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Far Eastern University

Institute of Law

CODE OF COMMERCE 4. Commercial Contracts of Overland


transportation (Arts. 349-379)
5. Letters of Credit(Arts. 567-572)
Commerce 6. Maritime Commerce (Atrs.573-869)
 It is that branch of human activity, the
purpose of which is to bring products to B. Special Laws
the consumer by means of exchanges or 1. Corporation Code
operations which tend to supply and 2. Negotiable Instruments Law
extend to him, habitually, with intent to 3. Insurance Code
gain at the proper time and place in 4. Insolvency Law
good quality and quantity. 5. Securities Registration Code
 “Commerce” and “trade” are used 6. Public Service Law
interchangeably although the former is 7. General Banking Law
more commonly used in international 8. Warehouse Receipts Law
dealings and the latter in domestic ones. 9. Chattel Mortgage Law
(Pandect of Commercial Law and 10. Others
jurisprudence, justice Jose Vitug, 1997
ed.) C. New Civil Code (repealed certain contracts in
the Code of Commerce)
Commercial Law 1. Sales
2. Partnership
 It is that branch of private law governing
3. Agency
acts of commerce (Business
4. Loan
intercourse) and/or the juridical relations
5. Deposit
arising from such commercial acts.
6. Guaranty
(Pandect of commercial law and
jurisprudence, justice Jose Vitug, 1997
Merchants
ed.)
A. Foreign Merchants
 Principal characteristics:
 Those engaged in business in the
1. uniform
Philippines
2. universal
1. As to capacity to contract
3. equitable
- governed by the laws of their country
4. customary
2. As to the creation of their
5. progressive
establishments, their mercantile
operations and the jurisdiction of our
Law Merchant/Lex Mercatoria
courts
 An old international law - governed by the Code of Commerce
of merchants and Note: The Corporation Code applies to
mariners growing out of corporations.
their customary
practices. It was a law B. Filipino Merchants
practiced and enforced 1. Natural Person
by businessman and  Qualifications:
ship owners in their own a. Legal capacity to engage in commerce
courts without (capacity)
professional judges or i. of legal age (18years)
lawyers. (Tristan ii. has free disposition of property
Catindig, Notes on b. habitually engaged in commerce (habituality)
Selected Commercial 2. Juridical person
Laws)  Qualifications:
a. industrial or commercial company
Commercial Laws in the Philippines b. organized in accordance with existing
A. Code of Commerce (Portions still in force) legislation
1. Merchants, Commercial registries, Book
of Merchants, General provisions on Habituality
Commercial Contracts (Arts. 1-63) 1. Series of acts:
2. Joint Accounts (Arts. 239-243)
 the repetition and continuation of
3. Transfers of non- negotiable credits
commercial acts in such manner that
(Arts. 347- 348)
they are related to each other by reason
of the commercial or end which they

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Commercial Law Study Guide
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tend to have, which is, the exchange or Acts of Commerce (Commercial


circulation of products. Transactions)
2. Single acts: 1) Those acts contained in the Code of
 Act which manifests the intention to Commerce and 2) all others of analogous
engage habitually in commerce. character.
 Examples: Throwing open to the public a The Code of Commerce does not attempt
shop or establishment; public announce; anywhere to define what commercial
etc. transactions are. It only specifies two
 Presumption of habituality general classes.
Exists from the moment a person who  Moreover, an act need not be performed
intends to engage in commerce by the merchant in order that it may be
announces through circulars, considered an act of commerce. (Cia
newspapers, handbills, posters exhibited Agricola de Ultramar v. Reyes, 4 PHIL 2)
to the public, or in any other manner  Governing Law (in successive order): 1)
whatsoever, an establishment which has Code of Commerce; 2) commercial
for its object some commercial usage; and 3) Civil Code.
operations. (Art. 3 of code of commerce)
Commercial Registry
Disqualifications from Engaging in 1. A book where entries are made
Commerce of merchants and of documents
A. Absolute disqualifications: affecting their commercial
1. those serving the penalty of civil transactions; OR
interdiction; 2. An office established for the
2. those judicially declared insolvent; purpose of copying and
3. those who are absolutely disqualified recording verbatim certain
under special laws. classes of documents of
B. Relative Disqualifications: commercial nature.
1. Certain government officials, such as
judicial officers, prosecutors, department Nature of Registration
heads, collectors, and custodian of 1. By individual merchants – optional;
government funds 2. By corporations – compulsory, as it is
2. Money and commercial brokers the fact of registration which creates the
3. those who are under relative Corporation;
disqualification under special laws 3. Partnerships with a capital of P3,000 or
4. Members of Congress. more or where the contributions consist
5. President, Vice President, members of of real estate properties – Compulsory,
the Cabinet and their deputies or as provided by Art.1772 of the Civil
assistants. Code;
6. Members of the Constitutional 4. Philippine Vessels –
Commission. a. With more than 3 tons gross –
7. President, Vice President, Members of compulsory
the Cabinet , Congress, Supreme Court b. With gross tonnage of 3 tons or
and the Constitutional Commission, less – optional.
Ombudsman with respect to any loan,
guaranty, or other form of financial Effect of Failure to Register
accommodation for any business  An individual merchant who fails to
purpose by any government- owned or register cannot request the inscription of
controlled bank to them. any document in the mercantile registry,
nor take advantage of its effects (Art. 18,
ABSOLUTE RELATIVE Code of Commerce)
INCAPACITY INCAPACITY  Failure to register the articles of
Extends through out Extends only to the incorporation of a corporation will not
the Philippines territory where the create the corporation.
officer is exercising his  Failure to register a partnership does not
functions affect the existence of juridical
Effect of act is null and Effect is to subject the personality, whether or not it has P3,
void violator to disciplinary 000 or more or real estate properties on
action or punishment contributions by the partners.(Bar
Review Materials in Commercial Law, J.
Miravite, 2005 ed.)

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However, Justice Vitug believes that


Required Books of Merchants Article 54 is applicable only to contracts still
1. Under the Code of Commerce specially governed by the Code of Commerce.
a. Book of inventories and balances
b. Journal Joint Account (cuentas en participacion)
c. ledger  A business arrangement of merchants
d. Books for copies of letters and where other merchants agree to
telegrams. contribute the amount of capital agreed
2. Under special laws; e.g stock and transfer upon, and participating in the favorable
book under the corporation Code or unfavorable results thereof in the
3. Under the National Internal Revenue Code. proportion they may determine. (Art;239)

Commercial Contracts Distinctions between Joint Account and


 Those entered into by, merchants in the Partnership (2000 Bar Exam)
pursuit of their activities as such
merchants, those involving articles of JOINT ACCOUNT PARTNERSHIP
commerce, or those defined as such
contract by certain special commercials No firm name Has a firm name
laws. No common fund Has common fund
 An agreement between two or more No juridical personality Has juridical
merchants or non-merchants bonding personality
themselves to give or to do something in Only ostensible All general partners
commercial transactions. (Del Viso 88 partner manages liable to third persons
cited in Miravite Bar Review Materials in Liquidation done by All general partners
Commercial law.) ostensible partner manage
Liquidation done by Liquidation entrusted
Governing Laws: ostensible partner to any partners.
1. Code of Commerce- primary
2. Civil Code- suppletory (Art. 18, Civil Code) LETTER OF CREDIT ( LC)
 But in case of inconsistency. The lather (2000, 2002, 2005 Bar Exams)
prevails except as to contracts explicitly
governed by the former such as  That issued by one merchant to another
bottomry and respondentia. for the purpose of attending to a
commercial transaction (Art. 567)
Formalities:  An instrument issued by a bank on
General Rule: Need not be in any particular form behalf on one of its customers,
Exception: authorizing an individual or firm to draw
1. Contracts required by the code or special laws on the bank or one of its correspondents
to be in writing or in a certain form. for its account under certain conditions
2. Foreign contracts executed abroad, required of the credit. (Commercial Law Review,
by foreign law to be in a particular form. C Villanueva, 2004 ed.)
 An engagement by a bank or other
Perfection: person made at the request of a
General Rule: Commercial contracts are customer that the issuer will honor drafts
consensual as to perfection. or other demands for payment upon
Exception: When the Code of commerce compliance with the conditions specified
requires specific forms such as charter parties in the credit. (Prudential Banks vs. CA,
and loans on bottomry and respondentia. 216 SCRA 257). Through it, the bank
merely substitutes its own promise to
Exact moment of perfection: pay for the promise to pay of one of its
General Rule: All contracts, whether civil or customers who in return promises to pay
commercial, are perfected from the moment the the bank the amount of funds mentioned
offeror has notice of the offeree’s acceptance. in the letter of credits or commitment
(Cognition Theory; Art.1319, Civil Code) fees mutually agreed upon.
Exception: Under Art.54 of the Code of
 Letters of credit are in effect absolute
Commerce, commercial contracts entered into
undertakings to pay the money
by correspondence are perfected from the
advanced or the amount for which credit
moment an answer is made accepting the offer
is given on the faith of the instrument.
or the condition by which the latter may be
They are primary obligations and not
modified. (Manifestation Theory)

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Institute of Law

accessory contracts and while they are may be the opening bank or another
security arrangements, they are not bank not in the city of the beneficiary.
converted thereby into contracts of 7. Negotiating Bank –
guaranty. (Metropolitan vs. Daway) bank in the city of the beneficiary which
 A letter of credit is a commercial buys or discounts the drafts
transaction because it is one of the contemplated by the LC, if such draft is
contracts provided for by the Code of to be drawn on the opening bank or on
Commerce not repealed by the Civil another designated bank not in the city
Code. (Bar Review Materials in of the beneficiary.
Commercial Law, Miravite, 2005 ed.)  A mere
advertising or
Essential conditions: notifying bank is
1. Issued in favor of a definite person and not liable for a
not to order; breach of the
2. Amount fixed and specified. (Art. 568) letter of credit,
Note: If any of these essential conditions is not while a
present, the instrument is merely considered as confirming bank
a letter of recommendation. is liable in case
Duration: of breach
a. Upon the period fixed by the parties: or thereof. An
b. If none is fixed, 6 months from its date if advertising
used in the Philippines, or 12 months if used bank is bound
abroad. (Art. 572) only to check
Note: The LC becomes void if it is not used the apparent
within the period applicable. authenticity of
Perfection: LC are perfected from the moment the letter of
the correspondent bank makes payment to credit. (Bank of
persons in whose favor the LC has been America NT. &
opened. (Belman, Inc. vs. Central Bank, 104 SA vs. CA, G.R.
Phil. 887) No. 105395,
Parties December 10,
1. Applicant/buyer/importer – one who 1993)
purchases the goods, procures the LC, and Nature: The LC is the financial devise (mode of
obliges himself to reimburse the issuing bank payment) developed a s a convenient and
upon receipt of the documents of title. relatively safe mode of dealing with sales of
2. Issuing/opening bank – one which issues the goods to satisfy the seemingly irreconcilable
LC, and undertakes to pay the seller upon interests of a seller, who refuses to part with his
receipt of the draft and proper documents of title goods before he is paid, and a buyer, who wants
from the seller and to surrender them to the to have control of the goods before paying.
buyer upon reimbursement; and
3. Seller/exporter/beneficiary – one who sells the
goods to the buyer, and who delivers the draft
and documents to the issuing bank to recover Stages:
payment. 1. Contract of sale
 The number of parties may be between the buyer and seller
increased. Modern letters of credit are 2. Application for LC by
usually not made between natural the buyer with the bank
persons. They involve bank- to bank 3. Issuance of LC by the
transactions. bank
4. Advertising/ Notifying 4. shipping of goods by the
Bank - the correspondent bank (agent) seller
of the opening bank through which it 5. Execution of draft and
advises the beneficiary of the LC. tender of documents by the seller
5. Confirming Bank – bank 6. Redemption of draft
which, upon the request of the (payment)and obtaining of documents by the
beneficiary, confirms the LC issued. issuing bank
7. reimbursement to the
6. Paying Bank – bank on
bank and obtaining of documents by the
which the drafts are to be drawn, which
buyer

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 There are at least 3 distinct and and the


independent contracts involved in a LC: underta
1. Contract of sale kings of
between the buyer and the seller the
2. Contract of the buyer respecti
with the issuing bank ve
3. LC roper in which bank parties
promises to pay the seller pursuant to the in each
terms and conditions stated therein (with a are
pour autrui stipulation in favor of the seller). neither
subject
How their respective relationships are to
governed claims
and
a. Issuing bank and defense
applicant/buyer/importer – s nor
governed by the terms of the affected
application and agreement for by the
the issuance of the letter of the breach
credit by the bank. in the
b. Issuing bank and others.
Beneficiary/seller/exporter –  A direct
governed by the terms of the conseq
letter of the credit issued by the uence
bank. of the
c. Applicant and beneficiary – indepen
governed by the sales of dence
contract (Bar Review Materials principl
in Commercial Law, J. MIravite, e is the
2005 ed.) rule that
 The opening of the banks
letter of credit in favor deal
of a vendor is only a only
mode of payment; it is which
not among the docume
essential nts and
requirements of a not with
contract of sale goods,
enumerated in services or obligation to which they relate. By
arts.1305 and 1474 of this so-called independence principle, the bank
the Civil Code. determines compliance with the letter of credit
Therefore it does not only by examining the shipping documents
prevent the perfection presented; it is precluded from determining
of the contract whether the main contract is actually
between the parties. accomplished or not. (Bank of America, NT. &
(Johannes vs. CA, SA vs. CA, G.R. No. 105395, December 10,
227 SCRA 717) 1993)
Other contracts maybe involved especially
where additional parties are present. Rule of strict compliance
 It espouses that the documents
Independence Principle tendered by the seller/beneficiary must
strictly conform to terms of the LC.
 The 3 (Feati bank vs. CA 196 SCRA 576)
basic  Thus, a correspondent bank which
contract departs from what has been stipulated
s are under the letter of credit acts on its own
distinct risk and may not thereafter be able to
and recover from the buyer or the issuing
indepen bank the money thus paid to the
dent, beneficiary.(Feati Bank vs. CA)

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beneficiary
Kinds of LC have been
reimbursed
CONFIRMED LC IRREVOCABLE LC to the
A LC issued by one A definite opening
bank confirmed by undertaking on the bank by the
another , in which part of the issuing buyer
case both banks are bank and constitutes
obligated to honor the engagement of Governing Law
drafts drawn in the bank to the 1. Code of Commerce
compliance with the beneficiary and bona 2. Uniform Customs and Practice for
credit fide holders of drafts Documentary Credits
drawn and or
documents Note: the Uniform Commercial Practice for
presented Documentary Credits allow Letters of Credit to
thereunder, that the be payable to order.
provisions for
payment,
acceptance and NEGOTIABLE INSTRUMENTS LAW
negotiation (Act No. 2031)
contained in the
credit will be fully I. General Concepts
fulfilled, provided
that all the terms and Negotiable Instrument (2005 Bar Exam) - a
conditions of the written contract for the payment of money which
credit are complied complies with the requirements of Sec. 1 of the
with. NIL, which by its form and on its face, is
The correspondent The issuing bank intended as a substitute for money and passes
bank gives an may not without the from hand to hand as money, so as to give the
absolute assurance consent of the holder in due course (HDC) the right to hold the
to the beneficiary beneficiary (seller) instrument free from defenses available to prior
that it will undertake and the applicant parties. (Reviewer on Commercial Law,
the issuing bank’s ( buyer) revoke his Sundiang and Aquino)
obligation as to its understanding under
own according to the the LC. Functions of Negotiable Instrument:
terms and conditions 1. Substitute for money
of the credit. 2. Medium of exchange
3. Tool used in commercial
transaction.

Two Distinctive Features/Characteristics of


OTHER KINDS OF LC NI: (2005 Bar Exam)
1. Negotiability - it is that attribute or property
REVOLVING BACK-TO- STANDBY whereby a bill or note or check may pass
LC BACK LC LC from hand to hand similar to money, so as to
A credit that A credit with A security give the holder in due course the right to
provides for identical arrangement hold the instrument and to collect the sum
the renewed documentary for the payable for himself free from defenses.
credit to requirements performance
 Requisites of Negotiability: (1996
become and covering of certain
Bar Exam)
available as the same obligations. It
soon as the merchandise can be
a. It must be in writing and signed by the
opening as another drawn
maker or drawer;
bank has LC, except against only
advised the for a if another b. Must contain an unconditional promise
paying bank difference in business or order to pay a sum certain in money;
that the the price. transaction is c. Must be payable on demand, or at a
drafts permitted. fixed or determinable future time;
already d. Must be payable to order or to bearer;
drawn by the and

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e. Where the instrument is addressed to a • Manager’s / Cashier’s Check – drawn by


drawee, he must be named or otherwise a bank on itself and therefore, it is a
indicated therein with reasonable primary obligation of the bank.
certainty. o It is accepted in advance by the
act of its issuance and is not
2. Accumulation of Secondary Contracts - subject to countermand by the
secondary contracts are picked up and payor after indorsement.
carried along with Negotiable Instruments as o The bank’s manager signs
they are negotiated from one person to manager’s check while cashier’s
another; or in the course of negotiation of check is signed by the bank
negotiable instruments, a series of juridical cashier.
ties between the parties thereto arise either
by law or by privity. The indorsers become • Memorandum Check –
secondarily liable to the holder. it is like an ordinary check except that
the word “memorandum,” “mem” or
Distinctions between Negotiable Instruments “memo” is written upon the face of the
and Non-Negotiable Instruments check, signifying that the drawer
engages to pay the bona fide holder
NEGOTIABLE NON-NEGOTIABLE absolutely, and not upon a condition to
INSTRUMENTS INSTRUMENTS pay upon presentment at maturity and if
due notice of the presentment and non-
1. Must contain all 1. Does not contain all
payment should be given.
requisites of sec.1 requisites of sec.1
2. Transferable by 2. Transferable by • Certified Check – one
negotiation and assignment only drawn by a depositor upon funds to his
assignment. credit in a bank which a proper officer of
3. HDC can have 3. A transferee the bank certifies will be paid when duly
rights better than his acquires no better right presented for payment
transferor than his transferor • Traveler’s check – one
4. Prior parties warrant 4. Prior parties do not upon which the holder’s signature must
payment (secondary warrant payment but appear twice, one to be affixed by him at
liability). merely the legality of the time it is issued and the second o
his title. counter-signature, to be affixed by him in
5. Governed by NIL 5. NIL only applies by the presence of the payee before it is
analogy paid, otherwise it is incomplete
6. Transferee is a 6. Transferee is • Crossed check (1995,
holder in due assignee only. 1996, 2004, 2005 Bar Exams) – when 2
course. 7. All defenses parallel lines are drawn across its face
7. Defenses generally available against last or across a corner thereof. If the name
not available. transferee. of a bank appears between the parallel
lines, the check is said to be specially
Classes of Negotiable Instruments: (2002 Bar crossed, and payment should be made
Exam) only if presented by the named bank. If
1. Promissory Note (PN) - unconditional no name appears between the parallel
promise in writing by one person to another lines, the check is said to be generally
signed by the maker engaging to pay on crossed, and payment should be made
demand or at a fixed or determinable future only upon presentment by some bank.
time, a sum certain in money to order or to • Effects of crossing a
bearer. check:
2. Bill of Exchange (BE) -an unconditional a. That the check may not be
order in writing addressed by one person to encashed but only be deposited
another, signed by the person giving it, in the bank;
requiring the person to whom it is addressed b. That the check may be
to pay on demand or at a fixed or negotiated only once to one
determinable future time a sum certain in who has an account with a
money to order or to bearer. bank; and
3. Check- a bill of exchange drawn on a bank c. That the act of crossing the
payable on demand. check serves as a warning to
Kinds: the holder that the check has
been issued for a definite
purpose so that he must inquire

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if he has received the check 5. A holder, if HDC, 5. A holder can never


pursuant to that purpose. may acquire rights acquire rights to
• Stale check – one which has not been over the the document
presented for payment within a instrument better better than his
reasonable time after its issue than his predecessors
predecessors
Iron Clad Rule: Prohibits the countermanding of
payment of certified checks. (Republic of the
Philippines v. PNB. GR No. 16106. December 1, PROMISSORY BILL OF
1961) NOTE EXCHANGE
1.Unconditional 1.Unconditional
Bills in Set: one composed of several parts, promise order
each part numbered and containing a reference 2. Involves 2 parties 2.Involves 3 parties
to the other parts, the whole of the parts 3. Maker is primarily 3.Drawer is only
constituting but one bill. liable secondarily liable
• Rights of holders where parts are 4.Only one 4.Two presentments:
negotiated separately: presentment: for for acceptance
1. If both are HDC, payment and for payment
the holder whose title first accrues is
considered the true owner of the bill. Instances when BILL may be treated as a
2. But the person NOTE:
who accepts or pays in due course 1. Drawer and drawee are the same person.
shall not be prejudiced. 2. Drawee is a fictitious person.
• Obligations of holder who indorses 2 or 3. Drawee has no capacity to contract.
more parts of the Bill in Set: 4. When instrument is so ambiguous, the
1. The person shall be liable on holder may treat it either as a BILL or a
every such part. NOTE.
2. Every indorser subsequent to
him is liable on the part he has BILLOF EXCHANGE CHECK
himself indorsed, as if such parts 1.Not necessarily 1.It is necessary that
were separate bills. drawn on a deposit. a check is drawn on
The drawee need a bank deposit. The
Distinctions between a Negotiable not be a bank. drawee is always a
Instrument and a Negotiable Document of bank.
Title (2005 Bar Exam) 2.Death of a drawer 2.Death of the drawer
of a BOE, with the of a check, with the
NEGOTIABLE NEGOTIABLE knowledge of the knowledge of the
INSTRUMENT DOCUMENT OF bank, does not bank, revokes the
TITLE revoke the authority authority of the
1. The subject is 1. The subject is of the drawee to pay. banker to pay.
Money goods 3. May be presented 3. Must be presented
2. Is itself the 2. The document is a for payment within a for payment within a
property with mere evidence of reasonable time after reasonable time after
value title – the things of its last negotiation its issue.
value being the because it may be
goods mentioned further negotiated.
in the document 4.May be payable on 4. Always payable on
3. Has all the 3. Does not have demand or at a fixed demand
requisites of Sec 1 these requisites or determinable
of NIL future time
4. A holder of NI may 4. Intermediate
run after the parties are not Other Forms of Negotiable Instruments
secondary parties secondarily liable if 1. Certificate of deposit issued by banks,
for payment if the document is payable to the depositor or his order, or to
dishonored by the dishonored bearer
party primarily 2. Trade acceptance
liable 3. Bonds, which are in the nature of promissory
notes

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4. Drafts, which are bills of exchange drawn by 1. Must be in writing, signed by the maker or
one bank upon another drawer;
 All of these must comply with Sec. 1, NIL - Otherwise it cannot be a substitute for money.
Note: Letters of credit are not negotiable.
2. Must contain an unconditional promise or
Legal Tender order to pay a sum certain in money;
That kind of money that the law compels a
creditor to accept in payment of his debt when Certainty of sum payable.
tendered by the debtor in the right amount. The sum payable is a sum certain although it is
to be paid:
Note: A negotiable instrument although intended a. With interest; or
to be a substitute for money, is generally not a b. By stated installments; or
legal tender. c. By stated installments, with a provision
that, upon default in payment of any
Incidents in “Life” of Negotiable Instrument installment or of interest, the whole shall
1. Issue become due; or
2. Delivery d. With exchange, whether at a fixed rate
3. Negotiation or at the current rate; or
4. Presentment for acceptance, in certain kinds e. With costs of collection or an attorney's
of bills of exchange fee, in case payment shall not be made
5. Acceptance at maturity. (sec. 2)
6. Dishonor by non-acceptance Acceleration clause - renders whole debt due
7. Presentment for payment and demandable upon failure of obligor to
8. Dishonor by non-payment comply with certain conditions.
9. Notice of dishonor
10. Discharge When promise is unconditional
An unqualified order or promise to pay is
Issue - the first delivery of the instrument, unconditional though coupled with:
complete in form, to a person who takes it as a
a. An indication of a particular fund out of
holder.
which reimbursement is to be made or a
particular account to be debited with the
Delivery - transfer of possession, actual or
amount; or
constructive, from one person to another
b. A statement of the transaction which
Holder – refers to the:
gives rise to the instrument.
a. The payee or indorsee of a bill or note
who is in possession of it, or  An order or promise to pay out of a particular
fund is not unconditional.
b. The bearer thereof (sec.191)
Bearer - the person in possession of a bill or
note which is payable to bearer.
Person - includes a body of persons, whether
incorporated or not.

II. Negotiability

Requisites of Negotiability (Sec. 1, NIL) (1996 FUND FOR PARTICULAR


Bar Exam) REIMBURSEMENT FUND FOR
a. It must be in writing and signed by the PAYMENT
maker or drawer; 1. Drawee pays the 1. There is only
b. Must contain an unconditional promise payee from his own one act- the
or order to pay a sum certain in money; funds; afterwards, the drawee pays
c. Must be payable on demand, or at a drawee pays himself directly from
fixed or determinable future time; from the particular the particular
d. Must be payable to order or to bearer; fund indicated. fund indicated.
and Payment is
e. Where the instrument is addressed to a subject to the
drawee, he must be named or otherwise condition that
indicated therein with reasonable the fund is
certainty. sufficient.

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2. Particular fund 2. Particular fund person so issuing, accepting, or indorsing it,


indicated is NOT the indicated is payable on demand.
direct source of the direct
payment but only the source of 4. Payable to order or to bearer
source of payment.
reimbursement. When payable to order
The instrument is drawn payable:
3. Indication in the 3. Indication in
a. To the order of a specified person or
instrument does not the instrument
b. To him or his order.
affect the makes the
unconditional nature of promise or  The payee must be named or otherwise
the promise or order. order indicated therein with reasonable certainty.
conditional.  It may be drawn payable to the order of:
a. A payee who is not maker, drawer, or
drawee; or
3. Payable on demand or at a fixed determinable b. The drawer or maker; or
future time; c. The drawee; or
Certainty of time of payment
d. Two or more payees jointly; or
An instrument is payable at a determinable e. One or some of several payees; or
future time which is expressed to be payable: f. The holder of an office for the time
a. At a fixed period after date or sight; or being.
b. On or before a fixed or determinable When payable to bearer.
future time specified therein; or
c. On or at a fixed period after the
a. When it is expressed to be so payable;
occurrence of a specified event which is or
certain to happen, though the time of b. When it is payable to a person named
happening be uncertain. therein or bearer; or
c. When it is payable to the order of a
 An instrument payable upon a contingency fictitious or non-existing person, and
is not negotiable, and the happening of the such fact was known to the person
event does not cure the defect. (sec. 4) making it so payable; or
 A promise to pay “when able,” “as soon as I d. When the name of the payee does not
can”, etc., without specification of an purport to be the name of any person; or
absolute date is not negotiable. However, e. When the only or last indorsement is an
there is a difference of opinion as to whether indorsement in blank. (Sec. 9)
it is a conditional promise or an absolute
promise to pay at un unreasonable time: 5. Identification of the drawee
a. Under the first view,  Where the instrument is addressed
negotiability is destroyed both by the to a drawee (meaning in a bill of
condition and by want of a fixed time exchange), he must be named or
for payment; otherwise indicated with reasonable
b. Under the second view, certainty. The holder must know to
by the general principle that a whom he should present it for
promise to pay within a reasonable acceptance and/or payment; otherwise,
time is not so certain as to render an the purpose of negotiable instrument as
instrument negotiable. a tool in commercial dealings will be
Aftersight Draft - payable only after the greatly hampered. (Reviewer on
expiration of the stipulated period from Commercial Law, Sundiang and Aquino)
acceptance (legal sight).
 A bill may be addressed to more
When payable on demand: than one drawee jointly, whether they
are partners or not; but not to two or
a. When it is so expressed to be payable more drawers in the alternative or in
on demand, or at sight, or on succession. (Sec. 128)
presentation; or
b. In which no time for payment is Test of Negotiability: presence of requirements
expressed. in Section 1 of NIL.
Note: Where an instrument is issued, accepted,
or indorsed when overdue, it is, as regards the Factors that Determine Negotiability:

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1. The whole instrument itself c. waives the benefit of any law intended
2. Only what appears on the face of for the advantage or protection of the
the instrument obligor; or
3. Provisions of the NIL, Sec.1 d. gives the holder an election to require
something to be done in lieu of payment
BAR QUESTION (Q): Which of the of money.
following stipulations or features of a
promissory notes (PN) affect or do not
 Confession of judgment – a written
affect its negotiability, assuming that the
statement signed by the defendant, setting
PN is otherwise negotiable? Indicate
forth the basis of liability and authorizing the
your answer by writing the paragraph
entry of judgment thereon.
number of the stipulation or feature of
the PN as shown below and your  Kinds of confession of judgment
corresponding answer, either ‘Affected” a. cognivit actiomen – literally means “he
or “Not affected.” Explain. has confessed action”. It is a written
(a)The date of the PN is “February 30, confession of action by the defendant
2002.” acknowledging is indebtedness to the
(b)The PN bears interest payable on the plaintiff after the action has been filed. It
last day of each calendar quarter at a is given after the action is brought to
rate equal to 5% above the then save expenses.
prevailing 91-day Tbill rate as published b. relicta verificationem – literally means
at the beginning of such calendar “his pleadings being abandoned.” It is
quarter. confession of judgment by withdrawal of
(c)The PN gives the maker the option to the defense.
make payment either in money or in
quantity of palay of equivalent value. Note: However, warrants of attorney to confess
(d) The PN gives the holder the option judgment, are not authorized nor contemplated
either to require payment in money or to by our law. They are void as against public
require the maker to serve as the policy because they enlarge the field for fraud,
bodyguard or escort of the holder for 0 because under these instruments, the
days. promissory bargains away his right to a day in
SUGGESTED ANSWER (SA): court. The NIL does not sanction nor validated
(a) NOT AFFECTED. The date is not any provision otherwise illegal.
one of the requirements for negotiability.
(b) NOT AFFECTED. The interest is to Omissions and Provisions that do not affect
be computed at a particular time and is Negotiability (Sec. 6)
determinable. It does not make the sum The validity and negotiable character of an
uncertain or the promise conditional. instrument are not affected by the fact that:
(c) AFFECTED. Giving the maker an a. it is not dated; or
option renders the promise conditional.
(d) NOT AFFECTED. Giving the holder
b. does not specify the value given, or that
any value had been given therefore; or
an option does not make the promise
conditional. c. does not specify the place where it is
drawn or the place where it is payable;
or
d. bears a seal; or
e. designates a particular kind of current
money in which payment is to be made.
Additional provisions not affecting  if it is not dated, the instrument will be
negotiability. considered to be dated as of the time it was
General Rule: the instrument is non-negotiable if issued.
it contains a promise or order to do any act in  consideration for the instrument is
addition to the payment of money. presumed. (art. 154 NCC & sec. 25 NIL)
Exceptions:  sec. 73 specifies where presentment for
a. authorizes the sale of collateral payment should be made when the place of
securities in case the instrument be not payment is not specified
paid at maturity; or
b. authorizes a confession of judgment if Rules of construction:
the instrument be not paid at maturity; or a. Where the sum payable is expressed in
words and also in figures and there is a

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discrepancy between the two, the sum deemed a holder for value to the extent
denoted by the words is the sum of his lien.
payable; but if the words are ambiguous  Effect of want of consideration: a matter
or uncertain, reference may be had to of defense as against any person not a
the figures to fix the amount; holder in due course; and partial failure of
b. Where the instrument provides for the consideration is a defense pro tanto,
payment of interest, without specifying whether the failure is an ascertained and
the date from which interest is to run, the liquidated amount or otherwise.
interest runs from the date of the Absence of consideration – total lack of any
instrument, and if the instrument is valid consideration for the contract is only a
undated, from the issue thereof; personal defense.
c. Where the instrument is not dated, it will Failure of consideration – failure or refusal or
be considered to be dated as of the time one party to do, perform or comply with the
it was issued; consideration agreed upon is also only a
d. Where there is a conflict between the personal defense.
written and printed provisions of the
instrument, the written provisions III. Transfer and Negotiation
prevail;
Types of transfers:
e. Where the instrument is so ambiguous
that there is doubt whether it is a bill or 1. Assignment - transfer of title to the
note, the holder may treat it as either at instrument, with the assignee generally
his election; taking only such title as his assignor has,
subject to all defenses available against his
f. Where a signature is so placed upon the
assignor;
instrument that it is not clear in what
capacity the person making the same 2. Negotiation - transfer of a negotiable
intended to sign, he is to be deemed an instrument from one person to another made
indorser; in such a manner as to constitute the
transferee the holder thereof
g. Where an instrument containing the
word "I promise to pay" is signed by two 3. By Operation of Law – such as by
or more persons, they are deemed to be succession, by insolvency.
jointly and severally liable thereon. (sec.
17) Distinctions between Negotiation and
Assignment
Consideration
NEGOTIATION ASSIGNMENT
 Presumption of consideration. - every 1. Refers only to 1. Refers generally to
negotiable instrument is deemed prima facie
negotiable an ordinary
to have been issued for a valuable
instruments; contract;
consideration; and every person whose
2. The transferee is a 2. The transferee is an
signature appears thereon to have become
holder; assignee;
a party thereto for value.
3. A holder in due 3. An assignee is
 Value - any consideration sufficient to course is subject subject to both real
support a simple contract. An antecedent or only to real and personal
pre-existing debt constitutes value; and is defenses; defenses;
deemed such whether the instrument is 4. Generally, an
payable on demand or at a future time. 4. A holder in due assignee merely
 Holder for value – one who has given a course may acquire steps into the shoes
valuable consideration for the instrument a better right than of the assignor;
issued or negotiated to him. that of a prior party 5. An assignor does
• What constitutes holder for 5. A general indorser not warrant the
value: warrants the solvency of prior
where value has at any time been given solvency of prior parties unless
for the instrument, the holder is deemed parties; expressly stipulated
a holder for value in respect to all parties or the insolvency is
who become such prior to that time. known to him;
6. An assignor is liable
• where the holder has a lien on 6. An indorser is not even without notice
the instrument arising either from liable unless there of dishonor;
contract or by implication of law, he is be presentment and

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notice of dishonor; 7. Governed by Arts. b. To bring any action thereon


7. Negotiation is 1624 to 1635 (on that the indorser could
governed y the NIL. assignment of bring;
credits) of the Civil
Code. c. To transfer his rights as
such indorsee, where the
Methods of negotiation form of the indorsement
1. Order Instrument – authorizes him to do so.
Indorsement and Delivery. But all subsequent indorsees
acquire only the title of the first
2. Bearer Instrument –
indorsee under the restrictive
Delivery only.
indorsement. (sec. 37)
Indorsement - legal transaction effected by the
writing of one's own name at the:  Such indorsement destroys the
a. back of the instrument or negotiability of the instrument and
bars further negotiation to a holder
b. upon a paper (allonge) attached thereto in due course.
with or without additional words
specifying the person to whom or to
d. Qualified - constitutes the indorser a
whose order the instrument is to be mere assignor of the title to the
payable whereby one not only transfers instrument. (sec. 38)
legal title to the paper transferred but • made by adding to the
likewise enters into an implied guaranty indorser's signature words like "sans
that the instrument will be duly paid. recourse,” “without recourse",
"indorser not holder", "at the
 General Rule: indorsement must be indorser's own risk", etc.
of the entire instrument.
• The purpose of this kind of
Exception: where instrument has been paid
indorsement is to transfer title
in part, it may be indorsed as to the residue.
without guaranteeing payment by
 Kinds of indorsement: the primary party.
a. Special - specifies the person to whom • It does not mean, however, that
or to whose order, the instrument is to the qualified indorser incurs no
be payable (sec. 34) liability at all. The effect is merely to
b. Blank - specifies no indorsee: limit his liability. He is secondarily
• Instrument is payable to bearer liable for breach of is warranties as
and may be negotiated by delivery an indorser under Sec. 65. Thus, he
(sec. 34) is liable if the instrument is
• May be converted to special dishonored by NON-ACCEPTANCE
indorsement by writing over the or NON-PAYMENT due to:
signature of indorser in blank any a. forgery;
contract consistent with character of b. lack of good title to
indorsement. the instrument indorsed;
c. Restrictive - when the indorsement c. lack of capacity to
either: contract on the part of prior
i. Prohibits further negotiation of parties; or
the instrument; or d. the fact that the
ii. Constitutes the indorsee the instrument was valueless or
agent of the indorser; or not valid at the time of the
iii. Vests the title in the indorsee in indorsement which fact was
trust for or to the use of some known to him.
other persons. But mere e. Conditional - right of the indorsee is
absence of words implying made to depend on the happening of a
power to negotiate does not contingent event
make an indorsement restrictive. • Party required to pay may
• A restrictive indorsement disregard the conditions.
confers upon the indorsee the right: • This kind of indorsement has no
a. To receive payment of the effect on the further negotiation of
instrument; the instrument. The party required to
pay, if he chooses, may make
payment, disregarding the condition

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without incurring any liability BEARER instrument. As opposed to an


because he is expressly authorized original order instrument becoming
to do so under Sec. 39. But the payable to bearer, if the same is
person who received payment will indorsed specifically, it can NO
hold the proceeds subject to the LONGER be negotiated further by mere
right of the conditional indorser. delivery, it has to be indorsed.

f. Absolute - one by which indorser binds • Striking out indorsements: the


himself to pay: holder may at any time strike out any
i. upon no other condition than indorsement, which is not necessary to
failure of prior parties to do so; his title. The indorser whose
and indorsement is struck out and all
ii. upon due notice to him of such indorsers subsequent to him, are
failure. thereby relieved from liability on the
g. Joint - indorsement of instrument instrument.
payable to 2 or more persons; all must  If the instrument is payable to bearer on
indorse in order for the transaction to its face, then whether or not there are
operate as a negotiation. indorsements on the back of the
• Exceptions to the instrument would be immaterial to the
rule requiring joint indorsement: title of the bearer, who is presumptively
a. Where the payees or the owner and holder by his mere
indorsees are partners; and possession of such instrument. None of
the indorsement would be necessary to
b. Where the payee or it’s title since mere delivery would have
indorsee indorsing has been sufficient to transfer title from one
authority to indorse for the holder to another.
others.  Where the instrument is payable to
h. Irregular - a person who, not otherwise a order on its face, the situation is
party to an instrument, places thereon different. First, the indorsement of a
his signature in blank before delivery. special indorsee is necessary for the
further negotiation of the instrument.
 Rules on Indorsements: Second, the last indorsement controls
the method of further negotiation.
• Effect of transfer without • When prior party (reacquirer) may negotiate:
indorsement: where an instrument is negotiated back to a
a. transfer vests in the transferee such prior party, such party may reissue and
title as the transferor had therein further negotiate the same. But he is not
(assignment), and entitled to enforce payment thereof against
b. the right to have the indorsement of any intervening party to whom he was
the transferor. personally liable.
 For the purpose of determining  In the following cases, a prior party
whether the transferee is a holder in cannot further negotiate the instrument:
due course, the negotiation takes 1. Where it is payable to the order of
effect as of the time when the a third person, and has been paid
indorsement is actually made. by the drawer;
 Applicable only to order instruments 2. Where it was made or accepted
for accommodation and has been
paid by the party accommodated;
• Indorsement of a bearer
3. In other cases, where the
instrument: where an instrument,
instrument is discharged when
payable to bearer, is indorsed specially,
acquired by a prior party.
it may nevertheless be further
negotiated by delivery; but the person
Holders
indorsing specially is liable as indorser
to only such holders as make title
Classes of holders:
through his indorsement.
1. simple holder (sec. 51)
Note: The rule only applies to originally
2. holder for value (sec. 26)
bearer instruments. If it is originally a
3. holder in due course (sec.52, 57)
BEARER instrument, it will always be a

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Holder in Due Course (1996, 1998, 2000 Bar c. facts of the particular
Exams) case.
 holder who has taken the instrument under • Effect: in the hands
the following conditions: of any holder other than a holder in due
course, a negotiable instrument is
a. That it is complete and regular upon its subject to the same defenses as if it
face; were non-negotiable.
b. That he became the holder of it before it  General Rule: every holder is
was overdue, and without notice that it deemed prima facie to be a holder in due
has been previously dishonored, if such course
was the fact; Exception: when it is shown that the title of
c. That he took it in good faith and for any person who has negotiated the
value; instrument was defective, the burden is on
d. That at the time it was negotiated to him, the holder to prove that he or some person
he had no notice of any infirmity in the under whom he claims acquired the title as
instrument or defect in the title of the holder in due course (shifting of burden of
person negotiating it. proof).
 When title defective - The title of a Limitation: the last-mentioned rule does not
person who negotiates an instrument is apply in favor of a party who became bound
defective when he obtained the instrument on the instrument prior to the acquisition of
or any signature thereto, by: such defective title. (sec. 59)
a. fraud,  Rights of a holder in due
b. duress, or force and fear, course:
c. other unlawful means, a. he may sue on the instrument in his own
d. illegal consideration, name;
e. negotiation in breach of faith, b. he may receive payment and if payment
f. circumstances amounting to fraud. is in due course, the instrument is
g. discharged.
c. holds the instrument free from any
 What constitutes notice of defect. - defect of title of prior parties,
The person to whom it is negotiated must d. holds the instrument free from defenses
have: available to prior parties among
a. actual knowledge of the infirmity themselves, and
or defect, or e. may enforce payment of the instrument
b. knowledge of such facts that his for the full amount thereof against all
action in taking the instrument parties liable thereon.
amounted to bad faith. (sec. 56)
 Notice before full amount is paid - • Payment in due
where the transferee receives notice of any course is payment made:
infirmity in the instrument or defect in the title at or after the maturity of the instrument
of the person negotiating the same before to the holder thereof
he has paid the full amount agreed to be in good faith and without notice that his
paid, he will be deemed a holder in due title is defective.
course only to the extent of the amount paid
 Shelter Rule:
by him.
a. derives his title through a holder in due
 When person not deemed a holder in course, and
due course - where an instrument payable b. who is not himself a party to any fraud or
on demand is negotiated on an illegality affecting the instrument, has all
unreasonable length of time after its issue, the rights of such former holder in
the holder is not deemed a holder in due respect of all parties prior to the latter.
course.
• Reasonable time,  Rights of a Holder NOT in
what constitutes. - regard is to be had to Due Course
the 1. He may sue on the
a. nature of the instrument, instrument in his own name;
b. the usage of trade or 2. He may receive
business with respect to such payment and if the payment is in
instruments, and the due course, the instrument is
discharged;

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3. He is entitled to the 3. his capacity and authority to


instrument but holds it subject to the draw the instrument; and
same defenses as if it were non- 4. the existence of the payee
negotiable; and and his then capacity to
4. He has all the rights of indorse.
the holder in due course from whom Note: the drawee is not liable until he
he derived his title in respect of all accepts the instrument
parties prior to such holder, provided • Where a check is certified by a
he is not himself a party to any fraud bank, it is equivalent to an
or illegality affecting the instrument. acceptance. Since certification is
equivalent to acceptance, a bank
which has certified a check whether at
V. Liabilities of Parties the request of the holder or of a
drawer, has the same liabilities and
Persons primarily liable on instrument: the makes the same warranties as an
person who, by the terms of the instrument, is acceptor. It cannot, after certification,
absolutely required to pay the same. All other question the genuineness of the
parties are "secondarily" liable. drawer’s signature. If it discovers that
such signature is forged subsequent
Classification of parties according to liability to certification but prior to payment, it
cannot refuse to pay on the check. If
Persons liable: Maker its discovery comes after it has paid
In a Promissory Note Indorser the check, it cannot recover back what
3. Persons it paid on the ground of mistaken
negotiating by payment unless the holder is guilty of
delivery fraud or negligence.
In a Bill of Exchange: Drawer
Acceptor • If a drawee-bank accepts or
Indorsers pays a check despite a stop payment
4. Persons order from the drawer, through
negotiating by oversight or otherwise, it cannot
delivery refuse to pay the holder or recover
what has been paid; neither may it
debit the drawer’s account unless the
acceptance nor payment was made
1. Parties Primarily Liable prior to the receipt of the order.
a. Maker (Sec. 60)
• engages to pay
according to the tenor of the 2. Parties Secondarily Liable
instrument; and a. Drawer (Sec. 61)
• admits the • admits the existence of the
existence of the payee and his then payee and his capacity to indorse;
capacity to indorse at the time of the • engages that the instrument will
making of the note. be accepted or paid by the party
• A person placing his primarily liable; and
name on the face of a note is prima • engages that if the instrument is
facie a maker and liable as such; dishonored and proper proceedings
and he is presumed to have acted are brought, he will pay to the party
with care and to have signed the entitled to be paid.
instrument with full knowledge of its b. General Indorser (Sec. 66)
contents. • Warrants:
b. Acceptor or Drawee (Sec. 62) 1. genuineness of the
• engages to pay instrument;
according to the tenor of his 2. his good title to it;
acceptance; 3. capacity to contract of prior
• admits: parties; and
1. the existence of the drawer, 4. instrument is valid and
2. the genuineness of his subsisting.
signature and

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• engages that the instrument will 2. Indorses the delivery;


be accepted or paid by the party instrument after its 3. Liable to the payee
primarily liable; and delivery to the payee; and subsequent
• engages that if the instrument is and parties unless he signs
dishonored and proper proceedings 3. Liable only to for the accommodation
are taken, he will pay to the party parties subsequent to of the payee in which
entitled to be paid. him case he is liable only
c. Irregular Indorser – a person, not to all parties
otherwise a party to an instrument, subsequent to the
places his signature thereon in blank payee.
before delivery.
Rules: 3. Parties with Limited Liability (sec. 65;
• If instrument payable to the Metropol Financing v. Sambok, 120 SCRA
order of a 3rd person, he is liable to 864)
the payee and subsequent parties. a. Qualified Indorser - warrants
• If instrument payable to order of that:
maker or drawer, he is liable to all  instrument is genuine and in all
parties subsequent to the maker or respects what it purports to be;
drawer.  he has good title to it;
• If he signs for accommodation of  all prior parties had capacity to
the payee, he is liable to all parties contract;
subsequent to the payee.  he has no knowledge of any fact
which would impair the validity of the
Distinctions: instrument or render it valueless.
b. Persons Negotiating by
Primary Party Secondary Party Delivery
1. Unconditionally 1. Conditionally  warranties same as those of
Bound; bound; qualified indorsers; and
2.Absolutely required 2. Undertakes to pay
to pay upon the only after certain  warranties extend to immediate
maturity of the conditions have been transferee only.
instrument. fulfilled:
a. due presentment Liability Warranty
for payment or 1. To pay a sum 1. No obligation to
acceptance to primary certain. pay.
party; 2. Requires 2. Notice of Dishonor
b. dishonor by such Notice of is not a requirement.
party; and Dishonor. 3. Action may be
c. the taking of 3. Action can be brought anytime.
proceedings brought only
required by law on maturity of
after dishonor. instrument.

