earlier
application under Section 31 of this Act, shall be
prior art with effect as of the filing date of such
Diamond vs. Chakrabarty 447 U.S. 303 (1980) earlier application. Provided further, That the
The patentee has produced a new bacterium with applicant or the inventor identified in both
markedly different characterisitics from any found in applications are not one and the same.
nature and one having potential for significant utility.
His discovery is not nature’s handiwork, but his own;
WHEN AN INVENTION IS NOT NEW
accordingly, it is a patentable subject matter. The
1. An invention is not new if it has been
inventions most benefiting mankind are those that
disclosed or used in public, or sold in the
“push back the frontiers of chemistry, physics and the
market before the patent application for the
like.” (Ed’s note: The subject matter in this case was
invention is filed. Most often, written
a genetically engineered live bacterium capable of
disclosures of inventions are founding earlier
breaking down components of crude oil)
filed and published patent applications or
issued patents, utility models or industrial
designs. Patent examiners carry out a search
Great Atlantic &TIFF
Pacific Tea Co.
QuickTime™ and a vs. Supermarket
(Uncompressed) decompressor
of these disclosures to determine if the
Equipment Corp 340 U.S. 147 picture.
are needed to see this (1950) invention is new.
The mere combination of a number of old parts or 2. The most common mistake is to be
elements, which, in combination, perform or produce unaware that premature disclosure or use
no new or different function or operation than that of an invention before the filing of any
theretofore performed or produced by them, is not patent application would destroy the
patentable invention. The conjunction or concert of novelty of an invention and thus completely
known elements must contribute something; only prejudice the chances of obtaining valid
when the whole in some way exceeds the sum of its protection.
parts is the accumulation of old devices patentable.

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RULE ON NON-OBVIOUSNESS OF THE Sec. 30 Inventions Created Pursuant to a


INVENTION Commission – The person who commissions the
A claimed invention is unpatentable if the work shall own the patent, unless otherwise provided
differences between it and the prior art are such that in the contract.
the subject matter as a whole would have been
obvious at the time the invention was made to a WHO IS ENTITLED TO A PATENT OF AN
person having ordinary skill in the art. The ultimate INVENTION BY AN EMPLOYEE MADE IN THE
determination as to whether or not an invention is COURSE OF HIS EMPLOYMENT CONTRACT?
obvious is a legal conclusion based on underlying 1. Employee – if the inventive activity is not a
factual inquiries, including: part of his regular duties even if the
1. scope and content of prior art; employee uses the time, facilities and
2. level of ordinary skill in the art; materials of the employer.
3. differences between the claimed invention 2. Employer – if the invention is the result of
and the prior art; and the performance of his regularly-assigned
4. objective evidence of non-obviousness. duties unless there is an agreement, express
or implied, to the contrary
Electric Storage Battery Co. vs. Shimadzu 507
U.S. 613 (1939)
Prior public use is a bar whether the use was with or Sec. 29 First to File Rule – If two (2) or more persons
without the consent of the patentee. A mere have made the invention separately and
experimental use is not the public use defined by the independently of each other, the right to the patent
Act, but a single use for profit, not purposely hidden, shall belong to the person who filed an application for
is such. The ordinary use of a machine or the such invention, or where two or more applications are
practice of a process in a factory in the usual course filed for the same invention, to the applicant who has
of producing articles for commercial purposes is a the earliest filing date or, the earliest priority date.
public use.
REMEDY OF A TRUE INVENTOR WHO WAS
Sec. 25 Non-Prejudicial Disclosure – The disclosure CHEATED OF HIS RIGHT TO A PATENT – Though
of information contained in the application during the he may not enjoin the IPO from processing the
twelve (12) months preceding the filing date or questioned application, he may ask the court , once
priority date of the application shall not prejudice the the application is granted, either to substitute him as
applicant on the ground of lack of novelty if such a patentee or to cancel the patent and ask for
disclosure was made by: damages.
(a) the inventor;
(b) a patent office and the information was contained
in another application filed by the inventor and should
Sec. 31 Right of Priority – An application for a patent
not have been disclosed by the office or in an
filed by any person who has previously applied for
application filed without the knowledge or consent of
the same invention in another country which by
the inventor by a third party which obtained the
treaty, convention or law affords the same privileges
information directly or indirectly from the inventor; or
to Filipino citizens shall be considered as filed as of
(c) a third party which obtained the information
the date of the filing the foreign application: Provided,
directly or indirectly from the inventor.
that:
a. the local application expressly claims priority
INDUSTRIAL APPLICABILITY QuickTime™ and– aThe invention must b. it is filed within twelve (12) months from the date
be applicable forTIFFare
(Uncompressed) decompressor
practical
needed to seepurposes.
this picture. It cannot be the earliest foreign application was filed
purely theoretical. c. a certified copy of the foreign application together
with an English translation is filed within six (6)
Sec. 28 Right to a Patent – The right to patent months from the date of filing in the Philippines
belongs to the inventor, his heirs, or assigns. When
two (2) or more persons have jointly made an WHY APPLY FOR A PATENT INSTEAD OF
invention, the right to a patent shall belong to them KEEPING THE INVENTION A SECRET – In general,
jointly. it is better and safer to try and obtain a patent for the
invention than try to keep the invention a secret. The

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chances of not being able to keep the invention a Sec 32. The Application – The patent application
secret are generally much greater than the risk of not shall be in Filipino or English and shall contain the
getting a patent for the invention that is patentable. following:
(a) a request for the grant of a patent;
(b) a description of the invention;
(c) drawings necessary for the understanding of the
Smith Kline Beckman vs. CA, GR No. 126627, invention;
August 14, 2003 (d) one or more claims; and
Concept of divisional applications, comes to play, (e) an abstract.
when two or more inventions are claimed in a single No patent may be granted unless the application
application but are of such a nature that a single identifies the inventor. If the applicant is not the
patent may not be issued for them. The applicant is inventor, the Office may require to submit said
thus required to divide that is to limit the claims to authority.
whichever invention he may elect, whereas those
inventions not elected may be made the subject of REQUEST must contain: (Section 34)
separate applications which are called divisional 1. a petition for the grant of the patent;
applications. 2. name and other data of the applicant,
inventor and the agent; and
IN WHICH COUNTRIES SHOULD PATENT 3. title of the invention
PROTECTION BE SOUGHT? – What should be
considered is whether there are potential competitors DISCLOSURE AND DESCRIPTION must disclose
likely to try and exploit the invention if it is not the invention: (Section 35)
patented there. If the answer is in the affirmative, 1. in a manner sufficiently clear and complete
patent protection should be sought. for it to be carried out by a person skilled in
the art;
WHO MAY FILE A PATENT APPLICATION IN THE 2. where the application concerns a
PHILIPPINES? microbiological process or the product
thereof and involves the use of a micro-
As to Nationality As to the legal organism which cannot be sufficiently
personality of an disclosed in the application in such a way as
applicant to enable the invention to be carried out by
1. Filipino nationals 1. inventor or his a person skilled in the art and such
2. Foreign nationals attorney-in-fact material is not available to the public, the
or those 2. assignee of the application shall be supplemented with a
domiciled or inventor deposit of such material with an
have a real and international depositary institution; and
effective 3. in accordance with the rules and regulations
commercial by the Patent Office with respect to the
establishment in contents of the description and the order of
a country which presentation.
is bound by a
treaty to grant CLAIMS – The application shall contain one (1) or
Filipinos same more claims which shall define the matter for which
right as its own QuickTime™ and a protection is sought. Each claim shall be: (Section
TIFF (Uncompressed) decompressor
nationals are needed to see this picture. 36)
1. clear ;
THE FILING DATE OF A PATENT APPLICATION 2. concise; and
IS THE DATE WHEN THE APPLICANT FILES ALL 3. supplemented by the description.
OF THE FOLLOWING (Section 40): Purpose of the claim: to set the boundaries of the
1. An express or implicit indication that a patent
Philippine patent is sought;
2. Information identifying the applicant; and ABSTRACT – consists of a concise summary of the
3. Description of the invention and one (1) or disclosure of the invention as contained in the
more claims in Filipino or English description and claims and drawings in preferably not

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more than one hundred fifty (150) words. It must be 2. allow the public to submit observations on
drafted in a way which allows the clear understanding the patentability of the invention (which will
of the following: (Section 37) be noted by the Bureau.
1. technical problem;
2. the gist of the solution of that problem EFFECT OF PUBLICATION ON THE RIGHTS OF
through the invention; and THE APPLICANT
3. the principal use or uses of the invention. BEFORE PUBLICATION AFTER PUBLICATION
It shall merely serve for technical information. The patent application Applicant, shall have all
and all related the rights of a patentee
documents shall not be under Section 76 against
Sec. 38 Unity of Invention – The application shall made
relate to one invention only or to a group of BEFORE PUBLICATION AFTER PUBLICATION
inventions forming a single general inventive concept. available for inspection any person who, without
without the consent of his authorization,
RULES ON SEVERAL INDEPENDENT the applicant, exercised any of the
INVENTIONS WHICH DO NOT FORM A SINGLE rights in Section 71 in
GENERAL INVENTIVE CONCEPT (Section 38) relation to the invention
1. Director may require that the application be claimed in the published
restricted to a single invention. patent application as if a
2. A later application filed for an invention patent had been granted
divided out shall be considered as having for that invention.
been filed on the same day as the first Provided that the person
application. Provided that: had:
a. The later application is filed within four AFTER-PUBLICATION 1. actual knowledge
(4) months after the requirement to divide RIGHTS may only be that the invention
becomes final or within such additional exercised by the that he was
time, not exceeding four (4) months, as applicant if: using was the
may be granted; and 1. the action is filed subject matter of
b. Each divisional application shall not go after the grant of a published
beyond the disclosure in the initial the patent and application; or
application 2. within four (4) 2. received written
years from the notice that the
Sec. 44 Publication of Patent Application – The commission of invention he was
patent application shall be published in the IPO the acts using was the
Gazette together with a search document established complained of. subject matter of
by or on behalf of the Office citing any documents a published
that reflect prior art, after the expiration of eighteen application being
(18) months from the filing date or priority date. identified in the
said notice by its
After the publication of a patent application, serial number.
any interested party may inspect the application
documents filed with the Office.
Sec. 47 Observation by Third Parties – Following the
The Director General,
QuickTime™subject
and a to the approval publication of the patent application, any person may
TIFF (Uncompressed) decompressor
of the Secretary ofareTrade
needed toand
see thisIndustry,
picture. may prohibit present observations in writing concerning the
or restrict the publication of an application, if in his patentability invention. Such observation shall be
opinion, to do so would be prejudicial to the national communicated to the applicant who may comment on
security and interests of the Republic of the them. The Office shall acknowledge and put such
Philippines. observations and comment in the file of the
application to which it relates.
PURPOSE OF THE PUBLICATION REQUIREMENT
1. enable research and development institutions Opposition proceedings cannot be instituted after the
to re-orient or avoid unnecessary research publication of the application. Only observations and
activities on similar technology; and comments are allowed.

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Sec. 48 Request for Substantive Examination – The person or entity from making, using, offering for sale,
application shall be deemed withdrawn unless within selling or importing that product;
six (6) months from the date of the publication under (b) Where the subject matter of a patent is a process,
Section 41, a written request to determine whether a to restrain, prevent or prohibit any unauthorized
patent application meets the requirements of person or entity from using the process, and from
Sections 21 to 27 and Sections 32 to 39 and the fees manufacturing, dealing in, using, selling or offering for
have been paid on time. sale, or importing any product obtained directly or
indirectly from such process.
Withdrawal of the request for examination shall be 71.2. Patent owners shall also have the right to
irrevocable and shall not authorize the refund of any assign, or transfer by succession the patent, and to
fee. conclude licensing contracts for the same.

After its publication, the application is not examined


automatically to determine its patentability. Within six LIMITATIONS OF PATENT RIGHTS – The owner of
(6) months after its publication, the applicant must a patent has no right to prevent third parties from
decide whether or not to request for a substantive performing, without his authorization, the acts
examination of his application. Usually, his decision conferred in Section 71 hereof in the following
would depend on the existence of issued patents for circumstances.
similar inventions indicated in the search report (1) Using a patented product – put on market
published in the IPO Gazette. in the Philippines by the owner of the
product, or with his express consent, insofar
Sec. 49 Amendment of Application – An applicant as such use is performed after that product
may amend the patent application during has been so put on the said market
examination. Provided that such amendment shall (2) Where act is done privately and on a non-
not include new matter outside the scope of the commercial scale or for a non-commercial
disclosure contained in the application as filed. purpose – provided that it does not
significantly prejudice the economic interests
IF THE APPLICATION FOR PATENT IS: of the owner of the patent
(3) Where the act consists of making or using
GRANTED REFUSED exclusively for the purpose of
experiments that relate to the subject matter
1. All fees should be 1. The final order of the
of the patented invention
paid on time. refusal to grant
(4) Where the act consists of the preparation
2. If the required fees patent shall be
for individual cases, in a pharmacy or by a
for grant and printing appealable to the
medical professional, of a medicine in
are not paid in due Director General.
accordance with a medical prescription or
time, the application 2. The Regulations
acts concerning the medicine so prepared
shall be deemed shall provide for the
(5) Where the invention is used in any ship,
withdrawn. procedure by which
vessel, aircraft or land vehicles of any
3. A patent shall take an appeal from the
other country entering the territory of the
effect on the date of order of refusal from
Philippines temporarily or accidentally –
publication of the the Director shall be
provided that such invention is used
grant of patent in the undertaken.
exclusively for the needs of such vessel and
IPO Gazette
QuickTime™ and a
not used for the manufacturing of anything to
TIFF (Uncompressed) decompressor
are needed to see this picture. be sold within the Philippines

Sec. 71. Rights Conferred by Patent. – Sec. 73 Prior User – Notwithstanding Section 72
hereof, any prior user, who, in good faith was using
71.1. A patent shall confer on its owner the following the invention or has undertaken serious preparations
exclusive rights: to use the invention in his enterprise or business,
(a) Where the subject matter of a patent is a product, before the filing date or priority date of the application
to restrain, prohibit and prevent any unauthorized on which a patent is granted, shall have the right to
continue the use thereof as envisaged in such

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preparations within the territory where the patent function in substantially the same way to
produces its effect. achieve the substantially same result.
The right of a prior user may only be
transferred or assigned together with his enterprise or Sec. 56. Surrender of Patent – The owner of a patent
business, or with that part of his enterprise or may surrender his patent or any claim or claims
business, or with that part of his enterprise or forming part thereof to the Office for cancellation
business in which the use or preparations for use provided the surrender is with the consent of all
have been made. persons:
(1) having grants or licenses or
CONDITIONS WHERE THE USE OF THE PATENT (2) other right, title, or interest in and to the patent
BY THE GOVERNMENT WITHOUT THE and invention covered thereby, which have been
AUTHORITY OF THE PATENT OWNER – such use recorded in the Office.
is subject to the same conditions for the grant of
compulsory licensing. (Section 74) OPPOSITION TO THE SURRENDER (Section
1. Where public interest, in particular, national 56.2)– A person may give notice to the Office of his
security, nutrition, health or the development opposition to the surrender of a patent under this
of other sectors, as determined by the section, and if he does so, the Bureau shall notify the
government, so requires or proprietor of the patent and determine the question.
2. A judicial or administrative body has
determined that the manner of exploitation, IF SURRENDER IS PROPER AS DETERMINED BY
by the owner of the patent or his license, THE PATENT OFFICE (Section 56.3):
is anti-competitive
1. Accept the offer of surrender
Sec. 54 Term of Patent – The term of patent shall be 2. Patent shall cease to have effect from the
twenty (20) years from the filing date of the day when the notice of his acceptance is
application. published in the IPO Gazette
3. No action for infringement or right to
Sec 53 Contents of the Patent – The patent shall be compensation shall accrue for any use of the
issued in the name of the Republic of the Philippines patented invention before that day referred in
under the seal of the Office and shall be signed by #2 for the services of the government
the Director, and registered together with the
description, claims and drawings, if any, in books and RULES AS TO CORRECTION OF MISTAKES
records of the Office.
1. If mistake incurred through the fault of the
Office when clearly disclosed in the
Sec 75. Extent of Protection and Interpretation of
records thereof – Director shall have power
Claims – The extent of protection conferred by the
to correct the mistake without fee to make
patent shall be determined by the claims, which are
the patent conform to the records
to be interpreted in the light of the description and
drawings.
2. If mistake is not incurred through the fault
of the Office – Director is authorized to
DOCTRINE OF EQUIVALENTS INFRINGEMENT correct any mistake of a formal and clerical
1. For the purpose of determining the extent of nature, on request of any interested person
protection conferred by the patent, due and payment of the prescribed fee
QuickTime™ and a
account shall be takendecompressor
TIFF (Uncompressed) of elements which are
are needed to see this picture.
equivalent to the elements expressed in the
Sec. 59. Changes in Patents. -
claims, so that a claim shall be considered
to cover not only all the elements as
expressed therein, but also equivalents. 59.1. The owner of a patent shall have the right to
2. An infringement takes place when a device request the Bureau to make the changes in the
appropriates a prior invention by patent in order to:
incorporating its innovative concept and (a) Limit the extent of the protection conferred by it;
although with some modification and (b) Correct obvious mistakes or to correct clerical
change, performs substantially the same errors; and

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(c) Correct mistakes or errors, other than those RULES ON DAMAGES


referred to in letter (b), made in good faith: Provided, 1. Damages cannot be recovered for acts of
That where the change would result in a broadening infringement committed before the infringer
of the extent of protection conferred by the patent, no had known or had reasonable grounds to
request may be made after the expiration of two (2) know of the patent.
years from the grant of a patent and the change shall 2. It is presumed that the infringer had known of
not affect the rights of any third party which has relied the patent if on the patented product, or on
on the patent, as published. the container or package in which the article
is supplied to the public, or on the advertising
59.2. No change in the patent shall be permitted material relating to the patented product or
under this section, where the change would result in process, are placed the words “Philippine
the disclosure contained in the patent going beyond Patent” with the number of the patent.
the disclosure contained in the application filed. 3. No damages can be recovered for
infringement committed more than four (4)
59.3. If, and to the extent to which the Office changes years before the institution of the action for
the patent according to this section, it shall publish infringement.
the same. (n)
ASSESSORS – possessed of the necessary
scientific and technical knowledge required by the
Sec. 60 Form and Publication of Amendment – An subject matter in litigation, may be appointed by the
amendment or correction of a patent shall be court.
accomplished by a certificate of such amendment or
correction, authenticated by the seal of the Office and Sec. 77. Infringement Action by a Foreign National –
signed by the Director, which certificate shall be Any foreign national or juridical entity who meets the
attached to the patent. Notice of such amendment or requirements of Section 3 of the Code and not
correction shall be published in the IPO Gazette and engaged in business in the Philippines, to which a
copies of the patent kept or furnished by the Office patent has been granted or assigned, may bring an
shall include a copy of the certificate of amendment action for infringement of the patent, whether or not it
or correction. is licensed to do business in the Philippines under
existing law.
Annex H – Remedies of the True and Actual
Inventor
Sec. 78. Process Patents; Burden of Proof. - If the
Annex I – Remedies of a Patent Owner against subject matter of a patent is a process for obtaining a
Infringement product, any identical product shall be presumed to
have been obtained through the use of the patented
PATENT INFRINGEMENT – is the making, using, process if the product is new or there is substantial
offering for sale, selling or importing a patented likelihood that the identical product was made by the
product or a product obtained directly or indirectly process and the owner of the patent has been unable
from a patented process without the authorization of despite reasonable efforts, to determine the process
the patentee. actually used. In ordering the defendant to prove that
the process to obtain the identical product is different
CONTRIBUTORY INFRINGER – any person who from the patented process, the court shall adopt
1. actively induces the infringement
QuickTime™ and a of patent or measures to protect, as far as practicable, his
TIFF (Uncompressed) decompressor
2. provides the infringer with
are needed to see this picture.a component of a manufacturing and business secrets. (n)
patented product or of a product produced
because of a patented process knowing it to Defendant must prove that the process to obtain the
be especially adopted for infringing the identical product is different from the patented
patented invention and not suitable for process.
substantial non-infringement
The court shall adopt measures to protect, as far as
Liability of Contributory Infringer – jointly and practicable, defendant’s manufacturing and business
severally liable with the infringer secrets.