Indorser Drawer
1. A party to either a 1. A party only to a bill; Negotiating by Mere
note or a bill; 2. The drawer makes delivery or by Qualified General Indorser
2. Does not make any such admission; Indorsement
admission regarding 3. Makes no 1. No secondary liability; 1. With secondary
the existence of the warranties, but he liability;
payee and his capacity engages to pay after 2. Warrants that he has 2. Warrants that the
to indorse; and certain conditions are no knowledge of any instrument is, at
3. Has warranties. complied with. fact, which would the time of his
impair the validity of indorsement,
(2005 Bar Exam) the instrument or valid and
GENERAL IRREGULAR render it valueless. subsisting.
INDORSER INDORSER
1. Makes either a 1. Always makes a 4. Other parties who may be liable:
blank or special blank indorsement;
indorsement; 2. Indorses before its

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General Rule: One whose signature does not accommodation party without first directing
appear on the instrument shall not be liable his action against the principal debtor
thereon. provided:
Exceptions: 1. he made the payment by virtue of
1. The principal who signs through an agent is judicial demand; or
liable; 2. the principal debtor is insolvent.
2. The forger is liable; Note: A corporation cannot act as an
3. One who indorses in a separate instrument accommodation party. The issuance or
(allonge) is liable; indorsement of negotiable instrument by a
4. One who signs his assumed or trade name corporation without consideration and for the
is liable; and accommodation of another is ultra vires.
5. A person negotiating by delivery (as in the (Crisologo v. CA, 117 SCRA 594).
case of a bearer instrument) is liable to his
immediate indorsee. Order of liability of indorsers:
1. among themselves – indorsers are liable
Requisites for an Agent to escape liability: prima facie in the order in which they
1. must be duly authorized; indorse; but evidence is admissible to show
2. add words to his signature indicating that he that, as between or among themselves, they
signs as an agent, that is, for or on behalf of have agreed otherwise (sec. 68)
a principal, or in a representative capacity;
and 2. to the holder – indorsers are liable in any
3. disclose his principal. order

 A signature by “procuration”
operates as notice that the agent has but a
limited authority to sign, and the principal is Defenses (1996, 1998, 2004, 2005 Bar Exams)
bound only in case the agent in so signing Kinds:
acted within the actual limits of his authority. 1. Real/Absolute Defenses - those that attach
(sec. 21) to the instrument itself and are available
 Indorsement or assignment of the NI against all holders, whether in due course or
by a corporation or by an infant passes the not.
property therein, notwithstanding that from Examples:
want of capacity, the corporation or infant 1. Alteration;
may incur no liability thereon. (sec. 22) 2. Non-delivery of incomplete
instrument;
Accomodation Party (1996, 1998, 2005 Bar 3. Duress amounting to forgery;
Exams) 4. Fraud in factum or fraud in esse
One who has signed the instrument as maker, contractus;
drawer, acceptor, or indorser, without receiving 5. Minority;
value therefor, and for the purpose of lending his 6. Marriage in the case of a wife;
name to some other person 7. Insanity where the insane
 Liability: such a person is person has a guardian appointed by the
liable on the instrument to a holder for value, court;
notwithstanding such holder, at the time of 8. Ultra vires acts of a corporation,
taking the instrument, knew him to be only where the corporation is absolutely
an accommodation party. prohibited by its charter or statute from
 Effects: issuing any commercial paper under any
circumstances;
1. accommodation party is
9. Want of authority of agent;
generally regarded as a surety for
10. Execution of instrument
the party accommodated;
between public enemies;
2. When accommodation party
11. Illegality of contract where it is
makes payment to holder of the
the contract or instrument itself which is
note, he has the right to sue the
expressly made illegal by statute; and
accommodated party for
12. Forgery.
reimbursement.
2. Personal/Equitable Defenses – those which
are available only against a person not a
 Rights of accommodation
holder in due course or a subsequent holder
parties as against each other: the other may who stands in privity with him.
demand contribution from his co- Examples:

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1. Absence or failure of contract. It implies that does not prevent a


consideration, partial or total; the person did not contract.
2. Want of delivery of complete know what he was
instrument; signing. But where the
3. Insertion of wrong date in an signer by the exercise
instrument, where it is payable at a fixed of reasonable
period after date and it is issued undated diligence could have
or where it is payable at a fixed period discovered the nature
after sight and the acceptance is of the instrument, the
undated; fraud cannot be
4. Filling up of blank contrary to considered a real
authority given or not within reasonable defense, as where a
time, where the instrument is delivered; person, who can read,
5. Fraud in inducement; signed a note but
6. Acquisition of instrument by failed to read it.
force, duress, or fear;
7. Acquisition of the instrument by  Effects of Defenses:
unlawful means; 1. Complete and undelivered instrument
8. Acquisition of the instrument for
• as between immediate parties and as
an illegal consideration;
regards a remote party other than a
9. Negotiation in breach of faith;
holder in due course, the delivery must
10. Negotiation under
be authorized in order to be effectual
circumstances that amount to fraud;
• where the instrument is in the hands of a
11. Mistake;
holder in due course, a valid delivery
12. Intoxication (according to better
thereof by all parties prior to him so as to
authority);
make them liable to him is conclusively
13. Ultra vires acts of corporations
presumed
where the corporation has the power to
issue negotiable paper but the issuance • where the instrument is no longer in the
was not authorized for the particular possession of a party whose signature
purpose for which it was issued; appears thereon, a valid and intentional
14. Want of authority of agent where delivery by him is presumed until the
he has contrary is proved
15. apparent authority;
16. Insanity where there is no notice 2. Incomplete but delivered instrument (1997,
of insanity on the part of the one 2004 Bar Exams)
contracting with the insane person; and • where the instrument is wanting in any
17. Illegality of contract where the material particular, the person in
form or consideration is illegal. possession thereof has a prima facie
authority to complete it by filling up the
Fraud in Factum Fraud in Inducement blanks therein.
1. It exists in those 1. It is that which • it must be filled up strictly in accordance
cases in which a related to the quality, with the authority given and within a
person, without quantity, value or reasonable time
negligence, has signed character of the • if any such instrument, after completion,
an instrument which consideration of the is negotiated to a holder in due course, it
was in fact a instrument. In this is valid and effectual for all purposes in
negotiable instrument, case, the signer is led his hands, and he may enforce it as if it
but was deceived as to by deception to had been filled up strictly in accordance
the character of the execute what he with the authority given and within a
instrument and without knows is a negotiable reasonable time.
knowledge of its, as instrument. It implies 3. Incomplete and undelivered instrument
where a not was that the signer knew • it will not, if completed and negotiated
signed by one under what he was signing without authority, be a valid contract in
the belief that he was but that he was the hands of any holder, as against any
signing as a witness to induced by fraud to person whose signature was placed
a deed. sign. thereon before delivery.
2. This kind of fraud is 2. Such type of fraud is • However, subsequent indorsers are
a real defense only a personal liable.
because there is no defense because it 4. Forgery (1995, 2006 Bar Exams)

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• counterfeit making or fraudulent c. Party


alteration of any writing, which may who made the forgery is liable.
consist of: Bearer Instrument
1. signing of another’s name with a.
intent to defraud; or Maker is not liable.
2. alteration of an instrument in the b.
name, amount, name of payee, etc.
Indorsers may be made liable to
with intent to defraud.
those persons who obtain title
• Effect: signature is wholly inoperative, through their indorsements.
and no right to retain the instrument, or c. Party
to give a discharge therefore, or to who made the forgery is liable.
enforce payment thereof against any 2. Payee’s signature forged
party thereto, can be acquired through
Order Instrument
or under such signature
a.
• Exception: unless the party against
Maker and payee not liable
whom it is sought to enforce such right is
precluded from setting up the forgery or
b.
want of authority. Indorsers subsequent to the
forgery is liable.
• Cut-Off Rule c.
General Rule: Parties prior to the forged
Party who made the forgery is
signature are cut-off from the parties
liable
after the forgery in the sense that prior
Bearer Instrument
parties cannot be held liable and can
raise the defense of forgery. The holder a. Maker is liable. Indorsement
can only enforce the instrument against is not necessary to title and the
parties who became such after the maker engages to pay holder.
forgery. b. Party who made the forgery
Exception: When the prior parties are is liable
precluded from setting up the defense of 3. Indorser’s signature forged
forgery. Order Instrument
Persons precluded from setting up the a. Maker, payee, and
defense of forgery are: indorser who signature was
1. Those who by their acts, forged is not liable.
silence, or negligence, are estopped b. Indorsers subsequent
from setting up the defense of to forgery are liable because of
forgery; their warranties.
2. Those who warrant or admit c. Party who made the
the genuineness of the signature in forgery is liable.
question. These include acts or Bearer Instrument
omissions that amount to ratification, a. Maker is liable. Indorsement is
express or implied.
not necessary to title and the
Note: Persons precluded from setting up
maker engages to pay holder.
the defense of forgery may still recover
damages under the NCC provisions on
b. Indorser whose signature was
quasi-delicts. forged is not liable
c. Party who made the forgery is
• Rules on Forgery:
liable.
A. Promissory Notes
B. Bill of Exchange
1. Maker’s signature forged
1. Drawer’s signature forged
Order Instrument
Order Instrument
a. Maker
a. Drawer is not liable.
is not liable because he never
became a party to the b. Drawee is liable if it
instrument. paid (nor recourse to drawer)
b. Indorse because he admitted the
genuineness of the drawer’s
rs subsequent to forgery are
signature. Drawee cannot
liable because of their
recover from the collecting bank
warranties.
because there is no privity

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between the collecting bank and c. Indorser whose signature was


the drawer. There is no warranty forged is liable because
as to the signature of the indorsement is not necessary to
drawer. (Associated Bank v. CA) pass title.
c. Indorsers subsequent d. Party who made the forgery is
to forgery are liable. liable.
d. Party who made the
forgery is liable 5. Alteration (1995, 1996, 1999 Bar Exams)
Bearer Instrument
• Effect: the instrument is avoided
a. Drawer is not liable
• Exceptions:
b. Drawee is liable if it 1. against a party who has himself
paid. Drawee cannot recover made, authorized, or assented to
from the collecting bank the alteration
because it is bound to known 2. subsequent indorsers
the drawer’s signature since the 3. holder in due course not a party to
latter is its depositor. the alteration - he may enforce
c. Party who made the payment according to its original
forgery is liable. tenor
2. Payee’s signature forged • Changes constituting material
Order Instrument alteration:
a. Drawer, drawee and a. date;
payee not liable. Cut-off rule b. sum payable, either for
applies. principal or interest;
b. Indorsers subsequent c. time or place of
to forgery are liable. payment;
c. Party who made the d. number or relations of
the parties;
forgery is liable
e. medium or currency in
Bearer Instrument
which payment is to be made;
a. Drawer is liable. His
f. that which adds a place
indorsement is not necessary to of payment where no place of
pass title. payment is specified; and
b. Drawee is liable. No g. any other change or
privity between drawer and addition which alters the effect
payee because indorsement of of the instrument in any respect.
payee is not necessary (Ang Note: a material alteration is one
Tek Lian case, 87 SCRA 383) that alters the effect of the
c. Payee is not liable instrument; one which changes the
d. Collecting bank is items required to be stated under
liable because of warranty. Sec. 1, NIL.
e. Party who made the • Spoliation – alteration made by a
forgery is liable. stranger.
3. Indorser’s signature forged • The general rule denies the drawee
Order Instrument bank’s right to charge against the
a. Drawer, payee and drawer’s account the amount of an
indorser whose signature was altered check. However, the latter’s
forged are not liable. negligence, before or after the alteration,
b. Drawee is liable if it may estop him from setting such
alteration as against an innocent drawee
paid.
bank who has paid the check.
c. Indorsers subsequent
to forgery are liable.
• In cases of altered checks and
checks with forged indorsements, the
d. Party who made the
drawee bank must notify and return
forgery is liable. them to the collecting bank before 4:00
Bearer Instrument p.m. of the next day of clearing, but the
a. Drawer is liable. Indorsement is drawee bank may still return them even
not necessary to pass title. after such time provided he does so
b. Drawee is liable. within 24 hours from its discovery of the

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alteration or forged instruments so that 2. readiness to exhibit the instrument if


recovery of the amount may be had. required, and to receive payment and to
BUT, in no event beyond the period surrender the instrument if the debtor is
fixed or provided by law for filing of a willing to pay.
legal action by the returning bank • Purpose of exhibition:
against the bank sending the same. To enable the debtor to:
Note: Alteration is only a partial real 1. determine the genuineness of the instrument
defense because a holder in due course and the right of the holder to receive
can still enforce it according to its payment; and
original tenor. 2. to enable him to reclaim possession upon
payment.
• When exhibition excused:
VI. Presentment for Payment 1. when debtor does not demand to see the
instrument but refuses payment on some
Presentment for payment – the presentation of other grounds, and
an instrument to the person primarily liable for 2. when the instrument is lost or destroyed.
the purpose of demanding and receiving When made:
payment. • where the instrument is payable at a
fixed or determinable future time,
General Rules: presentment must be made on the day it
• presentment for payment to charge falls due
persons primarily liable is not necessary • where it is payable on demand:
• presentment for payment to charge a. promissory note: presentment must
persons secondarily liable is necessary be made within a reasonable time
Exceptions: after its issue
a. drawer - where he has no right to b. bill of exchange: presentment for
expect or require that the drawee or payment will be sufficient if made
acceptor will pay the instrument (sec. 79) within a reasonable time after the
b. indorser - where the instrument was last negotiation thereof
made or accepted for his accommodation • a check must be presented for payment
and he has no reason to expect that the within a reasonable time after its issue or the
instrument will be paid if presented. drawer will be discharged from liability
c. when dispensed: thereon to the extent of the loss caused by
i. where, after the exercise of the delay.
reasonable diligence, Time of maturity:
presentment as required cannot • every negotiable instrument is payable
be made; at the time fixed therein without grace
ii. where the drawee is a fictitious • when the day of maturity falls upon a
person; Sunday or a holiday, the instruments are to
iii. by waiver of presentment, be presented for payment on the next
express or implied. (sec. 82) succeeding business day
d. when the instrument has been • when the day of maturity falls upon a
dishonored by non-acceptance (sec. 151) Saturday:
 Instrument is payable at a fixed
Sufficiency of presentment. or determinable future time (time
It must be: instrument) - presented for payment is
1. made by the holder or any on the next succeeding business day
person authorized to receive  instruments is payable on
payment on his behalf; demand - at the option of the holder, be
2. at a reasonable hour on a presented for payment:
business day; a. before 12:00 noon on
3. at a proper place; Saturday when that entire
4. to the person primarily liable or if day is not a holiday or
he is absent or inaccessible, to any b. the next succeeding
person found at the place where the business day.
presentment is made. How computed:
How made:  excluding the day from which the time is
1. personal demand for payment at the to begin to run, and by including the date
proper place; and of payment

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 applies to instruments which are 3. on a business day;


payable at a fixed period after date, after 4. before the bill is overdue and within
sight, or after that happening of a reasonable time;
specified event. 5. to the drawee or some person
Proper place for presentment: authorized to accept or refuse
a. Where a place of payment is acceptance on his behalf.
specified in the instrument and it is there Days presentment may be made. If date of
presented; presentment is:
b. Where no place of payment is a. Sunday or a holiday – must be made on
specified but the address of the person the next succeeding business day
to make payment is given in the b. Saturday – before 12:00 noon on
instrument and it is there presented; Saturday provided that it is not a holiday.
When delay for presentment excused:
c. Where no place of payment is
a. bill is drawn payable elsewhere than at
specified and no address is given and
the place of business or the residence of
the instrument is presented at the usual
the drawee.
place of business or residence of the
person to make payment; b. holder has no time, with the exercise of
d. In any other case if presented to reasonable diligence, to present the bill
the person to make payment wherever for acceptance before presenting it for
he can be found, or if presented at his payment on the day that it falls due.
last known place of business or Effect: does not discharge the drawers and
residence. indorsers.
When delay in presentment excused – delay Where presentment is excused:
is caused by circumstances beyond the control a. Where the drawee is dead, or has
of the holder and not imputable to his default, absconded, or is a fictitious person or a
misconduct, or negligence. When the cause of person not having capacity to contract
delay ceases to operate, presentment must be by bill.
made with reasonable diligence. b. Where presentment can not be made
after the exercise of reasonable
diligence
VII. Presentment for Acceptance c. Where, although presentment has been
irregular, acceptance has been refused
Presentment for acceptance – the production on some other ground.
or exhibition of a bill of exchange to the drawee Note: bill may be treated as dishonored by
for his acceptance or payment non-acceptance.
Duty of holder where bill not accepted. -
General Rule: presentment for acceptance is not where a bill is duly presented for acceptance
necessary to render any party to the bill liable. and is not accepted within the prescribed time
Exception: presentment for acceptance must be (24 hours – sec. 136), the person presenting it
made: must treat the bill as dishonored by non-
a. Where the bill is payable after sight, or acceptance or he loses the right of recourse
where presentment for acceptance is against the drawer and indorsers.
necessary in order to fix the maturity of
the instrument; or VIII. Acceptance

b. Where the bill expressly stipulates that it Acceptance: the signification by the drawee of
shall be presented for acceptance; or his assent to the order of the drawer. It is the act
by which the drawee manifests his consent to
c. Where the bill is drawn payable comply with the request contained in the bill of
elsewhere, then at the residence or exchange directed to him.
place of business of the drawee. (sec. How made :
143) 1) must be in writing
Note: in all the above cases, the holder must 2) signed by the drawee
either present the bill for acceptance or 3) must not express that the drawee will
negotiate it within a reasonable time; otherwise, perform his promise by any other means
the drawer and all indorsers are discharged. than the payment of money.
• the holder of the bill presenting the same for
How made: acceptance may require that the acceptance
1. made by or on behalf of the holder; be written on the bill, and if such request is
2. at a reasonable hour; refused, may treat the bill as dishonored.

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• where an acceptance is written on a paper • when a bill payable after sight is


other than the bill itself, it does not bind the dishonored by non-acceptance and the
acceptor except in favor of a person to drawee subsequently accepts it, the holder,
whom it is shown and who, on the faith in the absence of any different agreement, is
thereof, receives the bill for value. entitled to have the bill accepted as of the
Period for drawee to accept - allowed 24 hours date of the first presentment.
after presentment in which to decide whether or • an unconditional promise in writing
not he will accept the bill; if acceptance is given, to accept a bill before it is drawn is
it dates as of the day of presentation. deemed an actual acceptance in favor of
Constructive/Implied acceptance: where a every person who, upon the faith
drawee refuses within 24 hours after delivery or thereof, receives the bill for value.
within such other period as the holder may allow,
to return the bill accepted or non-accepted to the
• where a check is certified by the
bank on which it is drawn, the
holder, he will be deemed to have accepted the
certification is equivalent to an
same.
acceptance.
Note: same effect if the drawee destroys the
Effect: the drawer and all indorsers are
instrument.
discharged from liability thereon.
Kinds:
1. General - assents without qualification to the
Acceptance for Honor - an undertaking by a
order of the drawer.
stranger to a bill after protest for the benefit of
2. Qualified - which in express terms varies the
any party liable thereon or for the honor of the
effect of the bill as drawn.
person for whose account the bill is drawn which
a. Conditional - makes payment by the
acceptance inures also to the benefit of all
acceptor dependent on the fulfillment of
parties subsequent to the person for whose
a condition therein stated.
honor it is accepted, and conditioned to pay the
b. Partial - an acceptance to pay part only
bill when it becomes due if the original drawee
of the amount for which the bill is drawn.
does not pay it.
i. Local - an acceptance to pay
only at a particular place.  Requisites:
ii. Qualified as to time 1. the bill must have been
iii. The acceptance of some one or protested for dishonor by non-
more of the drawees but not of acceptance or for better security;
all. 2. the acceptor for honor must be a
3. Constructive stranger and not a party already
liable on the instrument;
Rights of parties as to qualified acceptance. 3. bill must not be overdue;
4. acceptance for honor must be
• Holder: he may refuse to take a with the consent of the holder of the
qualified acceptance and if he does not instrument.
obtain an unqualified acceptance, he may  Formalities:
treat the bill as dishonored by non- 1. must be in writing;
acceptance. 2. must indicate that it is an
• Drawer or indorser: when he acceptance for honor;
receives notice of a qualified acceptance, he 3. signed by the acceptor for
must, within a reasonable time, express his honor;
dissent to the holder or he will be deemed to 4. must contain an express or
have assented thereto (implied assent). implied promise to pay money;
Effect of taking a qualified acceptance: the 5. the accepted bill for honor must
drawer and indorsers are discharged from be delivered to the holder.
liability on the bill unless they have expressly or
impliedly authorized the holder to take a
qualified acceptance, or subsequently assent IX. Notice of Dishonor and Protest
thereto.
Other rules of acceptance: Notice of Dishonor - notice given by the holder
• a bill may be accepted before it has or his agent to a party or parties secondarily
been signed by the drawer, or while liable that the instrument was dishonored by
otherwise incomplete, or when it is overdue, non-acceptance by the drawee of a bill, or by
or after it has been dishonored by a previous non-payment by the acceptor of a bill or by non-
refusal to accept, or by non payment payment by a maker of a note.

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- If such notice is given by a notary public, it is  Where an instrument is dishonored in the


called PROTEST. hands of an agent, he can do either of the
ff.:
 Effect of failure to give notice: a. directly give notice to persons
parties secondarily liable are discharged secondarily liable thereon; or
 Requisites: b. give notice to his principal. In
1. Given by holder or his agent, or such case, he must give notice
by any party who may be compelled by within the time allowed by law as if
the holder to pay; he were a holder.
2. Given to secondary party or his  A party giving notice is deemed to have
agent; given due notice where:
3. Given within the periods a. the notice of dishonor is duly
provided by law; addressed, and
4. Given at the proper place. b. deposited in the post-office,
 When notice of dishonor dispensed with: even when there is miscarriage of
1. when party to be notified knows mail.
about the dishonor, actually or  Where a party receives notice of dishonor,
constructively; he has, after the receipt of such notice, the
2. if waived; and same time for giving notice to antecedent
3. when after due diligence, it parties that the holder has after the
cannot be given. dishonor.
 How given:  Notice may be waived either before the time
1. by bringing verbally or of giving notice, or after the omission to give
2. by writing to the knowledge of the person due notice. Waiver may be expressed or
liable the fact that a specified instrument, implied.
upon proper proceedings taken, has not  As to who are affected by an express waiver
been accepted or has not been paid, and depends on where the waiver is written:
that the party notified is expected to pay it. a. if it appears in the body or on
 To whom given: the face of the instrument, it binds
1. Non-acceptance (bill) – to persons all parties; but
secondarily liable, namely, the drawer and b. if it is written above the
indorsers as the case may be. signature of an indorser, it binds him
2. Non-payment (both bill and note) – only.
indorsers.  Notice of dishonor is not required to be given
Note: Notice must be given to persons to the drawer in any of the ff. cases:
secondarily liable. Otherwise, such 1. drawer and drawee are the
parties are discharged. Notice may be same;
given to the party himself or to his agent. 2. drawee is a fictitious person or
 By whom given: not having the capacity to contract;
1. the holder 3. drawer is the person to whom
2. another on behalf of the holder the instrument is presented for
3. any party to the instrument who may be payment;
compelled to pay it to the holder, and who 4. the drawer has no right to
would have a right of reimbursement from expect or require that the drawee or
the party to whom notice is given. acceptor will honor the instrument;
 Notice of dishonor given by or on behalf 5. where the drawer has
of a holder inures to the benefit of: countermanded payment.
a. all parties prior to the holder,  Notice of dishonor is not required to be given
who have a right of recourse against to an indorser in the ff. cases:
the party to whom the notice is 1. drawee is a fictitious person or
given; and does not have the capacity to
b. all holders subsequent to the contract, and indorser was aware of
holder giving notice. that fact at the time he indorsed the
 Notice of dishonor given by or on behalf of a instrument;
party entitled to give notice inures to the 2. indorser is the person to whom
benefit of: the instrument is presented for
a. the holder; and payment;
b. all parties subsequent to the 3. instrument was made or
party to whom notice is given. accepted for his accommodation.

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 If an instrument is not accepted by the  Effect of waiver: where protest is waived,


drawee, there is no sense presenting it presentment and notice of dishonor are also
again for payment, and notice of dishonor deemed waived. But where the notice of
must at once be given. If there was dishonor is waived, presentment is not
acceptance, presentment for payment is still waived.
required and if payment is refused, there is a  Applicability: protest is necessary only in
need for notice of dishonor. case of foreign bills of exchange which have
 An omission to give notice of dishonor by been dishonored by non-acceptance or non-
non-acceptance does not prejudice the payment, as the case may be. If it is not so
rights of a holder in due course subsequent protested, the drawer and indorsers are
to the omission. discharged.
 Foreign Bill of Exchange:
1. Drawn in the Philippines but payable outside
Dishonor by Non-Payment the Philippines.
2. Payable in the Philippines but drawn outside
When instrument dishonored by non-payment: the Philippines.
a. it is duly presented for payment  Protest may be made by::
and payment is refused or cannot be 1. a notary public; or
obtained; or 2. any respectable resident of the place where
b. presentment is excused and the the bill is dishonored, in the presence of 2 or
instrument is overdue and unpaid. more credible witnesses.
Protest for better security is one made by the
Effect of dishonor: an immediate right of holder of a bill after it has been accepted but
recourse to all parties secondarily liable thereon before it matures, against the drawer and
accrues to the holder. indorsers, where the acceptor has been
adjudged a bankrupt or an insolvent, or has
Dishonor by Non-Acceptance made an assignment for the benefit of the
creditors.
Instances:
a. When it is duly presented for X. Discharge
acceptance and such an acceptance is
refused or can not be obtained; or Discharge of instrument - a release of all
b. When presentment for parties, whether primary or secondary, from the
acceptance is excused and the bill is not obligations arising thereunder. It renders the
accepted (sec. 149) instrument without force and effect and,
Effect: an immediate right of recourse consequently, it can no longer be negotiated.
against the drawer and indorsers accrues to Instances:
the holder and no presentment for payment 1. By payment in due course by or on behalf of
is necessary. the principal debtor;
Note: where a bill is duly presented for 2. Payment by accommodated party;
acceptance and is not accepted within the 3. Intentional cancellation by the holder;
prescribed time (24 hours), the person 4. By any act which will discharge a simple
presenting it must treat the bill as contract for the payment of money;
dishonored by non-acceptance. 5. When the principal debtor becomes the
holder of the instrument at or after maturity
When Instrument Considered to be Dishonored in his own right.
a. If it is not accepted when By any act which would discharge a simple
presented for acceptance; or contract:
b. If it is not paid when presented 1. Payment or performance;
for payment at maturity; or 2. Loss of the thing due;
c. If presentment is excused or 3. Condonation or remission;
waived and the instrument is past due 4. Confusion or Merger;
and unpaid. 5. Compensation;
6. Novation;
Protest - the formal instrument executed usually 7. Annulment or Rescission;
by a notary public certifying that the legal steps 8. Fulfillment of a resolutory condition;
necessary to fix the liability of the drawee and 9. Prescription.
the indorsers have been taken. When persons secondarily liable on the
instrument are discharged:
1. By any act which discharges the instrument;

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2. By the intentional cancellation of his 4. the payment is attested by a notarial act of


signature by the holder; honor which must be appended to the
3. By the discharge of a prior party; protest or form an extension of it;
4. By a valid tender of payment made by a 5. the notarial act must be based on the
prior party; declaration made by the payor for honor or
5. By the release of the principal debtor, unless his agent of his intention to pay the bill for
the holder’s right of recourse against the honor and for whose honor he pays.
party secondarily liable is expressly Note: If the above formalities are not complied
reserved; with, payment will operate as a mere voluntary
6. By any agreement binding upon the holder payment and the payor will acquire no right to
to extend the time of payment or to postpone full reimbursement against the party for whose
the holder’s right to enforce the instrument. honor he pays.
 In the following cases, the agreement to  In payment for honor, the payee cannot
extend the time of payment does not refuse payment. If he refuses, he cannot
discharge a party secondarily liable: recover from the parties who would have
a. where the extension of time is been discharged had he accepted the same.
consented to by such party; In acceptance for honor, the holder’s
b. where the holder expressly consent is necessary.
reserves his right of recourse  The payor for honor is given the right to
against such party. receive both the bill and the protest
 Payment at or after maturity by a party obviously to enable him to enforce his rights
secondarily liable does not discharge the against the parties who are liable to him.
instrument. It only cancels his own liability
and that of the parties subsequent to him.
Effects of Renunciation: INSURANCE
1. A renunciation in favor of a secondary party (P.D. No. 1460)
may be made by the holder before, at or
after maturity of the instrument. Effect: only
such secondary party is discharged and all I. INTRODUCTION
parties subsequent to him but the instrument
itself remains in force. Laws governing Insurance:
2. A renunciation in favor of the principal debtor a. Insurance Code of 1978;
may be effected at or after maturity. Effect: b. Civil Code, Art. 2011 and other
the instrument is discharged and all parties articles;
thereto provided the renunciation is made c. Family Code (E.O 209);
unconditionally and absolutely. d. Other Special laws.
Note: In either case, renunciation does not
affect the rights of a holder in due course without General concepts
notice. Contract of Insurance - an agreement whereby
 Cancellation of an instrument includes one undertakes for a consideration to indemnify
tearing, erasure, obliteration, or burning. It another against loss, damage or liability arising
is not limited to writing of the word from an unknown or contingent event.
‘cancelled”, or “paid”, or drawing of criss- Contract of Suretyship – an agreement whereby
cross lines across the instrument. a party called the surety guarantees the
performance by another called the principal or
Payment for Honor - payment made by a obligor of an obligation or undertaking in favor of
person, whether a party to the bill or not, after it a third party called the obligee. It shall be
has been protested for non-payment, for the deemed to be an insurance contract if made by
benefit of any party liable thereon or for the a surety who or which, as such, is doing an
benefit of the person for whose account it was insurance business.
drawn. “Doing an insurance business or transacting an
 Requisites: insurance business”
1. the bill has been dishonored by non- 1. making or proposing to make, as
payment; insurer, any insurance contract
2. it has been protested for non-payment; 2. making or proposing to make, as surety,
3. payment supra protest (another term for any contract of suretyship as a vocation
payment for honor because prior protest for and not as a mere incident to any other
non-payment is required) is made by any legitimate business of a surety
person, even by a party thereto; 3. doing any insurance business, including
a reinsurance business

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4. doing or proposing to do any business in 8. Onerous - there is a valuable consideration


substance equivalent to any of the called the premium.
foregoing 9. Conditional - subject to conditions such as the
NOTE: Article 2011 of the Civil Code states that happening of the event insured against, payment
the contract of insurance is governed by special of premium, etc.
laws and that matters not expressly provided for 10. Since insurance is a contract, as such, it is
in the special laws shall be regulated by the Civil property in legal contemplation
Code. (Villanueva, Commercial Law Reviewer)

Types of Insurance Contracts Five Cardinal Principles in Insurance


1. LIFE INSURANCE 1. Insurable Interest
a. individual life (Secs. 179–183, 227) 2. Principle of Utmost Good Faith
b. group life (Secs. 50, last par., 228) 3. Contract of indemnity
c. industrial life (Secs. 229–231) 4. Contract of adhesion (Fine Print Rule)
2. NON-LIFE INSURANCE 5. Principle of Subrogation
a. Marine (Secs. 99–166)
b. Fire (Secs. 167–173)  Insurable Interest - that interest which
c. Casualty (Sec. 174) the law requires the owner of the insurance
3. CONTRACTS OF SURETYSHIP OR policy to have in the person or thing insured.
BONDING (Secs. 175–178)
Note:
 Principle of Utmost Good Faith - An
insurance contract requires utmost good
1. health and accident insurance are either
faith (uberrimae fidei) between the parties.
covered under life or casualty insurance
The applicant is enjoined to disclose any
2. marine, fire and the property aspect of
material fact which he knows or ought to
casualty insurance are also referred to as
know.
property insurance
 Contract of Indemnity - It is the basis of
Nature and Characteristics all property insurance. The insured who has
1. Risk distributing device – The device of insurable interest over a property is entitled
insurance serves to distribute the risk of to recover the amount of actual loss
economic loss among as many as possible of sustained and the burden is upon him to
those who are subject to the same kind of risk. establish the amount of such loss.
By paying a pre-determined amount into a • Rules:
general fund out of which payment will be made 1. applies only to property insurance
for an economic loss of a defined type, each except when the creditor insures the life
member contributes to a small degree toward of his debtor
compensation for losses suffered by any 2. life insurance is not a contract of
member of the group. indemnity
2. Consensual – it Is perfected by the meeting of 3. insurance contracts are neither wagering
the minds of the parties nor gambling contracts
3. Voluntary – the parties may incorporate such Reason: it is not a contract of chance and is not
terms and conditions as they may deem used for profit
convenient.
4. Aleatory – one of the parties or both WAGERING CONTRACT OF
reciprocally bind themselves to give or to do CONTRACT INSURANCE
something in consideration of what the other The parties The parties seek to
shall give or do upon the happening of an event contemplate gain distribute the
which is uncertain, or which is to occur at an through mere possible loss by
indeterminate time (Article 2010, NCC). chance reason of mischance
5. Contract of Indemnity – Except life and Gambler courts Insured seeks to
accident insurance, a contract of insurance is a misfortune avoid misfortune
contract of indemnity whereby the insurer Tends to increase Tends to equalize
promises to make good only the loss of the the inequality of fortune
insured. fortune
6. Personal Contract - insurer considers the Essence of gambling What one insured
personal qualifications of the insured in is that whatever one gains is not at the
approving the contract. wins from a wager is expense of another
7. Bilateral - both parties are bound to do lost by the other insured
something. wagering party
As soon as the party The purchase of

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makes a wager, he insurance does not 2. Where the insurer pays the insured the
creates a risk of loss create a new and value of the loss without notifying the
to himself where no non – existing risk of carrier who has in good faith settled the
such risk previously loss to the purchase insured’s claim for loss
existed 3. Where the insurer pays the insured for a
loss or risk not covered by the policy.
 Contract of Adhesion or Fine Print Rule - (Pan Malayan Insurance Company v.
most of the terms of the contract do not CA, 184 SCRA 54)
result from mutual negotiations between the 4. in life insurance
parties as they are prescribed by the insurer 5. for recovery of loss in excess of
in printed form to which the insured “adhere” insurance coverage
if he chooses but which he cannot change.
Hence, in case of doubt, the contract shall • Should the insured, after
be interpreted strictly against the insurer and receiving payment from the insurer,
liberally in favor of the insured (Rizal Surety release by his own act the wrongdoer or
and Insurance Co. v. C.A.,336 SCRA 12 third party responsible for the loss or
[2000]. damage from liability, the insurer loses
 Principle of Subrogation - A process of his rights against the wrongdoer since
legal substitution where the insurer steps the insurer can only be subrogated to
into the shoes of the insured and he avails of only such rights as the insured may
the latter’s rights against the wrongdoer at have. (Manila Mahogany Mfg. Corp. v.
the time of loss. CA, 154 SRA 668)
The principle of subrogation is a normal • If the amount paid by the
incident of indemnity insurance as a legal insurance company does not fully cover
effect of payment; it inures to the insurer the injury or loss, it is the aggrieved
without any formal assignment or any party, the insured, who is entitled to
express stipulation to that effect in the recover the deficiency from the person
policy. Said right is not dependent upon nor responsible for the loss or injury.
dos it grow out of any private contract.
Payment to the insured makes the insurer a Requisites for Recovery Upon Insurance
subrogee in equity (Malayan Insurance Co. 1. the insured must have an insurable
Inc., v. CA, 165 SCRA 536) interest in the subject matter;
• Purposes: 2. the interest is covered by the policy;
1. to make the person who caused the loss 3. there must be a loss;
responsible for it 4. the loss must be proximately caused by
2. to prevent the insured from receiving the peril insured against.
double recovery from the wrongdoer and
the insurer Construction of Insurance Contracts
- it is a method of implementing
the principle of indemnity  The ambiguous terms are to be
3. to prevent tortfeasors from being free construed strictly against the insurer, and
from liability and is thus founded on liberally in favor of the insured. However, if
public policy. the terms are clear, there is no room for
• Rules: interpretation.
1. Applicable only to property insurance.
Reason: the value of human life is  The word “intentional” as used in an
regarded as unlimited and therefore no accident policy excepting intentional injuries
recovery from a third party can be inflicted by the insured or any other person
deemed adequate to compensate the implies the reasoning faculties,
insured’s beneficiary consciousness and volition. The exception
2. The insurer can only recover from the does not speak of the purpose of inflicting
third person what the insured could have the injury but the fact that the same were
recovered. intentionally inflicted (Biagtan v. Insular Life
• No subrogation in the following Assurance Co., 44 SCRA 58)
instances:
1. Where the insured by his own act Distinguishing Elements of an Insurance
releases the wrongdoer or third party Contract (GRAIP)
liable for the loss or damage 1. Existence of an insurable interest
susceptible of pecuniary estimation

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2. Risk of loss; contract, must possess an insurable interest in


3. Insurer assumes the risk of loss; the subject of the insurance and must not be a
public enemy.
4. Such assumption is part of the general
scheme to distribute actual losses among a  Public enemy: a nation with whom the
large group or substantial number of Philippines is at war and it includes
persons bearing somewhat similar risks; and every citizen or subject of such nation
(Section 7)
5. Payment of premiums (Sec.77, ICP).
(Philamcare Health Systems, Inc. v. CA, No.  A juridical person may only take out a
125678, March 18,2002). policy of insurance on property owned.

Note: A contract possessing only the first 3  The relationship between the insurer
elements above is a risk-shifting device. If all the and the insured is that of a continent
elements, it is a risk-distributing device. debtor and creditor.
3. Beneficiary – person designated to receive
the proceeds of the policy when the risk attaches
II. CONTRACT OF INSURANCE  Kinds of beneficiary:

Requisites of a contract of insurance: a. insured himself


1. A subject matter in which the insured b. third person who paid the
has an insurable interest; consideration
2. Event or peril insured against which may c. third person though mere bounty of
be any contingent or unknown event, past or the insured
future, and a duration for the risk thereof;
3. A promise to pay or indemnify in a fixed In the second and third cases, the
or ascertainable amount; beneficiary is not a party to the contract.
4. A consideration for the promise, known
as the premium In all three cases, the proceeds of the
5. A meeting of minds of the parties upon life insurance policy become the
all the foregoing essentials exclusive property of the beneficiary
upon the death of the insured
Perfection
 Consensual contract and therefore Rule in the designation of the beneficiary:
perfected the moment there is meeting (1997, 1998, 2001, 2005 Bar Exams)
of the minds with respect to the object
and the cause or consideration. A. Life Insurance
 Mere submission of the application
without the corresponding approval of 1. a person who insures his own life can
the policy does not result in the designate any person as his beneficiary,
perfection of the contract of insurance whether or not the beneficiary has an insurable
(Great Pacific Life Assurance Corp. v. interest in the life of the insured subject to the
CA, 89 SCRA 543) limitations under Art. 739 and Art. 2012 of the
 What is being followed in insurance NCC.
contracts is what is known as the  Reason: in essence, a life insurance
Cognition Theory. Thus, an policy is no different from a civil donation
acceptance made by letter shall not bind insofar as the beneficiary is concerned. Both
the person making the offer except from are founded on the same consideration or
the time it came to his knowledge. liberality. (Insular Life v. Ebrado, 80 SCRA
(Enriquez v. Sun Life Assurance Co. of 181)
Canada, 41 PHIL 269)  When the court finds that a wagering
policy has been taken out by the insured on
Parties to a contract of insurance his life at the behest of a third person who is
1. Insurer – the person who undertakes to named as the beneficiary, the contract shall
indemnify another. be VOID entirely.
 For a person to be called an insurance 2. A person who insures the life of another
agent, it is necessary that he should person and names himself as the beneficiary
perform the function for compensation must have an insurable interest in such life.
(Aisporna v. CA, 113 SCRA 459)  When the owner of the policy insures the
2. Insured – the party to be indemnified upon the life of another – the cestui que vie – and
occurrence of the loss. He must have capacity to designates a third party as the beneficiary,

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both the owner and beneficiary must have a. appointment of a resident


an insurable interest in the life of cestui que as a general agent
vie. b. Paid-up unimpaired
 As a general rule, the designation of a assets or capital and reserves not less than
beneficiary is revocable unless the insured that required of Domestic Corporation.
expressly waived the right to revoke the c. Deposit for the benefit and
policy. security of policyholders, securities
 The interest of a beneficiary in a life satisfactory to the Commission
insurance policy shall be forfeited when the d. Investments should not
beneficiary is the principal, accomplice or exceed 20% of the net worth of the foreign
accessory in willfully bringing about the corporation or 20% of the capital of the
death of the insured in which event, the registered enterprise.
nearest relative of the insured shall receive
the proceeds of said insurance if not Subject matter of insurance
otherwise disqualified.  Any contingent or unknown event,
whether past or future, which may damnify a
person having an insurable interest, or
create a liability against him, may be insured
B. Property Insurance against, subject to the provisions of this
chapter.
The beneficiary of property insurance must have  An insurance for or against the drawing
an insurable interest in such property, which of any lottery, or for or against any chance or
must exist not only at the time the policy takes ticket in a lottery drawing a prize is not
effect but also when the loss occurs (Sections authorized.
13 and 18)
 Effects of irrevocable designation of III. INSURABLE INTEREST (1997, 1999,
beneficiary: 2000, 2001,2002 Bar Exams)

Insured cannot: Concept of insurable interest in general


1. assign the policy  A person has an insurable interest in the
2. take the cash surrender value of the subject matter if he is so connected, so
policy situated, so circumstanced, so related, that
3. allow his creditors to attach or execute by the preservation of the property he shall
on the policy derive pecuniary benefit, and by its
4. add new beneficiary destruction he shall suffer pecuniary loss,
5. change the irrevocable designation to damage or prejudice.
revocable, even though the change is  A policy issued to a person without the
just and reasonable. requisite insurable interest in the subject
The insured does not even retain the matter is a mere wager policy or contract,
power to destroy the contract by refusing to hence it is VOID.
pay the premiums for the beneficiary can
protect his interest by paring such premiums Insurable interest in life insurance
for he has an interest in the fulfillment of the
obligation.  Every person has an insurable interest
 Limitations in the appointment of in the life and health:
beneficiary: a. Of himself, of his spouse and of his children;
1. the person who takes out a policy acts in
good faith; and b. Of any person on whom he depends wholly
2. there is no intent in making the policy or in part for education or support, or in
merely a cover for a forbidden contract whom he has a pecuniary interest;
3. any person forbidden in Art. 739 NCC to
receive a donation cannot be named A risk of actual monetary loss is essential, it
beneficiary (Art. 2012, NCC) is not necessary that the expectation of
pecuniary benefits have legal basis.
Foreign Insurance Corporations - May be
authorized by the Commission to engage in c. Of any person under a legal obligation to him
insurance business in the country. for the payment of money, or respecting
property or services, of which death or
Requirements: illness might delay or prevent the
performance; and

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a. an existing interest
d. Of any person upon whose life any estate or
interest vested in him depends. An existing interest may be legal title or
equitable title.
 When it should exist: Insurable interest
in the life of another need exist only at the b. any inchoate interest founded on an
time of perfection of the contract and need existing interest; or
not exist thereafter or when the loss occurs
A stockholder has an inchoate interest in
 Amount: No limit in the amount the the property of the corporation of which
insured can insure his life except in a he is the stockholder which is founded
creditor-debtor relationship where the on an existing interest arising from his
creditor insures the life of his debtor, (the ownership of shares in the corporation.
limit of insurable interest is equal to the
amount of the debt) c. an expectancy coupled with an existing
 When insurance taken by the creditor on interest in that out of which the
the life of the debtor for the benefit of the expectancy arises.
creditor: An insuring creditor could only
recover such amounts as remain unpaid at The measure of insurable interest in
the time of the death of the debtor. If the property is the extent to which the
whole debt has already been paid, recovery insured might be damnified by loss or
on the policy by the creditor is no longer injury thereof.
possible. Neither can the debtor recover for  When it should exist: When the
he is not a privy to the contract of insurance insurance takes effect and when the loss
taken. occurs, but need not exist in the meantime
 When insurance taken by debtor n his  Amount: The measure of insurable
life for the benefit of the creditor: If at the interest in property is the extent to which the
time of the death of the debtor the whole insured might be damnified by loss or injury
debt has already been paid, the creditor can thereof (Section 17)
no longer recover on the policy because the Reason: this is because a contract of
principle of indemnity applies. Where the property insurance that gives the insured
debtor in good faith insures his life for the more than the indemnity of his actual loss
benefit of the creditor, full payment of the suffered by reason of the designated perils
debt does not invalidate the policy, in suh is a wagering policy contrary to public policy,
case, the proceeds shall go to the estate of hence, VOID.
the debtor.
 When the debt becomes legally
unenforceable, by reason of being barred b INSURABLE INSURABLE
the statute of limitations or of a debtor’s INTER INTEREST IN
discharge of insolvency, it does not cut off EST IN PROPERTY
the insurable interest of the creditor. LIFE
Reason: the moral or equitable obligation of Must exist only at the Must exist at time
a debtor to pay his debt is not destroyed by time the policy takes the policy takes
the discharge which affects only the legal effect and need not effect and when the
obligation to pay. exist at the time of loss loss occurs
 Consent of a person whose life is Insurable interest Insurable interest
insured is not essential to the validity of the unlimited except in life limited to actual
insurance taken by another, as long as the insurance effected by value of interest in
insured has a legal insurable interest at the creditor on life of debtor property insured
inception of the policy, the insurance
The expectation of An expectation of a
contract is VALID.
benefit to be derived benefit to be
from the continued derived from the
Insurable interest in property insurance
existence of life need continued existence
not have any legal of the property
 Every interest in property whether real or
basis whatever. A insured must have
personal, or any relation thereto, or liability
reasonable probability a legal basis.
in respect thereof, of such nature that the
is sufficient without
contemplated peril might directly damnify the
more.
insured (Sec. 13), which may consist in:

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The beneficiary need The beneficiary contrary to law and public policy. (Cha v.
not have an insurable must have CA, 227 SCRA 690)
interest over the life of insurable interest
the insured if the over the thing STANDARD OR OPEN OR LOSS
insured himself secured insured. UNION PAYABLE
the policy. However, if MORTGAGE MORTGAGE CLAUSE
the life insurance was CLAUSE
obtained by the the subsequent the mortgagor does not
beneficiary, the latter acts of the cease to be a party to
must have an insurable mortgagor cannot the contract. Thus,
interest over the life of affect the rights of the acts of the
the insured. the assignee mortgagor affect the
mortgagee (Secs. 8
Insurable interest in case of a carrier or and 9)
depository
 A carrier or depository of any kind has Effects of Loss Payable Clause:
an insurable interest in a thing held by him 1. the contract is deemed to be upon the
as such, to the extent of his liability but not interest of the mortgagor; hence, he does
to exceed the value thereof (Section 15) not cease to be a party to the contract;
Reason: the loss of the thing by the carrier 2. any act of the mortgagor prior to the loss
or depositor may cause liability against them which would otherwise avoid the insurance
to the extent of its value. affects the mortgagee even is the property is
in the hands of the mortgagee.
Insurable interest in case of mortgaged 3. any act, which under the contract of
property insurance is to be performed by the
 The mortgagor and the mortgagee each mortgagor, may be performed by the
have an insurable interest in the property mortgagee with the same effect
mortgaged and this interest is separate and 4. in case of loss, the mortgagee is entitled
distinct from each other. Therefore, to the proceeds t the extent of his credit
insurance taken by one in his name and in 5. upon recovery of the mortgagee to the
his favor alone, does not inure to the benefit extent of his credit, his debt is extinguished
of the other.
a. Mortgagor: as the owner, has an insurable  The rule on subrogation by the
interest to the extent of its value, even insurer to the right of the mortgagee does
though the mortgage debt equals such not apply in this case.
value. Reason: premium payment has been paid
Reason: the loss or destruction of the by the mortgagor and not by the mortgagee.
property insured will not extinguish the
mortgage debt Mortgage Redemption Insurance - a life
b. Mortgagee: his interest is only up to the insurance taken pursuant to a group mortgage
extent of the debt. Such interest continues redemption scheme by the lender of money on
until the mortgage debt is extinguished. the life of a mortgagor, who mortgages the
Reason: property relied on as mortgaged is house constructed to the extent of the mortgage
only a security. In insuring the property, he is indebtedness, such that if the mortgagor dies,
not insuring the property itself but only his the proceeds of his life insurance will be used to
interest or lien thereon. pay for his indebtedness and the deceased’s
 In case if an insurance taken by the heirs will thereby be relieved from paying the
mortgagee alone and for his benefit, the unpaid balance of the loan. (Great Pacific Life
mortgagee, after recovery from the insurer, Assurance Corp. v. CA, 316 SCRA 677)
is not allowed to retain his claim against the
mortgagor, but it passes by subrogation to Transfer of Interest
the insurer to the extent of the insurance 1. Life Insurance - It can be transferred even
money paid. (Palileo v. Caltex, 97 PHIL 919) without the consent of the insurer except when
there is a stipulation requiring the consent of the
insurer before the transfer.
 The lessor cannot be validly a
beneficiary of a fire insurance policy, taken Reason: the policy does not represent a
by a lessee over his merchandise, and the personal agreement between the insured and
provision in the lease contract providing for the insurer.
such automatic assignment is void for being

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Is the consent of the beneficiary necessary to g. When there is an express prohibition against
the assignment of a life insurance policy? alienation in the policy, in case of alienation, the
contract of insurance is not merely suspended
It depends. but avoided.

If the designation of the beneficiary is IV. POLICY OF INSURANCE


irrevocable, the beneficiary’s consent if essential
because of his vested right. Definition and form
 Policy of insurance - the written
If the designation is revocable, the policy instrument in which a contract of insurance
may be assigned without such consent because is set forth.
the beneficiary only has a mere expectancy to  A policy of insurance is signed only by
the proceeds. the insurer or his duly authorized agent.
It need not be signed by the insured
2. Property Insurance - It cannot be transferred except where express warranties are
without the consent of the insurer. contained in a separate instrument
forming part of the policy.
Reason: the insurer approved the policy based
on the personal qualifications and the insurable Contents of the policy (PARPIRD)
interest of the insured.
1. Parties – to determine who are privity to the
3. Casualty Insurance - It cannot be transferred contract of insurance concerned
without the consent of the insurer 2. Amount of insurance, except in open or
running policies – to easily determine the
amount of indemnity to be paid the insured in
case of loss or damage especially if it is only
partial and not total. It serves as the maximum
Effect of change in interest in the thing limit on the insurer’s liability.
insured 3. Rate of premium – represents the
General Rule: suspends the insurance until the consideration of the contract
interests in the thing and the interest in the 4. Property or life insured
insurance are vested in the same person. (Sec. 5. Interest of the insured in the property if he is
20) not the absolute owner thereof
Exceptions: 6. Risk insured against – the insurer’s
a. In life, health and accident insurance; undertaking is to indemnify the insured for the
b. Change in interest in the thing insured after loss, damage or liability caused or created
occurrence of an injury which results in a loss; ONLY by the risk insured against
Reason: after the loss has happened, the liability 7. Duration of the insurance
of the insurer becomes fixed. Therefore, the
insured has the right to assign his claim against Kinds of policy
the insurer as any other money claim. 1. Open - one in which the value of the thing
c. Change in interest in one or more of several insured is not agreed upon, but is left to be
distinct things separately insured by one policy; ascertained in case of loss.
Reason: contract is divisible
d. Change of interest, by will or succession, on  The actual loss, as determined,
the death of the insured; will represent the total indemnity due the
insured from the insurer EXCEPT only
Reason: upon death, the contract f insurance that the total indemnity shall not exceed
passes automatically to the heir, legatee or the face value of the policy
devisee of the insured. (Development Insurance Corp. c. IAC,
e. Transfer of interest by one of several partners, 143 SCRA 62)
joint owners, or owners in common, who are 2. Valued - one which expresses on its face an
jointly insured, to others; agreement that the thing insured shall be valued
Reason: no new party is brought to the at a specific sum.
insurance contract. It is alienation to a stranger
 In the absence of fraud or
that will avoid the policy.
mistake, the agreed valuation will be
f. When a policy is so framed that it will inure to
paid in case of total loss of the property,
the benefit of whomsoever, during the
unless the insurance is for a lower
continuance of the risk, may become the owner
amount.
of the interest insured

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3. Running - one which contemplates successive 2. A cover note shall be deemed to be a


insurances, and which provides that the object of contract of insurance and no separate
the policy may be from time to time defined, premiums are required for their issuance
especially as to the subjects of insurance, by
additional statements or indorsements. 3. No cover note shall be issued or renewed
unless in the form previously approved by
Rider - printed stipulation usually attached to the the Commission
policy because they constitute additional
stipulations between the parties. 4. A cover note shall be valid and binding
for a period not exceeding 60 days from the
 General Rule: not binding date of issuance, but such cover note may
Exception: valid when the descriptive title or be cancelled by the other party upon at least
name of the rider, clause, warranty or 7 days notice to the other party.
endorsement is also mentioned and written
on the blank spaces provided in the policy. 5. If the cover note is not so cancelled, a
 In case of conflict between the policy of insurance shall, within 60 days after
provisions of a rider and the the issuance of the cover note, be issued in
printed stipulations in the policy, lieu thereof.
the former shall prevail.
6. Insurance companies may impose on
 As a general rule, where the
cover notes a deposit premium equivalent t
rider is physically attached to
at least 25% of the estimated premium of the
the policy of insurance
intended insurance coverage but in no case
contemporaneously with its
less than P500.
execution and delivered to the
insured, the fact that it is without
Cancellation of policy
the signature of the insurer or
the insured will not prevent its
inclusion and construction as a  Grounds(except life insurance) (FUD-
part of the insurance contract. WNC)
The same rule applies where 1. Non-payment of premium;
the rider was applied for by the 2. Conviction of a crime out of acts
insured or owner. increasing the hazard insured against;
3. Discovery of fraud or material
Cover note - a concise and temporary written
misrepresentation;
contract issued to the insurer through its duly
authorized agent embodying the principal terms 4. Discovery of willful or reckless acts of
of an expected policy of insurance. omissions increasing the hazard insured
against;
 Purpose: It is intended to give temporary
insurance protection coverage to the 5. Physical changes in property making the
applicant pending the acceptance or property uninsurable; and
rejection of his application for a period of 6. Determination by the Insurance
not exceeding 60 days unless a longer Commissioner that the continuation of
period is approved by Insurance the policy would violate the Insurance
Commissioner Code.
 Binding Receipt - merely an
acknowledgment on behalf of the company Requirements for Cancellation of Policy:
that their branch office had received from the 1. prior notice of cancellation to the
applicant the insurance premium and had insured;
accepted the application subject to 2. notice must be based on the occurrence
processing by the head office. after the effectivity date of the policy;
 Rules of cover notes: 3. notice must be in writing, mailed or
1. Cover notes may be issued to afford delivered to the named insured at the
immediate protection to the insured until the address shown in the policy
insurer can inspect or evaluate the risk in 4. notice must state which of the grounds
question and issue the policy until the risk is set forth in Sec. 64 is relied upon and that
declined and notice thereof given. upon written request of the insured, the
insurer will furnish the facts on which the
cancellation is based.

Rule on renewal of policy:

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 General Rule: entitled to in forming his estimate of the disadvantages


renewal of the proposed contract, or in making his
Exceptions: inquiries. (Sec. 31)
a. life insurance; or Exceptions to Sec. 31:
b. the insurer does not intend to renew, 1. incontestability clause - In life insurance,
provided: after the policy has been in force for at
• the insurer at least 45 days in least 2 years, the insurer cannot rescind
advance of the end of the policy the policy due to fraudulent concealment
period or misrepresentation by the insured.
• mails or delivers to the named 2. matters under Sec. 110 (marine
insured at the address shown in insurance)
the policy  Effects: Rescission of the
• notice of its intention not to contract by the insurer, whether the
renew the policy or to condition concealment is intentional or unintentional.
its renewal upon reduction of Good faith therefore is not a defense. (Sec.
limits or elimination of coverage 27)
 The following matters, though
V. RISK concealed will not vitiate the contract except
when they caused the loss:
Four primary concerns of the parties: 1. National character of the insured;
1. correct estimation of the risk; 2. Liability of insured thing to capture or
2. precise delimitation of the risk; detention;
3. control of the risk; 3. Liability to seizure from breach of foreign
4. determining whether a loss occurred laws;
and if so, the amount of such loss. 4. Want of necessary documents;
5. Use of false or simulated papers.
What may be insured against:
1. Future contingent event resulting in loss
 The waiver of medical
examination in a non-medical insurance
or damage
contract renders even more material the
2. Past unknown event resulting in loss or
information required of the applicant
damage
concerning the previous conditions of health
3. Contingent liability
and diseases suffered (Sunlife v. Sps.
Bacani, 246 SCRA 268)
VI. DEVICES FOR ASCERTAINING AND
CONTROLLING RISK AND LOSS  The right to information of
material facts may be waived, either by the
1. Concealment terms of the insurance or by neglect to make
2. Representation inquiries as to such facts where they are
3. Warranties distinctly implied in other facts of which
4. Conditions information is communicated.
5. Exceptions
 Where matters of opinion or
Concealment (1996, 2001 Bar Exams ) - judgment are called for, matters made in
neglect to communicate that which a party good faith and without intent to deceive will
knows and ought to communicate not avoid the policy even though they are
 Requisites of concealment: untrue. Reason: the insurer cannot rely on
1. A party knows of a fact (a material fact) those statements. He must make further
which he neglects to communicate or inquiry (Philamcare Health Systems v. CA,
disclose to the other GR 125678, March 18, 2002)
2. Such party is duty bound to disclose
such fact to the other  Matters that must be
3. Such party concealing makes no communicated even if the absence of
warranty as to the fact concealed inquiry (Sec. 28):
4. The other party has not the means of 1. Those material to the contract (Secs.
ascertaining the fact concealed 31, 34, 35)
2. Those which the other has no means of
 Test of Materiality: determined ascertaining the said facts (Secs. 30, 32,
not by the event, but solely by the probable 33)
and reasonable influence of the facts upon
the party to whom the communication is due,

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3. Those as to which the party with the c. It is made at the same time of issuing
duty to communicate makes no warranty the policy or before but not after
(Secs. 67-76) d. It may be altered or withdrawn before
the insurance is effected but not
General Rule: Matters made subject of afterwards
special inquiries under Sec. 30 must be e. It always refers to the date the contract
deemed material, even though otherwise goes into effect
they might not be so regarded and the  Kinds:
insured is required to make full and true 1. Affirmative– affirmation of a fact when
disclosure to questions asked. the contract begins; and (Sec. 37)
Exceptions: There is no duty to make a 2. Promissory – promise to be performed
disclosure on the following instances: after policy was issued. (Sec. 39)
1. Those which the other knows;
2. Those which, in the exercise of ordinary  A representation may be made
care, the other ought to know, and of at the time of, or before, issuance of the
which the former has no reason to policy.
suppose him ignorant;  A representation as to the future
3. Those of which the other waives is to be deemed a promise, unless it
communication; appears that it was merely a statement of
4. Those which prove or tend to prove the belief or expectation.
existence of a risk excluded by a
warranty, and which are not otherwise
 Test of materiality: same as that
in concealment
material; and
5. Those which relate to a risk excepted  Where the insured merely
from the policy and which are not signed the application form and made the
otherwise material. (Sec. 30) agent of the insurer fill the same for him, it
6. Information on the nature or amount of was held that by doing so, the insured made
the interest of one need not be the agent of the insurer his own agent and
communicated unless in an answer to he was responsible for his acts for that
an inquiry, except as prescribed by Sec. purpose. (Insular Life Assurance Co. v.
51. (Sec. 34) Feliciano, 74 PHIL 469)

Representations - factual statements made by Warranties- Statement or promise by the


the insured at the time of, or prior to, the insured set forth in the policy or by reference
issuance of the policy to give information to the incorporated therein, the untruth or non-
insurer and induce him to enter into the fulfillment of which in any respect, and without
insurance contract. reference to whether insurer was in fact
prejudiced by such untruth or non-fulfillment,
 Requisites of false representation
renders the policy voidable by the insurer.
(misrepresentation):

1. The insured stated a fact which is untrue  Purpose: to eliminate potentially


2. Such fact was stated with knowledge increasing hazards which may either be due
that it is untrue and with intent to to the acts of the insured or to the change to
deceive or which he states positively as the condition of the property.
true without knowing it to be true and  Basis: the insurer took into consideration
which has a tendency to mislead the condition of the property at the time of
3. Such fact in either case is material to the effectivity of the warranty.
risk
 A misrepresentation by the
insured renders the insurance contract Warranty Representation
voidable at the option of the insurer.
 Effect: the injured party is part of the mere collateral
entitled to rescind from the time when the contract inducement
representation becomes false written on the may be written in
 Characteristics: policy, actually or the policy or may
a. It is not a part of the contract but merely by reference be oral.
a collateral inducement to it
b. It may be oral or written

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Falsity or non- Falsity renders the • Condition precedent – prevents the


compliance policy void on the accrual of cause of action
operates as a ground of fraud
breach of contract
• Condition subsequent – avoids the
policy or entitles the insurer to rescind
must be strictly requires only  The insurer may also protect himself
complied with substantial truth and against fraudulent claims of loss and this he
compliance. attempts to do by inserting in the policy
various conditions which take the form of
conditions precedent. For instance, there are
 Kinds:
conditions requiring the immediate notice of
a. Express - an agreement
loss or injury and detailed proofs of loss
expressed in a policy whereby the
within a limited period.
insured stipulates that certain facts
relating to the risk are or shall be true, or
Exceptions - provisions that may specify
certain acts relating to the same subject
excepted perils. It makes more definite the
have been or shall be done
coverage indicated by the general description of
b. Implied - it is deemed included
the risk by excluding certain specified risk that
in the contract although not expressly
otherwise would be included under the general
mentioned. Example: In marine
language describing the risks assumed
insurance, seaworthiness of the vessel.
c. Affirmative- asserts the
existence of the fact or condition at the  Effect: limit the coverage of the contract
time it is made.
d. Promissory- the insured  Breach of warranty or of condition may
stipulates that certain facts or conditions be waived without consideration BUT the
shall exist or thing shall be done or insurer does not become liable for an
omitted. (Sec. 67) excepted loss by waiver unless the waiver
amounts to a new contract on valuable
 Effects of breach: consideration.

a. Violation of material warranty RESCISSION

General Rule: Violation of material Grounds for rescission:


warranty or of a material provision of a a. Concealment
policy will entitle the other party to b. Misrepresentation
rescind the contract. c. Breach of material warranty
Exceptions: d. Breach of a condition subsequent
1. loss occurs before the time of e. Alteration of the thing insured
performance of the warranty
2. the performance becomes Waiver of right to rescind: The right to rescind is
unlawful at the place of the contract waived by the acceptance of premium payments
3. performance becomes despite the knowledge of the ground for
impossible rescission.

b. Violation of immaterial provision Limitations on the right of the insurer to rescind:


(example: “other insurance clause”) 1. In non-life policy – such right must be
exercised prior to the commencement of an
General Rule: it will not avoid the policy action on the contract
Exception: when the policy expressly 2. In life insurance – such right must be availed
provides or declares that a violation of during the first 2 years from the date of issue
thereof will avoid it. of policy or its last reinstatement.

Condition– an event signifying in its broadest INCONTESTABILITY CLAUSE (1998 Bar


sense either an occurrence or a non-occurrence Exam)
that alters the previously existing legal relations Concept: Clause in life insurance policy that
of the parties to the contract. It may be a stipulates that the policy shall become
condition precedent or a condition subsequent. incontestable after a stated period.

 Effect of breach:

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It creates a kind of contractual statute of


limitations on certain defenses that may be The basis of the right of the insurer to collect
raised by the insurer. premiums is the assumption of risk.

“Incontestability” – means that after the Effect of non-payment of premium;


requisites are shown to exist, the insurer shll be exceptions
estopped from contesting the policy or setting up
any defense, except as is allowed, on the General Rule: No policy issued by an insurance
ground of public policy. company is valid and binding until actual
payment of premium. Any agreement to the
Requisites: contrary is void. (Sec. 77)
a. The insurance is a life Exceptions to the requirement for pre-payment
insurance policy of premiums:
b. It is payable on the death of 1. in case of life or industrial life
the insured. insurance, when the grace periods applies;
c. It has been in force during 2. when the insurer makes a
the lifetime of the insured for at least two written acknowledgment of the receipt
years from its date of issue or of its last premium;
reinstatement. 3. when the parties have agreed to
the payment of the premium in installments
Note: the period of 2 years may be shortened and partial payment has been made at the
but it cannot be extended by stipulation. time of the loss (Makati Tuscany
Condominium Corp v. CA, 215 SCRA 462)
Effect when policy becomes incontestable: 4. when a credit term has been
agreed upon (UCPB v. Masagana Telemart,
a. Barred defenses of the insurer: 308 SCRA 259)
1. the policy is void ab initio 5. where the parties are barred by
2. it is rescissible by reason of the estoppel (UCPB v. Masagana Telemart, 356
fraudulent concealment or SCRA 307)
misrepresentation of the insured or his
agent Effect of non-payment: notwithstanding any
b. Defenses not barred agreement to the contrary, no policy or contract
1. That the person of insurance issued by an insurance company is
taking the insurance lacked insurable valid and binding unless and until the premium
interest as required by law; thereof has been paid. (Sec. 77)
2. hat the cause of
the death of the insured is an excepted  Section 77 merely precludes the parties
risk; from stipulating that the policy is valid even if
3. That the the premiums are not paid. (Makati
premiums have not been paid; Tuscanny Condominium Corp. v. CA, 215
4. That the SCRA 462)
conditions of the policy relating to
military or naval service have been Effect of acknowledgment of receipt of
violated; premium in policy: Conclusive evidence of its
5. That the fraud is payment, so far as to make the policy binding,
of a particularly vicious type; notwithstanding any stipulation therein that it
6. That the shall not be binding until the premium is actually
beneficiary failed to furnish proof of paid.
death or to comply with any condition Reason: when the policy contains such written
imposed by the policy after the loss has acknowledgment, it is presumed that the insurer
happened; or has waived the condition of the payment.
7. That the action Note: The conclusive presumption extends only
was not brought within the time to the question on the binding effect of the
specified. policy. As far as the payment of the premium
itself is concerned, the acknowledgment is only
VII. PREMIUM (2000, 2006 Bar Exams) a prima facie evidence of the fact of such
payment. The insurer may still dispute its
Concept: A consideration paid to an insurer for acknowledgment but only for the purpose of
undertaking to indemnify the insured against a receiving the premium due and paid.
specified peril.

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Effect of acceptance of the premium: which the insurer, in consideration of the


Acceptance of the premium within the stipulated premium, has undertaken to indemnify the
period for payment thereof, including the agreed insured. (Bonifacio Bros. Inc. v. Mora, 20 SCRA
period of grace, merely assures continued 261)
effectivity of the insurance policy in accordance
with its terms. Proximate cause - an event which sets all other
events in motion without any intervening or
A. When insured entitled to the return of independent case, without which the injury or
premiums loss would not have occurred.
Whole:
1. If thing insured was never exposed to
the risks insured against (Sec. 79); A. Loss for which the insurer is liable:
2. Contract is voidable due to the fraud or 1. loss the proximate cause of which is the
misrepresentation of insurer or his peril insured against;
agents; (Sec. 81) 2. loss the immediate cause of which is the
3. Contract is voidable because of the peril insured against except where
existence of facts of which the insured proximate cause is an excepted peril;
was ignorant without his fault; (Sec. 81) 3. loss through negligence of insured
4. When by any default of the insured except where there was gross
other than actual fraud, the insurer never negligence amounting to willful acts; and
incurred liability (Sec. 81); 4. loss caused by efforts to rescue the
5. When rescission is granted due to the thing from peril insured against;
insurer’s breach of contract (Sec. 74); 5. if during the course of rescue, the thing
Pro rata: is exposed to a peril not insured against,
1. When the which permanently deprives the insured
insurance is for a definite period and the of its possession, in whole or in part
insured surrenders his policy before the
termination thereof; B. Loss for which the insurer is not liable:
1. loss by insured’s willful act;
Exceptions: 2. loss due to connivance of the insured;
a. policy not made for a and
definite period of time 3. loss where the excepted peril is the
b. short period rate is agreed proximate cause.
upon
c. life insurance policy C. Notice and proof of loss
2. When there is over-insurance;  Purposes:
1. to give the insurer information by which
In case of over insurance by double he may determine the extent of his
insurance, the insurer is not liable for the liability
total amount of the insurance taken, his 2. to afford the insurer a means of
liability being limited on the property detecting any fraud that may have been
insured. Hence, the insurer is not practiced upon him
entitled to the portion of the premium 3. to operate as a check upon extravagant
corresponding to the excess of the claims
insurance over the insurable interest of
the insured. D. Effect of failure to give notice of loss:

In case of over insurance by several In fire insurance - it will defeat the right of the
insurers, the insured is entitled to a insured to recover;
ratable return of the premium, In other types of insurance – it will not exonerate
proportioned to the amount by which the the insurer unless there is a stipulation in the
aggregate sum insured in all policies policy to that effect.
exceeds the insurable value of the thing
insured. IX. DOUBLE INSURANCE (1999, 2005 Bar
Exams)
VIII. LOSS (1996, 2005 Bar Exams)
Overinsurance results when the insured insures
Loss - injury or damage sustained by the the same property for an amount greater than
insured in consequence of the happening of one the value of the property with the same
or more of the accidents or misfortune against insurance company.

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e. Each insurer is bound, as between


Effect in case of loss: himself and the other insurers, to
a. the insurer is bound only to pay to the contribute ratably to the loss in
extent of the real value of the property proportion to the amount for which he is
lost; liable under his contract. (sec. 94)
b. the insured is entitled to recover the
amount of premium corresponding to the Under the “Principle of Contribution” or
excess in value of the property “Contribution clause” it is required that each
insurer contribute ratably to the loss or damage
Double Insurance: exists where the same considering insurances to cover the same
person is insured by several insurers separately subject matter and interest against the same
in respect to the same subject and interest. peril.

 Requisites: Additional or Other Insurance Clause - a


1. The person insured is the same; condition in the policy requiring the insured to
2. Two or more insurers insuring inform the insurer of any other insurance
separately; coverage of the property insured is lawful and
3. The subject matter is the same; specifically allowed under Sec. 75 of the ICP
4. The interest insured is also the same; which provides that “a policy may declare that a
5. The risk or peril insured against is violation of a specified provision thereof shall
likewise the same. avoid it, otherwise the breach of an immaterial
provision does not avoid it.” It is a stipulation
Over-Insurance Double Insurance against double insurance.
1. One insurer is 1. Two or more insurers
sufficient Purposes:
2. Insurance taken must 2. Total amount of a. to prevent an increase in the moral hazard
be more than the policies taken need not b. to prevent over insurance and fraud
amount of insurable exceed the amount of
interest the insurable interest Note: to constitute a violation of the clause,
there must have been double insurance
 Effects: where double insurance X. REINSURANCE
is allowed, but over insurance results: (Sec.
94) Concept: a contract by which an insurer
procures a third person to insure him against
a. The insured, unless the policy loss or liability by reason of such original
otherwise provides, may claim payment insurance. Also known as Reinsurance Cession.
from the insurers in such order as he
may select, up to the amount for which In every reinsurance, the original contract of
the insurers are severally liable under insurance and the contract of reinsurance are
their respective contracts; covered by separate policies.
b. Where the policy under which the
insured claims is a valued policy, the Double Insurance
insured must give credit as against the Reinsurance
valuation for any sum received by him involves the same involves different
under any other policy without regard to interest interest
the actual value of the subject matter insurer remains in insurer becomes the
insured; such capacity insured in relation
c. Where the policy under which the to reinsurer
insured claims is an unvalued policy he insured is the party original insured has
must give credit, as against the full in interest in the no interest in the
insurable value, for any sum received by 2 contracts reinsurance
him under any policy; contract.
d. Where the insured receives any sum subject of subject of insurance
in excess of the valuation in the case of insurance is is the original
valued policies, or of the insurable value property insurer’s risk
in the case of unvalued policies, he must insured has to give insured’s consent not
hold such sum in trust for the insurers, his consent necessary
according to their right of contribution
among themselves; Duty of reinsured to disclose facts

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Where an insurer obtains reinsurance, except  Cargo can be the subject of marine
under automatic reinsurance treaties, he must insurance, and once it is entered
communicate all the representations of the into, the implied warranty of
original insured, and also all the knowledge and seaworthiness immediately attaches
information he possesses, whether previously or to whoever is insuring the cargo,
subsequently acquired, which are material to the whether he be the shipowner or not.
risk. (Roque v. IAC, 139 SCRA 596)
B. Marine protection and indemnity insurance

Terms: Classes of inland marine insurance:


1. Reinsurance Treaty – merely an agreement 1. Property in transit – provides protection to
between two insurance companies whereby one property frequently exposed to loss while it is
agrees to cede and the other to accept being transported from one location to another
reinsurance business pursuant to provisions 2. Bailee liability – insurance for those who have
specified in the treaty temporary custody of the goods
2. Automatic Reinsurance – the reinsured is 3. Fixed transportation property – they are so
bound to cede and the reinsurer is obligated to insured because they are held to be an essential
accept a fixed share of the risk which has to be part of the transportation system such as
reinsured under the contract. bridges, tunnels, etc.
3. Facultative Reinsurance – there is no 4. Floater – provides insurance to follow the
obligation to cede or accept participation I the insured property wherever it may be located,
risk each party having a free choice. But once subject always to the territorial limits of the
the share is accepted, the obligation is absolute contract
and the liability thereunder can be discharged
only by payment. Risks or Losses Covered:

4. Retrocession – a transaction whereby the  Perils Of The Sea - includes only


reinsurer in turn, passes to another insurer a those casualties due to the unusual violence
portion of the risk reinsured. It is really the or extraordinary action of wind and wave or
reinsurance of reinsurance. to other extraordinary causes connected
with navigation.
XI. TYPES OF INSURANCE
 Perils Of The Ship - a loss which in
A. MARINE INSURANCE the ordinary course of events, results from
(1998, 2000, 2005 Bar exams) the:
1. natural and inevitable action of the sea
Definition: insurance against risks connected 2. ordinary wear and tear of the ship or
with navigation, to which a ship, cargo, 3. negligent failure of the ship’s owner to
freightage, profits or other insurable interest in provide the vessel with proper
movable property, may be exposed during a equipment to convey the cargo under
certain voyage or a fixed period of time. (Sec. ordinary conditions.
99)
Note: it is only perils of the sea which may be
Scope: insured against unless perils of the ship is
A. Insurance against loss or damage to: covered by an all-risk policy.
1. vessels, goods, freight, cargo,
merchandise, profits, money, Special Contracts and Clauses
valuable papers, bottomry and 1. All Risks Policy - insurance against all causes
respondentia, and interest in respect of conceivable loss or damage, except: (1) as
to all risks or perils of navigation; otherwise excluded in the policy or (2) due to
2. persons or property in connection fraud or intentional misconduct on the part of the
with marine insurance; insured.
3. precious stones, jewels, jewelry and The insured has the initial burden of
precious metals whether in the proving that the cargo was in good condition
course of transportation or when the policy attached and that the cargo was
otherwise; and damaged when unloaded from the vessel;
4. bridges, tunnels, piers, docks and thereafter, the burden then shifts to the insurer
other aids to navigation and to show the exception to the coverage (Filipinas
transportation. (Sec. 99) Merchants Insurance v. C, 179 SCRA 638)

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2. Barratry Clause – A clause which provides Concealment in Marine Insurance


that there can be no recovery in case of any
willful misconduct on the part of the master or  Concept: failure to disclose any material
crew in pursuance of some unlawful or fact or circumstance which in fact or law is
fraudulent purpose without consent of owners, within, or which ought to be within the
and to the prejudice of the owner’s interest. knowledge of one party and of which the
3. Inchamaree Clause - covers loss or damage other has no actual or presumptive
to the hull or machinery through: knowledge.
1. negligence of the captain,  Matters although concealed will not
engineers, etc. vitiate the contract, except when they
2. explosions, breakage of shafts; and caused the loss:
3. latent defect of machinery or hull.
4. Sue and Labor Clause – a clause under which 1. national character of the insured;
the insurer may become liable to pay the 2. liability of the thing insured to capture
insured, in addition to the loss actually suffered, and detention;
such expenses as he may have incurred in his 3. liability to seizure from breach of foreign
efforts to protect the property against a peril for laws of trade;
which the insurer would have been liable (Sec. 4. want of necessary documents;
163) 5. use of false and simulated papers.
Insurable Interest in Marine Insurance Distinctions on Concealment
1. a. Shipowner MARINE OTHER PROPERTY
1. over the vessel t the extent of its value, INSURANCE INSURANCE
provided that if chartered, the recovery
The information of the The information of
is only up to the amount not recoverable
belief or expectation belief of a third party is
from the charterer
of third persons is not material and
2. he also has an insurable interest on
material and must be need not be
expected freightage
communicated communicated unless
3. no insurable interest if he will be
it proceeds from an
compensated by the charterer for the
agent of the insured
value of the vessel in case of loss.
whose duty it is to give
information
b. Charterer - to the extent that he is liable to
The concealment of Concealment of any
the shipowner, if the ship is lost or damaged
any fact in relation to material fact will vitiate
during the voyage.
any of the matters the entire contract,
stated in Section 110 whether or not the
c. Cargo Owner - over the cargo and the
does not vitiate the loss results from the
expected profits (Sec. 105)
entire contract but risk concealed
merely exonerates the
2. In loans on bottomry and respondetia
insurer from a risk
resulting from the fact
Repayment of the loan is subject to the
concealed
condition that the vessel or goods,
respectively, given as a security, shall arrive
safely at the port of destination. Representations in Marine Insurance

a. Owner/Debtor - difference between the  Effect of false representation by the


value of vessel or goods and the amount of insured
the loan If a representation is intentionally false in
any material respect, or in respect of any
b. Creditor/Lender - amount of the loan fact on which the character and nature of the
risk depends, the insurer may rescind the
Note: if the vessel is hypothecated by bottomry, entire contract.
only the excess is insurable, since a loan on  Effect of false representation as to
bottomry partakes of the nature of an insurance expectation
coverage to the extent of the loan The eventual falsity of a representation as to
accommodation. The same rule would apply to expectation does not, in the absence of
the hypothecation of the cargo by respondentia. fraud, avoid a contract of marine insurance.

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Implied Warranties in Marine Insurance • It becomes the obligation of a cargo


a. that the ship is seaworthy at the owner to look for a reliable common
inception of the insurance (Sec. 113); carrier which keeps its vessels in
b. that the ship will not deviate from seaworthy conditions. The shipper may
agreed voyage unless deviation is have no control over the vessel but he
proper (Sec. 123, 124, 125); has control in the choice of the common
c. that the ship will not engage in an carrier that will transport his goods
illegal venture; (Roque v. IAC, 139 SCRA 596).
d. warranty of neutrality: that the ship
will carry the requisite documents of
nationality or neutrality of the ship or
 General Rule: An implied
warranty of seaworthiness is complied with if
cargo where such nationality or
the ship be seaworthy at the time of the of
neutrality is expressly warranted; (Sec.
commencement of the risk. Prior or
120)
subsequent unworthiness is not a breach of
e. presence of insurable interest.
the warranty nor is it material that the vessel
arrives in safety at the end of her voyage.
 While the payment by the insurer for the
Exceptions:
insured value of the lost cargo operates as a
a. in the case of a time policy, the ship must
waiver of the insurer’s right to enforce the
be seaworthy at the commencement of
term of the implied warranty against the
every voyage she may undertake
assured under the marine insurance policy,
the same cannot be validly interpreted as an
b. in case of cargo policy, each vessel upon
automatic admission of the vessel’s
which the cargo is shipped or transshipped
seaworthiness by the insurer as to foreclose
must be seaworthy at the commencement of
recourse against the common carrier for any
each particular voyage
liability under the contractual obligation as
such common carrier (Delsan Transportation
c. in the case of a voyage policy
Lines v. CA, 264 SCRA 24)
contemplating a voyage in different stages,
the ship must be seaworthy at the
Seaworthiness: A relative term, depending
commencement of each portion
upon the nature of the ship, voyage, service and
goods, denoting in general a ship’s fitness to
 Rule where ship becomes unseaworthy
perform the service and to encounter the
in the course of the voyage
ordinary perils of the voyage contemplated by
the parties to the policy. (Sec. 114)
When the ship becomes unseaworthy during
 What constitutes seaworthiness:
the voyage to which an insurance relates, an
A warranty of seaworthiness extends not
unreasonable delay in repairing the defect
only to the condition of the structure of the
exonerates the insurer on ship or
ship itself, but requires that it be:
shipowner's interest from liability from any
a. properly laden,
loss arising therefrom.
and
b. provided with a
Warranty that necessary documents are
competent master,
carried Where the nationality or neutrality of a
c. sufficient number
ship or cargo is expressly warranted, it is implied
of competent officers and seamen,
that the ship will carry the requisite documents to
and the
show such nationality or neutrality and that it will
d. requisite
not carry any documents which cast reasonable
appurtenances and equipment, such
suspicion thereon. (Sec. 120)
as ballasts, cables and anchors,
cordage and sails, food, water, fuel
Warranty against improper deviation
and lights, and
e. other necessary
Deviation: a departure from the course of the
or proper stores and implements for
voyage insured or an unreasonable delay in
the voyage. (Sec. 116)
pursuing the voyage or the commencement of
• A ship which is seaworthy for the an entirely different voyage.
purpose of an insurance upon the ship
may, nevertheless, by reason of being Instances of deviation:
unfitted to receive the cargo, be 1. deviation from the agreed voyage
unseaworthy for the purpose of the 2. departure of vessel from the course of
insurance upon the cargo. sailing fixed by mercantile usage

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3. departure of the vessel from the most a. actual loss of more than ¾ of
natural, direct and advantageous route the value of the thing insured
is not fixed by mercantile usage b. damage reducing value by more
4. unreasonable delay in pursuing voyage than ¾ of the value of the vessel
5. commencement of an entirely different and of cargo
voyage c. expense of transshipment
exceed ¾ of the value of the
Kinds of deviation: cargo

a. Proper In case of constructive total loss, insured


may:
i. When caused by a. abandon the goods or vessel to
circumstances over which neither the the insurer and claim for the
master nor the owner of the ship has whole insured value
any control; b. without abandoning vessel,
ii. When necessary to comply claim for partial actual loss
with a warranty, or to avoid a peril,
whether or not the peril is insured b. partial loss – that which is not total (Sec. 128)
against;
iii. When made in good faith,
and upon reasonable grounds of belief Co-Insurance
in its necessity to avoid a peril; or A marine insurer is liable upon a partial loss,
iv. When made in good faith, only for such proportion of the amount insured
for the purpose of saving human life or by him as the loss bears to the value of the
relieving another vessel in distress. whole interest of the insured in the property
(Sec. 124) insured.
When the property is insured for less than its
Effect of a proper deviation: in case of loss, the value, the insured is considered a co-insurer of
insurer is still liable. the difference between the amount of insurance
and the value of the property.
b. Improper - Every deviation not specified in
Section 124.  Requisites:
1. The loss is partial;
Effect of improper deviation: An insurer is not 2. The amount of insurance is less than the
liable for any loss happening to the thing insured value of the property insured (Sec 157).
subsequent to an improper deviation. (Sec. 126)  Rules:
1. co – insurance applies only to marine
Loss in Marine Insurance insurance
2. logically, there cannot be co-insurance
Kinds: in life insurance
3. co – insurance applies in fire insurance
a. total loss: when expressly provided for by the
1. actual loss - caused by: parties
a. A total destruction of the
thing insured; CO-INSURANCE REINSURANCE
b. The irretrievable loss by A percentage in the Situation where the
sinking, or by being broken up; value of the insured insurer procures a
c. Any damage to the thing property which the third party called the
which renders it valueless to the insured himself reinsurer to insure
owner for the purpose for which assumes to act as him against liability
he held it; or insurer to the extent by reason of the
d. Any other event which of the deficiency in original insurance.
effectively deprives the owner of the insurance of the Basically,
the possession, at the port of insured property in reinsurance is an
destination, of the thing insured. case of loss or insurance against
(Sec. 130) damage liability which the
Right to payment: Upon an actual total loss, a original insurer may
person insured is entitled to payment without incur in favor of the
notice of abandonment. (Sec. 135) original insured
2. constructive total loss –

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Abandonment the thing insured which may have come to the


The act of the insured by which, after a hands of the insured. (Sec. 154)
constructive total loss, he declared the
relinquishment to the insurer of his interest in the Average
thing insured (Sec. 138)
Definition: Any extraordinary or accidental
 Requisites for validity of abandonment: expense incurred during the voyage for the
1. There must be an actual preservation of the vessel, cargo, or both, and all
relinquishment by the person insured of damages to the vessel and cargo from the time it
his interest in the thing insured; is loaded and the voyage commenced until it
2. There must be a ends and the cargo unloaded.
constructive total loss ;
3. The abandonment be  Kinds:
neither partial nor conditional; 1. General Average Loss - includes damages
4. It must be made within a and expenses which are deliberately caused by
reasonable time after receipt of reliable the master of the vessel or upon his authority, in
information of the loss ; order to save the vessel, her cargo, or both at
5. It must be factual; the same time from real or known risk. It must
6. It must be made by giving be borne equally by all of the interests
notice thereof to the insurer which may concerned in the venture.
be 2. Particular Average Loss - includes all
done orally or in writing; and damages and expenses caused to the vessel or
7. The notice of abandonment to her cargo which have not inured to the
must be explicit and must specify the common benefit and profit of all persons
particular cause of the abandonment interested in the vessel and her cargo. It is borne
 Effects: alone by the owner of the cargo or the vessel, as
1. equivalent to a transfer by the insured of his the case may be.
interest to the insurer, with all the chances of
recovery and indemnity. GENERAL PARTICULAR
2. acts done in good faith by those who were Has inured to the Has not inured to the
agents of the insured in respect to the thing common benefit and common benefit and
insured, subsequent to the loss, are at the risk of profit of all persons profit of all persons
the insurer and for his benefit. interested in the vessel interested in the vessel
Acceptance of abandonment, whether and cargo and her cargo
express or implied, is conclusive upon the Must be borne equally To be borne alone by
parties, and admits the loss and the sufficiency by all of the interests the owner of the cargo
of the abandonment. concerned in the or the vessel, as the
Once made and accepted abandonment is venture case may be
irrevocable, unless the ground upon which it was Requisites for the
made proves to be unfounded. right:
 Rules:
1. If a marine insurer pays for a loss as if it were 1. common danger to
an actual total loss, he is entitled to whatever the vessel or cargo;
may remain of the thing insured, or its proceeds
or salvage, as if there had been a formal 2. Part of the vessel or
abandonment. cargo was sacrificed
2. The acceptance of an abandonment may be deliberately;
either express or implied from the conduct of the
insurer. The mere silence of the insurer for an 3. sacrifice must be for
unreasonable length of time after notice shall be the common safety or
construed as an acceptance. for the benefit of all;
3. On an accepted abandonment of a ship,
freightage earned previous to the loss belongs to 4. sacrifice must be
the insured of said freightage; but freightage made by the master or
subsequently earned belongs to the insurer of upon his authority;
the ship.
4. If an insurer refuses to accept a valid 5. It must be not be
abandonment, he is liable as upon actual total caused by any fault of
loss, deducting from the amount any proceeds of the party asking the
contribution;

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to such fire policies or insured under separate


6. It must be policy.
successful, i.e.
resulted in the saving Prerequisites to recovery
of the vessel or cargo; 1. Notice of loss – must be immediately given,
and unless delay is waived expressly or impliedly by
the insurer
7. It must be 2. Proof of loss – according to best evidence
necessary. obtainable. Delay may also be waived expressly
or impliedly by the insurer

 Right of the insured in case of General HOSTILE FIRE FRIENDLY FIRE


Average: One that escapes One that burns in a
General Rule: The insured may either hold from the place where place where it was
the insurer directly liable for the whole of the it was intended to intended to burn and
insured value of the property sacrificed for burn and ought to be ought to be
the general benefit, subrogating him to his Insurer is liable Insurer is not liable
own right of contribution or demand
contrinution from the other interested parties Measure of indemnity
as soon as the vessel arrives at her 1. Open policy: only the expense necessary to
destination. replace the thing lost or injured in the condition it
Exceptions: was at the time of the injury
a. after the separation of 2. Valued Policy: the parties are bound by the
the interests liable to the contribution valuation, in the absence of fraud or mistake
b. when the insured has
neglected or waived his right to Note: It is very crucial to determine whether a
contribution marine vessel is covered by a marine insurance
or fire insurance. The determination is important
 FPA Clause (Free From for three reasons:
Particular Average): A clause agreed upon a. Rule on constructive total loss and
in a policy of marine insurance in which it is abandonment – applies only to marine insurance
stated that the insurer shall not be liable for b. Rule on co – insurance – applies primarily to
a particular average, such insurer shall be marine insurance
free therefrom, but he shall continue to be c. Rule on co – insurance applies to fire
liable for his proportion of all general insurance only if expressly agreed upon
average losses assessed upon the thing
insured (Sec. 136) Effect of alteration in the thing insured:
entitles an insurer to rescind a contract of fire
B. FIRE INSURANCE insurance
 Requisites:
Definition and scope of fire insurance 1. The use or condition of the thing is specifically
A contract by which the insurer for a limited or stipulated in the policy;
consideration agrees to indemnify the insured 2. Such use or condition as limited by the policy
against loss of, or damage to, property by fire, is altered;
but may include loss by lightning, windstorm, 3. The alteration is made without the consent of
tornado or earthquake and other allied risks, the insurer;
when such risks are covered by extension to fire 4. The alteration is made by means within the
insurance policies or under separate policies. control of the insured;

Risks or losses covered 5. The alteration increases the risk; and


1. direct losses 6. There must be a violation of a policy
2. indirect or consequential losses provision.
a. physical damage
b. loss of earnings Fall-of-building Clause: a clause in a fire
c. extra expense insurance policy which provides that if the
building or any part thereof falls, except as a
Note: The liability of the insurer is to pay for result of fire, all insurance by the policy shall
direct loss only. The insurer may be liable to pay immediately cease.
for consequential losses if covered by extension

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Option to Rebuild Clause: a clause giving the casualty insurance. Therefore, such casualty
insurer the option to reinstate or replace the insurance are governed by the general
property damaged or destroyed or any part provisions applicable to all types of
thereof, instead of paying the amount of the loss insurance, and outside of such statutory
or the damage. provisions, the rights and obligations of the
parties must be determined by their contract,
The insurer, after electing to rebuild, cannot be taking into consideration its purpose and
compelled to perform this undertaking by always in accordance with the general
specific performance because this is an principles of insurance law.
obligation to do, not to give. Remedy: ‘the same  In burglary, robbery and theft insurance,
be executed at his cost’. (Art. 1167 Civil Code) the opportunity to defraud the insurer – the
moral hazard – is so great that insurers have
found it necessary to fill up the policies with
C. CASUALTY OR ACCIDENT INSURANCE many restrictions designed to reduce the
(2005 Bar Exam) hazard. Persons frequently excluded are
Concept those in the insured’s service and
Insurance covering loss or liability arising from employment. The purpose of the exception
accident or mishap, excluding certain types of is to guard against liability should theft be
loss which by law or custom are considered as committed by one having unrestricted
falling exclusively within the scope of other types access to the property (Fortune Insurance v.
of insurance such as fire or marine. CA, 244 SCRA 208)
Classifications:
1. Insurance against specified perils which
may affect the person and/or property of
the insured (Accident or health Liability insurable
insurance)
Ex: personal accident, robbery/theft 1. liability for quasi-delict or non-fulfillment of
insurance contract
2. Insurance against specified perils which 2. liability for criminal negligence
may give rise to liability on the part of
the insured for claims for injuries to or Liability of the insurer if insured was committing
damage to the property of others (Third a felony:
party liability insurance) Liabilities arising out of acts of negligence, which
are also criminal, are also insurable on the
Insurable interest is based on the ground that such acts are accidental. But liability
interest of the insured in the safety of consequences of deliberate criminal acts are not
persons, and their property, who may insurable.
maintain an action against him in case of
their injury or destruction, respectively. “Intentional” vs. “Accidental” as used in
Ex: workmen’s compensation, motor insurance policies:
vehicle liability 1. Intentional - implies the exercise of the
reasoning faculties, consciousness and volition.
In a third party liability (TPL) insurance Where a provision of the policy excludes
contract, the insurer assumes the intentional injury, it is the intention of the person
obligation by paying the injured third inflicting the injury that is controlling. If the
party to whom the insured is liable. Prior injuries suffered by the insured clearly resulted
payment by the insured to the third from the intentional act of the third person, the
person is not necessary in order that the insurer is relieved from liability as stipulated
obligation may arise. The moment the (Biagtan v. the Insular Life Assurance Co. Ltd.,
insured becomes liable to third persons, 44 SCRA 58, 1972)
the insured acquires an interest in the 2. Accidental - that which happens by chance or
insurance contract which may be fortuitously, without intention or design, which is
garnished like any other credit (Perla unexpected, unusual and unforeseen.
Compania de Seguro, Inc. v. Ramolete,
205 SCRA 487) Right of a third party injured to sue the
insurer of party at fault
 Aside from compulsory motor vehicle
liability insurance, the Insurance Code
contains no other provisions applicable to

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Depends on whether the contract of insurance is A “no action clause” must yield to the provisions
intended to benefit third persons also or only the of the Rules of Court regarding multiplicity of
insured suits. (Shafer v. RTC, 167 SCRA 386)

 Test applied: D. SURETYSHIP

1. Indemnity against third party liability – a Definition An agreement whereby a surety


third party injured can directly sue the guarantees the performance by the principal or
insurer obligor of an obligation or undertaking in favor of
an obligee. (Sec. 175) It is essentially a credit
Purpose: to protect injured persons accommodation.
against the insolvency of the insured  It is considered an insurance contract if
who causes such injury it is executed by the surety as a
vocation, and not incidentally.
2. Indemnity against actual loss or  When the contract is primarily draws up
payment – A third party has no cause of by one party, the benefit of doubt goes
action against the insurer. The third to the other party (insured/oblige) in
person’s recourse is limited to the case of ambiguity following the rule in
insured alone (Bonifacio Bros. v. Mora, contracts of adhesion. Suretyship,
20 SCRA 261) especially in fidelity bonding, is thus
treated like non – life insurance in some
If the policy provides for “reimbursement respects.
after actual payment by the insured,” or
for the indemnity against loss, a third Kinds:
person has no cause of action against a. Fidelity Bond – contract of insurance against
the insurer. (Bonifacio Bros. v. Mora 20 loss from misconduct
SCRA 261) b. Fidelity Guaranty Insurance – a contract
whereby one, for a consideration, agrees to
The insurer is not solidarily liable with indemnify the assured against loss arising from
the insured. The insurer’s liability is want of integrity, fidelity or honesty of employees
based on contract; that of the insured is or other persons holding positions of trust
based on torts. Furthermore, the
insurer’s liability is limited by the amount Nature of liability of surety
of the insurance coverage. (Pan 1. Solidary;
Malayan Insurance Corp. v. CA, 184 2. Limited to the amount of the bond;
SCRA 54) 3. It is determined strictly by the terms of the
contract of suretyship in relation to the principal
While in a solidary obligation the creditor contract between the obligor and the obligee.
may enforce the entire obligation against (Sec. 176)
one of the solidary debtors, in an
insurance contract, the insurer SURETYSHIP PROPERTY
undertakes to indemnify the insured INSURANCE
against loss, damage or liability arising
from unknown or contingent event. To accessory contract principal contract
make the insurer solidarily liable with the parties: surety, parties: insurer and
latter’s entire obligation beyond the sum obligor and obligee insured
limited in the insurance contract would credit contract of indemnity
result in “evident breach of the concept accommodation
of solidary obligations.” (Vda. De surety can recover Insurer has no such
Maglana vs Consolacion, 212 SCRA from principal right; only right of
268) subrogation
bond can be may be cancelled
NO ACTION CLAUSE cancelled only with unilaterally either by
a requirement in a policy of liability which consent of obligee, insured or insurer on
provides that suit and final judgment be first Commissioner or grounds provided by
obtained against the insured’ that only thereafter court law
can the person injured recover on the policy requires acceptance no need of
(Guingon v. del Monte, 20 SCRA 1043) of obligee to be valid acceptance by any
third party
risk-shifting device, risk-distributing

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premium paid being device, premium paid 1. If committed after two years from the
in the nature of a as a ratable date of the policy’s issue or its last
service fee contribution to a reinstatement;
common fund 2. If committed after a shorter period
provided in the policy; and
3. If committed in a state of insanity
E. LIFE INSURANCE (1995, 2000 Bar Exams) regardless of the date of the commission
unless suicide is an excepted peril. (Sec.
Definition 180-A)
Insurance on human lives and insurance Note: Any stipulation extending the 2-
appertaining thereto or connected therewith year period is null and void.
which includes every contract or pledge for the 2. At the hands of the law (e.g. by legal
payment of endowments or annuities. execution)
It is one of the risks assumed by the
Kinds of life insurance insurer under a life insurance policy in
1. Ordinary Life, General Life or Old the absence of a valid policy exception.
Line Policy - insured pays a fixed premium Note: Justice Vitug believes that death
every year until he dies. Surrender value by suicide (if the insured is sane) or at
after 3 years. the hands of the law obviates against
2. Limited Payment Policy – insured recovery as being more in consonance
pays premium for a limited period. If he dies with public policy and as being implicit
within the period, his beneficiary is paid; if he under Section 87, ICP. (Pandect of
outlives the period, he does not get Commercial Law and Jurisprudence)
anything. 3. Killing by the beneficiary
3. Endowment Policy – pays premium General Rule: The interest of a beneficiary in a
for specified period. If he outlives the life insurance policy shall be forfeited when the
period, the face value of the policy is paid to beneficiary is the principal, accomplice or
him; if not, his beneficiaries receive the accessory in willfully bring about the death of the
benefit. insured, in which event, the nearest relative of
the insured shall receive the proceeds of said
4. Term Insurance – insurer pays once
insurance if not otherwise disqualified (Sec. 12)
only, and he is insured for a specified period.
Exceptions:
If he dies within the period, his beneficiaries
a. accidental killing
benefits. If he outlives the period, no person
b. self – defense
benefits from the insurance.
c. insanity of the beneficiary at the time he killed
the insured
5. Industrial Life - life insurance
entitling the insured to pay premiums
weekly, or where premiums are payable  If the premiums paid came from
monthly or oftener; conjugal funds, the proceeds are considered
conjugal. If the beneficiary is other than the
6. Group Life – essentially a single
insured’s estate, the source of premiums
insurance contract that provides coverage would not be relevant (Del Val v. Del Val, 29
for many individuals. Examples: in favor of Phil 534).
employees, “mortgage redemption Reason: a natural person cannot be placed
insurance” in the same footing as a juridical person
7. Variable Contract – Any policy or
contract on either a group or individual basis Right to assign life insurance policy
issued by an insurance company providing
for benefits or other contractual payments 1. A policy of insurance upon life or health may
thereunder to vary so as to reflect pass by transfer, will or succession to any
investment results of any segregated person, whether he has an insurable interest or
portfolio of investment. not, and such person may recover upon it
whatever the insured might have recovered.
Liability of insurer in certain causes of death (Sec. 181)
of the insured
2. Notice to an insurer of a transfer or bequest
1. Suicide thereof is not necessary to preserve the validity
Insurer is liable in the following cases: of a policy of insurance upon life or health,
unless thereby expressly required. (Sec. 182)

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Measure of indemnity 2. surety bond


The measure of indemnity in life or health 3. cash deposit
insurance policy is the sum fixed in the policy
except when a creditor insures the life of his Scope of coverage required
debtor 1. Private motorists – comprehensive against
Cash Surrender Value – as applied to a life third party liability for death or bodily injuries
insurance policy, it is the amount the insured, in 2. Operators of land transportation –
case of default, after the payment of at least 3 comprehensive against both passenger and third
full annual premiums, is entitled to receive if he party liabilities for death or bodily injuries
surrenders the policy and releases his claims
upon it. No-fault indemnity claim (2000 Bar Exam)

XII. COMPULSORY MOTOR VEHICLE No-fault Clause: a clause that gives the victim
LIABILITY INSURANCE (CMVLI) (injured person or heirs of the deceased) an
option to file a claim for death or injury without
A specie of compulsory insurance that provides the necessity of proving fault or negligence.
for protection coverage that will answer for legal
liability for losses and damages, for bodily Rules of recovery
injuries, or property damage that may be 1. Total indemnity: maximum of P5,000
sustained by another arising from the use and 2. Proof of loss:
operation of motor vehicle by its owner. a. police report of accident;
b. death certificate and evidence
Definitions: sufficient to establish proper payee
Motor Vehicle – any vehicle as defined in Sec. c. medical report and evidence of
3[a] of RA 4136, otherwise known as the “Land medical or hospital disbursement.
Transportation and Traffic Code.” 3. Claim may be made against one motor
Passenger – any fare – paying person being vehicle only
transported and conveyed in and by a motor
vehicle for transportation of passengers for 4. Proper insurer from which to claim –
compensation, including persons expressly a. In the case of an occupant: claim shall
authorized by law or by the vehicle’s operator or lie against the insurer of the vehicle in which
his agents to ride without fare. the occupant is riding, mounting or
dismounting from
Third Party – any person other than the b. in any other case: claim shall lie against
passenger, excluding a member of the the insurer of the directly offending vehicle.
household or a member of the family within the 5. In all cases, the right of the party paying the
second degree of consanguinity or affinity, of a claim to recover against the owner of the vehicle
motor vehicle owner or land transportation responsible for the accident shall be maintained.
operator, or his employee in respect of death or
bodily injury arising out of and in the course of The claimant is not free to choose from
employment. which insurer he will claim the “no fault
Owner or Motor Vehicle Owner – actual legal indemnity.” As the law, makes it mandatory that
owner of the motor vehicle, in whose name such the claim shall lie against the insurer of the
vehicle is duly registered with the Land vehicle in which the occupant is riding, mounting
Transportation Commission or dismounting from. The said vehicle might not
Land Transportation Operator – the owner or be the one that caused the accident is of no
owners of motor vehicles for transportation of moment since the law itself provides that the
passengers for compensation, including school party paying may recover against the owner of
buses. the vehicle responsible for the accident. (Perla
Compania de Seguros, Inc. v. Ancheta, 169
Purpose: to give immediate financial assistance SCRA 144).
to victims of motor vehicle accidents and/or their
dependents, especially if they are poor, This no-fault claim does not apply to
regardless of the financial capability of motor property damage. If the total indemnity of the
vehicle owners or operators responsible for the claim exceeds P5,000 and there is controversy
injury sustained. (Shafer vs Judge, RTC 167 in respect thereto, the finding of fault may be
SCRA 386) availed of by the insurer only as to the excess.
The P5,000 shall be paid without regard to fault.
Method of coverage (de Leon, The Insurance Code of the
1. insurance policy Philippines)

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extent of the claim and make payment within 5


The essence of the no-fault indemnity working days after reaching an agreement.
insurance is to provide victims of vehicular
accidents or their heirs immediate compensation If no agreement is reached, the insurance
although in limited amount, pending final company shall pay only the “no fault” indemnity,
determination of who is responsible for the without prejudice to the claimant from pursuing
accident and liable for the victim’s injuries or his claim further, in which case, he shall not be
death. required or compelled by the insurance company
to execute any quit claim or document releasing
Special Clauses it from liability under the policy of insurance or
surety bond issued.
1. Authorized Driver Clause
A clause which aims to indemnify the
insured owner against loss or damage to the car XIII. CLAIMS SETTLEMENT
but limits the use of the insured vehicle to the
insured himself or any person who drives on his The indemnification of the loss of the insured.
order or with his permission (Villacorta v.
Insurance Commissioner) In case of an unreasonable delay in the
payment of the insured’s claim by the insurer,
The requirement that the person driving the insured can recover:
the insured vehicle is permitted in accordance 1.) attorney’s fees;
with the licensing laws or other laws or 2.) expenses incurred by reason of the
regulations to drive the motor vehicle (licensed unreasonable withholding;
driver) is applicable only if the person driving is 3.) interest at double the legal interest rate fixed
other than the insured. by the Monetary Board; and
4.) the amount of the claim (Zenith Insurance
2. Theft Clause Corp. v. CA, 185 SCRA 398)
A clause which includes theft as among
the risks insured against. Time for payment of claims

Where the car is unlawfully and LIFE POLICIES NON – LIFE


wrongfully taken without the owner’s consent or POLICIES
knowledge, such taking constitutes theft, and a. Maturing upon the Proceeds under the
thus, it is the “theft clause” and not the expiration of the term policy shall be paid
“authorized driver clause” that should apply – the proceeds are within 30 days after the
(Palermo v. Pyramids Ins., 161 SCRA 677). immediately payable receipt by the insurer
to the insured of proof of loss, and
3. Cooperation Clause b. Maturing at the ascertainment of the
A clause in an automobile insurance death of the insured loss or damage by
policy which provides in essence that the occurring prior to the agreement of the
insured shall give all such information and expiration of the term parties or by arbitration
assistance as the insurer may require, usually stipulated – The but not later than 90
requiring attendance at trials or hearings. proceeds are payable days from such receipt
to the beneficiaries of proof of loss
Time to file and Process claim under CTPL within 60 days after whether or not
presentation and ascertainment is had
Period to file notice – the written notice of claim filing of proof of death or made
(setting forth the nature, extent and duration of
the injuries as certified by a duly licensed
physician) must be presented within 6 months XIV. PRESCRIPTIVE PERIOD (Sections 63 &
from the date of the accident otherwise the claim 384) (1996 Bar Exam)
is deemed waived.
Rules:
Prescriptive Period – the action must be filed in 1. In the absence of an express stipulation in the
court or the Insurance Commission within one policy, it being based on a written contract, the
year from the denial of the claim. action prescribes in 10 years.
2. HOWEVER, the parties may validly agree on
If there is an agreement, the insurance company a shorter period provided it is not less than one
concerned shall forthwith ascertain the truth and year from the time the cause of action accrues.

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 A condition, stipulation, or is not covered by the term “doing or


agreement in any policy of insurance, transacting an insurance business” under
limiting the time for commencing an action Section 2, ICP, neither is it covered by
thereunder to a period of less than 1 year Section 416 of the same Code which grants
from the time when the cause of action the Commissioner adjudicatory powers.
accrues, is void. (Sec. 63) (Philippine American Life Insurance Co. v.
3. The cause of action accrues from the rejection Ansaldo, 234 SCRA 509)
of the claim of the insured and not from the time
of the loss. 2. Administrative/Regulatory functions
 Prescriptive period shall a. Enforcement of
commence from the initial denial of the insurance laws
claim, not from the resolution of the motion b. issuance, suspension or
for reconsideration filed by the insured, revocation of certificate of authority
otherwise, it can be used by the insured as a c. power to examine books
scheme or device to waste time until the and records, etc.
evidence which may be used against him is d. rule – making authority
destroyed. (Sun Insurance Office Ltd. vs. e. punitive
CA, 195 SCRA 193)
4. In CMVLI, the written notice of claim must be
filed within 6 months from the date of the TRANSPORTATION LAWS
accident; otherwise, the claim is deemed waived
even if the action is brought within one year from
its rejection (Vda. De Gabriel vs. CA, 264 SCRA GOVERNING LAWS
137).
5. The suit for damages either with the proper Land Transportation
court or with the Insurance Commissioner 1. Common Carriers
should be filed within 1 year from the date of the a. New Civil Code (NCC) – primary
denial of the claim by the insurer, otherwise, the b. Code of Commerce – suppletory
claimant’s right of action shall prescribe. 2. Private Carriers
a. Object is a merchandise
XV. INSURANCE COMMISSIONER 1. Code of Commerce – primary
2. NCC – suppletory
Functions: b. Object is non-commercial
a. Law on deposit – if object is property
1. Adjudicatory/Quasi - Judicial functions b. Law on contracts – if passenger

a. Exclusive Original Jurisdiction – Any dispute Transportation by Sea


in the enforcement of any policy issued pursuant 1. Coastwise
to Chapter VI (CMVLI) (Sec. 385[2]) a. NCC – primary
b. Concurrent Original Jurisdiction (with the b. Code of Commerce – suppletory
RTC) – where the maximum amount involved in c. Carriage of Goods by Sea Act
any single claim is P100,000 (Sec. 416), except (COGSA) does not apply even if
in case of maritime insurance which is within the the parties expressly provide for
exclusive jurisdiction of the RTC. (BP 129; it
admiralty & maritime jurisdiction) 2. Philippine port to foreign ports – law of the
 Where the amount exceeds country of destination
P100,000, the RTC has jurisdiction 3. Foreign ports to Philippine ports
 The filing of a complaint with the a. NCC – primary
Commissioner shall preclude civil courts b. Code of Commerce
from taking cognizance of the case (Sec. c. COGSA
416). d. Philippine laws still apply even if
 A decision which has become the collision actually takes place in
final may be the subject of a writ of foreign waters.
execution which may be served and
enforced by a sheriff (Sec. 416). Air Transportation
1. Domestic – NCC; Code of
 The Insurance Commissioner
Commerce
has no jurisdiction to decide the legality of a
2. International – Warsaw
contract of agency entered into between an
Convention
insurance company and its agent. The same

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COMMON CARRIERS publicly known route, maintains no


terminals, and issues no tickets (Asia
 A person, corporation, firm or Lighterage Shipping vs. CA GR No. 147246,
association, engaged in the business of August 19, 2003)
carrying or transporting passengers or  A common
goods or both, by land, water or air, for carrier shall remain as such, notwithstanding
compensation, offering their services to the the charter of the whole or portion of a
public (Art. 1732 NCC) vessel, provided the charter is limited to the
ship only, as in the case of a time or voyage
Tests: (1996, 2000 Bar Exams) charter.
1. He must be engaged in the It is only when the charter includes both the
business of carrying goods for vessel and its crew, as in a bareboat or
others as a public employment, and demise, that a common carrier becomes
must hold himself out as ready to private (Planters Products vs. CA, 226
engage in transportation of goods SCRA 476)
for persons generally as a business  A travel agency
and not as a casual occupation; is not a common carrier. Its services include
2. He must undertake to carry procuring tickets and facilitating travel
goods of a kind to which his permits or visas as well as booking
business is confined; customers for tours (Crisostomo vs. CA, GR
3. He must undertake to carry by No. 138334, Aug. 25, 2003)
the method by which his business is
conducted and over his established Distinctions between a Common Carrier and
roads; and a Private Carrier: (2002 Bar Exam)
4. The transportation must be for
hire (First Phil. Industrial vs. CA, COMMON CARRIER PRIVATE CARRIER
300 SCRA 661)
Holds himself out for Contracts with
Characteristics: all people particular individuals
 Art. 1732 makes no indiscriminately or groups only
distinction between one whose principal Extraordinary Only ordinary
business activity is the carrying of persons diligence is required diligence is required
or goods or both, and one who does such Subject to State Not subject to State
carrying only as an ancillary activity regulation regulation
(sideline). There is a No presumption of
It also avoids distinction between presumption of fault fault or negligence
offering transportation service on a or negligence
regular or scheduled basis, and on an Exempting Exempting
occasional, episodic or unscheduled circumstances are circumstance is
basis. proof of extraordinary fortuitous event
Neither does it distinguish between diligence and Art.
a carrier offering its services to the 1734 NCC
“general public” (general community or Parties may not Parties may even
population) and one who offers services agree on limiting the exempt carrier’s
only from a narrow segment of the carrier’s liability liability, provided it is
population. except when not contrary to law,
A person or entity is a common carrier provided by law morals, good
even if he did not secure a Certificate of customs, public order
Public Convenience (De Guzman vs. CA, or public policy
168 SCRA 612) Governed by law on Governed by law on
 It does not common carriers obligations and
provide that the transportation should be by contracts
motor vehicle.
Hence, a grantee of pipeline concession Registered Owner Rule
under the Petroleum Act is considered a  A registered owner of a vehicle (even if
common carrier (First Phil. Industrial vs. CA, not used for public service) is the lawful
supra) operator insofar as the public and third
 One is a persons are concerned; consequently, it is
common carrier even if he has no fixed and directly and primarily responsible for the
consequences of its operation.