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Sec. 82 Patent Found Invalid May Be Cancelled – In exploiting the subject the TTA.
an action for infringement, if the court shall find the matter of the TTA
patent or any claim to be invalid, it shall cancel the himself, ABSENT any
same, and the Director of Legal Affairs upon receipt contrary provision in the
of the final judgment of cancellation by the court, TTA
shall record that fact in the register of the Office and
shall publish a notice to that effect in the IPO CASES WHEREIN EXEMPTION FROM ANY OF
Gazette. THE REQUIREMENTS IN A VOLUNTARY
LICENSING CONTRACT MAY BE ALLOWED –
Sec 81. Defenses in Action for Infringement – In an where, after evaluation by the DITT Bureau,
action for infringement, the defendant, in addition to substantial benefits will accrue to the economy such
other defenses available to him, may show the as:
invalidity of the patent, or any claim thereof, on any of 1. high technology content
the grounds on which a petition for cancellation can 2. increase in foreign exchange earnings
be brought. 3. employment generation
4. regional dispersal of industries and/or
5. substitution with or use of local raw materials
Sec 85. Voluntary License Contract – To encourage
or
the transfer and dissemination of technology, prevent
6. registered companies with pioneer status
or control practices and conditions that may in
particular cases constitute an abuse of intellectual
General Rule – One cannot exploit a patent without
property rights having an adverse effect on
the consent of the patentee.
competition and trade, all technology transfer
Exception – Through compulsory license
arrangements shall comply with the provisions of this
Chapter. Annex - GROUNDS FOR THE GRANT OF
COMPULSORY LICENSES
TECHNOLOGY TRANSFER ARRANGEMENT or
TTA refers to contracts involving the transfer of WHAT PETITIONER FOR COMPULSORY
systematic knowledge for the manufacture of a LICENSING CONTRACT MUST DO –
product, the application of process, or rendering of 1. Petitioner must file his petition for compulsory
service including management contracts, and the license with the Bureau of Legal Affairs of the
transfer, assignment or licensing of all forms of IPO.
intellectual property rights, including licensing of 2. He must show his capability to exploit the
computer software except computer software invention – if he is staffed with adequate and
developed for mass market. competent manpower and facilities to exploit
the invention
The nationality of parties in the agreement is no 3. Subject to certain exceptions, the would-be
longer relevant in determining if an agreement is TTA compulsory licensee has negotiated seriously
that is covered by the IP Code. with rightholders to obtain exclusive licenses
on reasonable terms but such efforts are not
The IP Code no longer requires the registration of the successful.
TTAs. It neither imposes any restriction on royalty 4. Pay the patentee adequate remuneration,
payments or the duration of the TTAs. However, it taking into account the economic value of the
provides that a TTA will be unenforceable if it grant except in cases where grant of license
QuickTime™ and a
contains any of the
TIFFprohibited clauses in Section 87.
(Uncompressed) decompressor is to:
are needed to see this picture.
a. Remedy a practice which was
Annex J – Prohibited Clauses and Mandatory determined to be anti-competitive
Clauses in a Voluntary Licensing Contract b. Need to correct the anti-competitive
practice may be taken into account in
RIGHTS OF LICENSOR RIGHTS OF LICENSEE fixing the amount of remuneration
Grant of license shall not The licensee shall be
prevent the licensor from entitled to exploit the
granting further licenses subject matter of the TTA
to 3rd persons nor from during the whole term of

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Law on Trademarks Functions of origin or any other


Trademarks common characteristic,
Sec 121.1 Mark means any visible sign capable of 1. indicate origin or including the quality of
distinguishing the goods or services of an enterprise ownership goods or services of
and shall include a stamped or marked container of 2. guarantee the different enterprises
goods. quality of the which use the sign under
goods and the control of the
EXERCISE OF INTELLECTUAL PROPERTY 3. advertise the registered owner of the
RIGHTS = MONOPOLY? articles they collective mark.
1. Monopoly – is the control obtained by one symbolize
supplier over the commercial market within a
given region.
2. In a way, Intellectual Property Rights is a Arce & Sons vs. Selecta Biscuit Co. 1 SCRA 253
form of monopoly. Copyrights allow others to The word Selecta is an ordinary or common
enjoy an author’s economic rights when there word but once adopted or coined in connection with
is permission. Trademarks protect goodwill, it one’s business as an emblem or as a badge of
does not prevent production of similar goods. authenticity, it may acquire a secondary meaning as
It is only allowed by the Constitution because to be exclusively associated with its products and
it provides incentive for innovation and business.
technological advancement. Converse Rubber Corp. vs. Universal Rubber
Products 147 SCRA 154
SALIENT FEATURES OF THE PARIS Boundless choice of words are available and
CONVENTION ON TRADEMARKS when there is no reasonable explanation for the
1. National Treatment Principle – foreign defendant’s choice of such a mark, the inference is
nationals are to be given the same treatment inevitable that it was chosen to deceive. Actual use of
in each of the member countries as that goods in the local market establishes trademark use
country makes available in its own citizens. which serves as the basis for action aimed at
2. Right of Priority – any person who has duly trademark pre-emption. Sales invoices are best proof
filed registration for trademark shall enjoy a of actual sales of the products in the Philippines.
right of priority of six (6) months.
3. Protection against Unfair Competition Philips Export B.V. vs. Court of Appeals GR No.
4. Protection of Tradenames – protected in all 96161
countries without obligation of filing or The right to use a corporate name is a
registration property right, a right in rem which it may assert.
5. Protection of Well-Known Marks – each Corporation Code gives two (2) requirements: (1)
country-member of the Union may refuse, That complaint acquired a prior right over such name
cancel the registration and prohibit the use of and (2) that the proposed name is either identical,
a trademark which is a reproduction, imitation deceptively or confusingly similar, or patently
or translation (or any essential part of which deceptive. The test is whether it would be confusing
constitutes such), liable to create confusion; to an ordinary person.
of a mark considered by competent authority
where protection is sought to be well-known
in the country as being the mark of a person
Canon Kabushiki vs. Court of Appeals GR No.
entitled to the benefits
QuickTime™of and the
a convention; and
TIFF (Uncompressed) decompressor 120900
used for similar ortoidentical
are needed see this picture.goods.
Ownership of trademark is a property right
which is entitled to protection. However, when a TM
TRADEMARK COLLECTIVE MARK
is used for a product in which the other party does
OR COLLECTIVE not deal, the use of the same trademark on the
TRADENAME
latter’s product cannot be validly objected to.
Any visible sign capable Any visible sign Trademark owner is entitled to protection when junior
of distinguishing the designated as such in user (2nd user) forestalls the normal expansion of the
goods. the application for business, but Canon Japan has failed to attach
registration and capable
Three (3) Distinct of distinguishing the

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evidence that would convince that it has also result in confounding it with the original, not side by
embarked in the production of footwear products. side comparison.

Kho vs. Court of Appeals GR No. 115758 ELEMENTS OF SUITABLE TRADEMARK AND
Trademark, copyright and patents are CLASSIFICATION
different intellectual property rights that cannot be
interchanged with one another. 1. Arbitrary - common words which when
applied to certain goods or services, neither
Pearl & Dean vs. Shoemart GR No. 148222 suggest nor describe any characteristic of
The certificate of registration can confer the those goods or services. Examples are
exclusive right to use its own symbol only to those Camel cigarettes and Apple Computer.
goods specified in the certificate and that one who 2. Fanciful – “coined” words invented solely for
has adopted and used a trademark on his goods the purpose of functioning as a mark.
does not prevent the adoption and use of the same Examples are Clorox and Kodak.
trademark by others for products which are of a 3. Suggestive – requires
different description. imagination/deduction.
4. Descriptive – marks that describe some
characteristic or alleged merit of a product or
DOCTRINE OF SECONDARY MEANING – a word service. Because descriptive terms may be
or phrase originally incapable of exclusive truthfully applied to the goods and services,
appropriation with reference to an article in the they are not entitled to protection unless they
market (because it is geographically or otherwise have acquired “secondary meaning” in the
descriptive) might nevertheless have been used for marketplace.
so long and so exclusively by one producer with 5. Generic – marks that tell what a product or
reference to his article that, in the trade and to that service is, rather than indicating the source of
branch of the purchasing public, the word or phrase a product; thus, they must remain in the
has come to mean that the article was his property. public domain and can never function as a
trademark. Examples are fresh fruits, flower
Asia Brewery Inc. vs. Court of Appeals GR No. shop.
103543
Unfair competition is the employment of APPLICATION FOR TRADEMARK REGISTRATION
deception or any other means contrary to good faith must contain:
by which a person shall pass off the goods
manufactured by him or in which he deals, or his 1. the request for registration of trademark
business, or services, for those of another who has 2. the goods and/or services in connection with
already established goodwill for his similar goods, which the mark will be used and
business, or services, or any acts calculated to 3. name of the applicant and his representative
produce the same result. and enclose the reproduction of mark.
The use of steinie bottle, similar but not
identical, is not unlawful. Being of functional and Application must be filed at the Bureau of
common use and not the exclusive invention of Trademarks in the Intellectual Property Office. On
anyone, it is available to all who might need to use it receipt of application, an examiner checks if the
within the industry. Nobody can acquire any exclusive application includes all the requirements needed to
right to market articlesQuickTime™
supplying and a
a simple human get the filing date. The filing date is very important
need in containersTIFFor wrappers
(Uncompressed) of
decompressor
are needed to see this picture.
the general form, under the current ‘first to file’ system because it
size, and character commonly and immediately used serves to determine, in case of a dispute with another
in marketing such articles. application for the same or similar mark, who has the
Dissent of Justice Cruz in Asia Brewery prior right and, therefore, entitled to the registration of
Case – The test is whether the two (2) articles are a mark.
distinguishable by their labels when put side by side,
but whether the general confusion made by the Annex L – GROUNDS FOR REFUSAL OF
article upon the eye of the casual customer who is TRADEMARK REGISTRATION
unsuspicious and off his guard is such as is likely to

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Sec 124.2 Use in Commerce – The applicant or the Polaroid Corp vs. Polaroid Elect. Corp., 287 F. 2d
registrant shall file a declaration of actual use of the 492
mark with evidence to that effect, as prescribed by Factors to consider in deciding TM infringement when
the Regulations within three (3) years from the filing the products are different:
date of the application. Otherwise, the application 1. Strength of the mark
shall be refused or the mark shall be removed from 2. Degree of similarity between the two marks
the Register by the Director. 3. Proximity of the products
4. Likelihood that the prior owner will bridge the gap
General Rule – What is required is actual use in the 5. Actual confusion
Philippines 6. Defendant’s good faith in adopting its own mark
Exception – Internationally Well-Known Marks 7. Quality of the defendant’s product
8. Sophistication of the buyers
INTERNATIONALLY WELL-KNOWN MARK - is that
which is determined by a competent authority (the
courts or the Bureau of Legal Affairs (BLA) of the IPO McDonald’s Corporation vs. LC Big Mak Burgers
when adjudicating infringement cases) to be well- Inc., GR No. 143993
known internationally and in the Philippines, whether To establish trademark infringement, the
or not it is registered in the Philippines, as being following elements: (1) validity of plaintiff’s mark, (2)
already owned by someone taking into account the the plaintiff’s ownership of the mark, and (3) use of
knowledge of the relevant sector in the Philippines the mark or its colorable imitation by the alleged
which has been obtained as a result of the promotion infringer results in the likelihood of confusion.
of the mark.
Del Monte Corp vs. Court of Appeals, GR No.
CONDITIONS TO CLAIM BENEFITS OF AN
INTERNATIONALLY WELL-KNOWN MARKS IN 78325
The question is not whether the two articles
THE PARIS CONVENTION
are distinguishable by their label when set side by
1. the mark must be internationally known or
well known side but whether the general confusion made by the
2. the subject of the right must be trademark, article upon the eye of the casual purchaser who is
unsuspicious and off his guard, is such as to likely
not a patent or copyright or anything else
3. the mark must be for use in the same or result in his confounding it with the original. The
similar kinds of goods and general impression of the ordinary purchaser buying,
buying under the normally prevalent conditions in
4. the person claiming must be the owner of the
mark trade and giving the attention such purchasers
usually give in buying that class of goods is the
EFFECT OF NON-USE – If the registered owner touchstone.
without legitimate reason fails to use the mark within
the Philippines, or to cause it to be used in the KINDS OF CONFUSION, WHICH CAN BE
Philippines by virtue of a license during an BROUGHT BY INFRINGEMENT
uninterrupted period of three (3) years or longer, a
petition may be filed for the cancellation of the mark. Confusion of goods Confusion of Business
When the ordinarily When although the
RIGHTS CONFERREDQuickTime™ BY THE and a REGISTRATION prudent purchaser would goods of the parties are
OF THE MARK TIFFare(Uncompressed) decompressor
needed to see this picture.
be induced to purchase different, the defendant’s
1. protection against the reproduction or one product in the belief products is such as might
imitation or unauthorized use of the mark (the that he was purchasing be reasonably be
legal term is infringement of mark); the other. assumed to originate with
2. right to stop the entry of imported the plaintiff, and the
merchandise into the country containing a public would then be
mark identical or similar to the registered deceived either into that
mark; and belief or into the belief
3. right to transfer or license out the mark. that there is some
connection between the

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plaintiff and defendant unfair competition if the effect is to pass off on the
which, in fact, does not public the goods of one man as the goods of another.
exist.
REMEDIES AVAILABLE TO REGISTRANT IN
TWO TESTS IN DETERMINING THE LIKELIHOOD ORDER TO STOP THE INFRINGEMENT OF MARK
OF CONFUSION 1. Judicial
a. Civil
Dominancy Test Holistic Test b. Criminal Prosecution
It focuses on the It requires the court to 2. Administrative
similarity of the prevalent consider the entirety of
features of the competing the marks as applied to
trademarks that might the products, including Annex N – CIVIL, CRIMINAL AND
cause confusion. the labels and ADMINISTRATIVE REMEDIES AGAINST
packaging, in TRADEMARK INFRINGEMENT
determining confusing
similarity Annex O – CAUSES OF ACTION IN TRADEMARK
INFRINGEMENT

Annex M – TRADEMARK INFRINGEMENT vs. Sec. 160 Right of Foreign Corporation to Sue in
UNFAIR COMPETITION Trademark or Service Mark Enforcement Action –
Any foreign national or juridical person who meets
RELATED GOODS DOCTRINE - When goods are the requirements of Section 3 of this Act and does
so related that the public may be, or is actually, not engage in business in the Philippines may bring a
deceived and misled that they come from the same civil or administrative action hereunder for opposition,
maker or manufacturer, trademark infringement cancellation, infringement, unfair competition, or false
occurs. designation of origin and false description, whether or
not it is licensed to do business in the Philippines
Alhambra Cigar vs. Mojica, 27 Phil. 266 under existing laws.
Unfair competition is passing off or
attempting to pass off upon the public the
goods/business of one person as for the LIMITS OF TRADEMARK PROTECTION
goods/business of another. Any conduct the end and
probable effect of which is to deceive the public or TERM TERRITORIAL LIMIT
pass off the goods or business of a person as that for A certificate of registration The registration of a mark
another constitutes actionable unfair competition. Not of a mark shall remain will have force and effect
armed at fostering monopoly but to prevent fraud and in force for ten (10) years. within the territory of the
imposition resulting in some resemblance. It is required, however, Philippines.
that the owner of a mark
Mighty Corp vs. E & J Gallo Winery, GR No. show that he is using the
154342 mark or that his non-use
The law on unfair competition is broader and of the same is due to
more inclusive than the law on trademark causes beyond his
infringement. Trademark infringement is a more control by filing an
exclusive right derived from the
QuickTime™ and trademark
a
TIFF (Uncompressed) decompressor
adoption Affidavit of Use or
and registration by the person whose goods or
are needed to see this picture. Excusable Non-Use, with
business is first associated with it. The law on the BT within one (1)
th
trademarks is a specialized subject distinct from the year from the 5
law on unfair competition, although the two subjects anniversary of the
are entwined with each other and are dealt with registration of the marks.
together in the IP code. Hence, even if one fails to
establish his exclusive property right to a trademark, The registration may also
he may still obtain relief on the ground of his be renewed for a period
competitor’s unfairness or fraud. Conduct constitutes of ten (10) years after
its expiration. There is

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no limit as to the number deprive the owner thereof the right granted to
of times the registrant him by the IP Code.
may request for the 4. Right of Owner of Tradename - The IP
renewal of his registration. Code deems unlawful any subsequent use of
the trade name by a third party, whether as a
trade name or a mark or collective mark, or
CANCELLATION OF REGISTRATION OF any such use of a similar trade name or
TRADEMARK mark, likely to mislead the public. The
1. When – Within five (5) years from the remedy against the unlawful use of a trade
registration of mark name would be a civil action for damages
2. Who - Any person who believes that he will and injunction.
be damaged by the registration of a mark.
3. Grounds - Any of the grounds to reject the Law on Copyright
registration of a mark which are enumerated
as absolute or relative grounds for refusal. COPYRIGHT – is bundle of rights that an author
Non-use for an uninterrupted period of three enjoys of the form of the expression of the ideas.
(3) years is also a ground for cancellation.

CRITERIA FOR COPYRIGHT PROTECTION


REGISTERED MARK vs. NON-REGISTERED 1. Originality – answers the question “did you
MARK make it?” while novelty in patents answers
A registered mark enjoys better protection. the question “did you make it first?”
In order to succeed in an action based on an 2. Fixation in a tangible medium – what is
unregistered mark, it is necessary to show that one protected is the tangible expression of the
has established a goodwill in the mark and that the idea, not the concept, idea or format
use complained of would be liable to confuse or
deceive the public. Registration on the other hand, Annex Q – INTERNATIONAL CONVENTIONS
gives a right to stop someone using the same or GOVERNING COPYRIGHT
similar mark on the same or similar goods or services
without the need to prove goodwill of the mark or that
deception was employed by the defendant. The Joaquin vs. Drilon, 302 SCRA 225 (1999)
owner of a mark would, therefore, always be well- Copyright refers to finished works, not
advised to register the mark where this is possible. concepts. The mere format of a show, explained
solely through words, doesn’t encompass the whole
TRADENAMES spectrum of possible audio and visual effects that the
1. Definition – the name or designation actual show would produce; thus the written words in
identifying or distinguishing an enterprise no sense finish the concept or idea of the show.
2. The following may not be used as Hence, without production of the master tapes of both
tradenames: shows, even the determination of probable cause for
a. If by its nature or the use to which the infringement is not possible.
name or designation may be put, it is
contrary to public order or morals.
b. If it is liable to deceive the public as to Sec 171
the nature of the enterprise identified by “Author” is the natural person who has created the
the name.
QuickTime™ and a
TIFF (Uncompressed) decompressor work.
are needed to see this picture.
A “collective work” is a work, which has been created
c. If the trade name is similar to a mark or a
by two (2) or more persons at the initiative and under
trade name owned by another person
the direction of another with the understanding that it
and its use would likely mislead the
will be disclosed by the latter under his own name
public.
and that contributing natural persons will not be
3. Registration - Trade names are protected
identified.
even prior to or without registration. Thus,
A “work of applied art” is an artistic creation with
non-registration of the trade name with the
utilitarian functions or incorporated in a useful article,
Securities and Exchange Commission or the
Department of Trade and Industry will not

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whether made by hand or produced on an industrial COPYRIGHT or ECONOMIC RIGHTS – is the


scale. exclusive right to carry out, authorize and prevent
anything that has to do with the work. (see Annex 12)
WORKS THAT CAN BE PROTECTED BY
COPYRIGHT Important: Copyright protection never accorded
1. Original Works – see Annex P copyright owner complete control over all possible
2. Derivative Works – see Annex R uses of his work. Infringement only possible if violate
any of the enumeration in Annex S.
WORKS shall be protected:
(a) by the sole fact of their creation, not registration Habana vs. Robles, 310 SCRA 511 (1999)
(b) irrespective of their mode or form of expression, Substantial reproduction doesn’t necessarily
content, quality and purpose mean that the entire work, or even a large portion, be
copied. If so much is taken that the value of the
WORKS NOT PROTECTED original work is substantially diminished, there is
1. any idea, procedure, system, method or infringement.
operation (PIOSM), concept, principle,
discovery, or mere data (CPDiD) even if they
are expressed, illustrated, or embodied in a
work (EIE)
FIRST SALE DOCTRINE - Since the owner has the
2. news of the day & other miscellaneous facts:
exclusive right to offer the work for sale, he may do
having character of mere items of press info
so. That’s the first sale. However, once the sale is
3. official text of a legislation, administrative, or
completed and the buyer becomes the owner of the
legal nature (including its translation)
tangible medium, thereafter, he has a right to do
4. public domain
anything with the medium. In other words, he can
5. useful article: no separate artistic value
sell it to someone else, rent it out, burn it, eat it, use
RATIO: ideas are relatively few and not worth of
its pages to photocopy, etc. So, a bookstore selling
monopoly protection.
second-hand books is protected under this doctrine.
USEFUL ARTICLE DOCTRINE - Works whose sole
purpose is utilitarian, and have no separate artistic Though the vendee has absolute license to
value, are not copyrightable. do whatever he wants with the medium, the content
of the medium is still protected. So, if, after the sale,
WORKS OF PUBLIC DOMAIN - Works whose 50 the buyer copies out the words of the book and treats
year term for copyright protection has expired. them as his own, that’s infringement.

WORKS OF THE GOVERNMENT In digital works, there is no tangible medium.


And the vendee is merely given the right to use (i.e.
General Rule - No copyright subsists in any work of the license). So, a work sold over the internet may
the Philippine Government. not then be sold to other people; but, the vendee may
read or listen to it. On the other hand, if you buy a
Exception – BUT prior approval of the agency where DVD and then sell it, the doctrine applies. But if you
it came from is necessary for exploitation of work for buy a DVD, copy the contents, then sell a burnt DVD
profit. Such agency MAY impose things such as with those contents, it’s infringement.
payment of royalties. QuickTime™ and a
TIFF (Uncompressed) decompressor Annex T – OWNERSHIP OF COPYRIGHT
are needed to see this picture.
Exception to the Exception – No prior approval is
necessary for those rendered in courts,
administrative agencies, deliberative assemblies and MORAL RIGHTS - Rights granted to the owner of a
meetings of public character such statutes, lectures, copyright, independent of his economic (copyright)
dissertations, rules and regulations, sermons, rights and of any assignment or license.
speeches and addresses.

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SCOPE OF HIS MORAL RIGHTS 4. It provides the same rights and remedies as
1. to require that his name as author be a copyright owner.
indicated in a prominent way on the copies,
in connection with the public use of his work Sec. 194 Breach of Contract – An author cannot be
2. to make any alterations of his work, prior to compelled to perform is contract to create a work or
or withhold it from publication for the publication of his work already in existence.
3. to object to any distortion, mutilation or However, he may be held liable for damages for
modification or other derogatory action in breach of such contract.
relation to, his work (would be prejudicial to
his honor or reputation) If creator contributes work to a collective work, the
4. to restrain the use of his name w/ respect to general rule is that he has waived his right of
any work, not of his own creation or in a attribution unless the creator expressly reserved such
distorted version of his work right.

EXCEPTIONS TO THE MORAL RIGHTS Annex U – TERM OF PROTECTION


1. Absent special contract at the time creator RIGHTS TO PROCEEDS IN SUBSEQUENT
licenses/permits another to use his work, the TRANSFERS or DROIT DE SUITE - If there is a
following are deemed NOT to contravene sale or lease of an original work of painting, sculpture
creator’s moral rights, provided they are done or manuscript subsequent to the first disposition by
in accordance w/ reasonable customary the author, the author or his heir have an inalienable
standards or requisites of the medium: right to participate in the gross proceeds to the extent
of 5%.
a. Editing
b. Arranging WORKS NOT COVERED BY RIGHT TO
c. Adaptation PROCEEDS IN SUBSEQUENT TRANSFERS -
d. Dramatization Prints, engravings, applied art or works of a similar
e. Mechanical and electrical reproduction kind from which the author primarily derives gain from
the proceeds of the reproduction.
2. Complete destruction of work unconditionally
transferred by creator NEIGHBORING RIGHTS - the rights of a performer
of an original work.
WAIVER OF MORAL RIGHTS
General Rule: Moral rights can be waived in writing,
NEIGHBORING RIGHTS
expressly so stating such waiver.
1. encompasses moral rights - specifically the
Exceptions: Even if writing, waiver is still not valid if:
right of the performer to claim to be identified
a. use the name of author, title of his work,
as such performer.
or his reputation w/ respect to any
2. include the right to proceeds in
version/adaptation of his work, which
subsequent transfers - equivalent to 5% of
because of alterations, substantially tend
the compensation received for the original
to injure literary/artistic reputation of
performance.
another author
b. use name of author in a work that he did
NEIGHBORING RIGHTS DOES NOT APPLY TO THE
NOT create QuickTime™ and a
TIFF (Uncompressed) decompressor
FOLLOWING
are needed to see this picture. 1. exclusive use of a natural person for own
TERM OF MORAL RIGHTS - during the lifetime of
personal purposes
the author and fifty (50) years after the death of the
2. short excerpts for reporting current
author.
events
1. Post-humous enforcers shall be named in
3. sole use for the purpose of teaching or
writing to be filed in the National Library.
for scientific research
2. Moral rights are not assignable or subject to
4. fair use of the broadcast
license.
3. Damages can be recovered under the Civil
Code for violation of moral rights.