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solidarily liable with the driver


1. In contemplation of the (Zamboanga Tranportation Co. vs. CA,
law, the owner/operator 30 SCRA 717)
of record is the 5. The transfer, sale, lease
employer of the driver, or assignment of the privilege granted is
the actual operator and valid between the contracting parties but
employer being not upon the public or third persons
considered as merely its (Gelisan vs. Alday, 152 SCRA 388)
agent (Equitable
Leasing Corp. vs. Exceptions to kabit system:
Suyom, GR No.  When neither of the parties to
143360. Sept. 5, 2002) the kabit system is being held liable for
2. The registered owner damages.
cannot escape  When the case arose from the
responsibility by proving negligence of another vehicle in using the
that a third person is the public road to whom no representation or
actual and real owner. misrepresntation as regards the ownership
He is liable to the and operation of passenger jeepney was
injured party subject to made.
his right of recourse  When the riding public was not bothered
against the transferee or or inconvenienced at the very least by the
buyer. illegal arrangement. (Lim vs. CA, 373 SCRA
a. The registered owner is liable 394)
even
if the vehicle was leased to Boundary System (2005 Bar Exam)
another (BA  The driver pays for the gasoline consumed
Finance Corp. vs. CA, 215 and does not receive a fixed wage but gets
SCRA 715) only the excess of the receipt of the fares
collected by him over the amount he has
b. It would be absurd to hold liable agreed to pay to the owner of the vehicle
the owner of a stolen vehicle for
an accident caused by the  The owner cannot escape liability:
person who stole the vehicle 1. The owner is subsidiarily liable as
(Duavit vs. CA, 173 SCRA 490) employer in accordance with Art. 103
RPC
Kabit System (2005 Bar Exam) 2. From the viewpoint of labor laws, he is
 A system whereby a person who has been an employee, being entitled to all
granted a certificate of public convenience privileges going along with the
allows other persons who own motor employer-employee relationship
vehicles to operate under such license, for a 3. From the viewpoint of the NCC, the
fee or a percentage of such earnings. It is driver is a lessee because he pays a
void under Art. 1409 NCC. fixed amount of rental for his use of the
vehicle
 Effects: 4. From the viewpoint of the law on
1. The thrust of the law in common carriers, he is an employee of
enjoining the kabit system is to identify the operator for purpose of the latter’s
the person upon whom responsibility liability to passengers
may be fixed with the end in view of
protecting the riding public Arrastre Operator
2. The registered owner is  The legal relationship between the
primarily liable for all the consequences consignee and the arrastre operator is akin
of the operations of the carrier. to that of a depositor and a warehouseman.
3. The registered owner The relationship between the consignee and
cannot recover from the actual owner the common carrier is similar to that of the
and the latter cannot obtain transfer of consignee and the arrastre operator. Hence,
the vehicle to himself, both being in pari the duty of the arrastre operator to take care
delicto (Teja Marketing vs. IAC, 148 of the goods that are in its custody and to
SCRA 347) deliver them in good condition to the
4. Both the registered consignee also devolves upon the common
owner and the actual owner are

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carrier. Thus, the arrastre operator and the the carrier to the consignee or to the person who
common carrier are liable in solidum for the has the right to receive them (Art. 1736)
proper delivery of the goods to the
consignee (Eastern Shipping Lines v. CA, Liability remains:
234 SCRA 78) a. Even when goods are temporarily unloaded
or stored in transit unless the shipper or
TOWAGE A vessel is hired to bring owner has made use of the right of stoppage
another vessel to another in transitu (Art. 1737)
place b. And when goods are stored in the carrier’s
ARRASTRE A contract for unloading of warehouse at the place of destination until
goods from a vessel. the consignee has been advised of the
Services are not maritime. arrival thereof and had reasonable
They are in fact no different opportunity thereafter to remove or dispose
from those of a depositary them (Art. 1738)
or warehouseman.
c. Delivery to the customs authorities is not
STEVEDORIN Loading and unloading of
delivery to the consignee. However, the
G coastwise vessels calling
parties may agree to limit the liability of
at the port
carrier (Lu Do vs. Binamira, 101 Phil. 120)

Defenses (1995, 1996, 1997, 2001, 2002 Bar


I. CARRIAGE OF GOODS Exams)
Extraordinary Diligence (1997, 2001, 2002 Bar  Flood, storm, earthquake, lighting, or other
Exams) natural disaster or calamity.(Caso
Fortuito/Force Majeure)
 Common carriers, from the nature of their
 Act of public enemy in war, whether
business and for reasons of public policy,
international or civil
are bound to observe extraordinary diligence
in the vigilance over the goods and for the  Act or omission of shipper or owner of goods
safety of passengers transported by them,  Character of goods or defects in packing or
according to all circumstances of each case in containers.
(Art. 1733, NCC)  Order or act of competent authority (Art.
1734)
 Presumption of Negligence  Stipulation limiting liability of carrier (Arts.
1. If the goods are lost, destroyed or 1744, 1448, 1749, 1750)
deteriorated, common carriers are
presumed to have been at fault or to Caso Fortuito/Force Majeure
have acted negligently (Art. 1735) a. Must be proximate and only cause of loss
2. Mere proof of the delivery of goods in b. Carrier must exercise due diligence to
good order to a common carrier and prevent or minimize the loss before, during
their arrival in bad order at their or after the disaster (Art. 1739)
destination makes for a prima facie case c. Carrier not in delay in transporting the goods
against the carrier (Coastwise (Art. 1740)
Lighterage Corp. vs. CA, 245 SCRA
796)  Fire may not be considered a natural
3. The court need not make an express disaster (Eastern Shipping vs. IAC, 150
finding of fault or negligence, the law SCRA 463)
imposes liability upon common carriers,
as long as it is shown that:  “Very rough seas and stormy weather” were
a. There is a contract between the not caso fortuito, but normal occurences that
shipper and common carrier an ocean-going vessel, particularly in the
b. Loss or deterioration took place month of September which, in our area, is a
during the existence of contract month of rains and heavy seas would
encounter as a matter of routine (Eastern
Duration of Liability Shipping vs, CA, 196 SCRA 570)
Commencement: from the time the goods are
unconditionally placed in the possession of, and Acts of Public Enemy
received by the carrier for transportation a. Must be proximate and only cause
of loss
Termination: actual or constructive delivery by

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b. Carrier must exercise due diligence circumstances and has been fairly
to prevent or minimize loss before, and freely agreed upon. (Art. 1750)
during or after the act causing loss, c. Limiting carrier’s liability for
of goods (Art. 1739) delay on account of strikes or riots.
(Art. 1748)
Contributory Negligence
 If shipper or owner merely contributed to Invalid Stipulations: (RL²NTD²)
the loss, the proximate cause thereof being a. Goods are transported at the risk of the
the negligence of carrier, the carrier shall still owner or shipper;
be liable for damages, but such shall be b. Carrier will not be liable for any loss of
equitably reduced (Art. 1741) goods;
c. Carrier need not observe any diligence in
Character of the Goods the custody of goods;
1. Even if damage d. Carrier shall exercise a degree of diligence
caused by the inherent less than that of a good father of a family;
defect/character of goods,
e. Carrier shall not be responsible for the acts
the common carrier must
or omissions of his or its employees;
exercise due diligence to
forestall or lessen loss (Art. f. Carrier’s liability for acts committed by
1742) thieves or robbers who do not act with grave
or irresistible threat, violence or force is
2. Carrier who, knowing
dispensed with or diminished;
the fact of improper packing
of the goods upon ordinary g. Carrier not responsible for the loss of goods
observation, still accepts the on account of defective condition of car,
goods notwithstanding such vehicle, ship or other equipment used in the
condition is not relieved of contract of carriage. (Art. 1745)
liability for loss resulting
therefrom (Southern Lines, Effect of Delay
Inc. v. CA, 4 SCRA 258)  If, without just cause, (1) delays the
transportation of goods or (2) changes the
Order or Act of Public Authority stipulated or usual route, the contract limiting
 Public authority must have power to the common carrier's liability cannot be
issue the order (Art. 1743). Where the officer availed of in case of loss of goods (Art.
acts without legal process, the common 1747)
carrier will be held liable.
Presumption despite stipulation
Stipulation Limiting Liability of Carrier (2002  Even when there is an agreement
Bar Exam) limiting the liability, the common carrier is
 Common carrier and shipper may agree disputably presumed to have been negligent
on carrier’s observance of diligence to a in case of their loss. (Art. 1752)
degree less than extraordinary, provided
it be: Grounds for valid refusal to accept goods:
1. In writing, signed by shipper or owner; (DUO-CIEDSF)
2. Supported by a valuable consideration other 1. Dangerous objects or substances
than the service rendered by carriers; and including dynamites and other
explosives
3. Reasonable, just and not contrary to public
policy. (Art. 1744) 2. Unfit for transportation
3. Acceptance would result in
Valid Stipulations: overloading
a. Carrier's liability limited to the 4. Contrabands or illegal goods
value of goods appearing in the bill 5. Injurious to health
of lading, unless the shipper or 6. Goods will be exposed to untoward
owner declares a greater value. danger like flood, capture by enemies
(Art. 1749) and the like
b. Fixing the sum to be recovered 7. Goods like livestock will be exposed
by the owner or shipper, if it is to diseases
reasonable and just under the
8. Strike

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9. Failure to tender goods in time BAR QUESTION (Q): X, an 80-year old


epileptic, boarded the S/S Tamaraw in
Duty to Deliver Goods Manila going to Mindoro. To disembark,
the passengers have to walk thru a gang
 Oft-Repeated Rule: In the absence of a
plank. While negotiating the gang plank, X
special contract, a carrier is not an insurer
slipped and fell into the waters. X was
against delay in transportation of goods
saved from drowning, brought to a
hospital but after a month, died from
 Consequences of Delay: pneumonia. Except for X, all the
a. A natural disaster shall not free carrier from passengers were able to walk thru the
responsibility (Art. 1740) gang plank. What is the liability of the
b. Contract limiting carrier's liability cannot be owner of S/S Tamaraw?
availed of in case of loss of goods (Art. SUGGESTED ANSWER (SA): The owner
1747) of S/S Tamaraw is liable for the death of X
c. Excusable delays in carriage suspend, but in failing to exercise utmost diligence in
do not generally terminate, the contract of the safety of passengers. Evidently, the
carriage, and when the cause is removed, carrier did not take the necessary
the master must proceed with the voyage precautions in ensuring the safety of
and make delivery passengers in the boarding of and
d. During delay the vessel continues to be disembarking from the vessel. Unless
liable as a common carrier, not as a shown to the contrary, a common carrier
warehouseman, and remains duty bound to is presumed to have been negligen tin
exercise extraordinary diligence cases of death or injury to its passengers
e. Payment of indemnity: (Arts. 1755-1756, NCC). Since X has not
i. Stipulated in bill of lading completely disembarked yet, the
ii. If no indemnity stipulated, then carrier obligation of the shipowner to exercise
shall be liable for damages incurred utmost diligence still then subsisted and
due to delay he can still be held liable.
f. Consignee may:
i. Leave goods transported in the hands Duration of Liability
of carrier (Abandonment) advising  Commencement: From the moment the
him thereof in writing before their person who purchases the ticket (or token or
arrival at the point of destination. The card) presents himself at the proper place
carrier shall pay the full value of goods and in a proper manner to be transported
as if they had been lost or mislaid. with a bona fide intent to ride the coach
ii. If no abandonment was made (Vda. De Nunca vs. Manila Railroad Co., 13
indemnification shall not exceed the SCRA 249)
current price of goods at the time it
should have been delivered Termination: Until the passenger has, after
reaching his destination, (1) safely alighted;
II. CARRIAGE OF PASSENGERS or (2) had a reasonable opportunity to leave
the carrier’s premises
Not Passengers:
1. One who has boarded by fraud, stealth or Liability remains:
deceit 1. Not only during the course of the trip, but for
2. Rides any part of the vehicle unsuitable or so long as the passengers are within its
dangerous or which he knows is not premises and where they ought to be in
designated or intended for passengers pursuance to the contract of carriage (LRTA
3. Remains on a carrier for an unreasonable vs. Navidad)
length of time after he has been afforded 2. Includes reasonable time to remain on the
every safe opportunity to alight premises to see after his baggage and
prepare for his departure (La Mallorca vs.
Utmost Diligence CA, 17 SCRA 739)
 A common carrier is bound to carry the 3. Extends to persons boarding the cars as
passengers safely as far as human care and well as to those alighting therefrom. It is the
foresight can provide, using the utmost duty of common carriers to stop their
diligence of very cautious persons, with a conveyances a reasonable length of time to
due regard for all the circumstances (Art. afford passengers an opportunity to enter
1755) (Dangwa Trans Co. vs. CA, 202 SCRA 574)

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arises from the breach of


Presumption of Negligence the contract of carriage. The
1. In case of death of or injury to passengers, defense under Art. 2180 is
common carriers are presumed to have applicable to negligence in
been at fault or to have acted negligently quasi-delicts (Del Prado v.
(Art. 1756 NCC). This provision applies the Manila Electric Co., 52 Phil
doctrine of res ipsa loquitor for several 900)
reasons:
i) The contract imposes on the
carrier the obligation to transport the Liability for Acts of Strangers or other
passengers safely, hence the burden of Passengers
explaining should fall on the carrier; a. A common carrier is responsible for
ii) The cause of accident is better injuries suffered by a passenger on
known to the carrier than the passenger; account of the willful acts or negligence
and of other passengers or of strangers, if
iii) The accident could not have the common carrier’s employees,
happened if due care was exercised by through the exercise of the diligence of a
the carrier good father of a family could have
2. The court need not make an express finding prevented or stopped the act or
of fault or negligence of the common carrier omission (Art. 1763)
to hold it liable b. The carrier is liable when its personnel
allowed a passenger to drive the vehicle
Liability for Acts of Employees causing it to collide with another vehicle
a. Common carriers are liable resulting to the injuries suffered by the
for the death of or injuries to other passengers (MRR v. Ballesteros,
passengers through the 16 SCRA 641)
negligence or willful acts of
the former’s employees, Effect of Stipulation on Liability
although:
 General Rule: Liability cannot be
i. Such employees
dispensed with or lessened by stipulation,
may have acted
posting of notices, statements on tickets or
beyond the scope of
otherwise (Art. 1757)
their authority or
Exception: When a passenger is carried
ii. In violation of the orders of common gratuitously, a stipulation limiting the
carriers (Art. 1759) common carrier’s liability for negligence is
b. Not a defense: valid
i. Proof of exercise of diligence of a good Exception to the exception: Willful acts or
father of a family in the selection and gross negligence (Art. 1758)
supervision of employees (Ibid)
ii. Cannot be eliminated or limited by Passenger’s Baggages
stipulation, posting of notices, HAND-CARRIED CHECKED-IN
statements on the tickets or otherwise (In the custody of (In the custody of the
(Art. 1760) passengers or their common carrier)
c. Liability of carrier for the employees)
personal violence of its Necessary deposit Considered as goods
employees or agents upon Common carrier Requires extraordinary
its passengers extends only exercises diligence of diligence
to those acts that the carrier a depositary (ordinary
could foresee or avoid diligence)
through the exercise of the Governed by Arts. Governed by Arts.
degree of diligence 1998 and 2000-2003 1733-1753
required.
d. Diligence in the selection
and supervision of III. ACTIONS
employees under Art. 2180
NCC cannot be interposed Causes of Action:
by the common carrier to 1. Culpa Contractual
prevent damages because a. The liability of the carrier is not
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direct, immediate and primary. respective claims may be determined by


(Medina vs. Cresencia, 99 Phil. 506) legal proofs which each of the
b. Only the carrier is primarily liable contracting parties may present in
and not the driver, because there is conformity with law.
no privity between the driver and the
passenger. Obligations of the Carrier
c. No defense of due diligence in the a) Duty to Accept Goods – see
selection and supervision of notes on Common Carriers for ground for
employees. (Art. 1759) valid refusal to accept goods
b) Duty to Deliver Goods to (i)
2. Culpa Aquiliana person indicated in bill of lading; or (ii) any
a. The carrier and driver person to whom bill of lading was validly
are solidarily liable as joint transferred or negotiated
tortfeasors.
 see notes on Common Carriers
b. Defense of due
for effects of delay
diligence in the selection and
c) Duty to exercise extraordinary
supervision of employees is
diligence
available. Except: maritime tort
resulting in collision
Right of Consignee to Abandon the Goods
3. Culpa Delictual
a. The
1. Partial non-delivery, where
goods are useless with others (Art. 363
driver is primarily liable. The carrier
Code of Commerce)
is subsidiarily liable only if the driver
is convicted and declared insolvent 2. Goods rendered useless for sale
(Art. 100 RPC) or consumption for purposes for which
they are properly destined (Art. 365)
OVERLAND TRANSPORTATION 3. In case of delay through the
fault of carrier (Art. 371)
Scope:
1. Domestic land and water/maritime Notice of Damage
transportation  Condition precedent
2. Domestic air transportation  Damage apparent – immediately
upon delivery
Bill of lading (1998, 2005 Bar Exams)  Damage not apparent – within
 Written acknowledgment of receipt of goods 24 hours from delivery (Art. 366)
and agreement to transport them to a
specific place to a person named or to his Prescriptive Period
order. 1. Not provided by Art. 366, hence NCC
applies
Note: It is not indispensable for the creation of a 2. No bill of lading – within 6 years
contract of carriage. The contract itself arises 3. With bill of lading – 10 years
from the moment goods are delivered by the
shipper to the carrier and the carrier agrees to
carry them (Compania Maritima v. Insurance Art. 366 COGSA
Company of North America, 12 SCRA 213) Code of Commerce
Notice of damage is a Notice of damage not a
Functions: condition precedent condition precedent
1. A receipt for the goods shipped. 24-hour period for non- 3-day period for non-
2. A contract which the three parties apparent damage apparent damage
(shipper, carrier, consignees) undertake No prescriptive period 1-year period
specific responsibilities and assume provided. NCC applies
stipulated obligations.
Does not cover Also does not cover
3. A legal evidence of the contract between misdelivery or delay misdelivery or delay
the shipper and the carrier. Its contents Extrajudicial demand Extrajudicial demand
shall decide all disputes which may arise tolls prescriptive period does not toll
with regard to their execution and prescriptive period
fulfillment. (Magellan Manufacturing v. Parties can stipulate 1-year period cannot
CA, 201 SCRA 2021) shorter period be shortened
 In the absence of a bill of lading, their

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6. Voyage is not maritime but only in a


MARITIME LAW river or gulf

Characteristics: Abandonment
1. Real 1. Indispensable requirement before the
a) Similar to shipowner or ship agent can enjoy the
transactions over benefits of the limited liability principle. The
real property with only instance where such abandonment is
respect to effectivity dispensed with is when the vessel was
against third entirely lost.
persons which is 2. Only the ship owner and the ship agent can
done through make an abandonment
registration 3. What may be abandoned – vessel
b) Evidence of real 4. Instances:
nature is shown by 1. Civil liability from indemnities to
(1) limitation of third persons (Art. 587 Code of
liability of agents to Commerce)
actual value of the 2. Leakage of at least ¾ of
vessel and freight contents of cargo containing liquids (Art.
money; and (2) right 687)
to retain cargo and
embargo and
3. Constructive loss of vessel
detention of vessel (Sec. 138 Insurance Code)
(Luzon Stevedoring
Corp v. CA, 156  See notes on Overland Transportation
SCRA 169) for right of consignee to abandon goods
5. No procedure to be followed
6. No prescriptive period provided not
2. Hypothecary estopped from invoking the same or do acts
i) Liability of owner of vessel is inconsistent with abandonment
limited to the value of vessel 7. May be made to be exempted from the
(Doctrine of Limited Liability) following liabilities:
i. Civil liability to third persons arising from
the conduct of the captain in the
I. DOCTRINE OF LIMITED LIABILITY (1997, vigilance over the goods
1999, 2000 Bar Exams) ii. Proportionate contribution of co-owners
of the vessel to a common fund for the
“No vessel, no liability” results of the acts of the captain referred
 The liability of ship owners is limited to to in Art. 587 Code of Commerce
the amount of interest in said vessel such iii. Civil liability incurred by the ship owner
that where vessel is entirely lost, the in case of collision
obligation is extinguished (Luzon
Stevedoring v. Escano, 156 SCRA 169) Admiralty Jurisdiction
 Interest extends to:  all actions in admiralty and maritime
a. Vessel itself jurisdiction where the claim exceeds
b. Equipments P300,000 or in Metro Manila, exceeds
c. Freightage P400,000 the RTC has jurisdiction (Sec.
d. Insurance proceeds (Chua v. IAC, 166 19(3) BP 129, as amended by RA 7691)
SCRA 183)
II. VESSELS
Exceptions:
1. Where injury or damage is due to  Engaged in navigation, whether
ship owner’s fault coastwise or on the high seas, including
floating docks, pontoons, dredges, scows
2. Vessel is insured and any other floating apparatus destined for
3. Claims under Workmen’s
the services of the industry or maritime
Compensation
commerce. Excluded are local and foreign
4. Expenses for repair on vessel military vessels, bancas and other
before loss watercrafts of less than 3 tons gross
5. Vessel is not abandoned

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capacity and small watercrafts engaged in 2. Contracts of the captain,


river and bay traffic. whether authorized or not, to repair, equip
and provision the vessel, provided that the
Ownership amount claimed was invested for the benefit
1. Acquisition of the vessel (Art. 586)
a. Prescription – (1) acquisition must appear 3. Indemnities in favor of third
in a written instrument, (2) which shall not persons which may arise from the conduct of
produce any effect to third persons if not the captain in the care of the goods which
inscribed in the registry of vessels and (3) the vessel carried, as well as for the safety
shall be acquired by possession in good of the passengers transported
faith, continued for 3 years, (4) with a just 4. Damages to the goods
title duly recorded. (5) In the absence of any loaded on the vessel without prejudice to
of these, continuous possession for 10 years their right to free themselves from liability by
shall be necessary to acquire ownership. abandoning the vessel to the creditors (Art.
587)
b. Sale
 If made while it is on voyage – the Notes:
freightage which it earns from the time it  Liable jointly and severally
receives its last cargo shall pertain  Not liable for an obligation contracted by
entirely to the purchaser, and the the captain in excess of the latter’s powers
payment of the crew and other persons and privileges pertaining to him. However, if
who make up its complement shall be the amount claimed were used for the
for his account. benefit of the vessel, the ship owner or ship
 If made after vessel arrived at port of its agent is liable
destination – freightage shall pertain to
the vendor, and the payment of the crew Captains and Masters of Vessels
and other individuals who make up its
complement shall be for his account,  Nature of Position
unless the contrary is stipulated in either 1. General agent of the
case. ship-owner
2. Technical director of the
2. Registration – through the Maritime vessel
Industry Authority (MARINA) 3. Representative of the
government of the country under whose
Ship’s Manifest - Declaration of the entire flag he navigates
cargo. The object is to furnish customs officers  Qualifications:
with a list to check against, to inform the revenue 1. Filipino citizen
officers what goods are brought into a port of the 2. Legal capacity to contract
country on a vessel. Hence, the requirement that 3. must have passed the required physical and
a vessel must carry a manifest is not complied mental examinations required for licensing
with even if a bill of lading can be presented him as such (Art. 609)
 A bill of lading is just a declaration of a
specific cargo rather than the entire cargo. It
 Supercargoes - Persons who discharge
administrative duties assigned to him by ship
is issued as a matter of convenience by
agent or shippers, keeping an account and
virtue of a contract.
record of transaction as required in the
accounting book of the captain (Art. 649)
III. PARTIES

1. Ship-owners and ship


IV. CHARTER PARTY
agents
2. Captains and masters of the
vessel  Contract by which an entire ship, or
3. Officers and crew of the some principal part thereof is let by the
vessel owner to another person for a specified time
4. Supercargoes or use for the conveyance of goods, in
consideration of the payment of freight
Shipowners and Ship Agents (Caltex Phils. vs. Sulpicio Lines, 315 SCRA
 Liabilities: 709)
1. Acts of the captain (Art. 618)

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LEASE CHARTER PARTY Common carrier Common carrier


If for a definite Charterer may becomes private remains as such
period, lessee rescind charter party
cannot give up lease by paying half of Freight – Parties may fix the manner or form in
by paying a portion freightage agreed which the charter price shall be satisfied
of the amount upon
agreed upon Lay days – period when vessel will be delayed in
If the leased The new owner is the port for loading and unloading
property is sold to not compelled to
one who knows of respect the charter Primage – bonus to be paid to the captain after
the existence of the party so long as he the successful voyage
lease, the new can load the vessel
owner must respect with his own cargo Deadfreight – where the charterer failed to
the lease occupy the leased portion of the vessel, he may
thereby be made liable by the ship-owner
Classes:
1. Bareboat or Demise Charter Demurrage – sum due, by express contract, for
 Charterer provides crew, food and fuel. the detention of the vessel, in loading and
The charterer is liable as if he were the unloading, beyond the time allowed in the
owner, except when such arises from contract of affreightment, and to any other
the unworthiness of the vessel improper detention or delay beyond the time set
for loading
 Owner pro hac vice – a demise
charterer, in spite of the fact that
V. BOTTOMRY AND RESPONDENTIA
somebody else is the owner of the
vessel, is treated as the owner of the
Bottomry – loan made by ship-owner or ship
chartered vessel, just for that one
agent guaranteed by the vessel itself and
particular purpose only.
repayable upon arrival of vessel at destination
Effect: charterer assumes customary
(Art. 719)
rights and liabilities of the ship-owner to
third persons and is held liable for the
Respondentia – loan, taken on security of the
expense of the voyage and the wages of
cargo laden on a vessel, and repayable upon
the seamen
safe arrival of cargo at destination (Art. 719)
2. Contract of Affreightment
Common Requisites: (BDPS²R)
 Owner leases the boat or part of it for
the carriage of goods  Borrows money for use, equipment or
repair of vessel
1. Time charter – vessel is  For a definite term
chartered for a period of time or  With extraordinary interest called
duration of voyage premium
2. Voyage or trip charter –
contract for hire of vessel for one or  Secured by pledge of vessel or portion
series of voyages thereof (in bottomry) or goods
(respondentia)
BAREBOAT OR CONTRACT OF  Loan repayment depends or conditioned
DEMISE CHARTER AFFREIGHTMENT on the safe arrival of the vessel
Charterer becomes Owner remains liable (bottomry) or goods (respondentia)
liable to others caused as carrier and must  Obligation to repay extinguished if
by its negligence answer for any vessel is lost due to specific marine
breach of duty perils in the course or voyage within a
Charterer regarded as Charterer is not limited time, or if pledged goods are lost
owner pro hac vice for regarded as owner
the voyage Formal Requirements:
Owner of vessel Owner retains 1. By means of public instrument
relinquishes possession, 2. Policy signed by the contracting parties and
possession, command command and the broker taking part therein
and navigation to navigation of the ship 3. Private instrument
charterer

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Who may contract: not extinguish the loan extinguishes the same
 Bottomry – ship owner or ship agent.
Outside of the residence of the owners, the
captain. VI. ACCIDENTS
 Respondentia – only the owner of the cargo,
except: (i) on the portion of the vessel he 1. Averages
owns, provided no money has been 2. Collision
previously borrowed on the whole vessel, 3. Arrival Under Stress
nor exists any other kind of lien or obligation 4. Shipwreck
chargeable against her; (ii) when he is
permitted to do so, he must necessarily state Protest– written statement by the master of a
what interest he has in the vessel vessel or any authorized officer, attested by
proper officer or a notary, to the effect that
Exceptions to the Hypothecary Nature of damages has been suffered by the ship.
Bottomry and Respondentia:
1. Loss due to inherent defect Required in the following instances:
2. Loss due to the barratry on the part of 1. Vessel makes an arrival under stress
the captain 2. Vessel is shipwrecked
3. Loss due to the fault of malice of the 3. Vessel has gone through hurricane or
borrower the captain has suffered damages or
4. Vessel was engaged in contraband averages
5. Cargo loaded on the vessel be different 4. Maritime collisions
in form that agreed upon
Note: Should be made within 24 hours following
When Bottomry/Respondentia Regarded as the arrival of the vessel at the first port.
Simple Loan Upon arrival at the place of destination, the
1. Lender loaned an amount larger captain shall ratify the protest within 24
than the value of the object due to hours.
fraudulent means employed by borrower
(Art. 726) Averages
2. Full amount of the loan is not 1. An extra-ordinary or
accidental expense incurred during the
used for the cargo or given on the goods
voyage in order to preserve the cargo,
if all of them could not have been
vessel or both; and
loaded, the balance will be considered a
simple loan (Art. 727) 2. All damages or
3. If the effects on which the deterioration suffered by the vessel from
departure to the port of destination, and
money is taken is not subjected to any
to the cargo from the port of loading to
risk (Art. 729)
the port consignment (Art. 806)
BOTTOMRY/ ORDINARY LOAN
 Classes of Averages
RESPONDENTIA
1. Particular or Simple Average
May or may not have a Must have collateral
(i) Damage or expenses caused to the
collateral
vessel or cargo that did not inure to common
Collateral may be any Must be vessel or
benefit, and (ii) borne by respective owners
property cargo subject to
(Art. 809)
maritime risks
2. Gross or General Average
Absolutely repayable Depends upon the safe
arrival of the collateral a. Damage or expenses deliberately
at the port caused in order to save the vessel, its
Need not be in writing Must be in writing cargo or both from real and known risk
but interest shall not (Art. 811)
be due unless b. All the persons having an interest in the
expressly stipulated in vessel and the cargo therein at the time
writing of the occurrence of the average shall
Need not be registered Must be recorded in contribute to satisfy this average (Art.
to bind third persons the registry of vessels 812)
of the port of registry of c. Requisites:
the vessel 1. Common danger
Loss of collateral does Loss of collateral present

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2. Arising from accidents and time of impact


of sea, disposition of authority  Error in Extremis – sudden movement
3. Peril imminent and made by a faultless vessel during the third
ascertained zone of collision with another vessel which is
4. Part of vessel or cargo at fault during the second zone. Even if such
deliberately sacrificed sudden movement is wrong, no
5. Intended to save vessel responsibility will fall on said faultless vessel
or cargo or both (Urrutia and Co. v. Baco River Plantation, 26
6. Successful saving of Phil. 632)
vessel or cargo  Cases Covered:
7. Proper legal steps and
authority taken
1. One vessel at fault – such vessel is
liable for damage caused to
d. Procedure for recovery:
innocent vessel as well as damages
1. There must be an
suffered by the owners of cargo of
assembly of the sailing mate and other
both vessels
officers with the captain including
those with interests in the cargo 2. Both vessels at fault – each vessel
2. Resolution of the must bear its own loss, but the
captain shippers of both vessels may go
3. The resolution must be against the ship owners who will be
entered in the logbook, with reasons solidarily liable
and motives and the votes for and 3. Vessel at fault not known
against the resolution
4. The minutes shall be Doctrine of “Inscrutable Fault” (1997 Bar
signed by the parties Exam)
5. The captain shall deliver  In case of collision where it cannot be
a copy of the minutes to the maritime determined which between the two
judicial authority of the first port he vessels was at fault, both vessels bear
may make, within 24 hours after his their respective damage, but both should
arrival, and to ratify it immediately be solidarily liable for damage to the
under oath (Art. 813-814) cargo of both vessels.

York-Antwerp Rules on determining liability 4. Third vessel at fault – same rule as


for contribution on averages: (1)
1. Deck cargo is permitted in coastwise 5. Fortuitous event – each bears its
shipping but prohibited in overseas shipping own loss
2. Overseas trade – must always contribute to  Procedure:
general average, but should the same be 1. Protest should be made within
jettisoned, it would not be entitled to 24 hours before the competent authority
reimbursement because there is violation of at the point of collision or at the first port
the Y-A Rules of arrival, if in the Philippines and to the
3. Coastwise shipping – must always Philippine consul, if the collision took
contribute to general average and if place abroad (Art. 835)
jettisoned would be entitled to
2. Injuries to persons and damage
reimbursement
to cargo of owners not on board on
collision time need not be protested (Art.
Collision – Impact of two vessels both of which
836)
are moving
Arrival under Stress
 Allision - Impact between a moving  Arrival of a vessel at a port of destination
vessel and a stationary one
on account of lack of provision, well-founded
 Zones of Time in the Collision of fear of seizure, pirates, or accidents of sea
vessels: disabling navigation (Art. 819)
1. First zone - all time up to the moment when  When Not Lawful:
risk of collision begins 1. Lack of provisions due to negligence to carry
2. Second zone - time between moment when according to usage and customs
risk of collision begins and moment it 2. Risk of enemy not well known or manifest
becomes a practical certainty; 3. Defect of vessel due to improper repair; and
3. Third zone - time when collision is certain 4. Malice, negligence, lack of foresight or skill

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of captain (Art. 820) b. Exposed to


 Who Bears Expenses: marine peril
1. The ship-owner or ship agent except for c. Voluntary
damages caused by the shippers by reason salvage services
of a lawful arrival (Art. 821) d. Success in
2. The captain shall be liable for damages whole or in part, or that services
caused by his delay, if after the cause of the contributed to success
arrival under stress has ceased, he  Rules on Salvage Award
continues the voyage (Art. 825) (1) Fixed by RTC in the absence of
 Procedure: agreement or where the latter is excessive
1. Captain determines during the voyage if (Sec. 9)
there is well founded fear of seizure, (2) If sold (no claim being made
privateers and other valid grounds within 3 months from publication)
2. He shall then assemble the officers a. Proceeds, after deducting expenses and
3. He shall summon the persons interested the salvage claim, shall go to the owner
in the cargo who may be present and who b. If he does not claim it within 3 years,
may attempt but without right to vote 50% of the said proceeds shall go to the
4. The officers determine and agree if there salvors, and the other half to the
is well founded reason after examining the government (Secs. 11-12)
circumstances. The captain shall have the 3. If a vessel is the salvor, the reward shall be
deciding vote distributed as follows:
5. The agreement shall be drafted and the a. 50% to ship owner
proper minutes shall be signed and entered b. 25% to captain
in the log book
6. Objections and protests shall likewise
c. 25% to officers and crew in proportion to
entered in the minutes their salaries (Sec. 13)
 Persons Without Right to a Salvage
Shipwreck Reward:
 Denotes all types of loss/ wreck of a 1. Crew of the vessel saved
vessel at sea either by being swallowed up 2. Persons who commenced salvage in
by the waves, by running against another spite of opposition of the captain or his
vessel or thing at sea or on coast where the representative
vessel is rendered incapable of navigation 3. Person who fails to deliver a salvaged
vessel or cargo to the Collector of
Customs (Sec. 3)
SALVAGE LAW (Act 2616)
 Towage - contract whereby one vessel,
 Salvage - Compensation allowed to usually motorized, pulls another from one
persons by whose voluntary assistance a place to another, for compensation. It is a
ship at sea or her cargo or both have been contract for services rather than a contract of
saved in whole or in part from an impending carriage.
or actual peril, shipwrecks, derelicts or
recapture SALVAGE TOWAGE
- Services one person render to the Governed by special Governed by NCC
owner of a ship or goods, by his own labor, law (Act No. 2616) on contract of lease
preserving the goods or the ship which the Requires success, Success not required
owner or those entrusted with the care of otherwise no
them have either abandoned in distress at payment
sea, or are unable to protect or secure Must be done with Only the consent of
the consent of the the tugboat owner is
 Derelict – Ship or her cargo which is captain/crewmen needed
abandoned and deserted at sea by those Vessel must be Vessel need not be
who were in charge of it, without any hope of involved in an involved in an
recovering it, or without any intention of accident accident
returning to it Fees distributed Fees belong to the
 Requisites for Salvage Award: among crewmen tugboat owner
a. Valid object of Salvor takes Tower has no
salvage possession and may possessory lien; only
retain possession an action for sum of

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until he is paid money against the insurer for the insurance


Court can reduce Court cannot change proceeds. The claim against the insurer
amount of amount in towage is based on contract that expires in 10
renumeration if even if years (Mayer Steel Pipe Corp. vs. CA
unconscionable unconscionable 274 SCRA 432)
d. If there is no delivery in case of
undelivered or lost cargo the one-year
CARRIAGE OF GOODS BY SEA ACT (CA 65) period starts to run from the day the
(1995, 2000, 2004) vessel left port
 Requisites: e. When interrupted
1. Contracts for carriage of goods i. Action is filed in court
2. By sea ii. Contrary agreement between parties
3. To and from Philippine ports 4. Delivery to the wrong person –
4. In foreign trade prescriptive period is (i) 10 years
 Shipper guarantees at time of shipment because there is a breach of contract, or
the accuracy of marks, number quantity and (ii) 4 years for quasi-delict (Ang v.
weight as furnished by him. He shall American SS Agencies (19 SCRA 631)
indemnify the carrier against all loss,  Delay or late delivery are not the
damages and expenses arising from damage or loss contemplated under
inaccuracies in such particulars the COGSA. The goods are not
 To recover loss or damage to cargo, actually lost or damaged. The
notice and general nature thereof in writing applicable period is 10 years (Mitsui
must be given by the shipper or consignee vs. CA 287 SCRA 366)
to the carrier or his agent at the port of  Liability under COGSA:
discharge or at the time of removal of the 1. Maximum of $500 per package or, if not
goods shipped in packages, per customary
• If loss/damage not apparent – freight unit (e.g. metric ton)
within 3 days from delivery 2. Nature and value of goods may be
• May be endorsed upon receipt declared by shipper and inserted in bill
for the goods given by the person taking of lading; declaration is prima facie
delivery thereof evidence and not conclusive on carrier
• Need not be given if the state of 3. Shipper and carrier may agree on
goods at the time of their receipt has another maximum amount, but not more
been the subject of joint inspection than the amount of damage actually
 Prescriptive Periods: sustained
1. To give notice if loss or damage is  No Liability under COGSA:
1. Nature or value of goods knowingly and
apparent – notice in writing must be
fraudulently misstated by shipper
given to carrier or agent at time of
2. Damage resulted from dangerous nature
removal of goods by persons entitled to
of shipment loaded without consent of
delivery.
carrier
2. To give notice if not apparent – within 3 3. Unseaworthiness not due to negligence
days from delivery. of carrier
3. To bring suits – 1 year after delivery or 4. Deviation was to save life or property at
when goods should have been delivered sea
a suit must be filed (whether notice of
loss/damage is given), otherwise SHIP MORTGAGE DECREE
prescribed.
a. Stipulation reducing the 1 year period is Purpose: To accelerate the growth and
null and void, but a written agreement to development of the shipping industry in the
suspend it is valid (Maritime Company Philippines and to finance the acquisition,
of the Philippines vs. CA, 164 SCRA construction, purchase or initial operation of
593) vessels
b. An extra-judicial demand does not
suspend the period Salient Features: Recognizes the creation of
c. An insurer who is exercising its right of preferred mortgage that must be satisfied prior
subrogation is also bound by the 1-year to all other claims and it allows for the arrest of
period (Fil. Merchants vs. Alejandro 145 the vessel which in effect treats the vessel itself
SCRA 42). It does not apply to a claim as the defendant in an action

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whether or not there be a break in the


 Preferred Mortgage Lien - One transportation or transshipment
constituted for the financing, acquisition, 2. Within the territory of a single
purchase, construction and initial operation High Contracting Party, if there is an
of vessels under the provisions of PD 1521 agreed stopping place within a territory
• Requisites subject to the sovereignty, mandate or
a. Recorded in MARINA authority of another power, even though
b. Affidavit of good faith that power is not a party to the
c. Mortgage does not stipulate Convention (“round trip”)
the waiver of preferred Note: Absence of agreement concerning
status of claim stopping place – transportation not deemed
d. Mortgage must be valid international for purposes of the WC
e. Mortgage includes the
whole vessel of domestic  When Not Applicable:
ownership 1. If there is willful misconduct on the part
• If Vessel is of Foreign Ownership of the carrier’s employees (PAL v. CA,
– it will be recognized if: 257 SCRA 33).
1. Mortgage, hypothecation or 2. When it contradicts public policy
similar charge has been duly and validly 3. If requirements under WC are not
executed in accordance with the laws of complied with
the country under which the vessel is  Liability of Air Carriers
documented
1. Death or injury of a passenger if the accident
2. Same has been duly registered
causing it took place on board the aircraft or
in accordance with such laws in a public
in the course of its operations (Art. 17)
register – either at the port of registry of
vessel or at a central office 2. Destruction, loss or damage to any luggage
or goods, if it took place during the carriage
 Claims Preferred Over a Preferred (Art. 18)
Mortgage Lien: 3. Delay in the transportation of passengers,
1. Taxes luggage or goods (Art. 19)
2. Judicial costs Note: The Hague Protocol amended the
3. Pilotage and tonnage charges and other Warsaw Convention by removing the provision
sea and port charges that if the airline took all necessary steps to
4. Salaries of depositaries and keepers of avoid the damage, it could exculpate itself
vessel completely (Art. 20(1)) (Alitalia v. IAC, 192
5. Captain and crew’s wages SCRA 9)
6. General average  Action for Damages
7. Salvage 1. Condition precedent
8. Prior maritime liens a. Written complaint (protest) must me
9. Damages arising out of tort made:
10. Prior preferred mortgage lien i. Damage to baggage – 3
days from receipt
WARSAW CONVENTION OF 1929 ii. Damage to goods – 7 days
from receipt
Scope iii. Delay – 14 days from
1. International transport by air receipt
2. Transport of persons, baggage b. Otherwise the action is barred except in
or goods case of fraud on the part of the carrier
(Art. 26)
Note: Warsaw Convention prevails over the Civil
2. Jurisdiction – governed by domestic law
Code, Rules of Court and all laws in the
Philippines since an international law prevails 3. Venue – at the option of the plaintiff:
over general law. a. Court of domicile of carrier
b. Its principal place of business
 International Transportation by Air – c. Where it has a place of business
any transportation in which the place of through which the contract has been
departure and the place of destination are made
situated either:
d. Place of destination (Art. 28)
1. Within the territories of two High
Note: The above enumeration cannot be
Contracting Parties regardless of waived, but are jurisdictional in nature

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(Santos III vs. Northwest Orient Airlines 210 until they have reached their final
SCRA 256) destination (Philippine Airlines v. CA,
4. Prescriptive period – 2 years from: 226 SCRA 423)
1. Arrival at the destination 2. Even where overbooking of passengers
2. Expected arrival is allowed as a commercial practice, the
3. Date on which the transportation airline company would still be guilty of
stopped (Art. 29) bad faith and still be liable for damages
5. Rule in case of various successive if it did not properly inform passenger
carriers that it could breach the contract of
1. In case of transportation of passengers carriage even if they were confirmed
– action is filed only against the carrier in passengers (Zalamea v. CA, 228 SCRA
which the accident or delay occurred unless 23)
there is an agreement whereby the first 3. An open-dated ticket constitutes a
carrier assumed liability for the whole complete contract between the carrier
journey. and passenger. Hence, the airline
2. Transportation of baggage or goods company is liable if it refused to confirm
i. Consignor can file an action a passenger’s flight reservation
against the first carrier and (Singson v. CA, 282 SCRA 149)
the carrier in which the 4. An airline company which issued a
damage occurred confirmed ticket to a passenger covering
ii. Consignee can file an action successive trips on different airlines can
against the last carrier and be held liable for damages occasioned
the carrier in which the by “bumping off” by one of the
damage occurred successive airlines (Lufthansa German
iii. These carriers are jointly Airlines v. CA, 238 SCRA 290)
and severally liable (Art. 30) 5. An airline ticket providing that carriage
 Limit of Liability by successive air carriers is to be
regarded as a “single operation” is to
 Passengers – $10,000 to
make the issuing carrier liable for the
$100,000 tortuous conduct of the other carrier. A
except: agreement to a higher limit printed provision in the ticket limiting
 Checked-in baggage – $20 / kg liability only to its own conduct is not
except: consigner declared its value and enough to rebut that liability (KLM Royal
paid a supplementary sum, carrier liable to Dutch Airlines v. CA, 65 SCRA 237)
not more than the declared sum unless it
proves the sum is greater than its actual PUBLIC SERVICE ACT
value (CA 146, as amended)
 Hand-carry baggage – $400 to (1995, 1998, 2000 Bar Exams)
$1000 / passenger (Art. 22 as amended
by Guatemala Protocol, 1971; Alitalia v. “Public Service” - Includes any person
IAC, supra) who may own, operate, manage, or
• An agreement relieving the carrier control in the Philippines for hire or
from liability or fixing a lower limit is compensation, with general or limited
null and void (Art. 23) clientele, whether permanent, occasional
or accidental, and done for general
• Carrier not entitled to the foregoing business purposes, any common carrier,
limit if the damage is caused by his railroad, street railway, traction railway,
willful misconduct or default (Art. 25) subway motor vehicle, steamboat, or
 Special Rules on steamship line, ferries, and water craft,
Liabilities of Airline Carriers: shipyard, ice-plant, electric light, heat
1. In case of flight diversion due to bad and power or any public utility (Sec.
weather or other circumstances beyond 13(b) Commercial Act 146)
the pilot’s control, the relation between
carrier and passenger continues until  A casual or incidental service devoid of
the latter has been landed at the port of public character and interest is not brought
destination and has left the carrier’s within the category (Luzon Stevedoring vs.
premises. The carrier should exercise PSC, 156 SCRA 169)
extraordinary diligence in safeguarding
the safety of its stranded passengers Certificate of Public Convenience

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No public service shall operate without 3. Where operator totally abandons the
having been issued a certificate of public service (Manzanal vs. Ausejo, 164
convenience (no franchise is required by SCRA 36)
law, e.g. common carriers) or a certificate of
public convenience and necessity (a prior NOTICE AND WHEN NOT
franchise is required by law, e.g. telephone HEARING REQUIRED REQUIRED
and other services) (Sec. 15 Comm. Act a. Issuance of 1. Investigation of
146) Certificate any matter
• Exceptions: b. Fixing of rates, concerning public
1. Warehouses tolls and charges service
2. Animal drawn vehicles and bancas c. Setting up of 2. Requiring
moved by oar or sail; tugboats standards and operators to
3. Airships, except for the fixing of classifications furnish safe,
maximum rates for fare and freight d. Establishment adequate and
4. Radio companies, except for rates fixing of rules to secure proper service
5. Public services owned or operated by accuracy of all 3. Requiring public
the government, except as to rates fixing meters and all services to pay
6. Ice plants measuring expenses of
7. Public markets appliances investigation
• The certificate constitutes neither a e. Issuance of 4. Valuation of
franchise nor a contract, confers no orders requiring properties of
property right, and is a mere license or establishment or public utilities
privilege. The holder of said certificate maintenance of 5. Examination and
does not acquire a property right in the extension facilities test of measuring
route covered thereby. Nor does it f. Revocation of appliances
confer any property right, interest or modification of 6. Grant of special
interest in the public highways. Certificate permits to make
Revocation of this certificate deprives g. Suspension of extra or special
him of no vested right. New and Certificate (except trips in territories
additional burdens, alteration of the when it is specified in
certificate, or even revocation or necessary to avoid certificate
annulment thereof is reserved to the serious and 7. Uniform
State (Luque vs. Villegas, 30 SCRA irreparable accounting
408) damage or system and
• It is a “property” and has a inconvenience to furnishing of
considerable value and can be the the public or annual reports
subject of sale or attachment (Coque- private interest, in 8. Compelling
Cubao Operators vs. CA, 207 SCRA which case, a compliance with
343) suspension not the laws and
more than 30 days regulations
 Requirements for granting may be ordered
certificate: prior to the
1. Citizen of the Philippines, or a corporation, hearing)
etc. constituted and organized under the
laws of the Philippines at least 60% of its
stock or paid-up capital must belong entirely CORPORATION CODE OF THE PHILIPPINES
to citizens of the Philippines (BP 68)
2. Financially capable of undertaking the
proposed service
3. Proof of public necessity, interest and GENERAL PROVISIONS
convenience (KMU vs. Garcia, Jr., 239
SCRA 386) Corporation is an artificial being created by
operation of law, having the right of succession
 Grounds for revocation of certificate: and the powers, attributes and properties
1. Where holder is a mere dummy expressly authorized by law or incident to its
2. Where operator ceased operation and existence. (Sec. 2)
placed his buses on storage
Attributes of a Corporation(CARP)
1. It is an artificial being.

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2. It is created by operation of law. • Protection against


3. It enjoys the right of succession. unreasonable searches and
seizures
4. It has the powers, attribute and
Note: A corporation is not entitled to
properties expressly authorized by law
invoke the right against self-
or incident to its existence.
incrimination. (Bataan Shipyard vs
PCGG)
Theories on the Formation of a Corporation:
7. Liability for torts – a corporation is
1. Concession theory – a corporation is an liable whenever a tortuous act is
artificial creature without any existence until
committed by an officer or agent
it has received the imprimatur of the state
under the express direction or
acting according to law, through the SEC.
authority of the stockholders or
2. Theory of corporate enterprise or economic members acting as a body or
unit – the corporation is not merely an generally, from the directors as the
artificial being, but more of an aggregation of governing body.
persons doing business, or an underlying 8. A corporation is not entitled to moral
business unit.
damages because it has no feelings,
3. Genossenschall theory – treats the no emotions, no senses (ABS-CBN
corporation as the reality of the group as a vs CA)
social and legal entity independent of state 9. Liability for crimes – since a
recognition and “concession.”
corporation is a mere legal fiction, it
Doctrine of Separate Personality (1996, 1999,
cannot be held liable for a crime
2000 Bar Exams)
committed by its officers, since it
 A corporation has a juridical personality does not have the essential element
separate and distinct from that of its of malice; in such case the
stockholders or members. responsible officers would be
 Consequences: criminally liable (People vs Tan
1. Liability for acts or contracts- Boon Kong, 54 Phil 607)
obligations incurred by a
corporation, acting through its Doctrine of Piercing the Veil of Corporate
authorized agents are sole its sole Entity (1998, 2001, 2004, 2006 Bar Exams)
liabilities (Creese vs CA, 93 SCRA  Requires the court to see through the
483) protective shroud which exempts its
2. Right to bring actions – may bring stockholders from liabilities that they
civil and criminal actions in is own ordinarily would be subject to, or
name in the same manner as distinguishes a corporation from a seemingly
natural persons. separate one, were it not for the existing
3. Right to acquire and possess corporate fiction (Lim vs CA, 323 SCRA 102)
property – property conveyed to or  Extent: The application of the doctrine to a
acquired by the corporation is in law particular case does not deny the
the property of the corporation itself corporation of legal personality for any and
as a distinct legal entity and not that all purposes, but only for the particular
of the stockholders or members. transaction or instance for which the doctrine
4. Acquisition of court of jurisdiction – was applied (Koppel v. Yatco 77 Phil. 496)
service of summons may be mad on  Rules:
the president, general manager, 1. has only a res
corporate secretary, treasure or in- judicata effect
house counsel (Sec 11, Rule 14, 2. to prevent wrong or
Rules of Court) fraud and not available for other
5. Changes in individual membership - purposes;
Remains unchanged and unaffected 3. judicial prerogative
in its identity by changes in its only;
individual membership 4. must be with
6. Entitlement to constitutional necessary and factual basis
guarantees:
• Due Process BAR QUESTION (Q): XYZ Corp. owns
• Equal protection of the law a beach resort with several cottages. A,
the President of XYZ Corp. occupied
one of the cottages for residential

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purposes. After A’s term expired, XYZ 3. Such control and breach of duty must
wanted to recover possession of the proximately cause the injury to the
cottage. A refused to surrender the plaintiff. (proximate cause)
cottage, contending that as a
stockholder and former President, he Distinctions between Corporation and
has the right to enjoy the properties of Partnership
the corporation. Is A’s contention CORPORATION PARTNERSHIP
correct? Explain. 1. Creation
SUGGESTED ANSWER (SA): A’s Created by operation Created by agreement
contention is not correct. A may own of law; of the parties;
shares of stock of XYZ Corp. but such
ownership does not entitle him to the
possession of any specific property of 2. Numbers of incorporators
the corporation or a definite portion 2. Requires at least 5 2. Requires at least 2
thereof. Neither is he a co-owner of incorporators; partners;
corporate property. Properties
registered in the name of the
3. Commencement of juridical personality
corporation are owned by it as an entity
separate and distinct from that of its Acquires juridical Acquires juridical
stockholders. Stockholders like A can personality from the personality form the
only own shares of stock in the date of issuance of the moment of execution
corporation. Such shares of stock do not certificate of of the contract of
represent specific corporate property. incorporation by the partnership
(Rebecca Boyer-Roxas vs. CA, 211 Securities and
SCRA 470) Exchange Commission

3 Classes of Piercing: (FAE)


4. Powers
1. Fraud Cases – when a corporation is used
Corporation can Partnership may
as a cloak to cover fraud, or to do wrong.
exercise only the exercise any power
2. Alter Ego Cases – when the corporate entity powers expressly authorized by the
is merely a farce since the corporation is an granted by law or partners (provided it is
alter ego, business conduit or instrumentality implied from those not contrary to law,
of a person or another corporation granted or incident to morals, good customs,
3. Equity cases – when piercing the corporate its existence public order, public
fiction is necessary to achieve justice or policy)
equity.
Instrumentality / Alter Ego Rule 5. Management
 Where one corporation is so organized and The power to do the When management is
controlled and its affairs are conducted so business and manage not agreed upon, every
that it is, in fact, a mere instrumentality or its affairs is vested partner is an agent of
adjunct of the other, the fiction of the in the board of the partnership
corporate entity of the “instrumentality” may directors and trustees
be disregarded. 6. Effect of mismanagement
• Requisites: The suit against a A partner as such can
1. There must be control, not mere majority member of the board sue a co-partner who
or complete stock control, but complete of directors or trustees mismanages
domination, not only of finances, but of who mismanages must
policy, and business practice in respect be in the name of the
to the transaction attacked so that the corporation
corporate entity as to this transaction 7. Right of succession
had, at that time, no separate mind, will Has right of Has nor right of
or existence of its own (control); succession succession
2. Such control must have been used by
the defendant to commit fraud or wrong, 8. Extent of liability to third persons
to perpetrate the violation of a statutory
or other positive duty, or dishonest and
unjust act in contravention of plaintiff’s
legal rights (breach of duty); and

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Stockholders are liable Partners are liable PRIMARY


only to the extent of personally and SECONDARY
the shares subscribed subsidiarily 1. Refers to the 1. Refers to the
by them (sometimes solidarily) franchise of being exercise of rights.
for partnership debts or existing as a Example: right of
to third persons corporation eminent domain
2. Vested in the 2. Vested in the
9. Transferability of interests individuals who corporation after its
Stockholder has Partner cannot transfer compose the incorporation and not
generally the right to his interest in the corporation upon the individuals
transfer his shares partnership so as to who compose it
without prior consent make the transferee a 3. It cannot be sold 3. It may be sold or
of the other partner without the or transferred transferred; subject
stockholders because unanimous consent of because it is to sale on execution,
a corporation is not all existing partners inseparable from subject to levy
based on this principle because the the corporation
partnership is based itself.
on the principle of
delectus personarum Classes of Corporations:
1. AS TO ORGANIZERS:
10. Term of existence a. Public – by State only; and
May not be formed for May be established for b. Private – by private persons alone or
a term in excess of 50 any period of time with the State.
years extendible to no stipulated by the 2. AS TO FUNCTIONS:
more than 50 years in partners
any one instance
a. Public – government of a portion of the
territory; and
11. Firm name b. Private – usually for profit-making
May adopt any name Limited partnership is c. Quasi-public – those private corps.
provided it is not the required by law to add which have accepted from the state the
same as or similar to the word “Ltd” to its grant of a franchise or contact involving
any registered firm name the performance of public duties.
name 3. AS TO GOVERNING LAW:
12. Dissolution a. Public – Special Laws; and
Can only be dissolved May be dissolved at b. Private – Law on Private
with the consent of the any time by or all of Corporations
State the partners 4. AS TO LEGAL STATUS:
13. Governing Law a. De jure corporation – organized in
Governed by the Governed by the Civil accordance with the requirements of
Corporation Code Code law.
b. De facto corporation – organized with a
Franchises of Corporations: colorable compliance with the
1. Primary or corporate franchise requirements of a valid law. Its existence
 The right or privilege granted by the cannot be inquired collaterally. Such
State to individuals to exist and act as a inquiry may be made by the Solicitor
corporation after its incorporation. General in a quo warranto proceeding.
2. Secondary or special franchise  Requisites:
 The special right or privilege conferred 1. The existence of a valid
upon an existing corporation to the law under which it may be
business for which it was created. incorporated;
Example, use of the streets of a 2. A bona fide attempt in
municipality to lay pipes or tracks, or good faith to incorporate
operation of a messenger and express under such law;
delivery service. 3. Actual use or exercise in
good faith of corporate
powers; and
4. Issuance of certificate of
incorporation by the SEC

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as a minimum requirement  The board of directors of the parent


of continued good faith company determines its
Note: The only difference between a de representatives to attend and vote in
facto corporation and a de jure the stockholder’s meeting of its
corporation is that a de jure subsidiary.
corporation can successfully resist a suit  The stockholders of the parent
by a state brought to challenge its company demand representation in
existence; a de facto corporation cannot the board meetings of its subsidiary.
sustain its right to exist. 7. AS TO PLACE OF INCORPORATION:
c. Corporation by estoppel – group of a. Domestic corporation - a corporation
persons that assumes to act as a formed, organized, or existing under
corporation knowing it to be without Philippine laws.
authority to do so, and enters into a b. Foreign corporation – a corporation
transaction with a third person on the formed, organized, or existing under any
strength of such appearance. It cannot laws other than those of the Philippines.
be permitted to deny its existence in an
action under said transaction. It is Quasi-Corporation Public Corporation
neither de jure nor de facto.
1. Possesses only 1. A full corporation;
d. Corporation by prescription – one which some corporate
has exercised corporate powers for an powers, therefore, not
indefinite period without interference on a full corp.
the part of the sovereign power, e.g. 2. Organized for the
Roman Catholic Church. 2. Organized to aid the government of a
5. AS TO EXISTENCE OF SHARES OF state in some public or portion of the state.
STOCK: state work other than
a. Stock corporation – a corporation: the government of a
1. whose capital stock is portion thereof.
divided into shares and
2. which is authorized to Quasi-Corporation Quasi-Public
distribute to shareholders Corporation
dividends or allotments of 1. Not a full corp.; 1. A full corp.;
the surplus profits on the
basis of the shares held. 2. An instrumentality of 2. An instrumentality of
b. Non-stock Corporation – does not issue the state. private individuals.
stocks nor distribute dividends to their
members. De Facto Corporation by
6. AS TO RELATIONSHIP OF MANAGEMENT Corporation Estoppel
AND CONTROL: 1. Has a real 1. No real existence in
existence in law; law but it is a mere
a. Holding corporation - it is one which
fiction existing only for
controls another as a subsidiary by the
a particular case;
power to elect management.
b. Subsidiary corporation
2. Cannot exist unless
1. Majority-owned subsidiary – where
2. May exist even if there are dealings
one corporation owns 51% to 94%
there are no dealings between the parties on
of the capital stock of another
between the parties a corporate basis.
corporation.
on a corporate basis.
2. Wholly-owned subsidiary – where
(2004 Bar Exam)
one corporation holds 95% to 100%
of the capital stock of another
corporation. Concept of Going Public and Going Private
A corporation is deemed to be ‘going public’
c. Affiliates - company that is subject to
when it decides to list its shares in the stock
common control of a mother holding
exchange. These include corporations that will
company and operated as part of the
make initial public offering of its shares. A
system.
corporation is said to be ‘going private’ when it
d. Parent and Subsidiary Corporation - would restrict the shareholders to a certain
separate entities with power to contract group. In a sense, these also include closed and
with each other. closely held corporation. (Phil. Corporate Law
Compendium, T. Aquino, 2005 ed.)

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One Man Corporation the Articles and acknowledged the same before
A corporation wherein all or substantially all of a notary public. They have no powers beyond
the stocks is held directly or indirectly by those vested in them by the statute.
one person. However, it should still follow  Qualifications:
the formal requirements of a corporation 1. natural person;
(e.g. number of incorporators, board of 2. not less than 5 but not more
directors composed of stockholders owning than 15;
shares in a nominal capacity) in order to 3. of legal age;
validly enjoy the attributes of the 4. majority must be residents of the
corporation, so as to avoid the application Philippines; and
of the doctrine of piercing the veil of 5. each must own or subscribe to
corporate entity.
at least one share.
General Rule: Only natural persons can be
Tests to Determine Nationality of Corporation
incorporators.
1. INCORPORATION TEST – determined by
Exception: When otherwise allowed by law,
the state of incorporation, regardless of the
e.g., Rural Banks Act of 1992, where
nationality of the stockholders.
incorporated cooperatives are allowed to be
2. DOMICILE TEST – determined by the state
incorporators of rural banks.
where it is domiciled.
Note: However, it is undeniable that
 The domicile of a corporation is the place corporations can be corporators.
fixed by the law creating or recognizing it; in the c. Stockholders – owners of shares of stock in a
absence thereof, it shall be understood to be the stock corporation
place where its legal representation is d. Members – corporators of a corporation which
established or where it exercise its principal has no capital stock
functions.
3. CONTROL TEST – determined by the
INCORPORATORS CORPORATORS
nationality of the controlling stockholders or
signatory to the stockholder (stock
members. This test is applied in times of war.
Articles of corporation) or
Also known as the WARTIME TEST.
Incorporation member (non-
stock corporation)
“Philippine National” under the Foreign
fait accompli; they may cease to
Investment Act (R.A. No. 7042):
accomplished fact be such if they
1. A corporation organized under the laws of the
(the Articles of subsequently lose
Philippines of which at least 60% of the
Incorporation cannot their qualifications
outstanding capital stock entitled to vote is
be amended to
owned and held by Filipino citizens;
replace them)
2. A foreign corporation licensed as doing
business in the Philippines of which 100% of the number is limited to no restriction as to
outstanding capital stock entitled to vote is 5-15 number
wholly owned by Filipinos; and must have may be such
 However, it provides that where a corporation contractual capacity through a
and its non-Filipino stockholders own stocks in a guardian
SEC-registered enterprise, at least 60% of the
capital stock outstanding and entitled to vote of Other Components
both corporations and at least 60% of the a. Promoter - A person who, acting alone or with
members of the board of directors of both others, takes initiative in founding and organizing
corporations must be Filipino citizens (double the business or enterprise of the issuer and
60% rule). receives consideration therefor.
NOTE: The law applies the control test both with  He is an agent of the incorporators but not of
respect to the ownership of shares entitled to the corporation.
vote and the membership in the board of  Contracts by the promoter for and in behalf
directors. of a proposed corporation generally bind
only him, subject to and to the extent of his
Components of a Corporation representations, and not the corporation,
a. Corporators – those who compose a unless and until after these contracts are
corporation, whether as stockholders or ratified, expressly or impliedly, by its Board
members of Directors/Trustees.
b. Incorporators - They are those mentioned in b. Subscriber – persons who have agreed to
the Articles of Incorporation as originally forming take and pay for original, unissued shares of a
and composing the corporation, having signed corporation formed or to be formed.

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c. Underwriter – a person who guarantees on a by purchase, donation, and redemption or


firm commitment and/ or declared best effort through some lawful means. (Sec. 9)
basis the distribution and sale of securities of  If purchased from
any king by another company. (Sec. 3 R.A. stockholders: The transaction in effect is a
8799) return to the stockholders of the value of
their investment in the company and a
Classification of Shares reversion of the shares to the corporation.
1. COMMON SHARES The corporation must have surplus profits
 The basic class of stock ordinarily and with which to buy the shares so that the
usually issued without extraordinary rights transaction will not cause an impairment of
and privileges, and the owners thereof are the capital.
entitled to a pro rata share in the profits of
 If acquired by donation
the corporation and in its assets upon
from the stockholders: The act would
dissolution and, likewise, in the management
amount to a surrender of their stock without
of its affairs without preference or advantage
getting back their investments that are
whatsoever.
instead, voluntarily given to the corporation.
2. PREFERRED SHARES
 Treasury shares need
 Those issued with par value, and
not be sold at par or issued value but may
preferences either with respect to (a) assets
be sold at the best price obtainable,
after dissolution, (b) distribution of dividends,
provided it is reasonable. When treasury
or both, and other preferences.
shares are sold below its par or issued
 Limitations: value, there can be no watering of stock
a. If deprived of voting rights, it shall still be because such watering contemplates an
entitled to vote on matters enumerated in original issuance of shares.
Section 6 paragraph 6.
b. Preference must not be violative of the Code.  Treasury shares have
c. May be issued only with a stated par value. no voting rights as long as they remain in
d. The board of directors may fix the terms and treasury (uncalled and subject to reissue).
conditions only when so authorized by the Reason: A corporation cannot in any proper
articles of incorporation and such terms and sense be a stockholder in itself and equal
conditions shall be effective upon filing a distribution of voting rights will be effectively
certificate thereof with the SEC. lost.
3. REDEEMABLE SHARES  Neither are treasury
 Those which permit the shares entitled to dividends or assets
issuing corporation to redeem or purchase because dividends cannot be declared by a
its own shares. corporation to itself.
5. FOUNDERS' SHARE
 Limitations:
 Shares issued to
a. Redeemable shares may be issued only
organizers and promoters of a corporation in
when expressly provided for in the articles of
consideration of some supposed right or
incorporation;
property.
b. The terms and conditions affecting said
 Shares classified as
shares must be stated both in the articles of
such in the articles of incorporation which
incorporation and in the certificates of stock
may be given special preference in voting
representing such shares;
rights and dividend payments. But if an
c. Redeemable shares may be deprived of
exclusive right to vote and be voted for as
voting rights in the articles of incorporation,
director is granted, this privilege is subject to
unless otherwise provided in the Code.
approval by the SEC, and cannot exceed 5
 Redeemable shares years from the date of approval.
may be redeemed, regardless of the 6. VOTING SHARES
existence of unrestricted retained earnings - Shares with a right to vote.
(Sec. 8), provided that the corporation has, 7. NON-VOTING SHARES
after such redemption, sufficient assets in its  Shares without right to
books to cover debts and liabilities inclusive vote.
of capital stock.
 The law only authorizes
4. TREASURY SHARES
the denial of voting rights in the case of
 Shares that have been redeemable shares and preferred shares,
earlier issued as fully paid and have provided that there shall always be a class
thereafter been acquired by the corporation or series of shares which have complete
voting rights.

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 These redeemable and  Shares with a


preferred shares, when such voting rights value fixed in the certificates of stock and
are denied, shall nevertheless be entitled to the articles of incorporation.
vote on the following fundamental matters: 12. NO PAR VALUE SHARES
(A2 SI2 MID)  Shares having no
a. amendment of Articles of par value but have issued value stated in the
Incorporation certificate or articles of incorporation.
b. adoption and amendment of  Limitations:
by-laws; a. No par value shares cannot have an
c. sale or disposition of all or issued price of less than P5.00;
b. The entire consideration for its issuance
substantially all of corporate property;
constitutes capital so that no part of it should
d. incurring, creating or be distributed as dividends;
increasing bonded indebtedness; c. They cannot be issued as preferred
e. increase or decrease of stocks;
capital stock d. They cannot be issued by banks, trust
f. merger or consolidation of companies, insurance companies, public
capital stock utilities and building and loan association;
g. investments of corporate e. The articles of incorporation must state
funds in another corporation or the fact that it issued no par value shares as
another business purpose; and well as the number of said shares;
h. corporate dissolution f. Once issued, they are deemed fully paid
and non-assessable.
13. STREET CERTIFICATE
8. ESCROW STOCK
 Deposited with a
 A stock certificate
endorsed by the registered holder in blank
third person to be delivered to a stockholder
and transferee can command its transfer to
or his assign after complying with certain
his name from the issuing corporation.
conditions, usually payment of full
14. CONVERTIBLE SHARE
subscription price.
 A share that is
9. OVER-ISSUED STOCK changeable by the stockholder from one
 Stock issued in class to another at a certain price and within
excess of the authorized capital stock. It is a certain period.
also known as spurious stock. Its issuance is 15. FRACTIONAL SHARE
considered null and void.  A share with a
10. WATERED STOCK value of less than one full share.
 A stock issued not
in exchange for its equivalent either in cash, Doctrine of Equality of Shares
property, share, stock dividends, or services.  Where the articles
 “Water” in the of incorporation do not provide for any
stock represents the difference between the distinction of the shares of stock, all shares
fair market value at the time of the issuance issued by the corporation are presumed to
of the stock and the par or issued value of be equal and enjoy the same rights and
said stock. Both par and no par stocks can privileges and are also subject to the same
thus be watered stocks. liabilities.
 It includes Definition of Terms
stocks: 1. CAPITAL STOCK OR LEGAL STOCK OR
a. Issued without consideration. STATED CAPITAL - The amount fixed in the
b. Issued as fully paid when the corporation has corporate charter to be subscribed and paid in
received a lesser sum of money than its par or cash, kind or property at the organization of the
issued value. corporation or afterwards and upon which the
c. Issued for a consideration other than actual corporation is to conduct its operation.
cash, the fair valuation of which is less than its 2. CAPITAL – The value of the actual property or
par or issued value. estate of the corporation whether in money or
d. Issued as stock dividend when there are no property. Its net worth (or stockholder’s equity) is
sufficient retained earnings to justify it. its assets less liabilities.
11. PAR VALUE SHARES 3. AUTHORIZED CAPITAL STOCK - The capital
stock divided into shares with par values. Par
value stocks are required in the case of

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corporations issuing preferred shares, as well as b. The amendment is effected before the
in the case of banks, trust companies, insurance expiration of corporate term, for after dissolution
companies, building and loan associations, and by expiration of the corporate term there is no
public utilities. It is the total amount in the more corporate life to extend.
charter, which may be raised by the corporation c. The extension cannot be made earlier than 5
for its operations. years prior to the expiration date unless there
4. SUBSCRIBED CAPITAL STOCK - The total are justifiable reasons as determined by the
amount of the capital stock subscribed whether SEC.
fully paid or not.
5. OUTSTANDING CAPITAL STOCK - The Capital Stock Requirement
portion of the capital stock issued to subscribers  General Rule: No
except treasury stocks. minimum authorized capital stock as long as
6. STATED CAPITAL – The capital stock divided the paid-up capital is not less than
into no par value shares. P5,000.00
7. PAID-UP CAPITAL – The amount paid by the Except:
stockholders on subscriptions from unissued a. as provided for by special law
shares of the corporation.
1.  Domestic Insurance
Corporations - P500T capital stock; 50%
INCORPORATION AND ORGANIZATION
subscribed and the balance payable in
(2002, 2006 Bar Exams)
12 months.
2. Private Development Banks
Steps in the Creation of a Corporation
- P4M for class A
a. PROMOTION – a number of business
- P2M for class B
operations peculiar to the commercial world by
- P1M for class C
which a company is generally brought into
3. Investment Companies – paid
existence. (18 Am. Jur. 2d 647, cited in de Leon
up at least P500T
p. 116)
4. Savings and Loan Corporation –
b. INCORPORATION
to be fixed by the Monetary Board, but
 Steps: not less than P100T
1. Drafting and execution of Articles of 5. Financing Companies
Incorporation by the incorporators and other Paid up: - P2M for Metro Manila
documents required for registration of the - P1M for Cities
corporation - P500T for others
2. Filing with the SEC of the articles of b. provided that at least 25% of the authorized
incorporation capital stock has been subscribed and at least
3. Payment of filing and publication fees 25% of the total subscription must be paid-up
4. Issuance by the SEC of the certificate of
incorporation Filipino Percentage Ownership Requirement
c. FORMAL ORGANIZATION AND No Foreign Equity
COMMENCEMENT OF THE TRANSACTION 1. Mass Media except recording (Art. XVI, Sec.
OF BUSINESS 11 of the Constitution; Presidential
 These are Memorandum dated 04 May 1994)
conditions subsequent, which may be 2. Practice of all professions
satisfied by substantial compliance in order
that a corporation may legally continue as 3. Retail trade enterprises with paid-up capital
such. of less than US$2,500,000(Sec. 5 of RA
 Formal 8762)
organization: 4. Cooperatives (Ch. III, Art. 26 of RA 6938)
1. Adoption of By-Laws and filing of the same 5. Private Security Agencies (Sec. 4 of RA
with the SEC; 5487)
2. Election of board of directors/trustees, and 6. Small-scale Mining (Sec. 3 of RA 7076)
officers; 7. Utilization of Marine Resources in
3. Establishment of principal office; archipelagic waters, territorial sea, and
4. Providing for subscription and payment of exclusive economic zone as well as small-
capital stock. scale utilization of natural resources in
rivers, lakes, bays, and lagoons (Art. XII,
Term of Existence Sec. 2 of the Constitution)
 Limitations: 8. Ownership, operation and management of
a. The term shall not exceed 50 years in any one cockpits (Sec. 5 of PD 449)
instance.

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9. Manufacture, repair, stockpiling and/or owned or controlled corporation, company,


distribution of nuclear weapons (Art. II, Sec. agency or municipal corporation (Sec. 1 of
8 of the Constitution) RA 5183)
10. Manufacture, repair, stockpiling and/or 23. Project Proponent and Facility Operator
distribution of biological, chemical and of a BOT project requiring a public utilities
radiological weapons and anti-personnel franchise (Art. XII, Sec. 11 of the
mines (Various treaties to which the Constitution; Sec. 2a of RA 7718)
Philippines is a signatory and conventions 24. Operation of deep sea commercial
supported by the Philippines) fishing vessels (Sec. 27 of RA 8550)
11. Manufacture of firecrackers and other 25. Adjustment Companies (Sec. 323 of PD
pyrotechnic devices (Sec. 5 of RA 7183) 612 as amended by PD 1814)
26. Ownership of condominium units where
Up to Twenty Percent (20%) Foreign Equity the common areas in the condominium
project are co-owned by the owners of the
12. Private radio communications network separate units or owned by a corporation
(RA 3846) (Sec. 5 of RA 4726)

Up to Twenty-Five Percent (25%) Foreign


Equity Up to Sixty Percent (60%) Foreign Equity

13. Private recruitment, whether for local or 27. Financing companies regulated by the
overseas employment (Art. 27 of PD 442) Securities and Exchange
14. Contracts for the construction and repair of Commission (Sec. 6 of RA 5980 as
locally-funded public works (Sec. 1 of CA amended by RA 8556)
541, LOI 630) except: 28. Investment houses regulated by the SEC
a) infrastructure/development projects (Sec. 5 of PD 129 as amended by RA 8366)
covered in RA 7718; and
b) projects which are foreign funded or Articles of Incorporation (AI)
assisted and required to undergo  The document
international competitive bidding (Sec. prepared by the persons establishing a
2a of RA 7718) corporation and filed with the SEC
15. Contracts for the construction of defense- containing the matters required by the Code.
related structures (Sec. 1 of CA 541)  Significance:
1. The issuance of a certificate of
Up to Thirty Percent (30%) Foreign Equity incorporation signals the birth of the
corporation’s juridical personality;
16. Advertising (Art. XVI, Sec. 11 of the 2. It is an essential requirement for the
Constitution) existence of a corporation, even a de facto
one.
Up to Forty Percent (40%) Foreign Equity
17. Exploration, development and utilization of  Contents:
natural resources (Art. XII, Sec. 2 of the 1. name of corporation;
Constitution) 2. purpose/s, indicating the primary and
18. Ownership of private lands (Art. XII, Sec. 7 secondary purposes;
of the Constitution; Ch. 5, Sec. 22 of CA 3. place of principal office;
141; Sec. 4 of RA 9182) 4. term of existence;
19. Operation and management of public 5. names, citizenship and residences of
utilities (Art. XII, Sec. 11 of the Constitution; incorporators;
Sec. 16 of CA 146) 6. number, names, citizenship and residences
20. Ownership/establishment and administration of directors or trustees;
of educational institutions (Art. XIV, Sec. 4 of 7. names, nationalities, and residences of the
the Constitution) persons who shall act as directors or
21. Culture, production, milling, processing, trustees until the first regular ones are
trading excepting retailing, of rice and corn elected and qualified;
and acquiring, by barter, purchase or 8. if a stock corporation, the amount of its
otherwise, rice and corn and the by-products authorized capital stock, number of shares
thereof (Sec. 5 of PD 194;Sec. 15 of RA and in case the shares are par value shares,
8762 the par value of each share;
22. Contracts for the supply of materials, 9. names, residences, number of shares, and
goods and commodities to government- the amounts subscribed and paid by each of

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the original subscribers which shall not be 5. Date and place of execution of
less than 25% of authorized capital stock; the articles of incorporation;
10. if non-stock, the amount of capital, the 6. Witnesses to the signing and
names, residences, and amount paid by acknowledgment of the articles.
each contributor, which shall not be less
than 25% of total subscription; Grounds for rejection of AI or amendments
11. name of treasurer elected by subscribers; thereto
and 1. The articles or its amendment is not
12. if the corporation engages in a nationalized substantially in accordance with the form
industry, a statement that no transfer of prescribed
stock will be allowed if it will reduce the 2. The purposes of the corporation are patently
stock ownership of Filipinos to a percentage unconstitutional, illegal, immoral, or contrary to
below the required legal minimum. government rules and regulations
Amendment of AI 3. The Treasurer’s Affidavit concerning the
 Limitations: amount of capital stock subscribed and/or paid is
1. The amendment of any provision or matters false
stated in the articles of incorporation is not 4. The required percentage of ownership of the
allowed when it will be contrary to the provisions capital stock to be owned by Filipino citizens has
or requirement prescribed by the Code or by not been complied with
special law or changes any provision in the
articles of incorporation stating an accomplished Grounds for Suspension or Revocation of
fact Certificate of Incorporation
2. It must be for legitimate purposes 1. Fraud in procuring its certificate of
3. It must be approved by the required vote of incorporation
the board of directors or trustees and the 2. Serious misrepresentation as to what the
stockholders or members corporation can do or is doing to the great
4. The original articles and amended articles prejudice of, or damage to, the general public
together must contain all provisions required by 3. Refusal to comply with or defiance of a lawful
law to be set out in the articles of incorporation order of the SEC restraining the commission of
5. Such articles, as amended, must be indicated acts which would amount to a grave violation of
by underscoring the changes made, and a copy its franchise
thereof duly certified under oath by the corporate 4. Continuous inoperation for a period of at least
secretary and a majority of the directors or 5 years
trustees stating that the amendments have been 8. Failure to file the by-laws within the required
duly approved by the required vote of the period
stockholders or members must be submitted to 9. Failure to file required reports
the SEC
6. The amendments shall take effect only upon
their approval by the SEC BOARD OF DIRECTORS/TRUSTEES
7. If the corporation is governed by special law, Qualifications:
the amendments must be accompanied by a 1. For a stock corporation, ownership of at least
favorable recommendation of the 1 share capital stock of the corporation in his
appropriate government agency. own name, and if he ceases to own at least one
Number of Votes for BOD: share in his own name, he automatically ceases
Majority vote to be a director. (Sec. 23) For a non-stock
Number of Votes of Corporators corporation, only members of the corporation
Vote or written assent of 2/3 of OCS/ members can be elected to seat in the Board of Trustees.
 In order to be
Non-Amendable Facts in the AI eligible as a director, what is material is the
 Those matters legal title to, not beneficial ownership of the
referring to facts existing as of the date of stocks appearing on the books of the
the incorporation such as: corporation
1. Names of incorporators; 2. A majority of the directors/trustees must be
2. Names of original subscribers to residents of the Philippines. (Sec. 23)
the capital stock of the corporation and 3. He must not have been convicted by final
their subscribed and paid up capital; judgment of an offense punishable by
3. Treasurer elected by the original imprisonment for a period exceeding 6 years or
subscribers; a violation of the Corporation Code, committed
4. Members who contributed to the within five years from the date of his election.
initial capital of a non-stock corporation; (Sec. 27)

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4. Only natural persons can be elected its board of directors and through its officers
directors/trustees. and agents when authorized by a board
• In case of corporate stockholders or resolution or by its by-laws. (Spouses
members, their representation in the board Constantine Firme vs. Bukal Enterprises
can be achieved by making their individual and Development Corporation, G.R. No.
representatives trustees of the shares or 146608, October, 23, 2003)
membership to make them
stockholders/members of record. Limitations on Powers of BOD/BOT
5. Other qualifications as may be prescribed in 1. Limitations imposed by the Constitution,
the by-laws of the corporation. statutes, articles of incorporation or by-laws.
6. Must be of legal age 2. Cannot perform constituent or those involving
fundamental changes in the corporation
Corporate Officers requiring the approval of stockholders or
1. President – must be a director; members.
2. Treasurer – may or may not be a director; as 3. Cannot exercise powers not possessed by the
a matter of sound corporate practice, must corporation. (The Corporation Code of the
be a resident Philippines Annotated, Hector de Leon, 2002
3. Secretary – need not be a director unless ed.)
required by the by-laws; must be a resident Nature of Powers of BOD/BOT (The
and citizen of the Philippines; and Corporation Code of the Philippines Annotated,
4. Such other officers as may be provided in the Hector de Leon, 2002 ed.)
by-laws. a. Under the Theory of Original Power, the
CORPORATE CORPORATE powers of the board of directors or trustees are
OFFICER EMPLOYEE ORIGINAL and UNDELEGATED. The
Position is provided Employed by the stockholders or members do not confer, nor can
for in the by-laws or action of the they revoke those powers.
under the managing officer of b. They are DERIVATIVE only in the sense of
Corporation Code the corporation being received from the State in the act of
RTC has NLRC has incorporation.
jurisdiction in case jurisdiction in case
of labor dispute of labor disputes Business Judgment Rule
 A resolution or
BOD/BOT as Repositary of Powers transaction
General Rule: The corporate powers of the pursued within the
corporation shall be exercised, all business corporate powers
conducted and all property of such corporation and business
controlled and held by the board of directors or operations of the
trustees. (Sec. 23) corporation, and
Exceptions: passed in good
1. In case of an Executive Committee duly faith by the board
authorized in the by-laws; of directors, is
2. In case of a contracted manager which valid and binding,
may be an individual, a partnership, or and generally the
another corporation. Note: In case the courts have no
contracted manager is another corporation, authority to review
the special rule in Sec. 44 applies. the same and
3. In case of close corporations, the substitute their
stockholders may manage the business of own judgment,
the corporation instead by a board of even when the
directors, if the articles of incorporation so exercise of such
provide. power may cause
 The power to losses to the
purchase real property is vested in the board corporation or
of directors or trustees. While a corporation decrease the
may appoint agents to negotiate for the profits of a
purchase of real property needed by the department.
corporation, the final say will have to be with (Philippine
the board, whose approval will finalize the Corporate Law,
transaction. A corporation can only exercise Cesar Villanueva,
its powers and transact its business through 2001 ed.)

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 Limitations:
Consequences: a. At any meeting of stockholder or members
a. Resolutions and transactions entered into by called for the election of directors or trustees,
the Board within the powers of the corporation there must be present either in person or by
cannot be reversed by the courts not even on representative authorized to act by written proxy,
the behest of the stockholders. the owners of the majority of the outstanding
b. Directors and officers acting within such capital stock or majority of the members entitled
business judgment cannot be held personally to vote.
liable for such acts. (Philippine Corporate Law, b. The election must be by ballot if requested by
Cesar Villanueva, 2001 ed.) any voting member or stockholder.
c. A stockholder cannot be deprived in the
3-Fold Duties of Directors (Philippine articles of incorporation or in the by-laws of his
Corporate Law, Cesar Villanueva, 2001 ed.) statutory right to use any of the methods of
1. Duty of Obedience voting in the election of directors.
 To direct the d. No delinquent stock shall be voted.
affairs of the corporation only in accordance e. The candidates receiving the highest number
with the purposes for which it was of votes shall be declared elected.
organized.
 Legal Basis: The Methods of Voting
directors or trustees and officers to be a. Straight Voting – every stockholder may vote
elected shall perform the duties enjoined on such number of shares for as many persons as
them by law and the by-laws (Sec. 25) there are directors to be elected.
2. Duty of Diligence b. Cumulative voting for one candidate – a
 Legal Basis: Directors or trustees who stockholder is allowed to concentrate his votes
willfully and knowingly vote for or assent to and give one candidate, as many votes as the
patently unlawful acts of the corporation or number of directors to be elected multiplied by
who are guilty of gross negligence or bad the number of his shares shall equal.
faith in directing the affairs of the corporation c. Cumulative voting by distribution - a
shall be liable jointly and severally for all stockholder may cumulate his shares by
damages resulting therefrom suffered by the multiplying the number of his shares by the
corporation, its stockholders or members number of directors to be elected and distribute
and other persons (Sec. 31) the same among as many candidates as he
3. Duty of Loyalty shall see fit.
 Legal Basis: Directors or trustees who
Limitations on the Stockholder’s Right to
acquire any pecuniary or personal interest in
Vote
conflict with their duty as such directors or
1. Where the articles of incorporation
trustees shall be liable jointly and severally
for all damages resulting therefrom. (Sec. provides for classification of shares
pursuant to Sec. 6, non-voting shares
31)
are not entitled to vote except as
 When a director or trustee attempts to
provided for in the last paragraph of
acquire or acquires in violation of his duty,
Sec. 6.
any interest adverse to the corporation in
2. Preferred or redeemable shares may
respect of any matter which has been
be deprived of the right to vote unless
reposed in him in confidence as to which
otherwise provided in the Code.
equity imposes a liability upon him to deal in
3. Fractional shares of stock cannot be
his own behalf, he shall be liable as trustee
voted.
for the corporation and must account for all
4. Treasury shares have no voting
the profits which otherwise would have
rights as long as they remain in the
accrued to the corporation (Sec. 31, 2nd
treasury.
par.)
5. Holders of stock declared delinquent
 Where a director, by virtue of his office, by the board of directors for unpaid
acquires for himself a business opportunity subscription are not entitled to vote or
which should belong to the corporation, to a representation at any
thereby obtaining profits which should stockholder’s meeting.
belong to the corporation, he must account 6. A transferee of stock cannot vote if
to the latter for all such profits by refunding his transfer is not registered in the
the same (Sec. 34) stock and transfer book of the
corporation.
Elections of Directors/Trustees

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Removal of Directors/Trustees (1996, 2001 LIMITED LIABILITY IMMUNITY


Bar Exams)
 Limitations: Shields the Protects a person
a. Vote of the stockholders representing at least corporators from acting for and in
2/3 of the outstanding capital stock, or 2/3 of the corporate liability behalf of the
members entitled to vote beyond their agreed corporation from
b. At a regular or special meeting after proper contribution to the being himself
notice is given capital or personally liable
c. Removal may be with or without cause. shareholding in the for his authorized
d. A minority director elected through cumulative corporation. actions
voting cannot be removed without cause. (Sec.
28)
Remedies in case of Mismanagement
Extent of Powers or Authority of Corporate 1. Receivership;
Officers 2. Injunction, if the act has not yet been done;
1. The authority which he has by virtue of his 3. Dissolution if the abuse amounts to a ground
office; for quo warranto but the Solicitor General
2. The authority which is expressly conferred refuses to act; and
upon him or is incidental to the effectualness of 4. Derivative suit or complaint filed with SEC.
such express authority;
3. As to third persons dealing with him without Special Rules on Contracts Entered Into by
notice of any restriction thereof, the authority Directors, Trustees or Officers
which the corporation holds the officer out as 1. Doctrine of Corporate Opportunity (2001,
possessing or is estopped to deny. 2005 Bar Exams)
4. The nature of the corporate business must  Unless his act is ratified, a director shall
also be taken into consideration; and refund to the corporation all the profits he
5. The nature act of an officer though originally realizes on a business opportunity which:
unauthorized, may become upon the corporation 1. The corporation is financially able to
by a subsequent ratification. (The Corporation undertake;
Code of the Philippines Annotated, Hector de 2. From its nature, is in line with corporations
Leon, 2002 ed.) business and is of practical advantage to it;
Note: It is a familiar doctrine that if a corporation and
knowingly permits one of it officers, or any other 3. The corporation has an interest or a
agent, to act within the scope of an apparent reasonable expectancy.
authority, it holds him out to the public as  The rule shall be applied
possessing the power to do those acts; and notwithstanding the fact that the director
thus, the corporation will, as against anyone who risked his own funds in the venture.
has in good faith dealt with it through such 2. Contracts of self-dealing directors
agent, be estopped from denying the agent’s
authority. (2004, 2006 Bar Exams; LapuLapu  Contracts which are entered into by the
Foundation Inc., vs. Court of Appeals, et al., corporation with one or more of its own
G.R. No. 126006, January 29, 2004.) directors/trustees, or officers. (Sec. 32)
 They are voidable, unless:
a) The presence of such director/trustee in the
Personal Liability of Directors board meeting approving the contract was
1. Willfully and knowingly voting for and not necessary to constitute a quorum for
assenting to patently unlawful acts of the such meeting;
corporation; (Sec. 31) b) The vote of such director/trustee in the
2. Gross negligence or bad faith in directing the board meeting approving the contract was
affairs of the corporation; (Sec. 31) not necessary for the approval of the
3. Acquiring any personal or pecuniary interest contract;
in conflict of duty; (Sec. 31) c) The contract is fair and reasonable under
4. Consenting to the issuance of watered the circumstances;
stocks, or, having knowledge thereof, failing d) In the case of an officer, there was previous
to file objections with the secretary;(Sec. 65) authorization by the board of directors.
 Although not all said conditions
5. Agreeing or stipulating in a contract to hold are present, the corporation may elect not to
himself liable with the corporation; or
attack or question the validity of the contract,
6. By virtue of a specific provision of law
without prejudice, however, to the liability of
DOCTRINE OF DOCTRINE OF

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the director/trustee for damages under Sec. an entirely new transaction (Yao Ka Sin
31. Trading vs. CA, 209 SCRA 763).
 Where any of the first two conditions is
absent, said contract must be ratified by the Compensation of Directors or Trustees
vote of the stockholders representing at General Rule: They shall be entitled to
least 2/3 of the outstanding capital stock or reasonable per diems only
2/3 of the members in a meeting called for Exception:
the purpose, provided that full disclosure of a. when their compensation is fixed in the by-
the adverse interest of the director/ trustee laws
involved is made at such meeting. b. when granted by the vote of stockholders
3. Contracts of interlocking directors representing at least a majority of the
 Contracts entered into between outstanding capital stock at a regular or special
corporations with interlocking directors meeting
(interest of said directors is “substantial”, i.e. c. when they are also officers of the corporation
exceeding 20% of the outstanding capital
stock). Executive Committee
 They are valid, provided that:  A body created by the by-laws and
a. The contract is not fraudulent; and composed of some members of the board
b. The contract is fair and reasonable under which, subject to the statutory limitations,
the circumstances. has all the authority of the board to the
 If the interlocking director’s interest in extent provided in the board resolution or by-
one corporation or corporations is “nominal” laws.
(not exceeding 20% of the outstanding  Must be provided for in the by laws and
capital stock), then all the conditions composed of not less than 3 members of the
prescribed in Sec. 32 on self-dealing board appointed by the board.
directors must be present with respect to the  May act by a majority vote of all of its
corporation in which he has nominal interest. members.

BAR Q: A, the President of XYZ Corp., Limitations on the Powers of the Executive
wrote a letter to B, offering to sell to the Committee
latter 5000 bags of cement at P100 per It cannot act on the following:
bag. B signed his conformity to the letter 1. Matters needing stockholder approval;
offer, and paid a down payment of 2. Filling up of board vacancies;
50000. A few days later, C the 3. Amendment, repeal or adoption of by-laws;
Corporate Secretary of XYZ Corp. 4. Amendment or repeal of any resolution of
informed B of the decision of the Board the Board which by its express terms is not
of Directors not to ratify the letter offer. amendable or repealable; and
However, since B had already paid the 5. Cash dividend declaration.
down payment, XYZ Corp. delivered
500 bags of cement which B accepted. POWERS OF THE CORPORATION
XYZ Corp. made it clear that the 1. Express Powers - granted by law,
delivery should be considered as an Corporation Code, and its Articles of
entirely new transaction. Thereafter, B Incorporation or Charter
sought to enforce the letter-offer. Is 2. Inherent/Incidental Powers – not
there a binding contract for the 5000 expressly stated but are deemed to be within
bags of cement? the capacity of corporate entities
SA: NO. There is no binding contract for 3. Implied/Necessary Powers – exists as a
the 5000 bags of cement. First, the facts necessary consequence of the exercise of
do not indicate that A, the President , the express powers of the corporation or the
was authorized by the Board of pursuit of its purposes as provided for in the
Directors to enter into the contract or Charter
that he was empowered to do so under Classification:
some provision of the by-laws of XYZ 1. Acts in the usual course of business
Corp. The facts do not indicate that A 2. Acts to protect debts owing to the corporation
has been clothed with the apparent 3. Acts which involve embarking in a different
power to execute the contracts or business usually to collect debts out of profits
agreements similar to it. Second, XYZ 4. Acts to protect or aid employees
Corp. has specifically informed B that it 5. Acts to increase business (The Corporation
has not ratified and that the delivery to B Code of the Philippines Annotated, Hector de
of the 500 bags, which A accepted, is Leon, 2002 ed.)

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General Powers 1. Power to extend or shorten corporate term


1. To sue and be sued;  May be used as means to voluntarily
2. Of succession; dissolve a corporation
2. Power to increase or decrease capital stock
3. To adopt and use of corporate seal;
4. To amend its Articles of Incorporation; Ways of Increasing/Decreasing the Capital
5. To adopt its by-laws; Stock (1998, 2001 Bar Exams)
6. For stock corporations: issue and sell stocks a. By increasing/decreasing the number of
to subscribers and treasury stocks; for non- shares and retaining the par value;
stock corporations: admit members; b. By increasing/decreasing the par value of
7. To purchase, receive, take or grant, hold, existing shares without increasing/decreasing
convey, sell, lease, pledge, mortgage and the number of shares;
deal with real and personal property, c. By increasing/decreasing the number of
securities and bonds shares and increasing/decreasing the par value.
Number of Votes for BOD:
8. To enter into merger or consolidation; Majority vote
9. To make reasonable donations for public Number of Votes of Corporators:
welfare, hospital, charitable, cultural, 2/3 of OCS/ members
scientific, civic or similar purposes, provided
that no donation is given to any (i) political Tools Available to the Stockholder to
party, (ii) candidate and (iii) partisan political Replenish Capital (1999 Bar Exam)
activity. a. Additional subscription to shares of stock of
10. To establish pension, retirement, and other the corporation by stockholders or by investors;
plans for the benefit of its directors, trustees, b. Advances by the stockholders to the
officers and employees. corporation;
11. To exercise other powers essential or c. Payment of unpaid subscription by the
necessary to carry out its purposes. stockholders; and
d. Loans from third persons.
Special/Specific Powers
1. Power to extend or 3.Incur, create or increase bonded indebtedness
shorten corporate term; Corporate bond – an obligation to pay a definite
2. Increase or decrease sum of money at a future time at fixed rate of
corporate stock; interest
3. Incur, create, or
increase bonded indebtedness; BONDED DEBENTURE
4. Sell, dispose, lease, INDEBTEDNESS
encumber all or substantially all of corporate Secured by a Serial obligations or
assets; mortgage on notes issued on the
5. Purchase or acquire corporate property. basis of the general
own shares provided: credit of the
a.there is an unrestricted retained corporation. Hence,
earnings, and they are not
b. it is for a legitimate purpose. bonded
6. Invest corporate funds indebtedness
in another corporation or business for other
purpose other than primary purpose; Salient Points:
7. Power to declare • Meeting is required
dividends out of unrestricted retained • Non-voting shares can vote
earnings;
• No appraisal right
8. Enter into management • Notice is required
contract with another corporation (not with • Registration of bonds with the SEC is
an individual or a partnership-within general necessary
powers) whereby one corporation Number of Votes for BOD:
undertakes to manage all or substantially all Majority vote
of the business of the other corporation for a Number of Votes of Corporators:
period not longer than 5 years for any one 2/3 of OCS/ members
term.

Corporate Acts

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4. Sell, dispose, lease, encumber all or • Stockholder’s ratification is not


substantially all of corporate assets; necessary if the investment is incidental to
No ratificatory vote needed: primary purpose
a. If it is necessary in the usual and regular Number of Votes for BOD:
course of business Majority vote
b. if the proceeds of the sale or other disposition Number of Votes of Corporators:
of such property and assets be appropriated for 2/3 of OCS/ members
the conduct of the remaining business
7. Power to declare dividends out of unrestricted
Salient Points: retained earnings
• Majority can vote
• Non-voting shares can vote RETAINED EARNINGS = ASSETS –
• Appraisal right is available LIABILITIES AND LEGAL CAPITAL
• Notice is required
• If sale is abandoned, director’s action is “Unrestricted” – if the retained earnings have not
sufficient, no need for ratification by been reserved or set aside by the board of
stockholders directors for some corporate purpose.
Number of Votes for BOD:
Majority vote Number of Votes for BOD:
Number of Votes of Corporators: Majority of the quorum
2/3 of OCS/ members Number of Votes of Corporators:
2/3 of OCS/ members
5. Power to acquire own shares
Instances: Dividends (2001, 2005 Bar Exams)
a. To eliminate fractional shares out of stock  Corporate profits set aside, declared,
dividends and ordered to be paid by the directors for
b. To collect or compromise an indebtedness to distribution among shareholders at a fixed
the corporation, arising out of unpaid time.
subscription, in a delinquency sale and to  Forms:
purchase delinquent shares sold during said a. Cash
sale b. Property
c. To pay dissenting stockholders c. Stock
d. To acquire treasury shares  While cash
e. Redeemable shares regardless of existence dividends due on delinquent shares can be
of retained earnings applied to the payment of the unpaid
f. To effect a decrease of capital stock balance, stock dividends cannot be applied
g. In close corporations, when there is a as payment for unpaid subscription.
deadlock in the management of the business The right to dividends is based on duly
Note: In letters a-c, there must be unrestricted recorded stockholdings; accordingly, the
retained earnings. corporation is prohibited from entitling
thereto anyone else.
Number of Votes for BOD:  General Rule: Stock
Director’s action corporations are prohibited from retaining
surplus profits in excess of 100% of their
6. Invest corporate funds in another corporation paid-in capital stock
or business for other purpose other than primary Exceptions:
purpose a. When justified by definite corporate
The other purposes for which the funds may be expansion projects approved by the board of
invested must be among those enumerated as directors
secondary purposes and must further comply b. When the corporation is prohibited under
with the requirements of Section 42. any loan agreement with any financial
institution or creditor from declaring
Salient Points: dividends without its/his consent and such
• Non-voting shares can vote consent has not yet been secured
• Appraisal right available c. When it can be clearly shown that such
• Notice is required retention is necessary under special
• Investment in the secondary purpose is circumstances obtaining in the corporation,
covered such as when there is a need for special
reserve for probable contingencies.

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Sources of dividends: h. Corporate earnings which have not yet


General Rule: Dividends can only be been received even though they consist in
declared and paid out of actual and bona money which is due, cannot be included in
fide unrestricted retained earnings. the profits out of which dividends may be
Special Rules: paid.
a. Where a corporation sold its real property,
which is not being used for business, at a CASH DIVIDENDS STOCK DIVIDENDS
gain, the income derived therefrom may be
availed of for dividend distribution. 1. Involves a 1. Does not involve
b. Increase in the value of a fixed asset as a disbursement to the any disbursement
result of its revaluation is not retained stockholders of
earning. However, increase in the value of accumulated earnings
fixed assets as a result of revaluation
(“Revaluation surplus”) may be declared as 2. When declared and 2. Since it is still part
cash or stock dividends provided that the paid becomes the of corporate property,
company: absolute property of the may be reached by
(i) Has sufficient income from operations stockholder and cannot corporate creditors
from which the depreciation on the appraisal be reached by creditors
increase was charged of the corporation in the
(ii) Has no deficit at the time the absence of fraud
depreciation on the appraisal increase was
charged to operations; and
(iii) Such depreciation on appraisal increase
3. Declared only by the 3. Declared by the
previously charged to operations has not
board of directors at its board with the
been impaired by losses.
discretion concurrence of the
c. Dividends can be declared out of the
stockholders
amount received in excess of the par value
representing at least
of shares (“paid-in surplus”) when:
2/3 of the outstanding
(i) That they be declared only as stock
capital stock at a
dividends and not cash;
regular/special
(ii) No creditors are prejudiced; and
meeting
(iii) There is no impairment of capital.
Note: unlike par value shares, when no par
value shares are sold at a premium, the
entire consideration paid is considered 4. Does not increase the 4. Corporate capital
capital; hence the same cannot be declared corporate capital is increased
as dividends.
d. Reduction surplus can be a source of 5. Its declaration creates 5. No debt is created
dividends. Rule on paid-in surplus is a debt from the by its declaration
applicable. corporation to each of its
e. No dividends can be declared out of stockholders
capital except only in two instances: 1)
liquidating dividends; and 2) dividends from
investments in wasting asset corporation. Trust Fund Doctrine
Note: It permits corporations solely or  The subscribed
principally engaged in the exploitation of capital stock of the corporation is a trust fund
“wasting assets” to distribute the net for the payment of debts of the corporation
proceeds derived from exploitation of their which the creditors have the right to look up
holdings such as mines, oil wells, patents to satisfy their credits, and which the
and leaseholds, without allowance or corporation may not dissipate. The creditors
deduction for depletion. may sue the stockholders directly for the
f. Profits realized from sale of treasury latter’s unpaid subscription.
shares are part of capital and cannot be  Application of the
declared as cash or stock dividend as TFD:
purchase and sale of such shares are 1. Where the corporation has distributed its
regarded as contractions and expansions of capital among the stockholders without
paid-in capital. providing for the payment of creditors;
g. Money cannot be borrowed for the 2. Where it had released the subscribers to the
payment of dividends because indebtedness capital stock from their subscriptions;
is not a retained earning of the corporation.

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3. Where it has transferred the corporate  An ultra vires act may be that of:
property in fraud of its creditors; and a. The corporation;
4. Where the corporation is insolvent. b. The Board of Directors; and
 Coverage of the TFD: c. The corporate officers.
1. If the corporation is solvent, the TFD extends  Effects of ultra vires act on:
to the capital stock represented by the a. Executed contract – courts will not set
corporation’s legal capital. aside or interfere with such contracts;
2. If the corporation is insolvent, the TFD b. Executory contracts – no enforcement
extends to the capital stock of the corporation as even at the suit of either party (void and
well as all of its property and assets. unenforceable);
 Exceptions to the TFD: c. Part executed and part executory –
1. Redemption of redeemable shares (Sec. 8) principle of “no unjust enrichment at
2. In close corporation, when there should be a expense of another” shall apply; and
deadlock and the SEC orders the payment of the d. Executory contracts apparently
appraised value of the stockholder’s share. (Sec. authorized but ultra vires – the principle of
104) estoppel shall apply.

8. Power to enter into management contract Ultra Vires Acts and Illegal Acts
Ultra vires (“beyond powers”) refers only to an
EXECUTIVE MANAGEMENT act outside or beyond corporate powers,
COMMITTEE CONTRACT including those that may ostensibly be within
such powers but are, by general or special laws,
1. Its creation 1. Express power either prohibited or declared illegal. It is in this
must be provided of a corporation context that the Code has used the term.
for in the by-laws
Ultra Vires Acts Illegal Acts
2. A governing 2. Management Not necessarily Unlawful; against
body which company must unlawful, but law, morals, public
functions as the always be subject outside the powers policy, and public
board itself. to the superior of the corporation order
power of the board Can be ratified Cannot be ratified
to give specific Can bind the Cannot bind the
directions from parties if wholly or parties
time to time or to partly executed
recall the
delegation of
TEST whether or not a corporation may
managerial power.
perform an act: consider the logical and
necessary relation between the act questioned
and the corporate purpose expressed by law or
Ultra Vires (“beyond powers”) Act in the charter. If the act is lawful in itself and not
 An act which is beyond the conferred prohibited, and is done for the purpose of
powers of a corporation or the purposes or serving corporate ends, and reasonably
objects for which it is created as defined by contributes to the promotion of those ends in a
the law of its organization. substantial and not in a remote and fanciful
 An act done by a corporation outside of sense. (Montelibano vs. Bacolod-Murcia Milling
the express and implied powers vested in it Co., Inc., 5 SCRA 36)
by its charter and by the law.
 Types: (Philippine Corporate Law, Remedies in Case of Ultra Vires Acts
Cesar Villanueva, 2001 ed.) 1. State
1. Acts done beyond the powers of the a. Obtain a judgment of forfeiture; or
corporation as provided in the law or its b. The SEC may suspend or revoke the
articles of incorporation; certificate of registration
2. Acts or contracts entered into in behalf 2. Stockholders
of a corporation by persons who have no a. Injunction; or
corporate authority (Note: This is b. Derivative suit
technically ultra vires acts of officers and 3. Creditors
not of the corporation); and a. Nullification of contract in fraud of creditors
3. Acts or contracts, which are per se
illegal as being contrary to law. BY-LAWS

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(1998, 2000, 2001 Bar Exams) e. The qualification, duties and compensation of
 Rules of action adopted by a corporation directors or trustees, officers and employees
for its internal government and for the f. Time for holding the annual election of
regulation of conduct and prescribe the directors or trustees and the mode or manner of
rights and duties of its stockholders or giving notice thereof
members towards itself and among g. Manner of election or appointment and the
themselves in reference to the management term of office of all officers other than directors
of its affairs. or trustees
 Functions: h. Penalties for violation of the by-laws
a. Supplement the articles of incorporation i. In case of stock corporations, the manner of
b. Provide for details not important enough to be issuing certificates
stated in the articles of incorporation j. Such other matters as may be necessary for
c. Continuing rule for the government of the the proper or convenient transaction of its
corporation and the individuals composing it corporate business and affairs
d. Define the rights and duties of corporate
officers and directors/trustees and of Articles of By-Laws
stockholders/members towards the corporation Incorporation
and among themselves Condition precedent Condition
e. Source of authority for corporate officers and in the acquisition of subsequent; its
agents of the corporation corporate existence; absence merely
Requisites for validity: furnishes a ground
a. Must not be contrary to law nor with the for the revocation
Corporation Code of the franchise
b. Must not be contrary to morals and public Essentially a For the internal
policy; contract between the government of the
c. Must not impair obligations and contracts; corporation and the corporation but has
d. Must be general and uniform; stockholders/ the force of a
e. Must be consistent with the charter or members; between contract between
articles of incorporation; and the stockholders/ the corporation
f. Must be reasonable, not arbitrary or member inter se, and the
oppressive. and between the stockholders/
Binding effect: corporation and the members, and
a. As to members and corporation State; between the
They have the force of contract between the stockholders and
members themselves.They are binding only members;
upon the corporation and on its members Executed before May be executed
and those having direction, management incorporation after incorporation.
and control of its affairs. Sec. 46 allows the
b. As to third persons filing of the by-laws
They are not bound to know the by-laws simultaneously
which are merely provisions for the with the Articles of
government of a corporation and notice to Incorporation
them will not be presumed. Amended by a May be amended
Reason: By-laws have no extra-corporate majority of the by a majority vote
force and are not in the nature of legislative directors/ trustees of the BOD and
enactments so far as third persons are and stockholders majority vote of
concerned. representing 2/3 of outstanding
Contents of By-Laws the outstanding capital stock or a
a. Time, place and manner of calling and capital stock, or 2/3 majority of the
conducting regular or special meetings of of the members in member in non-
directors or trustees case of non-stock stock corporation
b. Time and manner of calling and conducting corporations
regular or special meetings of the stockholder or Power to Power to amend
members amend/repeal or repeal by-laws
c. The required quorum in meeting of articles cannot be or adopt new by-
stockholders or members and the manner of delegated by the laws may be
voting therein stockholders/ delegated by the
d. The form for proxies of stockholders and members to the 2/3 of the
members and the manner of voting them board of directors/ outstanding
trustees capital stock or

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2/3 of the a. GENERAL PROXY – confers a general


members in the discretionary power to attend and vote at annual
case of non-stock meeting.
corporation b. LIMITED PROXY – restrict the authority to
vote to specified matters only and may direct the
MEETINGS manner in which the vote shall be cast
Stockholders/Members Meeting
WHEN: Voting Trust - An agreement whereby one or
1. REGULAR - held on the date fixed in the more stockholders transfer their shares of stocks
by-laws or if not fixed on any date in to a trustee, who thereby acquires for a period of
April;and time the voting rights (and/or any other rights)
2. SPECIAL - held at any time deemed over such shares; and in return, trust certificates
necessary or as so provided in the by-laws. are given to the stockholder/s, which are
WHERE: transferable like stock certificates, subject,
 In the city or municipality where the however, to the trust agreement.
principal office of the corporation is  Limitations:
located, and if practicable, in the a. Cannot be entered into for a period exceeding
principal office of the corporation. 5 years at any one time except when it is a
However, in the case of non-stock corporations, condition in a loan agreement or for the purpose
the by-laws may provide that meetings may of circumventing the law against monopolies and
be held at any place even outside the illegal combinations
principal place of the corporation. b. The agreement must not be used for
Board Meeting purposes of fraud
WHEN: c. It must be in writing and notarized and specify
1. REGULAR - held monthly, unless the terms and conditions thereof
otherwise provided in the by-laws; and d. A certified copy of the agreement must be
2. SPECIAL - held at any time upon the call filed with the corporation and with the SEC
of the president. e. The agreement shall be subject to
WHERE: examination by any stockholder of the
May be held anywhere in or outside of the corporation
Philippines. f. Unless expressly renewed, all rights granted in
the agreement shall automatically expire at the
Proxy end of the agreed period
 Limitations:
a. It must be in writing and signed by the VOTING TRUSTS PROXY
stockholder or member (as principal) and filed The trustee votes The proxy holder
before the scheduled meeting with the corporate as owner rather votes as agent
secretary, and given to another person (as than as mere agent
agent) authorizing such person to exercise the The trust may vote The proxy must
voting rights of the former. in person or by vote in person
b. Unless otherwise provided in the proxy, it proxy unless the
shall be valid only for the meeting for which it is agreement
intended. provides otherwise
c. No proxy shall be valid and effective for a Trustee acquires Proxy has no legal
longer period than five years at any one time. legal title to the title to the shares of
• The right to vote by proxy may be shares of the the principal
exercised in any of the following instances: transferring
1. Election of the board of directors or trustees; stockholder
2. Voting in case of joint ownership of stock; The agreement Proxy need not be
3. Voting by trustee under voting trust must be notarized notarized
agreement; The agreement is Revocable anytime
4. Pledge or mortgage of shares; irrevocable except one with
5. As provided for in its by-laws. interest
Note: Stockholders or members may attend and Trustee is not Proxy can only act
vote in their meetings by proxy (Sec. 58); limited to act at any at a specified
directors cannot do so. Directors must always particular meeting stockholder’s
act in person. (Sec. 25). meeting (if not
Extent of Authority continuing)
A trustee can vote A proxy can only
and exercise all the vote in the absence

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rights of the of the owners of which cannot be absolute.


stockholder even the stock sold.
when the latter is Underwriters are There is no
present given commission. commission.
An agreement must A proxy is usually The signer can He becomes a
not exceed 5 years of shorter duration refuse to become a stockholder of the
at any one time although under stockholder/ company and is
except when the Sec. 58 it cannot member of the liable to pay the
same is made a exceed 5 years at company. amount due on the
condition of a loan. any one time stock.
The voting right is The right to vote is Pre-Incorporation Subscription Agreements
divorced from the inherent in or (PISA) - Subscription of shares of
ownership of stocks inseparable from stock of a corporation still to be
the right to formed shall be irrevocable for a
ownership of stock period of at least 6 months from date
of subscription, unless:
1. All of the other subscribers
STOCKS AND STOCKHOLDERS consent to the revocation;
2. The incorporation of said
Subscription Contract - any contract for the corporation fails to materialize with said
acquisition of unissued stock in an existing period or within a longer period as may
corporation or a corporation still to be formed be stipulated in the contract of
shall be deemed a subscription. subscription; provided that no pre-
 The subscribed shares need not be paid incorporation subscription may be
in full in order that the subscription may be revoked after the submission of the
valid. The subscription contract is a articles of incorporation to the SEC.
consensual contract that is perfected upon (Sec. 61)
the meeting of the minds of the parties. The
name of the subscriber is recorded in the Modes of issuance of Shares
stock and transfer book, and from that time, a. By subscription before and after incorporation
such subscriber becomes a stockholder of to original, unissued stock
record entitled to all the rights of a b. By sale of treasury stock after incorporation
stockholder. Until the stocks are fully paid, it for money, property or service
continues to be a subsisting liability that is c. By subscription to new issues of stock in case
legally enforceable. of an increase in the capital stock
 In Ong Yong, et.al, vs. David Tiu, the d. By making a stock dividend
Court did not allow the rescission of the Pre-
Subscription agreement since the action was Valid Considerations in Subscription
filed by the Tius in their personal capacities. Agreement
It ruled that it was the corporation who had 1. Cash actually received;
the legal personality to file the suit, it being 2. Property, tangible or intangible, actually
the real party in interest. received AND necessary or convenient for
its use and lawful purposes;
Underwriting Agreement - an agreement Requisites;
between a corporation and a third person, a. Necessary or proper in carrying on
termed the “underwriter”, by which the latter the corporate business
agrees, for a certain compensation, to take a b. Ascertainable pecuniary value
stipulated amount of stocks or bonds, specified c. Capable of being transferred and
in the underwriting agreement, if such securities applied to payment of debts
are not taken by those to whom they are first 3. Labor or services actually rendered to the
offered. corporation;
4. Previously incurred corporate indebtedness;
Underwriting Stock
Agreement Subscription
5. Amounts transferred from unrestricted
Agreement retained earning to stated capital,
The signers The obligation of 6. Outstanding shares in exchange for stocks
obligate the signer to the in the event of reclassification or conversion.
themselves to take purchasers and to Note: Shares of stock shall not be issued in
the shares of stock the public is exchange for promissory notes or future
services. There is no prohibition on the use of