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ACTS THAT DO NOT CONSTITUTE c. subject to such other limitations as may


INFRINGEMENT be provided in the regulations
1. recitation or performance of a work 10. public display of original/copy of work
a. lawfully made accessible to public NOT made
b. done privately & free of charge or a. by any media means
c. made strictly for charitable or religious b. either work has been published, sold,
institution or society given away, transferred to another
2. making quotations from a published work person by author or his successor in title
provided: (SGT)
a. compatible w/ fair use and 11. use: work for purpose of:
b. extent: justified for the purpose a. any judicial proceedings
c. source & name of author, if appearing on b. for giving of professional advice by legal
the work, are mentioned practitioner
3. reproduction or communication to the
public by mass media of articles of FAIR USE DOCTRINE – the fair use of copyrighted
current PRESS provided: work for criticism, news reporting, teaching (including
a. delivered in public multiple copies for classroom use), research, and
b. use: info purposes similar purposes is not an infringement of copyright.
c. not expressly reserved
d. source: clearly indicated FACTORS TO DETERMINE FAIR USE
4. reprod. or comm.. to public of literary, 1. purpose & character of the use
artistic, scientific works 2. nature of the copyrighted work
a. part of reports of current events 3. amount & substantiality of the portion used in
b. by means of photo, cinema, broadcasting relation to the whole thing as a whole
c. extent necessary for that purpose 4. effect of the use: on the potential market or
5. inclusion of a work in any comm. to the the value of the copyrighted work
public: Important: It is immaterial whether the alleged
a. made by illustration for teaching infringement was done for profit or not. A teacher that
purposes copies a book and hands out the copies to his
b. compatible with fair use: source/name of students is liable. It is also immaterial whether or not
author, mentioned the infringer acknowledges the author.
6. recording in schools, uni and educational
institutions DECOMPILATION = FAIR USE
a. intended for broadcast for such schools 1. reproduction/translation of code
b. recording: deleted w/in reasonable period 2. to achieve interoperability of an
st
after they were 1 broadcast independently created computer program
c. recordings: may NOT be made from AV
works are part of the general feature EFFECT OF FAIR USE AS A DEFENSE IN
films except for brief excerpts of the INFRINGEMENT – The defendant relieves the
works. prosecution of the burden of presenting evidence
7. making of ephemeral recordings by showing the use of the copyright, as the defendant
broad-orgs by its own facilities and for admits having used it. But evidence should still be
use of its own broadcasts presented for the purpose of proving damages.
8. use of work QuickTime™ made andby a
or under the
direction/control of
TIFF (Uncompressed) Gov’t
decompressor
are needed to see this picture. Habana vs. Robles, 310 SCRA 511 (1999)
a. by National Lib or any educ, scientific or Infringement consists in the doing of any
professional (SEP) institution person, without the consent of the copyright owner, of
b. use: public interest anything, the sole right to do which is conferred by
c. compatible w/ fair use statute to the owner of the copyright.
9. public performance/comm. of a work: It is when the infringer lifts from another’s
a. in a place: no admission fee work content that was the result of the latter’s
b. by a club/institution for education and research, then proceeds to misrepresent them as her
charitable purpose: aim is NOT profit- own, then circulates the book for commercial use
making without acknowledging the real author.

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ELEMENTS OF INFRINGEMENT Annex W – DEPOSIT AND NOTICE REQUIREMENTS


1. Unauthorized act
2. Existence of Copyright
3. Access to the Original
4. Copying took place.
BANK SECRECY LAW

DEFAULT RULE IN DETERMINING WHETHER


THERE’S INFRINGEMENT – For the progress of art
and science, allow use of the work provided the use BANK SECRECY ACT
does: This is an act prohibiting disclosure of or inquiry
1. not conflict with the normal exploitation of the into all types of deposits in any banking institution
work and including investments in bonds issued by the
2. not unreasonably prejudice the legitimate Philippine government and its political subdivisions
interests of the right’s holder and instrumentalities.
Microsoft Corp vs. Maxicorp Inc., GR No.140946,
September 13, 2004 ™ R.A. 1405 considers deposits as absolutely
Copyright infringement and unfair confidential in nature
competition are not limited to the act of selling
counterfeit goods. They cover a whole range of acts ™ The Law was later extended to include
from copying, assembling, packaging to marketing, deposits in foreign currency deposits (RA
including the mere offering for sale of counterfeit No. 6426, 1972) and deposits in offshore
goods. banking units (PD No. 1246, 1977).

™ Deposits may not be examined, inquired or


RULE ON MERE POSSESSION OF INFRINGING looked into by any person, government
GOODS official, bureau or office
General Rule – Mere possession of infringing goods
is not punishable. ™ It is also unlawful for any official or employee
Exceptions – Unless one can prove that the of a bank to disclose to any person any
possessor knows or ought to know that the goods in information concerning deposits
his possession are an infringing copy of the work and
held for the purpose of: PURPOSE of the Law:
1. selling, letting for hire, or exposing it for To encourage people to deposit their money in
selling, letting for hire banks and, thereby, discourage private hoarding
2. distributing the article either for purposes of so that the banks may lend out the money and
trade or for any other purpose that will prejudice the assist in the economic development of the
rights of the copyright owner in the work country. [Sec 1]
3. trade exhibit of the article in public
GROUNDS TO ALLOW EXAMINATION OF A
Columbia Pictures vs. CA, 261 SCRA 144 BANK ACCOUNT:
(1996)
If so much is taken that the value of the original 1. Where the depositor consents in writing;
is sensibly diminished, or the labors of the original author 2. Impeachment cases;
are substantially and to an injurious
QuickTime™ and a extent appropriated 3. By court order in bribery or dereliction of
TIFF (Uncompressed) decompressor
by another, that is sufficient to constitute
are needed to see this picture. infringement. duty cases against public officials;
4. Deposit is subject of litigation
REMEDIES FOR INFRINGEMENT 5. In cases of unexplained wealth
1. Civil (PNB v. Gancayco)
2. Administrative 6. By order of the court in cases filed by the
3. Criminal ombudsman and upon the latter’s authority
Important: Doctrine of exhaustion of administrative remedies to examine and obtain access to bank
does not apply. accounts and bank records
(Marquez v. Desierto)
Annex V – REMEDIES AGAINST INFRINGEMENT

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7. Audit purposes, made by an independent have unexplained wealth under the Anti-
auditor hired by the bank, the results of which Graft and Corrupt Practices Act of 1960
used exclusively for the latter

REQUISITES BEFORE ALLOWING AN IN- Mellon Bank v. Magsino, 190 SCRA 633 (1990)
CAMERA INSPECTION: Even in cases not involving prosecution under
the Anti-Graft and Corrupt practices Act, an inquiry
1. Pending case before a court of competent into the whereabouts of the amount converted
jurisdiction necessarily extends to whatever is concealed (being
2. Account must be clearly identified in the name of persons other than the one
3. The inspection is limited to the subject responsible for the illegal acquisition) inasmuch as
matter of the pending case the case is aimed at recovering the amount
4. The bank personnel and the account converted.
holder must be notified to be present
during the inspection, and such inspection
may cover only the account identified in
the pending case.
INSOLVENCY LAW
• An investigation by the Office of the Ombudsman
is not a pending litigation to allow examination of
a bank account.

OTHER ADDITIONAL EXEMPTIONS TO THE INSOLVENCY


SECRECY OF BANK DEPOSIT ACT (ASIDE FROM Insolvency generally denotes the state of a person
THOSE STATED IN THE LAW): whose liabilities are more than his assets.
1. The National Internal Revenue Code
authorizes the Commissioner of Internal
There are two principal laws available to a
Revenue to inquire into bank deposit
corporation seeking debt relief. These are, (1) the
accounts of:
Insolvency Law and (2) Presidential Decree No.
a. a decedent to determine his gross estate;
902-A.
and
b. any taxpayer who has filed an application
THREE (3) PRINCIPAL SUBJECTS OF
for compromise of his tax liability by
INSOLVENCY LAW:
reason of financial incapacity to pay his
1. Suspension of Payments
tax liability, which application shall
2. Voluntary Insolvency
include a written waiver of his privilege
3. Involuntary Insolvency
under the Secrecy of Bank Deposit Act or
under other general or special laws, and
such waiver shall constitute the authority ™ In accordance with the provisions of the
of the Commissioner to inquire into the Insolvency Law "every insolvent debtor may
bank deposits of the taxpayer. be permitted to suspend payments or be
2. In cases of unclaimed balances (Sec. 2, Act discharged from his debts and liabilities"
3936) (Sec. 1). Corporate debtors however are not
3. inquiry into or examination of any deposit or given a discharge.
investmentTIFFwith
QuickTime™ and a
any
(Uncompressed) banking
decompressor institution when ™ A petition for suspension of payments with a
are needed to see this picture.
the examination is made by the Banko request for the appointment of a
Sentral ng Pilipinas in the course of a management committee or rehabilitation
periodic or special examination in receiver where the corporation has no
accordance with the rules of examination of sufficient assets to cover its liabilities is a
the BSP (Sec 11, RA 9160) creation of PD 902-A and not the Insolvency
4. The Courts were authorized to examine bank Law.
deposits of spouse and unmarried ™ The Insolvency Law is both distributive and
children of government officials found to rehabilitative

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In Re: Estate of Mindanao Motor Line, Inc., 57 or rehabilitation receiver


SCRA 103
"......and the purpose of the filing of the petition was
other than the purpose for which the Insolvency Law ™ However, if the SEC finds that the debtor is
was enacted, which is to effect an equitable insolvent and can no longer be rehabilitated,
distribution of the bankrupt's properties among his the SEC can order the dissolution of the
creditors and to benefit the debtor by discharging him debtor and the distribution of its assets in
to start afresh with the property set apart for him as accordance with the provisions of the Civil
exempt." Code.

™ In the Philippines, no person shall be EFFECT OF INSOLVENCY PROCEEDINGS FILED


imprisoned for debt (Sec. 20, Art, III, BY INDIVIDUAL DEBTORS:
Constitution). The penal provisions of the 1. Suits pending in court
Insolvency Law (Sec. 70 to 71) and the a. secured obligations suspended until
Revised Penal Code (Art. 314) punish the assignee appointed
commission of fraud by the insolvent and b. unsecured obligations terminated except
not the non-payment of the debt to fix amount of obligation
c. foreclosure suits pending continue
Jurisdiction in INSOLVENCY MATTERS: 2. Suit not yet filed - cannot be filed anymore,
but claims may be presented to assignee
Regular Courts SEC
Original and Exclusive Original and Exclusive NOTE: The result is different if the petitioner is a
jurisdiction over all Jurisdiction over: CORPORATION, because under the Revised Rules
petitions for Voluntary on Corporate Recovery, ALL claims, whether secured
and Involuntary or unsecured, are stayed.
1) Petitions for
Insolvency suspension of
payments where SUSPENSION OF PAYMENTS - the postponement,
debtor possesses by court order, of the payment of debts of one who,
sufficient assets to while possessing sufficient property to cover his
cover all its debts but debts, foresees the impossibility of meeting them
foresees the when they respectively fall due. (Sec. 2)
impossibility of
meeting them Distinctions between SUSPENSION OF
PAYMENTS and INSOLVENCY:
- may or may not be
accompanied with a Suspension of Payment Insolvency
request for the appt of Debtor has enough Debtor has more liabilities
a management assets to meet liabilities than assets
committee or but cannot meet them as
rehabilitation receiver they fall due
always initiated by debtor initiated by creditors/other
2) Petitions for persons if
suspension
QuickTime™ and a
TIFF (Uncompressed) decompressor of payments involuntary; initiated by
are needed to see this picture.
where the corporation debtor if voluntary
has no sufficient assets Purpose is to delay or Purpose is to discharge the
but accompanied with a suspend the payment of debtor from payment of
request for the debts debts
appointment with a
The amount of Creditors receive less than
request for the
indebtedness is not their credits, and in cases
appointment of a
affected where there are
management committee
preferences, some
creditors may not receive

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anything at all 5. Conveyance of the debtor’s property by


the clerk of court to the assignee (Sec. 32);
6. Liquidation of the debtor’s assets and
PROCEDURE FOR SUSPENSION OF PAYMENTS: payment of his debts (Sec. 33);
1. Filing of the petition by the debtor (Sec.2); 7. Composition, if agreed upon (Sec. 63);
2. Issuance by the court of an order calling a 8. Discharge of the debtor on his application
meeting of creditors (Sec.3); (Sec. 64), except a corporation (Sec. 52);
3. Publication of the order and service of 9. Objection, if any, to the discharge (Sec. 66);
summons (Sec.4); 10. Appeal to the Supreme Court in certain
4. Meeting of creditors for the consideration of Cases (Sec. 62).
the debtor’s proposition (Sec. 4);
5. Approval by the creditors of the debtor’s
proposition Effect of Filing of Petition:
6. Objections, if any, to the decision which
must be made within 10 days following the
Phil. Trust Co. vs. National Bank, 42 Phil. 413
meeting (Sec. 11);
(1921)
7. Issuance of order by the court directing
Once the petition is filed, ipso facto takes away
that the agreement be carried out in case the
and deprives the debtor petitioner of the right to do or
decision is declared valid, or when no
commit any act of preference as to creditors, pending
objection to aid decision has been presented
the final adjudication.
(Sec. 11);
8. If the decision of the meeting be negative,
the proceeding shall be terminated and the EFFECT OF COURT ORDER DECLARING
creditors shall at liberty to enforce the rights DEBTOR INSOLVENT:
which may correspond to them (Sec. 11). 1. All the assets of the debtor not exempt from
execution are taken possession of by the
EFFECTS OF FILING OF PETITION: sheriff until the appointment of a receiver
1. No disposition in any manner of his or assignee;
property may be made by the petitioner (Sec. 2. The payment to the debtor of any debts due
3); to him and the delivery to the debtor or to
2. No payments may be made (Sec. 3); any person for him of any property belonging
3. Upon request to the court, all pending to him, and the transfer of any property by
executions against the debtor shall be him are forbidden;
suspended except execution against 3. All civil proceedings pending against the
property especially mortgaged (Sec. 6) insolvent debtor shall be stayed;
4. Mortgages or pledges, attachments or
executions on property of the debtor duly
VOLUNTARY INSOLVENCY
recorded and not dissolved are not, however,
An insolvent debtor owing debts exceeding in
affected by the order
amount the sum of P1,000 may apply to be
discharged from his debts and liabilities by petition
to the Regional Trial Court of the province or city in INVOLUNTARY INSOLVENCY
which he has resided for 6 months next preceding An adjudication of insolvency may be made on
the filing of the petition. (Sec. 14) the petition of three or more creditors, residents of
the Philippines, whose creditors or demands accrued
QuickTime™ and a in the Philippines, and the amount of which creditors
PROCEDURE FOR VOLUNTARY
TIFF (Uncompressed) INSOLVENCY:
decompressor
are needed to see this picture. or demands are in the aggregate of not less than
The procedure is as follows:
P1,000.
1. Filing of petition by the debtor praying for
the declaration of insolvency (Sec. 14);
2. Issuance of an order of adjudication Nature of Involuntary Insolvency:
declaring the petitioner insolvent (Sec. 18); ™ Not a mere personal action against the
3. Publication and service of the order (Sec. insolvent for the collection of debts
19); ™ Purpose is to impound all of his non-exempt
4. Meeting of the creditors to elect the property, to distribute it equitably among his
assignee in insolvency (Sec. 30); creditors, and to release him from further
liability

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™ Action is a proceeding in rem as well as in 6. allowing default judgment in favor of a


personam (Sec. 46) creditor to defraud other creditors
7. Allowing property to be taken under legal
PROCEDURE FOR INVOLUNTARY INSOLVENCY: process in preference of a particular creditor
1. Filing of the petition by three or more to defraud other creditors
creditors (Sec. 20); 8. Making conveyance, assignment or transfer
2. Issuance of the order requiring the debtor to of his property to defraud his creditors
show cause why he should not be 9. Making conveyance, assignment or transfer
adjudged insolvent (Sec. 21); of his property in contemplation of insolvency
3. Service of order to show cause (Sec. 22); 10. Default of a merchant or tradesman to pay
4. Filing of answer or motion to dismiss (Sec. his current obligations for a period of 30 days
23); 11. Failure to pay money on deposit or received
5. Hearing of the case (Sec. 24); in a fiduciary capacity for a period of 30 days
6. Issuance of order for decision adjudging after demand
debtor insolvent (Sec. 24); 12. Insufficiency of property to satisfy execution
7. Publication and service of order (Sec. 25); against him (Sec. 20)
8. Meeting of the creditors to elect the
assignee in insolvency (Sec. 30); Assets of the insolvent which are not exempt from
9. Conveyance of the debtor’s property by the execution will then be distributed among his creditors
clerk of court to the assignee (Sec. 32); in accordance with the rules of concurrence in
10. Liquidation of the debtor’s assets and preference of credits in the Civil Code. There is a
payment of his debts (Sec. 33); provision in the Labor Code which says the claim of
11. Composition, if agreed upon (Sec. 63); laborer’s take over and priority over all other place
12. Discharge of the debtor on his application including taxes of the government.
(Sec. 52);
13. Objection, if any, to the discharge (Sec. 66); Distinctions between VOLUNTARY INSOLVENCY
14. Appeal to the Supreme Court in certain and INVOLUNTARY INSOLVENCY:
cases (sec. 62) VOLUNTARY INVOLUNTARY
INSOLVENCY INSOLVENCY
COMPOSITION – an agreement, made upon a One creditor is sufficient Three or more creditors
sufficient consideration, between an insolvent or required
embarrassed debtor and his creditors, whereby the Filed by the insolvent Filed by three or more
latter for the sake of immediate or sooner payment, debtor creditors who possess
agree to accept a dividend less than the whole qualifications required by
amount of their claims, to be distributed pro rata, in law
discharge and satisfaction of the whole debt.
Debtor must not be guilty Debtor must have
of any of the acts of committed one or more
ACTS OF INSOLVENCY:
insolvency enumerated in of such acts
In voluntary insolvency – filing of a petition
Sec. 20
Amount of indebtedness It must not be less than
In involuntary insolvency - the following are
must exceed P1,000 P1,000
considered act of insolvency and the petition for
Bond is not required Petition accompany bond
involuntary insolvency must set forth one or more of
the following: Order of adjudication of Granted only after
1. Intention TIFF
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toare(Uncompressed)
depart from the Philippines to
decompressor
insolvency may be hearing
defraud creditors
needed to see this picture.
granted ex parte
2. Absence from the Philippines to defraud Petition is filed in RTC Length of residence is
creditors where debtor has resided immaterial
3. Concealing self to avoid service of legal for 6 months
processes Court issues order of Only after hearing
4. concealing pr removing property to avoid its adjudication declaring
being attached or taken on legal process petitioner insolvent upon
5. confession of judgment in favor of a creditor filing of the voluntary
to defraud other creditors petition

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ORDER OF DISTRIBUTION/PREFERENCE: Discharge is the formal and judicial release of an


1. Equitable Claims; insolvent debtor from his debts with the exception
2. Preferred claims with respect to specific of those expressly reserved by law.
movable property and specific immovable
property under Article 2241 and 2242 of the DEBTS NOT DISCHARGED:
Civil Code; 1. Taxes due the National government of any
3. Preferred claims as to unencumbered property provincial or municipal government;
of the debtor which shall be paid in the order 2. Debts created by fraud, embezzlement,
named in Article 2244 of the Civil Code; defalcation as a public officer or while acting
4. Common or ordinary credits which shall be in a fiduciary capacity
paid pro rata regardless of dates under Article
2245 of the Civil Code MORE SPECIFICALLY, (these debts not discharged
are the following):
PARTNERSHIPS AND CORPORATIONS 1. Taxes and assessments due the
Government, whether national or local
2. Any debt created by the fraud or
A partnership may be declared insolvent
embezzlement of the debtor;
- BY A PETITION of the partners or any one of them 3. Any debt created by the defalcation of the
or three or more creditors who can also petition for debtor as a public officer or while acting in a
insolvency.
fiduciary capacity;
- may be done DURING THE CONTINUATION of the
4. Debt of any person liable for the same
partnership business or AFTER ITS DISSOLUTION debt, for or with the insolvent debtor,
and BEFORE THE FINAL SETTLEMENT thereof.
either as partner, joint contractor, indorser,
surety or otherwise
Campos Rueda & Co. v. Pacific Commercial Co., 5. Debts of a corporation
44 Phil.916 (1922) 6. Claim for support
A partnership may be declared insolvent 7. Discharged debt but revived by a
notwithstanding the solvency of the partners subsequent new promise to pay
constituting the same. 8. Debts which have not been duly scheduled
in time for proof and allowance, unless the
Who may file petition for declaration of creditors had notice or actual knowledge of
insolvency of a PARTNERSHIP the insolvency proceedings, are not
Voluntary Insolvency –ALL the partners, or ANY discharged as to such creditors;
ONE of them 9. Claims for unliquidated damages arising
Involuntary Insolvency – ONE OR MORE of the out of pure tort;
partners or THREE OR MORE creditors of the 10. Claims of secured creditors
partnership 11. Claims not in existence or not mature at
the time of discharge
Who may file petition for the declaration of 12. Claims that are contingent at the time of
Insolvency of a CORPORATION discharge
The petition may be filed by ANY OFFICER DULY
AUTHORIZED by the vote of the board of directors or FRAUDULENT PREFERENCE -
trustees at a meeting especially called for that A fraudulent preference is committed when the
purpose, or by the assent in writing of the majority of debtor procures any part of his property to be
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the directors, or trustees, as the
TIFF (Uncompressed) case may be.
decompressor attached, sequestered, or seized on execution or
are needed to see this picture.
makes any payment, pledge, mortgage, assignment,
EFFECT when a corporation is declared insolvent transfer, sale or conveyance of any part of his
Whenever any corporation is declared insolvent, its property, whether directly or indirectly, absolutely or
property and assets shall be distributed to the conditionally, to any one under the following
creditors, but NO DISCHARGE shall be granted to circumstances:
any corporation. 1. The debtor is insolvent or in contemplation of
insolvency;
DISCHARGE