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checks, bills or notes in payment of the “cash” intangible property tangible


consideration.
May be issued by May be issued
Shares of Stock the corporation only if the
Interest or right which owner has in the even if the subscription is fully
management of the corporation, and its surplus subscription is not paid.
profits, and, on dissolution, in all of its assets fully paid.
remaining after the payment of its debt.
Requirements for Validity of Transfers of
Certificate of Stock (1996, 2001 Bar Exams) Stocks
 The document evidencing the ownership a. In case of shares covered by a certificate, the
of shares of stocks by a stockholder and the indorsement of the owner or his agent coupled
full payment of its issue or subscription with delivery is essential
price. b. Where no certificate has been issued or for
 It is not essential to the ownership some reason it is not in the possession of the
and/or existence of the share of stock. stockholder, it may be transferred by means of a
 Where the certificate of stock reflects a deed of assignment duly recorded in the books
greater volume of shares than the actual of the corporation
number of shares issued or to be issued, the c. To be valid against the corporation and third
following rules may be considered: persons, the transfer must be recorded in the
1. To the extent that there is an overissue, stock and transfer book
the excess issuance (over the authorized d. The transferee must present the indorsed
capital stock or the stated capital) shall be certificate to the corporate secretary who shall
void as being ultra vires. effect the transfer in the corporate books, issue
2. If there is no overissue, but no payment a new stock certificate in favor of the transferee
has been made to cover the par or stated and cancel the former certificate.
value of the excess shares, the latter would Note: Only absolute transfers need be
constitute “watered” stocks. registered. The pledge or mortgage itself need
3. If there is no overissue and watering of not be recorded in the stock and transfer book,
stocks, the corporation may be bound to but a chattel mortgage must comply with the
honor the certificate (if duly signed and Chattel Mortgage Law, and a pledge would
released by its authorized officers) in the require the shares to be placed in the
hands of a holder in good faith, reserving a possession of the creditor/pledgee. The
right of recourse that an aggrieved party may agreement must appear in a public instrument to
pursue against the culpable or unjustly take effect against third persons. (Chemphil vs.
enriched party. CA, 251 SCRA 257)

Capital Stock Shares of Stock Effects of Unregistered Transfer of Stocks


Amount paid in or Interest or right a. It is valid and binding as between the
secured to be paid which the transferor and the transferee
in by the stockholder has in b. It is invalid as to the corporation except when
stockholders upon the management of notice is given to the corporation for purposes of
which the the corporation, registration
corporation is to and its surplus c. It is invalid as against corporate creditors and
conduct its profits, and upon a the transferor is still liable to the corporation
operation. It is the dissolution, in all of d. It is invalid as to the attaching or executing
property of the its assets creditors of the transferor, as well as subsequent
corporation itself remaining after purchasers in good faith without notice of the
(monetary value). payment of transfer.
corporate debts.
Issuance of Certificate of Stock
No certificate of stock shall be issued until the
SHARES OF CERTIFICATE OF
full amount of the subscription is paid. Basis:
STOCK STOCK
Doctrine of Individuality of Subscription that
Unit of interest in a Evidence of the
espouses that the subscription is one, entire,
corporation holder’s ownership
indivisible, and whole contract, which cannot be
of the stock and of
divided into portions.
his right as a
shareholder
Collection of Unpaid Subscription
Incorporeal or Concrete and
1. Voluntary payment

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a. Upon the date specified in the the provisions of this Code until and unless he
subscription contract pays the amount due on his subscription with
b. Upon call by the Board of Directors accrued interest, and the cost and expenses of
2. Involuntary payment advertisement, if any.
a. Extra-judicial
i. Delinquency sale Procedure for the Sale of Delinquent Stocks
ii. Application of dividends Call by resolution demanding payment of the
b. Judicial action balance. However, if the contract of
Note: The prescriptive period in case of subscription prescribes the date of payment,
subscription of shares begins to run only from no call is necessary.
the time the board of directors declares that the Notice of the board resolution given to the
balance are due and payable. It does not begin stockholders by the corporate secretary,
to run from the date of the subscription. (Garcia either personally or by registered mail.
vs. Suarez, 67 Phil. 441) Publication of notice of call is not required.
Failure of the stockholder to pay within a grace
DELINQUENCY period of 30 days from the date specified in
1. If the subscription contract fixes the date for the contract of subscription or in the call, the
payment, failure to pay on such date shall stocks shall be declared delinquent and shall
render the entire balance due and payable be subject to sale.
with interest. Thirty days therefrom, if still Notice of delinquency served on the subscribers
unpaid, the shares become delinquent, as of either personally or registered mail and
the due date, and subject to sale, unless the publication in a newspaper of general
board declares otherwise. circulation in the province or the city where
2. If no date is fixed in the subscription principal office is located for once a week for
contract, the board of directors can make the 2 consecutive weeks. Notice shall state the
call for payment, and specify the due date. amount due on each subscription plus
The notice of call is mandatory. The failure accrued interest, and the date, time and
to pay on such date shall render the entire place of the sale which shall not be less than
balance due and payable with interest. Thirty 30 days nor more than 60 days from the
days therefrom, if still unpaid, the shares date the stocks become delinquent.
become delinquent, as of the date of call, Sale of the delinquent shares at public auction.
and subject to sale, unless the board
declares otherwise. Highest Bidder in Delinquency Sale
Effect: a. The person participating in the delinquency
A. Upon the stockholder sale who offers to pay the full amount of the
1. Accelerates the entire balance of the subscription together with the
amount of the unpaid subscription; accrued interest, costs of advertisement and
2. Subjects the shares to expenses of sale, for the smallest number of
interest, expenses and costs; shares. In other words, the amount of the bid
3. Disenfranchises the does not vary but only the number of shares to
shares from any right that inheres to a be bought changes and determines the highest
shareholder, except the right to bidder.
dividends (but which shall be applied to b. If there is no bidder as mentioned above, the
any amount due on said shares or, in corporation may bid for the same, and the total
the case of stock dividends, to be amount due shall be credited as paid in full in
withheld by the corporation until full the books of the corporation. Such shares shall
payment of the delinquent shares. be considered as treasury shares.
B. Upon the director owning delinquent shares
1. He can continue serving in that capacity Procedure for Issuance of New Certificate of
unless and until said shares are totally bidded Stock in lieu of Lost, Stolen or Destroyed
away, he continues to be the owner thereof and Ones
in the interim he is not disqualified. 1. Filing with the corporation an affidavit in
2. A delinquent stockholder seeking to be triplicate by the registered owner setting forth the
elected as director may not be a candidate for, circumstances as to how the certificate was lost,
nor be duly elected to, the board. stolen or destroyed, the number of shares, serial
Note: No delinquency stock shall be voted for or number of the certificate and the name of the
be entitled to vote or representation at any corporation that issued the same.
stockholders meeting, nor shall the holder be 2. Publication of notice of loss by the corporation
entitled to any of the rights of a stockholder in a newspaper of general circulation in the
except the right to dividends in accordance with

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place of the principal office, once a week for 3 authorized capital stock for subscription. If
consecutive weeks. subsequently, it offers the remaining
3. After the lapse of 1 year from the date of the unsubscribed portion, there would be
last publication, if no contest has been preemptive right as to the remaining portion
presented, the corporation shall cancel in its thus offered for subscription.
books the certificate of stock, which has been  When pre-emptive right not available:
lost, stolen or destroyed, and issue in lieu a. When denied by the article of incorporation
thereof a new certificate of stock. b. Shares requiring stock offering or minimum
However, if the registered owner files a bond stock ownership by the public
or other securities as may be necessary to the c. Shares to be issued in good faith with the
board, the new certificate of stock may be issued approval of the stockholders representing 2/3 of
even before the expiration of one (1) year the outstanding capital stock, in exchange for
period. property needed for corporate purposes or in
payment of a previously contracted debt
Rights of Stockholders
1. Managerial Rights PRE-EMPTIVE RIGHT OF FIRST
a. Voting rights; and RIGHT REFUSAL
b. Right to remove directors May be exercised Arises only by
2. Proprietary Rights even when there virtue of
a. Right to dividends; is no express contractual
b. Right to issuance of stock certificate for provision of law stipulations but is
fully paid shares; also granted under
c. Proportionate participation in the the provisions on
distribution of assets in liquidation; Close Corporation
d. Right to transfer of stocks in corporate Pertains to Exercisable
books; unsubscribed against another
e. Right to recover stocks unlawfully sold portion of the stockholder of the
for delinquent payment of subscription authorized capital corporation of his
f. Preemptive right stock. A right that shares of stock
may be claimed
Preemptive Right of Stockholders (1999, against the
2001, 2004 BAR EXAMS) corporation
 It is the shareholders’ preferential right
to subscribe to all issues or dispositions of 3. Remedial Rights
shares of any class in proportion to their a. Individual suit – a suit instituted by a
present stockholdings. shareholder for his own behalf against
the corporation;
 Purpose: to enable the shareholder to
retain his proportionate control in the b. Representative suit – a suit filed by a
corporation and to retain his equity in the shareholder in his behalf and in behalf
surplus. likewise of other stockholders similarly
 Extends to treasury shares in case of situated and with a common cause
their reissuance. against the corporation; and
 If the shares preferentially offered to a c. Derivative suit – a suit filed in behalf of
stockholder are not subscribed or purchased the corporation by its shareholders (not
by him, it does not follow that said shares creditors whose remedies are merely
shall again be re-offered on a pro rata basis subsidiary such as accion subrogatoria
to stockholders who already exercised their and accion pauliana) upon a cause of
preemptive rights. There is no preemptive action belonging to the corporation, but
right with respect to the share to be re- not duly pursued by it, against any
offered. person or against the directors, officers
 In case additional issues of originally and/or controlling shareholders of the
authorized shares: corporation.
 Requisites:
 General Rule: There is no preemptive (i) An existing cause of action in favor of
right. This is on the theory that when a
the corporation
corporation at its inception offers its first
(ii) The stockholder/member must first
shares, it is presumed to have offered all of
make a demand upon the corporation or
those which it is authorized to issue.
the management to sue unless such a
Exception: When a corporation at its
demand would be futile
inception offers only a specified portion of its

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(iii) The stockholder/member must be 3. Financial Records.


such at the time of the objectionable
acts or transactions unless the
transactions are continuously injurious MERGER AND CONSOLIDATION
(iv) The action must be brought in the (1996, 1999 Bar Exams)
name of the corporation Merger
 The number of shares of the stockholder A union whereby one or more existing
is immaterial since he is not suing in his corporations are absorbed by another
own behalf corporation which survives and continues the
Note: The mere trustee of shares combined business.
registered in his name cannot file a
derivative suit for he is not a stockholder
in his own right. (Bitong vs. CA, 292
SCRA 304) Consolidation
The union of two or more existing corporations
Liabilities of Stockholders to form a new corporation called the
a. Liability to the corporation for unpaid consolidated corporation.
subscription
b. Liability to the corporation for Procedure:
interest on unpaid subscription a. The board of directors or trustees of each
c. Liability to creditors of the corporation shall approve a plan of merger or
corporation on the unpaid subscription consolidation
d. Liability for watered stock b. The plan shall be submitted for approval by
e. Liability for dividends unlawfully paid the stockholders or members of each of such
f. Liability for failure to create corporation at separate corporate meetings duly
corporation called for the purpose
c. The articles of merger or consolidation shall
CORPORATE BOOKS AND RECORDS be executed by each of the constituent
corporations
Inspection Rights d. Submission to the SEC for approval
Limitations: e. The SEC may or may not conduct a hearing
a. The right must be exercised f. Issuance of certificate of merger or
during reasonable hours on business consolidation by the SEC.
days;
b. The person demanding the right Effects of Merger and Consolidation
has not improperly used nay information 1. The constituent corporations shall become a
obtained through any previous single corporation which, in case of merger shall
examination of the books and records of be the surviving corporation and, in the case of
the corporation; and consolidation, shall be the consolidated
c. The demand is made in good corporation;
faith or for a legitimate purpose. (Sec. 2. The separate existence of the constituent
74) corporation shall cease, except that of the
 The right extends, in consonance with surviving corporation;
equity, good faith, and fair dealing, to a 3. The surviving or consolidated corporation
foreign subsidiary wholly-owned by the shall possess all rights, privileges, immunities
corporation. and powers and subject to all the duties and
liabilities of a corporation;
 Books required to be kept by the
4. The surviving or consolidated corporation
corporation:
shall thereafter possess all the rights, privileges,
1. Book of Minutes
immunities and franchises of each of the
a. minutes of stockholder or members
constituent corporations;
meetings; and
5. All property, real or personal, and all
b. minutes of board meetings.
receivables due to, and all other interest of each
2. Book of all business transactions; constituent corporation, shall be deemed
3. Stock and transfer book, in case transferred to and vested in such surviving or
of stock corporations. consolidated corporation without further act or
 Corporate records required by the SEC deed;
to be kept and/or registered: 6. The surviving or consolidated corporation
1. Books of Account; shall be responsible for all the liabilities and
2. List of Stockholders or Members; and

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obligations of each of the constituent 4. Title to the 4. Transfer of


corporations; assets are title is by virtue
7. Any claim, action or proceeding pending by
or against any of the constituent corporations transferred by of contract
may be prosecuted by or against the surviving or operation of law
consolidated corporations; and 5. The 5. The selling
8. The rights of the creditors or lien upon the constituent corporation is
property of any of each constituent corporation
corporations are not dissolved by
shall not be impaired by such merger or
consolidation. automatically the mere
dissolved transfer of all its
General Rule: When one corporation buys all the property
shares of another corporation, this will not
operate to dissolve the other corporation and as Types of Acquisitions (Philippine Corporate
the two corporations still maintaining their Law, Cesar Villanueva, 2001 ed.)
separate corporate entities, one will not answer a. “ASSETS-ONLY” LEVEL
for the debts of the other. The purchaser is interested only in the raw
Exceptions as to Non-assumption of Liabilities: assets and properties of the business. He is not
1. If there is an express assumption of liabilities; interested in the entity of the corporate owner of
2. If there is a consolidation or merger; the assets nor of the goodwill and other factors
3. If the purchase was in fraud of creditors; and relating to the business itself.
4. If the purchaser is merely a continuation of The transferee would not be liable for the debts
the seller. and liabilities of his transferor since there is no
privity of contract over debt obligations between
De Facto Merger the transferee and the transferor’s creditors
One corporation acquiring all or substantially all b. “BUSINESS-ENTERPRISE” LEVEL
of the properties of another corporation in The transferee merely continues the same
exchange for shares of stock of the acquiring business of the transferor since he obtains the
corporation. The acquiring corporation would earning capability of the venture
end-up with the business enterprise of the The transferee is liable for the debts and
selling corporation whereas the latter would end liabilities of the transferor
up with basically its remaining assets being the c. “EQUITY” LEVEL
shares of stock of the acquiring corporation and The purchaser takes control and ownership of
may then distribute it as liquidating dividend to the business by purchasing the shareholdings of
its stockholders. (Philippine Corporate Law, the corporate owner. What the purchaser
Cesar Villanueva, 2001 ed.) actually purchased is the ability to elect the
members of the board of the corporation who
Merger and Sale of Assets run the business.
Consolidation
1. Sale of 1.merger/consol APPRAISAL RIGHT
assets is always idation is not
Appraisal Right
involved always involved
The right to withdraw from the corporation and
2. There is 2. Purchasing demand payment of the fair value of his shares
automatic corporation is after dissenting from certain corporate acts
assumption of not generally involving fundamental changes in corporate
liabilities liable for the structure, namely:
(ASIM)
debts and
1. An amendment to the articles
liabilities of the that has the effect of a) changing or
selling restricting the rights of shareholders or
corporation of authorizing preferences over those of
3. There is 3. The selling outstanding shares, or b) changing the
continuance of corporation term of corporate existence;
the enterprise ordinarily 2. Sale, encumbrance or other
dispositions of all or substantially all of
and of the contemplates a the corporate property or assets. (Sec.
stockholders liquidation of the 81)
enterprise 3. Merger or consolidations; and

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4. Investment of corporate funds in General Rule: A dissenting stockholder who


another corporation or in a purpose demands payment of his shares is no longer
other than the primary purpose; allowed to withdraw from his decision
 Other instances when right available: Exceptions:
5. When a corporation invest its 1. The corporation consents to the withdrawal
funds in another corporation or business 2. The proposed corporate action is abandoned
for any purpose other than its primary or rescinded by the corporation
purpose 3. The proposed corporate action is
6. In a close corporation, a disapproved by the SEC where its approval is
stockholder for any reason compel the necessary
corporation to purchase his shares when 4. The Commission determines that such
the corporation has sufficient assets in stockholder is not entitled to appraisal right.
its books to cover its debts and liabilities
exclusive of capital stock NON-STOCK CORPORATION

Procedure Non-Stock Corporation –a corporation


a. The dissenting stockholder shall make a organized for an eleemosynary purpose, and no
written demand on the corporation within 30 part of whose income is, during its existence,
days after the date on which the vote was taken distributable as dividends to its members,
for the payment of the fair value of his shares. trustees, or officers, subject to the provisions of
Failure to do so, shall be deemed a waiver of his the Corporation Code on dissolution. (Sec. 87)
a waiver of his appraisal right  Any profit which it may obtain as an
b. If the proposed corporate action is incident to its operations shall, whenever
implemented or effected, the corporation shall necessary or proper, be used for the
pay to such stockholder, upon surrender of the furtherance of the purpose or purposes for
corresponding certificate of stock within 10 days which it was organized.
after demanding payment of his shares  Eleemosynary purposes: charitable,
c. Upon payment of the agreed or awarded religious, educational, professional, cultural,
price, the stockholder shall transfer his shares to recreational, fraternal, literary, scientific,
the corporation social, civic service, or similar purposes, like
trade, industry, agricultural. (Sec. 88)
Conditions on the Exercise of Appraisal  They are governed by the same rules
Rights established for stock corporations, whenever
1. Any of the instances provided for by law for pertinent, subject, however, to a number of
the exercise of the right must be present. special features.
2. The dissenting stockholder must have voted Rules on Conversion (2001 Bar Exam)
against the proposed corporate action. 1. Stock to non-stock corporation
3. The stockholder must make a written demand Conversion may be made by mere
within 30 days from the date that the vote amendment of the articles of incorporation.
was taken. 2. Non-stock to stock corporation
4. The price must be based on the fair value of
• The corporation must first be dissolved;
the shares as of the day prior to the date in
mere amendment of the articles of
which the vote was taken.
incorporation would not suffice because
5. Payment of the shares must be made only
the conversion would change the
out of the unrestricted retained earnings of
corporate nature from non-profit to
the corporation.
monetary gain.
6. Upon payment, the stockholder must transfer
• The conversion without dissolving it first
his shares to the corporation.
would be tantamount to distribution of its
assets or income to its members
Effect of the Exercise of the Right:
inasmuch as after its conversion, the
a. All rights accruing to the such shares shall be
asset of the non-stock corporation would
suspended
now be treated as payment to the
b. The dissenting stockholder shall be entitled to
subscriptions of the members who will
receive payment of the fair value of his
now become stockholders of the
shares as agreed upon between him and the
corporation.
corporation or as determined by the
appraisers chosen by them.
Rights of Members
1. To be entitled to 1 vote unless otherwise
provided in the articles or by-laws

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2. To vote by proxy unless otherwise 1. Assets held by the corporation


provided in the articles or by-laws upon a condition requiring return, transfer or
3. To transfer membership if allowed by the conveyance, and which condition occurs by
articles or by-laws reason of dissolution, shall be returned,
4. To be elected as trustee transferred or conveyed in accordance with
such requirements
Distinctions between Stock Corp and Non- 2. Assets received and held by the
Stock Corp (2004 Bar Exam) corporation subject to limitations permitting
Stock Non-Stock their use only for charitable, religious,
Has capital stock • Does not have benevolent, educational or similar purposes
divided into shares shares and may not but not held upon a condition requiring
and with authority distribute profits to return, transfer or conveyance by reason of
to distribute its members dissolution, shall be transferred or conveyed
dividends to its to one or more corporations, societies or
stockholders organizations engaged in activities in the
Stockholders may • Members Philippines substantially similar to those of
transfer their cannot transfer the dissolving corporation pursuant to a plan
shares their membership of distribution
unless allowed by 3. Other assets, if any, shall be
the articles or by- distributed in accordance with the provisions
laws of the articles of incorporation or the by-laws
Cumulative voting • Cumulative 4. In any other case, assets may
is available in the voting not available be distributed to such persons, societies,
election of directors unless otherwise organizations or corporations, whether or not
provided in the organized for profit, as may be specified in a
articles or by-laws plan of distribution.
Note: The plan of distribution shall be approved
Directors cannot • Trustees may
exceed 15 in by a majority vote of the board of trustees
exceed 15 in
number and by 2/3 of the members having voting
number
rights at a meeting
The term of a • The term of a
CLOSE CORPORATION
director is 1 year trustee is 3 years;
1/3 of the Board Definition:
shall be elected A special kind of stock corporation:
annually 1. whose articles of incorporation should
Stockholders may • Members may provide that:
vote by proxy be deprived of the a.the number of stockholders shall not
right to vote by exceed 20;
proxy in the articles
b. issued stocks are subject to
or by-laws
transfer restrictions, with a right of
Officers are elected • Officers may be
preemption in favor of the stockholders
by the Board of directly elected by
or the corporation; and
Directors the members
unless otherwise
c. the corporation shall not be listed in
provided in the the stock exchange or its stocks should
articles or by-laws not be publicly offered; AND
2. whose at least 2/3 of the voting stocks or
Stockholders and • Members may
voting rights should not be owned or
directors must act be allowed by the
controlled by another corporation which is
in a meeting, by-laws to vote by
not a close corporation.
except where a mail or other similar
Characteristics:
mere written assent means
1. Stockholders may act as
is sufficient or a
directors without need of election and
formal meeting
therefore are liable as directors;
unnecessary
2. Stockholders who are involved
in the management of the corporation
Rules for Distribution of Assets in case of
are liable in the same manner as
Dissolution
directors are.
All liabilities and obligations of the corporation
3. Quorum may be greater than
shall be paid, satisfied and discharged or
mere majority;
adequate provision shall be made therefor

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4. Transfers of stocks to others, articles so provide,


which would increase the number of but they are liable
stockholders to more than the maximum as directors.
are invalid; The corporate Its articles may
5. Corporate actuations may be officers and provide that any or
binding even without a formal board employees are all of the corporate
meeting, if the stockholder had elected by a officers or
knowledge or ratified the informal action majority vote of all employees may be
of the others; the members of the elected or
6. Preemptive right extends to all board of directors. appointed by the
stock issues; stockholders.
7. Deadlocks in board are settled The pre-emptive The pre-emptive
by the SEC, on the written petition by right is subject to right is subject to no
any stockholder; and the exceptions exceptions unless
8. Stockholder may withdraw and found in Sec. 39. denied in the
avail of his right of appraisal. articles
Note: Special rules are provided for close The appraisal right The appraisal right
corporations because it is essentially an may be exercised may be exercised
incorporated partnership. (The Corporation by a stockholder and compelled
Code of the Philippines Annotated, Hector de only in the cases against the
Leon, 2002 ed.) provided in Secs. corporation by a
81 and 42 of the stockholder for any
The following cannot be a close corporation: Code. reason.
a. mining companies; Except as regards In case of an
b. oil companies; redeemable arbitration of an
c. stock exchanges; shares, the intra-corporate
d. banks; purchase by the deadlock by the
e. insurance companies; corporation of its SEC, the
f. public utilities; own stock must corporation may be
g. education institutions; always be made ordered to purchase
h. other corporations declared to be vested from the its own shares from
with public interest. unrestricted the stockholders
retained earnings. regardless of the
Ordinary Stock Close Corporation availability of
Corporation unrestricted
Its articles of Its articles must retained earnings.
incorporation need contain the special Arbitration of intra- Arbitration of intra-
only contain the matters prescribed corporate deadlock corporate deadlock
general matters by Sec. 97, aside by the SEC is not a by the SEC is an
enumerated in from the general remedy in case the available remedy in
Sec. 14 of the matters in Sec. 14. directors or case the directors
Code. Failure to do so stockholders are or stockholders are
precludes a de jure so divided so divided
close corporation respecting the respecting the
status. management of the management of the
Its status as an 2/3 of its voting corporation. corporation.
ordinary stock stock or voting
corporation is not rights must not be Powers of the SEC in case of DEADLOCK in
affected by the owned or controlled Close Corporations
ownership of its by another 1. Cancel or alter any provision in the articles
voting stock or corporation which is of incorporation or bylaws
voting rights. not a close 2. Cancel, alter or enjoin any resolution of the
corporation. corporation
Its articles cannot Its articles may 3. Direct or prohibit any act of the corporation
classify its classify its directors. 4. Require the purchase at their fair value of
directors. shares of any stockholder either by any
Business of the Business of the stockholder or by the corporation regardless
corporation is corporation may be of the availability of unrestricted retained
managed by the managed by the earnings.
board of directors. stockholders if the 5. Appoint a provisional director

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6. Dissolve the corporation incorporated by an aggregate of persons,


7. Granting such other relief as the e.g. religious order, diocese, synod, sect,
circumstances may warrant. etc.

SPECIAL CORPORATIONS
DISSOLUTION AND WINDING UP
1. Educational Corporation (LIQUIDATION)
 A stock or non-stock corporation Dissolution
organized to provide facilities for teaching or Extinguishment of the franchise of a corporation
instruction. and the termination of its corporate existence.
 A favorable recommendation of the Modes:
DECS is essential for the approval of its 1. Voluntary (2002 Bar Exam)
articles and by-laws. a) Application for dissolution with the SEC
 It is primarily governed by special laws i. Where no creditors are affected
and suppletorily by the provisions of the ii. Where creditors are affected
Code. b) Shortening of the corporate term by
amending the articles of incorporation.
NON-STOCK EDUCATIONAL 2. Involuntary
EDUCATIONAL CORPORATION a) Expiration of the corporate term;
CORPORATION b) Failure to organize and commence
A non-stock A special business within 2 years from the date of
corporation corporation which issuance of the certificate of incorporation
may a stock or non- c) Legislative dissolution;
stock d) Quo warranto suit against a de facto
Governed by the Governed by corporation;
provisions on non- special laws and by e) Minority stockholders’ suit for dissolution
stock corporations the general on justifiable grounds; or
and suppletorily by provisions of the f) SEC dissolution, upon complaint and after
the provisions on Corporation Code notice and hearing, on the following grounds:
stock corporations i. The corporation was illegally
The number of The number of the organized;
board of trustees board of trustees ii. Continuous inactivity (subsequent to
may be more than should not be less incorporation, organization and
15 than 5 but not more commencement of business) for at
than 15. least 5 years;
iii. Serious dissension in the corporation;
The term of office The term of office of
or
of the board of the board of
iv. Commission by the corporation of
trustees shall be 3 trustees shall be 5
illegal or ultra vires acts or violations
years years
of the Code.
Effects of Dissolution
2. Religious Corporation a. Transfer of legal title to corporate property to
 A corporation composed entirely of the stockholders who become co-owners thereof
spiritual persons and which is organized for b. Continuation of corporate business merely as
the furtherance of a religion or for an association without juridical personality
perpetuating the rights of the church or for c. Conveyance by the stockholders of their
the administration of church or religious work respective shareholdings toward the creation of
or property. It is different from an ordinary a new corporation to continue the business of
non-stock corporation organized for religious the old
purposes. d. Reincorporation of the dissolved corporation
 Kinds: by refilling new articles of incorporation and by-
A) CORPORATION SOLE laws
- A special form of corporation, usually e. The corporation continues as a body
associated with the clergy, consisting of one corporate for 3 years for purposes of winding up
person only and his successors, who is f. Cessation of corporate existence for all
incorporated by law to give some legal purposes upon the expiration of the winding up
capacities and advantages; and period of 3 years. (The Corporation Code of the
B) RELIGIOUS SOCIETIES Philippines Annotated, Hector de Leon, 2002 ed.
- A non-stock corporation governed by a
board but with religious purposes. It is

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Liquidation (1997, 2000, 2001 Bar Exams) following ways: (1) physical division or
The process by which all the assets of the partition based on the proportion of the
corporation are converted into liquid assets value of their stockholdings; or (2)
(cash) in order to facilitate the payment of selling the property to a 3rd person and
obligations to creditors, and the remaining dividing the proceeds among the 5
balance, if any, is to be distributed to the stockholder in proportion to their
stockholders or members. stockholdings; or (3) after determination
Methods: of the value of the property, by
1. By the corporation itself through its assigning or transferring the property to
board of directors/trustees; one stockholder with the obligation on
2. By a trustee to whom the corporate the part of the said stockholder to pay
assets have been conveyed; and the other four stockholders the amount
3. By a management committee or in proportion to the value of the
rehabilitation receiver appointed by the stockholdings of each.
SEC.
Note: The 3-year period of liquidation does not
apply to Methods 2 and 3 as long as the trustee FOREIGN CORPORATION
or the receiver is appointed within the said (1995, 2002 Bar Exams)
period.
 The termination of the life of a juridical Definition: A corporation formed, organized or
entity does not by itself cause the extinction existing under any law other than those of the
or diminution of the rights and liabilities of Philippines, and whose laws allow Filipino
such entity nor those of its owners and citizens and corporations to do business in its
creditors alike (see Sec. 145). own country or state. (Sec. 123)
 The word “trustee” as sued in the  The definition espouses the
corporation statute must be understood in its incorporation test and the reciprocity rule
general concept which could include the and is significant for licensing purposes.
counsel to whom was entrusted the  It is not permitted to “transact or do
prosecution of the suit filed by the business in the Philippines” until it has
corporation. (Spouses Gelano vs. CA 103 secured a license for that purpose from the
SCRA 90) SEC and a certificate of authority from the
appropriate government agency.
Liquidation Rehabilitation
Connotes a Connotes a Resident Agent
winding up or reopening or An individual, who must be of good moral
settling with reorganization character and of sound financial standing,
creditors and residing in the Philippines, or a domestic
debtors corporation lawfully transacting business in the
Winding up Contemplates a Philippines, designated in a written power of
process so that continuance of attorney by a foreign corporation authorized to
assets may be corporate life in an do business in the Philippines, on whom any
distributed to those effort to restore the summons and other legal processes may be
entitled corporation to its served in all actions or other legal proceedings
former successful against the foreign corporation.
operation
Grounds for Revocation of License
BAR Q: XYZ Corp. shortened its 1. Failure to file annual reports required by the
corporate life by amending its articles of Code;
incorporation. It has no debts but owns 2. Failure to appoint and maintain a resident
several real estate properties in Metro agent;
Manila. How would said property be 3. Failure to inform the SEC of the change of
liquidated among the 5 stockholders of residence of the resident agent;
said corporation. Discuss the two 4. Failure to submit copy of amended articles
methods of liquidation. or by-laws or articles of merger or
SA: The real estate properties of XYZ consolidation;
Corp. can be liquidated among the five 5. A misrepresentation in material matters in
stockholders after the property has been reports;
conveyed by the corporation to the 5 6. Failure to pay taxes, imposts and
stockholders, by dividing or partitioning assessments;
it among themselves in any of the 7. Engage in business unauthorized by SEC;

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8. Acting as dummy of a foreign corporation; b) Appointing a representative or distributor


and domiciled in the Philippines which
9. Not licensed to do business in the transacts business in its own name and
Philippines. (Sec. 134) for its own account;
c) Publication of a general advertisement
Test of “Doing or Transacting Business in through any print or broadcast media;
the Philippines” (1998, 2002 Bar Exams) d) Maintaining a stock of goods in the
The Corporation Code does not define the Philippines solely for the purpose of
phrase “doing or transacting business.” having the same processed by another
A. Jurisprudential Tests entity in the Philippines;
1. Twin characterization test e) Consignment by the foreign corporation
a) Whether the foreign corporation is of equipment with a local company to be
maintaining or continuing in the Philippines used in the processing of products for
the body or substance of the business for export;
which it was organized or whether it has f) Collecting information in the Philippines;
substantially retired from it and turned it over and
another (Substance Test); and g) Performing services auxiliary to an
b) Whether there is continuity of commercial existing isolated contract of sale which
dealings and arrangements, contemplating are not on a continuing basis.
to some extent the performance of acts or C. Jurisprudential Rules
works or the exercise of some functions 1. Doctrine of Isolated Transactions
normally incident to and in progressive Foreign corporations, even unlicensed ones, can
prosecution of, the purpose and object of its sue or be sued on a transaction or series of
organization (Continuity Test). transactions set apart from their common
2. Contract Test business in the sense that there is no intention
Whether the contracts entered into by the to engage in a progressive pursuit of the
foreign corporation, or by an agent acting purpose and object of business transaction.
under the control and direction of the foreign (Eriks Pte.Ltd vs. CA, 267 SCRA 567)
corporation, are consummated in the
Philippines. 2. In Pari Delicto Rule
B. Statutory Tests In the case of Top-Weld Manufacturing vs.
1. Foreign Investment Act of 1991 (R.A. No. ECED, S.A., the Court denied the relief prayed
7042) for by petitioner when it ruled that the very
Acts constituting “doing business”: purpose of the law was circumvented and
a) Soliciting orders, service contracts, evaded when the petitioner entered into the said
opening offices, whether called “liaison” agreements despite the prohibition contained in
offices or branches; the questioned law. The parties were considered
b) Appointing representatives or as being in pari delicto because they equally
distributors domiciled in the Philippines violated R.A. 5455
or who in any calendar year stay in the 3. Estoppel Rule
country for a period or periods totaling  A party is estopped from questioning the
180 days or more; capacity of a foreign corporation to institute
c) Participating in the management, an action in our courts where it had obtained
supervision or control of any domestic benefits from its dealings with such foreign
business, firm or entity or corporation in corporations and thereafter committed a
the Philippines; and breach or sought to renege on its
d) Any other act or acts that imply a obligations.
continuity of commercial dealings or
arrangements, and contemplate to that Effects of Lack of License
extent the performance of acts or works, A. On suits
or the exercise of some of the functions 1. Foreign corporation doing business in the
normally incident to, and in progressive Philippines:
prosecution of, commercial gain or of the a) may not sue or intervene in any action in
purpose of the business organization. any court or administrative agency of the
2. Implementing Rules of R.A. No. 7042 Philippines; but
Acts not constituting “doing business”: b) may be sued on any valid cause of action
a) Mere investment as a shareholder in a recognized in the Philippines (under the
domestic corporation and/or the exercise doctrine of quasi-estoppel by acceptance
of rights as such investor; of benefits). (Sec. 133)

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2. Foreign corporation not doing business in contemplated are those whose offices are
the Philippines: created by the Corporation Code or the by-laws.
a) Generally, it may not sue and be sued in
any court or administrative agency of the Intra-Corporate Dispute (1996, 1997, 2006 Bar
Philippines; Exams)
b) However, it may sue and be sued for Elements:
isolated transactions, as well as for those 1. Status or relationship of the parties –
which are casual or incidental thereto. controversy must be between and among
B. On contracts corporators, between corporators and the
The contracts contemplated are those that corporation
satisfy the “contract test” or those that make a 2. Nature of the question – intrinsic connection
foreign corporation as one “doing business in the with the regulation or the internal affairs of
Philippines.” the corporation
General Rule: The contracts are unenforceable. Examples:
They are enforceable only upon securing a 1. Action by a corporate officer to recover
license. compensation from the corporation
Exception: However, the contracts are null and 2. Action by a stockholder to compel issuance
void if they are contrary to law, morals, good of certificate of stocks
customs, public order and public policy. 3. Action for recovery of corporate funds
Note: Allegations in the complaint determines
Instances when a Foreign Corp may sue in jurisdiction.
the Philippines whether or not Licensed to
do Business thereat Grounds for Suspension or Cancellation of
1. To seek redress for an isolated business Certificate of Registration (SEC. 6[L])
transaction; 1. fraud in procuring registration;
2. To protect its corporate reputation, name, and 2. serious misrepresentation as to objectives of
goodwill; corporation;
3. To enforce a right not arising out of a 3. refusal to comply with lawful order of SEC;
business transaction, e.g. tort that occurred in 4. continuous inoperation for at least 5 years;
the Philippines; 5. failure to file by-laws within required period;
4. When the parties have contractually stipulated 6. failure to file reports; and
that Philippines is the venue of actions; and 7. Others similar grounds.
5. When the party sued is barred by the principle
of estoppel and/or principle of unjust enrichment Interim Rules of Procedute on Corporate
from questioning the capacity of the foreign Rehabilitation (effective December 15, 2000)
corporation.
Corporate Rehabilitation
SEC REORGANIZATION DECREE A process to try to conserve and administer the
O (P.D. No. 902-A) rig corporation’s assets in the hope that it may
i nal eventually be able to return from financial stress
and Exclusive Jurisdiction of the RTC (Sec. 5 to solvency.
in relation to Sec. 5.2 OF RA 8799): Nature: in rem, summary, and non-adversarial
1. Fraudulent devices and schemes employed Applicability: These Rules apply to petitions for
by directors detrimental to the public interest rehabilitation filed by corporations, partnerships
and to other firms; and associations pursuant to P.D. 902-A
2. Intra-corporate disputes; Steps:
3. Disputes with the state in relation to their 1. Filing verified petition with the appropriate
franchise and right to exist as such; RTC by:
4. Controversies in election, appointment of a. corporate debtor who foresees the
directors or trustees; impossibility of meeting its debts when
5. Petition to be declared in a state of they respectively fall due; or
suspension of payments; b. creditors holding at least 25% of the
6. Petition for rehabilitation; and debtor’s total liabilities;
7. Appointment of rehabilitation receiver or 2. The following shall be annexed to the petition:
management committee (provisional a. audited financial statements at end of its
remedies). last fiscal year;
b. interim financial statement;
Note: A corporate officer’s dismissal is always a c. schedule of debts and liabilities;
corporate act and/or an intra-corporate d. inventory of assets;
controversy. However, the corporate officers e. rehabilitation plan;

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f. schedule of payments and


disposition of assets effected within 3 Powers and Functions of Management
months preceding the filing of the petition; Committee and Rehabilitation Receiver (Sec.
g. schedule of cash flow for the 6[d], P.D. 902-A)
last 3 months’ 1. To take custody
h. statement of possible claims; of, and control over, all the existing assets
i. affidavit of general financial and property of such entities under
condition; management;
j. at least 3 nominations for 2. To evaluate the
rehabilitation receiver; existing assets and liabilities, earnings and
k. certificate under oath that operations of such corporations,
directors and stockholders have partnerships or other associations;
irrevocably approved/ consented to all 3. To determine
actions/matters necessary under the the best way to salvage and protect the
rehabilitation plan. interest of the investors and creditors;
3. The court shall issue the stay order not later 4. To study,
than 5 days from the filing of the petition, which review and evaluate the feasibility of
among others, shall: continuing operations and structure and
a. appoint a rehabilitation receiver; rehabilitate such entities if determined to be
b. stay all actions for claims against the feasible by the RTC;
debtor, which shall cover both secured 5. To report and
and unsecured creditors; be responsible to the RTC until dissolved;
c. set an initial hearing for the petition (not and
earlier than 45 days but not later than 60 6. May overrule or
days from filing of the petition); and revoke the actions of the previous
d. direct the creditors to file their verified management and board of directors of the
comment or opposition not later than 10 entity under management, notwithstanding
days before the initial hearing; their any provision of law, articles of incorporation
failure to do so would bar them from any or by-laws to the contrary.
participating in the proceedings.
4. Publication of the stay order in a newspaper  Mere
of general circulation once a week for 2 disagreement among stockholders as to the
consecutive weeks; affairs of the corporation would not in itself
5. Referral of rehabilitation plan to rehabilitation suffice as a ground for the appointment of a
receiver; management committee. At least where
6. Meetings between corporate debtor with there is no imminent danger of loss of
creditors. Discussions on the rehabilitation plan; corporate property or of any other injury to
7. Submission of final rehabilitation plan to the stockholders, management of corporate
RTC for approval; business should not be wrested away from
8. The petition shall be dismissed (which results duly elected officers, who are prima facie
into the automatic lifting of the stay order unless entitled to administer the affairs of the
RTC ordered otherwise) if no rehabilitation plan corporation, and placed in the hands of the
is approved after 180 days from initial hearing; management committee. However, where
9. Approval or disapproval of the rehabilitation the dissension among stockholders is such
plan by RTC. that the corporation cannot successfully
carry on its corporate functions the
Rehabilitation Receiver appointment of a management committee
 A person appointed by the RTC, in becomes imperative. (Jacinto and Colayco
behalf of all the parties for the purpose of vs. First Women’s Credit Corporation, G.R.
preserving and conserving the property and No. 154049, August 28, 2003)
preventing its possible destruction or
 RA 8799 effectively amended Sec. 5 of
dissipation, if it were left in the possession of
PD 902-A, jurisdiction over intra-corporate
any of the parties.
disputes is now vested in the RTCs.
 He acts in a fiduciary capacity and with However, while Sec. 5 was amended, there
impartiality towards all interested. is no repeal of Sec. 6 thereof declaring that
 He does not take over the management the fraudulent acts or schemes, which the
and control of the debtor, but shall closely SEC shall exclusively investigate and
oversee and monitor the operations of the prosecute, are those in violation of any law
debtor during the pendency of the or rules and regulations administered and
proceedings. enforced by the SEC alone. The filing of

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civil/intra-corporate case before SEC does 2. Formulate policies and


not preclude the simultaneous and recommendations on securities market,
concomitant filing of a criminal action before advise Congress and other government
the regular courts; such that a fraudulent act agencies on all aspects of securities market,
may give rise to liability for violation of the and propose legislation and amendments
rules and regulations of the SEC cognizable thereto;
by the SEC itself, as well as criminal liability 3. Approve, reject, suspend, revoke, or
for violation of the Revised Penal Code require amendments to the registration
cognizable by the regular courts, both statements, and registration licensing
charges to be filed and proceeded applications;
independently, and may be simultaneously 4. Regulate, investigate or supervise
with the other. (Fabia vs. CA, G.R.No. activities of persons to ensure compliance;
132684. September 11, 2002.) 5. Supervise, monitor, suspend or take
over activities of exchanges, clearing
Automatic Stay agencies and other SROs;
 Effect of appointment of a management 6. Impose sanctions for violation of laws
committee or rehabilitation receiver and rules, regulations, and orders;
 All actions for claims against the 7. Prepare, approve, amend or repeal rules
corporation shall be suspended accordingly. and regulation and orders, and issue
 Purpose/justification: To enable the opinions and provide guidance on and
supervise compliance therewith;
management committee or the rehabilitation
8. Enlist aid and support of and/or deputize
receiver to effectively exercise its powers
any and all enforcement agencies of
free from any judicial or extrajudicial
Government, as well as any private
interference that might unduly hinder or
institution, corporation, firm, association or
prevent the rescue of the debtor company.
person in the implementation of its powers
(Rubberworld v. NLRC)
and functions;
 No definite duration; deemed to apply
9. Issue cease and desist orders to prevent
during the entire period that the corporate
fraud or injury to investing public;
debtor is under management committee or
10. Punish for both direct and indirect
the rehabilitation receiver. (BF Homes v. CA)
contempt;
11. Compel corporate officers to call
meetings of stockholders or members
thereof under its supervision;
12. Issue subpoena duces tecum and
summon witnesses, and order the
SECURITIES REGULATION CODE
examination, search and seizure of all
(R.A. 8799)
documents, papers, file and records, tax
returns, and books of accounts of any entity
Securities Regulation (1995, 1996, 2001, 2004 or person under investigation;
Bar Exams) 13. Suspend, or revoke, after proper notice
• The Code is also known as the “Blue and hearing, franchise or certificate of
Sky Law”, because it was enacted to protect registration of corporations, partnerships or
the public from unscrupulous promoters who associations; and
stake business or venture claims which have 14. Exercise such other powers as may be
really no basis and sell shares or interests provided by law, implied from, or which are
therein to investors, who are then left necessary or incidental to the carrying out of
holding certificates representing nothing express powers.
more than a square of the blue sky.
• The Code is self-executory and failure of Securities
SEC to issue rules and regulations shall not Shares, participation or interest in a corporation
in any manner affect its self-executory or in a commercial enterprise or profit-making
nature. (Subsec. 72.1) venture and evidenced by a certificate, contract,
instrument, whether written or electronic in
Powers and Functions of the SEC: character. (Sec. 3)
1. Shall have jurisdiction and supervision Kinds:
over all corporations, partnerships or a. Debt Instruments: bonds, debentures,
associations who are grantees of primary notes, and other evidences of indebtedness,
franchises; asset-backed securities;

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b. Equity Instruments: shares of stock, d. Distribution of stock dividends;


certificate of deposit for a future e. Sale of capital stock exclusively to
subscription, proprietary or nonpropriety stockholders where no commission
membership certificates in corporations; is paid;
c. Investment Instruments: investment f. The issuance of bonds or notes
contracts, fractional undivided interests in secured by mortgage upon real
oil, gas or other mineral rights; estate or tangible personal property,
where the entire mortgage are sold
d. Derivatives: like options and warrants; to a single purchaser at a single
e. Trust Instruments: certificates of sale;
assignments, certificates of participation, g. Issuance of security in exchange of
trust certificates, voting trust certificates or any security from same issuer
similar certificates; pursuant to the right of conversion;
f. Catch-All: other instruments as may in h. Broker’s transactions;
the future determined by the Commission. i. Pre-incorporation subscription
pursuant to the increase of the
Registration of Securities authorized capital stock;
General Rule: Securities shall NOT be sold or j. Exchange of securities by issuer
offered for sale or distribution within the with securities holders exclusively;
Philippines (a) without registration statement k. Sale to less than 20 persons during
duly filed and approved by SEC; and (b) Prior to any 12 month period;
such sale, information on the securities in such l. Sale of securities to banks,
form and with such substance as SEC may registered investment house,
prescribe, shall be made available to each insurance companies, pension fund
prospective purchaser. or retirement plan maintained by the
Exception: The following securities may be sold government or other persons
without need of registration; authorized by the BSP to engage in
A. Exempt Securities: trust functions.
a. Those issued or guaranteed by
the Government or by any political Procedure for Registration of Securities:
subdivision, agency, or by any 1. The Issuer(originator, maker, obligor, or
person controlled or supervised by, creator of the security) shall file with the
and acting as an instrumentality of SEC a sworn registration statement;
the Government; 2. The registration statement shall include
b. Those issued or guaranteed by a prospectus (document made by and
the government of any country with on behalf of an issuer, underwriter or
which the Philippines has diplomatic dealer to sell or offer securities for sale
relations, or by any state, province, to the public through a registration
or political subdivision thereof on statement filed with SEC);
the basis of reciprocity, although the 3. The submission of the following
SEC may require compliance with information: the effect of the securities
the form and content of disclosures; issue on ownership, on the mix of
c. Certificates issued by receiver ownership, especially foreign and local
or by trustee in a bankruptcy duly ownership;
approved by proper adjudicatory 4. The registration statement shall be
body; signed by Issuer’s executive officer,
d. Any security or its derivatives principal operation officer, principal
the sale or transfer of which, by law, officer, comptroller, principal accounting
is under supervision and regulation officer, secretary or persons performing
of OIC, HLURB, or BIR; similar functions accompanied by a duly
e. Any security issued by bank, verified petition of the Board of Director’s
except its own shares. of the Issuer;
B. Exempt Transactions 5. Filing of the written consent of the expert
a. Judicial sale by executor, named;
administrator, guardian/receiver in 6. Written certification of the selling
insolvency or bankruptcy; shareholders, if the registration
b. Sale of pledged or foreclosed statement includes shares to be sold by
property to liquidate debts; selling shareholders;
c. Sale on isolated transaction by 7. Payment of fees to the SEC by the
owner; Issuer;

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8. Publication in 2 newspapers of general life, pension, interment, and other plans which
circulation in the Philippines, once a SEC shall approve. (Subsec. 3.9)
week for 2 consecutive weeks, reciting
that a registration statement has been Tender Offer (2002 Bar Exam)
filed; A publicly announced intention by a person
9. The SEC may compel the production of acting alone or in concert with other persons to
all the books of such Issuer, and may acquire equity securities of a “public company”
administer oaths to, and examine the  It is mandatory to make a tender offer for
officers of such Issuer or any other equity shares of a public company in an
person connected therewith as to its amount equal to the number of shares
business and affairs; that the person intends to acquire in the
10. Within 45 days after the date of filing of following circumstances:
the registration statement, or by such a. The person intends to acquire 15%
later date to which the issuer has or more of the equity shares of a
consented, SEC shall declare the public company pursuant to an
registration statement effective or agreement made between or
rejected, unless the applicant is allowed among the person and one or more
to amend the registration statement. sellers;
b. The person intends to acquire 30%
Grounds for Rejection and Revocation: (Sec.
or more of the equity shares of a
13.1)
public company within a period of
1. The issuer:
12 months; or
a. has been judicially declared
insolvent; c. The person intends to acquire
b. has violated the provisions of the shares that would result in
Code or orders issued by the SEC; ownership of more than 50% of the
c. has been engaged in fraudulent equity shares of a public company.
transactions; (Sec. 19)
d. has made false or misleading  Securities deposited may be withdrawn
representation in any material facts; at any time throughout the period that
e. has failed to comply with any the tender offer remains open and if the
requirement the SEC may impose securities deposited have not been
as a condition of registration; previously accepted for payment, and at
2. The registration statement is on its face any time after 60 days from the date of
inaccurate or incomplete, or includes ant the original tender offer or request or
untrue statement or omits to state a invitation.
material fact required to be stated  Unlawful and Prohibited Acts Relating to
therein; Tender Offers: To make an untrue
3. The issuer, any officer, director or statement of a material fact or omit to
controlling person performing similar state any material fact in order to make
functions, has been convicted by a the statements made, not misleading, or
competent judicial or administrative to engage in any fraudulent, deceptive,
body (it includes a foreign court of or manipulative act or practices.
competent jurisdiction), of an offense
involving moral turpitude and/or fraud or How Tender Offer is made:
is restrained by the SEC or other bodies 1. By filing with the SEC a declaration to
for violation of securities, commodities make a tender offer;
and other related laws; 2. By furnishing the issuer or the originator
4. Non-production of all books and papers, of the security a statement containing
administration of oath or examination of such information required under Sec. 17
its officers as required by the SEC. of the SRC:
a. Annual Report (includes balance
Pre-Need Plans sheet, profit and loss statement);
Contracts which provide for the performance of and
future services or the payment of future b. Periodical reports for interim fiscal
monetary consideration at the time of actual periods; and
need, for which planholders pay in cash or 3. By publishing all request or invitations
installment at stated prices, with or without for tender, or materials, making a tender
interest or insurance coverages and includes offer or requesting on inviting letters of
such a security.