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2. The transaction in question is made within 30


days before the filing of a petition by or When provisions of Act NOT APPLICABLE
against the debtor; The provisions of the Act shall not apply to
3. It is made with a view to giving preference to corporations principally in the BANKING BUSINESS
any creditor or person having a claim against or any other corporation as to which there is any
him; SPECIAL PROVISION OF LAW for its liquidation in
4. and the person receiving a benefit thereby case of insolvency
has reasonable cause to believe
5. that the transfer is made with a view to ™ A petition for liquidation of a n insolvent
prevent his property from coming to his partnership or corporation is a special
assignee in insolvency or to prevent the proceeding not an ordinary action
same from being distributed ratably among
his creditors or to defeat the object of or any
way hinder the operation of or evade the
provisions of the Insolvency Law. CORPORATE SUSPENSION OF
PAYMENTS
PRESUMPTION OF FRAUD
If such payment, pledge, mortgage, assignment,
transfer, sale or conveyance is not made in the usual
and ordinary course of business of the debtor, or if
such seizure is made under a judgment which the GOVERNING LAWS
debtor has confessed or offered to allow, that fact
shall be prima facie evidence of fraud. (If it is made in 1. The Insolvency Law [Sections 2 to 13]
good faith and for value—it is a valid conveyance).
Section 2. The debtor who, possessing sufficient
TRANSFER property to cover all his debts, be it an individual
Transfer includes the sale and every other and person, be it a sociedad or corporation, foresees the
different modes of disposing of or parting with impossibility of meeting them when they respectively
property, or the possession of property, absolutely fall due, may petition that he be declared in the state
or conditionally, as a payment, pledge, mortgage, of suspension of payments by the court, or the judge
gift or security. thereof on vacation, of the province or of the city
™ A deposit of money is NOT transfer. which he has resided for six months next preceding
the filing of his petition.
™ An exchange of securities within the 30-day
period is not a fraudulent preference under 2. Section 5[d] of PD 902-A
the law even when both parties know that the
debtor is insolvent, if the security given up is Section 5. In addition to the regulatory and
a valid one at the time the exchange is made adjudicative functions of the Securities and
and of equal value with the one received in Exchange Commission over corporations,
exchange. The reason is that the exchange partnerships and other forms of associations
takes away nothing from the other creditor. registered with it as expressly granted under existing
laws and decrees, it shall have original and exclusive
Effect of Fraudulent Transfer: jurisdiction to hear and decide cases involving:
As against the creditors ofandthe
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TIFF (Uncompressed) decompressor
any conveyance orto seeassignment
are needed this picture. fraudulently Petitions of corporations, partnerships or
made is void. associations to be declared in the state of
suspension of payments in cases where the
In all actions to set aside or nullify fraudulent corporation, partnership or association possesses
preference or transactions as void under the sufficient property to cover all its debts but foresees
provisions of sec. 70, the assignee appears for, the impossibility of meeting them when they
and represents, the general creditors. The respectively fall due or in cases where the
creditors of the insolvent are not authorized to corporation, partnership or association has no
institute an independent action to annul such sufficient assets to cover its liabilities, but is under
fraudulent preferences. the management of a Rehabilitation Receiver or

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Management Committee created pursuant to this companies, upon request of the government agency
Decree. [as amended by PD 1758] concerned.

The management committee or rehabilitation


3. Section 6[c] and [d] of PD 902 –A receiver, board or body shall have the power to take
custody of, and control over, all the existing assets
and property of such entities under management; to
Section 6. In order to effectively exercise such
jurisdiction, the Commission shall possess the evaluate the existing assets and liabilities, earnings
and operations of such corporations, partnerships or
following powers:
c. To appoint one or more receivers of the other associations; to determine the best way to
property, real and personal, which is the subject of salvage and protect the interest of the investors and
creditors; to study, review and evaluate the feasibility
the action pending before the Commission in
accordance with the pertinent provisions of the Rules of continuing operations and restructure and
of Court in such other cases whenever necessary in rehabilitate such entities if determined to be feasible
by the Commission. It shall report and be responsible
order to preserve the rights of the parties-litigants
and/or protect the interest of the investing public and to the Commission until dissolved by order of the
creditors: Provided, however, That the Commission Commission: Provided, however, That the
Commission may, on the basis of the findings and
may, in appropriate cases, appoint a rehabilitation
receiver of corporations, partnerships or other recommendation of the management committee, or
associations not supervised or regulated by other rehabilitation receiver, board or body, or on its own
findings, determine that the continuance in business
government agencies who shall have, in addition to
the powers of a regular receiver under the provisions of such corporation or entity would not be feasible or
of the Rules of Court, such functions and powers as profitable nor work to the best interest of the
are provided for in the succeeding paragraph d) stockholders, parties-litigants, creditors, or the
hereof: Provided, further, That the Commission may general public, order the dissolution of such
corporation entity and its remaining assets liquidated
appoint a rehabilitation receiver of corporations,
partnerships or other associations supervised or accordingly. The management committee or
regulated by other government agencies, such as rehabilitation receiver, board or body may overrule or
revoke the actions of the previous management and
banks and insurance companies, upon request of the
government agency concerned: Provided, finally, board of directors of the entity or entities under
That upon appointment of a management committee, management notwithstanding any provision of law,
articles of incorporation or by-laws to the contrary
rehabilitation receiver, board or body, pursuant to this
Decree, all actions for claims against corporations, notwithstanding.
partnerships or associations under management or
The management committee, or rehabilitation
receivership pending before any court, tribunal, board
or body shall be suspended accordingly; receiver, board or body shall not be subject to any
action, claim or demand for, or in connection with,
any act done or omitted to be done by it in good faith
d. To create and appoint a management
committee, board, or body upon petition or motu in the exercise of its functions, or in connection with
propio to undertake the management of corporations, the exercise of its power herein conferred [as
partnerships or other associations not supervised or amended by PD 1799]
regulated by other government agencies in
appropriate cases when there is imminent danger of 4. Section 5.2 of the Securities Regulation Code
dissipation, loss, wastage or destruction
QuickTime™ and a of assets or
TIFF (Uncompressed) decompressor
other properties areofneededparalyzation
to see this picture. of business Section 5.2. The Commission’s jurisdiction over all
operations of such corporations or entities which may cases enumerated under section 5 of Presidential
be prejudicial to the interest of minority stockholders, Decree No. 902-A is hereby transferred to the Courts
parties-litigants or the general public: Provided, of general jurisdiction or the appropriate Regional
further, That the Commission may create or appoint a Trial Court: Provided, That the Supreme Court in the
management committee, board or body to undertake exercise of its authority may designate the Regional
the management of corporations, partnerships or Trial Court branches that shall exercise jurisdiction
other associations supervised or regulated by other over the cases. The Commission shall retain
government agencies, such as banks and insurance jurisdiction over pending cases involving intra-

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corporate disputes submitted for final resolution When an individual files a petition for
which should be resolved within one (1) year from the suspension of payments, the applicable provisions
enactment of this Code. The Commission shall retain found in the Insolvency Law provide that only those
jurisdiction over pending suspension of claims of unsecured creditors are stayed. Those
payment/rehabilitation cases filed as of 30 June 2000 having preferred liens may still enforce. This is found
until finally disposed. in Section 9 of the Insolvency Law which provides
that the following creditors are not affected by an
5. Interim Rules of Procedure on Corporate order of suspension of payments:
Rehabilitation (2000) a. Persons having claims for personal labor,
maintenance, expenses of last illness
EQUITY TEST and funeral of the wife or children of the
™ When corporation has more assets than debtor incurred in the sixty (60) days
liabilities, but is unable to meet his immediately preceding the filing of the
obligations when they fall due. petition; and,
™ A corporation may petition for suspension of b. Persons having legal and contractual
payments although he may be able to pay his mortgages.
debts at some future time on a settlement
and winding up of his affairs. Corporations.
When a Corporation files a petition for
SUSPENSION OF PAYMENTS PROCEEDINGS: suspension of payments, the applicable laws are PD
902-A and the Interim Rules on Corporate
™ A remedy available to the debtor who, Rehabilitation Promulgated by the Supreme Court.
possessing sufficient property to cover all his Such Rules provide for an order “staying enforcement
debts, foresees the impossibility of meeting of all claims, whether for money or otherwise, and
them when they respectively fall due, and whether such enforcement is by court action or
therefore presents a proposal to pay his otherwise, against the debtor, its guarantors and
obligations on dates later than due dates. sureties not solidarily liable with the debtor.” [Rule 4
™ Purpose: To seek postponement of the (b), Section 6].
payment of debts in order to provide the
debtor a given period to convert some of his ™ This means that “all claims against
properties to cash. corporations, partnerships, or
™ Jurisdiction: RTC associations that are pending before any
™ When the suspensive effect commences: court, tribunal or board, without
Upon the filing of the petition. distinction as to whether or not a creditor
is secured or unsecured, shall be
REQUISITES OF PETITION FOR SUSPENSION OF suspended effective upon the
PAYMENTS: appointment of a management
1. Filed by a debtor possessing sufficient committee, rehabilitation receiver, board
property to cover all his debts; or body in accordance with the provisions
2. Foreseeing the impossibility of meeting them in PD 902-A.”
when they respectively fall due; ™ This stay extends to all claims, pecuniary
3. Petitioning that he be declared in the state of or otherwise. Thus, even petitions
suspension of payments; involving non-monetary claims [i.e. a
Note: Petition need QuickTime™
not be verified.
and a
case to rescind a Special Power of
TIFF (Uncompressed) decompressor
are needed to see this picture.
Attorney], and unestablished claims [i.e.
EFFECT OF FILING A PETITION FOR a labor claim in the NLRC for illegal
SUSPENSION OF PAYMENTS ON THE PENDING dismissal] are stayed upon petition for
CLAIM FILED AGAINST THE PETITIONER suspension of payments. Only the
payments of taxes are not stayed.
A distinction must be made between an INDIVIDUAL
that files for suspension of payments, and a WHEN AN AUTOMATIC STAY ORDER MAY BE
CORPORATION that files the same. LIFTED
The Interim Rules of Procedure for Corporate
Individual. Rehabilitation provide that the stay order shall be

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issued not later than five [5] days from the filing of the creditors
petition. [Rule 4, Section 6] Generally, this stay order No time limit as long the Absent any agreement
shall be effective during the whole of the proceedings corporation, partnership or among creditors,
for suspension of payments, from its issuance until its association debtor is under automatically expires
termination. [Rule 4, Section 11]. management after 3 months
committee/rehabilitation
Thus, this stay order may be lifted in two instances: receiver
1. When the proceedings are terminated. No need to obtain approval Agreement is subject
2. When relief from, modification, or termination of creditors to qualifying majority
of stay order has been filed, or motu proprio votes
granted by the court, upon showing that:
a. Any of the allegation in the petition, or
any of the contents of any attachment, or
the verification thereof has ceased to be
true; CORPORATE REHABILITATION
b. A creditor does not have adequate
protection over property securing the
claim; or
c. The debtor’s secured obligation is more
than the fair market value of the property (Interim Rules of Procedure on Corporate
subject of the stay and such property is Rehabilitation (effective December 15, 2000))
not necessary for the rehabilitation of the
debtor.
CORPORATE REHABILITATION
THE CREDITOR SHALL LACK ADEQUATE A process to try and conserve and administer the
PROTECTION IF IT CAN BE SHOWN THAT: corporation’s assets in the hope that it may
1. The debtor fails or refuses to honor a pre- eventually be able to return from financial stress to
existing agreement with the creditors to keep solvency.
the property insured;
2. The debtor fails or refuses to take
commercially reasonable steps to maintain
the property; or NATURE OF CORPORATION REHABILIATION
3. The property has depreciated to an extent PROCEEDINGS
that the creditor is unsecured [Rule 4, ™ in rem
Section 12] ™ summary and
™ non-adversarial
Note: The court may motu proprio grant relief from
stay. Furthermore, this relief is subject to the caveat APPLICABILITY
that it may be denied if it would prevent the Rules apply to petitions for rehabilitation filed
continuation of the debtor as a going concern or by corporations, partnerships and associations
otherwise prevent the approval and implementation pursuant to PD 902-A.
of the rehabilitation plan.
STEPS:
1. Filing verified petition with the appropriate
QuickTime™ and a
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RTC by
are needed to see this picture. a. corporate debtor who foresees the
Corporate Suspension of Payment vis-à-vis
impossibility of meeting its debts when
Insolvency Law
they respectively fall due; or
PD 902-A INSOLVENCY LAW b. creditors holding at least 25% of the
Applies only to Applies to either debtor’s total liabilities.
corporations, partnerships individual, partnerships 2. The following shall be annexed to the
or assication debtors or association debtors petition:
Suspensive effect covers Suspensive effect a. audited financial statements at end of its
secured and unsecured covers creditors only, last fiscal year;
creditors and not secured

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b. interim financial statement; ™ A person appointed by the RTC, in behalf of


c. Schedule of debts and liabilities; all the parties for the purpose of preserving
d. Inventory of assets; and conserving the property and preventing
e. Rehabilitation plan; its possible destruction or dissipation, if it
f. Schedule of payments and disposition of were left in the possession of any of the
assets effected within 3 months parties.
preceding the filing of the petition; ™ He does not take over the management and
g. Schedule of cash flow for the last 3 control of the debtor, but shall closely
months; oversee and monitor the operations of the
h. Statement of possible claims; debtor during the pendency of the
i. Affidavit of general financial condition; proceedings. (Bar Review Materials in
j. At least 3 nominations for rehabilitation Commercial Law, Jorge Miravite, 2002 ed.)
receiver;
k. Certificate under oath that directors and POWERS AND FUNCTIONS OF MANAGEMENT
stockholders have irrevocably COMMITTEE OR REHABILITATION RECEIVER
approved/consented to all [Sec. 6 (d), PD 902-A]
actions/matters necessary under the 1. To take custody of, and control over, all the
rehabilitation plan. existing assets and property of such entities
3. The court shall issue the stay order not later under management;
than 5 days from the filing of the petition, 2. To evaluate the existing assets and liabilities,
which among others shall: earnings and operations of such
a. appoint a rehabilitation receiver; corporations, partnerships and associations;
b. stay all actions for claims against the 3. To determine the best way to salvage and
debtor, which shall cover both secured protect the interest of the investors and
and unsecured creditors; creditors;
c. set an initial hearing for the petition (not 4. To study, review and evaluate the feasibility
earlier than 45 days but not later 60 days of continuing operations and structure and
from filing of the petition); and rehabilitate such entities if determined to be
d. direct the creditors to file their verified feasible by the RTC;
comment or opposition not later than 10 5. To report and be responsible to the RTC until
days before the initial; their failure to do dissolved; and
so would bar them from participating in 6. May overrule or revoke the actions of the
the proceedings. previous management, notwithstanding any
provision of law, articles of incorporation or
4. Publication of the stay orders in a by-laws to the contrary.
newspaper of general circulation for 2
consecutive weeks; AUTOMATIC STAY
5. Referral of rehabilitation plan to Effect of appointment of a management
rehabilitation receiver; committee or rehabilitation receiver:
6. Meetings between corporate debtor with ™ All actions for claims against the corporation
creditors. Discussions on the rehabilitation shall be suspended accordingly.
plans; ™ Purpose: To enable the management
7. Submission of final rehabilitation plan to t committee or the rehabilitation receiver to
the RTC for approval;
QuickTime™ and a
effectively exercise its powers free from any
8. The petition shall be discussed
TIFF (Uncompressed) decompressor
are needed to see this picture.
(which result judicial or extrajudicial interference that might
into the automatic lifting of the stay order unduly hinder or prevent the rescue of the
unless RTC ordered otherwise) if no debtor company (Rubberworld v. NLRC).
rehabilitation plan is approved 180 days ™ No definite duration; deemed to apply during
from initial hearing. the entire period that the corporate debtor is
9. Approval or disapproval of the rehabilitation under management committee or the
plan by RTC. rehabilitation receiver (BF Homes v. CA).

REHABILITATION RECEIVER PURPOSE FOR CERTIFICATION UNDER INTERIM


RULES ON CORPORATE REHABILITATION:

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amended, there is no repeal of Sec. 6 thereof


1. To state that the filing of the petition has declaring that the fraudulent acts or schemes, which
been duly authorized. the SEC shall exclusively investigate and prosecute
2. To confirm that the directors and are those in violation of any laws or rules and
stockholders have irrevocably approved and regulations administered and enforced by the SEC
or consented to, in accordance with existing alone. The filing of civil/intra-corporate case before
laws, all actions or matters necessary and SEC does not preclude the simultaneous and
desirable to rehabilitate the corporate debtor. concomitant filing of a criminal actions before the
(Chas Realty vs. Talavera, GR 151925) regular courts, such that a fraudulent act may have
given rise to liability for violation of the rules and
regulations of the SEC cognizable by the SEC itself,
NATURE AND PURPOSE OF CORPORATE as well as criminal liability for violation of the Revised
REHABILITATION Penal Code cognizable by the regular courts both
charges to be filed and proceeded independently,
Philippine Veterans Bank Employees Union vs. and may be simultaneously with the other.
N.U.B.E., 360 SCRA 22 (2001)
Rehabilitation connotes a reopening or
reorganization; a continuance of corporate life and Phil. Blooming Mills vs. CA, GR 142381, (October
activities in an effort to restore the corporation to its 15, 2003)
former position of successful operation and solvency. The SEC was empowered, as rehabilitation receiver,
It is the opposite of liquidation, which is the winding to take custody and control of the assets and
up wherein assets are reduced to cash, liabilities properties of corporation only; for the SEC has
discharged and surplus or loss is divided. They jurisdiction over corporations only, not over private
cannot thus be undertaken simultaneously. Thus, to individuals, except stockholders in an intra-corporate
allow liquidation would hinder the rehabilitation of a dispute (PD 902-A and PD 1758).
corporation
VOID CORPORATE REHABILITATION
MANAGEMENT COMMITTEE
NDC vs. Phil. Veterans Bank, 192 SCRA 257
Ramon Jacinto and Jaime Colayco v. First (1990)
Woman’s Credit Corporation, G.R. No. 154049 A decreed corporate rehabilitation that provides for
(August 28, 2003) the extinguishment of mortgage liens and other
Mere disagreement among stockholders as to the charges on the claims of secured creditors is void
affairs of the corporation would not in itself suffice as and unconstitutional, since it constitutes an unlawful
a ground for the appointment of a management and unreasonable exercise of police power that
committee. At least where there is no imminent abridges the obligatory force of contracts.
danger of loss of corporate property or of any other
injury to stockholders, management of corporate
business should not be wrested away from duly
elected officers who are prima facie entitled to SECURITIES REGULATION
administer he affairs of the corporation, and placed in CODE
the hands of the management committee. However,
where the dissension among stockholders is such
that the corporation cannot successfully
QuickTime™ and a carry on its
TIFF (Uncompressed) decompressor
corporate functions are neededthe
to see thisappointment
picture. of a
management committee becomes imperative. PURPOSE OF THE LAW:

SEC OR RTC JURISDICTION 1. Encourage the widest participation of


ownership in enterprises;
Fabia v. CA, GR No. 132684, (Sept. 11, 2002). 2. Protect investors, ensure full and fair
RA 8799 effectively amended Sec. 5 of PD 902-A, disclosure about securities;
jurisdiction over intra-corporate disputes is now 3. Minimize, if not totally eliminate, insider
vested in the RTCs. However, while Sec. 5 was trading and other fraudulent or

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manipulative devices and practices which BROKER is a person engaged in the business of
create distortions in the free market. buying and selling securities for the account of
others.
POWERS AND FUNCTIONS OF THE SEC (SEC 5):
REGISTRATION STATEMENT is the application for
1. Have jurisdiction and supervision over all the registration of securities required to be filed with
entities who are the grantees of primary the SEC.
franchises and/or a license or permit issued
by the Government; All securities must first have a registration statement
2. Formulate, amend, or repeal policies and duly filed with the SEC before they may be sold or
recommendations concerning the securities offered for sale or distribution within the Philippines.
market; advise Congress and other Prior to any sale, information on the securities shall
government agencies and propose legislation be made available to each prospective purchaser.
and amendments;
3. Handle registration statements, and A registration statement may be withdrawn by the
registration and licensing applications; issuer only with the consent of the SEC.
4. Supervise, monitor, suspend or take over
the activities of exchanges, clearing agencies PROSPECTUS is the document made by or on
and other SROs; behalf of an issuer, underwriter or dealer to sell or
5. Impose sanctions for the violation of laws offer securities for sale to the public through a
and IRR; registration statement filed with the SEC.
6. Deputize any and all enforcement agencies
of the Government, civil or military as well as UNDERWRITER is a person who guarantees on a
any private institutions, firm commitment and/or declared best effort basis the
7. Issue cease and desist orders to prevent distribution and sale of securities of any kind by
fraud or injury to the investing public; another company.
8. Punish for contempt, both direct and
indirect; DEALER is any person who buys and sells securities
9. Compel the officers of any registered for his/her own account in the ordinary course of
corporation or association to call meetings of business.
stockholders or members;
10. Issue subpoena duces tecum and CLEARING AGENCY is any person who acts as
summon witnesses to appear in any intermediary in making deliveries upon payment to
proceedings, order the examination, search effect settlement in securities transactions.
and seizure of all documents,
11. Suspend, or revoke, after proper notice and EXCHANGE is an organized marketplace or facility
hearing, the franchise or certificate of that brings together buyers and sellers and executes
registration of corporations, partnerships or trades of securities and/or commodities.
associations;
AN ASSOCIATED PERSON OF A BROKER OR
NOTE: However, the SEC’s jurisdiction over all DEALER is an employee who, directly exercises
cases enumerated under Section 5 of PD No. control of supervisory authority, but does not include
902-A (intra-corporate disputes) has been a salesman, or an agent or a person whose functions
transferred to the courts of general jurisdiction or
QuickTime™ and a
are solely clerical or ministerial.
the appropriate
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(Uncompressed) decompressor
are needed to see this picture.
SALESMAN is a natural person, employed as such
SECURITIES are shares, participation or interests in or as an agent, by a dealer, issuer or broker to buy
a corporation or in a commercial enterprise or profit- and sell securities.
making venture evidenced by a certificate, contract,
instrument, whether written or electronic in character.
INVESTMENT CONTRACTS AS SECURITIES is an
ISSUER is an originator, maker, obligor, or creator of investment in a common venture, premised on a
the security. reasonable expectation of profits to be derived from
the entrepreneurial or managerial efforts of others

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(People vs. Petralba, 439 SCRA 159 [Sept. 27, 4. The sale of any security, or its derivatives,
2004]) which, by law, is under the supervision and
regulation of the Office of the Insurance
PUBLIC COMPANIES Corporations with a class of Commission, Housing and Land Use
equity securities listed on an exchange, or with Regulatory Board, or the Bureau of
assets of at least 50M Pesos and having 200 or more Internal Revenue;
holders, each of them holding at least 100 shares of 5. Any security issued by a bank (except its
a class of equity securities. own shares of stock).
6. Exempt Transactions (Sec. 10)
REPORTS WHICH MUST BE SUBMITTED BY
EVERY ISSUER TO THE COMMISSION: STEPS TO AVAIL OF THE EXEMPTION:

1. Within 135 days, after the end of the 1. Apply for an exemption by filing with the
issuer’s fiscal year, OR such other time as SEC a notice identifying the exemption;
the Commission may prescribe, an annual 2. Pay to the SEC a fee equivalent to one-
report which shall include among others, a tenth (1/10) of one percent (1%) of the
balance sheet, profit and loss statement and maximum aggregate price or issued value
statement of cash flows, for such last fiscal of the securities.
year, certified by an independent certified
public accountant, and a management PROCEDURE FOR REGISTRATION (SEC. 12):
discussion and analysis of results of
operations; and 1. Filing: The issuer must file in the main office
of the SEC,
2. Such other periodical reports for interim a. a sworn registration statement with
fiscal periods AND current reports on respect to such securities,
significant development of the issuer as the b. the registration statement must include
Commission may prescribe as necessary any prospectus which may be required
to keep current information on the operation 2. Signature: The registration statement shall
of the business and financial condition of the be signed by the issuer’s executive officer,
issuer. its principal operating officer, its principal
financial officer, its comptroller, principal
GENERAL RULE: Securities shall not be: accounting officer, its corporate secretary
1. sold, or persons performing similar functions
2. offered for sale or distribution accompanied by a duly verified resolution
3. within the Philippines of the board of directors of the issuer
4. without a registration statement duly filed corporation.
and approved by the SEC 3. Fees: Upon filing, the issuer shall pay a fee
of not more than 1/10 of 1% of the
EXCEPT: maximum aggregate price at which such
securities are proposed to be offered.
EXEMPT SECURITIES (Sec. 9) – NO need for 4. Publication: Notice of the filing of the
registration statement to be duly filed and registration statement shall be immediately
approved by the SEC.: published by the issuer, at its own expense,
1. Those issuedQuickTime™ or guaranteed
and a
by the in two (2) newspapers of general
Government of the Philippines,
TIFF (Uncompressed) decompressor
are needed to see this picture. or by any circulation in the Philippines, once a week
political subdivision, agency, or for two (2) consecutive weeks, reciting:
instrumentality; - That a registration statement for the
2. Those issued or guaranteed by the sale of such security has been filed,
government of any country with which the - That the aforesaid registration statement,
Philippines maintains diplomatic relations as well as the papers attached thereto
(on the basis of reciprocity); are open to inspection;
3. Certificates issued by a receiver or by a - Copies, photostatic or otherwise, shall
trustee in bankruptcy duly approved by the be furnished to interested parties at
proper adjudicatory body;

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such reasonable charge as the SEC REQUISITES BEFORE A PRE-NEED PLAN IS


may prescribe. SOLD OR OFFERED FOR SALE TO THE PUBLIC:
5. Order: Within forty-five (45) days after the
date of filing, the SEC shall declare the 1. It must be registered;
registration statement effective or rejected, 2. Persons involved in the sale of pre-need
6. Entry of Order: The SEC will enter an order plans must be licensed;
declaring the registration statement to be. 3. There must be disclosures to prospective
7. Oath by the issuer: Upon effectivity of the plan holders;
registration statement, the issuer shall state 4. Provide for uniform accounting system,
under oath in every prospectus that all reports and record keeping with respect to
registration requirements have been met such plans,
and that all information are true and 5. Impose capital, bonding and other
correct as represented by the issuer or the financial responsibility;
one making the statement. 6. And establish trust funds for the payment
of benefits under such plans.
SUSPENSION OF REGISTRATION (SEC. 15):
REPORTORIAL REQUIREMENTS; PERIODIC AND
1. The SEC may suspend registration if the issuer OTHER REPORTS OF ISSUERS (SEC. 17):
refuses to furnish information required by the
SEC in order to enable it to ascertain whether the Every issuer shall file with the SEC:
registration of such security should be revoked if a. Within 135 days, after the end of the
it finds that: issuer’s fiscal year, an annual report
2. The information contained in the registration which shall include, a balance sheet,
statement filed is or has become misleading, profit and loss statement and statement
incorrect, inadequate or incomplete in any of cash flows, for such last fiscal year,
material respect, certified by an independent certified
3. Or the sale or offering for sale of the security public accountant, and a management
registered may work or tend to work a fraud. discussion and analysis of results of
4. The SEC may also suspend the right to sell and operations; and
offer for sale such security pending further b. Other periodical reports for interim
investigation. fiscal periods and current reports on
significant developments of the issuer
NOTE:
1. Any sale of the security when the ISSUER An issuer is one which has sold a class of its
registration is suspended shall be void. securities pursuant to Sec. 12 or is a Public
2. Upon issuance of an order of suspension, the Company.
SEC shall conduct a hearing. If it
determines that the sale of any security PUBLIC TENDER OFFER a public announced
should be revoked, it shall issue an order intention by a person acting alone or in concert with
prohibiting the sale of such security. other persons, to acquire equity securities of a public
company. (SEC IRR’s, Rule 19)
SALE, OFFER, OR DISTRIBUTION WITHIN THE
PHILIPPINES – have to be registered whether or not CREEPING ACQUISITION When a person seeks to
the offeror is a foreignerQuickTime™
or not. and a acquire 35% or more of equity shares in a public
TIFF (Uncompressed) decompressor
are needed to see this picture. company, in one or more transactions, within a period
PRE-NEED PLAN is a contract which provides for of 12 months. 1
the performance of future services or the payment of
future monetary considerations at the time of actual REPORTORIAL REQUIREMENTS OF PERSONS
need. A contract wherein plan holders pay in cash or ACQUIRING SECURITIES:
installment at stated prices, with or without interest or 1. If the issuer is one that has to make a report,
insurance coverage and includes life, pension, any person who acquires directly or
education, interment, and other plans which the SEC
may from time to time approve. 1
Again, note that under the SRC itself, the creeping acquisition threshold
is 30%.

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indirectly the beneficial ownership of more want to sell to you, even if you go above 51%. In
than 5% of such class, or in excess of such other words, there’s no pro rata buying, and neither is
lesser per centum as the Commission may there a cap on how much you have to buy.
prescribe, shall, within 10 days after such
acquisition or such reasonable time as fixed Remember, these measures are undertaken to
by the Commission, submit to the issuer of protect the existing stockholders. If they don’t want to
the security, to the Exchange where the be shareholders in a corporation in which Emil “Piolo”
security is traded, and to the Commission a Ocfemia, for example, as the potential substantial
sworn statement containing: shareholder, will have a stake after his acquisition,
a. His personal circumstances they can get out if they want, and he has to be the
b. The nature of such beneficial one to bail them out.
ownership
c. If the purpose was to acquire control of NOTE: present status of thresholds on tender offers:
the business, any plans the recipient The thresholds of 15% or more for a single
may have affecting a major change in acquisition or 30% for creeping acquisitions under S.
the business 19 of the SRC have been suspended indefinitely,
d. The number of shares beneficially until the subject provisions of the Code are duly
owned, and the number of shares for amended and on the finding that the economic
which there is a right to acquire conditions that prompted the issuance of the said
granted to such person or his Resolution (originally suspending the thresholds) still
associates prevail. (SEC Memorandum Circ. 12, s. 2003)
e. Information as to any agreement with a
third person regarding the securities (e.g. REQUISITES OF A PROXY SOLICITATION (SEC.
joint ventures, loans, option 20):
arrangements, etc.) (Sec. 18) 1. Must be in writing,
2. Signed by the stockholder or his duly
REPORTORIAL REQUIREMENTS OF THOSE WHO authorized representative,
ACQUIRE SUBSTANTIALLY MORE THAN 5% 3. Filed before the scheduled meeting with
1. Any person who intends to acquire 35% or the corporate secretary.
more of equity shares in a public company, a. The proxy shall be valid only for the
whether in a single acquisition or over a meeting for which it is intended. No proxy
period of within 12 months, must submit a shall be valid and effective for a period
public tender offer to the stockholders. If longer than 5 years at one time.
the acquisition of even less than 35%
results in ownership of more than 51% of REPORTORIAL REQUIREMENTS OF THOSE WHO
total outstanding equity securities, the person HAS BENEFICIAL OWNERSHIP OF 10%(SEC. 23):
making the offer is obligated to purchase 1. Every person who is directly or indirectly
all securities thus tendered. (Sec. 19) 2 the beneficial owner of more than 10% of
any class of any equity security, or who is a
NOTE: In a public tender offer, the person intending director or an officer of the issuer of such
to acquire more than 35% is essentially making to the security, shall file:
stockholders an open offer to purchase securities a. Statement with the SEC and, if such
from whoever is willing to sell them to him. If the security is listed for trading on an
tender offer is over-subscribed, he is obligated to buy
QuickTime™ and a
Exchange, also with the Exchange, of
from those offering pro rata,
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decompressor
are needed to see this picture.
the amount of all equity securities of
plateau (or whatever percentage he was trying to such issuer of which he is the
reach). beneficial owner,
Now, if you were going to acquire more than 51%, b. Within 10 days after the close of each
then since you’re basically taking over the company, calendar month, if there is a change in
you are obligated to purchase from all those that ownership during such month, a
statement indicating his ownership at
the close of the calendar month and
2
Note: These threshold limits are found in the SEC IRR’s. The limits such changes in his ownership as have
found in the SRC itself are: a) 15% for a single acquisition; and, b) 30% occurred during such calendar month.
for a creeping acquisition. The 51% requirement is not in the SRC.

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SALE OF ANY EQUITY SECURITY BY A UNLAWFUL ACTS, DIRECTLY OR INDIRECTLY:


BENEFICIAL OWNER, DIRECTOR OR OFFICER
WHEN UNLAWFUL if the person selling the security 1. To create a false or misleading
or his principal: appearance of active trading in any listed
security traded in an Exchange or any other
1. Does not own the security sold; or trading market:
2. If owning the security, does not deliver it 2. To effect, alone or with others, a series of
against such sale within 20 days, or does transactions in securities that:
not within 5 days after such sale, deposit a. Raises their price to induce the
it in the mails or other usual channels of purchase of a security,
transportation. b. Depresses their price to induce the
sale of a security,
SHORT SWING PROFITS (SEC. 23.2) c. Creates active trading to induce such
1. Any officer, director, or 10% beneficial a purchase or sale through manipulative
owner of any security registered under Sec. devices
12 of SRC 3. To circulate or disseminate information
2. Who realizes any profit that the price of any security listed in an
3. from a purchase and sale, or sale and Exchange will or is likely to rise or fall
purchase of because of manipulative market
4. any non-exempt equity security operations
5. within any period of less than 6 months 4. To make false or misleading statements
6. shall be liable to the corporation for the with respect to any material fact, which he
profits made from the trading. knew or had reasonable ground to believe
- This provision is for the purpose of was so false or misleading, for the purpose
preventing the unfair use of information of inducing the purchase or sale of any
which may have obtained by such beneficial security listed or traded in an Exchange.
owner, director, or officer by reason of his 5. To effect any series of transactions for the
relationship to the issuer. purchase and/or sale of any security traded
in an Exchange for the purpose of pegging,
PROHIBITIONS ON FRAUD, MANIPULATION AND fixing or stabilizing the price of such
INSIDER TRADING security, unless otherwise allowed by this
Code.
PERSONS DEEMED AS INSIDER:
PROHIBITED CONDUCTS:
1. The issuer;
2. A director or officer (or person performing PAINTING THE TAPE – engaging in a series of
similar functions) of, or a person controlling transactions in securities that are reported publicity to
the issuer; give the impression of activity or price movement in a
3. A person whose relationship or former security.
relationship to the issuer gives or gave
him access to material information about MARKING THE CLOSE – buying and selling
the issuer or the security that is not securities at the close of the market in an effort to
generally available to the public; alter the closing price of the security.
4. A government QuickTime™ employee, and a
or director, or
officer ofTIFFare
an exchange,
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needed to see this picture.
clearing agency IMPROPER MATCHED ORDERS – engaging in
and/or self-regulatory organization who transaction where both the buy and sell orders are
has access to material information about entered at the same time with the same price and
an issuer or a security that is not generally quantity by different but colluding parties.
available to the public; or
5. A person who learns such information by a HYPE AND DUMP – engaging in buying activity at
communication from any of the foregoing increasingly higher prices and then selling securities
insiders. in the market at the higher prices.

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WASH SALES – engaging in transactions in which 2. Would be considered by a reasonable


there is no genuine change in actual ownership of a person important under the
security. circumstances in determining his course of
action whether to buy, sell or hold a security.
SQUEEZING THE FLOAT – taking advantage of a
shortage of securities in the market by controlling the REGISTRATION REQUIREMENT; MANDATORY:
demand side and exploiting market congestion during
such shortages in a way as to create artificial prices. No person shall engage in the business of buying or
selling securities in the Philippines as a broker or
FRAUDULENT TRANSACTIONS: dealer, or act as a salesman, or an associated
person of any broker or dealer unless registered as
It shall be unlawful for any person, directly or such with the SEC (Sec. 28).
indirectly, in connection with the purchase or sale of
any securities to: QUALIFICATIONS OF BROKERS, DEALERS,
SALESMEN AND ASSOCIATED PERSONS
1. Obtain money or property by means of any (hereinafter, the applicant for registration):
untrue statement of a material fact
2. Engage in any act, transaction, practice or 1. If a natural person, the applicant must
course of business, which operates as a satisfactorily pass a written examination;
fraud or deceit upon any person. 2. In the case of a broker or dealer, the
applicant satisfy a minimum net capital as
POSSESSION OF MATERIAL INFORMATION; prescribed by the SEC, and provide a bond
UNLAWFUL: or other security
3. If located outside of the Philippines, the
It shall be unlawful for an insider to sell or buy a applicant must file a written consent to
security of the issuer, while in possession of service of process upon the SEC.
material information with respect to the issuer or
the security that is not generally available to the PROHIBITED SALE BY A DEALER OR BROKER:
public,
Unless: No broker or dealer shall deal in or otherwise buy or
1. The insider proves that the information was sell, for its own account or for the account of
not gained from such relationship; or customers, when:
2. If the other party selling to or buying from 1. The securities listed on the Exchange and
the insider (or his agent) is identified, and dealt, are issued by a corporation,
the insider proves: 2. When such corporation’s stockholder,
a. That he disclosed the information to director, associated person or salesman is at
the other party, or the time holding office in said issuer
b. That he had reason to believe that the corporation as a director, president, vice-
other party otherwise is also in president, manager, treasurer,
possession of the information. comptroller, secretary or any office of
trust and responsibility, or is a controlling
It shall be unlawful for any insider to communicate person of the issuer (Sec. 30).
material non-public information about the issuer or
the security to any person QuickTime™who,and a by virtue of the BROKER OF THE EXCHANGE EXERCISING
communication, TIFF (Uncompressed) decompressor
becomes
are needed to seean insider, where the
this picture.
INVESTMENT DISCRETION TO EFFECT ANY
insider communicating the information knows or has TRANSACTION FOR HIS OWN ACCOUNT:
reason to believe that such person will likely buy
or sell a security of the issuer while in It shall be unlawful for any member-broker of an
possession of such information. Exchange to effect any transaction on such
Exchange for its own account, the account of an
INFORMATION IS “MATERIAL NON-PUBLIC” IF: associated person, or an account with respect to
1. It has not been generally disclosed to the which it or an associated person exercises
public and would likely affect the market investment discretion.
price of the security; or

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HOWEVER, THE FOLLOWING SHALL NOT BE 1. If approved by a Board resolution and agreed
UNLAWFUL: by a shareholder, investor or securities
intermediary, issue shares to, or record the
1. Any transaction by a member-broker acting transfer of some or all of its shares in the
in the capacity of a market maker; form of uncertificated securities.
2. Any transaction reasonably necessary to 2. If so provided in its articles of incorporation
carry on an odd-lot transactions; and by-laws, issue all of the shares of a
3. Any transaction to offset a transaction made particular class in the form of uncertificated
in error; and securities and subject to a condition that
4. Any other transaction of a similar nature as investors may not require the corporation to
may be defined by the SEC. issue a certificate in respect of any shares
recorded in their name.
POWERS WITH RESPECT TO EXCHANGES AND
OTHER TRADING MARKET (SEC. 36) RESTRICTIONS ON BORROWINGS BY
MEMBERS, BROKERS, AND DEALERS (SEC. 49):
POWERS ARE GRANTED TO THE SEC IN THE
CODE: It shall be unlawful for any registered broker or
dealer, or member of an Exchange, directly or
The SEC is authorized (provided there is notice and indirectly:
an opportunity for hearing): 1. To permit an aggregate indebtedness to
1. To summarily suspend trading in any listed exceed the percentage of the net capital
security on any Exchange or other trading (exclusive of fixed assets and value of
market for a period not exceeding thirty Exchange membership) employed in the
(30) days or, business, but not exceeding 2,000%.
2. With the approval of the President of the 2. To encumber or arrange to encumber any
Philippines, summarily to suspend all security carried for the account of any
trading on any securities Exchange or customer under circumstances that will
other trading market for a period of more permit:
than thirty (30) but not exceeding ninety a. the commingling of his securities, without
(90) days; his written consent, with the securities of
3. To determine the number, size and location any customer;
of stock Exchanges, other trading markets b. such securities to be commingled with
and commodity Exchanges and other the securities of any person other than a
similar organizations bona fide customer; or
4. To establish or facilitate the c. such securities to be encumbered, or
establishment of trust funds which shall be subjected to any lien or claim for a sum
contributed by Exchanges, brokers, dealers, in excess of the aggregate indebtedness
underwriters, transfer agents, salesmen and of such customers in respect of such
other persons transacting in securities, for securities.
the purpose of compensating investors for
the extraordinary losses or damage they may 3. To lend or arrange for the lending of any
suffer due to business failure or fraud or security carried for the account of any
mismanagement of the persons with whom customer without the written consent of such
they transact, QuickTime™ and a customer or in contravention of the SEC’s
5. Take custody and management
TIFF (Uncompressed) decompressor
are needed to see this picture.
of the fund IRRs.
itself as well as investments in and
disbursements from the funds. PRESCRIPTIVE PERIOD FOR ACTIONS UNDER
THE CODE – two (2) years after the discovery of the
UNCERTIFICATED SECURITIES (SEC. 43): facts constituting the cause of action and within five
(5) years after such cause of action accrued.
A corporation whose securities are registered
pursuant to this Code or listed on a securities
Exchange may:

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PROCEDURE FOR THE SETTLEMENT OF the license of the erring broker, dealer,
CHARGES: salesman and associated person.

1. Parties being investigated and/or charged CEASE AND DESIST ORDERS ISSUED BY THE
may propose in writing an offer of settlement SEC UNDER THE CODE:
with the SEC.
2. Upon receipt of such offer of settlement, the General rule: Whenever it shall appear that any
SEC may consider the offer based on timing, person has engaged or is about to engage in any act
the nature of the investigation or proceeding, or practice which would violate this Code, the SEC
and the public interest. may issue an order to such person to desist from
committing such act or practice.
POWER OF THE SEC WITH REGARD TO Exception: The SEC cannot charge any person with
SPECIAL ACCOUNT RULES (SEC. 68): a violation of the rules of an Exchange or other self
regulatory organization unless it appears to the SEC
1. The authority to make, amend, and rescind that such Exchange or other self-regulatory
such accounting rules and regulations as organization is unable or unwilling to take action
may be necessary to carry out the provisions against such person.
of this Code, Exception to the exception: If the SEC makes a
2. Prescribe the form or forms in which required finding that there is a reasonable likelihood of
information shall be set forth, the items or continuing, further or future violations by such
details to be shown in the balance sheet and person, then an ex-parte cease and desist order
income statement, and the methods to be for a maximum period of ten (10) days can be
followed in the preparation of accounts, issued, enjoining the violation and compelling
appraisal or valuation of assets and liabilities, compliance with such provision.

APPEAL FROM SEC (SEC. 70): ACTION TO RECOVER THE PROFITS OBTAINED
THROUGH THE UNFAIR USE OF INFORMATION:
Any person aggrieved by an order of the SEC may
appeal the order to the Court of Appeals by petition Suit to recover such profit may be instituted before
for review in accordance with the pertinent the Regional Trial Court by the issuer, or by the
provisions of the Rules of Court. owner of any security of the issuer in the name and in
behalf of the issuer if the issuer shall fail or refuse to
COURSES OF ACTION WHEN INVESTIGATION being such suit within 60 days after request or shall
DISCLOSES POSSIBLE FRAUD OR OTHER LAW fail diligently to prosecute the same thereafter, but no
VIOLATIONS: such suit shall be brought more than two years after
When investigation discloses possible fraud or other the date such profit was realized.
law violations, there are several courses of action or
remedies which the Commission may pursue, as
follows:
1. Civil Injunction – The Commission may
issue ex-parte a cease and desist order, for TRUTH IN LENDING ACT
a maximum period of ten days, enjoining the
violation, and compelling compliance with
such provision; QuickTime™ and a
2. Criminal TIFF
Prosecution – The Commission
(Uncompressed) decompressor
are needed to see this picture. TRUTH IN LENDING ACT
shall refer all violations of this Code to the [with IRRs: CB Circular Nos. 158 & 431]
Department of Justice for preliminary
investigation and prosecution before the
PURPOSES OF THE LAW
proper court;
1. To protect the debtor from the effects of
3. Administrative remedy – The Commission
misrepresentation and concealment;
may suspend the security from being traded
2. To permit him to fully appreciate and
and revoke the registration of thereof. The
evaluate the real cost of his borrowing; and
Commission may likewise suspend or revoke
3. To avoid circumvention of usury laws.