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stipulated price which is usually below


Public Company: the prevailing market price of the stock
1. Any corporation with a class of equity at the time the “put” is purchased.
securities listed on an Exchange; or 4. CALL— An option that, in consideration
2. Any corporation with assets in excess of of a premium paid, entitles the buyer the
P50M and having 200 or more holders, right to compel the seller to deliver to
at least 200 of which are holding at least him a certain number of shares within a
100 shares of a class of its securities. given time at a stipulated price which is
usually higher than the prevailing market
Unlawful Acts: price of the stock at the time the “call” is
1. UNLAWFUL SALE OF SECURITIES-- bought. “Call” is the reverse of “put”.
For any beneficial owner, director, or 5. STRADDLE—The double privilege of a
officer to sell any security if the seller or “put” and a “call”, and secures to the
his principal does not own or does not holder the right to demand of the seller
deliver it within 20 days from sale. (Sec. at a certain price within a certain time a
23.3) certain number of shares of specified
2. Manipulation of security prices. (Sec. stock, or to require him to take, at the
24.1) price within the same time, the same
3. MANIPULATIVE AND DECEPTIVE shares of stock.
DEVICES-- Employment of manipulative 6. WASH SALE—the operation of
or deceptive device or contrivance in simultaneously buying and selling the
connection with purchase and sale of same stock. It is any transaction in any
authorities. Execution of “short sale”, security which involves no change in the
“stop-loss order” not in accordance with beneficial ownership thereof. It is the
SEC rules. (Sec 24.2) reverse of “matched orders” wherein
there is a change in the ownership of the
4. OPTION TRADING-- For any member of securities.
Exchange directly or indirectly endorse 7. SHORT SWING TRANSACTION—One
or guarantee the performance of any where a person buys securities and sells
“put”, “call”, “straddle”, “option” or the same within a period of six months.
“privilege” in relation to any security
registered. (Sec. 25) Unlawful Sale of Securities (Sec. 23.3)
5. FRAUDULENT TRANSACTION-- • It shall be unlawful for any such
Fraudulent transactions in the sale of beneficial owner, director, or officer,
securities. (Sec. 26) directly or indirectly, to sell any equity
6. Insider trading (Sec. 27) security of such issuer if person selling
7. For an insider to communicate material security or his principal:
non-public information about the issuer a. does not own the security sold;
or security (Sec. 27.3) or
8. Unlawful Tender Offer (Sec. 27.4) b. if owning the security, does not
deliver it against such sale
9. Use of Extensive Credit. (Sec. 48.1) within 20 days thereafter, or
does not within 5 days after
Definition of terms:
such sale deposit it in the mails
1. SHORT SALE— A contract for sale of
or other usual channels of
shares of stock which the seller does not
transportation.
own, or certificates which are not within
• No person shall be deemed to have
his control, so as to be available for
violated the Code if he proves the
delivery at the time when delivery must
exercise of good faith.
be made.
2. STOP-LOSS ORDER—The direction by • Prohibition does NOT apply to a dealer
a customer to his broker that if the in the ordinary course of his business
commodity touches the price named, the and incident to the establishment or
broker shall close the trade at the best maintenance by him of a primary or
available price. secondary market, otherwise than in an
Exchange, for such security.
3. PUT—An option that, in consideration of
a premium paid, give the purchase the Insider’s Trading (Sec. 27)
right to make the seller take for him a
given number of shares of a named  The selling or buying of a security by an
stock between a given time at a insider while in possession of material

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non-public information with respect to 2. Information about the Issuer or the


the issuer or the security. It is security which would be considered by a
considered unlawful unless: reasonable person important under the
1. The insider proves that the circumstances in determining his course
information was not gained from of action to buy, sell or hold security.
such relationship; or
2. If the other party selling to or buying Self- Regulatory Organizations (SROs)
form the insider (or his agent) is Organizations whose operation are related to or
identified, the insider proves: connected with securities market such as but not
a. that he disclosed the limited to associations of:
information to the other party; a. brokers and dealers;
or b. transfer agents;
b. that he had reason to c. custodians;
believe that the other party d. fiscal and paying agents;
otherwise is also in possession e. computer services;
of the information. f. news disseminating services;
Presumption: A purchase or sale made by g. proxy solicitors;
an insider, his spouse, or relatives, shall be h. statistical agencies;
presumed to have been effected while in i. securities- rating agencies; and
possession of material nonpublic j. securities information processors.
information if transacted after such
information came into existence but prior to Margin
public dissemination of such information. Sum of money, or its equivalent, placed in the
(Sec 27.1) hands of a stockbroker by principal or persons
on whose account the purchase is to be made,
Insider as a security to the former against losses to
A person who, with respect to a particular which he may be exposed by a subsequent
security, may be any of the following: depression in the market value of the stock.
a. The issuer; Purpose: Margin limitations are provided in the
b. The director or officer of, or a Code to prevent excessive use of credit for the
person controlling, controlled by, or purchase or carrying of securities.
under common control with the
Issuer; Margin Trading
c. A person whose relationship or A kind of trading that allows a broker to advance
former relationship to Issuer gives for the customer part of the purchase price of a
or gave him access to a fact of security and to keep it as a collateral for such
special significance about Issuer or advance.
the security that is not generally • The credit extended must be for an
available; amount not greater than whichever is
d. A government employee, or higher of:
director, or officer of an exchange, 1. 65% of current market price of the
clearing agency and/ or self- security;
regulatory organization who has 2. 100% of the lowest market price of
access to material information security during the preceding 36
about an Issuer or a security that is calendar months, but not greater
not generally available to the public; than 75% of the current market
e. A person who learns such a fact price. (Sec. 48)
from any of the foregoing insiders Margin Call
with knowledge that the person When a broker makes a demand on the investor
from whom he learns the fact is an to deposit money or securities with the broker
insider. when a purchase is made or when the investor’s
Material Non-Public Information (Sec. 27.2) equity in a margin account declines below a
1. Information about the Issuer or the minimum standard set by the exchange or the
security which has not been generally broker.
disclosed to the public and would likely Compliance with SRC Provisions
affect the market price of the security Any condition, stipulation or provision binding
after being disseminated to the public any person to waive compliance with any
and the lapse of a reasonable time for provision of the SRC or of any rule or regulation
the market to absorb information; or thereunder, or of any rule of an Exchange

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required thereby, as well as the waiver itself, mortgages (GSIS v. Santiago, G.R. No.
shall be void. 155206, October 28, 2003)

Consequences of nature of business:


BANKING LAWS
1. It is subject to heavy and close
I. supervision and/or regulation by the
INTRODUCTION BSP (Central Bank of the Phils. v. CA,
208 SCRA 652).
Banks – entities engage in the lending of funds 2. It is required to exercise utmost
obtained in the form of deposits from the public diligence in the handling of deposits
Quasi-banks –entities engaged in the borrowing (Simex International Manila Inc., 183
of funds through the issuance, endorsement or SCRA 361).
assignment with recourse or acceptance of 3. Special rules on strikes and lockouts:
deposit substitutes for purposes of relending or any strike or lockout involving banks, if
purchasing of receivables and other obligations unsettled after 7 calendar days shall be
 Entities authorized to perform universal reported by the BSP to the Sec. of
or commercial banking functions may Labor who has 2 options:
also engage in quasi-banking functions a. He may assume jurisdiction over and
(Sec. 6) decide the dispute; or
Deposit substitutes – an alternative form of b. certify it to the NLRC for compulsory
obtaining funds from the public, other than arbitration
deposits, through the issuance, endorsement, or The President may also intervene at any
acceptance of debt instruments for the time and assume jurisdiction over such
borrower’s own account, for the purpose of labor dispute in order to settle or
relending or purchasing of receivables and other terminate the same.
obligations.
Financial Intermediaries – persons or entities
Nature of Business: whose principal functions include the lending,
 A bank has a vital role in providing an investing or placement of funds on evidences of
environment conducive to the sustained indebtedness or equity deposited with them,
national economy. Banking is fiduciary in acquired by them or otherwise coursed through
nature that requires high standards of them, either for their own account or for the
integrity and performance. account of others.
• The appropriate standard of diligence
must be very high, if not the highest Foreign Stockholdings - Foreign individuals
degree of diligence; highest degree of and non-bank corporations may own or control
care (PCI Bank v. CA, 350 SCRA 446) up to 40% of the voting stock of a domestic
• This applies only to cases bank. This rule shall apply to Filipinos and
where banks are acting in their fiduciary domestic non-bank corporations. (Sec. 11)
capacity, as depository of the deposits of  Grandfather Rule: The percentage of
their depositors (Reyes v. CA). foreign-owned voting stocks in a bank shall
• An innocent mortgage is not be determined by the citizenship of the
expected to conduct an exhaustive individual stockholders in that bank. The
investigation on the history of the citizenship of the corporation which is a
mortgagor’s title, in case of a banking stockholder in a bank shall follow the
institution, it must exercise due diligence citizenship of the controlling stockholders of
before entering into said contract, and the corporation, irrespective of the place of
cannot rely upon what is or is not incorporation.
annotated on the title. (DBP v. CA, 331 Note: Non-Filipino citizens may become
SCRA 267) members of the board of directors of a bank to
• The banks are expected to the extent of the foreign participation in the
ascertain and verify the identities of the equity of said bank.
persons it transacts business with
(UCPB v. Ramos, G.R. No. 147800,
II. GENERAL BANKING LAW (GBL) [R.A.
November 11, 2003)
8791
• Due diligence required of
banks extend even to persons or
institutions, like the GSIS, regularly Declaration of Policy: to promote and maintain
engaged in the business of lending a stable and efficient banking and financial
money secured by real estate system that is globally competitive, dynamic and

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responsive to the demands of a developing 4. May 4. May not


economy. purchase/acquire its purchase/acquire its
own shares for a shares or accept them
Scope of Application: The GBL primarily legitimate corporate as security for a loan.
governs universal banks and commercial banks. purpose; provided Except: when
It suppletorily governs thrift banks, rural banks that, it has authorized by the
and other banking institutions. unrestricted retained Monetary Board. In
earnings in its books such case, the bank
A. Classification of Banks (2002 Bar Exam) to cover the shares must sell or dispose of
1. Universal Banks – primarily governed by the to be said shares within 6
GBL, can exercise the powers of an purchased/acquired. months from the time
investment house and invest in non-allied of their acquisition.
enterprises and have the highest (Sec. 10)
capitalization requirement. 5. Must be composed 5. Also composed of 5
2. Commercial Banks – ordinary banks of 5 to 15 directors, to 15 directors w/ 2
governed by the GBL, which have a lower each of whom shall independent directors
capitalization requirement than universal own at least one (1) (Sec. 15). In case of
banks and cannot exercise the powers of an share of the capital merger or
investment house and invest in non-allied stock of the consolidation, the
enterprises. corporation. number of directors
shall not exceed 21.
3. Thrift Banks – these are a) Savings and
(Sec. 17)
mortgage banks; b) Stock savings and loan
associations; c) Private development banks,
Independent Director –
which are primarily governed by the Thrift
a person other than an
Banks Act.
officer or employee of
4. Rural Banks – mandated to make needed the bank, its
credit available and readily accessible in the subsidiaries or affiliates
rural areas on reasonable terms and which or related interests.
are primarily governed by the Rural Banks 6. May declare 6. May not declare
Act. dividends out of its dividends, if any of the
5. Cooperative Banks – those banks organized unrestricted retained conditions set forth
whose majority shares are owned and earnings. under Sec. 57 are
controlled by cooperatives primarily to present.
provide financial and credit services to
cooperatives. It shall include cooperative
rural banks. They are governed primarily by
Universal Bank Commercial Bank
the Cooperative Code.
6. Islamic Banks – banks whose business Authority to exercise No such additional
dealings and activities are subject to the additional powers powers
basic principles and rulings of Islamic other than those
Shari’a, such as the Al Amanah Islamic authorized for
Investment Bank of the Philippines. commercial banks
May invest in the May only invest in
7. Other classification of banks as determined
equities of allies, equities of allied
by the Monetary Board of the BSP.
whether financial or enterprises, whether
non-financial, and financial or non-
ORDINARY BANKING
non-allied financial
CORPORATION CORPORATION
enterprises (Sec. 24)
1. May be a stock or 1. Must generally be a
1. The powers 1. General powers
non-stock stock corporation
authorized for a incident to corporations
corporation
commercial bank; Such powers as may be
2. May issue par 2. May issue par value 2. The powers of an necessary to carry on
value or no par value stocks only. (Sec. 9) investment house; the business of
stocks. and commercial banking.
3. May be registered 3. Must secure a 3. The power to
with the SEC without certificate of authority invest in non-allied
any certificate of from the Monetary enterprises. (Sec.23)
authority issued by a Board before it can a. Accepting drafts and
government agency. register with SEC. issuing letter of credits;

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b. Discounting and in any one 25% 25%


negotiating promissory enterprise of net of net worth
notes, drafts, bills of worth
exchange and other Equity investment
evidence of debt; in financial allied 100% 100%
c. Accepting or creating enterprise - thrift of equity of equity
demand deposits; bank, rural bank or In other financial
receiving other types of any financial allied allied enterprises
deposits and deposit enterprise (Sec. investment shall
substitutes; 25) remain a
d. Buying and selling A publicly-listed minority holding.
foreign exchange and bank may own up (Sec. 31)
other debt securities; to 100% of the
e. Extending credit. voting stock of
(Sec. 29) only one other
UB / CB. (Sec. 25)
Equity investment
Universal & Other Banks in non-financial 100% 100%
Commercial Banking allied enterprises of equity of equity
Authorized to engage Not so authorized Equity investment
in quasi-banking in non-allied
functions without need enterprise
for approval. Equity investment 40% 40%
May accept or create Must seek approval of in Quasi-Banks of equity of equity
demand deposits Monetary Board before
without need for accepting or creating  Allied Enterprises – those entities which
approval demand deposits (Sec. enhance or complement banking.
Demand deposits – 33)
Liabilities of the BSP
 Non-financial Allied Enterprises – pertains
to activities that do not involve money
and of other banks
matters (such as warehousing, safety
which are
deposit boxes)
denominated in
Philippine currency
Net Worth -- the total of the unimpaired paid-in
and are subject to
capital including paid-in surplus, retained
payment in legal
earnings and undivided profit, net valuation
tender upon demand
reserves and other adjustments as may be
by the presentation of
required by the Bangko Sentral.
checks. (Sec. 58,
Risk-Based Capital – The Monetary Board shall
NCBA)
prescribe the minimum ratio which the net worth
of a bank must bear to its total risk assets which
EQUITY INVESTMENTS: may include contingent accounts. Provided: the
Universal Comm’l Bank Monetary Board may require or suspend
Bank (Sec. 30-32) compliance with such ratio whenever necessary
(Sec. 24- for a maximum period of one year; that such
28) ratio shall be applied uniformly to banks of the
Power to invest May invest May invest only same category.
in allied in the equities of Effects of non-compliance with the
and non- allied enterprises prescribed minimum ratio:
allied (Sec. 30) 1. Distribution of net profits may be limited or
enterprises prohibited and MB may require that part or
(Sec. 24) all of the net profits be used to increase the
Total investment in 50% 35% capital accounts of the bank until the
allied enterprises of net of net worth minimum requirement has been met; or
worth 2. Acquisition of major assets and making of
Total investment in new investments may be restricted.
non-allied 50% N/A EXCEPT: purchases of evidence of
enterprises of net indebtedness guaranteed by the
worth Government.
Equity investment

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3. In case of a bank merger or consolidation, or C. Authority to engage in banking or quasi-


when a bank is under rehabilitation under a banking functions
program approved by BSP, the MB may  A person or entity cannot engage in banking
temporarily relieve the surviving bank, or quasi-banking functions without a
consolidated bank, or constituent bank or certificate of authority from the BSP.
corporations under rehabilitation from full  The determination of whether a person or
compliance with the required capital ratio. entity is performing banking or quasi-
banking functions without BSP authority
III. ORGANIZATION AND OPERATION shall be decided by the Monetary Board.

Authority to Register/Incorporate Fit and Proper Rule. To maintain the quality of


 The SEC shall not register the articles of bank management and afford better protection
incorporation of any bank or nay amendment to depositors and the public in general the
thereto unless accompanied by a certificate Monetary Board shall prescribe, pass upon and
of authority issued by the Monetary Board review the qualifications and disqualifications of
under its seal ( Sec. 14) individuals elected or appointed bank directors
 The certificate of authority shall not be or officers and disqualify those found unfit.
issued unless the Monetary Board is
satisfied:  After due notice to the board of directors of
1. that all requirements of existing laws the bank, the Monetary Board may
and regulations for which the applicant disqualify, suspend or remove any bank
is proposed to be incorporated have director or officer who commits or omits an
been complied with; act which render him unfit for the position.
2. that the public interest and economic
conditions, both general and local, In determining whether an individual is fit and
justify the authorization; proper to hold the position of a director or officer
3. that the amount of the capital, the of a bank, regard shall be given to his:
financing, organization, direction and a. integrity,
administration, as well as the integrity b. experience,
and responsibility of the organizers and c. education,
administrators, reasonably assure the d. training, and
safety of deposits and the public e. competence. (Sec. 16)
interest.
Prohibition on Public Officials. - No appointive
B. Organization of a Bank or Quasi-Bank or elective public official whether full-time or
Requirements: part-time shall at the same time serve as officer
1. the entity must be organized as a stock of any private bank, save in cases where such
corporation service is incident to financial assistance
2. funds must be obtained from the public (20 provided by the government or a government
or more persons) owned or controlled corporation to the bank or
3. minimum capital requirements prescribed by unless otherwise provided under existing laws.
the Monetary Board are satisfied (Sec. 19)
• an investment company that performs Exceptions:
functions as such is not a bank. Thus
an investment company that is engaged 1. as otherwise provided under Sec. 5 of
solely in investing, reinvesting or the Rural Bank Act
trading in securities is NOT engaged in - Nothing in the Act shall be construed
banking (Banas v. Asia Pacific Finance as prohibiting any appointive or elective
Corp., Oct. 18, 2000) public official from serving as director,
officer, consultant or in any capacity in
• An investment company which loans out
the bank.
the money of its customers, collects the
2. where such service is incident to
interests, and charges a commission to
financial assistance provided by the
both lender and borrower is engaged in
government-owned or -controlled
banking.
corporation to the bank
3. as otherwise provided under existing
laws.

IV. FUNCTIONS OF BANKS

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1. Deposit Function he must prove the same before a competent


jurisdiction. (Fulton Ironworks v. Chinabank,
November 6, 1930)
a. As debtor-creditor
i. Savings
3. The bank has the right to compensation. It
ii. Time can set off the deposits with the
iii. Demand indebtedness of the depositor that are due
and demandable. (Gullas v. PNB, 62 Phil.
Characteristics: 519)
• In the nature of irregular deposits 4. The bank cannot be held liable for estafa if
(Serrano v. Central Bank, 96 they authorized the use of the money
SCRA96) deposited by the depositor even if the bank
• Contract of loan/mutuum with the failed to return the amount deposite
depositor as creditor (Guingona v. City Fiscal of Manila, 128
SCRA 577).
• Bank acquires ownership of the thing
deposited and the right to use and
Depositors:
dispose.
1. Minors :
• Money deposited is commingled with
a. at least seven years of age
other money, constituting a common
b. able to read and write
fund
c. not disqualified by any incapacity
• Not preferred credits (Central Bank v. d. it should only be savings or time
Morfe, 20 SCRA 507) deposits
b. As lessor-lessee
 Parents may deposit for their
minor children or wards (Sec.1
 Safety deposit boxes (2004 Bar PD No.734)
Exam) – the relations between a bank  If the guardian shall give notice
renting out safety deposit boxes and in writing to any thrift bank not to
its customer with respect to the make payments of deposits,
contents of the box is that of a bailor dividends, or interest to the
and bailee, the bailment for hire and minor of whom he is the
mutual benefit. It cannot be guardian, then such payment
considered as a contract of lease shall be made to the guardian.
because the full possession and (Sec. 22, Thrift Banks Act of
control of the safety deposit box is not 1995)
given to the renters (Sila v. CA, 222 2. Married Women are allowed to open bank
SCRA 24).
accounts without assistance of their
husbands (RA No. 7192)
c. As trustee-trustor – trustt account
d. As bailee-bailor – deposit strictly for Kinds of Deposits
safekeeping and for specific purposes
e. As agent-principal DEMAND DEPOSITS SAVINGS
i. Deposit of check for collection ACCOUNT
ii. Deposit for specific purpose 1. Only a universal or 1. Evidenced by a
iii. Deposit for safekeeping commercial bank can passbook .
accept or create 2. Banks are
Simple Loan - fixed, savings and current demand deposits. prohibited from
deposits of money in banks and similar 2. Other banks can issuing / accepting
institutions shall be governed by the provisions only accept demand withdrawal slips or
concerning simple loan. deposits except upon other similar
prior approval of the instruments to effect
1. The bank can use as its own the money Monetary Board. withdrawals without
deposited. The amount is not being held in 3. Temporary the passbooks except
trust for the depositor not is it being kept for overdrawing against for bank authorized
safety (Tang Tiong Tick vs. American current accounts shall by the BSP to adopt
Aphothecaries , 65 Phil. 414). not be allowed unless the no passbook
2. The duty of a bank is to its creditor-depositor caused by normal withdrawal system.
and not to third persons. If a third person bank charges and 3. A bank is negligent
has a valid right over the money deposited, other fees incidental to if it allows the

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handling such withdrawal without its deposit liabilities continuously for more
accounts. requiring the than 30 days, the Monetary Board may
4. Drawings against presentation of a summarily and without need for prior
uncollected deposits passbook. (BPI v. hearing close such banking institution and
(uncleared checks) are CA) place it under receivership of the PDIC.
generally prohibited.
Deposits that are exempt from garnishment:
NOW ACCOUNTS TIME DEPOSITS 1. Foreign Currency Deposits .
(Negotiable Order of Exception: The SC ruled in Salvacion v.
Withdrawal) Central Bank of the Philippines (August 20,
Interest bearing An account with fixed 1997) that the FCD of an American tourist
deposit accounts that term who was found guilty of repeatedly raping a
combine the payable twelve (12) year old child is subject to
on demand feature of garnishment.
checks and investment 2. Those exempt under the Rules of Civil
feature of savings Procedure like the provision for the family for
account. four months.

2. Loan Function

Note: Demand , savings , NOW accounts , time Requirement for grant of loans:
deposits and deposit substitutes shall not be  Before granting of a loan, a bank must
subject to interest ceilings. ascertain that the debtor is capable of
fulfilling his commitments to the bank.
Note: A bank other than a universal or Rules:
commercial bank must seek approval of 1. A bank may demand from its applicants a
Monetary Board before accepting or creating statement of their assets and liabilities and
demand deposits. (Sec. 33) of their income and expenditures and other
information.
Deposit Substitutes - An alternative form of 2. Should such statements prove to be false or
obtaining funds from the public, other than incorrect the bank may terminate any loan
deposits, through the issuance, granted on the basis of said statements and
endorsement, or acceptance of debt shall have the right to demand immediate
instruments for the borrower’s own repayment or liquidation of obligation (Sec.
account, for the purpose of re-lending or 40).
purchasing of receivables and other
obligations (Sec. 95, RA 7653).
CLASSIFICATION OF LOANS
Deposit Deposit Substitute Unclassified Loans Classified Loans
No security given to Guaranteed by Those that do not have Those that have
guarantee repayment; certificates and other a greater-than-normal extraordinary risks of
the depositor relies on instruments risk, and the borrower loss in collection due
the stability and has apparent ability to to some defects such
reputation of the bank. satisfy it in full and no as bad debts or those
loss in ultimate under litigation.
collection is
 A bank has the right to set-off to the anticipated.
deposits in its hands for the payment of nay
outstanding indebtedness to it on the part of
the depositor (Gullas v. PNB, 62 Phil 519) Limitation on Loans, Credit Accomodations
and Gurantees (2002, 2006 Bar Exams)
 Failure by the bank to pay the depositor is
failure to pay a simple loan and not a A. Single Borrower’s Limit
breach of trust (CBTC v. CA, G.R. No.  the total amount of loans extended by a
138569, September 11,2003) bank to any person, partnership,
association, corporation or other entity shall
Suspension of Payment on Its Deposit at no time exceed 20% of the net worth of
Liabilities such bank.
 In case a bank or quasi-bank notifies the  The total amount of loans may be
BSP or publicly announces a bank holiday, increased by additional 10% of the net worth
or in any manner suspends the payment of of such bank provided the additional

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liabilities of any borrower are adequately Requisites:


secured by trust receipts, shipping 1. The borrower is a director, officer or any
documents, warehouse receipts or other stockholder of a bank (and related
similar documents transferring or securing interests)
title covering readily marketable, non- 2. He contracts a loan or any form of
perishable goods which must be fully financial accommodation.
covered by insurance; 3. The loan or accommodation is from:
The prescribed ceiling shall include: a. his bank , or
a. The direct liability of the maker or b. a bank that is a subsidiary
acceptor of paper discounted with or of a bank holding company
sold to such bank and the liability of a of which both his bank and
general endorser, drawer or guarantor lending bank are
who obtains a loan or other credit subsidiaries
accommodation from or discount paper c. a bank in which a controlling
with or sells paper to such banks; proportion of the shares is
b. In the case of an individual who owns or owned by the same interest
controls a majority interest in a that owns a controlling
corporation, partnership, association or proportion of the shares of
any other entity, the liabilities of the said his bank;
entities to the bank; 4. The loan or financial accommodation is
c. In a case of a corporation, all liabilities to in excess of 5% of capital and surplus of
such bank of all subsidiaries in which the lending bank or in the maximum
such corporation owns or controls a amount permitted by law, whichever is
majority interest; and lower.
d. In the case of a partnership, association, Who are covered (BSP Circular No. 170):
or other entity, the liabilities of the 1. Directors – of the lending bank
member thereof to such bank. 2. Officers – either identified in the by-
Exclusions from the Limits: laws or are generally know as such
a. loans secured by obligations of the 3. Stockholders – those whose
Bangko Sentral or the Philippine stockholdings and/or together with any
Government; of the following persons, amount to 2%
b. loans fully guaranteed by the or more of the total subscribed capital
government; stock of the bank;
c. loans covered by assignment of deposits a. His spouse or relative within the
maintained in the lending bank and held first degree of
in the Philippines; affinity/consanguinity or relative by
d. loans, credit accommodations and legal adoption, partnership,
acceptances under letters of credit to the wherein any of the foregoing is a
extent covered by margin deposits; and general partner;
e. other loans or credit accommodations b. A co-owner with the stockholder or
which the MB may specify as non-risk the stockholder’s spouse or
items. relative mentioned above of
property/right/interest (mortgaged,
B. DOSRI accounts pledged, or assigned to secure the
loan or credit accommodations,
 Restrictions on bank exposure to except when the mortgage, pledge
Directors, Officers, Stockholder and their or assignment covers only said co-
Related Interests (DOSRI) owner’s undivided interest).
4. Related interests
 No director or officer of any bank shall, a. Spouse, relatives within the first
directly or indirectly, for himself or as the degree of consanguinity of a DOS,
representative or agent of others, borrow partnerships of which a DOS or
from such bank nor shall he become a any of the foregoing is a general
guarantor, endorser or surety for loans from partner;
such bank to others, or in any manner be an b. Co-owner with the DOS or his
obligor or incur any contractual liability to the spouse or relative within the first
bank except with the written approval of the degree of consanguinity or affinity,
majority of all the directors of the bank, or relative by legal adoption, of the
excluding the director concerned (Sec. 36) property/interest/right mortgaged,
pledged, assigned to secure the

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loans or credit accommodations, A bank shall grant loans and other credit
except when the mortgage, pledge accommodations only in amounts and for the
or assignment covers only said co- periods of time essential for the effective
owner’s undivided interest. completion of the operations to be financed.
c. Corporation with inter-locking Such grant of loans and other credit
directors or 20% of the capital accommodations shall be consistent with safe
stock is owned by the DOS and/or and sound banking practices. (Sec. 39)
their spouses or relative The Monetary Board is hereby authorized to
mentioned above, or wholly or issue such regulations as it may deem
majority owned or controlled by necessary with respect to unsecured loans or
any related entities in items (b), other credit accommodations that may be
(d), and (e). granted by banks.

Principles Involved: Requirement for Grant of Loans:


 Dealings of a bank with any of its Before granting a loan, a bank must ascertain
directors, officers or stockholders that the debtor is capable of fulfilling his
and their related interests shall be commitments to the bank.
upon terms not less favorable to the 1. A bank may demand from its applicants
bank than those offered to others; a statement of their assets and liabilities
 After due notice to the board of and of their income and expenditures
directors of the bank, the office of and other information.
any bank director or officer who 2. Should such statements prove to be
violates the provisions of this false or incorrect, the bank may
Section may be declared vacant and terminate any loan granted on the basis
the director or officer shall be of said statements and shall have the
subject to the penal provisions of the right to demand immediate repayment or
New Central Bank Act; liquidation of obligation. (Sec. 40)
 DOSRI account shall be limited to
an amount equivalent to their Restrictions under the GBL and NCBA:
respective unencumbered deposits a. No director or officer of any bank shall,
and book value of their paid-in directly or indirectly, borrow from such bank
capital contribution in the bank. nor shall be guarantor, endorser or surety for
Provided: loans from such bank to others, or in any
manner be obligor or incur any contractual
 That loans, credit accommodations liability to the bank, except with the written
and guarantees secured by assets approval of the majority of all the directors of
considered as non-risk by the the bank, excluding the director concerned.
Monetary Board shall be excluded The written approval shall not be required for
from such limit loans granted to officers under a fringe
 That loans, credit accommodations benefit plan approved by the Bangko
and advances to officers in the form Sentral.
of fringe benefits granted shall not b. Dealings of a bank with any of its DORSI
apply to loans, credit shall be upon terms not less favorable to the
accommodations and guarantees bank than those offered to others. (ARMS
extended by a cooperative bank to LENGTH RULE)
its cooperative shareholders. c. Loans extended to DORSI shall be limited to
an amount equivalent to their respective
Note: Stockholdings of individuals related to unencumbered deposits and book value of
each other within the 4th degree of their paid-in capital contribution in the bank.
consanguinity or affinity, legitimate or Except :
common-law, shall be considered family i. Loans, credit accommodations,
groups or related interests and must be fully and guarantees secured by assets
disclosed in all transactions by such considerd as non-risk by the
corporations or related groups of persons Monetary Board.
with the bank. ii. Loans, credit accommodations,
and advances to officers in the
Grant and Purpose of Loans and Other Credit form of fringe benefits.
Accomodations iii. Cooperative bank with regard to its
cooperative shareholders.

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d. The resolution approving the loan shall be b. Make misrepresentations for the
entered in the records of the bank and purpose of obtaining, renewing, or
transmitted to the BSP. increasing a loan or extending the period
e. Waiver of secrecy of deposits of whatever thereof;
nature in all banks in the Philippines by the c. Attempt to defraud the said bank in the
borrower. No waiver is required if the event of a court action to recover a loan
related interests are the borrower. or other credit accommodation; or
f. Information obtained form examination are d. Offer any director, officer, employee or
strictly confidential. agent of a bank any gift, fee,
Other Functions commission, or any other form of
a. Receive in custody funds, documents and compensation in order to influence such
valuable objects; persons into approving a loan or other
b. Act as financial agent and buy and sell, by credit accommodation application.
order of and for the account of their 3. Prohibited acts by BSP officers - No
customer, shares, evidences of examiner, officer or employee of the
indebtedness and types of securities; Bangko Sentral or any department,
c. Make collection and payments for the bureau, office, branch or agency of the
account of others and perform such other Government that is assigned to
services for their customer as are not supervise, examine, assist or render
incompatible with banking business; technical assistance to any bank shall
d. Upon prior approval of the Monetary Board, make false reports or suppress material
act as managing agent, adviser, consultant facts.
or administrator of investment management/ 4. No bank shall employ casual or non
advisory/consultancy accounts; and regular personnel or too lengthy
e. Rent out safety deposit boxes. probationary personnel in the conduct of
its business involving bank deposits.
Note: The bank shall act as depositary or as an (Sec. 55)
agent shall keep the funds, securities and other 5. Conducting Business in an Unsafe or
effects which it receives duly separated from its Unsound Manner - In determining
own assets and liabilities. (Sec. 53) whether a particular act or omission,
which is not otherwise prohibited by any
Prohibitions: law, rule or regulation affecting banks,
1. Prohition to act as insurer - A bank shall not quasi-banks or trust entities, may be
directly engage in insurance business as the deemed as conducting business in an
insurer. (Sec. 54) unsafe or unsound manner for purposes
2. Prohibited transactions by bank officials - No of this Section, the Monetary Board shall
director, officer, employee, or agent of any consider any of the following
bank shall - circumstances:
a. Make false entries in any bank report or  The act or omission has resulted or
statement or participate in any may result in material loss or
fraudulent transaction; damage, or abnormal risk or danger
b. Without order of a court of component to the safety, stability, liquidity or
jurisdiction, disclose to any unauthorized solvency of the institution;
person any information relative to the  The act or omission has resulted or
funds or properties in the custody of the may result in material loss or
bank belonging to private individuals, damage or abnormal risk to the
corporations, or any other entity; institution's depositors, creditors,
c. Accept gifts or any other form of investors, stockholders or to the
remuneration in connection with the Bangko Sentral or to the public in
approval of a loan or other credit general;
accommodation from said bank;  The act or omission has caused any
d. Overvalue or aid in overvaluing any undue injury, or has given any
security for the purpose of influencing in unwarranted benefits, advantage or
any way the actions of the bank or any preference to the bank or any party
bank; or in the discharge by the director or
e. Outsource inherent banking functions. officer of his duties and
3. Prohibited acts by borrower - No borrower of responsibilities through manifest
a bank shall - partiality, evident bad faith or gross
a. Fraudulently overvalue property offered inexcusable negligence; or
as security for a loan from the bank;

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 The act or omission involves Declaration of Policy


entering into any contract or - The State shall maintain a central monetary
transaction manifestly and grossly authority that shall function and operate as an
disadvantageous to the bank, quasi- independent and accountable body corporate in
bank or trust entity, whether or not the discharege of its mandated responsibilities
the director or officer profited or will concerning money, banking and credit.
profit thereby
Bangko Sentral
Whenever a bank, quasi-bank or trust entity - a government-owned corporation established
persists in conducting its business in an as an independent central monetary authority
unsafe or unsound manner, the Monetary
Board may, without prejudice to the Responsibility and Primary Objective
administrative sanctions provided in Section 1. Provide policy
37 of the New Central Bank Act, take action directions in the areas of money, banking,
under Section 30 of the same Act and/or and credit
immediately exclude the erring bank from 2. Supervise the operations of banks and
clearing, the provisions of law to the contrary exercise such regulatory powers over the
notwithstanding. operations of finance companies and non-
6. Prohibition on dividend declaration – No bank financial institutions performing quasi-
bank or quasi-bank shall declare banking functions.
dividends, if at the time of declaration:
a. Its clearing account with the Bangko Powers and Functions:
Sentral is overdrawn; 1. Issuer of Currency (Sec. 50)
b. It is deficient in the required liquidity floor 2. Custodian of Reserves (Sec. 94)
for government deposits for 5 or more 3. Clearing Channel or House - especially
consecutive days; where the PCHC does not operate
c. It does not comply with the liquidity 4. Banker of the Government - the BSP
standards/ratios prescribed by the shall be the official depository of the
Bangko Sentral for purposes of Government and shall represent it in all
determining funds available for dividend monetary fund dealings. (Secs. 110 and
declaration; 111)
d. It has committed a major violation as 5. Financial Advisor of the Government
may be determined by the Bangko (Sec. 123)
Sentral. Under Article VII, Sec. 20 of the 1987
Constitution, the President may contract
Foreign Banks or guarantee foreign loans but with the
 The entry of foreign banks in the prior concurrence of the Monetary
Philippines through the establishment of Board.
branches shall be governed by the 6. Source of Credit (Sec. 81)
provisions of the Foreign Bank 7. Supervisor of the Banking System (Sec.
Liberalization Act. 25)
 The Monetary Board may revoke the Shall include the power to:
license to transact business in the a. Examine – extends to enterprises
Philippines of any foreign bank if it finds wholly or majority-owned or
that the foreign bank is insolvent or in controlled by the bank. (Sec. 7, RA
imminent danger thereof or that its 8791); this power may not be
continuance in business will involve restrained by a writ of injunction
probable loss to those transacting unless there is convincing proof that
business with it. the action of the BSP is plainly
arbitrary. (Sec. 25)
Trust Operations b. Place a bank under receivership or
• Only a stock corporation or a person liquidation (Sec. 30)
duly authorized by the Monetary Board c. Initiate criminal prosecution of erring
shall act as a trustee or administer any officers of banks.
trust or hold property in trust or on
deposit for the use, benefit, or behalf of
others.

V. THE NEW CENTRAL BANK ACT


(R.A. No. 7653)

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Monetary Board or ad honorem, with the exception of


The powers and functions of BSP are exercised positions in eleemosynary, civic, cultural
by the Monetary Board, composed of 7 or religious organizations or whenever,
members appointed by the President of the by designation of the President, the
Philippines for a term of 6 years: Governor or the full-time member is
1. The governor as Chairman tasked to represent the interest of the
2. A member of the Cabinet designated by Government or other government
the President agencies in matters connected with or
3. 5 members who shall come from the affecting the economy or the financial
private sector, all of whom shall serve system of the country (Sec. 20);
full-time; 6. in case any member of the Monetary
No member of the Monetary Board may be Board with personal or pecuniary
reappointed more than once. interest in any matter in the agenda of
Qualifications of Members of the Monetary the Monetary Board shall disclose his
Board: interest to the Board and shall retire
1. must be natural-born citizens of the from the meeting when the matter is
Philippines, taken up (Sec. 14).
2. at least 35 years of age, with the
exception of the Governor who should at Supervision and Examination of Banks
least be 40 years of age,  The BSP shall have supervision over,
3. of good moral character, of and conduct periodic or special
unquestionable integrity, of known examinations of, banking institutions and
probity and patriotism, and quasi-banks, including their subsidiaries and
4. with recognized competence in social affiliates engaged in allied activities.
and economic disciplines.  Subsidiary – a corporation more than
Disqualifications and Inhibition on Governor 50% of the voting stock of which is owned by
and Board Members: a bank or quasi-bank
1. disqualified from being a director, officer,
employee, consultant, lawyer, agent or  Affiliate – a corporation the voting
stockholder of any bank, quasi-bank or stock of which, to the extent of 50% or less,
any other institution which is subject to is owned by a bank or quasi-bank or which
supervision or examination by the is related or linked to such institution or
Bangko Sentral, in which case such intermediary through common stockholders
member shall resign from, and divest or other factors determined by the Monetary
himself of any and all interests in such Board.
institution before assumption of office  No Restraining Order against BSP
(Sec. 9); No restraining order or injunction shall be
2. those coming from the private sector issued by the court enjoining the Bangko
shall not hold any other public office or Sentral from examining any institution
public employment during their tenure subject to supervision or examination by the
(Sec. 9); Bangko Sentral, unless there is convincing
3. cannot be connected directly with any proof that the action of the Bangko Sentral is
multilateral banking or financial plainly arbitrary and made in bad faith and
institution or has a substantial interest in the petitioner or plaintiff files with the clerk or
any private bank in the Philippines, judge of the court in which the action is
within one (1) year prior to his pending a bond executed in favor of the
appointment (Sec. 9); Bangko Sentral, in an amount to be fixed by
4. cannot be employed in any such the court.
institution within two (2) years after the
expiration of his term except when he Refusal to Make Reports or Permit
serves as an official representative of Examination. - Any officer, owner, agent,
the Philippine Government to such manager, director or officer-in-charge of any
institution (Sec. 9); institution subject to the supervision or
5. the Governor of the Bangko Sentral and examination by the Bangko Sentral who,
the full-time members of the Board shall being required in writing by the Monetary
limit their professional activities to those Board or by the head of the supervising and
pertaining directly to their positions with examining department willfully refuses to file
the Bangko Sentral. Accordingly, they the required report or permit any lawful
may not accept any other employment, examination into the affairs of such
whether public or private, remunerated

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institution shall be punished under the Act. Such power to revoke cannot extend to post
(Sec. 34) facto repudiation of perfected transactions,
otherwise they would infringe against the non-
False Statement. - The willful making of a impairment clause of the Constitution. Sec. 28-
false or misleading statement on a material A gives the conservator power to revoke
fact to the Monetary Board or to the contracts that are deemed defective – i.e., void,
examiners of the Bangko Sentral shall be voidable, unenforceable or rescissible. (First
punished. (Sec. 35) Phil. Int’l Bank v. CA, 252 SCRA 259)

Duration – Period not exceeding one year


When conservatorship terminated:
Prohibitions on Bank Officers, Directors, 1. When the Monetary Board is satisfied
Lawyers, Agents that the institution can continue to
Personnel of the Bangko Sentral are hereby operate on its own and the
prohibited from: conservatorship is no longer necessary;
1. being an officer, director, lawyer or 2. But if the continuance in business of the
agent, employee, consultant or stockholder, bank would involve probable loss to its
directly or indirectly, of any institution subject depositors or creditors, proceedings for
to supervision or examination by the Bangko receivership and liquidation shall be
Sentral; pursued (Sec. 29).
Exception: non-stock savings and loan
associations and provident funds organized Receivership:
exclusively for employees of the Bangko Whenever the Monetary Board finds that a bank
Sentral, and except as otherwise provided in or quasi-bank:
this Act; 1. is unable to pay its liabilities as they
2. directly or indirectly requesting or become due in the ordinary course of
receiving any gift, present or pecuniary or business. But shall not include inability
material benefit for himself or another, from to pay cause by extraordinary demands
any institution subject to supervision or induced by financial panic in the banking
examination by the Bangko Sentral; community;
3. revealing in any manner, except under 2. has insufficient realizable assets to meet
orders of the court, the Congress or any its liabilities;
government office or agency authorized by 3. cannot continue business without
law, information relating to the condition or involving probable losses to its
business of any institution; depositors or creditors; or
4. borrowing from any institution subject to 4. has willfully violated a cease and desist
supervision or examination by the Bangko order involving acts or transactions
Sentral shall be prohibited unless said which amount to fraud or a dissipation of
borrowings are adequately secured, fully the assets of the institution.
disclosed to the Monetary Board. (Sec. 27)
Note: The designation of a conservator is not a
Conservatorship precondition to the designation of a receiver.
Whenever the Monetary Board finds that a bank
or a quasi-bank is in a state of continuing Liquidation - If the receiver determines that the
inability or unwillingness to maintain a condition bank cannot be rehabilitated:
of liquidity deemed adequate to protect the 1. He shall file ex parte, with the proper
interest of depositors and creditors, the RTC, a petition for assistance in the
Monetary Board may appoint a conservator to: liquidation of the institution pursuant to a
a. Take charge of the assets, liabilities, and liquidation plan adopted by the PDIC for
the management thereof; general application to all closed banks.
b. Reorganize the management; In case of quasi-banks, the liquidation
c. Collect all monies and debts due said plan shall be adopted by the Monetary
bank; and Board.
d. Exercise all powers necessary to restore 2. He shall convert the assets of the
its viability, with the power to overrule or institution to money for the purpose of
rebuke the actions of the previous paying the debts of the institution. (Sec.
management and board of directors of 30)
the bank or quasi-bank.
Effect of appointment of receiver / liquidation
on creditor’s claims: The assets under

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receivership or liquidation shall be deemed in - If BSP wants to decrease money supply,


custodia legis in the hands of the receiver and it closes rediscount window or charges
shall be exempt from garnishment, levy, very high interest rates for rediscounted
attachment or execution (Sec. 30). notes
2. Open Market Operations (Sec. 90)
Close Now and Hear Later Scheme - If BSP wants to increase money supply,
Sec. 29 of the Central Bank Act does not it buys government securities
contemplate prior notice and hearing before a - If BSP wants to decrease money supply,
bank is placed under receivership. It is enough it sells government securities
that such action is made the subject of a 3. Reserve Requirements
subsequent judicial review. The purpose of the - The required reserves of each bank shall
scheme is to protect the depositors, creditors, be proportional to the volume of its
stockholders and general public (Central Bank v. deposit liabilities
CA, 220 SCRA 536).
Since the required reserves are imposed
Legal Tender – all notes and coins issued by primarily to control the volume of money, the
the Bangko Sentral and fully guaranteed by the Bangko Sentral shall not pay interests thereon.
Government. Deposits maintained with the Bangko Sentral as
part of the reserve requirements shall be exempt
Note: Coins shall be legal tender in amounts: from attachment, garnishment, or any other
a. Not exceeding P50.00 - 25 centavos or order or process of any court or agency.
above
b. Not exceeding P20.00 - 10 centavos or Prohibitions on the BSP:
less. 1. The BSP shall not acquire shares of any
 The BSP may call in for replacement kind or accept them as collateral, and shall
notes for any series or denomination not participate in the ownership or
which are more than 5 years old and management of any enterprise, either
coins which are more than 10 years directly or indirectly; and
old. 2. It shall not engage in development banking
 Notes and coins called in for and financing. (Sec. 128)
replacement shall remain legal tender
for a period of one year from the date of V. OTHER RELATED LAWS
call. After that period, they shall cease
to be legal tender during the following (See notes on Anti-Money Laundering Act and
year or for such longer period as MB Truth in Lending Act under SPECIAL LAWS)
may determine. After the expiration of
this latter period, the notes and coins A. SECRECY OF BANK DEPOSITS LAW
which have not been exchanged shall (R.A. No. 1405)
cease to be a liability of BSP and shall (1995, 1996, 1997, 1998, 2000, 2001, 2005,
be demonetized (Sec. 57). 2005, 2006 Bar Exams)

Demand Deposits – all those liabilities of the Purpose: to give encouragement to the people
Bangko Sentral and of other banks which are to deposit their money in banking institutions and
denominated in Philippine currency and are to discourage private hoarding so that the same
subject to payment in legal tender upon demand may be properly utilized by banks in authorized
by the presentation of checks. (Sec. 58) loans to assist in the economic development of
Checks representing demand deposits do not the country (Sec. 1)
have legal tender power and their acceptance in Acts prohibited:
the payment of debts, both public and private, is 1. the examination and inquiry or looking
at the option of the creditor. into all deposits of whatever nature with
However, a check which has been cleared and banks or banking institutions in the
credited to the account of the creditor shall be Philippines (including investments in
equivalent to a delivery to the creditor of cash in bonds issued by the Government of the
an amount equal to the amount credited to his Philippines, its political subdivisions and
account. its instrumentalities) by any person,
government official, bureau or office.
3 Important Tools to Achieve Price Stability: 2. the disclosure by any official or
1. Loans to Banks (Sec. 83) employee of any bank to any
- If BSP wants to increase money supply, unauthorized person of any information
it opens rediscount window concerning the said deposits.

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General Rule: All deposits of whatever nature by terrorists against non-combatant


with banks or banking institutions in the persons and similar targets
Philippines are considered as of an absolutely 11. upon order o the court, if the AMLC
confidential nature and may not be examined, determines that a particular deposit or
inquired or looked into by any person, investment with any banking institution is
government official, bureau or office. related to any one of the unlawful
Exceptions: activities under Section 3 (i), except
1. upon written permission of the depositor; those refereed to in Section(i)[1], [2] and
2. in cases of impeachment; [12] of RA 9160 or a money laundering
3. upon order of a competent court in offense under Section 4.
cases of bribery or dereliction of duty of 12. inquiry into or examination of any
public officials; deposit or investment with any banking
4. In cases where the money deposited or institution when the examination is made
invested is the subject matter of the by the Bangko Sentral ng Pilipinas to
litigation; insure compliance with the Anti-Money
5. upon order of the court in cases of Laundering Law in the course of a
unexplained wealth under Section 8 of periodic or special examination in
the Anti-Graft and Corrupt Practices Act accordance with the rules of
(PNB vs Gancayco 15 SCRA 91) examination of the BSP (Sec. 11, RA
6. upon order of the Commissioner of 9160; see also Sec. 4, RA 8791)
Internal Revenue in respect of the bank  Impeachment
deposits of a decedent for the purpose • In impeachment proceedings, the
of determining such decedent’s gross impeachment court may inquire into
estate (Sec. 6[F][1], NIRC) bank deposits. Thus, during the
7. upon order of the Commissioner of impeachment proceedings against
Internal Revenue in respect of the bank former President Estrada, Chief
deposits of a taxpayer who has filed an Justice Davide ruled that Clarissa
application for compromise of his tax Ocampo could testify on the Jose
liability under Section 204(A)(2) of the Estrada/Jaime Dichaves accounts
NIRC by reason of financial incapacity to maintained with Equitable PCIB
pay his tax liability (Sec. 6[F][2], NIRC) Bank, over the objections of the
8. upon order of the court in cases filed by defense that this would violate the
the Ombudsman and upon the latter’s Bank Secrecy Law. Basis for this
authority to examine and have access to ruling was that the inquiry would be
bank accounts and records (Marquez, et made in the course of an
al. vs Desierto, et al., GR No. 135882 in impeachment proceeding.
relation to Sec. 15[8], RA 6770)
9. disclosure of the Treasurer of the Written Permission of Depositor
Philippines for dormant deposits for at • A bank may allow an inquiry into a
least 10 years under the Unclaimed deposit with the written consent of
Balances Act (Sec. 2, RA 3936) the depositor. An oral or implied
10. without need of a court order if the Anti- authorization does not suffice. This
Money Laundering Council determines consent may be given voluntarily. In
that a particular deposit or investment some cases, however, the consent is
with any banking institution is related to involuntary because the law requires
any one of the following unlawful it.
activities: • Thus, Section 26 of the New Central
a. kidnapping for ransom under Article Bank Act as implemented by BSP
267 of the Revised Penal Code, as Circular No. 170, series of 1998,
amended requires a director, officer or
b. violations of sections 4, 5, 6, 8, 9, 10, stockholder of a bank or their related
12, 13, 14, 15, and 16 of the interests to submit a written waiver of
Comprehensive Dangerous Act of the secrecy of all his deposits of
2002 (RA 9165) whatever nature in all banks of the
c. hijacking and other violations under Philippines in favor of the Banko
Republic Act No. 6235; destructive Sentral, if he applies for a DOSRI
arson and murder, as defined under loan. However, the information
the Revised Penal Code, as obtained from the examination
amended, including those perpetrated remains confidential and may be
used by BSP examiners only in legal

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action it may initiate involving the Graft Law among the exceptions, the
said deposits. Supreme Court held that they should be
• A waiver of the Bank Secrecy Law is included. The only conclusion possible is
also required in case of loans that Section 8 of the Anti-Graft Law is
secured by a hold-out or an intended to amend Section 2 of Republic
assignment of certificates of time Act No. 1405 by providing an additional
deposits. (Section X315, Manual of exception to the rule against disclosure
Regulations for Banks). of band deposits.” (PNB v. Gancayco,
Where Funds Deposited are Subject of 15 SCRA 91 (1965).
Litigation
• This overturned an earlier case
• In a case where Sun Life brought a
decided by the High Court where it held
collection case to recover the
that a prosecution under the Anti-Graft
proceeds of a check it had issued, the
Law was not embraced within any of the
insurance company wanted to
exceptions to the Bank Secrecy Law that
determine how the defendant had
would allow disclosure by a bank of
applied the proceeds of the check.
information concerning a deposit.
The trial court allowed Sun Life to
(Tatalon Bario Council v. Bank of PI, 7
examine pertinent records of the bank
SCRA 10 (1963).
in which the check was deposited.
The Supreme Court held that the • In another case, the Supreme Court
examination was authorized by expanded the exception under the Anti-
Section 10 of Rule 57, on the Graft Law, when it allowed an examination
examination of a person whose not only of the accused’s deposits, but also
property has been attached and those of his spouse, ascendant,
person indebted to him or controlling descendants and relatives, and other
his property. The Court struck down persons as well. (Banco Filipino v. Hon.
the argument that the examination Fidel Purisima, 161 SCRA 576 (1988).
would violate the Bank Secrecy Law, Here, the Court declared as proper the
explaining that the examination fell production by subpoena duces tecum of
within the exception “in cases where bank records of transactions by or in the
the money deposited or invested is names of the wife, children and friends of a
the subject matter of litigation.” The special agent of the Bureau of customs
Court added that the examination of accused of having allegedly acquired
bank records was not a fishing property manifestly out of proportion to his
expedition, but rather a method by salary and lawful income. The Court
which Sun Life could trace the explained:
proceeds of the check that it paid to
• To sustain the petitioner’s theory,
the petitioners. (Onate v Hon Zeus
and restrict the inquiry only to
Abrogar, 230 SCRA 181(1994).
property held by or in the name of the
• In another case, Mellon Bank remitted government official or employee, or
$1 million rather that an intended his spouse and unmarried children, is
$1,000 to the recipient, who deposited unwarranted in the light of the
part of the remittance in a local bank. provisions of the statutes in question,
When personnel of the depositary and would make available to persons
bank testified on the bank deposits, in government who illegally acquire
the defense moved to strike out the property an easy and fool-proof
testimonies of the depositary bank’s means of evading investigation and
witnesses. The Supreme Court prosecution; all they would have to
allowed their testimonies to remain on do would be to simply place the
the record, stating Section 2 of said property in the possession or name
law allows the disclosure of bank of persons other than their spouse
deposits in cases where the money and unmarried children. This is an
deposited is the subject matter of the absurdity that we will not ascribe to
litigation. (Mellon Bank v. Magsino, the lawmakers.
190 SCRA 633.
 Upon Order of the Ombudsman
 Unexplained Wealth (RA3019)
• Although Section 8 of the law that
• Although the Bank Secrecy Law did created the Office of the
not include cases covered by the Anti- Ombudsman expressly granted the

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Ombudsman the power to Court of Appeals, 93 SCRA 452


“administer oaths, issue subpoena (1991).
and subpoena duces tecum and take  Confidentiality under General Banking
testimony in any investigation or Law
inquiry, including the power to
examine and have access to bank • Section 55.1(b) of Republic Act No.
accounts and records,” the Supreme 8791, better known as the General
court held that the Ombudsman Banking Law, contains a provision
could not inquire into bank deposits that extends the confidentiality of
until there was a pending case in bank transactions beyond deposits.
court involving the deposits. The provision reads:
(Marquez v. Desierto, 359 SCRA 772 (b) Without order of a court of
(2001) competent jurisdiction, disclose to
 Unclaimed Balances Law any authorized person any
information relative to the funds or
• The Unclaimed Balances Law properties in the custody of the bank
(Republic Act No. 3936) requires belonging to private individuals,
each bank to file a sworn statement corporations, or any other entity;
with the Treasurer of the Philippines Provided, That with respect to bank
stating the deposits that the bank deposits, the provisions of existing
holds in the names of persons known laws shall prevail.
to be dead or who have not made • Considered confidential under this
deposits or withdrawals during the provision are transactions not
preceding ten years or more. It is covered by the Bank Secrecy Law.
also requires the bank to post a copy These would include, among others,
of the sworn statement in the bank safety deposit boxes, trust accounts
premises. However, this is done only and money market placements.
after the bank shall have first
communicated with the depositor at  Note that the exception
his last known residence or post expressly set forth in the Bank
office address. Such a disclosure of Secrecy Law, do not apply to
the deposits and the depositors, does the confidential transactions
not violate the Bank Secrecy Law. covered by the General Banking
Law. These confidential
 Garnishment of Bank Deposit transactions, however, are
• In China Banking Corporation v. within the ambit of the Anti-
Court of Appeals, (193 SCRA 452 Money Laundering Act.
(1991) the Supreme Court held that  Foreign Currency Deposit Act
the garnishment of a bank deposit
does not violate the Bank Secrecy • The secrecy afforded foreign
Law. Said the court: currency deposits is greater that that
granted to peso deposits. For
“It is clear from the Section 8 of Republic Act No. 6426
discussion of the conference provides:
committee report on x x x Republic
Act. No. 1405, that the prohibition Sec. 8. Secrecy of foreign
against examination of or inquiry into currency deposits. - All foreign
a bank deposit under Republic Act currency deposits authorized under
No. 1405 does not preclude its being this Act, as amended by PD No.
garnished to insure satisfaction of a 1035, as well as foreign currency
judgment. Indeed, there is no real deposits authorized under PD No.
inquiry in such a case, and if the 1034, are hereby declared as and
existence of the deposit is disclosed, considered of an absolutely
the disclosure to evade payment of confidential nature and, except upon
their just debts, even if ordered by the written permission of the
the Court, through the expedient of depositor, in no instance shall such
converting their assets into cash and foreign currency deposits be
depositing the same in a bank.”(Phil. examined, inquired or looked into by
Commercial & International Bank v. any person, government official,
bureau or office whether judicial or
administrative or legislative, or any

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other entity whether public or private: 2. To direct the management, operations