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The Truth in Lending Act (R.A. No. 3765), transaction in partial payment for the property
was enacted primarily “to protect its citizens or service purchased
from a lack of awareness of the true cost of 3. The charges, individually itemized, which
credit to the user by using a full disclosure of are paid or to be paid by such person in
such cost with a view of preventing the connection with the transaction but which
uninformed use of credit to the detriment of are not incident to the extension of credit.
the national economy.” (Sec. 2, R.A. No. Meaning of non-finance charges:
3765). — amounts advanced by the creditor for
items normally associated with the
DUTIES OF THE CREDITOR UNDER THIS ACT ownership of the property or of the
Under this Act, any person extending “credit” must availment of the service purchased which
give the debtor, in writing, a recital of: are not incident to the extension of credit.
— in the case of the purchase of an
1. Cash price, automobile on credit, the creditor may
2. Amount credited if on installment price, advance the insurance premium as well
3. The difference between the cash and as the registration fee for the account of
installment price, the debtor
4. Recital of the finance charges and what 4. The total amount to be financed.
these charges bear to the amount to be Meaning of amount financed:
financed in percentage. — consists of the cash price plus non-
finance charge less the amount of the
INFORMATION REQUIRED TO BE STATED [Sec. down payment and value of the trade-in
4, RA 3765] 5. The finance charge expressed in terms of
Any creditor shall furnish to each person to whom pesos and centavos.
credit is extended, prior to the consummation of the Meaning of finance charge:
transaction, a clear statement in writing setting forth — includes interest, fees, collection
the following: charges, discounts, and such other
charges incident to the extension of
1. The cash price or delivered price of the credit as the Board may by regulation
property or service to be acquired. prescribe
Meaning of cash price or delivered price: — represents the amount to be paid by the
— in case of trade transactions, it is the debtor incident to the extension of credit
amount of money which would constitute such as interest or discounts, collection
full payment upon delivery of the property fees, credit investigation fees, attorney's
or service purchased at the creditor’s fees, and other service charges
place of business — the total finance charge represents the
— in financial transactions, it is the amount difference between (1) the aggregate
of money received by the debtor upon consideration (down payment plus
consummation of the credit transaction, installments) on the part of the debtor,
net of finance charges collected at the and (2) the sum of the cash price and
time the credit is extended, if any non-finance charges

2. The amounts, if any, to be credited as 6. The percentage that the finance bears to
down payment QuickTime™
and/or andtrade-in.
a
the total amount to be financed expressed
TIFF (Uncompressed) decompressor
are needed to see this picture.
as a simple annual rate on the
DOWN PAYMENT outstanding unpaid balance of the
amount paid by the debtor at the time of the obligation.
transaction in partial payment for the property
or service purchased Definition of a SIMPLE ANNUAL RATE -
uniform percentage which represents the
TRADE-IN ratio, on an annual basis, between the
value of an asset, agreed upon by the finance charges and the amount to be
creditor and debtor, given at the time of the financed

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TRANSACTIONS WHEREIN TRUTH IN LENDING 7. Any transaction or series of transactions having


ACT APPLIES [Sec. 3, CB Circ. 158] a similar purpose or effect.

1. Any loans, mortgages, deeds of trust, Definition of a CREDITOR [Sec. 3(4), RA 3765]
advances and discounts 1. Any person engaged in the business of
2. Any conditional sales contract, any contract extending credit who requires as an incident
to sell, or sale or contract of sale of property to the extension of credit, the payment of a
or services, either for present or future finance charge
delivery, under which part or all of the price is 2. Includes any person who as a regular
payable subsequent to the making of such business practice make loans or sells or
sale or contract rents property or services on a time, credit, or
3. Any rental-purchase contract installment basis, either as principal or as
4. Any contract or arrangement for the hire, agent
bailment, leasing of property 3. Includes, but not limited to, banks and
5. Any option, demand, lien, pledge, or other banking institutions, insurance and bonding
claim against, or for delivery of, property or companies, savings and loan associations,
money credit unions, financing companies,
6. Any purchase, or other acquisition of, or any installment houses, real estate dealers,
credit upon the security of, any obligation or lending investors, and pawnshops
claim arising out of any of the foregoing
7. Any transaction or series of transactions
having a similar purpose or effect
EFFECT OF FAILURE TO ABIDE BY THE
REQUIREMENTS OF THE LAW [Sec. 6, RA
TRANSACTIONS NOT COVERED BY ACT [Sec. 3,
3765]
CB Circ. 158]
Considering that the specific purpose of the law
1. A creditor who fails to disclose to any person
is the full disclosure of the true cost of credit, the
any information in violation of the Act or any
following credit transactions are outside the scope of
of its regulations shall be liable to such
the regulations:
person in the amount of P100 or in an
1. Which do not involve the payment of any
amount equal to twice the finance charged
finance charge by the debtor
required by such creditor in connection with
2. In which the debtor is the one specifying a
such transaction, whichever is the greater,
definite and fixed set of credit terms such as
except that such liability shall not exceed
bank deposits, insurance contracts, sale of
P2,000 on any credit transaction
bonds, etc
2. A Creditor shall be liable for reasonable
attorney’s fees and court costs as
Definition of a CREDIT [Sec. 3(2), RA 3765] determined by the court
1. Any loan, mortgage, deed of trust, advance, or 3. Any person who willfully violates any
discount; provision of the Act or any of its regulations
2. Any conditional sales contract; any contract to shall be fined by not less than P1,00 or more
sell, or sale or contract of sale of property or than P5,000 or imprisonment for not less
services, either for present or future delivery, than 6 months, nor more than one year or
under which part or all of the price is payable both
subsequent to theQuickTime™ making and a
of such sale or 4. No punishment or penalty provided by the
contract; TIFF (Uncompressed) decompressor
are needed to see this picture. Act shall apply to the Philippine Government
3. Any rental-purchase contract; or any agency or any political subdivision
4. Any contract or arrangement for the hire, thereof
bailment, or leasing of property;
5. Any option, demand, lien, pledge, or other claim PRESCRIPTIVE PERIOD WITHIN WHICH A
against, or for the delivery of, property or money; DEBTOR MAY RECOVER [Sec. 6(a), RA 3765]
6. Any purchase, or other acquisition of, or any Action to recover such penalty may be brought by
credit upon the security of, any obligation of borrower within one year from the date of the
claim arising out of any of the foregoing; occurrence of the violation, in any court of competent
jurisdiction

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New Sampaguita Builders Construction, Inc. v.


PNB, 435 SCRA 565 (2004)
If said bank fails to provide the Disclosure Statement TRANSPORTATION CODE
under the Truth-in-Lending Act prior to the draw down
or disbursement of the loan.

EFFECT OF A FINAL JUDGMENT ON THE CONTRACT OF TRANSPORTATION – It is a


CREDITOR contract whereby a certain person or association of
A final judgment hereafter rendered in any criminal persons obligate themselves to transport persons,
proceeding under this Act to the effect that a things, news, from one place to another for a fixed
defendant has willfully violated this Act shall be prima price
facie evidence against such defendant in an action or
proceeding brought by any other party against such
defendant under this Act as to all matters respecting Art. 1766. In all matters not regulated by this Code,
which said judgment would be an estoppel as the rights and obligations of common carriers shall be
between the parties thereto. governed by the Code of Commerce and by special
laws.
OFFICERS TASKED WITH ENFORCING THE
PROVISIONS OF THE LAW [Sec. 1, CB Circ. 431] Governing Laws:
1. New Civil Code
1. Central Bank (now Bangko Sentral ng 2. Code of Commerce
Pilipinas) and its offices; 3. Special Laws
2. Department of Commercial and Savings
Banks, with respect to commercial, savings Parties to the Contract of Transportation:
and development banks, and building and 1. Shipper - one who gives rise to the contract
loan associations of transportation by agreeing to deliver the
3. Department of Rural Banks and Savings and things or news to be transported, or to
Loan Associations, with respect to rural present his own person or those of other or
banks and savings and loan associations others in the case of transportation of
4. Office of Non-Bank Financial Intermediaries, passengers
with respect to non-bank financial 2. Carrier/Conductor - one who binds himself
institutions and other persons, whether to transport persons, things, or news, as the
natural or juridical, covered by the Act and case may be, or one employed in or
not otherwise assigned to the above engaged in the business of carrying goods
departments for others for hire

GENERAL PROVISIONS ON COMMON


DBP v. Arcilla G.R. No. 161426 June 30, 2005 CARRIERS:
It might have been different if the borrower was,
say, an ordinary employee eager to buy his first Difference between common and private carrier:
house and is easily lured into accepting onerous
terms so long as the same is payable on installments. COMMON CARRIER PRIVATE CARRIER
In such cases, the Court would be disposed to be person, corporation, firm, is not engaged in the
stricter in the applicationQuickTime™
of the and Truth
a in Lending Act, association engaged in business of carrying for
TIFF (Uncompressed) decompressor
insisting that the borrower bethisfully
are needed to see picture. informed of what the business of carrying the public
he is entering into. But in the case at bar, considering or transporting
appellee’s education and training [he was a lawyer], passengers, goods or
We must hold, in the light of the evidence at hand, both, by land, water, air,
that he was duly informed of the necessary charges for compensation, offering
and fully understood their implications and effects. services to the public;
must exercise requires only ordinary
extraordinary diligence diligence.
he holds himself out as carries only for persons
engaged in public service with whom he has initial

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to all persons indifferently. contract and assumes Conditions to avail of defense:


no obligation to carry for a. if proximate cause, exempting
the others b. if contributory negligence, mitigating

4. The character of the goods or defects in the


To be a common carrier, must the carrier’s packing or in the containers.
principal activity be the carriage of persons or Note: There should be a protest when the
goods? defect due to the act or omission is visible.
No. Art. 1732 of the Civil Code makes no distinction
between one, whose principal business activity is the Conditions to avail of defense: exercise of
carrying of persons or goods or both, and one who due diligence to forestall or prevent loss
does such carrying only as an ancillary activity
(sideline). 5. Order or act of competent authority.

Requisites to be a Common Carrier Conditions to avail of defense: with power to


1. Engaged in business of carrying or issue order
transporting goods or passengers whether as
principal or ancillary business and whether Exception to the Exception:
on regular/scheduled or occasional basis. 1. When the natural disaster is not the
2. Offers its services to the public whether to proximate and only cause of the loss;
the general population or narrow segment of 2. When the common carrier failed to exercise
general population due diligence to prevent or minimize the
3. For compensation or fixed price or rate loss before, during and after the occurrence
4. Control of operation or cargo of the natural disaster; and
3. When the common carrier negligently incurs
General Rule: The common carrier is presumed to in delay in transporting the goods.
have been at fault or to have acted negligently when
the goods transported are lost, destroyed or NOTES REGARDING THE COMMENCEMENT AND
deteriorated, or when a passenger dies or is injured. TERMINATION OF EXTRAORDINARY
Exception: When the same is due to any of the RESPONSIBILITY OF THE COMMON CARRIER
following causes only: 1. The extraordinary responsibility of the
1. Flood, storm, earthquake, lightning or other common carrier in the transportation of
natural disaster or calamity. goods lasts from the time the goods are
Conditions to avail of defense: unconditionally placed in the possession of,
a. natural disaster was the proximate & only and received by the carrier for transportation
cause until the same are delivered,actually or
b. exercise of diligence to prevent or constructively, by the carrier to the consignee
minimize loss or to the person who has a right to receive
c. no delay (Art. 1740 New Civil Code them.
[NCC]) 2. Also even when the goods are temporarily
unloaded or stored in transit, unless shipper
2. Act of the public enemy in war, whether used right of stoppage in transitu.
international or civil. 3. During the time of the storage at warehouse
Conditions to avail of defense:
QuickTime™ and a
of common carrier at place of destination,
a. act was the proximate
TIFF (Uncompressed) & only cause
decompressor
are needed to see this picture.
until consignee is advised of good’s arrival
b. exercise of diligence to prevent or and has had opportunity to remove or
minimize loss dispose of them.
c. no delay (Art. 1740, NCC) 4. As to the transportation of persons, there are
two views:
3. Act or omission of the shipper or owner of the a. Liberal view- when a person offers to be
goods. transported placing himself in the care
Note: There should be a protest and control of the common carrier who
when the defect due to the act or omission is accepts him as such passenger.
visible. (Philippine law adopts this view)

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b. Strict view- there is actual boarding or A STIPULATION IN TRANSPORTATION OF


placing of a part of the passenger’s body GOODS CONTRACT LIMITING LIABILITY IS
in the vehicle. The contract terminates VALID
when the passenger alights from the 1. limited to value of goods appearing in the bill
vehicle at the place of destination and of lading
has reasonable opportunity to leave the 2. fixed sum that is reasonable and just and
common carrier. [Airline has no control agreed upon
over pre-departure area] 3. delay due to strike or riot

EXTRAORDINARY DILIGENCE OR What provisions of law shall apply to a


RESPONSIBILITY OF COMMON CARRIER passenger’s baggage?
REGARDING TRANSPORT OF GOODS – (1) To The provisions of Articles 1733 to 1753 shall
transport with greatest skill and utmost foresight (2) apply to the passenger’s baggage which is not in his
Utmost vigilance of very cautious person, according personal custody or in that of his employees. As to
to all circumstances the other baggage, the rules in Articles 1998 and
2000 to 2003 concerning the responsibility of hotel-
Is delivery of the common carrier to the customs keepers shall apply.
authorities considered as delivery to the
consignee so as to end the carrier’s REQUISITES FOR A CASO FORTUITO WHICH
extraordinarily responsibility over the goods? WOULD EXEMPT THE CARRIER FROM LIABILITY
Delivery of the cargo to the customs authorities is 1. The event must be independent of human
not delivery to the consignee or “to the person who will
has a right to receive them” because in such case the 2. The occurrence must render it impossible for
goods are still in the hands of the government and the debtor to fulfill the obligation in a normal
the owner cannot exercise dominion over them. manner
However, the parties may agree to limit the liability of 3. The obligor must be free of participation in, or
the carrier. aggravation of, the injury to the creditor, and
4. The event must have been impossible to
General Rule: The extraordinary diligence of the foresee, or if it could be foreseen, must have
common carrier over the goods continues even when been impossible to avoid.
the goods are temporarily unloaded or stored in
transit. Passenger –one who travels in a public conveyance
Exception: when the shipper or owner has made use by virtue of an express or implied contract with the
of the right of stoppage in transitu. common carrier paying fare or what is equivalent
thereof.
REQUISITES FOR A VALID STIPULATION IN
TRANSPORTATION OF GOODS CONTRACT NOTE: The contributory negligence of the passenger
BETWEEN THE COMMON CARRIER AND THE does not bar recovery of damages for his death or
SHIPPER OR OWNER LIMITING THE LIABILITY injuries, if the proximate cause thereof is the
OF THE FORMER TO LESS THAN THE negligence of the common carrier, but the amount of
EXTRAORDINARY DILIGENCE damages shall be equitably reduced.
1. In writing
2. Supported by a valuable consideration other DEFENSES THAT A COMMON CARRIER INVOKE
than the service rendered by the common
QuickTime™ and a
TO BE EXEMPTED FROM LIABILITY OR
carrier TIFFare(Uncompressed) decompressor
needed to see this picture.
MITIGATE SUCH LIABILITY
3. Reasonable, just and not contrary to public 1. Exercise of extraordinary diligence by a
policy. common carrier
2. Negligent act of the passenger the proximate
A STIPULATION IN TRANSPORTATION OF cause of death and injury.
GOODS CONTRACT LIMITING LIABILITY IS VOID 3. Employees could not have prevented by
IF: ordinary diligence the willful act or negligence
1. unreasonable of other passengers or strangers which
2. unjust caused the injury or death.
3. contrary to public policy

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4. Liability is mitigated by the contributory 2. Even if death does not result, when the
negligence of passenger or his failure to carrier was guilty of fraud or bad faith.
observe ordinary diligence to avoid injury. However only the injured passenger is
5. Stipulation to limit liability is valid in entitled to moral damages due to his injury.
gratuitous carriage if no willful act or gross
negligence by common carrier. NOTE: The defense of the exercise of all the
diligence of a good father in the selection and
NOTE: Common carriers are liable for the death or supervision of their employees is appropriate only in
injuries to passengers through the negligence or the quasi-delict or culpa aquiliana. It is not available,
willful acts of the former’s employees, although such however, in culpa contractual and therefore, a
employees may have acted beyond the scope of their common carrier cannot raise such defense in action
authority or in violation of the orders of the common brought by its passengers.
carriers.
BILL OF LADING – written acknowledgment of
A passenger brought into the bus a box which he receipt of goods and agreement to transport them to
declared to contain clothes and other harmless a specific place to a person named or his order.
items. It turned out that the box contained
firecrackers. A passenger was injured when the NOTE: It is not indispensable to the creation of a
firecrackers exploded. Is the carrier liable? contract of carriage. The contract itself arises from
The carrier is not liable as it exercised the moment goods are delivered by shipper to carrier
extraordinary diligence. It is to be presumed that the and the carrier agrees to carry them.
passenger will not take with him anything dangerous
to the life and limbs of his co-passengers, not to The bill of lading serves 3 functions:
speak of his own. Not to be considered lightly is the 1. It is a receipt for the goods shipped
right to privacy to which each passenger is entitled. 2. It is a contract by which the three parties
namely the shipper, carrier and consignee
Will the answer to the above be the same if the undertake specific responsibilities and
carrier is an airplane? assume stipulated obligations; and
No. While there is no law that authorizes bus 3. It is a legal evidence of the contract between
operators to open the luggage of their passengers, the shipper and the carrier. As evidence, its
RA 6235 (Acts Inimical to Civil Aviation) gives the contents shall decide all disputes which may
airline companies operating as public utilities the arise with regard to their execution and
authority to open and investigate packages and fulfillment.
cargoes being loaded on board the aircraft. Should NOTE: In the absence of a bill of lading, their
the personnel of the airline fail to discover the respective claims may be determined by legal proofs
explosive devise, it could only be due to their failure which each of the contracting parties may present in
to exercise the utmost diligence of very cautious conformity with law.
persons for which the air carrier may be held liable.
How may the contract of transportation be proven
May the responsibility of the common carrier for in the absence of a bill of lading?
the safety of the passengers be dispensed with or In the absence of a bill of lading, their respective
lessened? claims shall be determined by legal proofs which
No. The responsibility of a common carrier for the each of the contracting parties may present in
safety of passengers aQuickTime™
required and a
by law cannot be conformity with the general provisions established in
dispensed with orTIFF
lessened
(Uncompressed)by stipulation,
decompressor
are needed to see this picture.
by posting this Code for commercial contracts.
of notices, by statements on tickets or otherwise.
Exception: In gratuitous carriage, stipulation to limit
liability may be valid but not for willful act or gross Delivery
negligence. The carrier must deliver the goods in the same
condition and quantity in which they were received
MORAL DAMAGES MAY BE RECOVERED IN AN according to the bill of lading.
ACTION FOR BREACH OF CONTRACT OF
TRANSPORTATION Partial/Defective Delivery
1. When death results.

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1. In case of partial delivery, consignee may


refuse to receive those delivered if they PERSONS PARTICIPATING IN MARITIME
cannot be used independently of those not COMMERCE
delivered. 1. Ship owner and/or ship agent. A ship agent
2. If the goods delivered were rendered useless is the person entrusted with the provisioning
for sale or consumption, consignee may of a vessel or who represents her in the port
refuse to receive. in which she may be found.
3. If the goods delivered are damaged to such 2. Captain or master. He is the person in
an extent that their value is diminished, charge of the vessel and navigates it.
carrier must pay the difference in value as 3. Other officers of the vessel
judged by experts. 4. Supercargo. He is the person specially
employed by the owner of a cargo to take
In the first 2 cases, consignee may exercise charge of and sell to the best advantage
abandonment and be entitled to the full value of the merchandise which has been shipped, and to
goods. purchase returning cargoes and to receive
freight, as he may be authorized.
NOTES REGARDING CLAIMS ON ACCOUNT OF
DAMAGE TO THE GOODS TRANSPORTED: LIABILITIES OF SHIP OWNERS AND SHIP
1. If the damage is apparent from the exterior of AGENTS
the package, the claim must be made upon 1. Civil liability for the acts of the captain
receipt of the package. 2. Civil liability for contracts entered into by the
2. If the damage cannot be known from the captain to repair, equip and provision the
exterior, the claim must be made within 24 vessel, provided that the amount claimed
hours following the receipt of the was invested for the benefit of the vessel
rd
merchandise. [longer period may be 3. Civil liability for indemnities in favor of 3
stipulated] persons which may arise from the conduct of
3. After the periods have elapsed, or after the the captain in the care of the goods which the
transportation charges have been paid, no vessel carried, as well as for the safety of the
claim whatsoever shall be admitted against passengers transported
the carrier with regard to the condition in 4. Damages in case of collision by reason of the
which the goods transported were delivered. fault, negligence or lack of skill of captain or
4. Claim is a condition precent to right of action, any of the complement.
which must be filed within 1 year from
delivery of goods or denial of claim. NOTE: Ship owner/agent not liable for the
[Sufficient shorter period maybe stipulated in obligations contracted by the captain if the latter
bill of lading] exceeds his powers and privileges inherent in his
position of those which may have been conferred
upon him by the former. However, if the amount
claimed were made use of for the benefit of the
vessel, the ship owner or ship agent is liable.
MARITIME COMMERCE
Liability of the ship Liability for the lawful
agent for the unlawful acts of the captain
QuickTime™ and a
acts of the captain
VESSELS – engaged
TIFF (Uncompressed) decompressor
inthis picture.
are needed to see navigation, whether the lawful acts and as to any liability
coastwise or on the high seas, including floating obligations of the captain incurred by the captain
docks, pontoons, dredges, scows and any other beneficial to the vessel through his unlawful
floating apparatus destined for the services of the may be enforced against acts, the ship agent is
industry or maritime commerce. Those with motive the agent for the reason limited to the vessel and
power and used as means of water transportation. that such obligations it does not extend
Excluded in the definition are local and foreign arise from the contract further.
military vessels, bancas and other watercrafts of less agency (provided,
than 3 tons gross capacity and small watercrafts however, that the captain
engaged in river and bay traffic. does not exceed his

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authority) b. For the proportionate contribution of co-


owners of the vessel to a common fund
DOCTRINE OF LIMITED LIABILITY - liability of ship for the results of the acts of the captain
owner is confined to that which he is entitled to referred to in Art. 587 of the Code of
abandon – “the vessel with all her equipments and Commerce; and
the freight he may have earned during the voyage” – c. For the civil liability incurred by the ship
and if they are lost, it suffices for his discharge. [No owner in case of collision.
ship Æ no liability]

Exceptions: ROLES OF THE CAPTAIN


1. Vessel is not abandoned (when the ship 1. General agent of the ship owner
owner does acts inconsistent with 2. Technical director of the vessels
abandonment e.g. salvage) 3. Represents the government of the country
2. Ship owner agent/ agent allows his vessel to under whose flag he navigates
embark in an unseaworthy condition.
3. Claims under workmen’s compensation THROUGH BILL OF LADING – the carrier
4. Injury/damage due to ship owner’s fault undertakes to be responsible for the carriage of
5. Vessel is insured goods by successive ocean carriers from the
6. In case the voyage is not maritime but only in point of loading to the final destination; the first
river or gulf carrier is responsible for the whole carriage and
7. In case of the expenses for equipping, claimant may call upon the first carrier for
repairing or provisioning the vessel indemnification for any loss along the route
NOTE: The doctrine also applies for claims due to whether or not the loss took place in the first
death or injuries to passengers, aside from claims for carrier’s custody.
goods. In abandoning the vessel, there is no
procedure to be followed. There is neither a
prescriptive period within which the ship owner can SPECIAL CONTRACTS OF MARITIME
make the abandonment. He may do so for so long
COMMERCE
as he is not estopped from invoking the same or do 1. Charter Parties
acts inconsistent with abandonment. 2. Bills of lading and contracts of transportation
of passengers on sea voyages
NOTES ON ABANDONMENT IN MARITIME 3. Loans on bottomry and respondentia
TRANSPORTATION: 4. Marine insurance
™ Only the ship owner and the ship agent can
make an abandonment.
CHARTER PARTY – a contract by which an entire
™ However, in cases of co-ownership of a ship or some principal part thereof is let by the owner
vessel, its part owner may exempt himself to another person for a specified time or use.
from liability by the abandonment of the part
of the vessel belonging to him. GENERAL CATEGORIES OR KINDS OF
™ A charterer cannot make an abandonment of CHARTER PARTY
the ship as the character cannot be regarded 1. Bareboat or demise charter – it involves
as being in the place of the owners or agents the transfer of full possession and control of
in matters relatingQuickTime™to and a the responsibility the vessel for the period covered by the
TIFF (Uncompressed) decompressor
pertaining are
to needed
ownership and possession of
to see this picture.
contract, the character obtaining the right to
the vessel. use the vessel and carry whatever cargo it
chooses, while maintaining and maintaining
™ Abandonment may be made so as to be the vessel as well. Liable for damages:
exempted from liability in the following cases: charterer (acts as a private carrier)
a. For civil liability to third persons arising 2. Time charter – it is a contract to use the
from the conduct of the captain in the vessel for a particular period of time, the
vigilance over the goods which the character obtaining the right to direct the
vessel carried; movements of the vessel during the

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chartering period, although the owner retains 1. By means of a public instrument.


possession. It is considered a contract of 2. By means of a policy signed by the
affreightment. (acts as a common carrier) contracting parties and the broker taking
part therein.
3. Voyage charter – it is a contract for the hire 3. By means of a private instrument.
of a vessel for one or a series of voyages
usually for the purpose of transporting goods General Rule: The captain cannot contract loans on
for the charterer. The voyage charter is a repondentia secured by the cargo, and should he do
contract of affreightment and is considered a so, the contract shall be void. Neither can he borrow
private carriage. In a contract of money or bottomry for his own transactions,
affreightment the ship owner is the one liable Exceptions:
for damages. (acts as a common carrier) 1. On the portion of the vessel he owns,
provided, no money has been previously
OWNER PRO HAC VICE – demise charterer to borrowed on the whole vessel, nor exists any
whom the owner of the vessel has completely and other kind of lien or obligation chargeable
exclusively relinquished possession, command and against her.
navigation of the vessel. In this kind of charter, the 2. When he is permitted to do so, he must
charterer mans and equips the vessel and assumes necessarily state what interest he has in the
all responsibility for its navigation, management and vessel.
operation. He thus acts as the owner of the vessel in
all important aspects during the duration of the
charter. DISTINCTIONS BETWEEN AN ORDINARY LOAN
AND A LOAN ON BOTTOMRY OR
LOAN ON BOTTOMRY – made by shipowner/ship RESPONDENTIA
agent guaranteed by vessel itself, repayable upon
arrival at destination ORDINARY LOAN LOAN ON BOTTOMRY
OR RESPONDENTIA
may or may not have a must have a collateral
LOAN ON RESPONDENTIA – taken on security of collateral
the cargo repayable upon the safe arrival at cargo
the collateral of an must be a vessel or cargo
destination
ordinary loan may be subject to maritime risks
any property, real or
REQUISITES OF A LOAN ON BOTTOMRY/ personal
RESPONDENTIA absolutely repayable depends upon the safe
1. Ship owner borrows money for use, arrival at the port of the
equipment or repair of vessel. collateral of the loan
2. For a definite term and with extraordinary subject to usury law Not subject to usury law
interest called premium
need not be in writing must be in writing
3. secured by pledge of vessel or portion
but interest shall not be
thereof in the case of loan on bottomry or
due unless expressly
pledge of goods with respect to
stipulated in writing
respondentia.
to be binding on third must be recorded in the
4. Loan repayment depends or conditioned on
persons, need not be registry of vessels of the
the safe arrival of the vessel for bottomry or
registered port of registry of the
safe arrival of QuickTime™ and a
goodsdecompressor
TIFF (Uncompressed) for respondentia and
are needed to see this picture. vessel
obligation to repay is extinguished if pledged
loss of the collateral if Loss of the collateral
goods are lost.
any, does not extinguish extinguishes the same
5. Obligation to repay is extinguished if vessel
the same
is lost due to specified marine perils in the
course of voyage or within limited time.
INSTANCES WHEN THE CONTRACT IS
FORMAL REQUIREMENTS OF LOANS ON CONSIDERED A SIMPLE LOAN AND NOT A LOAN
BOTTOMRY OR RESPONDENTIA ON BOTTOMRY OR RESPONDENTIA
Loans of bottomry or respondentia may be executed: 1. When the loan on bottomry is larger than the
value of the object liable for the loan on

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bottomry on account of fraudulent means 1. There must be an assembly of the sailing


employed by the borrower, the loan on the mate and other officers with the captain
amount in excess of the value of the object including those with interests in the cargo
as appraised by experts is a simple loan. 2. There must be a resolution of the captain
2. If the amount of the loan contracted in order 3. The resolution shall be entered in the log
to load the vessel should be used for the book, with the reasons and motives and the
cargo, the balance shall be considered as a votes for and against the resolution
simple loan. 4. The minutes shall be signed by the parties
3. Should the effects of on which money is 5. Within 24 hours upon arrival at the first port
taken is not subjected to risk, the contract the captain makes, he shall deliver one copy
shall be considered a simple loan, with the of these minutes to the maritime judicial
obligation on the part of the borrower to authority thereat
return the principal and interest at the legal
rate if that agreed upon should not be lower.
ARRIVAL UNDER STRESS – an arrival of the vessel
ACCIDENTS AND DAMAGES IN MARITIME at a port not of destination on account of (a) lack of
COMMERCE provisions; (b) well-founded fear of seizure; (c) by
1. Averages reason of accident of the sea disabling it to navigate
2. Arrivals Under Stress
3. Collisions
4. Shipwrecks Unlawful when:
1. Lack of provisions due to negligence to carry
AVERAGE – (1) All extraordinary or accidental according to usage and customs
expenses which may be incurred during the voyage 2. Risk of enemy not well known or manifest
for the preservation of the vessel or cargo or both (2) 3. Defect of vessel due to improper repair
All damages or deterioration which the vessel may 4. Malice, negligence, lack of foresight or skill of
suffer from the time it puts to sea at the port of captain
departure until it casts anchor at the port of
destination, and those suffered by the merchandise COLLISION – the impact of two vessels both of
from the time they are loaded in the port of shipment which are moving
until they are unloaded in the port of their
consignment
ALLISION – the striking of a moving vessel against
one that is stationary.
SIMPLE AVERAGE - expenses/damages caused to
the vessel/cargo not inured to common benefit and
CASES OF COLLISION
profit of all the persons interested in the vessel and 1. Due to the fault, negligence or lack of skill of
her cargo; borne by respective owners the captain, sailing mate or the complement
of the vessel - ship owner liable for the
GENERAL AVERAGE - expenses/damages losses and damages (Culpable Fault)
deliberately caused in order to save the vessel, its 2. Due to fortuitous event or force majeure -
cargo or both from a real and known risk each vessel and its cargo shall bear its own
damages (Fortuitous)
REQUISITES 3. It cannot be determined which of the 2
QuickTime™ and a
1. CommonTIFFdanger present
(Uncompressed) decompressor vessels caused the collision - each vessel
are needed to see this picture.
2. Arising from accidents of sea, disposition of shall suffer its own damages, and both shall
authority be solidarily responsible for the losses and
3. Peril imminent and ascertained damages occasioned to their cargoes
4. Part of vessel or cargo deliberately sacrificed (Inscrutable Fault)
5. Intended to save vessel and cargo or both
6. Successful saving of vessel or cargo ERROR IN EXTREMIS – where a navigator,
7. Proper legal steps and authority taken. suddenly realizing that a collision is imminent by no
fault of his own, in confusion and excitement of the
FORMALITIES TO INCUR GROSS AVERAGE moment, does something which contributes to the

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collision or omits to do something by which the derelict or recapture; a service which one person
collision might be avoided, such act or omission is renders to the owner of a ship or goods by his own
ordinarily considered to be in extremis and the labor, preserving the goods or ship which the owner
ordinary rules of strict accountability does not apply. or those entrusted with the care of them either
abandoned in distress at sea or are unable to protect
SHIPWRECK – denotes all types of loss/ wreck of a and secure; a permit is required to engage in the
vessel at sea either by being swallowed up by the salvage business
waves, by running against another vessel or thing at
sea or on coast where the vessel is rendered DERELICT – is a ship or cargo which is abandoned
incapable of navigation and deserted at sea by those who are in charge of it,
without any hope of recovering it, or without any
MARITIME PROTEST – a written statement under intention of returning it
oath, made by the master of a vessel, after the
occurrence of an accident or disaster in which the ELEMENTS OF A VALID SALVAGE
vessel or cargo is lost or injured, with respect to the 1. A marine peril
circumstances attending such occurrence. It is 2. Service voluntarily rendered when not
usually intended to show that the loss or damage required as an existing duty or from special
resulted from a peril of the sea, or from some other contract
cause for which neither master nor owner was 3. Success, in whole or in part, or that the
responsible, and concludes with the protestation services rendered contributed to such
against any liability of the owner for such loss or success
damage.
ORDER EFFECTS SHOULD BE JETTISONED
1. Those which are on deck, beginning with
A maritime protest is required in the following: those which embarrass the maneuver or
1. Arrival under stress; damage the vessel, preferring, if possible,
2. Shipwreck; the heaviest ones with the least utility and
3. Collision; value.
4. In case the vessel has gone through a 2. Those which are below the upper deck,
hurricane or when the captain believes that always beginning with those of the greatest
the cargo has suffered damages. weight and smallest value, to the amount and
number absolutely indispensable.
NOTES ON MARITIME PROTEST
1. A maritime protest should be made when a THE FOLLOWING GOODS ARE NOT LIABLE FOR
vessel has gone through a hurricane or the THE PAYMENT OF FREIGHT
captain believes that the cargo has suffered 1. Goods jettisoned for the common safety,
damage or averages. It shall likewise be shall not pay freight; but its latter amount
done if the vessel having been wrecked, the (freight lost) shall be considered as general
captain is saved alone or with part of his average, computing the same in proportion to
crew, in which case, he shall appear before the distance covered when they (goods)
the nearest authority and make a sworn were jettisoned.
statement of the facts. 2. Goods lost by reason of shipwreck or
2. The protest should be made within 24 hours stranding.
following TIFF
the(Uncompressed)
arrival if the
QuickTime™ andvessel
a at the first 3. Those seized by pirates or enemies.
decompressor
port. Upon arrival at the place of destination,
are needed to see this picture. NOTE: If the freight should have been paid in
the captain shall ratify the protest within 24 advance, it shall be returned, unless there is an
hours. agreement to the contrary.

FORWARDING AGENT receives and arranges to


SALVAGE – is the compensation allowed to persons forward or send the goods to their destination by the
by whose voluntary assistance a ship at sea or her instrumentality of the actual carrier, without assuming
cargo or both have been saved in whole or in part the role and responsibility of the carrier, and is
from an impending peril, or such property recovered compensated for his services from the shipper. He is
from actual peril or loss, in cases of shipwrecks,

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an agent and a warehouseman for the shipper, and


must exercise the care and diligence of a prudent
man. CARRIAGE OF

FREIGHT FORWARDER is a transport intermediary GOODS BY SEA ACT


which publishes its own tariff, issues bill of lading,
and assumes all responsibilities of a common carrier
without operating its own vessel. This Nonvessel REQUISITES OF CONTRACTS COVERED BY
Operating Common Carrier acts as a shipper in COGSA
relation to the actual shipper, and as a carrier to the 1. Contracts for the carriage of goods
shipper. He charges for the entire distance, and 2. By sea
assumes responsibility for the transportation of the 3. To and from Philippine ports
goods from point of receipt to point of destination. 4. In foreign trade

CARGO CONSOLIDATOR consolidates small What does the shipper guaranty upon delivery of
shipments for various consignors/consignees by the goods to the carrier for shipment?
procuring vessel/container space from carriers and The shipper guarantees at the time of shipment
issuing its own bill of lading. Its destination agents the accuracy of the marks, number, quantity and
distribute the small shipments to the consignees weight as furnished by him. The shipper shall
named in the consolidator’s manifest. indemnify the carrier against all loss, damages and
expenses arising from inaccuracies in such
particulars.
CONTRACT OF TOWAGE - contract whereby a
vessel usually motorized pulls another from one
What must the shipper or consignee do to be able
place to another for compensation. It is a contract of
to recover the loss or damage of the cargo?
services. Only the owner of the towing vessel can
Notice of the loss or damage and the general
ask for compensation for the towage. Not the
nature of such loss or damage should be given in
captain, even if the owner waived the claim for the
writing to the carrier or his agent at the port of
towage, unless the owner assigned or conveyed his
discharge or at the time of the removal of the goods.
right to the captain.
If the loss or damage is not apparent, the notice must
be given within 3 days from delivery. Said notice of
loss or damage may be endorsed upon the receipt for
TOWAGE VS SALVAGE the goods given by the person taking delivery thereof.
The notice or writing need not be given if the state of
Salvage Towage the goods at the time of their receipt has been the
subject of joint survey inspection.
Crew of salvaging ship crew of the towing ship
is entitled to salvage, does not have any PRESCRIPTIVE PERIODS:
and can look to the interest or rights with the 1. if loss or damage is apparent or external,
salvaged vessel for its remuneration pursuant notice in writing must be given to carrier or
share to the contract agent at time of removal of goods by persons
Salvor takes tower has no possessory entitled to delivery.
possession and may lien; only an action for 2. if loss or damage is not apparent, within 3
retain possessionTIFF
until recovery
QuickTime™ and a of sum of days of delivery.
(Uncompressed) decompressor
he is paid are needed tomoney
see this picture. a. if no notice is given, there is prima facie
Court has power to court has no power to evidence of delivery of goods as
reduce the amount of change amount in described in the bill of lading.
remuneration if towage even if b. notice is not needed if goods jointly
unconscionable unconscionable surveyed or inspected at time of their
receipt.
c. whether notice of loss/ damage is given
or not, suit must be filed within 1 year
after delivery or when goods should have

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been delivered; otherwise


PRESCRIBED.
d. if misdelivery, prescriptive period for suit WARSAW CONVENTION
is 10 years for breach of written contract
or 4 years for quasi-delict.
NOTE: Only the carrier’s liability is extinguished if no WHEN THE WARSAW CONVENTION
suit is filed within 1 year by shipper, consignee, or APPLICABLE
insurer. The prescriptive period does not apply to The Convention is applicable to:
suits by insured against insurer. 1. International transport by air
2. Transport of persons, baggage, or goods
When the one-year period in the COGSA is
interrupted: “INTERNATIONAL TRANSPORTATION BY AIR”
1. When an action is filed in court; UNDER THE WARSAW CONVENTION
2. When there’s a contrary agreement between Under the Warsaw Convention, there are two
the parties. categories of “international transportation by air”:
1. That where the place of departure and the
What is the effect of issuing a bill of lading under place of destination are situated within the
COGSA? territories of two High Contracting Parties
It shall be prima facie evidence of the receipt by regardless of whether or not there be a break
the carrier of the goods described therein. Contrary in the transportation or a transshipment; and
evidence may be presented. 2. That where the place of departure and the
place of destination are within the territory of
LIABILITY UNDER THE COGSA a single High Contracting Party if there is an
1. maximum of $500 per package or, if not agreed stopping place within a territory
shipped in packages, per customary freight subject to the sovereignty, mandate or
unit (e.g. metric ton). authority of another power, even though the
2. nature and value of goods may be declared power is not a party to the Convention.
by shipper and inserted in bill of lading;
declaration is prima facie evidence and not LIABILITIES UNDER THE CONVENTION
conclusive on carrier. The liabilities are:
3. shipper and carrier may agree on another 1. Damage sustained in the event of the death
maximum amount, but not more than amount or wounding of a passenger taking place on
of damage actually sustained. board the aircraft or in the course of any of
NOTE: When the packages are shipped in a the operations of embarking or disembarking
container supplied by carrier and the number of such 2. Loss or damage to any check baggage or
units is stated in the bill of lading, each unit and not goods sustained during the transport by air
the container constitute the “package”. 3. Delay in the transport by air of passengers,
baggage, or goods
NO LIABILITY UNDER COGSA
1. if nature or value of goods knowingly and NOTE: Enumeration of causes of action as above
fraudulently misstated by shipper. stated is not an exclusive list. (Northwest Airlines vs.
2. if damage resulted from dangerous nature of Cancer)
shipment loaded without consent of carrier.
3. if unseaworthiness not due to negligence of
QuickTime™ and a
carrier. TIFFare(Uncompressed) decompressor TRANSPORT BY AIR
needed to see this picture.
4. if deviation was to save life or property at It is the period during which the baggage or goods
sea. are in the charge of the carrier, whether in an airport
or on board an aircraft, or in the case of landing
outside an airport, in any place whatsoever

When must an Action for damages be brought at


the option of the plaintiff?
It must be brought, either:
1. Before the court of the domicile of the carrier;

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2. Court of principal place of business of carrier; if willful misconduct on the part of the carrier’s
3. Court where he has a place of business employees is found or established.
through which the contract has been made;
4. Before the court at the place of destination COGSA/ Warsaw- applies to foreign vessels or air
plane/ international travel
LIMITATIONS IN LIABILITY UNDER THE Code of Commerce – applies to inter-island /
CONVENTION domestic travel
1. The Convention provides for a limitation of
liability: Notice Requirements (see Annex X)
2. For each passenger - limited to 250,000
francs
3. For goods and checked in baggage - limited
to 250 francs per kilogram PUBLIC SERVICE ACT
4. For hand carry - limited to 5,000 francs per
passenger

When can a common carrier not avail of this Every person that may own, operate, manage,
limitation? control in the Philippines, for hire/compensation with
1. Willful misconduct general/limited clientele whether permanent,
2. Default amounting to willful misconduct occasional, accidental, and done for a general
3. Accepting passengers without ticket business purpose any common carrier, shipyard,
4. Accepting goods without airway bill or electric light, heat and power and public utility.
baggage without baggage check
PUBLIC UTILITY - business or service engaged in
When is a Right to Damages extinguished? regularly supplying the public with some commodity
The right to damages shall be extinguished if an or service of public consequence such as electricity,
action is not brought within 2 years from the date of gas, water, transportation, telephone or telegraph
arrival at the destination, or from the date on which service.
the aircraft ought to have arrived, or from the date on
which the transportation stopped. PRIOR OPERATOR RULE - before permitting a new
operator to invade the territory of another already
Notice requirement: established, the prior operator must be given an
damage to baggage: within 3 days from receipt opportunity to extend its service to meet the public
damage to goods: within 7 days from receipt needs in the matter of transportation
delay: within 21 days from receipt

NOTE: Failure to file written notice, no action shall lie PRIOR APPLICANT RULE = presupposes a
against the carrier, save in the case of fraud on his situation where two interested persons apply for a
part. Certificate of Public Convenience in the same
community over which no person has yet been
NOTE: The Warsaw Convention has the force and granted a CPC to operate. If both applicants equal,
effect of a law in the Philippines, being a treaty then the applicant who applied first will be given the
commitment assumed by the Philippine government. CPC.
However, said convention does not operate as an
QuickTime™ and a
exclusive enumeration of the
TIFF (Uncompressed) instances for declaring
decompressor PROTECTION OF INVESTMENT RULE
are needed to see this picture.
a carrier liable for breach of contract of carriage or as It means that one of the purposes of the Public
an absolute limit of the extent of that liability. Even Service Act is to protect and conserve investments
the Warsaw Convention declares the carrier liable for which have already been made for that purpose by
damages in the enumerated cases and certain public service operators.
conditions. It must not be construed to preclude the
operation of the Civil Code and other pertinent laws. PRIOR OPERATOR RULE OR PROTECTION OF
It does not regulate, much less exempt, the carrier INVESTMENT RULE NOT APPLICABLE
from liability for damages for violating the rights of the It is not applicable in the following:
passengers under the contract of carriage, especially