Provided however, That said foreign and administration of the PDIC
garnishment, or any other order or 3. To establish a human resource
process of any court, legislative management system which shall govern
body, government agency or any the selection, hiring, appointment,
administrative body whatsoever. transfer, promotion or dismissal of all
• The FCDU Act allows only one personnel
exception, and that is upon the 4. To appoint, establish the rank, fix the
written permission of the depositor. remuneration, approve local and foreign
However, the Anti-Money Laundering training of, and remove any officer or
Act added at least one more employee of the PDIC, for cause,
exception: upon order of a court of subject to pertinent civil service laws
competent jurisdiction for violations 5. To adopt an annual budget for, and
of the Act, when it has been authorize such expenditures by the
established that there is probable PDIC
cause that the deposits involved are 6. To approve the methodology for
in any way related to a money determining the level and amount of
laundering offense. In addition, the provisioning for insurance and financial
Unclaimed Balances Law also assistance losses, which shall establish
constitutes an exception to the FCDU reasonable levels of deposit insurance
Act. reserves.
A. Foreign Currency Deposit Act Main functions of the PDIC:
(RA No. 6426) 1. Risk Management:
 deals with the insurance assessment
All foreign currency deposits authorized
and premium collection from member
under the Act are declared as and considered of
banks.
an absolutely confidential nature and in no
 monitors the health of member banks,
instance shall foreign currency deposits be
examines and identifies “risk” areas in
examined, inquired or looked into by any person,
banks, or their weaknesses.
government official, bureau or office.
 institutes corrective measures to prevent
Except: closures thru bank rehabilitation and
1.when there is written consent of depositor provides financial assistance to
under Sec 8 of the Foreign Currency Deposits distressed banks and assists in the
Act ; reopening of closed banks, provided all
PDIC requirements are met.
2. upon order of the court (or even without court 2. Claims, Receivership and Liquidation.
order in proper cases) when there is probable  claims refers to the settlement of claims
cause of money laundering as provided for for insured deposits
under Sec.11 of the Anti-Money Laundering Act.  receivership deals with the takeover and
control of all assets, liabilities and affairs
C. Philippine Deposit Insurance of closed banks
Corporation (RA 3591, as amended by RA  liquidation covers the conversion of
9302) loans, disposal of fixed assets into cash
deposits, and the implementation of final
Purpose: settlement with creditors.
 shall insure the deposits of all banks which
are entitled to the benefits of insurance Insurance coverage:
under this Act  The deposit liabilities of any bank or
 shall promote and safeguard the interests of banking institution, which is engaged in
the depositing public by providing permanent the business of receiving deposits, or
and continuing insurance coverage on all which thereafter may engage in the
insured deposits business of receiving deposits, shall be
insured with the PDIC.
The Board of Directors shall have the
authority: Deposit - the unpaid balance of money or its
1. To prepare and issue rules and equivalent received by a bank in the usual
regulations course of business and for which it has given or
is obliged to give credit to a commercial,
checking, savings, time or thrift account or which

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is evidenced by passbook, check and/or 2. making available to each depositor a


certificate of deposit. transferred deposit in another insured
 any obligation of a bank which is bank in an amount equal to insured
payable at the office of the bank located deposit of such depositor
outside of the Philippines shall not be a
deposit for any of the purposes of this Transfer Deposit - a deposit in an insured
Act or included as part of the total bank made available to a depositor by the
deposits or of insured deposit PDIC as payment of insured deposit of such
 subject to the approval of the Board of depositor in a closed bank and assumed by
Directors, any insured bank which is another insured bank.
incorporated under the laws of the
Philippines which maintains a branch  The PDIC may withhold payment of
outside the Philippines may elect to such portion of the insured deposit of
include for insurance its deposit any depositor in a closed bank as may
obligations payable only at such branch. be required to provide for the payment of
any liability of such depositor as a
Extent of liability: not to exceed P250,000 as of stockholder of the closed bank, or of any
the date of the bank’s closure(Sec. 4) liability of such depositor to the closed
Rules: bank or its receiver, which is not offset
 In determining such amount due against a claim due from such bank,
to any depositor, there shall be added pending the determination and payment
together all deposits in the bank of such liability by such depositor or any
maintained in the same right and other liable therefor. (Sec. 16)
capacity for his benefit either in his own  Except as otherwise prescribed by the
name or in the name of others. Board of Directors, neither the PDIC nor
 A joint account regardless of such other insured bank shall be
whether the conjunction “and,” “or,” required to recognize as the owner of
“and/or” is used, shall be insured any portion of a deposit appearing on
separately from any individually-owned the records of the closed bank under a
deposit account, provided that name other than that of the claimant,
1. If the account is held jointly by any person whose name or interest as
two or more natural persons, or by such owner is not disclosed on the
two or more juridical persons or records of such closed bank as part
entities, the maximum insured owner of said deposit, if such
deposit shall be divided into as recognition would increase the
many equal shares as there are aggregate amount of the insured
individuals, juridical persons or deposits in such closed bank.
entities, unless a different sharing is
stipulated in the document of Effect of payment:
deposit, and 1. The PDIC, upon payment of any
2. If the account is held by a depositor shall be subrogated to all
juridical person or entity jointly with rights of the depositor against the closed
one or more natural persons, the bank to the extent of such payment.
maximum insured deposit shall be Extent: Such subrogation shall include
presumed to belong entirely to such the right on the part of the PDIC to
juridical person or entity receive the same dividends and
 The aggregate of the interests of each co- payments from the proceeds of the
owner over several joint accounts, whether assets of such closed bank and
owned by the same or different recoveries on account of stockholders’
combinations of individuals, juridical persons liability as would have been payable to
or entities, shall likewise be subject to the the depositor on a claim for the insured
maximum insured deposit of P250,000.00. deposits
 Liability is per bank basis. Limitation: The depositor shall retain his
claim for any uninsured portion of his
When liable: Whenever an insured bank shall deposit.
have been closed by the Monetary Board. Nature of payments: All payments by the
Form of payment: payment shall be made as PDIC of insured deposits in closed
soon as possible either by banks partake of the nature of public
1. cash or funds, and as such, must be considered
a preferred credit similar to taxes due to

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the National Government in the order of PDIC may have become


preference under Article 2244 of the subrogated, shall thereupon revert
New Civil Code. to the depositor
 the PDIC shall be discharged from
2. Payment of an insured deposit to any any liability on the insured deposit
person by the PDIC shall discharge the Permanent Insurance Fund
PDIC, and payment of a transferred  shall be three billion pesos
deposit to any person by the new bank (P3,000,000,000.00)
or by an insured bank in which a
transferred deposit has been made Deposit Insurance Fund
available shall discharge the PDIC and  shall be the capital account of the PDIC
such new bank or other insured bank, to and shall consist of the ff.: (i) the
the same extent that payment to such Permanent Insurance Fund; (ii)
person by the closed bank would have assessment collections; (iii) reserves for
discharged it from liability for the insured insurance and financial assistance
deposit. (Sec. 16) losses; and (iv) retained earnings

Period to settle claims by PDIC: 6 months D. Unclaimed Balances Law


from the date of filing of claim for insured (RA 3936)
deposit.
Liability for failure to settle: will subject the Elements of Unclaimed balances:
directors, officers or employees of the PDIC 1. there must be a claim or depost
responsible for the delay to imprisonment upon of: (a) money; (b) bullion; (c) security; or (d)
conviction from 6 months to 1 year, where such other evidence of indebtedness.
failure was due to: 2. the credit or deposit must be
a. grave abuse of discretion, with a bank, building and loan association,
b. gross negligence, or trust corporation; and
c. bad faith, or 3. the credit or deposit is in favor of
d. malice, a person: (a) who is dead; or (b) who has
not made further deposits or withdrawals
 the PDIC, in its discretion, may require during the preceding 10 years or more.
proof of claims to be filed before paying Note: Demand drafts cannot be escheated
the insured deposits, and that in any but telegraphic notes can be. (Republic v.
case where the PDIC is not satisfied as FNCB)
to the viability of a claim for an insured
deposit, it may require final Legal Consequence
determination of a court of competent The unclaimed balances may be subject of
jurisdiction before paying such claim escheat proceedings, after proper publication
 the period shall not apply if the validity of and the depositors still do not lay claim to them.
the claim requires the resolution of
issues of facts and or law by another
INTELLECTUAL PROPERTY CODE
office, body or agency or by the PDIC
(RA 8293)
together with such other office, body or
agency.
Prescription:
Unless otherwise waived by the PDIC, all of the
depositor’s rights with respect to the insured
deposit shall be barred if the said depositor in INTRODUCTION
the closed bank fails to claim his insured
deposits with the PDIC: Laws Specifically Repealed
a. within 2 years from actual takeover, or
b. does not enforce his claim within 2 years 1. Patent Law-R.A. 165
after the 2-year period to file a claim. 2. Trademark Law R.A. 166
Effects: 3. Copyright Law PD 49
 all rights of the depositor against the 4. Articles 188 & 189 RPC
PDIC with respect to the insured
deposit shall be barred Intellectual Property - Those property rights
 all rights of the depositor against the which result from the physical manifestation of
closed bank and its shareholders or original thought.
the receivership estate to which the

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Intellectual Property Rights (Sec. 4) to public performance or other communication of


1. Copyright his work.
2. Related rights or neighboring rights of 2. Bureau of Legal Affairs - Over:
copyright a. Opposition to applications for
3. Patents registration of marks;
4. Mark b.Cancellation of trademarks;
5. Geographical Indications c. Cancellation of patents, utility models,
6. Industrial Designs (Topographies) of and industrial designs;
Integrated Circuits d.Petitions for compulsory licensing
7. Protection of Undisclosed Information e.Administrative complaints for violation of
laws involving intellectual property rights
International Law Related Provisions where the total damages claimed are not
less than P200,000.00. The Director of
1. Principle of Reciprocity - (as referring to Legal Affairs has the power to punish
persons entitled to the benefits of IPC) any contempt.
person who is a national or who is domiciled or 3. Documentation, Information and Technology
has a real and effective industrial establishment Transfer Bureau - Over disputes involving
in a country which: technology transfer payments.
1. is party to any convention, 4. Regular Courts (Sec. 225)
treaty, or agreement relating to intellectual
property rights or the repression of unfair B. Appellate Jurisdiction
competition to which the Philippines is also
a party, or 1.Director General - Over all decision rendered
2. extends reciprocal rights to by the:
nationals of the Philippines by law, shall a. Director of Legal Affairs
be entitled to benefits to the extent b. Director of Patents
necessary to give effect to any provision of c. Director of Trademarks
such convention, treaty, or reciprocal law, d. Director of the Documentation,
in addition to the rights to which any owner Information and Technology
of an intellectual property right is otherwise Transfer.
entitled by the IPC. 2. Court of Appeals –Over Decisions of the
Director General in the exercise of his appellate
2. Principle of Reverse Reciprocity - Any jurisdiction over the decisions of the a)Director of
condition, restriction, limitation, diminution, Legal affairs, b) Director of Patents, c)Director of
requirement, penalty or any similar burden Trademarks.
imposed by the law of a foreign country on a 3. Secretary of Trade and Industry
Philippine national seeking protection of a. Over decisions of the Director in the
intellectual property rights in that country shall exercise of his appellate jurisdiction over
reciprocally be enforceable upon nationals of the decisions of the Director of the
said country within Philippine jurisdiction. Documentation, Information and
3. National Treatment Principle - The Technology Transfer.
Philippines, upon becoming a member of the b. Over decisions of the Director General in
WTO, has adhered to the Trade- Related the exercise of his original jurisdiction
Aspects of Intellectual Property Rights (TRIPS), relating to the terms of license involving
which provides that protection afforded to the the author’s rights.
member-state (with respect to intellectual
property) must be extended to the nationals of COPYRIGHT
other member-states. (1995, 1997, 1998, 2005, 2006 Bar Exams)
4. Most Favored Nation Principle - Whatever
favor, allowance, consideration, privilege or Copyright: The right over military and artistic
immunity a member-state grants the nationals of works which are original intellectual creations in
another country is “immediately and the literary and artistic domain protected from
unconditionally the moment of creation.
Requisites:
Jurisdiction over Disputes under the IPC 1. Originality
It does not mean novelty or ingenuity;
A. Original Jurisdiction neither uniqueness nor creativity. It simply
means that the work owes its origin to the
1. Director General - Over disputes relating to author.
the terms of a license involving the author’s right

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a. The work is an independent incorporated in a useful article, whether


creation of the author made by hand or produced on an industrial
b. It must not be copied scale.
c. It must involve some intellectual 5. Performers – are actors, singers,
effort. musicians, dancers, and other persons who
2. Expression act, sing, declaim, play in, interpret, or
There must be fixation. To be fixed a work otherwise perform literary and artistic work.
must be embodied in a medium sufficiently
permanent or stable to permit it to be Formalities:
perceived, reproduced, or otherwise
communicated for a period of more than Principle of Automatic Protection - No formality
transitory duration. is required for the author to be vested with the
 Strictly speaking, there is no work for rights of copyright.
copyright purpose, unless there is  Registration and Deposit with the
something tangible. National Library and the Supreme Court
 It is fixation that defines the time from Library of 2 copies of the work within 3
when copyright subsists. Before the time weeks after first public dissemination is
of fixation there can be no infringement. only for the purpose of completing the
Principles: records of these libraries. Failure to do
1. Works are protected by the sole so after formal demand subjects the
fact of their creation, irrespective of their author to a fine.
mode or form of expression, as well as their
content, quality or purpose. When Rights over Copyright are
2. The copyright of original literary conferred
and artistic works belong to the author of the From the moment of creation The work is
work. deemed created if something original is
3. Protection extends only to the expressed in a fixed manner.
expression of the idea, not to the idea itself Who Owns the Copyright:
or to nay procedure, system, method, or a) ONE CREATOR – creator or his heirs or
operation, concept or principle, discovery, or assigns owns copyright.
mere data. b) JOINT CREATION – co-authors shall be
4. The copyright is distinct from the the original owners of the copyright and
property in the material object subject to it. in the absence of agreement, their rights
5. Copyright in the strict sense of shall be governed by the rules on co-
the term, is purely a statutory right. Being a ownership. EXCEPTION: work of joint
mere statutory grant, the rights are limited to authorship consists of parts that can be
what the statute confers. It may be obtained used separately and the author of each
and enjoyed only with respect to the part shall be the original owner of the
subjects and by the persons, and on terms copyright in the part that he has created.
specified in the statute. Accordingly, it can
cover only the works falling within the
c) COMMISSIONED WORK – the person
commissioning owns the work;
statutory enumeration or description.
ownership of copyright remains with the
Definitions:
creator, unless there is a written
1. Author – is the natural person
stipulation to the contrary.
who has created the work.
2. Collective Work – is a work which has d) AUDIO-VISUAL WORK – producer (for
been created by two or more natural purposes of exhibition); for all other
persons at the initiative and under the purposes, the producer, the author of
direction of another with the understanding the scenario, the composer, the film
that it will be disclosed by the latter under his director, the photographic director and
own name and that contributing natural the author of the work are the owners.
persons will not be identified. e) PSEUDONYMOUS and ANONYMOUS
3. Joint Work– is a work prepared by two WORKS- unless the author is
or more authors with the intention that their undisputably known, the publisher shall
contributions be merged into inseparable or be presumed to be the representative of
interdependent parts of a unitary whole, i.e. the author.
medical textbook that is jointly authored by f) EMPLOYEE’S WORK DURING
two or three experts. COURSE OF EMPLOYMENT –
4. Work of Applied Art – is an employer, if it is the result of regular
artistic creation with utilitarian functions or

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functions or duties but the employee author and for fifty years after the death of the
owns it if it is not part of his duties. last surviving author.
g) COLLECTIVE WORKS – Contributor is 3. Anonymous or a pseudonymous work – till the
deemed to have waived his right, unless end of fifty years following the date of their first
he expressly reserves it. publication. The fifty-year period commences
h) LETTERS – Writer. However, the court from January 1 following the date of publication.
may authorize their publication or 4. Work of applied art – twenty-five years from
dissemination if the public good or the the date of making.
interest of justice so requires.  An artistic creation with utilitarian
functions or incorporated in a useful
BAR QUESTION (Q): May a person article, whether made by hand or
have photocopies of some pages of the produced on an industrial scale (Sec.
book of Professor Rosario made without 171.10)
violating the copyright law? 5. Photographic works – fifty years from the
SUGGESTED ANSWER (SA): YES. publication of the work, or from making if
The private reproduction of a published unpublished (the same term is given to audio-
work in a single copy, where the visual work produced by photography or
reproduction is made by a natural analogous processes).
person exclusively for research and 6. Broadcast – twenty years from the date of
private study, is permitted, without the broadcast.
authorization of the owner of the 7.Newspaper Article – Lifetime of the author and
copyright in the work. 50 years thereafter

BAR Q: BR and CT are noted artists Copyrightable Objects


whose paintings are highly prized by a) Literary and Artistic Works:
collectors. Dr. DL commissioned them to 1. Books, pamphlets, articles and other
paint a mural at the main lobby of his writings
new hospital for children. Both agreed to 2. Periodicals and newspapers
collaborate on the project for a total fee 3. Lectures, sermons, addresses,
of two million pesos to be equally divide dissertations prepared for oral delivery,
between them. It was also agreed that whether or not reduced in writing or
Dr. DL had to provide all the materials other material form
for the painting and pay for the wages of 4. Letters
technicians and laborers needed for the 5. Dramatic or dramatico-musical
work on the project. compositions; choreographic works or
Assume that the project is completed entertainment in dumb shows
and both Br and CT are fully paid the 6. Musical compositions, with or without
amount of P2M as artists’ fee by DL. words
Under the law on intellectual property, 7. Works of drawing, painting, architecture,
who will own the mural? Who will own sculpture, engraving, lithography or
the copyright in the mural? Why? other works of art; models or designs for
Explain. works of art
SA: Under Section 178.4 of the 8. Original ornamental design or models
Intellectual property Code, in case of for articles of manufacture, whether or
commissioned work, the creator (in the not registrable as an industrial design,
absence of a written stipulation to the and other works of applied art.
contrary) owns the copyright, but the 9. Illustrations, maps, plans sketches,
work itself belongs to the person who charts and three-dimensional works
commissioned its creation. Accordingly, relative to geography, topography,
the mural belongs to DL. However, BR architecture or science
and CT own the copyright since there is 10. Drawings or plastic works of a scientific
no stipulation to the contrary. or technical character
11. Photographic works including works
Duration of Copyright produced by a process analogous to
photography; lantern slides
1. Literary Artistic Works and Derivative Works – 12. Audiovisual works and cinematographic
during the lifetime of the creator and for fifty works and works produced by a process
years after his death. analogous to cinematography or any
2. Joint Creation – the economic rights shall be process for making audio-visual
protected during the life of the last surviving recordings

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13. Pictorial illustrations and advertisements sermons, addresses and dissertations,


14. Computer programs pronounced, read or rendered in courts
15. other literary, scholarly, scientific and of justice, before administrative
artistic works agencies, in deliberative assemblies and
• The author of speeches, lectures, in meetings of public character. (Sec.
sermons, addresses, dissertations shall 175,IPC).
have the exclusive right of making a e. The tradename and
collection of his works. (Sec. 176.2,IPC) container of a medicated cream is the proper
b) Derivative Works: subject of trademark. Hence, copyright and
1. dramatizations, translations, patent registration of the name and
adaptations, abridgements, container would not guarantee the registrant
arrangements, and other alterations of the right to the exclusive use of the same,
literary or artistic works; and not being the proper subjects thereof. (Kho
2. Collection of literary, scholarly or artistic v. CA, No. 115758, March 19, 2002).
works, and compilations of data and f. In the same manner,
other materials which are original by copyright registration of a drawing or
reason of the selection or coordination pictorial illustration which depicts light boxes
or arrangement of their contents (Sec. or box-type electrical devices protects the
173 IPC) drawing but no the light box depicted therein
(Pearl and Dean {Phil.}v Shoemart, Inc, No.
Unprotected Works 148222, August 15, 2003)
a. Any idea, procedure, system,
method or operation, concept, principle, Rights of Authors
discovery or mere data as such , even if they a) Economic Rights
are expressed, explained, illustrated or b) Moral Rights
embodied in a work. Thus, the format of a c) Right to participate in the gross proceeds
television game show is not subject to a of the sale or lease of the original work or
copyright (Joaquin v. Drilon, January 28, DROIT DE SUITE.
1999, No. 108946).
b. News of the day and other Publisher’s Rights
miscellaneous facts having the character of a. The right to publish granted
mere items of press information. by the author, his heirs, or assigns; b)
 No protection is given to “news of the copyright consisting merely of the right of
day and other miscellaneous facts reproduction of the typographical
having the character of mere items of arrangement of the published edition of the
press information.” work.
 A pure news report will no longer find b. if submitted to newspaper,
protection under the new law, but a magazine and the like, the right to publish
column or published comment will. once materials sent by a writer, a
When newspapers and periodicals photographer, an artist to a periodical or
include works enjoying independent newspaper publisher, but such writer or
copyrights, the works so included artist retains his copyright on the piece.
continue enjoying the rights for duration
proper to them. Limitations to the Rights of Copyright:
1. General Limitations (Sec. 184)
c. Any official text of a legislative, 2. Fair use
administrative or legal nature, as well as nay 3. In the case of a work of
official translation. architecture, the right to control the
d. Any work of the Government of reconstruction or rehabilitation in the same
the Philippines style as the original of the building.
4. Private reproduction of
 However, prior approval of the
published work in a single copy by a natural
government agency or office wherein the
person for research and private study.
work is created shall be necessary for
5. Reprographic reproduction in a
exploitation of such work for profit. Such
single copy by non-profit libraries, under
agency or office may, among other
certain circumstances.
things, impose as a condition the
6. Reproduction under certain
payment of royalties. No prior approval
circumstances, of a computer program in
or conditions shall be required for the
one back-up copy by the lawful owner of the
use of any purpose of statutes, rules and
program.
regulations, and speeches, lectures,

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7. Importation for personal 10. Public display of the original or a copy of the
purposes under certain conditions. work not made by means of a film, slide,
television image or otherwise on screen or by
Acts that do not infringe copyright means of any other device or process provided
that either the work has been published, sold,
1. Recitation or performance of a given away, or transferred to another person by
work: the author or his successors in title
a. made accessible to the public 11. Any use made of a work for the purpose of
b. privately done any judicial proceedings; or for the giving of
c. free of charge professional advice by a legal practitioner
d. strictly for a charitable or
religious institution 12. Single copy reproduction of a published
2. Making of quotations from a work by natural person exclusively for research
published work: and private study (even without authorization of
a. compatible with fair use owner).
b. extent is justified by the purpose
c. source and name of the author, 13. Reproduction by libraries of:
appearing on work, must be mentioned a. fragile works
3. Reproduction or communication to the b. isolated articles in composite
public by mass media of articles on current works
political, social, economic, scientific or religious c. brief portions of published
topic, lectures, addresses and other works, d. work
delivered in public: e. to preserve or replace copy
a. for information purposes
b. not expressly reserved 14. One back-up copy of computer program
c. source is already indicated
4. Reproduction and communication to the Fair Use
public of literary, scientific or artistic works as
part of reports of current events by means of  Fair use of a copyrighted work for
photography, cinematography or broadcasting to criticism, comment, news reporting, teaching
the extent necessary for the purpose. including multiple copies for classroom use,
scholarship, research and similar purposes
5. Inclusion of a work in a publication, is not an infringement of copyright.
broadcast, or other communication to the public, a) Factors to consider to determine
sound recording or film if made by way of whether use is fair or not: (P-A-N-E)
illustration for teaching purposes compatible with 1. Purpose and the
fair use and the source and name of the author, character of the use
appearing on work, must be mentioned. 2. Nature of the
6. Recording made in schools, universities, or copyrighted work
educational institutions of a work included in a 3. Amount and
broadcast for the use of such schools, substantially of the portion used
universities or educational institutions. Such 4. Effect of the use upon
recording must be deleted within a reasonable the potential market of the
period; such recording may not be made from copyrighted work.
audio-visual works which are part of the general
cinema repertoire of feature films except for brief Importation for Personal Purposes
excerpts of the work.  The importation of a
7. Making of ephemeral recordings: copy of a work by an individual for his
a. by a broadcasting organization personal purposes shall be permitted without
b. by means of its own facilities the authorization of the author of, or other
c. for use in its own broadcast owner of copyright in, the work under the
8. Use made of a work by or under the following circumstances:
direction or control of the Government for public a) Copies of the work are not available in
interest compatible with fairs use. the Philippines, and:
9. Public performance or the communication to 1. One copy at one time is
the public of a work in a place where no imported, but strictly for
admission fee is charged by a club on institution individual use only
for charitable or educational purpose only and 2. By authority of and for the use
the aim is not profit-making of the Philippine Government

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3.
For the use of religious, d. Seizure and impounding of
Charitable or educational infringing materials for the purpose of
Society or institution if not more evidence
than three copies per title Administrative:
provided they are not for sale. 1. administrative
b) Copies form parts of libraries and action
personal baggage belonging to persons 2. cease and desist
or families arriving from foreign countries order
and are not intended for sale: Provided, 3. forfeiture of
That such copies do not exceed three paraphernalia used in committing the
offense
Infringement 4. administrative
 Any violation of the owner’s fines
exclusive rights conferred by law. (Justice
Vitug, Pandect of Commercial Law, 1997 BAR Q. Juan Xavier wrote and
ed.) published a story similar to an
 An appropriation of a copyrighted unpublished copyrighted story of
work buy another who is not authorized. Manoling Santiago. It was, however,
 Copying alone is not what is conclusively proven that Juan Xavier
prohibited. The copying must produce was not aware that the story of Manoling
injurious effect. The author’s work is the Santiago was protected by copyright.
product of his long and assiduous research Manoling Santiago sued Juan Xavier for
and for another to represent it, as one’s own infringement of copyright. Is Juan Xavier
is injury enough. (Habana vs. Robles) liable?
 It is not necessary that the whole or SA: YES. Juan Xavier is liable for
even a large portion of the work shall have infringement of copyright. It is not
been copied. If so much is taken that the necessary that Juan Xavier is aware
value of the original is sensibly diminished, that the story of Manoling Santiago was
or the labors of the original author are protected by copyright. The work of
substantially and to an injurious extent Manoling Santiago wais protected from
appropriated by another, that is sufficient in the time of its creation.
point if law to constitute piracy. (Columbia
Pictures vs. CA) Plagiarism - The act of appropriating the
a) How Made – when there is literary composition of another, or parts or
piracy or substantial reproduction. If so passages of his writings, or the ideas or
much is taken that the value of the original language of the same and passing them off as
author are substantially and to an injurious the product of one’s mind. (Estela vs. Santiago)
extent appropriated by another (Habana v. - The incorporation in one’s own work that of
Robles, No. 131522, July 19, 1999) another without the proper acknowledgment
thereof.
b) Remedies
BAR Q. In an action for damages on
Judicial account of an infringement of a
a. Injunction to prevent copyright, the defendant (the alleged
infringement pirate) raised the defense that he was
b. Action for damages which unaware that what he had copied was a
should be filed within four years. copyright material. Would this defense
Damages are assessed on the basis of be valid?
the proof alleged by the plaintiff of sales SA: No. An intention to pirate is not
made by the defendant of the infringing an element of infringement. Hence, an
work minus whatever costs the honest intention is no defense to an
defendant may be able to prove and action for infringement.
appreciated by the court. ALTERNATIVE ANSWER: YES.
c. Criminal case. The infringer The owner of the copyright must make
also exposes himself to criminal liability others aware that the material in
wherein the law prescribes penalties of question is under or covered by a
imprisonment and fines, including copyright This is done by the giving of
subsidiary imprisonment in case of such notice at a prominent portion of the
insolvency. copyright material. When the alleged
pirate is thus made aware thereof; his

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act of pirating the copy material will shall be prima facie evidence of the
constitute infringement. validity of the registration, the
registrant’s ownership of the mark, and
TRADEMARKS of the registrant’s exclusive right to use
(1996, 2005 Bar Exams) the same.
This means that registrant’s right
Trademark – any visible sign capable of may be questioned by a person who has
distinguishing the goods or services of an a better right, including a prior actual
enterprise and shall include a stamped or user. This also includes persons with
marked container of goods. In relation thereto, a internationally known marks.
trade name means the name or designation d. Registration is also not
identifying or distinguishing an enterprise. (Kho important to protect the goodwill that
v. CA, No. 115758, March 11, 2002). Thus, the identifies in the mind of the public the
basic requirements are: goods he manufactures or deals in.
1. There must be a visible sign. e. Registration of a mark is not
2. It must be capable of necessary for purposes of filing a case
distinguishing the goods of an for unfair competition or false
enterprise. designation of origin (Secs. 168.2 and
Collective Mark – any visible sign 169,IPC). Unfair competition is present
designated as such in the application for when:1) there is passing of a product
registration and capable of distinguishing the format of another;2) giving goods or
origin or any other common characteristic, service the appearance of goods of
including the quality of goods or services of another.
different enterprises which use the sign under 2) When the law states the right is acquired
the control of the registered owner of the from the time of registration, it is acquired form
collective mark. the time of registration, it is actually referring to
There is no need to register trade names in the filing date of application.
order to secure protection for them. 1. the filing date of an application
shall be the date on which the IPO received
Functions: the following indications and elements:
a. To indicate the origin of i. express or implicit indication that the
the goods to which they are attached registration of the mark is sought
b. To guarantee the ii. identity of the applicant
standard of quality of the goods iii. indications sufficient to contact the
b. To advertise the applicant or his representative
goods (Mirpuri v. CA, 318 SCRA 516, 1999) iv. reproduction of the mark
v. list of goods or services for
How Marks are Acquired which registration is sought.
1) The rights in a mark shall be acquired 2. However, the right may also be
through registration with the Intellectual Property protected from the priority date. Subject
Office or IPO. to the rules on reciprocity, where the
1. Registration is necessary before application is filed in the Philippines and
one can file an action for infringement the same applicant previously filed an
2. Actual use application in the countries covered by
a. Prior use in the Philippines is not the reciprocity rule under Sec. 3 of the
required before registration IPC, the application is deemed filed as
b. However, there must be actual of the day the application was first filed
use after registration. The registrant as of the day the application was first
shall file a declaration of actual use of filed in the foreign country. However,
the mark with evidence to that effect there will be no registration in the
within 3 years from the filing date of Philippines until registered in such
application otherwise it may be foreign country.
cancelled. (Secs. 142.2 and 151(c), IPC)  Ownership of a mark or trade name may
The registrant is required to file a be acquired not necessarily by
declaration of actual use and evidence registration but by adoption and use in
to that effect, or shall show valid reasons trade or commerce. As between actual
for non-use within one year from the fifth use of a mark without registration, and
anniversary date of registration. registration of the mark without actual
c. It is also provided that a use thereof, the former prevails over the
certificate of registration of a mark latter. For a rule widely accepted and

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firmly entrenched, because it has come 2. Mark is used arbitrarily – a generic,


down through the years, is that actual descriptive or common term may be registered if
use in commerce or business is a pre- used in arbitrary or fanciful manner and with no
requisite to the acquisition of the right of relation to the product it identifies.
ownership. - a geographical name may be registered if it
 While the present law on trademarks is used in an arbitrary, artificial or fictitious sense
has dispensed with the requirement of merely to indicate ownership, independent of
prior actual use at the time of location or place of manufacture and for a
registration, the law in force at the time product not manufactured in the geographical
of registration must be applied (R.A. No. place.
166), and thereunder it was held that as 3. Descriptive word is used as a part of
a condition precedent to registration of coined mark.
trademark, trade name or service mark, 4. Descriptive word is used as part of
the same must have been in actual use composite mark.
in the Philippines before the filing of Composite Mark – is a mark consisting of
application for registration. (Shangrila two or more elements or a combination of words,
Intl Hotel Management v. Developers phrases or words and designs or symbols or
Group of Companies, March 31, color schemes.
2006,G.R. No. 159938)
What may become tradenames or marks- Marks that Cannot be Registered:
Generally, a word, name, symbol, emblem, sign, 1. Immoral, deceptive, or
device, figure or any combination thereof, which scandalous matter, or matter which may
may not validly monopolized and registered as disparage or falsely suggest a connection
mark or trade name because of some defects, with persons, living or dead, institutions,
as provided in Sec. 123 of R.A. 8293 may after beliefs, or national symbols, or bring them
such defects are removed, be appropriated and into contempt or disrepute;
registered as a mark or trade name. 2. Consists of the flag or coat of
What marks or tradenames cannot be arms or other insignia of the Philippines or
protected as such: any of its political subdivisions, or of any
1. 1.Those which consist foreign nation, or nay simulation thereof;
exclusively of sign or indications that may 3. Consists of a name, portrait or
serve in trade to designate the kind, quality, signature identifying a particular living
quantity, intended purpose, value, individual except by his written consent, or
geographical origin, time or production of the the name, signature, or portrait of a
goods or rendering of the services, or other deceased President of the Philippines,
characteristics of the goods or services. during the life of his widow, if many, except
2. Those which consist of shapes by written consent of the widow;
that may be necessitated by technical 4. Identical with a registered mark
factors or by the nature of the goods belonging to a different proprietor or a mark
themselves or factors that affect their with an earlier filing or priority date, in
intrinsic value respect of:
3. Those which consist of colors a. the same goods or
alone. services
4. a descriptive or common term or b. closely related goods
symbol or services
c. if it nearly resembles
Note: the abovementioned can still be such a mark as to be likely to deceive or
registered when: cause confusion;
5. Generic terms for goods or
1. They acquire a secondary meaning services;
Doctrine of Secondary Meaning - A word, 6. Characteristics of goods like
phrase, design or device originally incapable of quality or quantity;
exclusive appropriation with reference to an 7. Customary sign in everyday
article in the market because geographically or language;
otherwise descriptive, might nevertheless have 8. Color by itself.
been used so long and so exclusively by one
producer with reference to his article that, in that Internationally Well-Known Marks
trade and to that branch of the purchasing
public, the word, phrase, sign or device has a. The persons who may
come to mean that the article is his product. question the mark (that is, oppose

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registration, petition for the cancellation reasonably be assumed to originate from the
thereof, sue for unfair competition) include latter and the public would then be deceived into
persons whose internationally well-known the belief that there is some connection or
mark, whether or not registered, is identical business association between the parties which
with or confusingly similar to or constitutes a in fact is absent.
translation of a mark that is sought to be
registered or is actually registered. Confusion of Goods: The product or
b. There is also service of one is identical or similar to that of the
protection for internationally known marks other.
registered in the Philippines for goods that
are not similar with respect to which Colorable Imitation - Refers to such
registration is applied for. similarity in form, content, words, sound,
meaning, special arrangement or general
Rights Conferred appearance of the mark or trade name with that
1. The right to the exclusive of the other mark or trade name in their over-all
use of the mark for one’s own goods or presentation or in their essential, substantive
services . and distinctive parts as would likely mislead or
2. The right to prevent others confuse persons in the ordinary course of
from the use of the same mark for identical purchasing the genuine article.
goods or services in the course of trade.
3. The right to the exclusive Infringement
use of one’s already registered mark even  How Committed:
for goods or services into which one’s 1. If a person, without the owner’s consent,
venture expands, if used by others for use in commerce any reproduction,
dissimilar products is likely to damage the counterfeit, copy or colorable imitation of
business interest of the first venturer (Sec. a registered mark or the same container
147, IPC). or a dominant feature thereof in
connection with the sale, offering for
Duration – Ten years subject to indefinite sale of any goods or services on or in
renewal for periods of ten year each. connection with which such use is likely
to cause confusion, or to cause mistake
Confusion of Trademarks: or to deceive. (Sec. 155.1,IPC)
The term confusing similarity refers to such 2. If a person, without the owner’s consent,
resemblance between a mark or trade name of a reproduce, counterfeit, copy or colorably
person and that of another as to likely when imitate a registered mark or a dominant
applied to or used on their respective goods, feature thereof and apply such
business or services cause confusion or mistake reproduction, counterfeit, copy or
on the part of the purchasers as to the goods or colorable imitation to labels, signs,
services themselves or as to their source or prints, packages, wrappers, receptacles
origin. or advertisements intended to be used in
The result of confusion is damage or commerce upon or in connection with
prejudice on the part of the owner of the senior the sale, offering for sale, distribution, or
mark or trade name as well as on the part of the advertising of goods or services on or in
buying public. connection with which such use is likely
to cause confusion, or to cause mistake,
or to deceive (Sec. 155.2,IPC).
TWO TYPES OF CONFUSION OF MARKS  While an administrative cancellation of a
OR TRADE NAMES: registered trademark on any of the
grounds under Sec. 17 of R.A. No. 166,
1.Confusion of Goods or Services- a is within the ambit of the BPTTT, an
person’s goods or services are purchased as action for infringement or any other
those of another person, and the proper quality incidental remedy sought is within the
of the former reflects adversely on the latter’s jurisdiction of the ordinary courts.
reputation.  An action for infringement or unfair
The confusing similar marks or trade competition, including the available
names are used on the same kind of products or remedies of injunction & damages in the
services. regular courts can proceed
2. Confusion of Business or Origin- exist independently or simultaneously with an
when one party’s product or service though action for the administrative cancellation
different from that of another, is such as might of a registered trademark in the BPTTT.

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(Levi Strauss vs. Vogue Traders


Clothing Company, June 29, 2005, G.R. ILLUSTRATION:
No. 132993)
 Use of trademark by a person FACTS: ABC filed a petition for cancellation
for a product in which the other party does of the registered trademark STYLISTIC MR.LEE
not deal, the use of the same trademark used on skirts, jeans, blouses, socks, briefs,
cannot be objected to, it will only be jackets, jogging suits, dresses, shorts and
prohibited if the goods are related, that is, lingerie owned by EGM.
they belong to the same class or have the ISSUE: Is there confusing similarity?
same descriptive properties (Canon Kabushi HELD: NO. Although on its label the word
Kaisha v CA, 336 SCRA 266, 2000). LEE is prominent, the trademark should be
Thus, a trademark certificate that covers considered as a whole and not piecemeal.
stationeries such as letterheads, envelopes, Jeans are expensive products hence the casual
calling cards and newsletters does not cover buyer is predisposed to be more cautious.
light boxes or electrically operated backlit (Emerald Garment vs. CA, 251 SCRA 60,
advertising units.(Pearl & dean Phil. V December 29, 1995)
Shoemart, Inc., et al. No 148222, August 15,
2003) Unfair Competition:
 Tests in Determining if there is Section 168 of the IPC provides that a
colorable imitation person who has identified in the mind of the
1. Test of Dominancy – focuses on the public the goods he manufactures or deals in,
similarly of the prevalent features of the his business or services from those of others,
competing trademarks which might whether or not a registered mark is employed,
cause confusion or deception and thus has a property right in the goodwill of the said
constitute infringement. This test is goods, business or services so identified, which
incorporated in the IPL and is therefore will be protected in the same manner as other
controlling (Mcdonalds Corp. v L.C. Mak property rights. Hence, unfair competition may
Burger,Inc. 437 SCRA 10) be committed as follows:
The test of dominancy requires that 168.2. Any person who shall employ
if the competing trademark contains the deception or any other means contrary to good
main or essential features of another faith by which he shall pass off the goods
and confusion and deception is likely to manufactured by him or in which he deals, or
result, infringement takes place. hiss for those of the one having established such
Duplication or imitation is not necessary; good will, or who shall commit any acts
nor is it necessary that the infringing calculated to produce said result, shall be guilty
label should suggest an effort to imitate. of unfair competition, and shall be subject to an
Similarity in size, form and color, while action therefore.
relevant, is not conclusive. (Asia 168.3. In particular, and without in any way
Brewery, Inc. v CA, G.R. No. 193543, limiting the scope of protection against unfair
224 SCRA 437) competition, the following shall be deemed guilty
of unfair competition:
ILLUSTRATION: a) Any person, who is selling his goods
2. Holistic Test – mandates that the entirety and gives them the general
of the marks in question must be considered in appearance of goods of another
determining confusing similarity (Society des manufacturer or dealer, either as to
Produits Nestle v CA 112012, April 4, 2001; goods themselves or in the
Amigo Manufacturing v. Cluett Peabody Co. No. wrapping of the packages in which
139300, march 14, 2001) they are contained, or the devices or
*Idem Sonans test (similarity of sounds or words thereon, or in any other
pronunciations) alone cannot be applied (Amigo feature of their appearance, which
Mfg. V. Cluett Peabody) would likely to influence purchasers

FACTS: ER Co. used the trademark PHILIPPINE PLANTERS CORDIAL PEANUTS which was registered in
the IPO. JR Co. filed suit with the Director of Patents for the cancellation of the registration of Er Co.’s trademark
on the ground the trademark of ER Co. would likely deceive the buying public because JR Co.s trademark which
is also registered is PLANTERS COCKTAIL PEANUTS.
ISSUE: Is there confusing similarity between the two trademarks?
HELD: YES. Although “planters” is an ordinary word, nevertheless, it is used in the labels not to describe the
nature of the product but o project the source or origin of the salted peanuts. The word PLANTERS easily
attracts and catches the eye of the ordinary consumer and it is that word and none other that sticks in his mind
when he thinks of salted peanuts.(Phil. Nut Industry Inc. Vs. Standard Brands Inc., 65 SCRA 575, July 31, 1975)

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to believe that the goods offered are 4. Unfair competition is broader as it


those of a manufacturer or dealer, or includes cases that are covered not only
who otherwise clothes the goods by the IPC but also by Article 27 of the
with such appearance as shall New Civil Code (Del Monte Corp. v. CA,
deceive the public and defraud 181 SCRA 410)
another of his legitimate trade, or
any subsequent vendor of such Rights of Foreign Nationals:
goods or any agent of any vendor 1. those provided by local laws in favor of
engaged in selling such goods with nationals of country of which, by their laws, grant
a like purpose; similar rights or privileges to Filipino citizens
b) Any person who by any artifice, or 2. those provided by the Paris Convention
device, or who employs any other - a covenant among member countries for
means calculated to induce the false the protection of industrial property
belief that such person is offering - the underlying principle is that foreign
the services of another who has nationals should be given the same treatment in
identified such services in the mind each member countries as that country makes
of the public; or available to its own citizens.
c) Any person who shall make any
false statement in the course of Reciprocity Rights:
trade or who shall commit any other 1. the right to register their marks or
act contrary to good faith of a nature tradenames or to claim priority rights in
calculated to discredit the goods, connection wit their pending foreign application
business or services of another.” (Philippine law govern the requirements for
 Given the single registration of the registration)
trademark “Dockers and Design” and Right of Priority
considering that respondent only uses  The significance of priority right is that a
the assailed device but a different word Phil. Application filed by another applicant after
mark, the right to prevent the latter from the priority date but earlier than the foreign
using the challenged “Paddocks” device applicant’s actual filing may be refused
is far from clear. Stated otherwise, it is registration because the law provides that a
not evident whether the single mark cannot be registered if it is identical with a
registration of the trademark “Dockers mark with an earlier filing or priority date in
and Design” confers on the owner the respect of the same goods or closely related
right to prevent the use of a fraction goods or if it merely resembles such mark as to
thereof in the course of trade. It is also be likely to deceive or cause confusion.
unclear whether the use without the
owner’s consent of a portion of a 2. the right to file an action for infringement
trademark registered in its entirety or unfair competition whether or not the foreign
constitutes material or substantial corporation has been licensed to do business
invasion of the owner’s right.(Levi under Phil. Laws
Strauss vs. Clinton Apparel, September 3. the right to oppose or to cancel the
20, 2005) registration of a mark which is identical or
substantially similar to their own marks or
Distinctions between infringement of tradenames.
trademark and unfair competition.
1. In infringement of trademark, there is PATENT
unauthorized use of a trademark, while unfair (2005, 2006 Bar Exams)
competition under the IPC involves passing off
of one’s goods as those of another and giving Patentable inventions refer to any technical
one’s goods the appearance of that of another. solution of a problem in any field of human
2. It is not necessary to establish activity which is new, involves an inventive step
fraudulent intent in a case for infringement of and is industrially applicable. (Kho v. CA, No.
trademark while it is necessary to establish 115758, March 11, 2002.
fraudulent intent in an unfair competition case.
3. Registration of the trademark is Requisites:
necessary for the filing of an action for 1. a technical solution of a problem in any field
infringement of trademark while prior registration of human activity;
of a trademark is not necessary in unfair 2. it must be a novel intention
competition. 3. industrially applicable

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TRIPS Agreement: is one of the many 1. Any technical solution of a


agreements concluded during the Uruguay problem in any field of human activity which
Round of Negotiations of the WTO, provides is new involves an inventive step and is
minimum standards for intellectual property industrially applicable shall be patentable.
rights, including patents, which each member of 2. 2.If any person possessing
the WTO must incorporate in its national laws. ordinary skill in the art was able to draw the
inferences and the constructs that the
Definitions: supposed inventor drew from prior art, then
1. NOVEL – that which does not the latter did not really invent. (Test of Non-
form part of the prior art. obviousness)
2. PRIOR ART – a)that which has 3. 3.The application shall relate to
been made available to the public anywhere one invention only or to a group of
in the world before the filing date or the inventions forming a single general inventive
priority date of application; b) that which step.(Unity of Invention)
forms part of an application whether for 4. 4.An applicant may not file 2
patent, utility model or industrial design, applications for the same subject, one for
effective in the Philippines, Provided, That utility model registration and the other for the
the inventor or applicants are no the same grant of a patent whether simultaneously or
and the contents of the application are successively. (Parallel Application)
published in accordance with the 5. Whatever right one has to the
requirements of patent application rules and invention covered by the patent arises alone
the filing date of prior art is earlier. from the grant of patent. (Creser Precision
3. INVENTIVE STEP – an System vs. CA, 286 SCRA 13)
invention involves an inventive step if,
having regard to prior art, it is not obvious to Persons who may file an application:
a “person skilled in the art” at the time of the 1. As to nationality
filing date or priority date of the application a. Filipino nationals
claiming the invention. b. Foreign nationals or those
4. PERSON SKILLED IN THE domiciled or have a real and effective
ART – presumed to be an ordinary commercial establishment in a country
practitioner aware of what was common which is bound by treaty (such as the
general knowledge in the art at the relevant Paris Convention and the TRIPS
date. He is presumed to have knowledge of Agreement) to grant Filipinos the same
all references that are sufficiently related to rights it grants to its own nationals.
one another and to the pertinent art and to c. Foreign nationals whose country
have knowledge of all arts reasonable also accepts the patent application of
pertinent to the particular problems with Filipinos.
which the inventor was involved. He is 2. As to the legal personality of the
presumed also to have had at his disposal applicant
the normal means and capacity to routine a. inventor or his attorney-in-fact
work and experimentation. b. assignee of the inventor
5. INDUSTRIAL APPLICABILITY –  To be able to effectively and legally
an intervention that can be produced and preclude others from copying and
used in any industry. profiting from the invention, a patent is a
primordial requirement. No patent, no
Purposes: The patent law has a three-fold protection. The ultimate goal of a patent
purpose: first, patent law seeks to foster system is to bring new designs and
and reward invention; second, it promotes technologies into the public domain
disclosures of inventions to stimulate further through disclosures. Ideas, once
innovation and to permit the public to disclosed to the public without the
practice the invention once the patent protection of a valid patent, are subject
expires; third’ the stringent requirements for to appropriation without significant
patent protection seek to ensure that ideas restraint.
in the public domain remain there for free
use of the public (Pearl &Dean Phil. V. Classes of Patentable Inventions
Shoemart, Inc No. 148222, August 15, 1. useful machine
2003). 2. product
3. process
Principles 4. improvement of 1,2 or 3
5. micro-organism; and

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6. non-biological and making the gas-saving device. The


microbiological process (Rule 201, Rules invention of the gas-saving device is
and Regulations on Inventions). not part of their regular duties as
employees. (Sec. 30.2 a, Intellectual
Non-Patentable Inventions: property Code)
a. discoveries, scientific theories
and mathematical method; Registration of Utility Models
b. schemes, rules and methods of
performing mental acts, playing games, or  The provisions governing patents shall
doing business, and programs for computer; apply, mutates mutandis, to the registration
c. methods for treatment of the of utility models.
human body or animal body by surgery or  Where right to patent conflicts with right
therapy and diagnostic methods practiced to utility model registration in the cases
on the human or animal body; referred to in Sec. 29, said provision shall
d. plant varieties or animal breeds apply as if the word “patent” were replaced
of essentially biological process for the by words “patent or utility model
production of plants or animals; registration.”
e. aesthetic creations;  An invention qualifies for registration as
f. anything which is contrary to utility model if it is new and industrially
public order or morality. applicable.

BAR Q. Cezar works in a car


 PATENTABLE INVENTIONS – shall
apply except the reference to inventive step
manufacturing company owned by Joab.
as a condition of protection.
Cezar is quite innovative and loves to
tinker with things the materials and parts  A utility model registration shall expire,
of the car, he was able to invent a gas- without any possibility or renewal, at the end
saving device and likewise, came up of 7th year after date of filing of application.
with a similar gadget, also using scrap
materials and spare parts of the Protection of Industrial Design
company. Thereafter, Francis filed an  Only industrial design that are new or
application for registration pf his device ornamental shall benefit from protection
with the Bureau of Patents.  Only lay-out design that are original shall
a)Is the gas-saving device patentable? benefit from protection.
Explain.  A lay-out design consisting of
b)Assuming that it is patentable, who is combination of elements and
entitled to the patent? What, if any, is interconnections that are commonplace shall
the remedy of the losing party? be protected only if the combination taken as
c)Supposing Joab got wind of the a whole is original.
inventions of his employees and also  A lay-out design shall be considered
laid claim to the patents, asserting that original if it is the result of its creator’s own
Cezar and Francis were using his intellectual effort and is not commonplace
materials and company time in making among creators of lay-out designs and
the devices, will his claim prevail over manufacturers of integrated circuit at the
those of his employees? Explain. time of creation.
SA: :a)It is patentable because it is new,
it involves an inventive step and it is
industrially applicable. (Section 21,
Intellectual property Code) UTILITY MODEL INDUSTRIAL
b)Francis is entitled to the patent, DESIGN
because he had the earlier filing date Any new, model of Any composition of
(Sec.29, Intellectual property Code). implements or tools lines and colors or
The remedy of Cezar is to file a petition of any industrial any three
in Court for the cancellation of the product even if not dimensional for,
patent of Francis on the ground that he possessed of the whether or not
is the true and actual inventor, and ask quality of invention associated with lines,
for his substitution as patentee. (Secs. but which is of or colors Provided
67 and 68, Intellectual Property Code) practical utility. (Del that such composition
c)The claim of Joab will not prevail over Rosario vs. CA) or form gives a
those of his employees, even if they special appearance
used his materials and company time in to and can serve as

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pattern for an obtained the information directly or


industrial product or indirectly from the inventor;
handicraft. (Sec. a third party which obtained the
112.1) information directly or indirectly from
the inventor (Sec. 25)
 Bushing and cushion are not works c.) Made during the 12 months preceding
of art. They are utility models which may be the filing date or the priority date of the
the subject of a patent not copyright. application
The focus of copyright is the usefulness of
the artistic design and not its marketability. Compulsory Licensing:
While works of applied art, original, The Director of Legal Affairs may grant a license
intellectual, literary and artistic works are to exploit a patented invention without any
copyrightable, useful articles and works of agreement in favor of any person who has
industrial design are not. shown his capability to exploit the invention.
(Ching v. Salinas, G.R. No. 161295, June Grounds:
29, 2005) 1. National emergency or other
circumstances of extreme urgency.
Persons Entitled to Right: 2. Where the public interest
1. The right to a patent belongs to the inventor, (national security, nutrition, health,
his heirs, or assigns development of vital sectors of economy) so
2. When two or more persons have jointly requires.
made an invention, the right to a patent shall 3. Where a judicial or
belong to them jointly. administrative body has determined that the
3. First to File Rule – if two or more persons manner of exploitation by the owner or his
have made the invention separately and licensee is anti-competitive, or
independently of each other the right to the 4. In case of public non-
patent shall belong to the person who first commercial use of the patent by the
filed an application for such invention (Sec. patentee, without satisfactory reason.
29, IPC)  The grant of compulsory license was
sustained for medicinal products (Smith
Prior Art Kline and French Lab. V. CA, No. 121267,
 That which has been made available October 23, 2001)
to the public anywhere in the world before
the filing date or the priority date of the Concept of Divisional Applications
application. The concept of divisional applications comes
into play when two or more inventions are
 General Rule: That which forms part claimed in a single application but are of such
of an application whether for patent, utility nature that a single patent may not be issued for
model of industrial design, effective in the them. The applicant thus required to divide, that
Philippines, provided that: is, to limit the claims to which ever invention he
a.) the inventors or applicants are not the may elect, whereas those inventions not elected
same. may be made the subject of separate
b.) the contents of the application are applications which are called divisional
published in accordance with the applications.(Smith Kline Beckman Corp. v. CA,
requirements of patent application rules. ibid)
c.) the filing date of the prior art is earlier
Exception: Non-prejudicial disclosure Term/Duration of Patent: Twenty years from
a.) Disclosure of information contained in the filing date of application. (Sec. 54, IPC).
application
b). Made by: Infringement:
 The Inventor The making, using, offering for sale, selling or
 Patent Office and the importing a patented product or a product
information was contained: in obtained directly or indirectly from a patented
another application filed by the process, or the use of a patented process
inventor and should not have been without the authorization of the patentee.
disclosed by the office; or in an
application filed without the Tests of Patent Infringement:
knowledge or consent of the 1. Economic Interest Test
inventor by a third party which When the process-discoverer’s economic
interests are compromised, i.e., when others can

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import the products that result from the process, Purpose: To prevent secret or fraudulent sales
an act is said to be prohibited. or conveyances of goods in bulk and, thereby,
2. Literal Infringement Test protect the creditors of the seller.
Resort, in the first, must be had to the “words” of
the claim. If the accused matter clearly falls Bulk Sale: Any sale, transfer, mortgage, or
within the claim, infringement is made out and assignment of: (SBE)
that is the end of it. 1. a stock of goods, wares, merchandise,
The claims of patent and the accused product provisions, or materials otherwise than
must be juxtaposed within the over-all context of in the ordinary course of trade and the
claims and specification. (Godines vs. CA, 226 regular prosecution of business;
SCRA 338) 2. all, or substantially all, of the business or
3.Doctrine of Equivalents Test trade theretofore conducted; and
If two devices do the same work in substantially
the same way, the same result, and produce
3. all, or substantially all, of the fixtures and
substantially the same result, they are the same equipment used in and about the
even though they differ in name, form or shape. business.
(Godines vs. CA, 226 SCRA 338)
It provides that an infringement also takes place Exceptions: (WOJAE)
when a device appropriates a prior invention by 1. written waiver from all the
incorporating its innovative concept and, creditors;
although with some modification and change, 2. sale or transfer is made in the
performs substantially the same function in ordinary course of business;
substantially the same way to achieve 3. sale by virtue of a judicial order;
substantially the same result. In other words, the 4. those sold by assignee or those
principle or mode of operation must be the same beyond the right of creditors; and
or substantially the same. The doctrine of
equivalents thus requires satisfaction of the
5. sale of properties exempt from
function means and result test, the patentee attachment or execution. (Rule 39,
having the burden to show that all three Sec.13, Rules of Court)
components of such equivalency test are met
(Smith Klein Beckman Corp. v CA, No. 126627, Duties of Seller, Mortgagor or Assignor in
August 14, 2003). Bulk: (SPIN-R)
The doctrine of equivalents cannot be 1. to deliver to the vendee, mortgagee, or
applied when the infringing invention is clearly his agent or representative a sworn
beyond what is written in the claim. written statement of the names and
addresses of all the creditors to whom
Doctrine of File Wrapper Estoppel the vendor or mortgagor may be
It balances the doctrine of e