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Where public interest would be better served by furnished, as founded and determined by the
the new operator; Commission in a final order which shall be conclusive
1. Where the old operator failed to make an and shall effect in accordance with this Act, upon
offer to meet the increase in traffic; appeal or otherwise. (Sec. 19 [a])
2. Where the CPC granted to the new operator
is a maiden certificate; “KABIT SYSTEM”
3. When the application of the rule would be The “kabit system” has been defined as an
conducive to monopoly. arrangement whereby a person who has been
granted a certificate of public convenience allows
WHAT ARE THE DISTINCTIONS BETWEEN CPCS another person who owns motor vehicles to operate
AND CPCNS? under such franchise for a fee. (Lisa Enterprise Inc. v.
IAC)
Certificate of Public Certificate of Public
Convenience Convenience and Is the ‘kabit system’ legal?
Necessity Although not penalized outright as a criminal
Any authorization to issued by the appropriate offense, the “kabit system” is invariably recognized as
operate a public government being contrary to public policy and, therefore, void
service issued by the agency to a public service and inexistent under Art 1409 of the Civil Code.
appropriate to which any “Kabit System” has been identified as one of the root
government agency political subdivision has causes of graft and corruption in the government
granted a franchise transportation offices. It is a “pernicious system” that
An authorization an authorization issued by cannot be too severely condemned. It constitutes an
issued by the proper the proper imposition upon the good faith of the government. It
government agency for government agency for the is an abuse of a certificate of public convenience,
the operation of public operation which is a special privilege granted by the
services for which no of public services for which government (Teja Marketing v. IAC).
franchise, either a franchise is required by
municipal or legislative law CONSTITUTIONAL PROVISIONS
is required by law
May the Government be hampered in its exercise
REQUIREMENTS OF CPC AND FRANCHISE of its right to temporarily take over public utilities
1. Filipino citizenship or businesses affected with public interest?
2. financial capacity No. A. XII, S. 17 of the Const. envisions a
3. public convenience situation wherein the exigencies of the times
necessitated the gov’t to “temporarily take over or
GROUNDS FOR SUSPENSION AND REVOCATION direct the operation of any privately owned public
OF CERTIFICATES ISSUES UNDER PUBLIC utility or business affected with public interest.” Since
SERVICE ACT the State, in this case, is merely exercising its police
1. The facts and circumstances on the strength power, such exercise must not be unreasonably
of which said certificate was issued have hampered nor can it be a source of obligation, in the
been misrepresented or materially changed absence of damage due to arbitrariness. Also,
2. The holder has violated or willfully refused to requiring the gov’t to pay reasonable compensation
comply with any order, rule or regulation of for the reasonable use of the property pursuant to the
the commission QuickTime™ and a operation of the business contravenes the Const.
TIFF (Uncompressed) decompressor
3. The common carrier
are needed repeatedly fails to
to see this picture.
[Agan, Jr. vs. PIATCO, 402 SCRA 612 (2003)]
comply with his or its duty to observe
extraordinary diligence

What service on the part of the public utility is


considered unlawful?
It shall be unlawful for any public service to
provide or maintain any service that is unsafe,
improper, or inadequate, or withhold or refuse any
service which can reasonably be demanded and

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The powers of the Energy Regulation Commission


NATIONAL ELECTRIFICATION under the EPIRA law
DECREE 1. To regulate and fix the power rates to be
charged by electric companies;
2. To issue CPCs for the operation of electric
power utilities; and
Milwaukee Industries Corp. vs. Pampanga III 3. To grant or approve provisional electric rates.
Electric Cooperative, Inc., 430 SCRA 389 (2005)
Under PD 269, the distribution utility has the
exclusive right to sell electric power within its
authorized area of operation. In turn, NAPOCOR, as Freedom from Debt Coalition vs. ERC, 432 SCRA
the sole agency authorized to generate electric power 157 (2004)
may only sell to the duly franchised distribution The following are the safeguards to protect the public
utilities and electric cooperatives. It sells directly to (even if ground to grant it exists):
end-users only with the consent of the utility or 1. Publication
cooperative operating in the area. 2. Consumers affected are given an opportunity to
be heard
3. Increase is only provisional, and thus may be
Why are distribution companies given exclusive
modified or recalled anytime
rights to sell?
4. ERC must prescribe a rate-setting methodology
Because the electric power industry is highly-
“in the public interest” and “to promote efficiency”
capital intensive and operates as a natural monopoly,
5. ERC must conduct hearing on the propriety of the
and also because of the huge pre-operation costs.
grant within 30 days from the issuance of the
(Ibid)
provisional order

THE PHILIPPINE FLAG CARRIERS LAW


FRANCHISE FOR TV AND RADIO
When the government takes over a business affected
STATIONS with public interest under Art. XII, S. 17 of the Const.,
it is not required to give compensation to the private
entity-owner as there is no transfer of business,
Associated Communications $ Wireless Services whether permanent or temporary, and the entity-
vs. NTC, 397 SCRA 574 (2003) owner cannot likewise claim just compensation for
Even if Act 3846 only applies to radio stations, PD the use of the business and its properties as the
576-A clearly shows that a franchise is needed for temporary takeover is not in the exercise of the
both TV and radio stations, in addition to a certificate power of eminent domain [Agan, Jr. vs. Phil.
of public convenience. EO 567 which came after PD International Air Terminals Co., Inc., 402 SCRA 612
576-A did not dispense with the franchise (2003)]
requirement, though it did abolish the Board of
Communications and the Telecom Control Bureau,
transferring their powers to the NTC, including the
power to issue a CPC and grant permits for SHIP MORTGAGE DECREE
frequency use.
(P.D 1521)
QuickTime™ and a
TIFF (Uncompressed) decompressor
are needed to see this picture.

EPIRA LAW PURPOSES OF PD 1521


The purposes of PD 1521 are to accelerate the
growth and development of the shipping industry in
the Philippines and to finance the acquisition,
Freedom from Debt Coalition vs. ERC, 432 SCRA construction, purchase or initial operation of vessels
157 (2004)

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SALIENT FEATURES OF PD 1521


PD 1521 recognizes the creation of preferred
mortgage that must be satisfied prior to all other PHILIPPINE DEPOSIT
claims and it allows for the arrest of the vessel which
in effect treats the vessel itself as the defendant in an
INSURANCE CORPORATION ACT
action.

PREFERRED MORTGAGE LIEN AND ITS


REQUISITES (Republic Act No. 3591, as amended by RA 6037,
A preferred mortgage lien is one constituted for the PD 120, PD 1094, PD 1451, PD 1935, RA 7400, RA
financing of the acquisition, purchase, construction 8791, and RA 9302)
and initial operation of vessels under the provisions
of PD 1521, and which complies with the following
requisites: PDIC is a government-owned and controlled
1. It is recorded in the MARINA corporation created in 1963 by virtue of Republic Act
2. Affidavit of god faith; and 3591 for the purpose of insuring bank deposits. The
3. The mortgagee does not stipulate the waiver latest amendments to RA 3591 are contained in RA
of the preferred status of his claim. 9302 enacted on July 27, 2004, which provided
4. The mortgage must be valid. enhanced depositor protection through increased
5. The mortgage includes the whole vessel of deposit insurance coverage up to P250,000 and
domestic ownership. strengthened PDIC's risk management capabilities
through the restoration of PDIC's authority to examine
VESSEL OF FOREIGN OWNERSHIP member banks with prior approval by the Monetary
It will be recognized if: Board. The new law also enhanced PDIC's
1. The mortgage, hypothecation or similar receivership and liquidation powers.
charge has been duly and validly executed in The PDIC is an attached agency of the Department of
accordance with the laws of the country Finance.
under which the vessel is documented
2. The mortgage, hypothecation or similar
charge has been duly registered in PURPOSE – to create a government-owned entity,
accordance with such laws in a public the Philippine Deposit Insurance Corporation,
register – either at the port of registry of the that shall insure the deposit liabilities of all banks
vessel or at a central office. entitled to the benefits of insurance under the
Act. Such insurance is intended to protect
depositors from situations that prevent banks
from paying out deposits, as in bank failures or
CLAIMS PREFERRED OVER A PREFERRED closures, and to encourage people to deposit in
MORTGAGE LIEN banks.
The following claims are preferred over a preferred
mortgage lien: FUNCTIONS:
1. Taxes 1. Can lend money to banks before closure.
2. Crew’s wages 2. Insurer of deposits against bank closures
3. General average 3. Act as receiver for banks
4. Salvage QuickTime™ and a
5. Prior maritime liens decompressor
TIFF (Uncompressed)
are needed to see this picture. INSURED DEPOSIT is the net amount due to any
6. Damages arising from tort depositor for deposits in an insured bank, after
7. Prior preferred mortgage lien deducting unpaid loans and other obligations of the
depositor to the closed bank. In no case shall insured
deposit exceed P250,000 per depositor.

™ The deposit liabilities of any bank engaged in


the business of receiving deposits are

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required to be insured with the PDIC. (Sec. in an amount equal to the insured deposit of
4) such depositor. (Sec. 10 [c])
™ The PDIC becomes liable to pay the insured
deposits in a bank when the bank is closed TRANSFERRED DEPOSIT – a deposit in an insured
by the Monetary Board of the Bangko Sentral bank made available to a depositor by the PDIC as
ng Pilipinas, that is, prohibited from doing payment of the insured deposit of such depositor in a
further business in the Philippines, on closed bank and assumed by another insured bank.
account of insolvency and other grounds (Sec. 3 [h])
under the law. (Sec. 10 [c])
™ By paying its liabilities to depositors in this
On what GROUNDS may the Monetary Board close manner, the PDIC hopes to persuade these
a bank or quasi-bank, that is, prohibit it from doing depositors to keep their savings in banks where
business in the Philippines? such funds could be lent out, rather than hoarded
1. If the bank or quasi-bank is unable to pay and kept out of the banking system.
its liabilities as they become due in the ™ If a depositor has several accounts with the bank,
ordinary course of business (Sec. 30 [a] of the liability of the PDIC will be calculated by
BSP Law); sometimes referred to as the cash adding together all deposits in the bank
flow test; or maintained by the depositor in the same capacity
2. If the bank or quasi-bank has insufficient and the same right for his benefit either in his
realizable assets to meet its liabilities. own name or in the name of others. (Sec. 3 [g])
(Sec. 30 [b] of BSP Law); sometimes referred ™ PAYMENT to the depositor of his insured
to as the balance sheet test; or deposit:
3. If the bank or quasi-bank cannot continue 1. Discharges the PDIC from any further
in business without involving probable liability to the depositor, and
losses to its depositors and creditors 2. Subrogates the PDIC to all the rights of the
(Sec. 30 [c] of BSP Law); or depositor against the closed bank to the
4. If the bank or quasi-bank has willfully extent of such payment. (Secs. 10 [d] and 11
violated a cease and desist order under [a])
Sec. 37 of BSP Law (Administrative
Sanctions) that has become final and ™ Every insured bank is required by the Act to
involves acts or transactions which display at each place of business maintained
amount to fraud or a dissipation of assets by the bank a sign or signs stating that its
(Sec. 30[d]; or deposits are insured by the PDIC. A similar
5. If the bank or quasi-bank notifies the BSP statement shall be included by the bank in its
or publicly announces a bank holiday advertisements. (Sec. 16 [a])
(Sec. 53 of RA 8791); or ™ Claim must be filed within 18 months from
6. If the bank or quasi-bank in any manner order of closure.
suspends the payment of its deposit ™ Note: The PDIC Act is not applicable to
liabilities continuously for more than 30 Offshore Banking Units.
days (Sec. 53 of RA 8791); or
7. If a bank persists in conducting its
business in an unsafe or unsound manner PDIC vs CA, et al.,G.R. No. 118917, December 22,
(Sec. 56 of RA 8791). 1997
QuickTime™ and a The PDIC was created by law and, as such,
™ The PDIC’s TIFF liability is decompressor
(Uncompressed) up to P250,0000 per
are needed to see this picture. is governed primarily by the provisions of the special
depositor / per capacity (before the amount of law creating it. The liability of the PDIC for insured
insurance is up to P100,000 only). deposits therefore is statutory and, under RA 3591,
™ The liability of the PDIC is on a per bank basis. such liability rests upon the existence of deposits with
™ When an insured bank is closed on account of the insured bank, not on the negotiability or non-
insolvency, the PDIC SHALL PAY EITHER: negotiability of the certificates evidencing these
1. In cash or deposits.
2. By making available to each depositor a In order that a claim for deposit insurance
transferred deposit in another insured bank with the PDIC may prosper, the law requires that a
corresponding deposit be placed in the insured bank.

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A deposit, as defined in Section 3(f) of RA 3591, may business of receiving palay for storage; that the
be constituted only if money or the equivalent of clause in Section 2 thereof which refers to “any
money is received by a bank. contract or transaction wherein the rice delivered is to
be milled for and on account of the owner” must be
understood in relation to the subject matter of the
statute as expressed in its title, namely, “An Act to
GENERAL BONDED Regulate the Business of Receiving Commodity for
WAREHOUSE ACT Storage”; and that, since her business is the milling of
palay, the delivery thereof to her is merely incidental
(Act No. 3893, as amended by RA 247) to such business and does not constitute storage
within the meaning of the statute.

ISSUE: Whether or not Limjoco is engaged in the


PURPOSE – to regulate the business of receiving business of receiving palay for storage.
commodities for storage in order to protect
persons who may want to avail themselves of RULING:
warehouse facilities and to encourage the The Court ruled that Section 2 is too clear to
establishment of more warehouses. permit of any exercise in construction or semantics. It
does not stop at the bare use of the words “storage,”
™ To achieve this purpose, any person who wants but expressly provides that any contract or
to engage in the business of receiving transaction wherein the palay delivered is to be milled
commodities for storage is required by the Act to for and on account of the owner shall be deemed
first secure a license therefor from the included in the business of receiving rice for storage
Department of Trade and Industry. (Sec. 3) for the purpose of the Act. In other words, it is
enough that the palay is delivered, even if only to
WAREHOUSEMAN – a person engaged in the have it milled. Delivery connotes transfer of physical
business of receiving commodity for storage. (Sec. 2) possession or custody; and it may indeed be
- person lawfully engaged in the business of storing seriously doubted if the concept of “storage” under
goods for profit. (Sec. 58 (a) of the Warehouse the law would cover a situation where one merely
Receipts Act [Act No. 2137]) utilizes the services of the mill but keeps the palay
under his physical control all steps of the way. But in
The BUSINESS OF RECEIVING COMMODITY FOR this case, it is a fact that palay is delivered to
STORAGE includes entering into any contract or petitioner and sometimes piled inside her “camalig” in
transaction wherein: appreciable quantities, to wait for its turn in the milling
1. The warehouseman is obligated to return the process. This is precisely the situation covered by the
very same commodity to him or pay its value; statute. The main intention of the lawmaker is to give
2. The commodity delivered is to be milled for protection to the owner of the commodity against
the owner thereof; possible abuses and negligence of the person to
3. The commodity delivered is commingled whom the physical control of his properties is
with the commodity belonging to other delivered.
persons, and the warehouseman is obligated
to return commodity of the same kind or to
pay its value. ™ Generally, the commodities that may be stored in
QuickTime™ and a
a bonded warehouse could be any raw,
TIFF (Uncompressed) decompressor
Limjoco vs. Director of Commerce, G.R. No. L-
are needed to see this picture. processed, manufactured, or finished product or
17640, November 29, 1965 by-product, goods, article, or merchandise, either
domestic or of foreign production or origin, which
FACTS: may be traded to or dealt in openly and legally.
This petition for declaratory relief involved the Thus, prohibited substances, the possession of
interpretation of Section 2 of the General Bonded which is proscribed by law, may not be validly
Warehouse Act in relation to the rice milling business received for storage in a bonded warehouse.
of petitioner Limjoco. The latter submits that the test (Sec. 2)
to determine the applicability of Act NO. 3983, as
amended, is whether or not she is engaged in the

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BOND REQUIRED TO BE PUT UP BY THE 2. Receiving a quantity of commodity


WAREHOUSEMAN: greater than that specified in the license
1. The bond may either be a cash bond or a of the warehouseman (Sec. 12);
bond secured by real estate, or a bond 3. Conniving or entering into a combination
issued by a duly authorized bonding with an unlicensed warehouseman for the
company. purpose of avoiding compliance with the
2. The amount of the bond must not be less requirement of obtaining a license before
than 33 1/3 % of the market value of the engaging in the business of receiving
maximum quantity of the commodity to be commodities for storage (Sec. 13).
received by the warehouseman.
3. It shall be so conditioned as to respond for Gonzales vs. Go Tiong, et al., G.R. No. L-11776,
the market value of the commodity August 30, 1958
actually delivered and received at any time
by the warehouseman in case the latter is FACTS:
unable to return the commodity or to pay its Go Tiong owned a rice mill and a warehouse.
value. (Sec. 4) Gonzales deposited with Go Tiong on various dates
sacks of palay. The receipts for the palay issued by
DUTIES OF A BONDED WAREHOUSEMAN: Go Tiong to Gonzales were ordinary receipts, not the
1. To insure the commodity received for warehouse receipts required under the Warehouse
storage against fire (Sec. 6); Receipts Act. Later, Go Tiong’s warehouse burned
2. To receive for storage any commodity of the down. In defending himself from the claim of
kind customarily stored by him in the Gonzales for damages arising from the destruction of
warehouse, so far as his license and the hid deposit of palay, Go Tiong argued that inasmuch
capacity of his warehouse will permit, without as the receipts issued to Gonzales were ordinary
making any discrimination between the receipts and not the warehouse receipts required
persons desiring to avail themselves of under the Warehouse Receipts Act, the governing
warehouse facilities (Sec. 8); law should be the Civil Code and not Act No. 3893,
3. To keep a complete record of all as amended.
commodities received by him, of the receipts
issued therefor, of the withdrawals, of the ISSUE: Whether or not Act No. 3893, as amended,
liquidation, and of al the receipts returned to is applicable.
and cancelled by him (Sec. 9). RULING:

• The person injured by the breach by the The Court said that Act No. 3893, as
warehouseman of any of his obligations under amended, is a special law regulating the business of
the Act may sue on the bond put up by the receiving commodities for storage and defining the
warehouseman to recover the damages he may rights and obligations of a bonded warehouseman
have sustained on account of such breach. In and those transacting business with him.
case the bond given is not sufficient to cover the Consequently, any deposit made with him as a
full market value of the commodity stored, he bonded warehouseman must necessarily be
may sue on any property or assets of the governed by the provisions of Act No. 3893. The kind
warehouseman not exempt by law from or nature of the receipt issued by him for the deposits
attachment and execution. (Sec. 7) is not very material, much less decisive. Though it is
desirable that receipts issued by a bonded
QuickTime™ and a
OFFENSES PENALIZED:
TIFF (Uncompressed) decompressor warehouseman should conform to the provisions of
are needed to see this picture.
1. Engaging in the business of receiving the Warehouse Receipts Law, said provisions in our
commodities for storage without the proper opinion are not mandatory and indispensable in the
license (Sec. 11) from the Bureau of sense that if they fell short of the requirements of the
Commerce; Warehouse Receipts Act, then the commodities
Note: for palay and commodity license, a delivered for storage become ordinary deposits and
bond with the National Grains Authority is will not be governed by the provisions of the Bonded
required; also an insurance cover is required. Warehouse Act.

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™ The warehouseman is not covered by the law if • If the seller should foreclose on the mortgage
the owner merely rents space to a certain group constituted on the thing sold, he shall have no
of persons because the law covers a warehouse further action against the purchaser to recover
that accepts goods for: (a) storage, (b) milling, any unpaid balance of the price. Any agreement
and (c) commingling with the obligation to return to the contrary shall be void.
the same quantity or to pay their value.

Levy Hermanos, Inc. vs. Gervacio, 69 Phil. 52


(1939)
FACTS:
INSTALLMENT SALES LAW The seller sold a Packard car whereby the buyer
(Act No. 4122 also known as the RECTO LAW) paid an initial payment, and issued a promissory note
for the balance payable on or before a specified date,
with stipulated interest. When the buyer failed to pay
the note at its maturity, the seller foreclosed the
mortgaged constituted on the car and sold the same
at public auction, which resulted into a deficiency
™ Article 1484 of the Civil Code provides for the judgment. When the auction was brought to collect
remedies of a seller in contracts of sale of on the deficiency, the buyer sought the application of
personal property by installments, and the provisions of the then Article 1454-A of the Old
incorporates the provisions of Act No. 4122, Civil Code, and held that the seller could no longer
known as the Installment Sales Law or the Recto collect on the balance unpaid.
Law, which then amended Article 1454 of the
Civil Code of 1889. ISSUE: Whether or not the Recto Law is applicable.

RULING:
RATIONALE – the object of Recto Law was to The Court held that the provisions of the
remedy the abuses committed in connection with the Recto Law cannot apply to a sale where there is an
foreclosure of chattel mortgages and was meant to initial payment and the balance is payable in the
prevent mortgagees from seizing the mortgaged future, because the same is not a sale on installment
property, buying it at foreclosure sale for a low price but actually a “straight sale.” Since such a sale is not
and then bringing suit against the mortgagor for a covered by the Recto Law, the barring effects of the
deficiency judgment. law cannot be made to apply, and the seller may
• Under Article 1484 of the New Civil Code, in a recover the unpaid balance of the purchase price
contract of sale of personal property the price of against the buyer even when the latter shall have lost
which is payable in installments, the vendor may by foreclosure of the subject matter of the sale.
exercise any of the following REMEDIES: When there is only one payment to be paid in
the future, there is no basis to apply the Recto Law,
1. Exact fulfillment of the obligation, should since under the language of then Article 1454-A, the
the buyer fail to pay any installment; buyer needs to have defaulted in the payment of two
2. Cancel the sale, should the buyer’s failure to or more installments to allow the seller to rescind or
pay cover two or more installments; foreclose on the chattel mortgage.
The Recto Law is aimed at those sales
3. Foreclose the QuickTime™
chattel and amortgage on the
TIFF (Uncompressed) decompressor where the price is payable in several installments, for,
thing sold, if one has
are needed to see this been constituted,
picture.
generally, it is in these cases that partial payments
should the buyer’s failure to pay cover two or consist in relatively small amounts, constituting thus a
more installments. great temptation for improvident purchasers to buy
• The remedies have been recognized as beyond their means. There is no such temptation
alternative, not cumulative, in that the exercise of where the price is to be paid in cash, or, as in the
one would also bar the exercise of the others. instant case, partly in cash and partly in one term, for,
They cannot also be pursued simultaneously. in the latter case, the partial payment are not so small
as to place purchasers off their guard and delude
them to a miscalculation of their ability to pay.

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™ The provisions of Recto Law are applicable to


financing transactions derived or arising from
sales of movables on installments, even if the
underlying contract at issue is a loan because the
promissory note has been assigned or negotiated
by the original seller.

QuickTime™ and a
TIFF (Uncompressed) decompressor
are needed to see this picture.

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